ANGELES UNIVERSITY VS.

CITY OF ANGELS
DECISION
VILLARAMA, JR., J.:

Gonzalez. Despite petitioners plea, however, respondents refused to issue the building
permits for the construction of the AUF Medical Center in the main campus and
renovation of a school building located at Marisol Village. Petitioner then appealed the
matter to City Mayor Carmelo F. Lazatin but no written response was received by
petitioner.[8]

Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, which seeks to reverse and set aside the Decision[1] dated July
28, 2009 and Resolution[2] dated October 12, 2009 of the Court of Appeals (CA) in CAG.R. CV No. 90591. The CA reversed the Decision[3] dated September 21, 2007 of the
Regional Trial Court of Angeles City, Branch 57 in Civil Case No. 12995 declaring
petitioner exempt from the payment of building permit and other fees and ordering
respondents to refund the same with interest at the legal rate.

Consequently, petitioner paid under protest[9] the following:

The factual antecedents:

Locational Clearance Fee

Petitioner Angeles University Foundation (AUF) is an educational institution established on

May 25, 1962 and was converted into a non-stock, non-profit education foundation under
the provisions of Republic Act (R.A.) No. 6055[4] on December 4, 1975.

283,741.64

Sometime in August 2005, petitioner filed with the Office of the City Building Official an
application for a building permit for the construction of an 11-storey building of the
Angeles University Foundation Medical Center in its main campus located at MacArthur
Highway, Angeles City, Pampanga. Said office issued a Building Permit Fee Assessment in
the amount of P126,839.20. An Order of Payment was also issued by the City Planning
and Development Office, Zoning Administration Unit requiring petitioner to pay the sum
of P238,741.64 as Locational Clearance Fee.[5]

144,690.00

In separate letters dated November 15, 2005 addressed to respondents City Treasurer
Juliet G. Quinsaat and Acting City Building Official Donato N. Dizon, petitioner claimed
that it is exempt from the payment of the building permit and locational clearance fees,
citing legal opinions rendered by the Department of Justice (DOJ). Petitioner also
reminded the respondents that they have previously issued building permits
acknowledging such exemption from payment of building permit fees on the construction
of petitioners 4-storey AUF Information Technology Center building and the AUF
Professional Schools building on July 27, 2000 and March 15, 2004, respectively.[6]
Respondent City Treasurer referred the matter to the Bureau of Local Government Finance
(BLGF) of the Department of Finance, which in turn endorsed the query to the DOJ. Then
Justice Secretary Raul M. Gonzalez, in his letter-reply dated December 6, 2005, cited
previous issuances of his office (Opinion No. 157, s. 1981 and Opinion No. 147, s. 1982)
declaring petitioner to be exempt from the payment of building permit fees. Under the
1st Indorsement dated January 6, 2006, BLGF reiterated the aforesaid opinion of the DOJ
stating further that xxx the Department of Finance, thru this Bureau, has no authority to
review the resolution or the decision of the DOJ.[7]
Petitioner wrote the respondents reiterating its request to reverse the disputed
assessments and invoking the DOJ legal opinions which have been affirmed by Secretary

Medical Center (new construction)

Building Permit and Electrical Fee
P 217,475.20

Fire Code Fee

Total - P 645,906.84

School Building (renovation)

Building Permit and Electrical Fee

P 37,857.20
Locational Clearance Fee
6,000.57
Fire Code Fee
5,967.74

Total - P 49,825.51
Petitioner likewise paid the following sums as required by the City Assessors Office:

Real Property Tax Basic Fee

6055 and applicable jurisprudence and DOJ rulings, petitioner is clearly exempt from the
payment of building permit fees.[15]

P 86,531.10
On September 21, 2007, the trial court rendered judgment in favor of the petitioner and
against the respondents. The dispositive portion of the trial courts decision[16] reads:
SEF

WHEREFORE, premises considered, judgment is rendered as follows:

43,274.54

a. Plaintiff is exempt from the payment of building permit and other fees Ordering the
Defendants to refund the total amount of Eight Hundred Twenty Six Thousand Six
Hundred Sixty Two Pesos and 99/100 Centavos (P826,662.99) plus legal interest thereon
at the rate of twelve percent (12%) per annum commencing on the date of extra-judicial
demand or June 14, 2006, until the aforesaid amount is fully paid.

Locational Clearance Fee

1,125.00
Total P130,930.64[10]
[GRAND TOTAL - P 826,662.99]
By reason of the above payments, petitioner was issued the corresponding Building
Permit, Wiring Permit, Electrical Permit and Sanitary Building Permit. On June 9, 2006,
petitioner formally requested the respondents to refund the fees it paid under protest.
Under letters dated June 15, 2006 and August 7, 2006, respondent City Treasurer denied
the claim for refund.[11]
On August 31, 2006, petitioner filed a Complaint[12] before the trial court seeking the
refund of P826,662.99 plus interest at the rate of 12% per annum, and also praying for
the award of attorneys fees in the amount of P300,000.00 and litigation expenses.
In its Answer,[13] respondents asserted that the claim of petitioner cannot be granted
because its structures are not among those mentioned in Sec. 209 of the National
Building Code as exempted from the building permit fee. Respondents argued that R.A.
No. 6055 should be considered repealed on the basis of Sec. 2104 of the National
Building Code. Since the disputed assessments are regulatory in nature, they are not
taxes from which petitioner is exempt. As to the real property taxes imposed on
petitioners property located in Marisol Village, respondents pointed out that said premises
will be used as a school dormitory which cannot be considered as a use exclusively for
educational activities.
Petitioner countered that the subject building permit are being collected on the basis of
Art. 244 of the Implementing Rules and Regulations of the Local Government Code, which
impositions are really taxes considering that they are provided under the chapter on Local
Government Taxation in reference to the revenue raising power of local government units
(LGUs). Moreover, petitioner contended that, as held in Philippine Airlines, Inc. v. Edu,[14]
fees may be regarded as taxes depending on the purpose of its exaction. In any case,
petitioner pointed out that the Local Government Code of 1991 provides in Sec. 193 that
non-stock and non-profit educational institutions like petitioner retained the tax
exemptions or incentives which have been granted to them. Under Sec. 8 of R.A. No.

b. Finding the Defendants liable for attorneys fees in the amount of Seventy Thousand
Pesos (Php70,000.00), plus litigation expenses.
c. Ordering the Defendants to pay the costs of the suit.
SO ORDERED.
Respondents appealed to the CA which reversed the trial court, holding that while
petitioner is a tax-free entity, it is not exempt from the payment of regulatory fees. The
CA noted that under R.A. No. 6055, petitioner was granted exemption only from income
tax derived from its educational activities and real property used exclusively for
educational purposes. Regardless of the repealing clause in the National Building Code,
the CA held that petitioner is still not exempt because a building permit cannot be
considered as the other charges mentioned in Sec. 8 of R.A. No. 6055 which refers to
impositions in the nature of tax, import duties, assessments and other collections for
revenue purposes, following the ejusdem generisrule. The CA further stated that
petitioner has not shown that the fees collected were excessive and more than the cost of
surveillance, inspection and regulation. And while petitioner may be exempt from the
payment of real property tax, petitioner in this case merely alleged that the subject
property is to be used actually, directly and exclusively for educational purposes,
declaring merely that such premises is intended to house the sports and other facilities of
the university but by reason of the occupancy of informal settlers on the area, it cannot
yet utilize the same for its intended use. Thus, the CA concluded that petitioner is not
entitled to the refund of building permit and related fees, as well as real property tax it
paid under protest.
Petitioner filed a motion for reconsideration which was denied by the CA.
Hence, this petition raising the following grounds:

THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND DECIDED A QUESTION OF

SUBSTANCE IN A WAY NOT IN ACCORDANCE WITH LAW AND THE APPLICABLE DECISIONS
OF THE HONORABLE COURT AND HAS DEPARTED FROM THE ACCEPTED AND USUAL
COURSE OF JUDICIAL PROCEEDINGS NECESSITATING THE HONORABLE COURTS EXERCISE
OF ITS POWER OF SUPERVISION CONSIDERING THAT:
I. IN REVERSING THE TRIAL COURTS DECISION DATED 21 SEPTEMBER 2007, THE COURT
OF APPEALS EFFECTIVELY WITHDREW THE PRIVILEGE OF EXEMPTION GRANTED TO NONSTOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS BY VIRTUE OF RA 6055 WHICH
WITHDRAWAL IS BEYOND THE AUTHORITY OF THE COURT OF APPEALS TO DO.
A. INDEED, RA 6055 REMAINS VALID AND IS IN FULL FORCE AND EFFECT. HENCE, THE
COURT OF APPEALS ERRED WHEN IT RULED IN THE QUESTIONED DECISION THAT NONSTOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS ARE NOT EXEMPT.
B. THE COURT OF APPEALS APPLICATION OF THE PRINCIPLE OF EJUSDEM GENERIS IN
RULING IN THE QUESTIONED DECISION THAT THE TERM OTHER CHARGES IMPOSED BY
THE GOVERNMENT UNDER SECTION 8 OF RA 6055 DOES NOT INCLUDE BUILDING PERMIT
AND OTHER RELATED FEES AND/OR CHARGES IS BASED ON ITS ERRONEOUS AND
UNWARRANTED ASSUMPTION THAT THE TAXES, IMPORT DUTIES AND ASSESSMENTS AS
PART OF THE PRIVILEGE OF EXEMPTION GRANTED TO NON-STOCK, NON-PROFIT
EDUCATIONAL FOUNDATIONS ARE LIMITED TO COLLECTIONS FOR REVENUE PURPOSES.
C. EVEN ASSUMING THAT THE BUILDING PERMIT AND OTHER RELATED FEES AND/OR
CHARGES ARE NOT INCLUDED IN THE TERM OTHER CHARGES IMPOSED BY THE
GOVERNMENT UNDER SECTION 8 OF RA 6055, ITS IMPOSITION IS GENERALLY A TAX
MEASURE AND THEREFORE, STILL COVERED UNDER THE PRIVILEGE OF EXEMPTION.
II. THE COURT OF APPEALS DENIAL OF PETITIONER AUFS EXEMPTION FROM REAL
PROPERTY TAXES CONTAINED IN ITS QUESTIONED DECISION AND QUESTIONED
RESOLUTION IS CONTRARY TO APPLICABLE LAW AND JURISPRUDENCE.[18]
Petitioner stresses that the tax exemption granted to educational stock corporations
which have converted into non-profit foundations was broadened to include any other
charges imposed by the Government as one of the incentives for such conversion. These
incentives necessarily included exemption from payment of building permit and related
fees as otherwise there would have been no incentives for educational foundations if the
privilege were only limited to exemption from taxation, which is already provided under
the Constitution.
Petitioner further contends that this Court has consistently held in several cases that the
primary purpose of the exaction determines its nature. Thus, a charge of a fixed sum
which bears no relation to the cost of inspection and which is payable into the general
revenue of the state is a tax rather than an exercise of the police power. The standard set
by law in the determination of the amount that may be imposed as license fees is such
that is commensurate with the cost of regulation, inspection and licensing. But in this
case, the amount representing the building permit and related fees and/or charges is
such an exorbitant amount as to warrant a valid imposition; such amount exceeds the

probable cost of regulation. Even with the alleged criteria submitted by the respondents
(e.g., character of occupancy or use of building/structure, cost of construction, floor area
and height), and the construction by petitioner of an 11-storey building, the costs of
inspection will not amount to P645,906.84, presumably for the salary of inspectors or
employees, the expenses of transportation for inspection and the preparation and
reproduction of documents. Petitioner thus concludes that the disputed fees are
substantially and mainly for purposes of revenue rather than regulation, so that even
these fees cannot be deemed charges mentioned in Sec. 8 of R.A. No. 6055, they should
properly be treated as tax from which petitioner is exempt.
In their Comment, respondents maintain that petitioner is not exempt from the payment
of building permit and related fees since the only exemptions provided in the National
Building Code are public buildings and traditional indigenous family dwellings. Inclusio
unius est exclusio alterius. Because the law did not include petitioners buildings from
those structures exempt from the payment of building permit fee, it is therefore subject
to the regulatory fees imposed under the National Building Code.
Respondents assert that the CA correctly distinguished a building permit fee from those
other charges mentioned in Sec. 8 of R.A. No. 6055. As stated by petitioner itself, charges
refer to pecuniary liability, as rents, and fees against persons or property. Respondents
point out that a building permit is classified under the term fee. A fee is generally
imposed to cover the cost of regulation as activity or privilege and is essentially derived
from the exercise of police power; on the other hand, impositions for services rendered by
the local government units or for conveniences furnished, are referred to as service
charges.
Respondents also disagreed with petitioners contention that the fees imposed and
collected are exorbitant and exceeded the probable expenses of regulation. These fees
are based on computations and assessments made by the responsible officials of the City
Engineers Office in accordance with the Schedule of Fees and criteria provided in the
National Building Code. The bases of assessment cited by petitioner (e.g. salary of
employees, expenses of transportation and preparation and reproduction of documents)
refer to charges and fees on business and occupation under Sec. 147 of the Local
Government Code, which do not apply to building permit fees. The parameters set by the
National Building Code can be considered as complying with the reasonable cost of
regulation in the assessment and collection of building permit fees. Respondents likewise
contend that the presumption of regularity in the performance of official duty applies in
this case. Petitioner should have presented evidence to prove its allegations that the
amounts collected are exorbitant or unreasonable.
For resolution are the following issues: (1) whether petitioner is exempt from the payment
of building permit and related fees imposed under the National Building Code; and (2)
whether the parcel of land owned by petitioner which has been assessed for real property
tax is likewise exempt.
R.A. No. 6055 granted tax exemptions to educational institutions like petitioner which
converted to non-stock, non-profit educational foundations. Section 8 of said law
provides:

SECTION 8. The Foundation shall be exempt from the payment of all taxes, import duties,
assessments, and other charges imposed by the Government onall income derived from
or property, real or personal, used exclusively for the educational activities of the
Foundation.(Emphasis supplied.)

control; and tothis end, make it the purpose of this Code to provide for allbuildings and
structures, a framework of minimum standards and requirements to regulate and control
their location, site, design quality of materials, construction, use, occupancy, and
maintenance.

On February 19, 1977, Presidential Decree (P.D.) No. 1096 was issued adopting the
National Building Code of the Philippines. The said Code requires every person, firm or
corporation, including any agency or instrumentality of the government to obtain a
building permit for any construction, alteration or repair of any building or structure.
[19]Building permit refers to a document issued by the Building Official x x x to an
owner/applicant to proceed with the construction, installation, addition, alteration,
renovation, conversion, repair, moving, demolition or other work activity of a specific
project/building/structure or portions thereof after the accompanying principal plans,
specifications and other pertinent documents with the duly notarized application are
found satisfactory and substantially conforming with the National Building Code of the
Philippines x x x and its Implementing Rules and Regulations (IRR).[20] Building permit
fees refers to the basic permit fee and other charges imposed under the National Building
Code.

Section 103. Scope and Application

Exempted from the payment of building permit fees are: (1) public buildings and (2)
traditional indigenous family dwellings.[21] Not being expressly included in the
enumeration of structures to which the building permit fees do not apply, petitioners
claim for exemption rests solely on its interpretation of the term other charges imposed
by the National Government in the tax exemption clause of R.A. No. 6055.
A charge is broadly defined as the price of, or rate for, something, while the word fee
pertains to a charge fixed by law for services of public officers or for use of a privilege
under control of government.[22] As used in the Local Government Code of 1991 (R.A.
No. 7160), charges refers to pecuniary liability, as rents or fees against persons or
property, while fee means a charge fixed by law or ordinance for the regulation or
inspection of a business or activity.[23]
That charges in its ordinary meaning appears to be a general term which could cover a
specific fee does not support petitioners position that building permit fees are among
those other charges from which it was expressly exempted. Note that the other charges
mentioned in Sec. 8 of R.A. No. 6055 is qualified by the words imposed by the
Government on all x x x property used exclusively for the educational activities of the
foundation. Building permit fees are not impositions on property but on the activity
subject of government regulation. While it may be argued that the fees relate to
particular properties, i.e., buildings and structures, they are actually imposed on certain
activities the owner may conduct either to build such structures or to repair, alter,
renovate or demolish the same. This is evident from the following provisions of the
National Building Code:
Section 102. Declaration of Policy
It is hereby declared to be the policy of the State to safeguard life, health, property, and
public welfare, consistent with theprinciples of sound environmental management and

(a) The provisions of this Code shall apply to the design,location, sitting, construction,
alteration, repair,conversion, use, occupancy, maintenance, moving, demolitionof, and
addition to public and private buildings andstructures, except traditional indigenous
family dwellingsas defined herein.
xxxx
Section 301. Building Permits
No person, firm or corporation, including any agency orinstrumentality of the government
shall erect, construct, alter, repair, move, convert or demolish any building or structure or
causethe same to be done without first obtaining a building permittherefor from the
Building Official assigned in the place where thesubject building is located or the building
work is to be done. (Italics supplied.)
That a building permit fee is a regulatory imposition is highlighted by the fact that in
processing an application for a building permit, the Building Official shall see to it that the
applicant satisfies and conforms with approved standard requirements on zoning and
land use, lines and grades, structural design, sanitary and sewerage, environmental
health, electrical and mechanical safety as well as with other rules and regulations
implementing the National Building Code.[24] Thus, ancillary permits such as electrical
permit, sanitary permit and zoning clearance must also be secured and the corresponding
fees paid before a building permit may be issued. And as can be gleaned from the
implementing rules and regulations of the National Building Code, clearances from
various government authorities exercising and enforcing regulatory functions affecting
buildings/structures, like local government units, may be further required before a
building permit may be issued.[25]
Since building permit fees are not charges on property, they are not impositions from
which petitioner is exempt.
As to petitioners argument that the building permit fees collected by respondents are in
reality taxes because the primary purpose is to raise revenues for the local government
unit, the same does not hold water.
A charge of a fixed sum which bears no relation at all to the cost of inspection and
regulation may be held to be a tax rather than an exercise of the police power.[26] In this
case, the Secretary of Public Works and Highways who is mandated to prescribe and fix
the amount of fees and other charges that the Building Official shall collect in connection
with the performance of regulatory functions,[27] has promulgated and issued the

Implementing Rules and Regulations[28] which provide for the bases of assessment of
such fees, as follows:

Petitioners reliance on Sec. 193 of the Local Government Code of 1991 is likewise
misplaced. Said provision states:

1.

Character of occupancy or use of building

2.

Cost of construction 10,000/sq.m (A,B,C,D,E,G,H,I), 8,000 (F), 6,000 (J)

3.

Floor area

4.

Height

SECTION 193. Withdrawal of Tax Exemption Privileges. -- Unless otherwise provided in this
Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock
and non-profit hospitals and educational institutions, are hereby withdrawn upon the
effectivity of this Code. (Emphasis supplied.)

Petitioner failed to demonstrate that the above bases of assessment were arbitrarily
determined or unrelated to the activity being regulated. Neither has petitioner adduced
evidence to show that the rates of building permit fees imposed and collected by the
respondents were unreasonable or in excess of the cost of regulation and inspection.

Considering that exemption from payment of regulatory fees was not among those
incentives granted to petitioner under R.A. No. 6055, there is no such incentive that is
retained under the Local Government Code of 1991. Consequently, no reversible error
was committed by the CA in ruling that petitioner is liable to pay the subject building
permit and related fees.

In Chevron Philippines, Inc. v. Bases Conversion Development Authority,[29] this Court

explained:

Now, on petitioners claim that it is exempted from the payment of real property tax
assessed against its real property presently occupied by informal settlers.

In distinguishing tax and regulation as a form of police power, the determining factor is
the purpose of the implemented measure. If the purpose is primarily to raise revenue,
then it will be deemed a tax even though the measure results in some form of regulation.
On the other hand, if the purpose is primarily to regulate, then it is deemed a regulation
and an exercise of the police power of the state, even though incidentally, revenue is
generated. Thus, in Gerochi v. Department of Energy, the Court stated:

Section 28(3), Article VI of the 1987 Constitution provides:

The conservative and pivotal distinction between these two (2) powers rests in the
purpose for which the charge is made. If generation of revenue is the primary purpose
and regulation is merely incidental, the imposition is a tax; but if regulation is the primary
purpose, the fact that revenue is incidentally raised does not make the imposition a tax.
[30] (Emphasis supplied.)

xxxx
(3) Charitable institutions, churches and parsonages or convents appurtenant thereto,
mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually,
directly and exclusively used for religious, charitable or educational purposes shall be
exempt from taxation.
x x x x (Emphasis supplied.)
Section 234(b) of the Local Government Code of 1991 implements the foregoing
constitutional provision by declaring that --

Concededly, in the case of building permit fees imposed by the National Government
under the National Building Code, revenue is incidentally generated for the benefit of
local government units. Thus:

SECTION 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:

Section 208. Fees

xxxx

Every Building Official shall keep a permanent record and accurate account of all fees and
other charges fixed and authorized by the Secretary to be collected and received under
this Code.

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto,

mosques, non-profit or religious cemeteries and all lands, buildings, and improvements
actually, directly, and exclusively used for religious, charitable or educational purposes;

Subject to existing budgetary, accounting and auditing rules and regulations, the Building
Official is hereby authorized to retain not more than twenty percent of his collection for
the operating expenses of his office.

x x x x (Emphasis supplied.)

The remaining eighty percent shall be deposited with the provincial, city or municipal
treasurer and shall accrue to the General Fund of the province, city or municipality
concerned.

In Lung Center of the Philippines v. Quezon City,[31] this Court held that only portions of
the hospital actually, directly and exclusively used for charitable purposes are exempt
from real property taxes, while those portions leased to private entities and individuals
are not exempt from such taxes. We explained the condition for the tax exemption
privilege of charitable and educational institutions, as follows:

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to
the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that
(a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and
EXCLUSIVELY used for charitable purposes. Exclusive is defined as possessed and enjoyed
to the exclusion of others; debarred from participation or enjoyment; and exclusively is
defined, in a manner to exclude; as enjoying a privilege exclusively. If real property is
used for one or more commercial purposes, it is not exclusively used for the exempted
purposes but is subject to taxation. The words dominant use or principal use cannot be
substituted for the words used exclusively without doing violence to the Constitutions and
the law. Solely is synonymous with exclusively.
What is meant by actual, direct and exclusive use of the property for charitable purposes
is the direct and immediate and actual application of the property itself to the purposes
for which the charitable institution is organized. It is not the use of the income from the
real property that is determinative of whether the property is used for tax-exempt
purposes.[32] (Emphasis and underscoring supplied.)
Petitioner failed to discharge its burden to prove that its real property is actually, directly
and exclusively used for educational purposes. While there is no allegation or proof that
petitioner leases the land to its present occupants, still there is no compliance with the
constitutional and statutory requirement that said real property is actually, directly and
exclusively used for educational purposes. The respondents correctly assessed the land
for real property taxes for the taxable period during which the land is not being devoted
solely to petitioners educational activities. Accordingly, the CA did not err in ruling that
petitioner is likewise not entitled to a refund of the real property tax it paid under protest.
WHEREFORE, the petition is DENIED. The Decision dated July 28, 2009 and Resolution
dated October 12, 2009 of the Court of Appeals in CA-G.R. CV No. 90591 are AFFIRMED.

G.R. No. L-31156 February 27, 1976

PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,
vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant
appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and
Assistant Solicitor General Conrado T. Limcaoco & Solicitor Enrique M. Reyes for
appellees.
MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case
No. 3294, which was certified to Us by the Court of Appeals on October 6, 1969, as
involving only pure questions of law, challenging the power of taxation delegated to
municipalities under the Local Autonomy Act (Republic Act No. 2264, as amended, June
19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the
Philippines, Inc., commenced a complaint with preliminary injunction before the Court of
First Instance of Leyte for that court to declare Section 2 of Republic Act No.
2264. 1 otherwise known as the Local Autonomy Act, unconstitutional as an undue
delegation of taxing authority as well as to declare Ordinances Nos. 23 and 27, series of
1962, of the municipality of Tanauan, Leyte, null and void.
On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of
which state that, first, both Ordinances Nos. 23 and 27 embrace or cover the same
subject matter and the production tax rates imposed therein are practically the same,
and second, that on January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte,
as per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant in said
municipality, sought to enforce compliance by the latter of the provisions of said
Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25,
1962, levies and collects "from soft drinks producers and manufacturers a tai of onesixteenth (1/16) of a centavo for every bottle of soft drink corked." 2 For the purpose of
computing the taxes due, the person, firm, company or corporation producing soft drinks
shall submit to the Municipal Treasurer a monthly report, of the total number of bottles
produced and corked during the month. 3

On the other hand, Municipal Ordinance No. 27, which was approved on October 28,
1962, levies and collects "on soft drinks produced or manufactured within the territorial
jurisdiction of this municipality a tax of ONE CENTAVO (P0.01) on each gallon (128 fluid
ounces, U.S.) of volume capacity." 4 For the purpose of computing the taxes due, the
person, fun company, partnership, corporation or plant producing soft drinks shall submit
to the Municipal Treasurer a monthly report of the total number of gallons produced or
manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal
production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing
the complaint and upholding the constitutionality of [Section 2, Republic Act No. 2264]
declaring Ordinance Nos. 23 and 27 legal and constitutional; ordering the plaintiff to pay
the taxes due under the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of
Appeals, which, in turn, elevated the case to Us pursuant to Section 31 of the Judiciary
Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. Is Section 2, Republic Act No. 2264 an undue delegation of power,
confiscatory and oppressive?
2. Do Ordinances Nos. 23 and 27 constitute double taxation and
impose percentage or specific taxes?
3. Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of sovereignty, belonging
as a matter of right to every independent government, without being expressly conferred
by the people. 6 It is a power that is purely legislative and which the central legislative
body cannot delegate either to the executive or judicial department of the government
without infringing upon the theory of separation of powers. The exception, however, lies
in the case of municipal corporations, to which, said theory does not apply. Legislative
powers may be delegated to local governments in respect of matters of local
concern. 7 This is sanctioned by immemorial practice. 8 By necessary implication, the
legislative power to create political corporations for purposes of local self-government
carries with it the power to confer on such local governmental agencies the power to
tax. 9 Under the New Constitution, local governments are granted the autonomous
authority to create their own sources of revenue and to levy taxes. Section 5, Article XI
provides: "Each local government unit shall have the power to create its sources of
revenue and to levy taxes, subject to such limitations as may be provided by law." Withal,
it cannot be said that Section 2 of Republic Act No. 2264 emanated from beyond the

sphere of the legislative power to enact and vest in local governments the power of local
taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's
pretense, would not suffice to invalidate the said law as confiscatory and oppressive. In
delegating the authority, the State is not limited 6 the exact measure of that which is
exercised by itself. When it is said that the taxing power may be delegated to
municipalities and the like, it is meant that there may be delegated such measure of
power to impose and collect taxes as the legislature may deem expedient. Thus,
municipalities may be permitted to tax subjects which for reasons of public policy the
State has not deemed wise to tax for more general purposes. 10 This is not to say though
that the constitutional injunction against deprivation of property without due process of
law may be passed over under the guise of the taxing power, except when the taking of
the property is in the lawful exercise of the taxing power, as when (1) the tax is for a
public purpose; (2) the rule on uniformity of taxation is observed; (3) either the person or
property taxed is within the jurisdiction of the government levying the tax; and (4) in the
assessment and collection of certain kinds of taxes notice and opportunity for hearing are
provided. 11 Due process is usually violated where the tax imposed is for a private as
distinguished from a public purpose; a tax is imposed on property outside the State, i.e.,
extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and
collecting taxes. But, a tax does not violate the due process clause, as applied to a
particular taxpayer, although the purpose of the tax will result in an injury rather than a
benefit to such taxpayer. Due process does not require that the property subject to the
tax or the amount of tax to be raised should be determined by judicial inquiry, and a
notice and hearing as to the amount of the tax and the manner in which it shall be
apportioned are generally not necessary to due process of law. 12
There is no validity to the assertion that the delegated authority can be declared
unconstitutional on the theory of double taxation. It must be observed that the delegating
authority specifies the limitations and enumerates the taxes over which local taxation
may not be exercised. 13 The reason is that the State has exclusively reserved the same
for its own prerogative. Moreover, double taxation, in general, is not forbidden by our
fundamental law, since We have not adopted as part thereof the injunction against
double taxation found in the Constitution of the United States and some states of the
Union. 14 Double taxation becomes obnoxious only where the taxpayer is taxed twice for
the benefit of the same governmental entity 15 or by the same jurisdiction for the same
purpose, 16 but not in a case where one tax is imposed by the State and the other by the
city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double
taxation, because these two ordinances cover the same subject matter and impose
practically the same tax rate. The thesis proceeds from its assumption that both
ordinances are valid and legally enforceable. This is not so. As earlier quoted, Ordinance
No. 23, which was approved on September 25, 1962, levies or collects from soft drinks
producers or manufacturers a tax of one-sixteen (1/16) of a centavo for .every bottle
corked, irrespective of the volume contents of the bottle used. When it was discovered
that the producer or manufacturer could increase the volume contents of the bottle and

still pay the same tax rate, the Municipality of Tanauan enacted Ordinance No. 27,
approved on October 28, 1962, imposing a tax of one centavo (P0.01) on each gallon
(128 fluid ounces, U.S.) of volume capacity. The difference between the two ordinances
clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it was 1/16 of
a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on each
gallon (128 fluid ounces, U.S.) of volume capacity. The intention of the Municipal Council
of Tanauan in enacting Ordinance No. 27 is thus clear: it was intended as a plain
substitute for the prior Ordinance No. 23, and operates as a repeal of the latter, even
without words to that effect. 18 Plaintiff-appellant in its brief admitted that defendantsappellees are only seeking to enforce Ordinance No. 27, series of 1962. Even the
stipulation of facts confirms the fact that the Acting Municipal Treasurer of Tanauan, Leyte
sought t6 compel compliance by the plaintiff-appellant of the provisions of said Ordinance
No. 27, series of 1962. The aforementioned admission shows that only Ordinance No. 27,
series of 1962 is being enforced by defendants-appellees. Even the Provincial Fiscal,
counsel for defendants-appellees admits in his brief "that Section 7 of Ordinance No. 27,
series of 1962 clearly repeals Ordinance No. 23 as the provisions of the latter are
inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining Ordinance No. 27 imposes a
percentage or a specific tax. Undoubtedly, the taxing authority conferred on local
governments under Section 2, Republic Act No. 2264, is broad enough as to extend to
almost "everything, accepting those which are mentioned therein." As long as the text
levied under the authority of a city or municipal ordinance is not within the exceptions
and limitations in the law, the same comes within the ambit of the general rule, pursuant
to the rules of exclucion attehus and exceptio firmat regulum in cabisus non
excepti 19 The limitation applies, particularly, to the prohibition against municipalities and
municipal districts to impose "any percentage tax or other taxes in any form based
thereon nor impose taxes on articles subject to specific tax except gasoline, under the
provisions of the National Internal Revenue Code." For purposes of this particular
limitation, a municipal ordinance which prescribes a set ratio between the amount of the
tax and the volume of sale of the taxpayer imposes a sales tax and is null and void for
being outside the power of the municipality to enact. 20But, the imposition of "a tax of
one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity" on all
soft drinks produced or manufactured under Ordinance No. 27 does not partake of the
nature of a percentage tax on sales, or other taxes in any form based thereon. The tax is
levied on the produce (whether sold or not) and not on the sales. The volume capacity of
the taxpayer's production of soft drinks is considered solely for purposes of determining
the tax rate on the products, but there is not set ratio between the volume of sales and
the amount of the tax. 21
Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on
specified articles, such as distilled spirits, wines, fermented liquors, products of tobacco
other than cigars and cigarettes, matches firecrackers, manufactured oils and other fuels,
coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards, saccharine,
opium and other habit-forming drugs. 22 Soft drink is not one of those specified.

3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all
softdrinks, produced or manufactured, or an equivalent of 1- centavos per
case, 23 cannot be considered unjust and unfair. 24 an increase in the tax alone would not
support the claim that the tax is oppressive, unjust and confiscatory. Municipal
corporations are allowed much discretion in determining the reates of imposable taxes.
25 This is in line with the constutional policy of according the widest possible autonomy
to local governments in matters of local taxation, an aspect that is given expression in
the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is so excessive as to
be prohibitive, courts will go slow in writing off an ordinance as unreasonable. 27
Reluctance should not deter compliance with an ordinance such as Ordinance No. 27 if
the purpose of the law to further strengthen local autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five but not more
than ten crowners or P2,000.00 with ten but not more than twenty crowners imposed on
manufacturers, producers, importers and dealers of soft drinks and/or mineral waters
under Ordinance No. 54, series of 1964, as amended by Ordinance No. 41, series of 1968,
of defendant Municipality, 29 appears not to affect the resolution of the validity of
Ordinance No. 27. Municipalities are empowered to impose, not only municipal license
taxes upon persons engaged in any business or occupation but also to levy for public
purposes, just and uniform taxes. The ordinance in question (Ordinance No. 27) comes
within the second power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise
known as the Local Autonomy Act, as amended, is hereby upheld and Municipal
Ordinance No. 27 of the Municipality of Tanauan, Leyte, series of 1962, re-pealing
Municipal Ordinance No. 23, same series, is hereby declared of valid and legal effect.
Costs against petitioner-appellant.
SO ORDERED.

in the opinion of the Board of Trustees, may be justified by the facilities,

personnel, funds, or other requirements that are available;
G.R. No. 195909

September 26, 2012

COMMISSIONER OF INTERNAL REVENUE, PETITIONER,

vs.
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT.
x-----------------------x
G.R. No. 195960
ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,
vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
DECISION
CARPIO, J.:
The Case
These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules of
Court assailing the Decision of 19 November 2010 of the Court of Tax Appeals (CTA) En
Banc and its Resolution 2 of 1 March 2011 in CTA Case No. 6746. This Court resolves this
case on a pure question of law, which involves the interpretation of Section 27(B) vis--vis
Section 30(E) and (G) of the National Internal Revenue Code of the Philippines (NIRC), on
the income tax treatment of proprietary non-profit hospitals.
The Facts
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and nonprofit corporation. Under its articles of incorporation, among its corporate purposes are:
(a) To establish, equip, operate and maintain a non-stock, non-profit Christian,
benevolent, charitable and scientific hospital which shall give curative,
rehabilitative and spiritual care to the sick, diseased and disabled persons;
provided that purely medical and surgical services shall be performed by duly
licensed physicians and surgeons who may be freely and individually contracted
by patients;
(b) To provide a career of health science education and provide medical services
to the community through organized clinics in such specialties as the facilities
and resources of the corporation make possible;
(c) To carry on educational activities related to the maintenance and promotion
of health as well as provide facilities for scientific and medical researches which,

(d) To cooperate with organized medical societies, agencies of both government

and private sector; establish rules and regulations consistent with the highest
professional ethics;
xxxx

On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's
deficiency taxes amounting toP76,063,116.06 for 1998, comprised of deficiency income
tax, value-added tax, withholding tax on compensation and expanded withholding tax.
The BIR reduced the amount to P63,935,351.57 during trial in the First Division of the
CTA. 4
On 14 January 2003, St. Luke's filed an administrative protest with the BIR against the
deficiency tax assessments. The BIR did not act on the protest within the 180-day period
under Section 228 of the NIRC. Thus, St. Luke's appealed to the CTA.
The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a 10%
preferential tax rate on the income of proprietary non-profit hospitals, should be
applicable to St. Luke's. According to the BIR, Section 27(B), introduced in 1997, "is a new
provision intended to amend the exemption on non-profit hospitals that were previously
categorized as non-stock, non-profit corporations under Section 26 of the 1997 Tax Code
x x x." 5 It is a specific provision which prevails over the general exemption on income tax
granted under Section 30(E) and (G) for non-stock, non-profit charitable institutions and
civic organizations promoting social welfare. 6
The BIR claimed that St. Luke's was actually operating for profit in 1998 because only
13% of its revenues came from charitable purposes. Moreover, the hospital's board of
trustees, officers and employees directly benefit from its profits and assets. St. Luke's had
total revenues of P1,730,367,965 or approximately P1.73 billion from patient services in
1998. 7
St. Luke's contended that the BIR should not consider its total revenues, because its free
services to patients wasP218,187,498 or 65.20% of its 1998 operating income (i.e., total
revenues less operating expenses) ofP334,642,615. 8 St. Luke's also claimed that its
income does not inure to the benefit of any individual.
St. Luke's maintained that it is a non-stock and non-profit institution for charitable and
social welfare purposes under Section 30(E) and (G) of the NIRC. It argued that the
making of profit per se does not destroy its income tax exemption.
The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments
before the CTA that Section 27(B) applies to St. Luke's. The petition raises the sole issue
of whether the enactment of Section 27(B) takes proprietary non-profit hospitals out of
the income tax exemption under Section 30 of the NIRC and instead, imposes a
preferential rate of 10% on their taxable income. The BIR prays that St. Luke's be ordered
to payP57,659,981.19 as deficiency income and expanded withholding tax for 1998 with
surcharges and interest for late payment.

The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment and
withholding of a part of its income, 9 as well as the payment of surcharge and
delinquency interest. There is no ground for this Court to undertake such a factual review.
Under the Constitution 10 and the Rules of Court, 11 this Court's review power is generally
limited to "cases in which only an error or question of law is involved." 12 This Court
cannot depart from this limitation if a party fails to invoke a recognized exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First Division
Decision dated 23 February 2009 which held:
WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby PARTIALLY
GRANTED. Accordingly, the 1998 deficiency VAT assessment issued by respondent
against petitioner in the amount of P110,000.00 is hereby CANCELLED and WITHDRAWN.
However, petitioner is hereby ORDERED to PAY deficiency income tax and deficiency
expanded withholding tax for the taxable year 1998 in the respective amounts
of P5,496,963.54 andP778,406.84 or in the sum of P6,275,370.38, x x x.

otherwise, would be subject thereto, because of the existence of x x x net income." 22 The
NIRC of 1997 substantially reproduces the provision on charitable institutions of the old
NIRC. Thus, in rejecting the argument that tax exemption is lost whenever there is net
income, the Court in Jesus Sacred Heart College declared: "[E]very responsible
organization must be run to at least insure its existence, by operating within the limits of
its own resources, especially its regular income. In other words, it should always strive,
whenever possible, to have a surplus." 23
The CTA held that Section 27(B) of the present NIRC does not apply to St. Luke's. 24 The
CTA explained that to apply the 10% preferential rate, Section 27(B) requires a hospital to
be "non-profit." On the other hand, Congress specifically used the word "non-stock" to
qualify a charitable "corporation or association" in Section 30(E) of the NIRC. According to
the CTA, this is unique in the present tax code, indicating an intent to exempt this type of
charitable organization from income tax. Section 27(B) does not require that the hospital
be "non-stock." The CTA stated, "it is clear that non-stock, non-profit hospitals operated
exclusively for charitable purpose are exempt from income tax on income received by
them as such, applying the provision of Section 30(E) of the NIRC of 1997, as
amended." 25
The Issue

xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency
interest on the total amount of P6,275,370.38 counted from October 15, 2003 until full
payment thereof, pursuant to Section 249(C)(3) of the NIRC of 1997.
SO ORDERED.

13

The deficiency income tax of P5,496,963.54, ordered by the CTA En Banc to be paid,
arose from the failure of St. Luke's to prove that part of its income in 1998 (declared as
"Other Income-Net") 14 came from charitable activities. The CTA cancelled the remainder
of the P63,113,952.79 deficiency assessed by the BIR based on the 10% tax rate under
Section 27(B) of the NIRC, which the CTA En Banc held was not applicable to St. Luke's. 15
The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution covered
by Section 30(E) and (G) of the NIRC. This ruling would exempt all income derived by St.
Luke's from services to its patients, whether paying or non-paying. The CTA reiterated its
earlier decision in St. Luke's Medical Center, Inc. v. Commissioner of Internal
Revenue, 16 which examined the primary purposes of St. Luke's under its articles of
incorporation and various documents 17 identifying St. Luke's as a charitable institution.
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay City, 18 which
states that "a charitable institution does not lose its charitable character and its
consequent exemption from taxation merely because recipients of its benefits who are
able to pay are required to do so, where funds derived in this manner are devoted to the
charitable purposes of the institution x x x." 19 The generation of income from paying
patients does not per se destroy the charitable nature of St. Luke's.
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal
Revenue, 20 which ruled that the old NIRC (Commonwealth Act No. 466, as
amended) 21 "positively exempts from taxation those corporations or associations which,

The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on the income of
proprietary non-profit hospitals.
The Ruling of the Court
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No. 195960
because the petition raises factual issues. Under Section 1, Rule 45 of the Rules of Court,
"[t]he petition shall raise only questions of law which must be distinctly set forth." St.
Luke's cites Martinez v. Court of Appeals 26 which permits factual review "when the Court
of Appeals [in this case, the CTA] manifestly overlooked certain relevant facts not
disputed by the parties and which, if properly considered, would justify a different
conclusion." 27
This Court does not see how the CTA overlooked relevant facts. St. Luke's itself stated
that the CTA "disregarded the testimony of [its] witness, Romeo B. Mary, being allegedly
self-serving, to show the nature of the 'Other Income-Net' x x x." 28 This is not a case of
overlooking or failing to consider relevant evidence. The CTA obviously considered the
evidence and concluded that it is self-serving. The CTA declared that it has "gone through
the records of this case and found no other evidence aside from the self-serving affidavit
executed by [the] witnesses [of St. Luke's] x x x." 29
The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the 25%
surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the deficiency
tax within the time prescribed for its payment in the notice of assessment[.]" 30 St. Luke's
is also liable to pay 20% delinquency interest under Section 249(C)(3) of the NIRC. 31 As
explained by the CTA En Banc, the amount of P6,275,370.38 in the dispositive portion of

the CTA First Division Decision includes only deficiency interest under Section 249(A) and
(B) of the NIRC and not delinquency interest. 32

xxxx
(G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;

The Main Issue

The issue raised by the BIR is a purely legal one. It involves the effect of the introduction
of Section 27(B) in the NIRC of 1997 vis--vis Section 30(E) and (G) on the income tax
exemption of charitable and social welfare institutions. The 10% income tax rate under
Section 27(B) specifically pertains to proprietary educational institutions and proprietary
non-profit hospitals. The BIR argues that Congress intended to remove the exemption
that non-profit hospitals previously enjoyed under Section 27(E) of the NIRC of 1977,
which is now substantially reproduced in Section 30(E) of the NIRC of 1997. 33 Section
27(B) of the present NIRC provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. xxxx
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational
institutions and hospitals which are non-profit shall pay a tax of ten percent (10%) on
their taxable income except those covered by Subsection (D) hereof: Provided, That if the
gross income from unrelated trade, business or other activity exceeds fifty percent (50%)
of the total gross income derived by such educational institutions or hospitals from all
sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire
taxable income. For purposes of this Subsection, the term 'unrelated trade, business or
other activity' means any trade, business or other activity, the conduct of which is not
substantially related to the exercise or performance by such educational institution or
hospital of its primary purpose or function. A 'proprietary educational institution' is any
private school maintained and administered by private individuals or groups with an
issued permit to operate from the Department of Education, Culture and Sports (DECS),
or the Commission on Higher Education (CHED), or the Technical Education and Skills
Development Authority (TESDA), as the case may be, in accordance with existing laws
and regulations. (Emphasis supplied)
St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends that
it is a charitable institution and an organization promoting social welfare. The arguments
of St. Luke's focus on the wording of Section 30(E) exempting from income tax non-stock,
non-profit charitable institutions. 34 St. Luke's asserts that the legislative intent of
introducing Section 27(B) was only to remove the exemption for "proprietary non-profit"
hospitals. 35 The relevant provisions of Section 30 state:
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be
taxed under this Title in respect to income received by them as such:
xxxx
(E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans,
no part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person;

xxxx
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the disposition
made of such income, shall be subject to tax imposed under this Code. (Emphasis
supplied)
The Court partly grants the petition of the BIR but on a different ground. We hold that
Section 27(B) of the NIRC does not remove the income tax exemption of proprietary nonprofit hospitals under Section 30(E) and (G). Section 27(B) on one hand, and Section
30(E) and (G) on the other hand, can be construed together without the removal of such
tax exemption. The effect of the introduction of Section 27(B) is to subject the taxable
income of two specific institutions, namely, proprietary non-profit educational
institutions 36 and proprietary non-profit hospitals, among the institutions covered by
Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30%
corporate rate under the last paragraph of Section 30 in relation to Section 27(A)(1).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The
only qualifications for hospitals are that they must be proprietary and non-profit.
"Proprietary" means private, following the definition of a "proprietary educational
institution" as "any private school maintained and administered by private individuals or
groups" with a government permit. "Non-profit" means no net income or asset accrues to
or benefits any member or specific person, with all the net income or asset devoted to
the institution's purposes and all its activities conducted not for profit.
"Non-profit" does not necessarily mean "charitable." In Collector of Internal Revenue v.
Club Filipino Inc. de Cebu,37 this Court considered as non-profit a sports club organized for
recreation and entertainment of its stockholders and members. The club was primarily
funded by membership fees and dues. If it had profits, they were used for overhead
expenses and improving its golf course. 38 The club was non-profit because of its purpose
and there was no evidence that it was engaged in a profit-making enterprise. 39
The sports club in Club Filipino Inc. de Cebu may be non-profit, but it was not charitable.
The Court defined "charity" in Lung Center of the Philippines v. Quezon City 40 as "a gift,
to be applied consistently with existing laws, for the benefit of an indefinite number of
persons, either by bringing their minds and hearts under the influence of education or
religion, by assisting them to establish themselves in life or [by] otherwise lessening the
burden of government." 41 A non-profit club for the benefit of its members fails this test.
An organization may be considered as non-profit if it does not distribute any part of its
income to stockholders or members. However, despite its being a tax exempt institution,
any income such institution earns from activities conducted for profit is taxable, as
expressly provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test of

charity in Lung Center. The issue in Lung Center concerns exemption from real property
tax and not income tax. However, it provides for the test of charity in our jurisdiction.
Charity is essentially a gift to an indefinite number of persons which lessens the burden
of government. In other words, charitable institutions provide for free goods and services
to the public which would otherwise fall on the shoulders of government. Thus, as a
matter of efficiency, the government forgoes taxes which should have been spent to
address public needs, because certain private entities already assume a part of the
burden. This is the rationale for the tax exemption of charitable institutions. The loss of
taxes by the government is compensated by its relief from doing public works which
would have been funded by appropriations from the Treasury. 42
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The power of
Congress to tax implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that "[n]o law granting any tax
exemption shall be passed without the concurrence of a majority of all the Members of
Congress." 43 The requirements for a tax exemption are strictly construed against the
taxpayer 44 because an exemption restricts the collection of taxes necessary for the
existence of the government.
The Court in Lung Center declared that the Lung Center of the Philippines is a charitable
institution for the purpose of exemption from real property taxes. This ruling uses the
same premise as Hospital de San Juan 45and Jesus Sacred Heart College 46 which says that
receiving income from paying patients does not destroy the charitable nature of a
hospital.
As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether
out-patient, or confined in the hospital, or receives subsidies from the government, so
long as the money received is devoted or used altogether to the charitable object which it
is intended to achieve; and no money inures to the private benefit of the persons
managing or operating the institution. 47
For real property taxes, the incidental generation of income is permissible because the
test of exemption is the use of the property. The Constitution provides that "[c]haritable
institutions, churches and personages or convents appurtenant thereto, mosques, nonprofit cemeteries, and all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation." 48The test of exemption is not strictly a requirement on the intrinsic nature or
character of the institution. The test requires that the institution use the property in a
certain way, i.e. for a charitable purpose. Thus, the Court held that the Lung Center of the
Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to
remove from the tax exemption that portion of the property not devoted to charity.
The Constitution exempts charitable institutions only from real property taxes. In the
NIRC, Congress decided to extend the exemption to income taxes. However, the way
Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3),
Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or
association that is exempt from income tax. On the other hand, Section 28(3), Article VI

of the Constitution does not define a charitable institution, but requires that the
institution "actually, directly and exclusively" use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of
any member, organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must be devoted
"exclusively" for charitable purposes. The organization of the institution refers to its
corporate form, as shown by its articles of incorporation, by-laws and other constitutive
documents. Section 30(E) of the NIRC specifically requires that the corporation or
association be non-stock, which is defined by the Corporation Code as "one where no part
of its income is distributable as dividends to its members, trustees, or officers" 49 and that
any profit "obtain[ed] as an incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or purposes for which the corporation
was organized." 50 However, under Lung Center, any profit by a charitable institution must
not only be plowed back "whenever necessary or proper," but must be "devoted or used
altogether to the charitable object which it is intended to achieve." 51
The operations of the charitable institution generally refer to its regular activities. Section
30(E) of the NIRC requires that these operations be exclusive to charity. There is also a
specific requirement that "no part of [the] net income or asset shall belong to or inure to
the benefit of any member, organizer, officer or any specific person." The use of lands,
buildings and improvements of the institution is but a part of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke's from paying taxes.
This only refers to the organization of St. Luke's. Even if St. Luke's meets the test of
charity, a charitable institution is not ipso facto tax exempt. To be exempt from real
property taxes, Section 28(3), Article VI of the Constitution requires that a charitable
institution use the property "actually, directly and exclusively" for charitable purposes. To
be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable
institution must be "organized and operated exclusively" for charitable purposes.
Likewise, to be exempt from income taxes, Section 30(G) of the NIRC requires that the
institution be "operated exclusively" for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words "organized and
operated exclusively" by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any of their properties, real or
personal, or from any of their activities conducted for profit regardless of the disposition

made of such income, shall be subject to tax imposed under this Code. (Emphasis
supplied)

INCOME FROM OPERATIONS, Net of FREE SERVICES

In short, the last paragraph of Section 30 provides that if a tax exempt charitable
institution conducts "any" activity for profit, such activity is not tax exempt even as its
not-for-profit activities remain tax exempt. This paragraph qualifies the requirements in
Section 30(E) that the "[n]on-stock corporation or association [must be] organized and
operated exclusively for x x x charitable x x x purposes x x x." It likewise qualifies the
requirement in Section 30(G) that the civic organization must be "operated exclusively"
for the promotion of social welfare.
Thus, even if the charitable institution must be "organized and operated exclusively" for
charitable purposes, it is nevertheless allowed to engage in "activities conducted for
profit" without losing its tax exempt status for its not-for-profit activities. The only
consequence is that the "income of whatever kind and character" of a charitable
institution "from any of its activities conducted for profit, regardless of the disposition
made of such income, shall be subject to tax." Prior to the introduction of Section 27(B),
the tax rate on such income from for-profit activities was the ordinary corporate rate
under Section 27(A). With the introduction of Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying patients.
It cannot be disputed that a hospital which receives approximately P1.73 billion from
paying patients is not an institution "operated exclusively" for charitable purposes.
Clearly, revenues from paying patients are income received from "activities conducted for
profit." 52 Indeed, St. Luke's admits that it derived profits from its paying patients. St.
Luke's declared P1,730,367,965 as "Revenues from Services to Patients" in contrast to its
"Free Services" expenditure ofP218,187,498. In its Comment in G.R. No. 195909, St.
Luke's showed the following "calculation" to support its claim that 65.20% of its "income
after expenses was allocated to free or charitable services" in 1998. 53

REVENUES FROM SERVICES TO PATIENTS

P1,730,367,965.00

OPERATING EXPENSES
Professional care of patients
Administrative
Household and Property

P1,016,608,394.00

Free Services

34.80%

17,482,304.00

EXCESS OF REVENUES OVER EXPENSES

P133,937,421.00

In Lung Center, this Court declared:

"[e]xclusive" is defined as possessed and enjoyed to the exclusion of others; debarred
from participation or enjoyment; and "exclusively" is defined, "in a manner to exclude; as
enjoying a privilege exclusively." x x x The words "dominant use" or "principal use"
cannot be substituted for the words "used exclusively" without doing violence to the
Constitution and the law. Solely is synonymous with exclusively. 54
The Court cannot expand the meaning of the words "operated exclusively" without
violating the NIRC. Services to paying patients are activities conducted for profit. They
cannot be considered any other way. There is a "purpose to make profit over and above
the cost" of services. 55 The P1.73 billion total revenues from paying patients is not even
incidental to St. Luke's charity expenditure of P218,187,498 for non-paying patients.
St. Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating
income in 1998. However, if a part of the remaining 34.80% of the operating income is
reinvested in property, equipment or facilities used for services to paying and non-paying
patients, then it cannot be said that the income is "devoted or used altogether to the
charitable object which it is intended to achieve." 56 The income is plowed back to the
corporation not entirely for charitable purposes, but for profit as well. In any case, the last
paragraph of Section 30 of the NIRC expressly qualifies that income from activities for
profit is taxable "regardless of the disposition made of such income."
Jesus Sacred Heart College declared that there is no official legislative record explaining
the phrase "any activity conducted for profit." However, it quoted a deposition of Senator
Mariano Jesus Cuenco, who was a member of the Committee of Conference for the
Senate, which introduced the phrase "or from any activity conducted for profit."

287,319,334.00
91,797,622.00

P. Cuando ha hablado de la Universidad de Santo Toms que tiene un hospital, no cree

Vd. que es una actividad esencial dicho hospital para el funcionamiento del colegio de
medicina de dicha universidad?

P1,395,725,350.00

INCOME FROM OPERATIONS

OTHER INCOME

P116,455,117.00

P334,642,615.00

100%

-218,187,498.00

-65.20%

xxxx
R. Si el hospital se limita a recibir enformos pobres, mi contestacin seria afirmativa; pero
considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van

enfermos de buena posicin social econmica, lo que se paga por estos enfermos debe
estar sujeto a 'income tax', y es una de las razones que hemos tenido para insertar las
palabras o frase 'or from any activity conducted for profit.' 57
The question was whether having a hospital is essential to an educational institution like
the College of Medicine of the University of Santo Tomas. Senator Cuenco answered that
if the hospital has paid rooms generally occupied by people of good economic standing,
then it should be subject to income tax. He said that this was one of the reasons
Congress inserted the phrase "or any activity conducted for profit."
The question in Jesus Sacred Heart College involves an educational
institution. 58 However, it is applicable to charitable institutions because Senator Cuenco's
response shows an intent to focus on the activities of charitable institutions. Activities for
profit should not escape the reach of taxation. Being a non-stock and non-profit
corporation does not, by this reason alone, completely exempt an institution from tax. An
institution cannot use its corporate form to prevent its profitable activities from being
taxed.
The Court finds that St. Luke's is a corporation that is not "operated exclusively" for
charitable or social welfare purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict interpretation of a provision granting
tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E)
and (G) of the NIRC requires that an institution be "operated exclusively" for charitable or
social welfare purposes to be completely exempt from income tax. An institution under
Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit
activities. Such income from for-profit activities, under the last paragraph of Section 30, is
merely subject to income tax, previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B).
A tax exemption is effectively a social subsidy granted by the State because an exempt
institution is spared from sharing in the expenses of government and yet benefits from
them. Tax exemptions for charitable institutions should therefore be limited to institutions
beneficial to the public and those which improve social welfare. A profit-making entity
should not be allowed to exploit this subsidy to the detriment of the government and
other taxpayers.1wphi1
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt from all its income. However, it remains a proprietary non-profit
hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits
to its members and such profits are reinvested pursuant to its corporate purposes. St.
Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10%
on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the
NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by the
BIR, which opined that St. Luke's is "a corporation for purely charitable and social welfare
purposes"59 and thus exempt from income tax. 60 In Michael J. Lhuillier, Inc. v.
Commissioner of Internal Revenue, 61 the Court said that "good faith and honest belief
that one is not subject to tax on the basis of previous interpretation of government
agencies tasked to implement the tax law, are sufficient justification to delete the
imposition of surcharges and interest." 62

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909 is
PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19 November
2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746 are MODIFIED. St.
Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency income tax in 1998 based
on the 10% preferential income tax rate under Section 27(B) of the National Internal
Revenue Code. However, it is not liable for surcharges and interest on such deficiency
income tax under Sections 248 and 249 of the National Internal Revenue Code. All other
parts of the Decision and Resolution of the Court of Tax Appeals are AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating
Section 1, Rule 45 of the Rules of Court
PHILIPPINE HEALTH CARE PROVIDER VS CIR
RESOLUTION
CORONA, J.:

ARTICLE II
Declaration of Principles and State Policies
Section 15. The State shall protect and promote the right to health of the people and
instill health consciousness among them.
ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive approach to health
development which shall endeavor to make essential goods, health and other social
services available to all the people at affordable cost. There shall be priority for the needs
of the underprivileged sick, elderly, disabled, women, and children. The State shall
endeavor to provide free medical care to paupers.[1]
For resolution are a motion for reconsideration and supplemental motion for
reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by petitioner
Philippine Health Care Providers, Inc.[2]
We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is [t]o establish, maintain,
conduct and operate a prepaid group practice health care delivery system or a health
maintenance organization to take care of the sick and disabled persons enrolled in the
health care plan and to provide for the administrative, legal, and financial responsibilities
of the organization. Individuals enrolled in its health care programs pay an annual
membership fee and are entitled to various preventive, diagnostic and curative medical
services provided by its duly licensed physicians, specialists and other professional
technical staff participating in the group practice health delivery system at a hospital or
clinic owned, operated or accredited by it.
xxx xxx xxx
On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner
a formal demand letter and the corresponding assessment notices demanding the

payment of deficiency taxes, including surcharges and interest, for the taxable years
1996 and 1997 in the total amount of P224,702,641.18. xxxx
The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners
health care agreement with the members of its health care program pursuant to Section
185 of the 1997 Tax Code xxxx
xxx xxx xxx
Petitioner protested the assessment in a letter dated February 23, 2000. As respondent
did not act on the protest, petitioner filed a petition for review in the Court of Tax Appeals
(CTA) seeking the cancellation of the deficiency VAT and DST assessments.

On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:
WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to
P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until
fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge
plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency.
Accordingly, VAT Ruling No. [231]-88 is declared void and without force and effect. The
1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND
SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency
tax.
SO ORDERED.
Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it
cancelled the DST assessment. He claimed that petitioners health care agreement was a
contract of insurance subject to DST under Section 185 of the 1997 Tax Code.
On August 16, 2004, the CA rendered its decision. It held that petitioners health care
agreement was in the nature of a non-life insurance contract subject to DST.
WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax
Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary
stamp tax assessment and ordered petitioner to desist from collecting the same is
REVERSED and SET ASIDE.
Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as
deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge
for late payment and 20% interest per annum from January 27, 2000, pursuant to
Sections 248 and 249 of the Tax Code, until the same shall have been fully paid.
SO ORDERED.
Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this
case.

xxx xxx xxx

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs
decision. We held that petitioners health care agreement during the pertinent period was
in the nature of non-life insurance which is a contract of indemnity, citing Blue Cross
Healthcare, Inc. v. Olivares[3] and Philamcare Health Systems, Inc. v. CA.[4] We also ruled
that petitioners contention that it is a health maintenance organization (HMO) and not an
insurance company is irrelevant because contracts between companies like petitioner
and the beneficiaries under their plans are treated as insurance contracts. Moreover, DST
is not a tax on the business transacted but an excise on the privilege, opportunity or
facility offered at exchanges for the transaction of the business.
Unable to accept our verdict, petitioner filed the present motion for reconsideration and
supplemental motion for reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only
on a company engaged in the business of fidelity bonds and other insurance policies.
Petitioner, as an HMO, is a service provider, not an insurance company.
(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in
effect the CAs disposition that health care services are not in the nature of an insurance
business.
(c) Section 185 should be strictly construed.
(d) Legislative intent to exclude health care agreements from items subject to DST is
clear, especially in the light of the amendments made in the DST law in 2002.
(e) Assuming arguendo that petitioners agreements are contracts of indemnity, they are
not those contemplated under Section 185.
(f) Assuming arguendo that petitioners agreements are akin to health insurance, health
insurance is not covered by Section 185.
(g) The agreements do not fall under the phrase other branch of insurance mentioned in
Section 185.
(h) The June 12, 2008 decision should only apply prospectively.
(i) Petitioner availed of the tax amnesty benefits under RA[5] 9480 for the taxable year
2005 and all prior years. Therefore, the questioned assessments on the DST are now
rendered moot and academic.[6]
Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their
memoranda on June 8, 2009.
In its motion for reconsideration, petitioner reveals for the first time that it availed of a
tax amnesty under RA 9480[7] (also known as the Tax Amnesty Act of 2007) by fully

paying the amount of P5,127,149.08 representing 5% of its net worth as of the year
ending December 31, 2005.[8]

this distinction is indispensable in turn to the issue of whether or not it is liable for DST on
its health care agreements.[16]

We find merit in petitioners motion for reconsideration.

A second hard look at the relevant law and jurisprudence convinces the Court that the
arguments of petitioner are meritorious.

Petitioner was formally registered and incorporated with the Securities and Exchange
Commission on June 30, 1987.[9] It is engaged in the dispensation of the following
medical services to individuals who enter into health care agreements with it:
Preventive medical services such as periodic monitoring of health problems, family
planning counseling, consultation and advices on diet, exercise and other healthy habits,
and immunization;
Diagnostic medical services such as routine physical examinations, x-rays, urinalysis,
fecalysis, complete blood count, and the like and
Curative medical services which pertain to the performing of other remedial and
therapeutic processes in the event of an injury or sickness on the part of the enrolled
member.[10]
Individuals enrolled in its health care program pay an annual membership fee.
Membership is on a year-to-year basis. The medical services are dispensed to enrolled
members in a hospital or clinic owned, operated or accredited by petitioner, through
physicians, medical and dental practitioners under contract with it. It negotiates with
such health care practitioners regarding payment schemes, financing and other
procedures for the delivery of health services. Except in cases of emergency, the
professional services are to be provided only by petitioner's physicians, i.e. those directly
employed by it[11] or whose services are contracted by it.[12] Petitioner also provides
hospital services such as room and board accommodation, laboratory services, operating
rooms, x-ray facilities and general nursing care.[13] If and when a member avails of the
benefits under the agreement, petitioner pays the participating physicians and other
health care providers for the services rendered, at pre-agreed rates.[14]
To avail of petitioners health care programs, the individual members are required to sign
and execute a standard health care agreement embodying the terms and conditions for
the provision of the health care services. The same agreement contains the various
health care services that can be engaged by the enrolled member, i.e., preventive,
diagnostic and curative medical services. Except for the curative aspect of the medical
service offered, the enrolled member may actually make use of the health care services
being offered by petitioner at any time.

HEALTH MAINTENANCE ORGANIZATIONS ARE NOT ENGAGED IN THE INSURANCE

BUSINESS
We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and
not an insurer because its agreements are treated as insurance contracts and the DST is
not a tax on the business but an excise on the privilege, opportunity or facility used in the
transaction of the business.[15]
Petitioner, however, submits that it is of critical importance to characterize the business it
is engaged in, that is, to determine whether it is an HMO or an insurance company, as

Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability
made or renewed by any person, association or company or corporation transacting the
business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar,
elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland,
and fire insurance), and all bonds, undertakings, or recognizances, conditioned for the
performance of the duties of any office or position, for the doing or not doing of anything
therein specified, and on all obligations guaranteeing the validity or legality of any bond
or other obligations issued by any province, city, municipality, or other public body or
organization, and on all obligations guaranteeing the title to any real estate, or
guaranteeing any mercantile credits, which may be made or renewed by any such
person, company or corporation, there shall be collected a documentary stamp tax of fifty
centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of the premium
charged. (Emphasis supplied)
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or
part of a statute shall be considered surplusage or superfluous, meaningless, void and
insignificant. To this end, a construction which renders every word operative is preferred
over that which makes some words idle and nugatory.[17] This principle is expressed in
the maxim Ut magis valeat quam pereat, that is, we choose the interpretation which
gives effect to the whole of the statute its every word.[18]
From the language of Section 185, it is evident that two requisites must concur before the
DST can apply, namely: (1) the document must be a policy of insurance or an obligation
in the nature of indemnity and (2) the maker should be transacting the business of
accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator,
automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire
insurance).
Petitioner is admittedly an HMO. Under RA 7875 (or The National Health Insurance Act of
1995), an HMO is an entity that provides, offers or arranges for coverage of designated
health services needed by plan members for a fixed prepaid premium.[19] The payments
do not vary with the extent, frequency or type of services provided.
The question is: was petitioner, as an HMO, engaged in the business of insurance during
the pertinent taxable years? We rule that it was not.
Section 2 (2) of PD[20] 1460 (otherwise known as the Insurance Code) enumerates what
constitutes doing an insurance business or transacting an insurance business:
a)

making or proposing to make, as insurer, any insurance contract;

b)
making or proposing to make, as surety, any contract of suretyship as a
vocation and not as merely incidental to any other legitimate business or activity of the
surety;

c)
doing any kind of business, including a reinsurance business, specifically
recognized as constituting the doing of an insurance business within the meaning of this
Code;
d)
doing or proposing to do any business in substance equivalent to any of the
foregoing in a manner designed to evade the provisions of this Code.
In the application of the provisions of this Code, the fact that no profit is derived from the
making of insurance contracts, agreements or transactions or that no separate or direct
consideration is received therefore, shall not be deemed conclusive to show that the
making thereof does not constitute the doing or transacting of an insurance business.

Various courts in the United States, whose jurisprudence has a persuasive effect on our
decisions,[21] have determined that HMOs are not in the insurance business. One test
that they have applied is whether the assumption of risk and indemnification of loss
(which are elements of an insurance business) are the principal object and purpose of the
organization or whether they are merely incidental to its business. If these are the
principal objectives, the business is that of insurance. But if they are merely incidental
and service is the principal purpose, then the business is not insurance.
Applying the principal object and purpose test,[22] there is significant American case law
supporting the argument that a corporation (such as an HMO, whether or not organized
for profit), whose main object is to provide the members of a group with health services,
is not engaged in the insurance business.
The rule was enunciated in Jordan v. Group Health Association[23] wherein the Court of
Appeals of the District of Columbia Circuit held that Group Health Association should not
be considered as engaged in insurance activities since it was created primarily for the
distribution of health care services rather than the assumption of insurance risk.
xxx Although Group Healths activities may be considered in one aspect as creating
security against loss from illness or accident more truly they constitute the quantity
purchase of well-rounded, continuous medical service by its members. xxx The functions
of such an organization are not identical with those of insurance or indemnity companies.
The latter are concerned primarily, if not exclusively, with risk and the consequences of
its descent, not with service, or its extension in kind, quantity or distribution; with the
unusual occurrence, not the daily routine of living. Hazard is predominant. On the other
hand, the cooperative is concerned principally with getting service rendered to its
members and doing so at lower prices made possible by quantity purchasing and
economies in operation. Its primary purpose is to reduce the cost rather than the risk of
medical care; to broaden the service to the individual in kind and quantity; to enlarge the
number receiving it; to regularize it as an everyday incident of living, like purchasing food
and clothing or oil and gas, rather than merely protecting against the financial loss
caused by extraordinary and unusual occurrences, such as death, disaster at sea, fire and
tornado. It is, in this instance, to take care of colds, ordinary aches and pains, minor ills
and all the temporary bodily discomforts as well as the more serious and unusual illness.
To summarize, the distinctive features of the cooperative are the rendering of service, its
extension, the bringing of physician and patient together, the preventive features, the
regularization of service as well as payment, the substantial reduction in cost by quantity
purchasing in short, getting the medical job done and paid for; not, except incidentally to
these features, the indemnification for cost after the services is rendered. Except the last,

these are not distinctive or generally characteristic of the insurance arrangement. There
is, therefore, a substantial difference between contracting in this way for the rendering of
service, even on the contingency that it be needed, and contracting merely to stand its
cost when or after it is rendered.
That an incidental element of risk distribution or assumption may be present should not
outweigh all other factors. If attention is focused only on that feature, the line between
insurance or indemnity and other types of legal arrangement and economic function
becomes faint, if not extinct. This is especially true when the contract is for the sale of
goods or services on contingency. But obviously it was not the purpose of the insurance
statutes to regulate all arrangements for assumption or distribution of risk. That view
would cause them to engulf practically all contracts, particularly conditional sales and
contingent service agreements. The fallacy is in looking only at the risk element, to the
exclusion of all others present or their subordination to it. The question turns, not on
whether risk is involved or assumed, but on whether that or something else to which it is
related in the particular plan is its principal object purpose.[24] (Emphasis supplied)

In California Physicians Service v. Garrison,[25] the California court felt that, after
scrutinizing the plan of operation as a whole of the corporation, it was service rather than
indemnity which stood as its principal purpose.
There is another and more compelling reason for holding that the service is not engaged
in the insurance business. Absence or presence of assumption of risk or peril is not the
sole test to be applied in determining its status. The question, more broadly, is whether,
looking at the plan of operation as a whole, service rather than indemnity is its principal
object and purpose. Certainly the objects and purposes of the corporation organized and
maintained by the California physicians have a wide scope in the field of social service.
Probably there is no more impelling need than that of adequate medical care on a
voluntary, low-cost basis for persons of small income. The medical profession unitedly is
endeavoring to meet that need. Unquestionably this is service of a high order and not
indemnity.[26] (Emphasis supplied)

American courts have pointed out that the main difference between an HMO and an
insurance company is that HMOs undertake to provide or arrange for the provision of
medical services through participating physicians while insurance companies simply
undertake to indemnify the insured for medical expenses incurred up to a pre-agreed
limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue Shield of New
Jersey[27] is clear on this point:
The basic distinction between medical service corporations and ordinary health and
accident insurers is that the former undertake to provide prepaid medical services
through participating physicians, thus relieving subscribers of any further financial
burden, while the latter only undertake to indemnify an insured for medical expenses up
to, but not beyond, the schedule of rates contained in the policy.
xxx xxx xxx
The primary purpose of a medical service corporation, however, is an undertaking to
provide physicians who will render services to subscribers on a prepaid basis. Hence, if
there are no physicians participating in the medical service corporations plan, not only
will the subscribers be deprived of the protection which they might reasonably have

expected would be provided, but the corporation will, in effect, be doing business solely
as a health and accident indemnity insurer without having qualified as such and
rendering itself subject to the more stringent financial requirements of the General
Insurance Laws.
A participating provider of health care services is one who agrees in writing to render
health care services to or for persons covered by a contract issued by health service
corporation in return for which the health service corporation agrees to make payment
directly to the participating provider.[28] (Emphasis supplied)
Consequently, the mere presence of risk would be insufficient to override the primary
purpose of the business to provide medical services as needed, with payment made
directly to the provider of these services.[29] In short, even if petitioner assumes the risk
of paying the cost of these services even if significantly more than what the member has
prepaid, it nevertheless cannot be considered as being engaged in the insurance
business.
By the same token, any indemnification resulting from the payment for services rendered
in case of emergency by non-participating health providers would still be incidental to
petitioners purpose of providing and arranging for health care services and does not
transform it into an insurer. To fulfill its obligations to its members under the agreements,
petitioner is required to set up a system and the facilities for the delivery of such medical
services. This indubitably shows that indemnification is not its sole object.
In fact, a substantial portion of petitioners services covers preventive and diagnostic
medical services intended to keep members from developing medical conditions or
diseases.[30] As an HMO, it is its obligation to maintain the good health of its members.
Accordingly, its health care programs are designed to prevent or to minimize the
possibility of any assumption of risk on its part. Thus, its undertaking under its
agreements is not to indemnify its members against any loss or damage arising from a
medical condition but, on the contrary, to provide the health and medical services
needed to prevent such loss or damage.[31]
Overall, petitioner appears to provide insurance-type benefits to its members (with
respect to its curative medical services), but these are incidental to the principal activity
of providing them medical care. The insurance-like aspect of petitioners business is
miniscule compared to its noninsurance activities. Therefore, since it substantially
provides health care services rather than insurance services, it cannot be considered as
being in the insurance business.
It is important to emphasize that, in adopting the principal purpose test used in the
above-quoted U.S. cases, we are not saying that petitioners operations are identical in
every respect to those of the HMOs or health providers which were parties to those cases.
What we are stating is that, for the purpose of determining what doing an insurance
business means, we have to scrutinize the operations of the business as a whole and not
its mere components. This is of course only prudent and appropriate, taking into account
the burdensome and strict laws, rules and regulations applicable to insurers and other
entities engaged in the insurance business. Moreover, we are also not unmindful that
there are other American authorities who have found particular HMOs to be actually
engaged in insurance activities.[32]
Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry.
This is evident from the fact that it is not supervised by the Insurance Commission but by
the Department of Health.[33] In fact, in a letter dated September 3, 2000, the Insurance

Commissioner confirmed that petitioner is not engaged in the insurance business. This
determination of the commissioner must be accorded great weight. It is well-settled that
the interpretation of an administrative agency which is tasked to implement a statute is
accorded great respect and ordinarily controls the interpretation of laws by the courts.
The reason behind this rule was explained in Nestle Philippines, Inc. v. Court of Appeals:
[34]
The rationale for this rule relates not only to the emergence of the multifarious needs of a
modern or modernizing society and the establishment of diverse administrative agencies
for addressing and satisfying those needs; it also relates to the accumulation of
experience and growth of specialized capabilities by the administrative agency charged
with implementing a particular statute. In Asturias Sugar Central, Inc. vs. Commissioner
of Customs,[35] the Court stressed that executive officials are presumed to have
familiarized themselves with all the considerations pertinent to the meaning and purpose
of the law, and to have formed an independent, conscientious and competent expert
opinion thereon. The courts give much weight to the government agency officials charged
with the implementation of the law, their competence, expertness, experience and
informed judgment, and the fact that they frequently are the drafters of the law they
interpret.[36]

A HEALTH CARE AGREEMENT IS NOT AN INSURANCE CONTRACT CONTEMPLATED UNDER

SECTION 185 OF THE NIRC OF 1997

Section 185 states that DST is imposed on all policies of insurance or obligations of the
nature of indemnity for loss, damage, or liability. In our decision dated June 12, 2008, we
ruled that petitioners health care agreements are contracts of indemnity and are
therefore insurance contracts:
It is incorrect to say that the health care agreement is not based on loss or damage
because, under the said agreement, petitioner assumes the liability and indemnifies its
member for hospital, medical and related expenses (such as professional fees of
physicians). The term "loss or damage" is broad enough to cover the monetary expense
or liability a member will incur in case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional
services to the member in case of sickness, injury or emergency or his availment of socalled "out-patient services" (including physical examination, x-ray and laboratory tests,
medical consultations, vaccine administration and family planning counseling) is the
contingent event which gives rise to liability on the part of the member. In case of
exposure of the member to liability, he would be entitled to indemnification by petitioner.
Furthermore, the fact that petitioner must relieve its member from liability by paying for
expenses arising from the stipulated contingencies belies its claim that its services are
prepaid. The expenses to be incurred by each member cannot be predicted beforehand, if
they can be predicted at all. Petitioner assumes the risk of paying for the costs of the
services even if they are significantly and substantially more than what the member has
"prepaid." Petitioner does not bear the costs alone but distributes or spreads them out
among a large group of persons bearing a similar risk, that is, among all the other
members of the health care program. This is insurance.[37]

We reconsider. We shall quote once again the pertinent portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability
made or renewed by any person, association or company or corporation transacting the
business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar,
elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland,
and fire insurance), xxxx (Emphasis supplied)
In construing this provision, we should be guided by the principle that tax statutes are
strictly construed against the taxing authority.[38] This is because taxation is a
destructive power which interferes with the personal and property rights of the people
and takes from them a portion of their property for the support of the government.[39]
Hence, tax laws may not be extended by implication beyond the clear import of their
language, nor their operation enlarged so as to embrace matters not specifically
provided.[40]
We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care
agreement is in the nature of non-life insurance, which is primarily a contract of
indemnity. However, those cases did not involve the interpretation of a tax provision.
Instead, they dealt with the liability of a health service provider to a member under the
terms of their health care agreement. Such contracts, as contracts of adhesion, are
liberally interpreted in favor of the member and strictly against the HMO. For this reason,
we reconsider our ruling that Blue Cross and Philamcare are applicable here.
Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement
whereby one undertakes for a consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event. An insurance contract exists where
the following elements concur:
1.

The insured has an insurable interest;

2.

The insured is subject to a risk of loss by the happening of the designed peril;

3.

The insurer assumes the risk;

4.
Such assumption of risk is part of a general scheme to distribute actual losses
among a large group of persons bearing a similar risk and
5.

In consideration of the insurers promise, the insured pays a premium.[41]

Do the agreements between petitioner and its members possess all these elements?
They do not.
First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even
if a contract contains all the elements of an insurance contract, if its primary purpose is
the rendering of service, it is not a contract of insurance:

It does not necessarily follow however, that a contract containing all the four elements
mentioned above would be an insurance contract. The primary purpose of the parties in
making the contract may negate the existence of an insurance contract. For example, a
law firm which enters into contracts with clients whereby in consideration of periodical
payments, it promises to represent such clients in all suits for or against them, is not
engaged in the insurance business. Its contracts are simply for the purpose of rendering
personal services. On the other hand, a contract by which a corporation, in consideration
of a stipulated amount, agrees at its own expense to defend a physician against all suits
for damages for malpractice is one of insurance, and the corporation will be deemed as
engaged in the business of insurance. Unlike the lawyers retainer contract, the essential
purpose of such a contract is not to render personal services, but to indemnify against
loss and damage resulting from the defense of actions for malpractice.[42] (Emphasis
supplied)

Second. Not all the necessary elements of a contract of insurance are present in
petitioners agreements. To begin with, there is no loss, damage or liability on the part of
the member that should be indemnified by petitioner as an HMO. Under the agreement,
the member pays petitioner a predetermined consideration in exchange for the hospital,
medical and professional services rendered by the petitioners physician or affiliated
physician to him. In case of availment by a member of the benefits under the agreement,
petitioner does not reimburse or indemnify the member as the latter does not pay any
third party. Instead, it is the petitioner who pays the participating physicians and other
health care providers for the services rendered at pre-agreed rates. The member does not
make any such payment.

In other words, there is nothing in petitioner's agreements that gives rise to a monetary
liability on the part of the member to any third party-provider of medical services which
might in turn necessitate indemnification from petitioner. The terms indemnify or
indemnity presuppose that a liability or claim has already been incurred. There is no
indemnity precisely because the member merely avails of medical services to be paid or
already paid in advance at a pre-agreed price under the agreements.
Third. According to the agreement, a member can take advantage of the bulk of the
benefits anytime, e.g. laboratory services, x-ray, routine annual physical examination and
consultations, vaccine administration as well as family planning counseling, even in the
absence of any peril, loss or damage on his or her part.
Fourth. In case of emergency, petitioner is obliged to reimburse the member who
receives care from a non-participating physician or hospital. However, this is only a very
minor part of the list of services available. The assumption of the expense by petitioner is
not confined to the happening of a contingency but includes incidents even in the
absence of illness or injury.
In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,[43]
although the health care contracts called for the defendant to partially reimburse a
subscriber for treatment received from a non-designated doctor, this did not make
defendant an insurer. Citing Jordan, the Court determined that the primary activity of the
defendant (was) the provision of podiatric services to subscribers in consideration of
prepayment for such services.[44] Since indemnity of the insured was not the focal point

of the agreement but the extension of medical services to the member at an affordable
cost, it did not partake of the nature of a contract of insurance.
Fifth. Although risk is a primary element of an insurance contract, it is not necessarily
true that risk alone is sufficient to establish it. Almost anyone who undertakes a
contractual obligation always bears a certain degree of financial risk. Consequently, there
is a need to distinguish prepaid service contracts (like those of petitioner) from the usual
insurance contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health
services: the risk that it might fail to earn a reasonable return on its investment. But it is
not the risk of the type peculiar only to insurance companies. Insurance risk, also known
as actuarial risk, is the risk that the cost of insurance claims might be higher than the
premiums paid. The amount of premium is calculated on the basis of assumptions made
relative to the insured.[45]
However, assuming that petitioners commitment to provide medical services to its
members can be construed as an acceptance of the risk that it will shell out more than
the prepaid fees, it still will not qualify as an insurance contract because petitioners
objective is to provide medical services at reduced cost, not to distribute risk like an
insurer.

xxx xxx xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity
for loss, damage, or liability made or renewed by any person, association, company, or
corporation transacting the business of accident, fidelity, employers liability, plate glass,
steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except
life, marine, inland, and fire insurance) xxxx (Emphasis supplied)
On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted
revising and consolidating the laws relating to internal revenue. The aforecited pertinent
portion of Section 116, Article XI of Act No. 1189 was completely reproduced as Section
30 (l), Article III of Act No. 2339. The very detailed and exclusive enumeration of items
subject to DST was thus retained.

In sum, an examination of petitioners agreements with its members leads us to conclude

that it is not an insurance contract within the context of our Insurance Code.

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as
Section 1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on
March 10, 1917, the pertinent DST provision became Section 1449 (l) of Act No. 2711,
otherwise known as the Administrative Code of 1917.
Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of
1939), which codified all the internal revenue laws of the Philippines. In an amendment
introduced by RA 40 on October 1, 1946, the DST rate was increased but the provision
remained substantially the same.

THERE WAS NO LEGISLATIVE INTENT TO IMPOSE DST ON HEALTH CARE AGREEMENTS OF

HMOS

Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced
in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11,
1978 and October 10, 1984 respectively, the DST rate was again increased.

Furthermore, militating in convincing fashion against the imposition of DST on petitioners

health care agreements under Section 185 of the NIRC of 1997 is the provisions
legislative history. The text of Section 185 came into U.S. law as early as 1904 when
HMOs and health care agreements were not even in existence in this jurisdiction. It was
imposed under Section 116, Article XI of Act No. 1189 (otherwise known as the Internal
Revenue Law of 1904)[46] enacted on July 2, 1904 and became effective on August 1,
1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim
reproduction of the pertinent portion of Section 116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects
Section 116. There shall be levied, collected, and paid for and in respect to the several
bonds, debentures, or certificates of stock and indebtedness, and other documents,
instruments, matters, and things mentioned and described in this section, or for or in
respect to the vellum, parchment, or paper upon which such instrument, matters, or
things or any of them shall be written or printed by any person or persons who shall
make, sign, or issue the same, on and after January first, nineteen hundred and five, the
several taxes following:

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of
1977 was renumbered as Section 198. And under Section 23 of EO[47] 273 dated July 25,
1987, it was again renumbered and became Section 185.
On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with
respect to the rate of tax.
Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the
NIRC of 1997), the subject legal provision was retained as the present Section 185. In
2004, amendments to the DST provisions were introduced by RA 9243[48] but Section
185 was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines with the
formation of Bancom Health Care Corporation in 1974. The same pioneer HMO was later
reorganized and renamed Integrated Health Care Services, Inc. (or Intercare). However,
there are those who claim that Health Maintenance, Inc. is the HMO industry pioneer,
having set foot in the Philippines as early as 1965 and having been formally incorporated
in 1991. Afterwards, HMOs proliferated quickly and currently, there are 36 registered
HMOs with a total enrollment of more than 2 million.[49]
We can clearly see from these two histories (of the DST on the one hand and HMOs on
the other) that when the law imposing the DST was first passed, HMOs were yet unknown
in the Philippines. However, when the various amendments to the DST law were enacted,
they were already in existence in the Philippines and the term had in fact already been
defined by RA 7875. If it had been the intent of the legislature to impose DST on health
care agreements, it could have done so in clear and categorical terms. It had many

opportunities to do so. But it did not. The fact that the NIRC contained no specific
provision on the DST liability of health care agreements of HMOs at a time they were
already known as such, belies any legislative intent to impose it on them. As a matter of
fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a
decade in the business as an HMO.[50]
Considering that Section 185 did not change since 1904 (except for the rate of tax), it
would be safe to say that health care agreements were never, at any time, recognized as
insurance contracts or deemed engaged in the business of insurance within the context
of the provision.

THE POWER TO TAX IS NOT

THE POWER TO DESTROY

Far from disagreeing with petitioner, respondent manifested in its memorandum:

Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to
immunity from payment of the tax involved, including the civil, criminal, or administrative
penalties provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the
preceding years.
In view of petitioners availment of the benefits of [RA 9840], and without conceding the
merits of this case as discussed above, respondent concedes that such tax amnesty
extinguishes the tax liabilities of petitioner. This admission, however, is not meant to
preclude a revocation of the amnesty granted in case it is found to have been granted
under circumstances amounting to tax fraud under Section 10 of said amnesty law.[62]
(Emphasis supplied)

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no limits, so that security against its abuse is to
be found only in the responsibility of the legislature which imposes the tax on the
constituency who is to pay it.[51] So potent indeed is the power that it was once opined
that the power to tax involves the power to destroy.[52]

Furthermore, we held in a recent case that DST is one of the taxes covered by the tax
amnesty program under RA 9480.[63] There is no other conclusion to draw than that
petitioners liability for DST for the taxable years 1996 and 1997 was totally extinguished
by its availment of the tax amnesty under RA 9480.

Petitioner claims that the assessed DST to date which amounts to P376 million[53] is way
beyond its net worth of P259 million.[54] Respondent never disputed these assertions.
Given the realities on the ground, imposing the DST on petitioner would be highly
oppressive. It is not the purpose of the government to throttle private business. On the
contrary, the government ought to encourage private enterprise.[55] Petitioner, just like
any concern organized for a lawful economic activity, has a right to maintain a legitimate
business.[56] As aptly held in Roxas, et al. v. CTA, et al.:[57]

IS THE COURT BOUND BY A MINUTE RESOLUTION IN ANOTHER CASE?

The power of taxation is sometimes called also the power to destroy. Therefore it should
be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It
must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays
the golden egg.[58]
Legitimate enterprises enjoy the constitutional protection not to be taxed out of
existence. Incurring losses because of a tax imposition may be an acceptable
consequence but killing the business of an entity is another matter and should not be
allowed. It is counter-productive and ultimately subversive of the nations thrust towards a
better economy which will ultimately benefit the majority of our people.[59]

In support of its argument, petitioner cites the August 29, 2001 minute resolution of this
Court dismissing the appeal in Philippine National Bank (G.R. No. 148680).[66] Petitioner
argues that the dismissal of G.R. No. 148680 by minute resolution was a judgment on the
merits; hence, the Court should apply the CA ruling there that a health care agreement is
not an insurance contract.

PETITIONERS TAX LIABILITY

WAS EXTINGUISHED UNDER
THE PROVISIONS OF RA 9840
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable
years 1996 and 1997 became moot and academic[60] when it availed of the tax amnesty
under RA 9480 on December 10, 2007. It paid P5,127,149.08 representing 5% of its net
worth as of the year ended December 31, 2005 and complied with all requirements of the
tax amnesty. Under Section 6(a) of RA 9480, it is entitled to immunity from payment of
taxes as well as additions thereto, and the appurtenant civil, criminal or administrative
penalties under the 1997 NIRC, as amended, arising from the failure to pay any and all
internal revenue taxes for taxable year 2005 and prior years.[61]

Petitioner raises another interesting issue in its motion for reconsideration: whether this
Court is bound by the ruling of the CA[64] in CIR v. Philippine National Bank[65] that a
health care agreement of Philamcare Health Systems is not an insurance contract for
purposes of the DST.

It is true that, although contained in a minute resolution, our dismissal of the petition was
a disposition of the merits of the case. When we dismissed the petition, we effectively
affirmed the CA ruling being questioned. As a result, our ruling in that case has already
become final.[67] When a minute resolution denies or dismisses a petition for failure to
comply with formal and substantive requirements, the challenged decision, together with
its findings of fact and legal conclusions, are deemed sustained.[68] But what is its effect
on other cases?
With respect to the same subject matter and the same issues concerning the same
parties, it constitutes res judicata.[69] However, if other parties or another subject matter
(even with the same parties and issues) is involved, the minute resolution is not binding
precedent. Thus, in CIR v. Baier-Nickel,[70] the Court noted that a previous case, CIR v.
Baier-Nickel[71] involving the same parties and the same issues, was previously disposed
of by the Court thru a minute resolution dated February 17, 2003 sustaining the ruling of
the CA. Nonetheless, the Court ruled that the previous case ha(d) no bearing on the latter
case because the two cases involved different subject matters as they were concerned
with the taxable income of different taxable years.[72]

SO ORDERED.
Besides, there are substantial, not simply formal, distinctions between a minute
resolution and a decision. The constitutional requirement under the first paragraph of
Section 14, Article VIII of the Constitution that the facts and the law on which the
judgment is based must be expressed clearly and distinctly applies only to decisions, not
to minute resolutions. A minute resolution is signed only by the clerk of court by authority
of the justices, unlike a decision. It does not require the certification of the Chief Justice.
Moreover, unlike decisions, minute resolutions are not published in the Philippine Reports.
Finally, the proviso of Section 4(3) of Article VIII speaks of a decision.[73] Indeed, as a
rule, this Court lays down doctrines or principles of law which constitute binding
precedent in a decision duly signed by the members of the Court and certified by the
Chief Justice.
Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners
liability for DST on its health care agreement was not the subject matter of G.R. No.
148680, petitioner cannot successfully invoke the minute resolution in that case (which is
not even binding precedent) in its favor. Nonetheless, in view of the reasons already
discussed, this does not detract in any way from the fact that petitioners health care
agreements are not subject to DST.
A FINAL NOTE

Taking into account that health care agreements are clearly not within the ambit of
Section 185 of the NIRC and there was never any legislative intent to impose the same on
HMOs like petitioner, the same should not be arbitrarily and unjustly included in its
coverage.
It is a matter of common knowledge that there is a great social need for adequate
medical services at a cost which the average wage earner can afford. HMOs arrange,
organize and manage health care treatment in the furtherance of the goal of providing a
more efficient and inexpensive health care system made possible by quantity purchasing
of services and economies of scale. They offer advantages over the pay-for-service
system (wherein individuals are charged a fee each time they receive medical services),
including the ability to control costs. They protect their members from exposure to the
high cost of hospitalization and other medical expenses brought about by a fluctuating
economy. Accordingly, they play an important role in society as partners of the State in
achieving its constitutional mandate of providing its citizens with affordable health
services.

CIR VS SM PRIME HOLDINGS

DECISION

The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.[74] Its
imposition will elevate the cost of health care services. This will in turn necessitate an
increase in the membership fees, resulting in either placing health services beyond the
reach of the ordinary wage earner or driving the industry to the ground. At the end of the
day, neither side wins, considering the indispensability of the services offered by HMOs.

This Petition for Review on Certiorari under Rule 45 of the Rules of Court, in relation to
Republic Act (RA) No. 9282,[4] seeks to set aside the April 30, 2008 Decision[5] and the
June 24, 2008 Resolution[6] of the Court of Tax Appeals (CTA).
Factual Antecedents

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision
of the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996
and 1997 deficiency DST assessment against petitioner is hereby CANCELLED and SET
ASIDE. Respondent is ordered to desist from collecting the said tax.
No costs.

DEL CASTILLO, J.:

When the intent of the law is not apparent as worded, or when the application of the law
would lead to absurdity or injustice, legislative history is all important. In such cases,
courts may take judicial notice of the origin and history of the law,[1] the deliberations
during the enactment,[2] as well as prior laws on the same subject matter[3] to ascertain
the true intent or spirit of the law.

Respondents SM Prime Holdings, Inc. (SM Prime) and First Asia Realty Development
Corporation (First Asia) are domestic corporations duly organized and existing under the
laws of the Republic of the Philippines. Both are engaged in the business of operating
cinema houses, among others.[7]
CTA Case No. 7079

On September 26, 2003, the Bureau of Internal Revenue (BIR) sent SM Prime a
Preliminary Assessment Notice (PAN) for value added tax (VAT) deficiency on cinema
ticket sales in the amount of P119,276,047.40 for taxable year 2000.[8] In response, SM
Prime filed a letter-protest dated December 15, 2003.[9]
On December 12, 2003, the BIR sent SM Prime a Formal Letter of Demand for the alleged
VAT deficiency, which the latter protested in a letter dated January 14, 2004.[10]

A PAN for VAT deficiency on cinema ticket sales for the taxable year 2002 in the total
amount of P32,802,912.21 was issued against First Asia by the BIR. In response, First Asia
filed a protest-letter dated November 11, 2004. The BIR then sent a Formal Letter of
Demand, which was protested by First Asia on December 14, 2004.[23]

On September 6, 2004, the BIR denied the protest filed by SM Prime and ordered it to pay
the VAT deficiency for taxable year 2000 in the amount of P124,035,874.12.[11]

A PAN for VAT deficiency on cinema ticket sales in the total amount of P28,196,376.46 for
the taxable year 2003 was issued by the BIR against First Asia. In a letter dated
September 23, 2004, First Asia protested the PAN. A Formal Letter of Demand was
thereafter issued by the BIR to First Asia, which the latter protested through a letter dated
November 11, 2004. [24]

On October 15, 2004, SM Prime filed a Petition for Review before the CTA docketed as CTA
Case No. 7079.[12]
CTA Case No. 7085
On May 15, 2002, the BIR sent First Asia a PAN for VAT deficiency on
cinema ticket sales for taxable year 1999 in the total amount of P35,823,680.93.[13] First
Asia protested the PAN in a letter dated July 9, 2002.[14]
Subsequently, the BIR issued a Formal Letter of Demand for the alleged VAT deficiency
which was protested by First Asia in a letter dated December 12, 2002.[15]
On September 6, 2004, the BIR rendered a Decision denying the protest and ordering
First Asia to pay the amount of P35,823,680.93 for VAT deficiency for taxable year 1999.
[16]
Accordingly, on October 20, 2004, First Asia filed a Petition for Review before the CTA,
docketed as CTA Case No. 7085.[17]
CTA Case No. 7111
On April 16, 2004, the BIR sent a PAN to First Asia for VAT deficiency on cinema ticket
sales for taxable year 2000 in the amount of P35,840,895.78. First Asia protested the PAN
through a letter dated April 22, 2004.[18]
Thereafter, the BIR issued a Formal Letter of Demand for alleged VAT deficiency.[19] First
Asia protested the same in a letter dated July 9, 2004.[20]
On October 5, 2004, the BIR denied the protest and ordered First Asia to pay the VAT
deficiency in the amount of P35,840,895.78 for taxable year 2000.[21]
This prompted First Asia to file a Petition for Review before the CTA on December 16,
2004. The case was docketed as CTA Case No. 7111.[22]
CTA Case No. 7272
Re: Assessment Notice No. 008-02

Re: Assessment Notice No. 003-03

On May 11, 2005, the BIR rendered a Decision denying the protests. It ordered First Asia
to pay the amounts of P33,610,202.91 and P28,590,826.50 for VAT deficiency for taxable
years 2002 and 2003, respectively.[25]
Thus, on June 22, 2005, First Asia filed a Petition for Review before the CTA, docketed as
CTA Case No. 7272.[26]
Consolidated Petitions
The Commissioner of Internal Revenue (CIR) filed his Answers to the Petitions filed by SM
Prime and First Asia.[27]
On July 1, 2005, SM Prime filed a Motion to Consolidate CTA Case Nos. 7085, 7111 and
7272 with CTA Case No. 7079 on the grounds that the issues raised therein are identical
and that SM Prime is a majority shareholder of First Asia. The motion was granted.[28]
Upon submission of the parties respective memoranda, the consolidated cases were
submitted for decision on the sole issue of whether gross receipts derived from admission
tickets by cinema/theater operators or proprietors are subject to VAT.[29]
Ruling of the CTA First Division
On September 22, 2006, the First Division of the CTA rendered a Decision granting the
Petition for Review. Resorting to the language used and the legislative history of the law,
it ruled that the activity of showing cinematographic films is not a service covered by VAT
under the National Internal Revenue Code (NIRC) of 1997, as amended, but an activity
subject to amusement tax under RA 7160, otherwise known as the Local Government
Code (LGC) of 1991. Citing House Joint Resolution No. 13, entitled Joint Resolution
Expressing the True Intent of Congress with Respect to the Prevailing Tax Regime in the
Theater and Local Film Industry Consistent with the States Policy to Have a Viable,
Sustainable and Competitive Theater and Film Industry as One of its Partners in National
Development,[30] the CTA First Division held that the House of Representatives resolved
that there should only be one business tax applicable to theaters and movie houses,
which is the 30% amusement tax imposed by cities and provinces under the LGC of 1991.
Further, it held that consistent with the States policy to have a viable, sustainable and
competitive theater and film industry, the national government should be precluded from
imposing its own business tax in addition to that already imposed and collected by local
government units. The CTA First Division likewise found that Revenue Memorandum

Circular (RMC) No. 28-2001, which imposes VAT on gross receipts from admission to
cinema houses, cannot be given force and effect because it failed to comply with the
procedural due process for tax issuances under RMC No. 20-86.[31] Thus, it disposed of
the case as follows:
IN VIEW OF ALL THE FOREGOING, this Court hereby GRANTS the Petitions for Review.
Respondents Decisions denying petitioners protests against deficiency value-added taxes
are hereby REVERSED. Accordingly, Assessment Notices Nos. VT-00-000098, VT-99000057, VT-00-000122, 003-03 and 008-02 are ORDERED cancelled and set aside.
SO ORDERED.[32]
Aggrieved, the CIR moved for reconsideration which was denied by the First Division in its
Resolution dated December 14, 2006.[33]
Ruling of the CTA En Banc
Thus, the CIR appealed to the CTA En Banc.[34] The case was docketed as CTA EB No.
244.[35] The CTA En Banc however denied[36] the Petition for Review and dismissed[37]
as well petitioners Motion for Reconsideration.
The CTA En Banc held that Section 108 of the NIRC actually sets forth an exhaustive
enumeration of what services are intended to be subject to VAT. And since the showing or
exhibition of motion pictures, films or movies by cinema operators or proprietors is not
among the enumerated activities contemplated in the phrase sale or exchange of
services, then gross receipts derived by cinema/ theater operators or proprietors from
admission tickets in showing motion pictures, film or movie are not subject to VAT. It
reiterated that the exhibition or showing of motion pictures, films, or movies is instead
subject to amusement tax under the LGC of 1991. As regards the validity of RMC No. 282001, the CTA En Banc agreed with its First Division that the same cannot be given force
and effect for failure to comply with RMC No. 20-86.
Issue
Hence, the present recourse, where petitioner alleges that the CTA En Banc seriously
erred:

(d)
GRANTING WITHOUT CONCEDING THAT RULES OF CONSTRUCTION ARE
APPLICABLE HEREIN, STILL THE HONORABLE COURT ERRONEOUSLY APPLIED THE SAME
AND PROMULGATED DANGEROUS PRECEDENTS;
(e)
THERE IS NO VALID, EXISTING PROVISION OF LAW EXEMPTING RESPONDENTS
SERVICES FROM THE VAT IMPOSED UNDER SECTION 108 OF THE NIRC OF 1997;
(f)
QUESTIONS ON THE WISDOM OF THE LAW ARE NOT PROPER ISSUES TO BE
TRIED BY THE HONORABLE COURT; and
(g)
RESPONDENTS WERE TAXED BASED ON THE PROVISION OF SECTION 108 OF
THE NIRC.
(2)
In ruling that the enumeration in Section 108 of the NIRC of 1997
is exhaustive in coverage;
(3)
In misconstruing the NIRC of 1997 to conclude that the showing of
motion pictures is merely subject to the amusement tax imposed by the Local
Government Code; and
(4) In invalidating Revenue Memorandum Circular (RMC) No. 28-2001.[38]
Simply put, the issue in this case is whether the gross receipts derived by operators or
proprietors of cinema/theater houses from admission tickets are subject to VAT.
Petitioners Arguments
Petitioner argues that the enumeration of services subject to VAT in Section 108 of the
NIRC is not exhaustive because it covers all sales of services unless exempted by law. He
claims that the CTA erred in applying the rules on statutory construction and in using
extrinsic aids in interpreting Section 108 because the provision is clear and unambiguous.
Thus, he maintains that the exhibition of movies by cinema operators or proprietors to
the paying public, being a sale of service, is subject to VAT.
Respondents Arguments

(1)
In not finding/holding that the gross receipts derived by
operators/proprietors of cinema houses from admission tickets [are] subject to the 10%
VAT because:
(a)
THE EXHIBITION OF MOVIES BY CINEMA OPERATORS/PROPRIETORS TO THE
PAYING PUBLIC IS A SALE OF SERVICE;
(b)
UNLESS EXEMPTED BY LAW, ALL SALES OF SERVICES ARE EXPRESSLY SUBJECT
TO VAT UNDER SECTION 108 OF THE NIRC OF 1997;
(c)
SECTION 108 OF THE NIRC OF 1997 IS A CLEAR PROVISION OF LAW AND THE
APPLICATION OF RULES OF STATUTORY CONSTRUCTION AND EXTRINSIC AIDS IS
UNWARRANTED;

Respondents, on the other hand, argue that a plain reading of Section 108 of the NIRC of
1997 shows that the gross receipts of proprietors or operators of cinemas/theaters
derived from public admission are not among the services subject to VAT. Respondents
insist that gross receipts from cinema/theater admission tickets were never intended to
be subject to any tax imposed by the national government. According to them, the
absence of gross receipts from cinema/theater admission tickets from the list of services
which are subject to the national amusement tax under Section 125 of the NIRC of 1997
reinforces this legislative intent. Respondents also highlight the fact that RMC No. 282001 on which the deficiency assessments were based is an unpublished administrative
ruling.
Our Ruling
The petition is bereft of merit.

The enumeration of services subject to VAT under Section 108 of the NIRC is not
exhaustive

Section 108 of the NIRC of the 1997 reads:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax
equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of
services, including the use or lease of properties.
The phrase sale or exchange of services means the performance of all kinds of services in
the Philippines for others for a fee, remuneration or consideration, including those
performed or rendered by construction and service contractors; stock, real estate,
commercial, customs and immigration brokers; lessors of property, whether personal or
real; warehousing services; lessors or distributors of cinematographic films; persons
engaged in milling, processing, manufacturing or repacking goods for others; proprietors,
operators or keepers of hotels, motels, rest houses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating
places, including clubs and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods or cargoes, including persons who
transport goods or cargoes for hire and other domestic common carriers by land, air and
water relative to their transport of goods or cargoes; services of franchise grantees of
telephone and telegraph, radio and television broadcasting and all other franchise
grantees except those under Section 119 of this Code; services of banks, non-bank
financial intermediaries and finance companies; and non-life insurance companies
(except their crop insurances), including surety, fidelity, indemnity and bonding
companies; and similar services regardless of whether or not the performance thereof
calls for the exercise or use of the physical or mental faculties. The phrase sale or
exchange of services shall likewise include:
(1) The lease or the use of or the right or privilege to use any copyright, patent, design or
model, plan, secret formula or process, goodwill, trademark, trade brand or other like
property or right;
xxxx
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television, satellite transmission and
cable television time.
x x x x (Emphasis supplied)
A cursory reading of the foregoing provision clearly shows that the enumeration of the
sale or exchange of services subject to VAT is not exhaustive. The words, including,
similar services, and shall likewise include, indicate that the enumeration is by way of
example only.[39]

Among those included in the enumeration is the lease of motion picture films, films, tapes
and discs. This, however, is not the same as the showing or exhibition of motion pictures
or films. As pointed out by the CTA En Banc:
Exhibition in Blacks Law Dictionary is defined as To show or display. x x x To produce
anything in public so that it may be taken into possession (6th ed., p. 573). While the
word lease is defined as a contract by which one owning such property grants to another
the right to possess, use and enjoy it on specified period of time in exchange for periodic
payment of a stipulated price, referred to as rent (Blacks Law Dictionary, 6th ed., p. 889).
x x x[40]
Since the activity of showing motion pictures, films or movies by cinema/ theater
operators or proprietors is not included in the enumeration, it is incumbent upon the
court to the determine whether such activity falls under the phrase similar services. The
intent of the legislature must therefore be ascertained.
The legislature never intended operators
or proprietors of cinema/theater houses to be covered by VAT

Under the NIRC of 1939,[41] the national government imposed amusement tax on
proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses,
boxing exhibitions, and other places of amusement, including cockpits, race tracks, and
cabaret.[42] In the case of theaters or cinematographs, the taxes were first deducted,
withheld, and paid by the proprietors, lessees, or operators of such theaters or
cinematographs before the gross receipts were divided between the proprietors, lessees,
or operators of the theaters or cinematographs and the distributors of the
cinematographic films. Section 11[43] of the Local Tax Code,[44] however, amended this
provision by transferring the power to impose amusement tax[45] on admission from
theaters, cinematographs, concert halls, circuses and other places of amusements
exclusively to the local government. Thus, when the NIRC of 1977[46] was enacted, the
national government imposed amusement tax only on proprietors, lessees or operators of
cabarets, day and night clubs, Jai-Alai and race tracks.[47]
On January 1, 1988, the VAT Law[48] was promulgated. It amended certain provisions of
the NIRC of 1977 by imposing a multi-stage VAT to replace the tax on original and
subsequent sales tax and percentage tax on certain services. It imposed VAT on sales of
services under Section 102 thereof, which provides:
SECTION 102. Value-added tax on sale of services. (a) Rate and base of tax. There shall
be levied, assessed and collected, a value-added tax equivalent to 10% percent of gross
receipts derived by any person engaged in the sale of services. The phrase sale of
services means the performance of all kinds of services for others for a fee, remuneration
or consideration, including those performed or rendered by construction and service
contractors; stock, real estate, commercial, customs and immigration brokers; lessors of
personal property; lessors or distributors of cinematographic films; persons engaged in
milling, processing, manufacturing or repacking goods for others; and similar services
regardless of whether or not the performance thereof calls for the exercise or use of the
physical or mental faculties: Provided That the following services performed in the
Philippines by VAT-registered persons shall be subject to 0%:

(1) Processing manufacturing or repacking goods for other persons doing business
outside the Philippines which goods are subsequently exported, x x x
xxxx
Gross receipts means the total amount of money or its equivalent representing the
contract price, compensation or service fee, including the amount charged for materials
supplied with the services and deposits or advance payments actually or constructively
received during the taxable quarter for the service performed or to be performed for
another person, excluding value-added tax.
(b) Determination of the tax. (1) Tax billed as a separate item in the invoice. If the tax is
billed as a separate item in the invoice, the tax shall be based on the gross receipts,
excluding the tax.
(2) Tax not billed separately or is billed erroneously in the invoice. If the tax is not billed
separately or is billed erroneously in the invoice, the tax shall be determined by
multiplying the gross receipts (including the amount intended to cover the tax or the tax
billed erroneously) by 1/11. (Emphasis supplied)
Persons subject to amusement tax under the NIRC of 1977, as amended, however, were
exempted from the coverage of VAT.[49]
On February 19, 1988, then Commissioner Bienvenido A. Tan, Jr. issued RMC 8-88, which
clarified that the power to impose amusement tax on gross receipts derived from
admission tickets was exclusive with the local government units and that only the gross
receipts of amusement places derived from sources other than from admission tickets
were subject to amusement tax under the NIRC of 1977, as amended. Pertinent portions
of RMC 8-88 read:
Under the Local Tax Code (P.D. 231, as amended), the jurisdiction to levy amusement tax
on gross receipts arising from admission to places of amusement has been transferred to
the local governments to the exclusion of the national government.
xxxx
Since the promulgation of the Local Tax Code which took effect on June 28, 1973 none of
the amendatory laws which amended the National Internal Revenue Code, including the
value added tax law under Executive Order No. 273, has amended the provisions of
Section 11 of the Local Tax Code. Accordingly, the sole jurisdiction for collection of
amusement tax on admission receipts in places of amusement rests exclusively on the
local government, to the exclusion of the national government. Since the Bureau of
Internal Revenue is an agency of the national government, then it follows that it has no
legal mandate to levy amusement tax on admission receipts in the said places of
amusement.
Considering the foregoing legal background, the provisions under Section 123 of the
National Internal Revenue Code as renumbered by Executive Order No. 273 (Sec. 228, old
NIRC) pertaining to amusement taxes on places of amusement shall be implemented in
accordance with BIR RULING, dated December 4, 1973 and BIR RULING NO. 231-86 dated
November 5, 1986 to wit:
x x x Accordingly, only the gross receipts of the amusement places derived from sources
other than from admission tickets shall be subject to x x x amusement tax prescribed

under Section 228 of the Tax Code, as amended (now Section 123, NIRC, as amended by
E.O. 273). The tax on gross receipts derived from admission tickets shall be levied and
collected by the city government pursuant to Section 23 of Presidential Decree No. 231,
as amended x x x or by the provincial government, pursuant to Section 11 of P.D. 231,
otherwise known as the Local Tax Code. (Emphasis supplied)
On October 10, 1991, the LGC of 1991 was passed into law. The local government
retained the power to impose amusement tax on proprietors, lessees, or operators of
theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement
at a rate of not more than thirty percent (30%) of the gross receipts from admission fees
under Section 140 thereof.[50] In the case of theaters or cinemas, the tax shall first be
deducted and withheld by their proprietors, lessees, or operators and paid to the local
government before the gross receipts are divided between said proprietors, lessees, or
operators and the distributors of the cinematographic films. However, the provision in the
Local Tax Code expressly excluding the national government from collecting tax from the
proprietors, lessees, or operators of theaters, cinematographs, concert halls, circuses and
other places of amusements was no longer included.
In 1994, RA 7716 restructured the VAT system by widening its tax base and enhancing its
administration. Three years later, RA 7716 was amended by RA 8241. Shortly thereafter,
the NIRC of 1997[51] was signed into law. Several amendments[52] were made to expand
the coverage of VAT. However, none pertain to cinema/theater operators or proprietors.
At present, only lessors or distributors of cinematographic films are subject to VAT. While
persons subject to amusement tax[53] under the NIRC of 1997 are exempt from the
coverage of VAT.[54]
Based on the foregoing, the following facts can be established:
(1)
Historically, the activity of showing motion pictures, films or movies by
cinema/theater operators or proprietors has always been considered as a form of
entertainment subject to amusement tax.
(2)
Prior to the Local Tax Code, all forms of amusement tax were imposed by
the national government.
(3)
When the Local Tax Code was enacted, amusement tax on admission tickets
from theaters, cinematographs, concert halls, circuses and other places of amusements
were transferred to the local government.
(4)
Under the NIRC of 1977, the national government imposed amusement tax
only on proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and
race tracks.
(5)
The VAT law was enacted to replace the tax on original and subsequent
sales tax and percentage tax on certain services.
(6)
When the VAT law was implemented, it exempted persons subject to
amusement tax under the NIRC from the coverage of VAT.
(7)
When the Local Tax Code was repealed by the LGC of 1991, the local
government continued to impose amusement tax on admission tickets from theaters,
cinematographs, concert halls, circuses and other places of amusements.

(8)
Amendments to the VAT law have been consistent in exempting persons
subject to amusement tax under the NIRC from the coverage of VAT.
(9)
Only lessors or distributors of cinematographic films are included in the
coverage of VAT.
These reveal the legislative intent not to impose VAT on persons already covered by the
amusement tax. This holds true even in the case of cinema/theater operators taxed
under the LGC of 1991 precisely because the VAT law was intended to replace the
percentage tax on certain services. The mere fact that they are taxed by the local
government unit and not by the national government is immaterial. The Local Tax Code,
in transferring the power to tax gross receipts derived by cinema/theater operators or
proprietor from admission tickets to the local government, did not intend to treat
cinema/theater houses as a separate class. No distinction must, therefore, be made
between the places of amusement taxed by the national government and those taxed by
the local government.
To hold otherwise would impose an unreasonable burden on cinema/theater houses
operators or proprietors, who would be paying an additional 10%[55] VAT on top of the
30% amusement tax imposed by Section 140 of the LGC of 1991, or a total of 40% tax.
Such imposition would result in injustice, as persons taxed under the NIRC of 1997 would
be in a better position than those taxed under the LGC of 1991. We need not belabor that
a literal application of a law must be rejected if it will operate unjustly or lead to absurd
results.[56] Thus, we are convinced that the legislature never intended to include
cinema/theater operators or proprietors in the coverage of VAT.
On this point, it is apropos to quote the case of Roxas v. Court of Tax Appeals,[57] to wit:
The power of taxation is sometimes called also the power to destroy. Therefore, it should
be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It
must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays
the golden egg. And, in order to maintain the general public's trust and confidence in the
Government this power must be used justly and not treacherously.

No. 7160, thus, eliminating the statutory prohibition on the national government to
impose business tax on gross receipts from admission of persons to places of
amusement, led the way to the valid imposition of the VAT pursuant to Section 102 (now
Section 108) of the old Tax Code, as amended by the Expanded VAT Law (RA No. 7716)
and which was implemented beginning January 1, 1996.[58] (Emphasis supplied)
We disagree.
The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition
of VAT on the gross receipts of cinema/theater operators or proprietors derived from
admission tickets. The removal of the prohibition under the Local Tax Code did not grant
nor restore to the national government the power to impose amusement tax on
cinema/theater operators or proprietors. Neither did it expand the coverage of VAT. Since
the imposition of a tax is a burden on the taxpayer, it cannot be presumed nor can it be
extended by implication. A law will not be construed as imposing a tax unless it does so
clearly, expressly, and unambiguously.[59] As it is, the power to impose amusement tax
on cinema/theater operators or proprietors remains with the local government.
Revenue Memorandum Circular No. 28-2001 is invalid

Considering that there is no provision of law imposing VAT on the gross receipts of
cinema/theater operators or proprietors derived from admission tickets, RMC No. 28-2001
which imposes VAT on the gross receipts from admission to cinema houses must be
struck down. We cannot overemphasize that RMCs must not override, supplant, or modify
the law, but must remain consistent and in harmony with, the law they seek to apply and
implement.[60]
In view of the foregoing, there is no need to discuss whether RMC No. 28-2001 complied
with the procedural due process for tax issuances as prescribed under RMC No. 20-86.
Rule on tax exemption does not apply

The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition
of VAT

Petitioner, in issuing the assessment notices for deficiency VAT against respondents,
ratiocinated that:
Basically, it was acknowledged that a cinema/theater operator was then subject to
amusement tax under Section 260 of Commonwealth Act No. 466, otherwise known as
the National Internal Revenue Code of 1939, computed on the amount paid for admission.
With the enactment of the Local Tax Code under Presidential Decree (PD) No. 231, dated
June 28, 1973, the power of imposing taxes on gross receipts from admission of persons
to cinema/theater and other places of amusement had, thereafter, been transferred to
the provincial government, to the exclusion of the national or municipal government
(Sections 11 & 13, Local Tax Code). However, the said provision containing the exclusive
power of the provincial government to impose amusement tax, had also been repealed
and/or deleted by Republic Act (RA) No. 7160, otherwise known as the Local Government
Code of 1991, enacted into law on October 10, 1991. Accordingly, the enactment of RA

Moreover, contrary to the view of petitioner, respondents need not prove their
entitlement to an exemption from the coverage of VAT. The rule that tax exemptions
should be construed strictly against the taxpayer presupposes that the taxpayer is clearly
subject to the tax being levied against him.[61] The reason is obvious: it is both illogical
and impractical to determine who are exempted without first determining who are
covered by the provision.[62] Thus, unless a statute imposes a tax clearly, expressly and
unambiguously, what applies is the equally well-settled rule that the imposition of a tax
cannot be presumed.[63] In fact, in case of doubt, tax laws must be construed strictly
against the government and in favor of the taxpayer.[64]
WHEREFORE, the Petition is hereby DENIED. The assailed April 30, 2008 Decision of the
Court of Tax Appeals En Banc holding that gross receipts derived by respondents from
admission tickets in showing motion pictures, films or movies are not subject to valueadded tax under Section 108 of the National Internal Revenue Code of 1997, as amended,
and its June 24, 2008 Resolution denying the motion for reconsideration are AFFIRMED.
SO ORDERED.

SOUTH AFRICAN AIRWAYS VS CIR

DECISION
VELASCO, JR., J.:
The Case

This Petition for Review on Certiorari under Rule 45 seeks the reversal of the July 19, 2007
Decision[1] and October 30, 2007 Resolution[2] of the Court of Tax Appeals (CTA) En Banc
in CTA E.B. Case No. 210, entitled South African Airways v. Commissioner of Internal
Revenue. The assailed decision affirmed the Decision dated May 10, 2006[3] and
Resolution dated August 11, 2006[4] rendered by the CTA First Division.

The Facts
Petitioner South African Airways is a foreign corporation organized and existing under and
by virtue of the laws of the Republic of South Africa. Its principal office is located at
Airways Park, Jones Road, Johannesburg International Airport, South Africa. In the
Philippines, it is an internal air carrier having no landing rights in the country. Petitioner
has a general sales agent in the Philippines, Aerotel Limited Corporation (Aerotel). Aerotel
sells passage documents for compensation or commission for petitioners off-line flights
for the carriage of passengers and cargo between ports or points outside the territorial
jurisdiction of the Philippines. Petitioner is not registered with the Securities and
Exchange Commission as a corporation, branch office, or partnership. It is not licensed to
do business in the Philippines.
For the taxable year 2000, petitioner filed separate quarterly and annual income tax
returns for its off-line flights, summarized as follows:

Period
Date Filed
2.5% Gross
Phil. Billings
For Passenger
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
May 30, 2000
August 29, 2000
November 29, 2000

April 16, 2000

PhP
222,531.25
424,046.95
422,466.00
453,182.91
Sub-total

PhP
1,522,227.11
For Cargo
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
May 30, 2000
August 29, 2000
November 29, 2000
April 16, 2000
PhP
81,531.00
50,169.65
36,383.74
37,454.88
Sub-total

Petitioners Motion for Reconsideration of the above decision was denied by the CTA First
Division in a Resolution dated August 11, 2006.
Thus, petitioner filed a Petition for Review before the CTA En Banc, reiterating its claim for
a refund of its tax payment on its GPB. This was denied by the CTA in its assailed
decision. A subsequent Motion for Reconsideration by petitioner was also denied in the
assailed resolution of the CTA En Banc.
Hence, petitioner went to us.
The Issues

Whether or not petitioner, as an off-line international carrier selling passage documents

through an independent sales agent in the Philippines, is engaged in trade or business in
the Philippines subject to the 32% income tax imposed by Section 28 (A)(1) of the 1997
NIRC.
Whether or not the income derived by petitioner from the sale of passage documents
covering petitioners off-line flights is Philippine-source income subject to Philippine
income tax.
Whether or not petitioner is entitled to a refund or a tax credit of erroneously paid tax on
Gross Philippine Billings for the taxable year 2000 in the amount of P1,727,766.38.[5]
The Courts Ruling

PhP
205,539.27
TOTAL

This petition must be denied.

Petitioner Is Subject to Income Tax
at the Rate of 32% of Its Taxable Income

1,727,766.38
Thereafter, on February 5, 2003, petitioner filed with the Bureau of Internal Revenue,
Revenue District Office No. 47, a claim for the refund of the amount of PhP 1,727,766.38
as erroneously paid tax on Gross Philippine Billings (GPB) for the taxable year 2000. Such
claim was unheeded. Thus, on April 14, 2003, petitioner filed a Petition for Review with
the CTA for the refund of the abovementioned amount. The case was docketed as CTA
Case No. 6656.
On May 10, 2006, the CTA First Division issued a Decision denying the petition for lack of
merit. The CTA ruled that petitioner is a resident foreign corporation engaged in trade or
business in the Philippines. It further ruled that petitioner was not liable to pay tax on its
GPB under Section 28(A)(3)(a) of the National Internal Revenue Code (NIRC) of 1997. The
CTA, however, stated that petitioner is liable to pay a tax of 32% on its income derived
from the sales of passage documents in the Philippines. On this ground, the CTA denied
petitioners claim for a refund.

Preliminarily, we emphasize that petitioner is claiming that it is exempted from being

taxed for its sale of passage documents in the Philippines. Petitioner, however, failed to
sufficiently prove such contention.
In Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation,[6] we
held, Since an action for a tax refund partakes of the nature of an exemption, which
cannot be allowed unless granted in the most explicit and categorical language, it is
strictly construed against the claimant who must discharge such burden convincingly.
Petitioner has failed to overcome such burden.
In essence, petitioner calls upon this Court to determine the legal implication of the
amendment to Sec. 28(A)(3)(a) of the 1997 NIRC defining GPB. It is petitioners contention
that, with the new definition of GPB, it is no longer liable under Sec. 28(A)(3)(a). Further,
petitioner argues that because the 2 1/2% tax on GPB is inapplicable to it, it is thereby
excluded from the imposition of any income tax.

Sec. 28(b)(2) of the 1939 NIRC provided:

(2) Resident Corporations. A corporation organized, authorized, or existing under the laws
of a foreign country, engaged in trade or business within the Philippines, shall be taxable
as provided in subsection (a) of this section upon the total net income received in the
preceding taxable year from all sources within the Philippines: Provided, however, that
international carriers shall pay a tax of two and one-half percent on their gross Philippine
billings.
This provision was later amended by Sec. 24(B)(2) of the 1977 NIRC, which defined GPB
as follows:
Gross Philippine billings include gross revenue realized from uplifts anywhere in the world
by any international carrier doing business in the Philippines of passage documents sold
therein, whether for passenger, excess baggage or mail, provided the cargo or mail
originates from the Philippines.
In the 1986 and 1993 NIRCs, the definition of GPB was further changed to read:
Gross Philippine Billings means gross revenue realized from uplifts of passengers
anywhere in the world and excess baggage, cargo and mail originating from the
Philippines, covered by passage documents sold in the Philippines.
Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere in the
world, provided that the passage documents were sold in the Philippines. Legislature
departed from such concept in the 1997 NIRC where GPB is now defined under Sec. 28(A)
(3)(a):
Gross Philippine Billings refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating from the Philippines in a continuous
and uninterrupted flight, irrespective of the place of sale or issue and the place of
payment of the ticket or passage document.
Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and
cargo occur to or from the Philippines, income is included in GPB.
As correctly pointed out by petitioner, inasmuch as it does not maintain flights to or from
the Philippines, it is not taxable under Sec. 28(A)(3)(a) of the 1997 NIRC. This much was
also found by the CTA. But petitioner further posits the view that due to the nonapplicability of Sec. 28(A)(3)(a) to it, it is precluded from paying any other income tax for
its sale of passage documents in the Philippines.
Such position is untenable.
In Commissioner of Internal Revenue v. British Overseas Airways Corporation (British
Overseas Airways),[7] which was decided under similar factual circumstances, this Court
ruled that off-line air carriers having general sales agents in the Philippines are engaged
in or doing business in the Philippines and that their income from sales of passage
documents here is income from within the Philippines. Thus, in that case, we held the offline air carrier liable for the 32% tax on its taxable income.

Petitioner argues, however, that because British Overseas Airways was decided under the
1939 NIRC, it does not apply to the instant case, which must be decided under the 1997
NIRC. Petitioner alleges that the 1939 NIRC taxes resident foreign corporations, such as
itself, on all income from sources within the Philippines. Petitioners interpretation of Sec.
28(A)(3)(a) of the 1997 NIRC is that, since it is an international carrier that does not
maintain flights to or from the Philippines, thereby having no GPB as defined, it is exempt
from paying any income tax at all. In other words, the existence of Sec. 28(A)(3)(a)
according to petitioner precludes the application of Sec. 28(A)(1) to it.
Its argument has no merit.
First, the difference cited by petitioner between the 1939 and 1997 NIRCs with regard to
the taxation of off-line air carriers is more apparent than real.
We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term,
exempt all international air carriers from the coverage of Sec. 28(A)(1) of the 1997 NIRC.
Certainly, had legislatures intentions been to completely exclude all international air
carriers from the application of the general rule under Sec. 28(A)(1), it would have used
the appropriate language to do so; but the legislature did not. Thus, the logical
interpretation of such provisions is that, if Sec. 28(A)(3)(a) is applicable to a taxpayer,
then the general rule under Sec. 28(A)(1) would not apply. If, however, Sec. 28(A)(3)(a)
does not apply, a resident foreign corporation, whether an international air carrier or not,
would be liable for the tax under Sec. 28(A)(1).
Clearly, no difference exists between British Overseas Airways and the instant case,
wherein petitioner claims that the former case does not apply. Thus, British Overseas
Airways applies to the instant case. The findings therein that an off-line air carrier is doing
business in the Philippines and that income from the sale of passage documents here is
Philippine-source income must be upheld.
Petitioner further reiterates its argument that the intention of Congress in amending the
definition of GPB is to exempt off-line air carriers from income tax by citing the
pronouncements made by Senator Juan Ponce Enrile during the deliberations on the
provisions of the 1997 NIRC. Such pronouncements, however, are not controlling on this
Court. We said in Espino v. Cleofe:[8]
A cardinal rule in the interpretation of statutes is that the meaning and intention of the
law-making body must be sought, first of all, in the words of the statute itself, read and
considered in their natural, ordinary, commonly-accepted and most obvious significations,
according to good and approved usage and without resorting to forced or subtle
construction. Courts, therefore, as a rule, cannot presume that the law-making body does
not know the meaning of words and rules of grammar. Consequently, the grammatical
reading of a statute must be presumed to yield its correct sense. x x x It is also a wellsettled doctrine in this jurisdiction that statements made by individual members of
Congress in the consideration of a bill do not necessarily reflect the sense of that body
and are, consequently, not controlling in the interpretation of law. (Emphasis supplied.)
Moreover, an examination of the subject provisions of the law would show that petitioners
interpretation of those provisions is erroneous.
Sec. 28(A)(1) and (A)(3)(a) provides:
SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. (1) In General. - Except as otherwise provided in this Code, a corporation organized,
authorized, or existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be subject to an income tax equivalent to thirty-five
percent (35%) of the taxable income derived in the preceding taxable year from all
sources within the Philippines: provided, That effective January 1, 1998, the rate of
income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be
thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate shall be
thirty-two percent (32%).
xxxx
(3) International Carrier. - An international carrier doing business in the Philippines shall
pay a tax of two and one-half percent (2 1/2%) on its Gross Philippine Billings as defined
hereunder:
(a) International Air Carrier. Gross Philippine Billings refers to the amount of gross
revenue derived from carriage of persons, excess baggage, cargo and mail originating
from the Philippines in a continuous and uninterrupted flight, irrespective of the place of
sale or issue and the place of payment of the ticket or passage document: Provided, That
tickets revalidated, exchanged and/or indorsed to another international airline form part
of the Gross Philippine Billings if the passenger boards a plane in a port or point in the
Philippines: Provided, further, That for a flight which originates from the Philippines, but
transshipment of passenger takes place at any port outside the Philippines on another
airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown
from the Philippines to the point of transshipment shall form part of Gross Philippine
Billings.

flights to and from the Philippines but nonetheless earn income from other activities in
the country will be taxed at the rate of 32% of such income.
As to the denial of petitioners claim for refund, the CTA denied the claim on the basis that
petitioner is liable for income tax under Sec. 28(A)(1) of the 1997 NIRC. Thus, petitioner
raises the issue of whether the existence of such liability would preclude their claim for a
refund of tax paid on the basis of Sec. 28(A)(3)(a). In answer to petitioners motion for
reconsideration, the CTA First Division ruled in its Resolution dated August 11, 2006, thus:
On the fourth argument, petitioner avers that a deficiency tax assessment does not, in
any way, disqualify a taxpayer from claiming a tax refund since a refund claim can
proceed independently of a tax assessment and that the assessment cannot be offset by
its claim for refund.
Petitioners argument is erroneous. Petitioner premises its argument on the existence of
an assessment. In the assailed Decision, this Court did not, in any way, assess petitioner
of any deficiency corporate income tax. The power to make assessments against
taxpayers is lodged with the respondent. For an assessment to be made, respondent
must observe the formalities provided in Revenue Regulations No. 12-99. This Court
merely pointed out that petitioner is liable for the regular corporate income tax by virtue
of Section 28(A)(3) of the Tax Code. Thus, there is no assessment to speak of.[12]
Precisely, petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)
(a) with their liability under Sec. 28(A)(1), considering that there has not yet been any
assessment of their obligation under the latter provision. Petitioner argues that such
offsetting is in the nature of legal compensation, which cannot be applied under the
circumstances present in this case.
Article 1279 of the Civil Code contains the elements of legal compensation, to wit:

Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations are
liable for 32% tax on all income from sources within the Philippines. Sec. 28(A)(3) is an
exception to this general rule.
An exception is defined as that which would otherwise be included in the provision from
which it is excepted. It is a clause which exempts something from the operation of a
statue by express words.[9] Further, an exception need not be introduced by the words
except or unless. An exception will be construed as such if it removes something from the
operation of a provision of law.[10]
In the instant case, the general rule is that resident foreign corporations shall be liable for
a 32% income tax on their income from within the Philippines, except for resident foreign
corporations that are international carriers that derive income from carriage of persons,
excess baggage, cargo and mail originating from the Philippines which shall be taxed at 2
1/2% of their Gross Philippine Billings. Petitioner, being an international carrier with no
flights originating from the Philippines, does not fall under the exception. As such,
petitioner must fall under the general rule. This principle is embodied in the Latin maxim,
exception firmat regulam in casibus non exceptis, which means, a thing not being
excepted must be regarded as coming within the purview of the general rule.[11]
To reiterate, the correct interpretation of the above provisions is that, if an international
air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2
1/2% of its Gross Philippine Billings, while international air carriers that do not have

Art. 1279. In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due are consumable, they
be of the same kind, and also of the same quality if the latter has been stated;
(3) That the two debts be due;
(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or controversy, commenced by third
persons and communicated in due time to the debtor.
And we ruled in Philex Mining Corporation v. Commissioner of Internal Revenue,[13] thus:
In several instances prior to the instant case, we have already made the pronouncement
that taxes cannot be subject to compensation for the simple reason that the government
and the taxpayer are not creditors and debtors of each other. There is a material
distinction between a tax and debt. Debts are due to the Government in its corporate
capacity, while taxes are due to the Government in its sovereign capacity. We find no
cogent reason to deviate from the aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically

held that taxes cannot be subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the claims
that the taxpayer may have against the government. A person cannot refuse to pay a tax
on the ground that the government owes him an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the results of a lawsuit against the
government.
The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v.
Commission on Audit, which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not
such a debt, demand, contract or judgment as is allowed to be set-off.
Verily, petitioners argument is correct that the offsetting of its tax refund with its alleged
tax deficiency is unavailing under Art. 1279 of the Civil Code.
Commissioner of Internal Revenue v. Court of Tax Appeals,[14] however, granted the
offsetting of a tax refund with a tax deficiency in this wise:
Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioners
supplemental motion for reconsideration alleging bringing to said courts attention the
existence of the deficiency income and business tax assessment against Citytrust. The
fact of such deficiency assessment is intimately related to and inextricably intertwined
with the right of respondent bank to claim for a tax refund for the same year. To award
such refund despite the existence of that deficiency assessment is an absurdity and a
polarity in conceptual effects. Herein private respondent cannot be entitled to refund and
at the same time be liable for a tax deficiency assessment for the same year.
The grant of a refund is founded on the assumption that the tax return is valid, that is,
the facts stated therein are true and correct. The deficiency assessment, although not yet
final, created a doubt as to and constitutes a challenge against the truth and accuracy of
the facts stated in said return which, by itself and without unquestionable evidence,
cannot be the basis for the grant of the refund.
Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the
applicable law when the claim of Citytrust was filed, provides that (w)hen an assessment
is made in case of any list, statement, or return, which in the opinion of the Commissioner
of Internal Revenue was false or fraudulent or contained any understatement or
undervaluation, no tax collected under such assessment shall be recovered by any suits
unless it is proved that the said list, statement, or return was not false nor fraudulent and
did not contain any understatement or undervaluation; but this provision shall not apply
to statements or returns made or to be made in good faith regarding annual depreciation
of oil or gas wells and mines.
Moreover, to grant the refund without determination of the proper assessment and the
tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency
assessment should subsequently be upheld, the Government will be forced to institute
anew a proceeding for the recovery of erroneously refunded taxes which recourse must
be filed within the prescriptive period of ten years after discovery of the falsity, fraud or

omission in the false or fraudulent return involved. This would necessarily require and
entail additional efforts and expenses on the part of the Government, impose a burden on
and a drain of government funds, and impede or delay the collection of much-needed
revenue for governmental operations.
Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both
logically necessary and legally appropriate that the issue of the deficiency tax
assessment against Citytrust be resolved jointly with its claim for tax refund, to
determine once and for all in a single proceeding the true and correct amount of tax due
or refundable.
In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just
and fair that the taxpayer and the Government alike be given equal opportunities to avail
of remedies under the law to defeat each others claim and to determine all matters of
dispute between them in one single case. It is important to note that in determining
whether or not petitioner is entitled to the refund of the amount paid, it would [be]
necessary to determine how much the Government is entitled to collect as taxes. This
would necessarily include the determination of the correct liability of the taxpayer and,
certainly, a determination of this case would constitute res judicata on both parties as to
all the matters subject thereof or necessarily involved therein. (Emphasis supplied.)
Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC.
The above pronouncements are, therefore, still applicable today.
Here, petitioners similar tax refund claim assumes that the tax return that it filed was
correct. Given, however, the finding of the CTA that petitioner, although not liable under
Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the correctness of the
return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a
refund.
Be that as it may, this Court is unable to affirm the assailed decision and resolution of the
CTA En Banc on the outright denial of petitioners claim for a refund. Even though
petitioner is not entitled to a refund due to the question on the propriety of petitioners
tax return subject of the instant controversy, it would not be proper to deny such claim
without making a determination of petitioners liability under Sec. 28(A)(1).
It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while Sec.
28(A)(1) is based on taxable income, that is, gross income less deductions and
exemptions, if any. It cannot be assumed that petitioners liabilities under the two
provisions would be the same. There is a need to make a determination of petitioners
liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming or that a tax
deficiency exists. The assailed decision fails to mention having computed for the tax due
under Sec. 28(A)(1) and the records are bereft of any evidence sufficient to establish
petitioners taxable income. There is a necessity to receive evidence to establish such
amount vis--vis the claim for refund. It is only after such amount is established that a tax
refund or deficiency may be correctly pronounced.
WHEREFORE, the assailed July 19, 2007 Decision and October 30, 2007 Resolution of the
CTA En Banc in CTA E.B. Case No. 210 are SET ASIDE. The instant case is REMANDED to
the CTA En Banc for further proceedings and appropriate action, more particularly, the
reception of evidence for both parties and the corresponding disposition of CTA E.B. Case
No. 210 not otherwise inconsistent with our judgment in this Decision.

SO ORDERED.

Add: 25% surcharge

23,430,843.10
15,000.00

Compromise penalty
G.R. No. 134062

April 17, 2007

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.

TOTAL AMOUNT DUE AND COLLECTIBLE

Both notices of assessment contained the following note:

DECISION
CORONA, J.:
This is a petition for review on certiorari1 of a decision2 of the Court of Appeals (CA) dated
May 29, 1998 in CA-G.R. SP No. 41025 which reversed and set aside the decision 3 and
resolution4 of the Court of Tax Appeals (CTA) dated November 16, 1995 and May 27,
1996, respectively, in CTA Case No. 4715.
In two notices dated October 28, 1988, petitioner Commissioner of Internal Revenue (CIR)
assessed respondent Bank of the Philippine Islands (BPIs) deficiency percentage and
documentary stamp taxes for the year 1986 in the total amount of P129,488,656.63:
1986 Deficiency Percentage Tax
Deficiency percentage tax

P 7, 270,892.88

Add: 25% surcharge

1,817,723.22

20% interest from 1-21-87 to 10-28-88

3,215,825.03
15,000.00

Compromise penalty

TOTAL AMOUNT DUE AND COLLECTIBLE

P12,319,441.13

1986 Deficiency Documentary Stamp Tax

Deficiency percentage tax

P117,169,215.50.5

P93,723,372.40

Please be informed that your [percentage and documentary stamp taxes have] been
assessed as shown above. Said assessment has been based on return (filed by you)
(as verified) (made by this Office) (pending investigation) (after investigation). You
are requested to pay the above amount to this Office or to our Collection Agent in the
Office of the City or Deputy Provincial Treasurer of xxx 6
In a letter dated December 10, 1988, BPI, through counsel, replied as follows:
1. Your "deficiency assessments" are no assessments at all. The taxpayer is not
informed, even in the vaguest terms, why it is being assessed a deficiency. The
very purpose of a deficiency assessment is to inform taxpayer why he has
incurred a deficiency so that he can make an intelligent decision on whether to
pay or to protest the assessment. This is all the more so when the assessment
involves astronomical amounts, as in this case.
We therefore request that the examiner concerned be required to state, even in
the briefest form, why he believes the taxpayer has a deficiency documentary
and percentage taxes, and as to the percentage tax, it is important that the
taxpayer be informed also as to what particular percentage tax the assessment
refers to.
2. As to the alleged deficiency documentary stamp tax, you are aware of the
compromise forged between your office and the Bankers Association of the
Philippines [BAP] on this issue and of BPIs submission of its computations under
this compromise. There is therefore no basis whatsoever for this assessment,
assuming it is on the subject of the BAP compromise. On the other hand, if it
relates to documentary stamp tax on some other issue, we should like to be
informed about what those issues are.
3. As to the alleged deficiency percentage tax, we are completely at a loss on
how such assessment may be protested since your letter does not even tell the
taxpayer what particular percentage tax is involved and how your examiner
arrived at the deficiency. As soon as this is explained and clarified in a proper

letter of assessment, we shall inform you of the taxpayers decision on whether

to pay or protest the assessment.7
On June 27, 1991, BPI received a letter from CIR dated May 8, 1991 stating that:
although in all respects, your letter failed to qualify as a protest under Revenue
Regulations No. 12-85 and therefore not deserving of any rejoinder by this office as no
valid issue was raised against the validity of our assessment still we obliged to explain
the basis of the assessments.
xxx xxx xxx
this constitutes the final decision of this office on the matter.8
On July 6, 1991, BPI requested a reconsideration of the assessments stated in the CIRs
May 8, 1991 letter.9 This was denied in a letter dated December 12, 1991, received by BPI
on January 21, 1992.10
On February 18, 1992, BPI filed a petition for review in the CTA. 11 In a decision dated
November 16, 1995, the CTA dismissed the case for lack of jurisdiction since the subject
assessments had become final and unappealable. The CTA ruled that BPI failed to protest
on time under Section 270 of the National Internal Revenue Code (NIRC) of 1986 and
Section 7 in relation to Section 11 of RA 1125.12 It denied reconsideration in a resolution
dated May 27, 1996.13
On appeal, the CA reversed the tax courts decision and resolution and remanded the
case to the CTA14 for a decision on the merits.15 It ruled that the October 28, 1988 notices
were not valid assessments because they did not inform the taxpayer of the legal and
factual bases therefor. It declared that the proper assessments were those contained in
the May 8, 1991 letter which provided the reasons for the claimed deficiencies. 16 Thus, it
held that BPI filed the petition for review in the CTA on time. 17 The CIR elevated the case
to this Court.
This petition raises the following issues:
1) whether or not the assessments issued to BPI for deficiency percentage and
documentary stamp taxes for 1986 had already become final and unappealable
and
2) whether or not BPI was liable for the said taxes.
The former Section 27018 (now renumbered as Section 228) of the NIRC stated:

Sec. 270. Protesting of assessment. When the [CIR] or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify
the taxpayer of his findings. Within a period to be prescribed by implementing
regulations, the taxpayer shall be required to respond to said notice. If the taxpayer fails
to respond, the [CIR] shall issue an assessment based on his findings.
xxx xxx xxx (emphasis supplied)
Were the October 28, 1988 Notices Valid Assessments?
The first issue for our resolution is whether or not the October 28, 1988 notices 19 were
valid assessments. If they were not, as held by the CA, then the correct assessments
were in the May 8, 1991 letter, received by BPI on June 27, 1991. BPI, in its July 6, 1991
letter, seasonably asked for a reconsideration of the findings which the CIR denied in his
December 12, 1991 letter, received by BPI on January 21, 1992. Consequently, the
petition for review filed by BPI in the CTA on February 18, 1992 would be well within the
30-day period provided by law.20
The CIR argues that the CA erred in holding that the October 28, 1988 notices were
invalid assessments. He asserts that he used BIR Form No. 17.08 (as revised in November
1964) which was designed for the precise purpose of notifying taxpayers of the assessed
amounts due and demanding payment thereof.21 He contends that there was no law or
jurisprudence then that required notices to state the reasons for assessing deficiency tax
liabilities.22
BPI counters that due process demanded that the facts, data and law upon which the
assessments were based be provided to the taxpayer. It insists that the NIRC, as worded
now (referring to Section 228), specifically provides that:
"[t]he taxpayer shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void."
According to BPI, this is declaratory of what sound tax procedure is and a confirmation of
what due process requires even under the former Section 270.
BPIs contention has no merit. The present Section 228 of the NIRC provides:
Sec. 228. Protesting of Assessment. When the [CIR] or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify
the taxpayer of his findings: Provided, however, That a preassessment notice shall not
be required in the following cases:
xxx xxx xxx

The taxpayer shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void.
xxx xxx xxx (emphasis supplied)
Admittedly, the CIR did not inform BPI in writing of the law and facts on which the
assessments of the deficiency taxes were made. He merely notified BPI of his findings,
consisting only of the computation of the tax liabilities and a demand for payment thereof
within 30 days after receipt.
In merely notifying BPI of his findings, the CIR relied on the provisions of the former
Section 270 prior to its amendment by RA 8424 (also known as the Tax Reform Act of
1997).23 In CIR v. Reyes,24 we held that:
In the present case, Reyes was not informed in writing of the law and the facts on which
the assessment of estate taxes had been made. She was merely notified of the findings
by the CIR, who had simply relied upon the provisions of former Section 229 prior to its
amendment by [RA] 8424, otherwise known as the Tax Reform Act of 1997.
First, RA 8424 has already amended the provision of Section 229 on protesting an
assessment. The old requirement of merely notifying the taxpayer of the CIR's
findings was changed in 1998 to informing the taxpayer of not only the law, but also
of the facts on which an assessment would be made; otherwise, the assessment itself
would be invalid.
It was on February 12, 1998, that a preliminary assessment notice was issued against the
estate. On April 22, 1998, the final estate tax assessment notice, as well as demand
letter, was also issued. During those dates, RA 8424 was already in effect. The notice
required under the old law was no longer sufficient under the new
law.25 (emphasis supplied; italics in the original)
Accordingly, when the assessments were made pursuant to the former Section 270, the
only requirement was for the CIR to "notify" or inform the taxpayer of his "findings."
Nothing in the old law required a written statement to the taxpayer of the law and facts
on which the assessments were based. The Court cannot read into the law what obviously
was not intended by Congress. That would be judicial legislation, nothing less.
Jurisprudence, on the other hand, simply required that the assessments contain a
computation of tax liabilities, the amount the taxpayer was to pay and a demand for
payment within a prescribed period.26 Everything considered, there was no doubt the
October 28, 1988 notices sufficiently met the requirements of a valid assessment under
the old law and jurisprudence.
The sentence

[t]he taxpayers shall be informed in writing of the law and the facts on which the
assessment is made; otherwise, the assessment shall be void
was not in the old Section 270 but was only later on inserted in the renumbered Section
228 in 1997. Evidently, the legislature saw the need to modify the former Section 270 by
inserting the aforequoted sentence.27 The fact that the amendment was necessary
showed that, prior to the introduction of the amendment, the statute had an entirely
different meaning.28
Contrary to the submission of BPI, the inserted sentence in the renumbered Section 228
was not an affirmation of what the law required under the former Section 270. The
amendment introduced by RA 8424 was an innovation and could not be reasonably
inferred from the old law.29 Clearly, the legislature intended to insert a new provision
regarding the form and substance of assessments issued by the CIR.30
In ruling that the October 28, 1988 notices were not valid assessments, the CA explained:
xxx. Elementary concerns of due process of law should have prompted the [CIR] to inform
[BPI] of the legal and factual basis of the formers decision to charge the latter for
deficiency documentary stamp and gross receipts taxes. 31
In other words, the CAs theory was that BPI was deprived of due process when the CIR
failed to inform it in writing of the factual and legal bases of the assessments even if
these were not called for under the old law.
We disagree.
Indeed, the underlying reason for the law was the basic constitutional requirement that
"no person shall be deprived of his property without due process of law." 32 We note,
however, what the CTA had to say:
xxx xxx xxx
From the foregoing testimony, it can be safely adduced that not only was [BPI] given the
opportunity to discuss with the [CIR] when the latter issued the former a Pre-Assessment
Notice (which [BPI] ignored) but that the examiners themselves went to [BPI] and "we
talk to them and we try to [thresh] out the issues, present evidences as to what they
need." Now, how can [BPI] and/or its counsel honestly tell this Court that they did not
know anything about the assessments?
Not only that. To further buttress the fact that [BPI] indeed knew beforehand the
assessments[,] contrary to the allegations of its counsel[,] was the testimony of Mr. Jerry
Lazaro, Assistant Manager of the Accounting Department of [BPI]. He testified to the fact
that he prepared worksheets which contain his analysis regarding the findings of the

[CIRs] examiner, Mr. San Pedro and that the same worksheets were presented to Mr.
Carlos Tan, Comptroller of [BPI].
xxx xxx xxx
From all the foregoing discussions, We can now conclude that [BPI] was indeed aware of
the nature and basis of the assessments, and was given all the opportunity to contest the
same but ignored it despite the notice conspicuously written on the assessments which
states that "this ASSESSMENT becomes final and unappealable if not protested within 30
days after receipt." Counsel resorted to dilatory tactics and dangerously played with time.
Unfortunately, such strategy proved fatal to the cause of his client. 33
The CA never disputed these findings of fact by the CTA:
[T]his Court recognizes that the [CTA], which by the very nature of its function is
dedicated exclusively to the consideration of tax problems, has necessarily developed an
expertise on the subject, and its conclusions will not be overturned unless there has been
an abuse or improvident exercise of authority. Such findings can only be disturbed on
appeal if they are not supported by substantial evidence or there is a showing of gross
error or abuse on the part of the [CTA].34
Under the former Section 270, there were two instances when an assessment became
final and unappealable: (1) when it was not protested within 30 days from receipt and (2)
when the adverse decision on the protest was not appealed to the CTA within 30 days
from receipt of the final decision:35
Sec. 270. Protesting of assessment.1a\^/phi1.net
xxx xxx xxx
Such assessment may be protested administratively by filing a request for
reconsideration or reinvestigation in such form and manner as may be prescribed by the
implementing regulations within thirty (30) days from receipt of the assessment;
otherwise, the assessment shall become final and unappealable.
If the protest is denied in whole or in part, the individual, association or corporation
adversely affected by the decision on the protest may appeal to the [CTA] within thirty
(30) days from receipt of the said decision; otherwise, the decision shall become final,
executory and demandable.
Implications Of A Valid Assessment
Considering that the October 28, 1988 notices were valid assessments, BPI should have
protested the same within 30 days from receipt thereof. The December 10, 1988 reply it

sent to the CIR did not qualify as a protest since the letter itself stated that "[a]s soon as
this is explained and clarified in a proper letter of assessment, we shall inform you of
the taxpayers decision on whether to pay or protest the assessment."36 Hence,
by its own declaration, BPI did not regard this letter as a protest against the assessments.
As a matter of fact, BPI never deemed this a protest since it did not even consider the
October 28, 1988 notices as valid or proper assessments.
The inevitable conclusion is that BPIs failure to protest the assessments within the 30day period provided in the former Section 270 meant that they became final and
unappealable. Thus, the CTA correctly dismissed BPIs appeal for lack of jurisdiction. BPI
was, from then on, barred from disputing the correctness of the assessments or invoking
any defense that would reopen the question of its liability on the merits. 37 Not only that.
There arose a presumption of correctness when BPI failed to protest the assessments:
Tax assessments by tax examiners are presumed correct and made in good faith. The
taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in
the performance of duties, an assessment duly made by a Bureau of Internal Revenue
examiner and approved by his superior officers will not be disturbed. All presumptions are
in favor of the correctness of tax assessments. 38
Even if we considered the December 10, 1988 letter as a protest, BPI must nevertheless
be deemed to have failed to appeal the CIRs final decision regarding the disputed
assessments within the 30-day period provided by law. The CIR, in his May 8, 1991
response, stated that it was his "final decision on the matter." BPI therefore had 30
days from the time it received the decision on June 27, 1991 to appeal but it did not.
Instead it filed a request for reconsideration and lodged its appeal in the CTA only on
February 18, 1992, way beyond the reglementary period. BPI must now suffer the
repercussions of its omission. We have already declared that:
the [CIR] should always indicate to the taxpayer in clear and unequivocal language
whenever his action on an assessment questioned by a taxpayer constitutes his final
determination on the disputed assessment, as contemplated by Sections 7 and 11 of [RA
1125], as amended. On the basis of his statement indubitably showing that the
Commissioner's communicated action is his final decision on the contested
assessment, the aggrieved taxpayer would then be able to take recourse to the
tax court at the opportune time. Without needless difficulty, the taxpayer
would be able to determine when his right to appeal to the tax court accrues.
The rule of conduct would also obviate all desire and opportunity on the part of
the taxpayer to continually delay the finality of the assessment and,
consequently, the collection of the amount demanded as taxes by repeated
requests for recomputation and reconsideration. On the part of the [CIR], this
would encourage his office to conduct a careful and thorough study of every questioned
assessment and render a correct and definite decision thereon in the first instance. This
would also deter the [CIR] from unfairly making the taxpayer grope in the dark and
speculate as to which action constitutes the decision appealable to the tax court. Of

greater import, this rule of conduct would meet a pressing need for fair play, regularity,
and orderliness in administrative action.39 (emphasis supplied)
Either way (whether or not a protest was made), we cannot absolve BPI of its liability
under the subject tax assessments.
We realize that these assessments (which have been pending for almost 20 years)
involve a considerable amount of money. Be that as it may, we cannot legally presume
the existence of something which was never there. The state will be deprived of the taxes
validly due it and the public will suffer if taxpayers will not be held liable for the proper
taxes assessed against them:
Taxes are the lifeblood of the government, for without taxes, the government can neither
exist nor endure. A principal attribute of sovereignty, the exercise of taxing power derives
its source from the very existence of the state whose social contract with its citizens
obliges it to promote public interest and common good. The theory behind the exercise of
the power to tax emanates from necessity; without taxes, government cannot fulfill its
mandate of promoting the general welfare and well-being of the people. 40
G.R. No. L-18994
WHEREFORE, the petition is hereby GRANTED. The May 29, 1998 decision of the Court
of Appeals in CA-G.R. SP No. 41025 is REVERSED and SET ASIDE.
SO ORDERED.

June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First
Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late
Walter Scott Price,respondents.
Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.
Benedicto and Martinez for respondents.
LABRADOR, J.:
This is a petition for certiorari and mandamus against the Judge of the Court of First
Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of
the court and for an order in this Court directing the respondent court below to execute
the judgment in favor of the Government against the estate of Walter Scott Price for
internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674,
January 30, 1960, this Court declared as final and executory the order for the payment by
the estate of the estate and inheritance taxes, charges and penalties, amounting to
P40,058.55, issued by the Court of First Instance of Leyte in, special proceedings No. 14
entitled "In the matter of the Intestate Estate of the Late Walter Scott Price." In order to
enforce the claims against the estate the fiscal presented a petition dated June 21, 1961,
to the court below for the execution of the judgment. The petition was, however, denied

by the court which held that the execution is not justifiable as the Government is
indebted to the estate under administration in the amount of P262,200. The orders of the
court below dated August 20, 1960 and September 28, 1960, respectively, are as follows:

sale or mortgage of real estate is to be made, the regulations contained in Rule

90, section 7, should be complied with.1wph1.t
Execution may issue only where the devisees, legatees or heirs have entered
into possession of their respective portions in the estate prior to settlement and
payment of the debts and expenses of administration and it is later ascertained
that there are such debts and expenses to be paid, in which case "the court
having jurisdiction of the estate may, by order for that purpose, after hearing,
settle the amount of their several liabilities, and order how much and in what
manner each person shall contribute, and mayissue execution if circumstances
require" (Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.)
And this is not the instant case.

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price,
Administratrix of the estate of her late husband Walter Scott Price and Director
Zoilo Castrillo of the Bureau of Lands dated September 19, 1956 and
acknowledged before Notary Public Salvador V. Esguerra, legal adviser in
Malacaang to Executive Secretary De Leon dated December 14, 1956, the note
of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2,
1958, directing the latter to pay to Mrs. Price the sum ofP368,140.00, and an
extract of page 765 of Republic Act No. 2700 appropriating the sum of
P262.200.00 for the payment to the Leyte Cadastral Survey, Inc., represented by
the administratrix Simeona K. Price, as directed in the above note of the
President. Considering these facts, the Court orders that the payment of
inheritance taxes in the sum of P40,058.55 due the Collector of Internal Revenue
as ordered paid by this Court on July 5, 1960 in accordance with the order of the
Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be deducted from
the amount of P262,200.00 due and payable to the Administratrix Simeona K.
Price, in this estate, the balance to be paid by the Government to her without
further delay. (Order of August 20, 1960)

The legal basis for such a procedure is the fact that in the testate or intestate
proceedings to settle the estate of a deceased person, the properties belonging to the
estate are under the jurisdiction of the court and such jurisdiction continues until said
properties have been distributed among the heirs entitled thereto. During the pendency
of the proceedings all the estate is in custodia legis and the proper procedure is not to
allow the sheriff, in case of the court judgment, to seize the properties but to ask the
court for an order to require the administrator to pay the amount due from the estate and
required to be paid.

The Court has nothing further to add to its order dated August 20, 1960 and it
orders that the payment of the claim of the Collector of Internal Revenue be
deferred until the Government shall have paid its accounts to the administratrix
herein amounting to P262,200.00. It may not be amiss to repeat that it is only
fair for the Government, as a debtor, to its accounts to its citizens-creditors
before it can insist in the prompt payment of the latter's account to it, specially
taking into consideration that the amount due to the Government draws
interests while the credit due to the present state does not accrue any interest.
(Order of September 28, 1960)

Another ground for denying the petition of the provincial fiscal is the fact that the court
having jurisdiction of the estate had found that the claim of the estate against the
Government has been recognized and an amount of P262,200 has already been
appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under the
above circumstances, both the claim of the Government for inheritance taxes and the
claim of the intestate for services rendered have already become overdue and
demandable is well as fully liquidated. Compensation, therefore, takes place by operation
of law, in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and
both debts are extinguished to the concurrent amount, thus:

The petition to set aside the above orders of the court below and for the execution of the
claim of the Government against the estate must be denied for lack of merit. The
ordinary procedure by which to settle claims of indebtedness against the estate of a
deceased person, as an inheritance tax, is for the claimant to present a claim before the
probate court so that said court may order the administrator to pay the amount thereof.
To such effect is the decision of this Court in Aldamiz vs. Judge of the Court of First
Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:
. . . a writ of execution is not the proper procedure allowed by the Rules of Court
for the payment of debts and expenses of administration. The proper procedure
is for the court to order the sale of personal estate or the sale or mortgage of
real property of the deceased and all debts or expenses of administrator and
with the written notice to all the heirs legatees and devisees residing in the
Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when

ART. 1200. When all the requisites mentioned in article 1279 are present,
compensation takes effect by operation of law, and extinguished both debts to
the concurrent amount, eventhough the creditors and debtors are not aware of
the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment for
taxes against the estate of the deceased Walter Scott Price. Furthermore, the petition
for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the
remedy.
The petition is, therefore, dismissed, without costs.

Domingo v. Garlitos

Labrador, J (June 29, 1963)

Petitioner: Melecio Domingo as Commissioner of Internal Revenue
Respondent: Hon. Lorenzo Garlitos, CFI Leyte
Facts:
1.

2.

3.

In Melecio Domingo v. Judge Moscoso SC declared as final and executor the

order of payment by the estate of Walter Scott Price of estate & inheritance
taxes, charges, and penalties @P40K.
Petition for execution of this judgment was sought Atty Benedicto submitted:
a. Note by the then Pres. Carlos Garcia directing the Dir. Of Lands to pay
Mrs. Price (administratix of Walter Prices estate) @P369,140
b. RA 2700, page 765: appropriating P262,200 for payment to Mrs. Price.
CFI: Petition DENIED, execution is not justifiable since the Govt is indebted to the
estate. The payment of the claim of CIR deferred until the Govt has paid this
debt.
Hence this petition to Set Aside the above order.

Issue: w/n the set-off/deferment of the claim of CIR is proper.

Held: It is proper. Compensation/set-off of taxes may happen by operation of law when
both debts are due and demandable.
1. The ordinary procedure to settle claims before an estate is not a petition for
execution, but by presenting a claim before the probate court.
a. Aldamiz vs. Judge of CFI Mindoro- Execution may issue only where the
devisees, legatees or heirs have entered into possession of their
respective portions in the estate prior to settlement and payment of the
debts and expenses of administration and it is later ascertained that
there are such debts and expenses to be paid, in which case "the court
having jurisdiction of the estate may, by order for that purpose, after
hearing, settle the amount of their several liabilities, and order how
much and in what manner each person shall contribute, and may issue
execution if circumstances require" (Rule 89, section 6; see also Rule
74, Section 4; Emphasis supplied.)
b. Legal basis is the fact that the properties belonging to the state are
under custodia legis, which continues until said properties have been
distributed among the heirs.
2. Court having jurisdiction also found that the claim of the estate has been
recognized by the govt and has already appropriated the corresponding
amount.
3. Claim of the Govt for inheritance taxes against the estate is due and
demandable. The claim of the estate against the Govt is also due, demandable
and is fully liquidated. Compensation, therefore, takes place by operation of law,
in accordance with the provisions of Articles 1279 and 1290 of the Civil Code,
and both debts are extinguished to the concurrent amount.