TAX REV CASES

G.R. No. L-19342 May 25, 1972

LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA,
MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR.,
petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R.
Rosete, and Special Attorney Purificacion Ureta for respondent.

BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617,
similarly entitled as above, holding that petitioners have constituted an unregistered
partnership and are, therefore, subject to the payment of the deficiency corporate income
taxes assessed against them by respondent Commissioner of Internal Revenue for the
years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and 1% monthly
interest from December 15, 1958, subject to the provisions of Section 51 (e) (2) of the
Internal Revenue Code, as amended by Section 8 of Republic Act No. 2343 and the costs
of the suit,1 as well as the resolution of said court denying petitioners' motion for
reconsideration of said decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T.
Oña and her five children. In 1948, Civil Case No. 4519 was instituted in the Court of First
Instance of Manila for the settlement of her estate. Later, Lorenzo T. Oña the surviving
spouse was appointed administrator of the estate of said deceased (Exhibit 3, pp. 34-41,
BIR rec.). On April 14, 1949, the administrator submitted the project of partition, which
was approved by the Court on May 16, 1949 (See Exhibit K). Because three of the heirs,
namely Luz, Virginia and Lorenzo, Jr., all surnamed Oña, were still minors when the
project of partition was approved, Lorenzo T. Oña, their father and administrator of the
estate, filed a petition in Civil Case No. 9637 of the Court of First Instance of Manila for
appointment as guardian of said minors. On November 14, 1949, the Court appointed
him guardian of the persons and property of the aforenamed minors (See p. 3, BIR rec.).
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have
undivided one-half (1/2) interest in ten parcels of land with a total assessed value of
P87,860.00, six houses with a total assessed value of P17,590.00 and an undetermined
amount to be collected from the War Damage Commission. Later, they received from said
Commission the amount of P50,000.00, more or less. This amount was not divided
among them but was used in the rehabilitation of properties owned by them in common
(t.s.n., p. 46). Of the ten parcels of land aforementioned, two were acquired after the death
of the decedent with money borrowed from the Philippine Trust Company in the amount
of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR rec.).
The project of partition also shows that the estate shares equally with Lorenzo T. Oña,
the administrator thereof, in the obligation of P94,973.00, consisting of loans contracted
by the latter with the approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).
Although the project of partition was approved by the Court on May 16, 1949, no attempt
was made to divide the properties therein listed. Instead, the properties remained under
the management of Lorenzo T. Oña who used said properties in business by leasing or
selling them and investing the income derived therefrom and the proceeds from the sales
thereof in real properties and securities. As a result, petitioners' properties and
investments gradually increased from P105,450.00 in 1949 to P480,005.20 in 1956 as
can be gleaned from the following year-end balances:
Year Investment Land Building

Account Account Account

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
From said investments and properties petitioners derived such incomes as profits from
installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and
interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said incomes are
recorded in the books of account kept by Lorenzo T. Oña where the corresponding shares
of the petitioners in the net income for the year are also known. Every year, petitioners
returned for income tax purposes their shares in the net income derived from said
properties and securities and/or from transactions involving them (Exhibit 3, supra; t.s.n.,
pp. 25-26). However, petitioners did not actually receive their shares in the yearly income.
(t.s.n., pp. 25-26, 40, 98, 100). The income was always left in the hands of Lorenzo T.
Oña who, as heretofore pointed out, invested them in real properties and securities. (See
Exhibit 3, t.s.n., pp. 50, 102-104).
On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue)
decided that petitioners formed an unregistered partnership and therefore, subject to the
corporate income tax, pursuant to Section 24, in relation to Section 84(b), of the Tax
Code. Accordingly, he assessed against the petitioners the amounts of P8,092.00 and
P13,899.00 as corporate income taxes for 1955 and 1956, respectively. (See Exhibit 5,
amended by Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested against the
assessment and asked for reconsideration of the ruling of respondent that they have
formed an unregistered partnership. Finding no merit in petitioners' request, respondent
denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for Respondent,
June 12, 1961).
The original assessment was as follows:
1955
Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.00

25% surcharge .............................................. 2,010.50
Compromise for non-filing .......................... 50.00
Total ............................................................... P10,102.50
1956
Net income as per investigation ................ P69,245.23
Income tax due thereon ............................... 13,849.00
25% surcharge .............................................. 3,462.25
Compromise for non-filing .......................... 50.00
Total ............................................................... P17,361.25
(See Exhibit 13, page 50, BIR records)
Upon further consideration of the case, the 25% surcharge was eliminated in line with the
ruling of the Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692,
Jan. 6, 1958, so that the questioned assessment refers solely to the income tax proper
for the years 1955 and 1956 and the "Compromise for non-filing," the latter item obviously
referring to the compromise in lieu of the criminal liability for failure of petitioners to file
the corporate income tax returns for said years. (See Exh. 17, page 86, BIR records).
(Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS
FORMED AN UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS
WERE CO-OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS
DERIVED FROM TRANSACTIONS THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE
LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN
UNREGISTERED PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN
UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT
HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO
THE EXTENT ONLY THAT THEY INVESTED THE PROFITS FROM THE PROPERTIES
OWNED IN COMMON AND THE LOANS RECEIVED USING THE INHERITED
PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE
COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS
PAID BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE
SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN
COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under the
facts found by the Court of Tax Appeals, should petitioners be considered as co-owners
of the properties inherited by them from the deceased Julia Buñales and the profits
derived from transactions involving the same, or, must they be deemed to have formed
an unregistered partnership subject to tax under Sections 24 and 84(b) of the National
Internal Revenue Code? (2) Assuming they have formed an unregistered partnership,
should this not be only in the sense that they invested as a common fund the profits
earned by the properties owned by them in common and the loans granted to them upon
the security of the said properties, with the result that as far as their respective shares in
the inheritance are concerned, the total income thereof should be considered as that of
co-owners and not of the unregistered partnership? And (3) assuming again that they are
taxable as an unregistered partnership, should not the various amounts already paid by
them for the same years 1955 and 1956 as individual income taxes on their respective
shares of the profits accruing from the properties they owned in common be deducted
from the deficiency corporate taxes, herein involved, assessed against such unregistered
partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas
petitioners' predecessor in interest died way back on March 23, 1944 and the project of
partition of her estate was judicially approved as early as May 16, 1949, and presumably
petitioners have been holding their respective shares in their inheritance since those
dates admittedly under the administration or management of the head of the family, the
widower and father Lorenzo T. Oña, the assessment in question refers to the later years
1955 and 1956. We believe this point to be important because, apparently, at the start,
or in the years 1944 to 1954, the respondent Commissioner of Internal Revenue did treat
petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he
considered them as having formed an unregistered partnership. At least, there is nothing
in the record indicating that an earlier assessment had already been made. Such being
the case, and We see no reason how it could be otherwise, it is easily understandable
why petitioners' position that they are co-owners and not unregistered co-partners, for the
purposes of the impugned assessment, cannot be upheld. Truth to tell, petitioners should
find comfort in the fact that they were not similarly assessed earlier by the Bureau of
Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition approved in 1949, "the properties remained
under the management of Lorenzo T. Oña who used said properties in business by
leasing or selling them and investing the income derived therefrom and the proceed from
the sales thereof in real properties and securities," as a result of which said properties
and investments steadily increased yearly from P87,860.00 in "land account" and
P17,590.00 in "building account" in 1949 to P175,028.68 in "investment account,"
P135.714.68 in "land account" and P169,262.52 in "building account" in 1956. And all
these became possible because, admittedly, petitioners never actually received any
share of the income or profits from Lorenzo T. Oña and instead, they allowed him to
continue using said shares as part of the common fund for their ventures, even as they
paid the corresponding income taxes on the basis of their respective shares of the profits
of their common business as reported by the said Lorenzo T. Oña.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit
themselves to holding the properties inherited by them. Indeed, it is admitted that during
the material years herein involved, some of the said properties were sold at considerable
profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oña, in the purchase
and sale of corporate securities. It is likewise admitted that all the profits from these
ventures were divided among petitioners proportionately in accordance with their
respective shares in the inheritance. In these circumstances, it is Our considered view
that from the moment petitioners allowed not only the incomes from their respective
shares of the inheritance but even the inherited properties themselves to be used by
Lorenzo T. Oña as a common fund in undertaking several transactions or in business,
with the intention of deriving profit to be shared by them proportionally, such act was
tantamonut to actually contributing such incomes to a common fund and, in effect, they
thereby formed an unregistered partnership within the purview of the above-mentioned
provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can
be considered as co-owners rather than unregistered co-partners within the
contemplation of our corporate tax laws aforementioned. Before the partition and
distribution of the estate of the deceased, all the income thereof does belong commonly
to all the heirs, obviously, without them becoming thereby unregistered co-partners, but
it does not necessarily follow that such status as co-owners continues until the inheritance
is actually and physically distributed among the heirs, for it is easily conceivable that after
knowing their respective shares in the partition, they might decide to continue holding
said shares under the common management of the administrator or executor or of anyone
chosen by them and engage in business on that basis. Withal, if this were to be allowed,
it would be the easiest thing for heirs in any inheritance to circumvent and render
meaningless Sections 24 and 84(b) of the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons
for holding the appellants therein to be unregistered co-partners for tax purposes, that
their common fund "was not something they found already in existence" and that "it was
not a property inherited by them pro indiviso," but it is certainly far fetched to argue
therefrom, as petitioners are doing here, that ergo, in all instances where an inheritance
is not actually divided, there can be no unregistered co-partnership. As already indicated,
for tax purposes, the co-ownership of inherited properties is automatically converted into
an unregistered partnership the moment the said common properties and/or the incomes
derived therefrom are used as a common fund with intent to produce profits for the heirs
in proportion to their respective shares in the inheritance as determined in a project
partition either duly executed in an extrajudicial settlement or approved by the court in the
corresponding testate or intestate proceeding. The reason for this is simple. From the
moment of such partition, the heirs are entitled already to their respective definite shares
of the estate and the incomes thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other heirs, and, accordingly he
becomes liable individually for all taxes in connection therewith. If after such partition, he
allows his share to be held in common with his co-heirs under a single management to
be used with the intent of making profit thereby in proportion to his share, there can be
no doubt that, even if no document or instrument were executed for the purpose, for tax
purposes, at least, an unregistered partnership is formed. This is exactly what happened
to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code,
providing that: "The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or interest in any
property from which the returns are derived," and, for that matter, on any other provision
of said code on partnerships is unavailing. In Evangelista, supra, this Court clearly
differentiated the concept of partnerships under the Civil Code from that of unregistered
partnerships which are considered as "corporations" under Sections 24 and 84(b) of the
National Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief Justice,
elucidated on this point thus:
To begin with, the tax in question is one imposed upon "corporations", which, strictly
speaking, are distinct and different from "partnerships". When our Internal Revenue Code
includes "partnerships" among the entities subject to the tax on "corporations", said Code
must allude, therefore, to organizations which are not necessarily "partnerships", in the
technical sense of the term. Thus, for instance, section 24 of said Code exempts from the
aforementioned tax "duly registered general partnerships," which constitute precisely one
of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section
84(b) of said Code, "the term corporation includes partnerships, no matter how created
or organized." This qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in confirmity with the usual requirements of
the law on partnerships, in order that one could be deemed constituted for purposes of
the tax on corporation. Again, pursuant to said section 84(b),the term "corporation"
includes, among others, "joint accounts,(cuentas en participacion)" and "associations",
none of which has a legal personality of its own, independent of that of its members.
Accordingly, the lawmaker could not have regarded that personality as a condition
essential to the existence of the partnerships therein referred to. In fact, as above stated,
"duly registered general co-partnerships" — which are possessed of the aforementioned
personality — have been expressly excluded by law (sections 24 and 84[b]) from the
connotation of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership. Under the term "partnership" it includes not
only a partnership as known in common law but, as well, a syndicate, group, pool, joint
venture, or other unincorporated organization which carries on any business, financial
operation, or venture, and which is not, within the meaning of the Code, a trust, estate, or
a corporation. ... . (7A Merten's Law of Federal Income Taxation, p. 789; emphasis ours.)
The term "partnership" includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on. ... . (8 Merten's Law of Federal Income Taxation, p.
562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code includes
these partnerships — with the exception only of duly registered general copartnerships
— within the purview of the term "corporation." It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is concerned, and are
subject to the income tax for corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal
Revenue, G. R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled
against a theory of co-ownership pursued by appellants therein.
As regards the second question raised by petitioners about the segregation, for the
purposes of the corporate taxes in question, of their inherited properties from those
acquired by them subsequently, We consider as justified the following ratiocination of the
Tax Court in denying their motion for reconsideration:
In connection with the second ground, it is alleged that, if there was an unregistered
partnership, the holding should be limited to the business engaged in apart from the
properties inherited by petitioners. In other words, the taxable income of the partnership
should be limited to the income derived from the acquisition and sale of real properties
and corporate securities and should not include the income derived from the inherited
properties. It is admitted that the inherited properties and the income derived therefrom
were used in the business of buying and selling other real properties and corporate
securities. Accordingly, the partnership income must include not only the income derived
from the purchase and sale of other properties but also the income of the inherited
properties.
Besides, as already observed earlier, the income derived from inherited properties may
be considered as individual income of the respective heirs only so long as the inheritance
or estate is not distributed or, at least, partitioned, but the moment their respective known
shares are used as part of the common assets of the heirs to be used in making profits,
it is but proper that the income of such shares should be considered as the part of the
taxable income of an unregistered partnership. This, We hold, is the clear intent of the
law.
Likewise, the third question of petitioners appears to have been adequately resolved by
the Tax Court in the aforementioned resolution denying petitioners' motion for
reconsideration of the decision of said court. Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court that the herein petitioners
have formed an unregistered partnership and, therefore, have to be taxed as such, it
might be recalled that the petitioners in their individual income tax returns reported their
shares of the profits of the unregistered partnership. We think it only fair and equitable
that the various amounts paid by the individual petitioners as income tax on their
respective shares of the unregistered partnership should be deducted from the deficiency
income tax found by this Honorable Court against the unregistered partnership. (page 7,
Memorandum for the Petitioner in Support of Their Motion for Reconsideration, Oct. 28,
1961.)
In other words, it is the position of petitioners that the taxable income of the partnership
must be reduced by the amounts of income tax paid by each petitioner on his share of
partnership profits. This is not correct; rather, it should be the other way around. The
partnership profits distributable to the partners (petitioners herein) should be reduced by
the amounts of income tax assessed against the partnership. Consequently, each of the
petitioners in his individual capacity overpaid his income tax for the years in question, but
the income tax due from the partnership has been correctly assessed. Since the individual
income tax liabilities of petitioners are not in issue in this proceeding, it is not proper for
the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they
might have paid as individual income tax cannot be credited as part payment of the taxes
herein in question. It is argued that to sanction the view of the Tax Court is to oblige
petitioners to pay double income tax on the same income, and, worse, considering the
time that has lapsed since they paid their individual income taxes, they may already be
barred by prescription from recovering their overpayments in a separate action. We do
not agree. As We see it, the case of petitioners as regards the point under discussion is
simply that of a taxpayer who has paid the wrong tax, assuming that the failure to pay the
corporate taxes in question was not deliberate. Of course, such taxpayer has the right to
be reimbursed what he has erroneously paid, but the law is very clear that the claim and
action for such reimbursement are subject to the bar of prescription. And since the period
for the recovery of the excess income taxes in the case of herein petitioners has already
lapsed, it would not seem right to virtually disregard prescription merely upon the ground
that the reason for the delay is precisely because the taxpayers failed to make the proper
return and payment of the corporate taxes legally due from them. In principle, it is but
proper not to allow any relaxation of the tax laws in favor of persons who are not exactly
above suspicion in their conduct vis-a-vis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed
from is affirm with costs against petitioners.

G.R. No. 211666 February 25, 2015

REPUBLIC OF THE PHILIPPINES, represented by the DEPARTMENT OF PUBLIC
WORKS AND HIGHWAYS, Petitioners,
vs.
ARLENE R. SORIANO, Respondent.
DECISION
PERALTA, J.:
Before the Court is a petition for review under Rule 45 of the Rules of Court assailing the
Decision1 dated November 15, 2013 and Order2 dated March 10, 2014 of the Regional
Trial Court (RTC), Valenzuela City, Branch 270, in Civil Case No. 140-V-10.
The antecedent facts are as follows:
On October 20, 2010, petitioner Republic of the Philippines, represented by the
Department of Public Works and Highways (DPWH), filed a Complaint3 for expropriation
against respondent Arlene R. Soriano, the registered owner of a parcel of land consisting
of an area of 200 square meters, situated at Gen. T De Leon, Valenzuela City, and
covered by Transfer Certificate of Title (TCT) No. V-13790.4 In its Complaint, petitioner
averred that pursuant to Republic Act (RA) No. 8974, otherwise known as "An Act to
Facilitate the Acquisition of Right-Of-Way, Site or Location for National Government
Infrastructure Projects and for other Purposes," the property sought to be expropriated
shall be used in implementing the construction of the North Luzon Expressway (NLEX)-
Harbor Link Project (Segment 9) from NLEX to MacArthur Highway, Valenzuela City.5
Petitioner duly deposited to the Acting Branch Clerk of Court the amount of ₱420,000.00
representing 100% of the zonal value of the subject property. Consequently, in an Order6
dated May 27, 2011, the RTC ordered the issuance of a Writ of Possession and a Writ of
Expropriation for failure of respondent, or any of her representatives, to appear despite
notice during the hearing called for the purpose.
In another Order7 dated June 21, 2011, the RTC appointed the following members of the
Board of Commissioners for the determination of just compensation: (1) Ms. Eunice O.
Josue, Officer-in-Charge, RTC, Branch 270, Valenzuela City; (2) Atty. Cecilynne R.
Andrade, Acting Valenzuela City Assessor,City Assessor’s Office, Valenzuela City; and
(3) Engr. Restituto Bautista, of Brgy. Bisig,Valenzuela City. However, the trial court
subsequently revoked the appointment of the Board for their failure to submit a report as
to the fair market value of the property to assist the court in the determination of just
compensation and directed the parties to submit their respective position papers.8
Thereafter, the case was set for hearing giving the parties the opportunity to present and
identify all evidence in support of their arguments therein. According to the RTC, the
records of the case reveal that petitioner adduced evidence to show that the total amount
deposited is just, fair, and equitable. Specifically, in its Position Paper, petitioner alleged
that pursuant to a Certification issued by the Bureau of Internal Revenue (BIR), Revenue
Region No. 5, the zonal value of the subject property in the amount of ₱2,100.00 per
square meter is reasonable, fair, and just to compensate the defendant for the taking of
her property in the total area of 200 square meters.9 In fact, Tax Declaration No. C-018-
07994, dated November 13, 2009 submitted by petitioner, shows that the value of the
subject property is at a lower rate of ₱400.00per square meter. Moreover, as testified to
by Associate Solicitor III Julie P. Mercurio, and as affirmed by the photographs submitted,
the subject property is poorly maintained, covered by shrubs and weeds, and not
concretely-paved. It is located far from commercial or industrial developments in an area
without a proper drainage system, can only be accessed through a narrow dirt road, and
is surrounded by adjacent dwellings of sub-standard materials.
Accordingly, the RTC considered respondent to have waived her right to adduce evidence
and to object to the evidence submitted by petitioner for her continued absence despite
being given several notices to do so.
On November 15, 2013, the RTC rendered its Decision, the dispositive portion of which
reads: WHEREFORE, with the foregoing determination of just compensation, judgment
is hereby rendered:
1) Declaring plaintiff to have lawful right to acquire possession of and title to 200 square
meters of defendant Arlene R. Soriano’s parcel of land covered by TCT V-13790
necessary for the construction of the NLEX – Harbor Link Project(Segment 9) from NLEX
to MacArthur Highway Valenzuela City;
2) Condemning portion to the extent of 200 square meters of the above-described parcel
of land including improvements thereon, if there be any, free from all liens and
encumbrances;
3) Ordering the plaintiff to pay defendant Arlene R. Soriano Php2,100.00 per square
meter or the sum of Four Hundred Twenty Thousand Pesos (Php420,000.00) for the 200
square meters as fair, equitable, and just compensation with legal interest at 12% per
annum from the taking of the possession of the property, subject to the payment of all
unpaid real property taxes and other relevant taxes, if there be any;
4) Plaintiff is likewise ordered to pay the defendant consequential damages which shall
include the value of the transfer tax necessary for the transfer of the subject property from
the name of the defendant to that of the plaintiff;
5) The Office of the Register of Deeds of Valenzuela City, Metro Manila is directed to
annotate this Decision in Transfer Certificate of Title No. V-13790 registered under the
name of Arlene R. Soriano.
Let a certified true copy of this decision be recorded in the Registry of Deeds of
Valenzuela City.
Records of this case show that the Land Bank Manager’s Check Nos. 0000016913 dated
January 21, 2011 in the amount of Php400,000.00 and 0000017263 dated April 28, 2011
in the amount of Php20,000.00 issued by the Department of Public Works and Highways
(DPWH) are already stale. Thus, the said Office is hereby directed to issue another
Manager’s Check in the total amount Php420,000.00 under the name of the Office of the
Clerk of Court, Regional Trial Court, Valenzuela City earmarked for the instant case.10
Petitioner filed a Motion for Reconsideration maintaining that pursuant to Bangko Sentral
ng Pilipinas (BSP) Circular No. 799, Series of 2013, which took effect on July 1, 2013, the
interest rate imposed by the RTC on just compensation should be lowered to 6% for the
instant case falls under a loan or forbearance of money.11 In its Order12 dated March 10,
2014, the RTC reduced the interest rate to 6% per annum not on the basis of the
aforementioned Circular, but on Article 2209 of the Civil Code, viz.:
However, the case of National Power Corporation v. Honorable Zain B. Angas is
instructive.
In the aforementioned case law, which is similar to the instant case, the Supreme Court
had the occasion to rule that it is well-settled that the aforequoted provision of Bangko
Sentral ng Pilipinas Circular applies only to a loan or forbearance of money, goods or
credits. However, the term "judgments" as used in Section 1 of the Usury Law and the
previous Central Bank Circular No. 416, should be interpreted to mean only judgments
involving loan or forbearance of money, goods or credits, following the principle of
ejusdem generis. And applying said rule on statutory construction, the general term
"judgments" can refer only to judgments in cases involving loans or forbearance of any
money, goods, or credits. Thus, the High Court held that, Art. 2209 of the Civil Code, and
not the Central Bank Circular, is the law applicable.
Art. 2009 of the Civil Code reads:
"If the obligation consists in the payment of a sum of money, and the debtor incurs in
delay, the indemnity for damages, there being no stipulation to the contrary, shall be the
payment of the interest agreed upon, and in the absence of stipulation, the legal interest,
which is six per cent per annum."
Further in that case, the Supreme Court explained that the transaction involved is clearly
not a loan or forbearance of money, goods or credits but expropriation of certain parcels
of land for a public purpose, the payment of which is without stipulation regarding interest,
and the interest adjudged by the trial court is in the nature of indemnity for damages. The
legal interest required to be paid on the amount of just compensation for the properties
expropriated is manifestly in the form of indemnity for damages for the delay in the
payment thereof. It ultimately held that Art. 2209 of the Civil Code shall apply.13
On May 12, 2014, petitioner filed the instant petition invoking the following arguments:
I.
RESPONDENT IS NOT ENTITLED TO THE LEGAL INTEREST OF 6% PER ANNUM
ON THE AMOUNT OF JUST COMPENSATION OF THE SUBJECT PROPERTY AS
THERE WAS NO DELAY ON THE PART OF PETITIONER.
II.
BASED ON THE NATIONAL INTERNAL REVENUE CODE OF 1997 AND THE LOCAL
GOVERNMENT CODE, IT IS RESPONDENT’S OBLIGATION TO PAY THE TRANSFER
TAXES.
Petitioner maintains that if property is taken for public use before compensation is
deposited with the court having jurisdiction over the case, the final compensation must
include interests on its just value computed from the time the property is taken up to the
time when compensation is actually paid or deposited with the court.14 Thus, legal interest
applies only when the property was taken prior to the deposit of payment with the court
and only to the extent that there is delay in payment. In the instant case, petitioner posits
that since it was able to deposit with the court the amount representing the zonal value of
the property before its taking, it cannot be said to be in delay, and thus, there can be no
interest due on the payment of just compensation.15 Moreover, petitioner alleges that
since the entire subject property was expropriated and not merely a portion thereof, it did
not suffer an impairment or decrease in value, rendering the award of consequential
damages nugatory. Furthermore, petitioner claims that contrary to the RTC’s instruction,
transfer taxes, in the nature of Capital Gains Tax and Documentary Stamp Tax,
necessary for the transfer of the subject property from the name of the respondent to that
of the petitioner are liabilities of respondent and not petitioner.
The petition is partly meritorious.
At the outset, it must be noted that the RTC’s reliance on National Power Corporation v.
Angasis misplaced for the same has already been overturned by our more recent ruling
in Republic v. Court of Appeals,16 wherein we held that the payment of just compensation
for the expropriated property amounts to an effective forbearance on the part of the State,
to wit:
Aside from this ruling, Republic notably overturned the Court’s previous ruling in National
Power Corporation v. Angas which held that just compensation due for expropriated
properties is not a loan or forbearance of money but indemnity for damages for the delay
in payment; since the interest involved is in the nature of damages rather than earnings
from loans, then Art. 2209 of the Civil Code, which fixes legal interest at 6%, shall apply.
In Republic, the Court recognized that the just compensation due to the landowners for
their expropriated property amounted to an effective forbearance on the part of the State.
Applying the Eastern Shipping Lines ruling, the Court fixed the applicable interest rate at
12% per annum, computed from the time the property was taken until the full amount of
just compensation was paid, in order to eliminate the issue of the constant fluctuation and
inflation of the value of the currency over time. In the Court’s own words:
The Bulacan trial court, in its 1979 decision, was correct in imposing interest[s] on the
zonal value of the property to be computed from the time petitioner instituted
condemnation proceedings and "took" the property in September 1969. This allowance
of interest on the amount found to be the value of the property as of the time of the taking
computed, being an effective forbearance, at 12% per annum should help eliminate the
issue of the constant fluctuation and inflation of the value of the currency over time.
We subsequently upheld Republic’s 12% per annum interest rate on the unpaid
expropriation compensation in the following cases: Reyes v. National Housing Authority,
Land Bank of the Philippines v. Wycoco, Republic v. Court of Appeals, Land Bank of the
Philippines v. Imperial, Philippine Ports Authority v. Rosales-Bondoc, and Curata v.
Philippine Ports Authority.17 Effectively, therefore, the debt incurred by the government
on account of the taking of the property subject of an expropriation constitutes a
forbearance18 which runs contrary to the trial court’s opinion that the same is in the nature
of indemnity for damages calling for the application of Article 2209 of the Civil Code.
Nevertheless, in line with the recent circular of the Monetary Board of the Bangko Sentral
ng Pilipinas (BSP-MB) No. 799, Series of 2013, effective July 1, 2013, the prevailing rate
of interest for loans or forbearance of money is six percent (6%) per annum, in the
absence of an express contract as to such rate of interest.
Notwithstanding the foregoing, We find that the imposition of interest in this case is
unwarranted in view of the fact that as evidenced by the acknowledgment receipt19 signed
by the Branch Clerk of Court, petitioner was able to deposit with the trial court the amount
representing the zonal value of the property before its taking. As often ruled by this Court,
the award of interest is imposed in the nature of damages for delay in payment which, in
effect, makes the obligation on the part of the government one of forbearance to ensure
prompt payment of the value of the land and limit the opportunity loss of the owner.20
However, when there is no delay in the payment of just compensation, We have not
hesitated in deleting the imposition of interest thereon for the same is justified only in
cases where delay has been sufficiently established.21
The records of this case reveal that petitioner did not delay in its payment of just
compensation as it had deposited the pertinent amount in full due to respondent on
January 24, 2011, or four (4) months before the taking thereof, which was when the RTC
ordered the issuance of a Writ of Possession and a Writ of Expropriation on May 27, 2011.
The amount deposited was deemed by the trial court to be just, fair, and equitable, taking
into account the well-established factors in assessing the value of land, such as its size,
condition, location, tax declaration, and zonal valuation as determined by the BIR.
Considering, therefore, the prompt payment by the petitioner of the full amount of just
compensation as determined by the RTC, We find that the imposition of interest thereon
is unjustified and should be deleted.
Similarly, the award of consequential damages should likewise be deleted in view of the
fact that the entire area of the subject property is being expropriated, and not merely a
portion thereof, wherein such remaining portion suffers an impairment or decrease in
value, as enunciated in Republic of the Philippines v. Bank of the Philippine Islands,22
thus:
x x x The general rule is that the just compensation to which the owner of the condemned
property is entitled to is the market value. Market value is that sum of money which a
person desirous but not compelled to buy, and an owner willing but not compelled to sell,
would agree on as a price to be paid by the buyer and received by the seller. The general
rule, however, is modified where only a part of a certain property is expropriated. In such
a case, the owner is not restricted to compensation for the portion actually taken, he is
also entitled to recover the consequential damage, if any, to the remaining part of the
property.
xxxx
No actual taking of the building is necessary to grant consequential damages.
Consequential damages are awarded if as a result of the expropriation, the remaining
property of the owner suffers from an impairment or decrease in value. The rules on
expropriation clearly provide a legal basis for the award of consequential damages.
Section 6 of Rule 67 of the Rules of Court provides:
x x x The commissioners shall assess the consequential damages to the property not
taken and deduct from such consequential damages the consequential benefits to be
derived by the owner from the public use or public purpose of the property taken, the
operation of its franchise by the corporation or the carrying on of the business of the
corporation or person taking the property. But in no case shall the consequential benefits
assessed exceed the consequential damages assessed, or the owner be deprived of the
actual value of his property so taken.
In B.H. Berkenkotter & Co. v. Court of Appeals, we held that:
To determine just compensation, the trial court should first ascertain the market value of
the property, to which should be added the consequential damages after deducting
therefrom the consequential benefits which may arise from the expropriation. If the
consequential benefits exceed the consequential damages, these items should be
disregarded altogether as the basic value of the property should be paid in every case.23
Considering that the subject property is being expropriated in its entirety, there is no
remaining portion which may suffer an impairment or decrease in value as a result of the
expropriation. Hence, the award of consequential damages is improper.
Anent petitioner’s contention that it cannot be made to pay the value of the transfer taxes
in the nature of capital gains tax and documentary stamp tax, which are necessary for the
transfer of the subject property from the name of the respondent to that of the petitioner,
the same is partly meritorious.
With respect to the capital gains tax, We find merit in petitioner’s posture that pursuant to
Sections 24(D) and 56(A)(3) of the 1997 National Internal Revenue Code (NIRC), capital
gains tax due on the sale of real property is a liability for the account of the seller, to wit:
Section 24. Income Tax Rates–
xxxx
(D) Capital Gains from Sale of Real Property. –
(1) In General. – The provisions of Section 39(B) notwithstanding, a final tax of six percent
(6%) based on the gross selling price or current fair market value as determined in
accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon
capital gains presumed to have been realized from the sale, exchange, or other
disposition of real property located in the Philippines, classified as capital assets,
including pacto de retro sales and other forms of conditional sales, by individuals,
including estates and trusts: Provided, That the tax liability, if any, on gains from sales or
other disposition of real property to the government or any of its political subdivisions or
agencies or to government-owned or controlled corporations shall be determined either
under Section 24(A)or under this Subsection, at the option of the taxpayer.
xxxx
Section 56. Payment and Assessment of Income Tax for Individuals and Corporations. –
(A) Payment of Tax –
xxxx
(3) Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed under
Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on the date the
return prescribed therefor is filed by the person liable thereto: Provided, That if the seller
submits proof of his intention to avail himself of the benefit of exemption of capital gains
under existing special laws, no such payments shall be required : Provided, further, That
in case of failure to qualify for exemption under such special laws and implementing rules
and regulations, the tax due on the gains realized from the original transaction shall
immediately become due and payable, subject to the penalties prescribed under
applicable provisions of this Code: Provided, finally, That if the seller, having paid the tax,
submits such proof of intent within six (6) months from the registration of the document
transferring the real property, he shall be entitled to a refund of such tax upon verification
of his compliance with the requirements for such exemption.
Thus, it has been held that since capital gains is a tax on passive income, it is the seller,
not the buyer, who generally would shoulder the tax.24 Accordingly, the BIR, in its BIR
Ruling No. 476-2013, dated December 18, 2013, constituted the DPWH as a withholding
agent to withhold the six percent (6%) final withholding tax in the expropriation of real
property for infrastructure projects. As far as the government is concerned, therefore, the
capital gains tax remains a liability of the seller since it is a tax on the seller's gain from
the sale of the real estate.25
As to the documentary stamp tax, however, this Court finds inconsistent petitioner’s denial
of liability to the same. Petitioner cites Section 196 of the 1997 NIRC as its basis in saying
that the documentary stamp tax is the liability of the seller, viz.:
SECTION 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property. - On all
conveyances, deeds, instruments, or writings, other than grants, patents or original
certificates of adjudication issued by the Government, whereby any land, tenement or
other realty sold shall be granted, assigned, transferred or otherwise conveyed to the
purchaser, or purchasers, or to any other person or persons designated by such
purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates
herein below prescribed, based on the consideration contracted to be paid for such realty
or on its fair market value determined in accordance with Section 6(E) of this Code,
whichever is higher: Provided, That when one of the contracting parties is the
Government, the tax herein imposed shall be based on the actual consideration: (a) When
the consideration, or value received or contracted to be paid for such realty, after making
proper allowance of any encumbrance, does not exceed One thousand pesos (₱1,000),
Fifteen pesos (₱15.00).
(b) For each additional One thousand pesos (₱1,000), or fractional part thereof in excess
of One thousand pesos (₱1,000) of such consideration or value, Fifteen pesos (₱15.00).
When it appears that the amount of the documentary stamp tax payable hereunder has
been reduced by an incorrect statement of the consideration in any conveyance, deed,
instrument or writing subject to such tax the Commissioner, provincial or city Treasurer,
or other revenue officer shall, from the assessment rolls or other reliable source of
information, assess the property of its true market value and collect the proper tax
thereon.
Yet, a perusal of the provision cited above does not explicitly impute the obligation to pay
the documentary stamp tax on the seller. In fact, according to the BIR, all the parties to a
transaction are primarily liable for the documentary stamp tax, as provided by Section 2
of BIR Revenue Regulations No. 9-2000, which reads:26
SEC. 2. Nature of the Documentary Stamp Tax and Persons Liable for the Tax. –
(a) In General. - The documentary stamp taxes under Title VII of the Code is a tax on
certain transactions.1âwphi1 It is imposed against "the person making, signing, issuing,
accepting, or transferring" the document or facility evidencing the aforesaid transactions.
Thus, in general, it may be imposed on the transaction itself or upon the document
underlying such act. Any of the parties thereto shall be liable for the full amount of the tax
due: Provided, however, that as between themselves, the said parties may agree on who
shall be liable or how they may share on the cost of the tax.
(b) Exception. - Whenever one of the parties to the taxable transaction is exempt from the
tax imposed under Title VII of the Code, the other party thereto who is not exempt shall
be the one directly liable for the tax.27
As a general rule, therefore, any of the parties to a transaction shall be liable for the full
amount of the documentary stamp tax due, unless they agree among themselves on who
shall be liable for the same.
In this case, there is no agreement as to the party liable for the documentary stamp tax
due on the sale of the land to be expropriated. But while petitioner rejects any liability for
the same, this Court must take note of petitioner’s Citizen’s Charter,28 which functions as
a guide for the procedure to be taken by the DPWH in acquiring real property through
expropriation under RA 8974. The Citizen’s Charter, issued by petitioner DPWH itself on
December 4,2013, explicitly provides that the documentary stamp tax, transfer tax, and
registration fee due on the transfer of the title of land in the name of the Republic shall be
shouldered by the implementing agency of the DPWH, while the capital gains tax shall be
paid by the affected property owner.29 Thus, while there is no specific agreement between
petitioner and respondent, petitioner's issuance of the Citizen's Charter serves as its
notice to the public as to the procedure it shall generally take in cases of expropriation
under RA 8974. Accordingly, it will be rather unjust for this Court to blindly accede to
petitioner's vague rejection of liability in the face of its issuance of the Citizen's Charter,
which contains a clear and unequivocal assumption of accountability for the documentary
stamp tax. Had petitioner provided this Court with more convincing basis, apart from a
mere citation of an indefinite provision of the 1997 NIRC, showing that it should be
respondent-seller who shall be liable for the documentary stamp tax due on the sale of
the subject property, its rejection of the payment of the same could have been sustained.
WHEREFORE, premises considered, the instant pet1t10n 1s PARTIALLY GRANTED.
The Decision and Order, dated November 15, 2013 and March 10, 2014, respectively, of
the Regional Trial Court, Valenzuela City, Branch 270, in Civil Case No. 140-V-10 are
hereby MODIFIED, in that the imposition of interest on the payment of just compensation
as well as the award of consequential damages are deleted. In addition, respondent
Arlene R. Soriano is ORDERED to pay for the capital gains tax due on the transfer of the
expropriated property, while the documentary stamp tax, transfer tax, and registration fee
shall be for the account of petitioner.
SO ORDERED.

G.R. No. 198756 January 13, 2015

BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION,
METROPOLITAN BANK & TRUST COMPANY, PHILIPPINE BANK OF
COMMUNICATIONS, PHILIPPINE NATIONAL BANK, PHILIPPINE VETERANS BANK
AND PLANTERS DEVELOPMENT BANK, Petitioners,
RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL
CORPORATION, Petitioners-Intervenors,
CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor,
vs.
REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE,
BUREAU OF INTERNAL REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF
FINANCE, THE NATIONAL TREASURER AND BUREAU OF TREASURY,
Respondent.
DECISION
LEONEN, J.:
The case involves the proper tax treatment of the discount or interest income arising from
the ₱35 billion worth of 10-year zero-coupon treasury bonds issued by the Bureau of
Treasury on October 18, 2001 (denominated as the Poverty Eradication and Alleviation
Certificates or the PEA Ce Bonds by the Caucus of Development NGO Networks).
On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-
20111 (2011 BIR Ruling), declaring that the PEACe Bonds being deposit substitutes are
subject to the 20% final withholding tax. Pursuant to this ruling, the Secretary of Finance
directed the Bureau of Treasury to withhold a 20% final tax from the face value of the
PEACe Bonds upon their payment at maturity on October 18, 2011.
This is a petition for certiorari, prohibition and/or mandamus2 filed by petitioners under
Rule 65 of the Rules of Court seeking to:
a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October 2011 [and] other
related rulings issued by BIR of similar tenor and import, for being unconstitutional and
for having been issued without jurisdiction or with grave abuse of discretion amounting to
lack or· excess of jurisdiction ... ;
b. PROHIBIT Respondents, particularly the BTr; from withholding or collecting the 20%
FWT from the payment of the face value of the Government Bonds upon their maturity;
c. COMMAND Respondents, particularly the BTr, to pay the full amount of the face value
of the Government Bonds upon maturity ... ; and
d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary
injunction, enjoining Respondents, particularly the BIR and the BTr, from withholding or
collecting 20% FWT on the Government Bonds and the respondent BIR from enforcing
the assailed 2011 BIR Ruling, as well asother related rulings issued by the BIR of similar
tenor and import, pending the resolution by [the court] of the merits of [the] Petition.3
Factual background
By letter4 dated March 23, 2001, the Caucus of Development NGO Networks (CODE-
NGO) "with the assistance of its financial advisors, Rizal Commercial Banking Corp.
("RCBC"), RCBC Capital Corp. ("RCBC Capital"), CAPEX Finance and Investment Corp.
("CAPEX") and SEED Capital Ventures, Inc. (SEED),"5 requested an approval from the
Department of Finance for the issuance by the Bureau of Treasury of 10-year zerocoupon
Treasury Certificates (T-notes).6 The T-notes would initially be purchased by a special
purpose vehicle on behalf of CODE-NGO, repackaged and sold at a premium to investors
as the PEACe Bonds.7 The net proceeds from the sale of the Bonds"will be used to endow
a permanent fund (Hanapbuhay® Fund) to finance meritorious activities and projects of
accredited non-government organizations (NGOs) throughout the country."8
Prior to and around the time of the proposal of CODE-NGO, other proposals for the
issuance of zero-coupon bonds were also presented by banks and financial institutions,
such as First Metro Investment Corporation (proposal dated March 1, 2001),9
International Exchange Bank (proposal dated July 27, 2000),10 Security Bank Corporation
and SB Capital Investment Corporation (proposal dated July 25, 2001),11 and ATR-Kim
Eng Fixed Income, Inc. (proposal dated August 25, 1999).12 "[B]oth the proposals of First
Metro Investment Corp. and ATR-Kim Eng Fixed Income indicate that the interest income
or discount earned on the proposed zerocoupon bonds would be subject to the prevailing
withholding tax."13
A zero-coupon bondis a bond bought at a price substantially lower than its face value (or
at a deep discount), with the face value repaid at the time of maturity.14 It does not make
periodic interest payments, or have socalled "coupons," hence the term zero-coupon
bond.15 However, the discount to face value constitutes the return to the bondholder.16
On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGO’s letters dated
May 10, 15, and 25, 2001, issued BIR Ruling No. 020-200117 on the tax treatment of the
proposed PEACe Bonds. BIR Ruling No. 020-2001, signed by then Commissioner
ofInternal Revenue René G. Bañez confirmed that the PEACe Bonds would not be
classified as deposit substitutes and would not be subject to the corresponding
withholding tax:
Thus, to be classified as "deposit substitutes", the borrowing of funds must be obtained
from twenty (20) or more individuals or corporate lenders at any one time. In the light of
your representation that the PEACe Bonds will be issued only to one entity, i.e., Code
NGO, the same shall not be considered as "deposit substitutes" falling within the purview
of the above definition. Hence, the withholding tax on deposit substitutes will not apply.18
(Emphasis supplied)
The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was
subsequently reiterated in BIR Ruling No. 035-200119 dated August 16, 2001 and BIR
Ruling No. DA-175-0120 dated September 29, 2001 (collectively, the 2001 Rulings). In
sum, these rulings pronounced that to be able to determine whether the financial assets,
i.e., debt instruments and securities are deposit substitutes, the "20 or more individual or
corporate lenders" rule must apply. Moreover, the determination of the phrase "at any one
time" for purposes of determining the "20 or more lenders" is to be determined at the time
of the original issuance. Such being the case, the PEACe Bonds were not to be treated
as deposit substitutes.
Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo Sergio
G. Edeza (Former Treasurer Edeza) questioned the propriety of issuing the bonds directly
to a special purpose vehicle considering that the latter was not a Government Securities
Eligible Dealer (GSED).22 Former Treasurer Edeza recommended that the issuance of
the Bonds "be done through the ADAPS"23 and that CODE-NGO "should get a GSED to
bid in [sic] its behalf."24
Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury Bonds25
(Public Offering) dated October 9, 2001, the Bureau of Treasury announced that "₱30.0B
worth of 10-year Zero[-] Coupon Bonds [would] be auctioned on October 16, 2001[.]"26
The notice stated that the Bonds "shall be issued to not morethan 19 buyers/lenders
hence, the necessity of a manual auction for this maiden issue."27 It also required the
GSEDs to submit their bids not later than 12 noon on auction date and to disclose in their
bid submissions the names of the institutions bidding through them to ensure strict
compliance with the 19 lender limit.28 Lastly, it stated that "the issue being limitedto 19
lenders and while taxable shall not be subject to the 20% final withholding [tax]."29
On October 12, 2001, the Bureau of Treasury released a memo30 on the "Formula for the
Zero-Coupon Bond." The memo stated inpart that the formula (in determining the
purchase price and settlement amount) "is only applicable to the zeroes that are not
subject to the 20% final withholding due to the 19 buyer/lender limit."31
A day before the auction date or on October 15, 2001, the Bureau of Treasury issued the
"Auction Guidelines for the 10-year Zero-Coupon Treasury Bond to be Issued on October
16, 2001" (Auction Guidelines).32 The Auction Guidelines reiterated that the Bonds to be
auctioned are "[n]ot subject to 20% withholding tax as the issue will be limited to a
maximum of 19 lenders in the primary market (pursuant to BIR Revenue Regulation No.
020 2001)."33 The Auction Guidelines, for the first time, also stated that the Bonds are
"[e]ligible as liquidity reserves (pursuant to MB Resolution No. 1545 dated 27 September
2001)[.]"34
On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon
bonds.35 Also on the same date, the Bureau of Treasury issued another memorandum36
quoting excerpts of the ruling issued by the Bureau of Internal Revenue concerning the
Bonds’ exemption from 20% final withholding tax and the opinion of the Monetary Board
on reserve eligibility.37
During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was very
wide, from as low as 12.248% to as high as 18.000%.39 Nonetheless, the Bureau of
Treasury accepted the auction results.40 The cut-off was at 12.75%.41
After the auction, RCBC which participated on behalf of CODE-NGO was declared as the
winning bidder having tendered the lowest bids.42 Accordingly, on October 18, 2001, the
Bureau of Treasury issued ₱35 billion worth of Bonds at yield-to-maturity of 12.75% to
RCBC for approximately ₱10.17 billion,43 resulting in a discount of approximately ₱24.83
billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting Agreement44 with
CODE-NGO, whereby RCBC Capital was appointed as the Issue Manager and Lead
Underwriter for the offering of the PEACe Bonds.45 RCBC Capital agreed to underwrite46
on a firm basis the offering, distribution and sale of the 35 billion Bonds at the price of
₱11,995,513,716.51.47 In Section 7(r) of the underwriting agreement, CODE-NGO
represented that "[a]ll income derived from the Bonds, inclusive of premium on
redemption and gains on the trading of the same, are exempt from all forms of taxation
as confirmed by Bureau of Internal Revenue (BIR) letter rulings dated 31 May 2001 and
16 August 2001, respectively."48
RCBC Capital sold the Government Bonds in the secondary market for an issue price of
₱11,995,513,716.51. Petitioners purchased the PEACe Bonds on different dates.49
BIR rulings
On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT
on the Government Bonds and directing the BTr to withhold said final tax at the maturity
thereof, [allegedly without] consultation with Petitioners as bond holders, and without
conducting any hearing."50
"It appears that the assailed 2011 BIR Ruling was issued in response to a query of the
Secretary of Finance on the proper tax treatment of the discount or interest income
derived from the Government Bonds."51 The Bureau of Internal Revenue, citing three (3)
of its rulings rendered in 2004 and 2005, namely: BIR Ruling No. 007-0452 dated July 16,
2004; BIR Ruling No. DA-491-0453 dated September 13, 2004; and BIR Ruling No. 008-
0554 dated July 28, 2005, declared the following:
The Php 24.3 billion discount on the issuance of the PEACe Bonds should be subject to
20% Final Tax on interest income from deposit substitutes. It is now settled that all
treasury bonds (including PEACe Bonds), regardless of the number of
purchasers/lenders at the time of origination/issuance are considered deposit substitutes.
In the case of zero-coupon bonds, the discount (i.e. difference between face value and
purchase price/discounted value of the bond) is treated as interest income of the
purchaser/holder. Thus, the Php 24.3 interest income should have been properly subject
to the 20% Final Tax as provided in Section 27(D)(1) of the Tax Code of 1997. . . .
....
However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not able
tocollect the final tax on the discount/interest income realized by RCBC as a result of the
2001 Rulings. Subsequently, the issuance of BIR Ruling No. 007-04 dated July 16, 2004
effectively modifies and supersedes the 2001 Rulings by stating that the [1997] Tax Code
is clear that the "term public means borrowing from twenty (20) or more individual or
corporate lenders at any one time." The word "any" plainly indicates that the period
contemplated is the entire term of the bond, and not merely the point of origination or
issuance. . . . Thus, by taking the PEACe bonds out of the ambit of deposits [sic]
substitutes and exempting it from the 20% Final Tax, an exemption in favour of the PEACe
Bonds was created when no such exemption is found in the law.55
On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued by the
Philippine Dealing System Holdings Corporation and Subsidiaries ("PDS Group"). The
Memo provides that in view of the pronouncement of the DOF and the BIR on the
applicability of the 20% FWT on the Government Bonds, no transferof the same shall be
allowed to be recorded in the Registry of Scripless Securities ("ROSS") from 12 October
2011 until the redemption payment date on 18 October 2011. Thus, the bondholders of
record appearing on the ROSS as of 18 October 2011, which include the Petitioners, shall
be treated by the BTr asthe beneficial owners of such securities for the relevant [tax]
payments to be imposed thereon."56
On October 17, 2011, replying to anurgent query from the Bureau of Treasury, the Bureau
of Internal Revenue issued BIR Ruling No. DA 378-201157 clarifying that the final
withholding tax due on the discount or interest earned on the PEACe Bonds should "be
imposed and withheld not only on RCBC/CODE NGO but also [on] ‘all subsequent
holders of the Bonds.’"58
On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or
mandamus (with urgent application for a temporary restraining order and/or writ of
preliminary injunction)59 before this court.
On October 18, 2011, this court issued a temporary restraining order (TRO)60 "enjoining
the implementation of BIR Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject
to the condition that the 20% final withholding tax on interest income there from shall be
withheld by the petitioner banks and placed in escrow pending resolution of [the]
petition."61
On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to
intervene and to admit petition-in-intervention62 dated October 27, 2011, which was
granted by this court on November 15, 2011.63
Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with Urgent Ex
Parte Motion to Direct Respondents to Comply with the TRO."64 They alleged that on the
same day that the temporary restraining order was issued, the Bureau of Treasury paid
to petitioners and other bondholders the amounts representing the face value of the
Bonds, net however of the amounts corresponding to the 20% final withholding tax on
interest income, and that the Bureau of Treasury refused to release the amounts
corresponding to the 20% final withholding tax.65 On November 15, 2011, this court
directed respondents to: "(1) SHOW CAUSE why they failed to comply with the October
18, 2011 resolution; and (2) COMPLY with the Court’s resolution in order that petitioners
may place the corresponding funds in escrow pending resolution of the petition."66
On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached
petition-in-intervention with comment on the petitionin-intervention of RCBC and RCBC
Capital).67 The motion was granted by this court on November 22, 2011.68
On December 1, 2011, public respondents filed their compliance.69 They explained that:
1) "the implementation of [BIR Ruling No. 370-2011], which has already been performed
on October 18, 2011 with the withholding of the 20% final withholding tax on the face
value of the PEACe bonds, is already fait accompli . . . when the Resolution and TRO
were served to and received by respondents BTr and National Treasurer [on October 19,
2011]";70 and 2) the withheld amount has ipso facto become public funds and cannot be
disbursed or released to petitioners without congressional appropriation.71 Respondents
further aver that"[i]nasmuch as the . . . TRO has already become moot . . . the condition
attached to it, i.e., ‘that the 20% final withholding tax on interest income therefrom shall
be withheld by the banks and placed in escrow . . .’has also been rendered moot[.]"72
On December 6, 2011, this court noted respondents' compliance.73
On February 22, 2012, respondents filed their consolidated comment74 on the petitions-
in-intervention filed by RCBC and RCBC Capital and On November 27, 2012, petitioners
filed their "Manifestation with Urgent Reiterative Motion (To Direct Respondents to
Comply with the Temporary Restraining Order)."75
On December 4, 2012, this court: (a) noted petitioners’ manifestation with urgent
reiterative motion (to direct respondents to comply with the temporary restraining order);
and (b) required respondents to comment thereon.76
Respondents’ comment77 was filed on April 15,2013, and petitioners filed their reply78 on
June 5, 2013.
Issues
The main issues to be resolved are:
I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% final
withholding tax under the 1997 National Internal Revenue Code. Related to this question
is the interpretation of the phrase "borrowing from twenty (20) or more individual or
corporate lenders at any one time" under Section 22(Y) of the 1997 National Internal
Revenue Code, particularly on whether the reckoning of the 20 lenders includes trading
of the bonds in the secondary market; and
II. If the PEACe Bonds are considered "deposit substitutes," whether the government or
the Bureau of Internal Revenue is estopped from imposing and/or collecting the 20% final
withholding tax from the face value of these Bonds
a. Will the imposition of the 20% final withholding tax violate the non-impairment clause
of the Constitution?
b. Will it constitute a deprivation of property without due process of law?
c. Will it violate Section 245 of the 1997 National Internal Revenue Code on non-
retroactivity of rulings?
Arguments of petitioners, RCBC and RCBC
Capital, and CODE-NGO
Petitioners argue that "[a]s the issuer of the Government Bonds acting through the BTr,
the Government is obligated . . . to pay the face value amount of Ph₱35 Billion upon
maturity without any deduction whatsoever."79 They add that "the Government cannot
impair the efficacy of the [Bonds] by arbitrarily, oppressively and unreasonably imposing
the withholding of 20% FWT upon the [Bonds] a mere eleven (11) days before maturity
and after several, consistent categorical declarations that such bonds are exempt from
the 20% FWT, without violating due process"80 and the constitutional principle on non-
impairment of contracts.81 Petitioners aver that at the time they purchased the Bonds,
they had the right to expect that they would receive the full face value of the Bonds upon
maturity, in view of the 2001 BIR Rulings.82 "[R]egardless of whether or not the 2001 BIR
Rulings are correct, the fact remains that [they] relied [on] good faith thereon."83
At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as defined
under Section 22(Y) of the 1997 National Internal Revenue Code because there was only
one lender (RCBC) to whom the Bureau of Treasury issued the Bonds.84 They allege that
the 2004, 2005, and 2011 BIR Rulings "erroneously interpreted that the number of
investors that participate in the ‘secondary market’ is the determining factor in reckoning
the existence or non-existence of twenty (20) or more individual or corporate lenders."85
Furthermore, they contend that the Bureau of Internal Revenue unduly expanded the
definition of deposit substitutes under Section 22 of the 1997 National Internal Revenue
Code in concluding that "the mere issuance of government debt instruments and
securities is deemed as falling within the coverage of ‘deposit substitutes[.]’"86 Thus, "[t]he
2011 BIR Ruling clearly amount[ed] to an unauthorized act of administrative
legislation[.]"87
Petitioners further argue that their income from the Bonds is a "trading gain," which is
exempt from income tax.88 They insist that "[t]hey are not lenders whose income is
considered as ‘interest income or yield’ subject to the 20% FWT under Section 27 (D)(1)
of the [1997 National Internal Revenue Code]"89 because they "acquired the Government
Bonds in the secondary or tertiary market."90
Even assuming without admitting that the Government Bonds are deposit substitutes,
petitioners argue that the collection of the final tax was barred by prescription.91 They
point out that under Section 7 of DOF Department Order No. 141-95,92 the final
withholding tax "should have been withheld at the time of their issuance[.]"93 Also, under
Section 203 of the 1997 National Internal Revenue Code, "internal revenuetaxes, such
as the final tax, [should] be assessed within three (3) years after the last day prescribed
by law for the filing of the return."94
Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling
without prior notice to them was in violation of their property rights,95 their constitutional
right to due process96 as well as Section 246 of the 1997 National Internal Revenue Code
on non-retroactivity of rulings.97 Allegedly, it would also have "an adverse effect of
colossal magnitude on the investors, both localand foreign, the Philippine capital market,
and most importantly, the country’s standing in the international commercial
community."98 Petitioners explained that "unless enjoined, the government’s threatened
refusal to pay the full value of the Government Bonds will negatively impact on the image
of the country in terms of protection for property rights (including financial assets), degree
of legal protection for lender’s rights, and strength of investor protection."99 They cited the
country’s ranking in the World Economic Forum: 75th in the world in its 2011–2012 Global
Competitiveness Index, 111th out of 142 countries worldwide and 2nd to the last among
ASEAN countries in terms of Strength of Investor Protection, and 105th worldwide and
last among ASEAN countries in terms of Property Rights Index and Legal Rights Index.100
It would also allegedly "send a reverberating message to the whole world that there is no
certainty, predictability, and stability of financial transactions in the capital markets[.]"101
"[T]he integrity of Government-issued bonds and notes will be greatly shattered and the
credit of the Philippine Government will suffer"102 if the sudden turnaround of the
government will be allowed,103 and it will reinforce "investors’ perception that the level of
regulatory risk for contracts entered into by the Philippine Government is high,"104 thus
resulting in higher interestrate for government-issued debt instruments and lowered credit
rating.105
Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner
of Internal Revenue "gravely and seriously abused her discretion in the exercise of her
rule-making power"106 when she issued the assailed 2011 BIR Ruling which ruled that "all
treasury bonds are ‘deposit substitutes’ regardless of the number of lenders, in clear
disregard of the requirement of twenty (20)or more lenders mandated under the NIRC."107
They argue that "[b]y her blanket and arbitrary classification of treasury bonds as deposit
substitutes, respondent CIR not only amended and expanded the NIRC, but effectively
imposed a new tax on privately-placed treasury bonds."108 Petitioners-intervenors RCBC
and RCBC Capital further argue that the 2011 BIR Ruling will cause substantial
impairment of their vested rights109 under the Bonds since the ruling imposes new
conditions by "subjecting the PEACe Bonds to the twenty percent (20%) final withholding
tax notwithstanding the fact that the terms and conditions thereof as previously
represented by the Government, through respondents BTr and BIR, expressly state that
it is not subject to final withholding tax upon their maturity."110 They added that "[t]he
exemption from the twenty percent (20%) final withholding tax [was] the primary
inducement and principal consideration for [their] participat[ion] in the auction and
underwriting of the PEACe Bonds."111
Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that
respondent Commissioner of Internal Revenue violated their rights to due process when
she arbitrarily issued the 2011 BIR Ruling without prior notice and hearing, and the
oppressive timing of such ruling deprived them of the opportunity to challenge the
same.112
Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-
intervenors RCBC and RCBC Capital claim that respondents Bureau of Treasury and
CODE-NGO should be held liable "as [these] parties explicitly represented . . . that the
said bonds are exempt from the final withholding tax."113
Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the implementation
of the [2011 assailed BIR Ruling and BIR Ruling No. DA 378-2011] will have pernicious
effects on the integrity of existing securities, which is contrary to the State policies of
stabilizing the financial system and of developing capital markets."114
For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA
378-2011 are "invalid because they contravene Section 22(Y) of the 1997 [NIRC] when
the said rulings disregarded the applicability of the ‘20 or more lender’ rule to government
debt instruments"[;]115 (b) "when [it] sold the PEACe Bonds in the secondary market
instead of holding them until maturity, [it] derived . . . long-term trading gain[s], not interest
income, which [are] exempt . . . under Section 32(B)(7)(g) of the 1997 NIRC"[;]116 (c) "the
tax exemption privilege relating to the issuance of the PEACe Bonds . . . partakes of a
contractual commitment granted by the Government in exchange for a valid and material
consideration [i.e., the issue price paid and savings in borrowing cost derived by the
Government,] thus protected by the non-impairment clause of the 1987 Constitution"[;]117
and (d) the 2004, 2005, and 2011 BIR Rulings "did not validly revoke the 2001 BIR Rulings
since no notice of revocation was issued to [it], RCBC and [RCBC Capital] and
petitioners[-bondholders], nor was there any BIR administrative guidance issued and
published[.]"118 CODE-NGO additionally argues that impleading it in a Rule 65 petition
was improper because: (a) it involves determination of a factual question;119 and (b) it is
premature and states no cause of action as it amounts to an anticipatory third-party
claim.120
Arguments of respondents
Respondents argue that petitioners’ direct resort to this court to challenge the 2011 BIR
Ruling violates the doctrines of exhaustion of administrative remedies and hierarchy
ofcourts, resulting in a lack of cause of action that justifies the dismissal of the petition.121
According to them, "the jurisdiction to review the rulings of the [Commissioner of Internal
Revenue], after the aggrieved party exhausted the administrative remedies, pertains to
the Court of Tax Appeals."122 They point out that "a case similar to the present Petition
was [in fact] filed with the CTA on October 13, 2011[,] [docketed as] CTA Case No. 8351
[and] entitled, ‘Rizal Commercial Banking Corporation and RCBC Capital Corporation vs.
Commissioner of Internal Revenue, et al.’"123
Respondents further take issue on the timeliness of the filing of the petition and petitions-
in-intervention.124 They argue that under the guise of mainly assailing the 2011 BIR
Ruling, petitioners are indirectly attacking the 2004 and 2005 BIR Rulings, of which the
attack is legally prohibited, and the petition insofar as it seeks to nullify the 2004 and 2005
BIR Rulings was filed way out of time pursuant to Rule 65, Section 4.125
Respondents contend that the discount/interest income derived from the PEACe Bonds
is not a trading gain but interest income subject to income tax.126 They explain that "[w]ith
the payment of the Ph₱35 Billion proceeds on maturity of the PEACe Bonds, Petitioners
receive an amount of money equivalent to about Ph₱24.8 Billion as payment for interest.
Such interest is clearly an income of the Petitioners considering that the same is a flow
of wealth and not merely a return of capital – the capital initially invested in the Bonds
being approximately Ph₱10.2 Billion[.]"127
Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does
not constitute an impairment of the obligations of contract, respondents aver that: "The
BTr has no power to contractually grant a tax exemption in favour of Petitioners thus the
2001 BIR Rulings cannot be considered a material term of the Bonds"[;]128 "[t]here has
been no change in the laws governing the taxability of interest income from deposit
substitutes and said laws are read into every contract"[;]129 "[t]he assailed BIR Rulings
merely interpret the term "deposit substitute" in accordance with the letter and spirit of the
Tax Code"[;]130 "[t]he withholding of the 20% FWT does not result in a default by the
Government as the latter performed its obligations to the bondholders in full"[;]131 and "[i]f
there was a breach of contract or a misrepresentation it was between RCBC/CODE-
NGO/RCBC Cap and the succeeding purchasers of the PEACe Bonds."132
Similarly, respondents counter that the withholding of "[t]he 20% final withholding tax on
the PEACe Bonds does not amount to a deprivation of property without due process of
law."133 Their imposition of the 20% final withholding tax is not arbitrary because they
were only performing a duty imposed by law;134 "[t]he 2011 BIR Ruling is aninterpretative
rule which merely interprets the meaning of deposit substitutes [and upheld] the earlier
construction given to the termby the 2004 and 2005 BIR Rulings."135 Hence, respondents
argue that "there was no need to observe the requirements of notice, hearing, and
publication[.]"136
Nonetheless, respondents add that "there is every reason to believe that Petitioners —
all major financial institutions equipped with both internal and external accounting and
compliance departments as wellas access to both internal and external legal counsel;
actively involved in industry organizations such as the Bankers Association of the
Philippines and the Capital Market Development Council; all actively taking part in the
regular and special debt issuances of the BTr and indeed regularly proposing products
for issue by BTr — had actual notice of the 2004 and 2005 BIR Rulings."137 Allegedly,
"the sudden and drastic drop — including virtually zero trading for extended periods of six
months to almost a year — in the trading volume of the PEACe Bonds after the release
of BIR Ruling No. 007-04 on July 16, 2004 tend to indicate that market participants,
including the Petitioners herein, were aware of the ruling and its consequences for the
PEACe Bonds."138
Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the
Commissioner of Internal Revenue’s rule-making power;139 that it and the 2004 and 2005
BIR Rulings did not unduly expand the definition of deposit substitutes by creating an
unwarranted exception to the requirement of having 20 or more lenders/purchasers;140
and the word "any" in Section 22(Y) of the National Internal Revenue Code plainly
indicates that the period contemplated is the entire term of the bond and not merely the
point of origination or issuance.141
Respondents further argue that a retroactive application of the 2011 BIR Ruling will not
unjustifiably prejudice petitioners.142 "[W]ith or without the 2011 BIR Ruling, Petitioners
would be liable topay a 20% final withholding tax just the same because the PEACe
Bonds in their possession are legally in the nature of deposit substitutes subject to a 20%
final withholding tax under the NIRC."143 Section 7 of DOF Department Order No. 141-95
also provides that incomederived from Treasury bonds is subject to the 20% final
withholding tax.144 "[W]hile revenue regulations as a general rule have no retroactive
effect, if the revocation is due to the fact that the regulation is erroneous or contrary to
law, such revocation shall have retroactive operation as to affect past transactions,
because a wrong construction of the law cannot give rise to a vested right that can be
invoked by a taxpayer."145
Finally, respondents submit that "there are a number of variables and factors affecting a
capital market."146 "[C]apital market itself is inherently unstable."147 Thus, "[p]etitioners’
argument that the 20% final withholding tax . . . will wreak havoc on the financial stability
of the country is a mere supposition that is not a justiciable issue."148
On the prayer for the temporary restraining order, respondents argue that this order "could
no longer be implemented [because] the acts sought to be enjoined are already fait
accompli."149 They add that "to disburse the funds withheld to the Petitioners at this time
would violate Section 29[,] Article VI of the Constitution prohibiting ‘money being paid out
of the Treasury except in pursuance of an appropriation made by law[.]’"150 "The remedy
of petitioners is to claim a tax refund under Section 204(c) of the Tax Code should their
position be upheld by the Honorable Court."151
Respondents also argue that "the implementation of the TRO would violate Section 218
of the Tax Code in relation to Section 11 of Republic Act No. 1125 (as amended by
Section 9 of Republic Act No. 9282) which prohibits courts, except the Court of Tax
Appeals, from issuing injunctions to restrain the collection of any national internal revenue
tax imposed by the Tax Code."152
Summary of arguments
In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and
CODE-NGO argue that:
1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National Internal
Revenue Code when it declared that all government debt instruments are deposit
substitutes regardless of the 20-lender rule; and
2. The 2011 BIR Ruling cannot be applied retroactively because:
a) It will violate the contract clause;
● It constitutes a unilateral amendment of a material term (tax exempt status) in the
Bonds, represented by the government as an inducement and important consideration
for the purchase of the Bonds;
b) It constitutes deprivation ofproperty without due process because there was no prior
notice to bondholders and hearing and publication;
c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue Code;
d) It violates the constitutional provision on supporting activities of non-government
organizations and development of the capital market; and
e) The assessment had already prescribed.
Respondents counter that:
1) Respondent Commissioner of Internal Revenue did not act with grave abuse of
discretion in issuing the challenged 2011 BIR Ruling:
a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the
Commissioner of Internal Revenue’s power to interpret the provisions of the 1997
National Internal Revenue Code and other tax laws;
b. Commissioner of Internal Revenue merely restates and confirms the interpretations
contained in previously issued BIR Ruling Nos. 007-2004, DA-491-04,and 008-05, which
have already effectively abandoned or revoked the 2001 BIR Rulings;
c. Commissioner of Internal Revenue is not bound by his or her predecessor’s rulings
especially when the latter’s rulings are not in harmony with the law; and
d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated cannot
give rise to a vested right. Therefore, the 2011 BIR Ruling can be given retroactive effect.
2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate
remedy in the ordinary course of law:
a. Petitioners had the basic remedy offiling a claim for refund of the 20% final withholding
tax they allege to have been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of administrative remedies and of
hierarchy of courts.
Court’s ruling
Procedural Issues
Non-exhaustion of
administrative remedies proper
Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are
reviewable by the Secretary of Finance.
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. -
The power to interpret the provisions of this Code and other tax laws shall be under the
exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary
of Finance. (Emphasis supplied)
Thus, it was held that "[i]f superior administrative officers [can] grant the relief prayed for,
[then] special civil actions are generally not entertained."153 The remedy within the
administrative machinery must be resorted to first and pursued to its appropriate
conclusion before the court’s judicial power can be sought.154
Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of
administrative remedies:
[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility
is called upon by the peculiarity and uniqueness of the factual and circumstantial settings
of a case. Hence, it is disregarded (1) when there is a violation of due process, (2) when
the issue involved is purely a legal question,155 (3) when the administrative action is
patently illegal amounting to lack or excess of jurisdiction,(4) when there is estoppel on
the part of the administrative agency concerned,(5) when there is irreparable injury, (6)
when the respondent is a department secretary whose acts as an alter ego of the
President bears the implied and assumed approval of the latter, (7) when to require
exhaustion of administrative remedies would be unreasonable, (8) when it would amount
to a nullification of a claim, (9) when the subject matter is a private land in land case
proceedings, (10) when the rule does not provide a plain, speedy and adequate remedy,
(11) when there are circumstances indicating the urgency of judicial intervention.156
(Emphasis supplied, citations omitted)
The exceptions under (2) and (11)are present in this case. The question involved is purely
legal, namely: (a) the interpretation of the 20-lender rule in the definition of the terms
public and deposit substitutes under the 1997 National Internal Revenue Code; and (b)
whether the imposition of the 20% final withholding tax on the PEACe Bonds upon
maturity violates the constitutional provisions on non-impairment of contracts and due
process. Judicial intervention is likewise urgent with the impending maturity of the PEACe
Bonds on October 18, 2011.
The rule on exhaustion of administrative remedies also finds no application when the
exhaustion will result in an exercise in futility.157
In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling
would be a futile exercise because it was upon the request of the Secretary of Finance
that the 2011 BIR Ruling was issued by the Bureau of Internal Revenue. It appears that
the Secretary of Finance adopted the Commissioner of Internal Revenue’s opinions as
his own.158 This position was in fact confirmed in the letter159 dated October 10, 2011
where he ordered the Bureau of Treasury to withhold the amount corresponding to the
20% final withholding tax on the interest or discounts allegedly due from the bondholders
on the strength of the 2011 BIR Ruling. Doctrine on hierarchy of courts
We agree with respondents that the jurisdiction to review the rulings of the Commissioner
of Internal Revenue pertains to the Court of Tax Appeals. The questioned BIR Ruling
Nos. 370-2011 and DA 378-2011 were issued in connection with the implementation of
the 1997 National Internal Revenue Code on the taxability of the interest income from
zero-coupon bonds issued by the government.
Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended
by Republic Act No. 9282,160 such rulings of the Commissioner of Internal Revenue are
appealable to that court, thus:
SEC. 7.Jurisdiction.- The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue or other
laws administered by the Bureau of Internal Revenue;
....
SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely
affected by a decision, ruling or inaction of the Commissioner of Internal Revenue, the
Commissioner of Customs, the Secretary of Finance, the Secretary of Trade and Industry
or the Secretary of Agriculture or the Central Board of Assessment Appeals or the
Regional Trial Courts may file an appeal with the CTA within thirty (30) days after the
receipt of such decision or rulingor after the expiration of the period fixed by law for action
as referred toin Section 7(a)(2) herein.
....
SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving
matters arising under the National Internal Revenue Code, the Tariff and Customs Code
or the Local Government Code shall be maintained, except as herein provided, until and
unless an appeal has been previously filed with the CTA and disposed of in accordance
with the provisions of this Act.
In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v. Blaquera,162 this court
emphasized the jurisdiction of the Court of Tax Appeals over rulings of the Bureau of
Internal Revenue, thus:
While the Court of Appeals correctly took cognizance of the petition for certiorari,
however, let it be stressed that the jurisdiction to review the rulings of the Commissioner
of Internal Revenue pertains to the Court of Tax Appeals, not to the RTC.
The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of
the Commissioner implementing the Tax Code on the taxability of pawnshops.. . .
....
Such revenue orders were issued pursuant to petitioner's powers under Section 245 of
the Tax Code, which states:
"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. —
The Secretary of Finance, upon recommendation of the Commissioner, shall promulgate
all needful rules and regulations for the effective enforcement of the provisions of this
Code.
The authority of the Secretary of Finance to determine articles similar or analogous to
those subject to a rate of sales tax under certain category enumerated in Section 163 and
165 of this Code shall be without prejudice to the power of the Commissioner of Internal
Revenue to make rulings or opinions in connection with the implementation of the
provisionsof internal revenue laws, including ruling on the classification of articles of sales
and similar purposes." (Emphasis in the original)
....
The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:
"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal
Revenue, but merely an attempt to nullify General Circular No. V-148, which does not
adjudicate or settle any controversy, and that, accordingly, this case is not within the
jurisdiction of the Court of Tax Appeals.
We find no merit in this pretense. General Circular No. V-148 directs the officers charged
with the collection of taxes and license fees to adhere strictly to the interpretation given
by the defendant tothe statutory provisions abovementioned, as set forth in the Circular.
The same incorporates, therefore, a decision of the Collector of Internal Revenue (now
Commissioner of Internal Revenue) on the manner of enforcement of the said statute, the
administration of which is entrusted by law to the Bureau of Internal Revenue. As such, it
comes within the purview of Republic Act No. 1125, Section 7 of which provides that the
Court of Tax Appeals ‘shall exercise exclusive appellate jurisdiction to review by appeal .
. . decisions of the Collector of Internal Revenue in . . . matters arising under the National
Internal Revenue Code or other law or part of the law administered by the Bureau of
Internal Revenue.’"163
In exceptional cases, however, this court entertained direct recourse to it when "dictated
by public welfare and the advancement of public policy, or demanded by the broader
interest of justice, or the orders complained of were found to be patent nullities, or the
appeal was considered as clearly an inappropriate remedy."164
In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary,
Department of Interior and Local Government,165 this court noted that the petition for
prohibition was filed directly before it "in disregard of the rule on hierarchy of courts.
However, [this court] opt[ed] to take primary jurisdiction over the . . . petition and decide
the same on its merits in viewof the significant constitutional issues raised by the parties
dealing with the tax treatment of cooperatives under existing laws and in the interest of
speedy justice and prompt disposition of the matter."166
Here, the nature and importance of the issues raised167 to the investment and banking
industry with regard to a definitive declaration of whether government debt instruments
are deposit substitutes under existing laws, and the novelty thereof, constitute exceptional
and compelling circumstances to justify resort to this court in the first instance.
The tax provision on deposit substitutes affects not only the PEACe Bonds but also any
other financial instrument or product that may be issued and traded in the market. Due to
the changing positions of the Bureau of Internal Revenue on this issue, there isa need for
a final ruling from this court to stabilize the expectations in the financial market.
Finally, non-compliance with the rules on exhaustion of administrative remedies and
hierarchy of courts had been rendered moot by this court’s issuance of the temporary
restraining order enjoining the implementation of the 2011 BIR Ruling. The temporary
restraining order effectively recognized the urgency and necessity of direct resort to this
court.
Substantive issues
Tax treatment of deposit
substitutes
Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal Revenue
Code, a final withholdingtax at the rate of 20% is imposed on interest on any currency
bank deposit and yield or any other monetary benefit from deposit substitutes and from
trust funds and similar arrangements. These provisions read:
SEC. 24. Income Tax Rates.
....
(B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty
percent (20%) is hereby imposed upon the amount of interest fromany currency bank
deposit and yield or any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements; . . . Provided, further, That interest income from long-
term deposit or investment in the form of savings, common or individual trust funds,
deposit substitutes, investment management accounts and other investments evidenced
by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be
exempt from the tax imposed under this Subsection: Provided, finally, That should the
holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year,
a final tax shall be imposed on the entire income and shall be deducted and withheld by
the depository bank from the proceeds of the long-term deposit or investment certificate
based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%. (Emphasis supplied)
SEC. 27. Rates of Income Tax on Domestic Corporations. -
....
(D) Rates of Tax on Certain Passive Incomes. -
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. - A final tax
at the rate of twenty percent (20%) is hereby imposed upon the amount of interest on
currency bank deposit and yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements received by domestic corporations, and
royalties, derived from sources within the Philippines: Provided, however, That interest
income derived by a domestic corporation from a depository bank under the expanded
foreign currency deposit system shall be subject to a final income tax at the rate of seven
and one-half percent (7 1/2%) of such interest income. (Emphasis supplied)
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
....
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -
(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes, Trust Funds and Similar Arrangements and Royalties. - Interest from any
currency bank deposit and yield or any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements and royalties derived from sources within
the Philippines shall be subject to a final income tax at the rate of twenty percent (20%)
of such interest: Provided, however, That interest income derived by a resident foreign
corporation from a depository bank under the expanded foreign currency deposit system
shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%)
of such interest income. (Emphasis supplied)
This tax treatment of interest from bank deposits and yield from deposit substitutes was
first introduced in the 1977 National Internal Revenue Code through Presidential Decree
No. 1739168 issued in 1980. Later, Presidential Decree No. 1959, effective on October 15,
1984, formally added the definition of deposit substitutes, viz:
(y) ‘Deposit substitutes’ shall mean an alternative form of obtaining funds from the public,
other than deposits, through the issuance, endorsement, or acceptance of debt
instruments for the borrower's own account, for the purpose of relending or purchasing of
receivables and other obligations, or financing their own needs or the needs of their agent
or dealer.These promissory notes, repurchase agreements, certificates of assignment or
participation and similar instrument with recourse as may be authorized by the Central
Bank of the Philippines, for banks and non-bank financial intermediaries or by the
Securities and Exchange Commission of the Philippines for commercial, industrial,
finance companies and either non-financial companies: Provided, however, that only debt
instruments issued for inter-bank call loans to cover deficiency in reserves against deposit
liabilities including those between or among banks and quasi-banks shall not be
considered as deposit substitute debt instruments. (Emphasis supplied)
Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959,
adopted verbatim the same definition and specifically identified the following borrowings
as "deposit substitutes":
SECTION 2. Definitions of Terms. . . .
(h) "Deposit substitutes" shall mean –
....
(a) All interbank borrowings by or among banks and non-bank financial institutions
authorized to engage in quasi-banking functions evidenced by deposit substitutes
instruments, except interbank call loans to cover deficiency in reserves against deposit
liabilities as evidenced by interbank loan advice or repayment transfer tickets.
(b) All borrowings of the national and local government and its instrumentalities including
the Central Bank of the Philippines, evidenced by debt instruments denoted as treasury
bonds, bills, notes, certificates of indebtedness and similar instruments.
(c) All borrowings of banks, non-bank financial intermediaries, finance companies,
investment companies, trust companies, including the trust department of banks and
investment houses, evidenced by deposit substitutes instruments. (Emphasis supplied)
The definition of deposit substitutes was amended under the 1997 National Internal
Revenue Code with the addition of the qualifying phrase for public – borrowing from 20
or more individual or corporate lenders at any one time. Under Section 22(Y), deposit
substitute is defined thus: SEC. 22. Definitions- When used in this Title:
....
(Y) The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from
the public(the term 'public' means borrowing from twenty (20) or more individual or
corporate lenders at any one time) other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrower’s own account, for the
purpose of relending or purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer. These instruments may include, but need
not be limited to, bankers’ acceptances, promissory notes, repurchase agreements,
including reverse repurchase agreements entered into by and between the Bangko
Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or
participation and similar instruments with recourse: Provided, however, That debt
instruments issued for interbank call loans with maturity of not more than five (5) days to
cover deficiency in reserves against deposit liabilities, including those between or among
banks and quasi-banks, shall not be considered as deposit substitute debt instruments.
(Emphasis supplied)
Under the 1997 National Internal Revenue Code, Congress specifically defined "public"
to mean "twenty (20) or more individual or corporate lenders at any one time." Hence, the
number of lenders is determinative of whether a debt instrument should be considered a
deposit substitute and consequently subject to the 20% final withholding tax.
20-lender rule
Petitioners contend that "there [is]only one (1) lender (i.e. RCBC) to whom the BTr issued
the Government Bonds."169 On the other hand, respondents theorize that the word "any"
"indicates that the period contemplated is the entire term of the bond and not merely the
point of origination or issuance[,]"170 such that if the debt instruments "were subsequently
sold in secondary markets and so on, insuch a way that twenty (20) or more buyers
eventually own the instruments, then it becomes indubitable that funds would be obtained
from the "public" as defined in Section 22(Y) of the NIRC."171 Indeed, in the context of the
financial market, the words "at any one time" create an ambiguity.
Financial markets
Financial markets provide the channel through which funds from the surplus units
(households and business firms that have savings or excess funds) flow to the deficit
units (mainly business firms and government that need funds to finance their operations
or growth). They bring suppliers and users of funds together and provide the means by
which the lenders transform their funds into financial assets, and the borrowers receive
these funds now considered as their financial liabilities. The transfer of funds is
represented by a security, such as stocks and bonds. Fund suppliers earn a return on
their investment; the return is necessary to ensure that funds are supplied to the financial
markets.172
"The financial markets that facilitate the transfer of debt securities are commonly
classified by the maturity of the securities[,]"173 namely: (1) the money market, which
facilitates the flow of short-term funds (with maturities of one year or less); and (2) the
capital market, which facilitates the flow of long-term funds (with maturities of more than
one year).174
Whether referring to money marketsecurities or capital market securities, transactions
occur either in the primary market or in the secondary market.175 "Primary markets
facilitate the issuance of new securities. Secondary markets facilitate the trading of
existing securities, which allows for a change in the ownership of the securities."176 The
transactions in primary markets exist between issuers and investors, while secondary
market transactions exist among investors.177
"Over time, the system of financial markets has evolved from simple to more complex
ways of carrying out financial transactions."178 Still, all systems perform one basic
function: the quick mobilization of money from the lenders/investors to the borrowers.179
Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance;
and (3) indirect finance.180
With direct financing, the "borrower and lender meet each other and exchange funds in
returnfor financial assets"181 (e.g., purchasing bonds directly from the company issuing
them). This method provides certain limitations such as: (a) "both borrower and lender
must desire to exchange the same amount of funds at the same time"[;]182 and (b) "both
lender and borrower must frequently incur substantial information costs simply to find
each other."183
In semidirect financing, a securities broker or dealer brings surplus and deficit units
together, thereby reducing information costs.184 A Broker185 is "an individual or financial
institution who provides information concerning possible purchases and sales of
securities. Either a buyer or a seller of securities may contact a broker, whose job is simply
to bring buyers and sellers together."186 A dealer187 "also serves as a middleman between
buyers and sellers, but the dealer actually acquires the seller’s securities in the hope of
selling them at a later time at a more favorable price."188 Frequently, "a dealer will split up
a large issue of primary securities into smaller units affordable by . . . buyers . . . and
thereby expand the flow of savings into investment."189 In semi direct financing, "[t]he
ultimate lender still winds up holding the borrower’s securities, and therefore the lender
must be willing to accept the risk, liquidity, and maturity characteristics of the borrower’s
[debt security]. There still must be a fundamental coincidence of wants and needs
between [lenders and borrowers] for semidirect financial transactions to take place."190
"The limitations of both direct and semidirect finance stimulated the development of
indirect financial transactions, carried out with the help of financial intermediaries"191 or
financial institutions, like banks, investment banks, finance companies, insurance
companies, and mutual funds.192 Financial intermediaries accept funds from surplus units
and channel the funds to deficit units.193 "Depository institutions [such as banks] accept
deposits from surplus units and provide credit to deficit units through loans and purchase
of [debt] securities."194 Nondepository institutions, like mutual funds, issue securities of
their own (usually in smaller and affordable denominations) to surplus units and at the
same time purchase debt securities of deficit units.195 "By pooling the resources of[small
savers, a financial intermediary] can service the credit needs of large firms
simultaneously."196
The financial market, therefore, is an agglomeration of financial transactions in securities
performed by market participants that works to transfer the funds from the surplus units
(or investors/lenders) to those who need them (deficit units or borrowers).
Meaning of "at any one time"
Thus, from the point of view of the financial market, the phrase "at any one time" for
purposes of determining the "20 or more lenders" would mean every transaction executed
in the primary or secondary market in connection with the purchase or sale of securities.
For example, where the financial assets involved are government securities like bonds,
the reckoning of "20 or more lenders/investors" is made at any transaction in connection
with the purchase or sale of the Government Bonds, such as:
1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;
2. Sale and distribution by GSEDs to various lenders/investors in the secondary market;
3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary
market usually through a broker or dealer; or
4. Sale by a financial intermediary-bondholder of its participation interests in the bonds to
individual or corporate lenders in the secondary market.
When, through any of the foregoing transactions, funds are simultaneously obtained from
20 or morelenders/investors, there is deemed to be a public borrowing and the bonds at
that point intime are deemed deposit substitutes. Consequently, the seller is required to
withhold the 20% final withholding tax on the imputed interest income from the bonds.
For debt instruments that are
not deposit substitutes, regular
income tax applies
It must be emphasized, however, that debt instruments that do not qualify as deposit
substitutes under the 1997 National Internal Revenue Code are subject to the regular
income tax.
The phrase "all income derived from whatever source" in Chapter VI, Computation of
Gross Income, Section 32(A) of the 1997 National Internal Revenue Code discloses a
legislative policy to include all income not expressly exempted as within the class of
taxable income under our laws.
"The definition of gross income isbroad enough to include all passive incomes subject to
specific tax rates or final taxes."197 Hence, interest income from deposit substitutes are
necessarily part of taxable income. "However, since these passive incomes are already
subject to different rates and taxed finally at source, they are no longer included in the
computation of gross income, which determines taxable income."198 "Stated otherwise . .
. if there were no withholding tax system in place in this country, this 20 percent portion
of the ‘passive’ income of [creditors/lenders] would actually be paid to the
[creditors/lenders] and then remitted by them to the government in payment of their
income tax."199
This court, in Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo,200
explained the rationale behind the withholding tax system:
The withholding [of tax at source] was devised for three primary reasons: first, to provide
the taxpayer a convenient manner to meet his probable income tax liability; second, to
ensure the collection of income tax which can otherwise be lost or substantially reduced
through failure to file the corresponding returns[;] and third, to improve the government’s
cash flow. This results in administrative savings, prompt and efficient collection of taxes,
prevention of delinquencies and reduction of governmental effort to collect taxes through
more complicated means and remedies.201 (Citations omitted)
"The application of the withholdings system to interest on bank deposits or yield from
deposit substitutes is essentially to maximize and expedite the collection of income taxes
by requiring its payment at the source."202
Hence, when there are 20 or more lenders/investors in a transaction for a specific bond
issue, the seller isrequired to withhold the 20% final income tax on the imputed interest
income from the bonds.
Interest income v. gains from sale or redemption
The interest income earned from bonds is not synonymous with the "gains" contemplated
under Section 32(B)(7)(g)203 of the 1997 National Internal Revenue Code, which exempts
gains derived from trading, redemption, or retirement of long-term securities from ordinary
income tax.
The term "gain" as used in Section 32(B)(7)(g) does not include interest, which represents
forbearance for the use of money. Gains from sale or exchange or retirement of bonds
orother certificate of indebtedness fall within the general category of "gainsderived from
dealings in property" under Section 32(A)(3), while interest from bonds or other certificate
of indebtedness falls within the category of "interests" under Section 32(A)(4).204 The use
of the term "gains from sale" in Section 32(B)(7)(g) shows the intent of Congress not
toinclude interest as referred under Sections 24, 25, 27, and 28 in the exemption.205
Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from
the trading of the bonds before their maturity date, which is the difference between the
selling price of the bonds in the secondary market and the price at which the bonds were
purchased by the seller; and (2) gain realized by the last holder of the bonds when the
bonds are redeemed at maturity, which is the difference between the proceeds from the
retirement of the bonds and the price atwhich such last holder acquired the bonds. For
discounted instruments,like the zero-coupon bonds, the trading gain shall be the excess
of the selling price over the book value or accreted value (original issue price plus
accumulated discount from the time of purchase up to the time of sale) of the
instruments.206
The Bureau of Internal
Revenue rulings
The Bureau of Internal Revenue’s interpretation as expressed in the three 2001 BIR
Rulings is not consistent with law.207 Its interpretation of "at any one time" to mean at the
point of origination alone is unduly restrictive.
BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004
and 2005 BIR Rulings) that "all treasury bonds . . . regardlessof the number of
purchasers/lenders at the time of origination/issuance are considered deposit
substitutes."208 Being the subject of this petition, it is, thus, declared void because it
completely disregarded the 20 or more lender rule added by Congress in the 1997
National Internal Revenue Code. It also created a distinction for government debt
instruments as against those issued by private corporations when there was none in the
law.
Tax statutes must be reasonably construed as to give effect to the whole act. Their
constituent provisions must be read together, endeavoring to make every part effective,
harmonious, and sensible.209 That construction which will leave every word operative will
be favored over one that leaves some word, clause, or sentence meaningless and
insignificant.210
It may be granted that the interpretation of the Commissioner of Internal Revenue in
charge of executing the 1997 National Internal Revenue Code is an authoritative
construction ofgreat weight, but the principle is not absolute and may be overcome by
strong reasons to the contrary. If through a misapprehension of law an officer has issued
an erroneous interpretation, the error must be corrected when the true construction is
ascertained.
In Philippine Bank of Communications v. Commissioner of Internal Revenue,211 this court
upheld the nullification of Revenue Memorandum Circular (RMC) No. 7-85 issued by the
Acting Commissioner of Internal Revenue because it was contrary to the express
provision of Section 230 of the 1977 National Internal Revenue Codeand, hence,
"[cannot] be given weight for to do so would, in effect, amend the statute."212 Thus:
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the
prescriptive period of two years to ten years on claims of excess quarterly income tax
payments, such circular created a clear inconsistency with the provision of Sec. 230 of
1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative
rulings (in the sense of more specific and less general interpretations of tax laws) which
are issued from time to time by the Commissioner of Internal Revenue. It is widely
accepted that the interpretation placed upon a statute by the executive officers, whose
duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such
interpretation is not conclusive and will be ignored if judicially found to be erroneous.
Thus, courts will not countenance administrative issuances that override, instead of
remaining consistent and in harmony with, the law they seek to apply and implement.213
(Citations omitted)
This court further held that "[a] memorandum-circular of a bureau head could not operate
to vest a taxpayer with a shield against judicial action [because] there are no vested rights
to speak of respecting a wrong construction of the law by the administrative officials and
such wrong interpretation could not place the Government in estoppel to correct or
overrule the same."214 In Commissioner of Internal Revenue v. Michel J. Lhuillier
Pawnshop, Inc.,215 this court nullified Revenue Memorandum Order (RMO) No. 15-91 and
RMC No. 43-91, which imposed a 5% lending investor's tax on pawnshops.216 It was held
that "the [Commissioner] cannot, in the exercise of [its interpretative] power, issue
administrative rulings or circulars not consistent with the law sought to be applied. Indeed,
administrative issuances must not override, supplant or modify the law, but must remain
consistent with the law they intend to carry out. Only Congress can repeal or amend the
law."217
In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance
Secretary,218 this court stated that the Commissioner of Internal Revenue is not bound by
the ruling of his predecessors,219 but, to the contrary, the overruling of decisions is
inherent in the interpretation of laws:
[I]n considering a legislative rule a court is free to make three inquiries: (i) whether the
rule is within the delegated authority of the administrative agency; (ii) whether itis
reasonable; and (iii) whether it was issued pursuant to proper procedure. But the court is
not free to substitute its judgment as to the desirability or wisdom of the rule for the
legislative body, by its delegation of administrative judgment, has committed those
questions to administrative judgments and not to judicial judgments. In the case of an
interpretative rule, the inquiry is not into the validity but into the correctness or propriety
of the rule. As a matter of power a court, when confronted with an interpretative rule, is
free to (i) give the force of law to the rule; (ii) go to the opposite extreme and substitute
its judgment; or (iii) give some intermediate degree of authoritative weight to the
interpretative rule.
In the case at bar, we find no reason for holding that respondent Commissioner erred in
not considering copra as an "agricultural food product" within the meaning of § 103(b) of
the NIRC. As the Solicitor General contends, "copra per se is not food, that is, it is not
intended for human consumption. Simply stated, nobody eats copra for food." That
previous Commissioners considered it so, is not reason for holding that the present
interpretation is wrong. The Commissioner of Internal Revenue is not bound by the ruling
of his predecessors. To the contrary, the overruling of decisions is inherent in the
interpretation of laws.220 (Emphasis supplied, citations omitted)
Tax treatment of income
derived from the PEACe Bonds
The transactions executed for the sale of the PEACe Bonds are:
1. The issuance of the 35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO
at 10.2 billion; and
2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of
the PEACe Bonds to undisclosed investors at ₱11.996 billion.
It may seem that there was only one lender — RCBC on behalf of CODE-NGO — to
whom the PEACe Bonds were issued at the time of origination. However, a reading of the
underwriting agreement221 and RCBC term sheet222 reveals that the settlement dates for
the sale and distribution by RCBC Capital (as underwriter for CODE-NGO) of the PEACe
Bonds to various undisclosed investors at a purchase price of approximately ₱11.996
would fall on the same day, October 18, 2001, when the PEACe Bonds were supposedly
issued to CODE-NGO/RCBC. In reality, therefore, the entire ₱10.2 billion borrowing
received by the Bureau of Treasury in exchange for the ₱35 billion worth of PEACe Bonds
was sourced directly from the undisclosed number of investors to whom RCBC
Capital/CODE-NGO distributed the PEACe Bonds — all at the time of origination or
issuance. At this point, however, we do not know as to how many investors the PEACe
Bonds were sold to by RCBC Capital.
Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe
Bonds are deemed deposit substitutes within the meaning of Section 22(Y) of the 1997
National Internal Revenue Code and RCBC Capital/CODE-NGO would have been
obliged to pay the 20% final withholding tax on the interest or discount from the PEACe
Bonds. Further, the obligation to withhold the 20% final tax on the corresponding interest
from the PEACe Bonds would likewise be required of any lender/investor had the latter
turnedaround and sold said PEACe Bonds, whether in whole or part, simultaneously to
20 or more lenders or investors.
We note, however, that under Section 24223 of the 1997 National Internal Revenue Code,
interest income received by individuals from longterm deposits or investments with a
holding period of not less than five (5) years is exempt from the final tax.
Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes,
the proper procedure was for the Bureau of Treasury to pay the face value of the PEACe
Bonds to the bondholders and for the Bureau of Internal Revenue to collect the unpaid
final withholding tax directly from RCBC Capital/CODE-NGO, orany lender or investor if
such be the case, as the withholding agents.
The collection of tax is not
barred by prescription
The three (3)-year prescriptive period under Section 203 of the 1997 National Internal
Revenue Code to assess and collect internal revenue taxes is extended to 10 years in
cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failureto
file a return, to be computed from the time of discovery of the falsity, fraud, or omission.
Section 203 states:
SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in
Section 222, internal revenue taxes shall be assessed within three (3) years after the last
day prescribed by law for the filing of the return, and no proceeding in court without
assessment for the collection of such taxes shall be begun after the expiration of such
period: Provided, That in a case where a return is filed beyond the period prescribed by
law, the three (3)-year period shall be counted from the day the return was filed. For
purposes of this Section, a return filed before the last day prescribed by law for the filing
thereof shall be considered as filed on such last day. (Emphasis supplied)
....
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.
(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax
may be filed without assessment, at any time within ten (10) years after the discovery of
the falsity, fraud or omission: Provided, That in a fraud assessment which has become
final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or
criminal action for the collection thereof.
Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or
more lenders/investors, the Bureau of Internal Revenue may still collect the unpaid tax
from RCBC Capital/CODE-NGO within 10 years after the discovery of the omission.
In view of the foregoing, there is no need to pass upon the other issues raised by
petitioners and petitioners-intervenors.
Reiterative motion on the temporary restraining order
Respondents’ withholding of the
20% final withholding tax on
October 18, 2011 was justified
Under the Rules of Court, court orders are required to be "served upon the parties
affected."224 Moreover, service may be made personally or by mail.225 And, "[p]ersonal
service is complete upon actual delivery [of the order.]"226 This court’s temporary
restraining order was received only on October 19, 2011, or a day after the PEACe Bonds
had matured and the 20% final withholding tax on the interest income from the same was
withheld.
Publication of news reports in the print and broadcast media, as well as on the internet,
is not a recognized mode of service of pleadings, court orders, or processes. Moreover,
the news reports227 cited by petitioners were posted minutes before the close of office
hours or late in the evening of October 18, 2011, and they did not givethe exact contents
of the temporary restraining order.
"[O]ne cannot be punished for violating an injunction or an order for an injunction unless
it is shown that suchinjunction or order was served on him personally or that he had notice
of the issuance or making of such injunction or order."228
At any rate, "[i]n case of doubt, a withholding agent may always protect himself or herself
by withholding the tax due"229 and return the amount of the tax withheld should it be finally
determined that the income paid is not subject to withholding.230 Hence, respondent
Bureau of Treasury was justified in withholding the amount corresponding to the 20% final
withholding tax from the proceeds of the PEACe Bonds, as it received this court’s
temporary restraining order only on October 19, 2011, or the day after this tax had been
withheld.
Respondents’ retention of the
amounts withheld is a defiance
of the temporary restraining
order
Nonetheless, respondents’ continued failure to release to petitioners the amount
corresponding to the 20% final withholding tax in order that it may be placed in escrow as
directed by this court constitutes a defiance of this court’s temporary restraining order.231
The temporary restraining order is not moot. The acts sought to be enjoined are not fait
accompli. For an act to be considered fait accompli, the act must have already been fully
accomplished and consummated.232 It must be irreversible, e.g., demolition of
properties,233 service of the penalty of imprisonment,234 and hearings on cases.235 When
the act sought to be enjoined has not yet been fully satisfied, and/or is still continuing in
nature,236 the defense of fait accomplicannot prosper.
The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling
that constitutes both the withholding and remittance of the 20% final withholding tax to
the Bureau of Internal Revenue. Even though the Bureau of Treasury had already
withheld the 20% final withholding tax237 when it received the temporary restraining order,
it had yet to remit the monies it withheld to the Bureau of Internal Revenue, a remittance
which was due only on November 10, 2011.238 The act enjoined by the temporary
restraining order had not yet been fully satisfied and was still continuing.
Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which prescribes to
national government agencies such as the Bureau of Treasury the procedure for the
remittance of all taxes it withheld to the Bureau of Internal Revenue, a national agency
shall file before the Bureau of Internal Revenue a Tax Remittance Advice (TRA)
supported by withholding tax returns on or before the 10th day of the following month
after the said taxes had been withheld.240 The Bureau of Internal Revenue shall transmit
an original copy of the TRA to the Bureau of Treasury,241 which shall be the basis for
recording the remittance of the tax collection.242 The Bureau of Internal Revenue will then
record the amount of taxes reflected in the TRA as tax collection in the Journal ofTax
Remittance by government agencies based on its copies of the TRA.243 Respondents did
not submit any withholding tax return or TRA to provethat the 20% final withholding tax
was indeed remitted by the Bureau of Treasury to the Bureau of Internal Revenue on
October 18, 2011.
Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-10395244 dated
October 18, 2011 submitted to this court shows:
Account Debit Amount Credit
Code Amount
Bonds Payable-L/T, Dom-Zero 442-360 35,000,000,000.00
Coupon T/Bonds
(Peace Bonds) – 10 yr
Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59
Due to BIR 412-002 4,966,207,796.41
To record redemption of 10yr Zero
coupon (Peace Bond) net of the 20% final
withholding tax pursuant to BIR Ruling No.
378-2011, value date, October 18, 2011 per
BTr letter authority and BSP Bank
Statements.

The foregoing journal entry, however, does not prove that the amount of
₱4,966,207,796.41, representing the 20% final withholding tax on the PEACe Bonds, was
disbursed by it and remitted to the Bureau of Internal Revenue on October 18, 2011. The
entries merely show that the monies corresponding to 20% final withholding tax was set
aside for remittance to the Bureau of Internal Revenue.
We recall the November 15, 2011 resolution issued by this court directing respondents to
"show cause why they failed to comply with the [TRO]; and [to] comply with the [TRO] in
order that petitioners may place the corresponding funds in escrow pending resolution of
the petition."245 The 20% final withholding tax was effectively placed in custodia legiswhen
this court ordered the deposit of the amount in escrow. The Bureau of Treasury could still
release the money withheld to petitioners for the latter to place in escrow pursuant to this
court’s directive. There was no legal obstacle to the release of the 20% final withholding
tax to petitioners. Congressional appropriation is not required for the servicing of public
debts in view of the automatic appropriations clause embodied in Presidential Decree
Nos. 1177 and 1967.
Section 31 of Presidential Decree No. 1177 provides:
Section 31. Automatic Appropriations. All expenditures for (a) personnel retirement
premiums, government service insurance, and other similar fixed expenditures, (b)
principal and interest on public debt, (c) national government guarantees of obligations
which are drawn upon, are automatically appropriated: provided, that no obligations shall
be incurred or payments made from funds thus automatically appropriated except as
issued in the form of regular budgetary allotments.
Section 1 of Presidential Decree No. 1967 states:
Section 1. There is hereby appropriated, out of any funds in the National Treasury not
otherwise appropriated, such amounts as may be necessary to effect payments on
foreign or domestic loans, or foreign or domestic loans whereon creditors make a call on
the direct and indirect guarantee of the Republic of the Philippines, obtained by:
a. the Republic of the Philippines the proceeds of which were relent to government-owned
or controlled corporations and/or government financial institutions;
b. government-owned or controlled corporations and/or government financial institutions
the proceeds of which were relent to public or private institutions;
c. government-owned or controlled corporations and/or financial institutions and
guaranteed by the Republic of the Philippines;
d. other public or private institutions and guaranteed by government owned or controlled
corporations and/or government financial institutions.
The amount of ₱35 billion that includes the monies corresponding to 20% final withholding
tax is a lawfuland valid obligation of the Republic under the Government Bonds. Since
said obligation represents a public debt, the release of the monies requires no legislative
appropriation.
Section 2 of Republic Act No. 245 likewise provides that the money to be used for the
payment of Government Bonds may be lawfully taken from the continuing appropriation
out of any monies in the National Treasury and is not required to be the subject of another
appropriation legislation: SEC. 2. The Secretary of Finance shall cause to be paid out of
any moneys in the National Treasury not otherwise appropriated, or from any sinking
funds provided for the purpose by law, any interest falling due, or accruing, on any portion
of the public debt authorized by law. He shall also cause to be paid out of any such money,
or from any such sinking funds the principal amount of any obligations which have
matured, or which have been called for redemption or for which redemption has been
demanded in accordance with terms prescribed by him prior to date of issue. . . In the
case of interest-bearing obligations, he shall pay not less than their face value; in the case
of obligations issued at a discount he shall pay the face value at maturity; or if redeemed
prior to maturity, such portion of the face value as is prescribed by the terms and
conditions under which such obligations were originally issued. There are hereby
appropriated as a continuing appropriation out of any moneys in the National Treasury
not otherwise appropriated, such sums as may be necessary from time to time to carry
out the provisions of this section. The Secretary of Finance shall transmit to Congress
during the first month of each regular session a detailed statement of all expenditures
made under this section during the calendar year immediately preceding.
Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury
bills and bonds shall be made through the National Treasury’s account with the Bangko
Sentral ng Pilipinas, to wit:
Section 38. Demand Deposit Account.– The Treasurer of the Philippines maintains a
Demand Deposit Account with the Bangko Sentral ng Pilipinas to which all proceeds from
the sale of Treasury Bills and Bonds under R.A. No. 245, as amended, shall be credited
and all payments for redemption of Treasury Bills and Bonds shall be charged.1âwphi1
Regarding these legislative enactments ordaining an automatic appropriations provision
for debt servicing, this court has held:
Congress . . . deliberates or acts on the budget proposals of the President, and Congress
in the exercise of its own judgment and wisdom formulates an appropriation act precisely
following the process established by the Constitution, which specifies that no money may
be paid from the Treasury except in accordance with an appropriation made by law.
Debt service is not included inthe General Appropriation Act, since authorization therefor
already exists under RA Nos. 4860 and 245, as amended, and PD 1967. Precisely in the
light of this subsisting authorization as embodied in said Republic Acts and PD for debt
service, Congress does not concern itself with details for implementation by the
Executive, butlargely with annual levels and approval thereof upon due deliberations as
part of the whole obligation program for the year. Upon such approval, Congress has
spoken and cannot be said to havedelegated its wisdom to the Executive, on whose part
lies the implementation or execution of the legislative wisdom.246 (Citation omitted)
Respondent Bureau of Treasury had the duty to obey the temporary restraining order
issued by this court, which remained in full force and effect, until set aside, vacated, or
modified. Its conduct finds no justification and is reprehensible.247
WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR
Ruling Nos. 370-2011 and DA 378-2011 are NULLIFIED.
Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued
retention of the amount corresponding to the 20% final withholding tax despite this court's
directive in the temporary restraining order and in the resolution dated November 15,
2011 to deliver the amounts to the banks to be placed in escrow pending resolution of
this case.
Respondent Bureau of Treasury is hereby ORDERED to immediately ·release and pay
to the bondholders the amount corresponding-to the 20% final withholding tax that it
withheld on October 18, 2011.

G.R. No. 206526 January 28, 2015

WINEBRENNER & IÑIGO INSURANCE BROKERS, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
MENDOZA, J.:
In this petition for review under Rule 45 of the Rules of Court and Rule 16 of the Revised
Rules of the Court of Tax Appeals, Winebrenner & Ifiigo Insurance Brokers, Inc.
(petitioner) seeks the review of the March 22, 2013 Decision1 of the Court of Tax Appeals
En Banc (CTA-En Banc). In the said decision, the CTA-En Banc affirmed the denial of
petitioner's judicial claim for refund or issuance of tax credit certificate for excess and
unutilized creditable withholding tax (CWT) for the 1st to 4th quarter of calendar year (CJ}
2003 amounting to ₱4,073,954.00. In denying the refund, the CTA-En Banc held that
petitioner failed to prove that the excess CWT for CY 2003 was not carried over to the
succeeding quarters of the subject taxable year. Under the 1997 National Internal
Revenue Code (NJRC), a taxpayer must not have exercised the option to carryover the
excess CWT for a particular taxable year in order to qualify for refund.
The Factual Antecedents
On April 15, 2004, petitioner filed itsAnnual Income Tax Return for CY 2003.
About two years thereafter or on April 7, 2006, petitioner applied for the administrative tax
credit/refund claiming entitlement to the refund of its excess or unutilized CWT for CY
2003, by filing BIR Form No. 1914 with the Revenue District Office No. 50 of the Bureau
of Internal Revenue (BIR).
There being no action taken on the said claim, a petition for review was filed by petitioner
before the CTA on April 11, 2006. The case was docketed as CTA Case No. 7440 and
was raffled to the Special First Division (CTA Division).
On April 13, 2010, CTA Division partially granted petitioner’s claim for refund of excess
and unutilized CWT for CY 2003 in the reduced amount of ₱2,737,903.34 in its April 13,
2010 Decision2 (original decision). The dispositive portion of the decision reads:
In view of the foregoing, the Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, respondent is hereby ORDERED to REFUND or ISSUE A TAX CREDIT
CERTIFICATE in favor of the petitioner in the reduced amount of ₱2,737,903.34
representing its excess/unutilized creditable withholding taxes for the year 2003.
SO ORDERED.3
Petitioner filed a Motion for Partial Reconsideration with Leave to Submit Supplemental
Evidence. It prayed that an amended decision be issued granting the entirety of its claim
for refund, or in the alternative, that it be allowed to submit and offer relevant documents
as supplemental evidence.
Respondent Commissioner of Internal Revenue (CIR) also moved for reconsideration,
praying for the denial of the entire amount of refund because petitioner failed to present
the quarterly Income Tax Returns (ITRs) for CY 2004. To the CIR, the presentation of the
2004 quarterly ITRs was indispensable in proving petitioner’s entitlement to the claimed
amount because it would prove that no carry-over of unutilized and excess CWT for the
four (4) quarters of CY 2003 to the succeeding four (4) quarters of CY 2004 was made.
In the absence of said ITRs, no refund could be granted. In the CIR’s view, this was in
accordance with the irrevocability rule under Section 76 of the NIRC which reads:
SEC. 76. Final Adjustment Return. – Every corporation liable to tax under Section 27 shall
file an adjustment return covering the total taxable income for the preceding calendar or
fiscal year. If the sum of the quarterly tax payments made during the said taxable year is
not equal to the total tax due on the entire taxable income of that year, the corporation
shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credits; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated
quarterly income taxes paid, the excess amount shown on its final adjustment return may
be carried over and credited against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding taxable years. Once the option to carry-over and apply
the excess quarterly income tax against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option shall be considered irrevocable
for that taxable period and no application for cash refund or issuance of a tax credit
certificate shall be allowed therefor.
On July 27, 2011, the CTA-Division reversed itself. In an Amended Decision,4 it denied
the entire claim of petitioner. It reasoned out that petitioner should have presented as
evidence its first, second and third quarterly ITRs for the year 2004 to prove that the
unutilized CWT being claimed had not been carried over to the succeeding quarters.
Thus:
WHEREFORE,in view of the foregoing, petitioner’s Motion for Partial Reconsideration is
hereby DENIED while respondent’s Motion for Reconsideration is hereby GRANTED.
Accordingly, the Decision dated April 13, 2010 granting petitioner’s claim in the reduced
amount of ₱2,737,903.34 is hereby REVERSED AND SET ASIDE. Consequently, the
instant Petition for Review is hereby DENIEDdue to insufficiency of evidence.
SO ORDERED.5
Aggrieved, petitioner elevated the case to the CTA En Bancpraying for the reversal of the
Amended Decision of the CTA Division.
In its March 22, 2013 Decision,6 the CTA-En Bancaffirmed the Amended Decision of the
CTA-Division. It stated that before a cash refund or an issuance of tax credit certificate
for unutilized excess tax credits could be granted, it was essential for petitioner to
establish and prove, by presenting the quarterly ITRs of the succeeding years, that the
excess CWT was not carried over to the succeeding taxable quarters considering that the
option to carry over in the succeeding taxable quarters could not be modified in the final
adjustment returns (FAR).Because petitioner did not present the first, second and third
quarterly ITRsfor CY 2004, despite having offered and submitted the Annual ITR/FAR for
the same year, the CTA-En Banc stated that the petitioner failed to discharge its burden,
hence, no refund could be granted. In justifying its conclusions, the CTA-En Banccited its
own case of Millennium Business Services, Inc.v. Commissioner of Internal Revenue
(Millennium)7 wherein it held as follows:
Since the burden of proof is upon the claimant to show that the amount claimed was not
utilized or carried over to the succeeding taxable quarters, the presentation of the
succeeding quarterly income tax return and final adjustment return is indispensable to
prove that it did not carry over or utilized the claimed excess creditable withholding taxes.
Absent thereof, there will be no basis for a taxpayer’s claim for refund since there will be
no evidence that the taxpayer did not carry over or utilize the claimed excess creditable
withholding taxes to the succeeding taxable quarters.
Significantly, a taxpayer may amend its quarterly income tax return or annual income tax
return or Final Adjustment Return, which in any case may modify the previous intention
to carry-over, apply as tax credit certificate or refund, as the case may be. But the option
to carry over in the succeeding taxable quarters under the irrevocability rule cannot be
modified in its final adjustment return.
The presentation of the final adjustment return does not shift the burden of proof that the
excess creditable withholding tax was not utilized or carried overto the first three (3)
taxable quarters. It remains with the taxpayer claimant. It goes without saying that final
adjustment returns of the preceding and the succeeding taxable years are not sufficient
to prove that the amount claimed was utilized or carried over to the first three (3) taxable
quarters.
The importance of the presentation of the succeeding quarterly income tax return and the
annual income tax return of the subsequent taxable year need not be overly emphasized.
All corporations subject to income tax, are required to file quarterly income tax returns,
on a cumulative basis for the preceding quarters, upon which payment of their income tax
has been made. In addition to the quarterly income tax returns, corporations are required
to file a final or adjustment return on or before the fifteenth day of April. The quarterly
income tax return, like the final adjustment return, is the most reliable firsthand evidence
of corporate acts pertaining to income taxes, as it includes the itemization and summary
of additions to and deductions from the income tax due. These entries are not without
rhyme or reason. They are required, because they facilitate the tax administration
process, and guide this Court to the veracity of a petitioner’s claim for refund without
which petitioner could not prove with certainty that the claimed amount was not utilized
or carried over to the succeeding quarters or the option to carry over and apply the excess
was effectively chosen despite the intent to claim a refund.
In the same vein, if the government wants to disprove that the excess creditable
withholding tax was not utilized or carried over to the succeeding taxable quarters, the
presentation of the succeeding quarterly income tax return and the annual income tax
return of the subsequent taxable year indicating utilization or carrying over are [sic]
indispensible. However, the claimant must first establish its claim for refund, such that it
did not utilize or carry over or that it opted to utilize and carry over to the 1 st, 2nd, 3rd
quarters and final adjustment return of the succeeding taxable year.
Concomitantly, the presentation of the quarterly income tax return and the annual income
tax return to prove the fact that excess creditable withholding tax was not utilized or
carried over or opted to be utilized and carried over to the 1st, 2nd, 3rd quarters and final
adjustment return of the succeeding taxable quarter is not only for convenience to
facilitate the tax administration process but it is part of the requisites to establish the claim
for refund. Section 76 of the NIRC of 1997 provides that if the taxpayer claimant carries
over and applies the excess quarterly income tax against the income tax due for the
taxable quarters of the succeeding taxable years, the same is irrevocable and no
application for cash refund or issuance of a tax credit certificate shall be allowed.8
Hence, this petition.
Noteworthy is the fact that the CTA-En Bancruling was met with two dissents from
Associate Justices Juanito C. Castañeda (Justice Castañeda) and Esperanza R. Fabon-
Victorino (Justice Fabon-Victorino).
In his Dissenting Opinion9 which was concurred in by Justice FabonVictorino, Justice
Castañeda expressed the view that the CTA-En Banc should have reinstated the CTA-
Division’s original decision because in the cases of Philam Asset Management Inc. v.
Commissioner of Internal Revenue (Philam);10 State Land Investment Corporation v.
Commissioner of Internal Revenue (State Land);11 Commissioner of Internal Revenue v.
PERF Realty Corporation (PERF Realty);12 and Commissioner of Internal Revenue v.
Mirant (Philippines) Operations, Corporation (Mirant),13 this Court already ruled that
requiring the ITR or the FAR for the succeeding year in a claim for refund had no basis in
law and jurisprudence. According to him, the submission of the FAR of the succeeding
taxable year was not required under the law to prove the claimant’s entitlement to excess
or unutilized CWT, and by following logic, the submission of quarterly income tax returns
for the subsequent taxable period was likewise unnecessary. He found no justifiable
reason not to follow the existing rulings of this Court. Petitioner’s reasoning in this petition
echoes the dissenting opinion of Justice Castaneda. It further submits that despite the
non-presentation of the quarterly ITRs, it has sufficiently shown that the excess CWT for
CY 2003 was not carried over or applied to itsincome tax liabilities for CY 2004, as shown
in the Annual ITR for 2004 it submitted. Thus, petitioner insists that its refund should have
been granted. Petitioner further avers, in its Reply,14 that even if Millennium Business
case was applicable, such must be given prospective effect considering that this case
was litigated on the basis of the doctrines laid down in Philam, State Landand PERF
Realty cases wherein the submission of quarterly ITRs in a case for tax refund was held
by this Court as not mandatory.
In its Comment,15 the CIR counters that even if the taxpayer signifies the option for either
tax refund or carry-over as tax credit, this does not ipso facto confer the right to avail of
the option immediately. There is a need, according to the CIR, for an investigation to
ascertain the correctness of the corporate returns and the amount sought to be credited;
and part of which is to look into the quarterly returns so that it may be determined whether
or not excess and unutilized CWT was carried over into the succeeding quarters of the
next taxable year. Because the pertinent quarterly ITRs were not presented, the CIR
submits that the petitioner failed to prove its right to a tax refund.
Issue
The sole issue here is whether the submission and presentation of the quarterly ITRs of
the succeeding quarters of a taxable year is indispensable in a claim for refund.
The Court’s Ruling
The Court recognizes, as it always has, that the burden of proof to establish entitlement
to refund is on the claimant taxpayer.16 Being in the nature of a claim for exemption,17
refund is construed in strictissimi juris against the entity claiming the refund and in favor
of the taxing power.18 This is the reason why a claimant must positively show compliance
with the statutory requirements provided for under the NIRC in order to successfully
pursue one’s claim. As implemented by the applicable rules and regulations and as
interpreted in a vast array of decisions, a taxpayer who seeks a refund of excess and
unutilized CWT must:
1) File the claim with the CIR within the two year period from the date of payment of the
tax;
2) Show on the return that the income received was declared as part of the gross income;
and
3) Establish the fact of withholding by a copy of a statement duly issued by the payor to
the payee showing the amount paid and the amount of tax withheld.19
The original decision of the CTA-Division made plain that the petitioner complied with the
above requisites in so far as the reduced amount of ₱2,737,903.34 was concerned. In the
amended decision, however, it was pointed out that because petitioner failed to present
the quarterly ITRs of the subsequent year, there was an impossibility of determining
compliance with the irrevocability rule under Section 76 of the NIRC as in those
documents could be found evidence of whether the excess CWT was applied to its
income tax liabilities in the quarters of 2004. The irrevocability rule under Section 76 of
the NIRC means that once an option, either for refund or issuance of tax credit certificate
or carry-over of CWT has been exercised, the same can no longer be modified for the
succeeding taxable years.20 For said reason, the CTA-En Banc affirmed the conclusion
in the amended decision that because of the said impossibility, the claim for refund was
not substantiated.
The CIR agrees with the disposition of the CTA-En Banc, stressing that the petitioner
failed to carry out the burden of showing that no carryover was made when it did not
present the quarterly ITRs for CY 2004.
Petitioner disagrees, as the dissents did, that the non-submission of quarterly ITRs is fatal
to its claim.
Hence, the issue on the indispensability of quarterly ITRs of the succeeding taxable year
in a claim for refund.
The Court finds for the petitioner.
There is no question that those who claim must not only prove its entitlement to the excess
credits, but likewise must prove that no carry-over has been made in cases where refund
is sought.
In this case, the fact of havingcarried over petitioner’s 2003 excess credits to succeeding
taxable year isin issue. According to the CTA-En Bancand the CIR, the only evidence that
can sufficiently show that carrying over has been made is to present the quarterly ITRs.
Some members of this Court adhere to the same view.
The Court however cannot.
Proving that no carry-over has been made does not absolutely require the presentation
of the quarterly ITRs.
In Philam, the petitioner therein sought for recognition of its right to the claimed refund of
unutilized CWT. The CIR opposed the claim, on the grounds similar to the caseat hand,
that no proof was provided showing the non-carry over of excess CWT to the subsequent
quarters of the subject year. In a categorical manner, the Court ruled that the presentation
of the quarterly ITRs was not necessary. Therein, it was written:
Requiring that the ITR or the FAR of the succeeding year be presented to the BIR in
requesting a tax refund has no basis in law and jurisprudence.
First, Section 76 of the Tax Code does not mandate it. The law merely requires the filing
of the FAR for the preceding – not the succeeding – taxable year. Indeed, any refundable
amount indicated in the FAR of the preceding taxable year may be credited against the
estimated income tax liabilities for the taxable quarters of the succeeding taxable year.
However, nowhere is there even a tinge of a hint in any provisions of the [NIRC] that the
FAR of the taxable year following the period to which the tax credits are originally being
applied should also be presented to the BIR.
Second, Section 5 of RR 12-94, amending Section 10(a) of RR 6-85, merely provides that
claims for refund of income taxes deducted and withheld from income payments shall be
given due course only (1) when it is shown on the ITR that the income payment received
is being declared part of the taxpayer’s gross income; and (2) when the fact of withholding
is established by a copy of the withholding tax statement, duly issued by the payor to the
payee, showing the amount paid and the income tax withheld from that amount.
It has been submitted that Philam cannot be cited as a precedent to hold that the
presentation of the quarterly income tax return is not indispensable as it appears that the
quarterly returns for the succeeding year were presented when the petitioner therein filed
an administrative claim for the refund of its excess taxes withheld in 1997.
It appears however that there is misunderstanding in the ruling of the Court in Philam.
That factual distinction does not negate the proposition that subsequent quarterly ITRs
are not indispensable. The logic in not requiring quarterly ITRs of the succeeding taxable
years to be presented remains true to this day. What Section 76 requires, just like in all
civil cases, is to prove the prima facie entitlement to a claim, including the fact of not
having carried over the excess credits to the subsequent quarters or taxable year. It does
not say that to prove such a fact, succeeding quarterly ITRs are absolutely needed.
This simply underscores the rulethat any document, other than quarterly ITRs may be
used to establish that indeed the non-carry over clause has been complied with, provided
that such is competent, relevant and part of the records. The Court is thusnot prepared
to make a pronouncement as to the indispensability of the quarterly ITRs in a claim for
refund for no court can limit a party to the means of proving a fact for as long as they are
consistent with the rules of evidence and fair play. The means of ascertainment of a fact
is best left to the party that alleges the same. The Court’s power is limited only to the
appreciation of that means pursuant to the prevailing rules of evidence. To stress, what
the NIRC merely requires is to sufficiently prove the existence of the non-carry over of
excess CWT in a claim for refund.
The implementing rules similarly support this conclusion, particularly Section 2.58.3 of
Revenue Regulation No. 2-98 thereof. There, it provides as follows:
SECTION 2.58.3. Claim for Tax Credit or Refund.
(A) The amount of creditable tax withheld shall be allowed as a tax credit against the
income tax liability of the payee in the quarter of the taxable year in which income was
earned or received.
(B) Claims for tax credit or refund of any creditable income tax which was deducted and
withheld on income payments shall be given due course only when it is shown that the
income payment has been declared as part of the gross income and the fact of
withholding is established bya copy of the withholding tax statement duly issued by the
payer to the payee showing the amount paid and the amount of tax withheld therefrom.
xxx xxx xxx
Evident from the above is the absence of any categorical pronouncement of requiring the
presentation of the succeeding quarterly ITRs in order to prove the fact of non-carrying
over. To say the least, the Court rules that as to the means of proving it, Ithas no power
to unduly restrict it.
In this case, it confounds the Court why the CTA did not recognize and discuss in detail
the sufficiency of the annual ITR for 2004,21 which was submitted by the petitioner. The
CTA in fact said:
In the present case, while petitioner did offer its Annual ITR/Final Adjustment Return for
taxable year 2004, it appears that petitioner miserably failed to submit and offer as part
of its evidence the first, second, and third Quarterly ITRs for the year 2004. Consequently,
petitioner was not able to prove that it did not exercise its option to carry-over its excess
CWT.22
Petitioner claims that the requirement of proof showing the non-carry over has been
established in said document.
Indeed, an annual ITR contains the total taxable income earned for the four (4) quarters
of a taxable year, as well as deductions and tax credits previously reported or carried over
in the quarterly income tax returns for the subject period. A quick look atthe Annual ITR
reveals this fact:
Aggregate Income Tax Due
Less Tax Credits/Payments
Prior Year’s excess Credits – Taxes withheld
Tax Payment (s) for the Previous Quarter (s) of the same taxable year other than MCIT
xxx xxx xxx
Creditable Tax Withheld for the Previous Quarter (s)
Creditable Tax Withheld Per BIR Form No. 2307 for this Quarter
xxx xxx x x x23
It goes without saying that the annual ITR (including any other proof that may be sufficient
to the Court)can sufficiently reveal whether carry over has been made in subsequent
quarters even if the petitioner has chosen the option of tax credit or refund inthe
immediately 2003 annual ITR. Section 76 of the NIRC requires a corporation to file a Final
Adjustment Return (or Annual ITR) covering the total taxable income for the preceding
calendar or fiscal year. The total taxable income contains the combined income for the
four quarters of the taxable year, as well as the deductions and excess tax credits carried
over in the quarterly income tax returns for the same period.
If the excess tax credits of the preceding year were deducted, whether in whole or in part,
from the estimated income tax liabilities of any of the taxable quarters of the succeeding
taxable year, the total amount of the tax credits deducted for the entire taxable year should
appear in the Annual ITR under the item "Prior Year’s Excess Credits." Otherwise, or if
the tax credits were carried over to the succeeding quarters and the corporation did not
report it in the annual ITR, there would be a discrepancy in the amounts of combined
income and tax credits carried over for all quarters and the corporation would end up
shouldering a bigger tax payable. It must be remembered that taxes computed in the
quarterly returns are mere estimates. It is the annual ITR which shows the aggregate
amounts of income, deductions, and credits for all quarters of the taxable year. It is the
final adjustment return which shows whether a corporation incurred a loss or gained a
profit during the taxable quarter.24 Thus, the presentation of the annual ITR would suffice
in proving that prior year’s excess credits were not utilized for the taxable year in order to
make a final determination of the total tax due.
In this case, petitioner reported an overpayment in the amount of ₱7,194,213.00 in its
annual ITR for the year ended December 2003:
Annual ITR 2003
Income Tax Due 1,259,259.00
Less: Prior Year’s Excess Credits (2002 Annual ITR) (4,379,518.00)
Creditable Tax Withheld for the 4th Quarter (4,073,954.00)
Tax Payable / (Overpayment) (7,194,213.00)
For the overpayment, petitioner chose the option "To be issued a Tax Credit Certificate."
In its Annual ITR for the year ended December 2004, petitioner did not report the
Creditable Tax Withheld for the 4th quarter of 2003 in the amount of ₱4,073,954.00 as
prior year’s excess credits. As shown in the 2004 ITR:
Annual ITR 2004
Income Tax Due 1,321,409.00
Less: Prior Year’s Excess Credits -
Creditable Tax Withheld for the 4th (3,689,419.00)
Quarter

Tax Payable / (Overpayment) (2,368,010.00)

Verily, the absence of any amount written in the Prior Year excess Credit – Tax Withheld
portion of petitioner’s 2004 annual ITR clearly shows that no prior excess credits were
carried over in the first four quarters of 2004. And since petitioner was able to sufficiently
prove that excess tax credits in 2003 were not carried over to taxable year 2004 by leaving
the item "Prior Year’s Excess Credits" as blank in its 2004 annual ITR, then petitioner is
entitled to a refund. Unfortunately, the CTA, in denying entirely the claim, merely relied
on the absence of the quarterly ITRs despite being able to verify the truthfulness of the
declaration that no carry over was indeed effected by simply looking at the 2004 annual
ITR.
At this point, worth mentioning is the fact that subsequent cases affirm the proposition as
correctly pointed out by petitioner. State Land, PERF and Mirantreiterated the rule that
the presentation of the quarterly ITRs of the subsequent year is not mandatory on the part
of the claimant to prove its claims.
There are some who challenges the applicability of PERF in the case at bar. It is said that
PERFis not in point because the Annual ITR for the succeeding year had actually been
attached to PERF’s motion for reconsideration with the CTA and had formed part of the
records of the case. Clearly, if the Annual ITR has been recognized by this Court in PERF,
why then would the submitted 2004 Annual ITR in this case be insufficient despite the
absence of the quarterly ITRs? Why then would this Court require more than what is
enough and deny a claim even if the minimum burden has been overcome? At best, the
existence of quarterly ITRs would have the effect of strengthening a proven fact. And as
such, may only be considered corroborative evidence, obviously not indispensable in
character. PERF simply affirms that quarterly ITRs are not indispensable, provided that
there is sufficient proof that carrying over excess CWT was not effected.
Stateland and Mirantare equally challenged. In all these cases however, the factual
distinctions only serve to bolster the proposition that succeeding quarterly ITRs are not
indispensable. Implicit from all these cases is the Court’s recognition that proving carry-
over is an evidentiary matter and that the submission of quarterly ITRs is but a means to
prove the fact of one’s entitlement to a refund and not a condition sine qua non for the
success of refund. True, it would have been better, easier and more efficient for the CTA
and the CIR to have as basis the quarterly ITRs, but it is not the only way considering
further that in this case, the Annual ITR for 2004 is sufficient. Courts are here to
painstakingly weigh evidence so that justice and equity in the end will prevail.
It must be emphasized that once the requirements laid down by the NIRC have been met,
a claimant should be considered successful in discharging its burden of proving its right
to refund. Thereafter, the burden of going forward with the evidence, as distinct from the
general burden of proof, shifts to the opposing party,25 that is, the CIR. It is then the turn
of the CIR to disprove the claim by presenting contrary evidence which could include the
pertinent ITRs easily obtainable from its own files.
All along, the CIR espouses the viewthat it must be given ample opportunity to investigate
the veracity of the claims. Thus, the Court asks: In the process of investigation at the
administrative level to determine the right of the petitioner to the claimed amount, did the
CIR, with all its resources even attempt to verify the quarterly ITRsit had in its files?
Certainly, it did not as the application was met by the inaction of the CIR. And if desirous
in its effort to clearly verify petitioner’s claim, it should have had the time, resources and
the liberty to do so. Yet, nothing was produced during trial to destroy the prima facie right
of the petitioner by counterchecking the claims with the quarterly ITRs the CIR has on its
file. To the Court, it seems that the CIR languished on its duties to ascertain the veracity
of the claims and just hoped that the burden would fall on the petitioner’s head once the
issue reaches the courts.
This mindset ignores the rule that the CIR has the equally important responsibility of
contradicting petitioner’s claim by presenting proof readily on hand once the burden of
evidence shifts to its side. Claims for refund are civil in nature and as such, petitioner, as
claimant, though having a heavy burden of showing entitlement, need only prove
preponderance of evidence in order to recover excess credit in cold cash. To review,
"[P]reponderance of evidence is [defined as] the weight, credit, and value of the aggregate
evidence on either sideand is usually considered to be synonymous with the term ‘greater
weight of the evidence’ or ‘greater weight of the credible evidence.’ It is evidence which
is more convincing to the court asworthy of belief than that which is offered in opposition
thereto.26
The CIR must then be reminded that in Philam, the CIR’s "failure to present[the quarterly
ITRs and AFR] to support its contention against the grant of a tax refund to [a claimant]
is certainly fatal." PERF reinforces this with a sweeping statement holding that the
verification process is not incumbent on PERF[or any claimant for that matter]; [but] is the
duty of the CIR to verify whether xxx excess incometaxes [have been carried over].
And should there be a possibility that a claimant may have violated the irrevocability rule
and thereafter claim twice from its credits, no one is to be blamed but the CIR for not
discharging its burden of evidence to destroy a claimant’s right to a refund. At any rate, a
claimant who defrauds the government cannot escape liability be it criminal or civil in
nature.
Verily, with the petitioner having complied with the requirements for refund, and without
the CIR showing contrary evidence other than its bare assertion of the absence of the
quarterly ITRs, copies of which are easily verifiable by its very own records, the burden
of proof of establishing the propriety of the claim for refund has been sufficiently
discharged. Hence, the grant of refund is proper.
The Court does not, and cannot, however, grant the entire claimed amount as it finds no
error in the original decision of the CTA Division granting refund to the reduced amount
of ₱2,737,903.34. This finding of fact is given respect, if not finality, as the CTA,27 which
by the very nature of its functions of dedicating itself exclusively to the consideration of
the tax problems has necessarily developed an expertise on the subject.28 It being the
case, the Court partly grants this petition to the extent of reinstating the April 23, 2010
original decision of the CTA Division.
The Court reminds the CIR that substantial justice, equity and fair play take precedence
over technicalities and legalisms.1âwphi1 The government must keep in mind that it has
no right to keep the rponey not belonging to it, thereby enriching itself at the expense of
the law-abiding citizen29 or entities who have complied with the requirements of the law
in order to forward the claim for refund. Under the principle of solution ihdebiti provided in
Article 2154 of the Civil Code, the CIR must return anythihg it has received.30
Finally, even assuming that the Court reverses itself and pronounces the indispensability
of presenting the quarterly ITRs to prove entitlement to the claimed refund, petitioner
should not be Brejudiced for relying on Philam. The CTA En Banc merely based its
pronouncement on a case that does not enjoy the benefit of stare decis et non quieta
movere which means "to adhere to precedents, and not to unsettle things which are
established."31 As between a CTA En Banc Decision (Millennium) and this Court's
Decision (Philam), it is elementary that the latter should prevail.
WHEREFORE, the Court partly grants the petition. The March 22, 2013 Decision of the
Court of Tax Appeals En Banc is REVERSED. The April 13, 2010 Decision of the Court
of Tax Appeals Special First Division is REINSTATED. Respondent Commissioner of
Internal Revenue is ordered to REFUND to petitioner the amount of ₱2,737,903.34 as
excess creditable withholding tax paid for taxable year 2003.
SO ORDERED.