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G.R. No. L-23794 February 17, 1968

ORMOC SUGAR COMPANY, INC., plaintiff-appellant, vs.THE TREASURER OF ORMOC CITY, THE
MUNICIPAL BOARD OF ORMOC CITY, HON. ESTEBAN C. CONEJOS as Mayor of Ormoc City and
ORMOC CITY, defendants-appellees.

On January 29, 1964, the Municipal Board of Ormoc City passed 1 Ordinance No. 4, Series of 1964,
imposing "on any and all productions of centrifugal sugar milled at the Ormoc Sugar Company, Inc., in Ormoc
City a municipal tax equivalent to one per centum (1%) per export sale to the United States of America and other
foreign countries." 2

Payments for said tax were made, under protest, by Ormoc Sugar Company, Inc. on March 20, 1964 for
P7,087.50 and on April 20, 1964 for P5,000, or a total of P12,087.50.

On June 1, 1964, Ormoc Sugar Company, Inc. filed before the Court of First Instance of Leyte, with service
of a copy upon the Solicitor General, a complaint 3 against the City of Ormoc as well as its Treasurer, Municipal
Board and Mayor, alleging that the afore-stated ordinance is unconstitutional for being violative of the equal
protection clause (Sec. 1[1], Art. III, Constitution) and the rule of uniformity of taxation (Sec. 22[1]), Art.VI,
Constitution), aside from being an export tax forbidden under Section 2287 of the Revised Administrative Code.
It further alleged that the tax is neither a production nor a license tax which Ormoc City under Section 15-kk of its
charter and under Section 2 of Republic Act 2264, otherwise known as the Local Autonomy Act, is authorized to
impose; and that the tax amounts to a customs duty, fee or charge in violation of paragraph 1 of Section 2 of
Republic Act 2264 because the tax is on both the sale and export of sugar.

Answering, the defendants asserted that the tax ordinance was within defendant city's power to enact under
the Local Autonomy Act and that the same did not violate the afore-cited constitutional limitations. After pre-trial
and submission of the case on memoranda, the Court of First Instance, on August 6, 1964, rendered a decision
that upheld the constitutionality of the ordinance and declared the taxing power of defendant chartered city
broadened by the Local Autonomy Act to include all other forms of taxes, licenses or fees not excluded in its
charter.

Appeal therefrom was directly taken to Us by plaintiff Ormoc Sugar Company, Inc. Appellant alleges the
same statutory and constitutional violations in the aforesaid taxing ordinance mentioned earlier.

Section 1 of the ordinance states: "There shall be paid to the City Treasurer on any and all productions of
centrifugal sugar milled at the Ormoc Sugar Company, Incorporated, in Ormoc City, a municipal tax equivalent to
one per centum (1%) per export sale to the United States of America and other foreign countries." Though
referred to as a tax on the export of centrifugal sugar produced at Ormoc Sugar Company, Inc. For production of
sugar alone is not taxable; the only time the tax applies is when the sugar produced is exported.

Appellant questions the authority of the defendant Municipal Board to levy such an export tax, in view of
Section 2287 of the Revised Administrative Code which denies from municipal councils the power to impose an
export tax. Section 2287 in part states: "It shall not be in the power of the municipal council to impose a tax in any
form whatever, upon goods and merchandise carried into the municipality, or out of the same, and any attempt to
impose an import or export tax upon such goods in the guise of an unreasonable charge for wharfage use of
bridges or otherwise, shall be void."

Subsequently, however, Section 2 of Republic Act 2264 effective June 19, 1959, gave chartered cities,
municipalities and municipal districts authority to levy for public purposes just and uniform taxes, licenses or
fees. Anent the inconsistency between Section 2287 of the Revised Administrative Code and Section 2 of
Republic Act 2264, this Court, in Nin Bay Mining Co. v. Municipality of Roxas 4 held the former to have been
repealed by the latter. And expressing Our awareness of the transcendental effects that municipal export or import
2|Page

taxes or licenses will have on the national economy, due to Section 2 of Republic Act 2264, We stated that there
was no other alternative until Congress acts to provide remedial measures to forestall any unfavorable results.

The point remains to be determined, however, whether constitutional limits on the power of taxation,
specifically the equal protection clause and rule of uniformity of taxation, were infringed.

The Constitution in the bill of rights provides: ". . . nor shall any person be denied the equal protection of
the laws." (Sec. 1 [1], Art. III) In Felwa vs. Salas, 5 We ruled that the equal protection clause applies only to
persons or things identically situated and does not bar a reasonable classification of the subject of legislation, and
a classification is reasonable where (1) it is based on substantial distinctions which make real differences; (2)
these are germane to the purpose of the law; (3) the classification applies not only to present conditions but also to
future conditions which are substantially identical to those of the present; (4) the classification applies only to
those who belong to the same class.

A perusal of the requisites instantly shows that the questioned ordinance does not meet them, for it taxes
only centrifugal sugar produced and exported by the Ormoc Sugar Company, Inc. and none other. At the time of
the taxing ordinance's enactment, Ormoc Sugar Company, Inc., it is true, was the only sugar central in the city of
Ormoc. Still, the classification, to be reasonable, should be in terms applicable to future conditions as well. The
taxing ordinance should not be singular and exclusive as to exclude any subsequently established sugar central, of
the same class as plaintiff, for the coverage of the tax. As it is now, even if later a similar company is set up, it
cannot be subject to the tax because the ordinance expressly points only to Ormoc City Sugar Company, Inc. as
the entity to be levied upon.

Appellant, however, is not entitled to interest; on the refund because the taxes were not arbitrarily collected
(Collector of Internal Revenue v. Binalbagan). 6 At the time of collection, the ordinance provided a sufficient basis
to preclude arbitrariness, the same being then presumed constitutional until declared otherwise.

WHEREFORE, the decision appealed from is hereby reversed, the challenged ordinance is declared
unconstitutional and the defendants-appellees are hereby ordered to refund the P12,087.50 plaintiff-appellant paid
under protest. No costs. So ordered.

[G.R. No. 127410. January 20, 1999]

CONRADO L. TIU, JUAN T. MONTELIBANO JR. and ISAGANI M. JUNGCO, petitioners, vs. COURT
OF APPEALS, HON. TEOFISTO T. GUINGONA JR., BASES CONVERSION AND DEVELOPMENT
AUTHORITY, SUBIC BAY METROPOLITAN AUTHORITY, BUREAU OF INTERNAL REVENUE,
CITY TREASURER OF OLONGAPO and MUNICIPAL TREASURER OF SUBIC,
ZAMBALES, respondents.

The constitutional right to equal protection of the law is not violated by an executive order, issued pursuant
to law, granting tax and duty incentives only to businesses and residents within the secured area of the Subic
Special Economic Zone and denying them to those who live within the Zone but outside such fenced-in
territory. The Constitution does not require absolute equality among residents. It is enough that all persons under
like circumstances or conditions are given the same privileges and required to follow the same obligations. In
short, a classification based on valid and reasonable standards does not violate the equal protection clause.

The Case

Before us is a petition for review under Rule 45 of the Rules of Court, seeking the reversal of the Court of
Appeals Decision[1] promulgated on August 29, 1996, and Resolution[2] dated November 13, 1996, in CA-GR SP
No. 37788.[3] The challenged Decision upheld the constitutionality and validity of Executive Order No. 97-A (EO
97-A), according to which the grant and enjoyment of the tax and duty incentives authorized under Republic Act
No. 7227 (RA 7227) were limited to the business enterprises and residents within the fenced-in area of the Subic
Special Economic Zone (SSEZ).
3|Page

The assailed Resolution denied the petitioners motion for reconsideration.

The Facts

On March 13, 1992, Congress, with the approval of the President, passed into law RA 7227 entitled An Act
Accelerating the Conversion of Military Reservations Into Other Productive Uses, Creating the Bases Conversion
and Development Authority for this Purpose, Providing Funds Therefor and for Other Purposes. Section 12
thereof created the Subic Special Economic Zone and granted thereto special privileges, as follows:

SEC. 12. Subic Special Economic Zone. -- Subject to the concurrence by resolution of the sangguniang
panlungsod of the City of Olongapo and the sangguniang bayan of the Municipalities of Subic, Morong and
Hermosa, there is hereby created a Special Economic and Free-port Zone consisting of the City of Olongapo and
the Municipality of Subic, Province of Zambales, the lands occupied by the Subic Naval Base and its contiguous
extensions as embraced, covered, and defined by the 1947 Military Bases Agreement between the Philippines and
the United States of America as amended, and within the territorial jurisdiction of the Municipalities of Morong
and Hermosa, Province of Bataan, hereinafter referred to as the Subic Special Economic Zone whose metes and
bounds shall be delineated in a proclamation to be issued by the President of the Philippines. Within thirty (30)
days after the approval of this Act, each local government unit shall submit its resolution of concurrence to join
the Subic Special Economic Zone to the Office of the President. Thereafter, the President of the Philippines shall
issue a proclamation defining the metes and bounds of the zone as provided herein.

The abovementioned zone shall be subject to the following policies:

(a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent
provisions of the Local Government Code, the Subic Special Economic Zone shall be developed into a self-
sustaining, industrial, commercial, financial and investment center to generate employment opportunities in and
around the zone and to attract and promote productive foreign investments;

(b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory
ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic
Zone, as well as provide incentives such as tax and duty-free importations of raw materials, capital and
equipment. However, exportation or removal of goods from the territory of the Subic Special Economic Zone to
the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff
Code and other relevant tax laws of the Philippines;

(c) The provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local
and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent
(3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall
be remitted to the National Government, one percent (1%) each to the local government units affected by the
declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby
established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises
within the Subic Special Economic Zone to be utilized for the development of municipalities outside the City of
Olongapo and the Municipality of Subic, and other municipalities contiguous to the base areas.

In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special
Economic Zone, the same shall be resolved in favor of the latter;

(d) No exchange control policy shall be applied and free markets for foreign exchange, gold, securities
and future shall be allowed and maintained in the Subic Special Economic Zone;

(e) The Central Bank, through the Monetary Board, shall supervise and regulate the operations of banks
and other financial institutions within the Subic Special Economic Zone;
4|Page

(f) Banking and finance shall be liberalized with the establishment of foreign currency depository units of
local commercial banks and offshore banking units of foreign banks with minimum Central Bank regulation;

(g) Any investor within the Subic Special Economic Zone whose continuing investment shall not be less
than two hundred fifty thousand dollars ($250,000), his/her spouse and dependent children under twenty-one (21)
years of age, shall be granted permanent resident status within the Subic Special Economic Zone. They shall have
the freedom of ingress and egress to and from the Subic Special Economic Zone without any need of special
authorization from the Bureau of Immigration and Deportation. The Subic Bay Metropolitan Authority referred to
in Section 13 of this Act may also issue working visas renewable every two (2) years to foreign executives and
other aliens possessing highly technical skills which no Filipino within the Subic Special Economic Zone
possesses, as certified by the Department of Labor and Employment. The names of aliens granted permanent
residence status and working visas by the Subic Bay Metropolitan Authority shall be reported to the Bureau of
Immigration and Deportation within thirty (30) days after issuance thereof;

(h) The defense of the zone and the security of its perimeters shall be the responsibility of the National
Government in coordination with the Subic Bay Metropolitan Authority. The Subic Bay Metropolitan Authority
shall provide and establish its own security and fire-fighting forces; and

(i) Except as herein provided, the local government units comprising the Subic Special Economic Zone shall
retain their basic autonomy and identity. The cities shall be governed by their respective charters and the
municipalities shall operate and function in accordance with Republic Act No. 7160, otherwise known as the
Local Government Code of 1991.

On June 10, 1993, then President Fidel V. Ramos issued Executive Order No. 97 (EO 97), clarifying the
application of the tax and duty incentives thus:

Section 1. On Import Taxes and Duties -- Tax and duty-free importations shall apply only to raw materials, capital
goods and equipment brought in by business enterprises into the SSEZ. Except for these items, importations of
other goods into the SSEZ, whether by business enterprises or resident individuals, are subject to taxes and duties
under relevant Philippine laws.

The exportation or removal of tax and duty-free goods from the territory of the SSEZ to other parts of the
Philippine territory shall be subject to duties and taxes under relevant Philippine laws.

Section 2. On All Other Taxes. -- In lieu of all local and national taxes (except import taxes and duties), all
business enterprises in the SSEZ shall be required to pay the tax specified in Section 12(c) of R.A. No. 7227.

Nine days after, on June 19, 1993, the President issued Executive Order No. 97-A (EO 97-A), specifying
the area within which the tax-and-duty-free privilege was operative, viz.:

Section 1.1. The Secured Area consisting of the presently fenced-in former Subic Naval Base shall be the only
completely tax and duty-free area in the SSEFPZ [Subic Special Economic and Free Port Zone]. Business
enterprises and individuals (Filipinos and foreigners) residing within the Secured Area are free to import raw
materials, capital goods, equipment, and consumer items tax and duty-free. Consumption items, however, must be
consumed within the Secured Area. Removal of raw materials, capital goods, equipment and consumer items out
of the Secured Area for sale to non-SSEFPZ registered enterprises shall be subject to the usual taxes and duties,
except as may be provided herein

On October 26, 1994, the petitioners challenged before this Court the constitutionality of EO 97-A for
allegedly being violative of their right to equal protection of the laws. In a Resolution dated June 27, 1995, this
Court referred the matter to the Court of Appeals, pursuant to Revised Administrative Circular No. 1-95.

Incidentally, on February 1, 1995, Proclamation No. 532 was issued by President Ramos. It delineated the
exact metes and bounds of the Subic Special Economic and Free Port Zone, pursuant to Section 12 of RA 7227.
5|Page

Ruling of the Court of Appeals

Respondent Court held that there is no substantial difference between the provisions of EO 97-A and Section
12 of RA 7227. In both, the Secured Area is precise and well-defined as xxx the lands occupied by the Subic
Naval Base and its contiguous extensions as embraced, covered and defined by the 1947 Military Bases
Agreement between the Philippines and the United States of America, as amended, xxx. The appellate court
concluded that such being the case, petitioners could not claim that EO 97-A is unconstitutional, while at the same
time maintaining the validity of RA 7227.

The court a quo also explained that the intention of Congress was to confine the coverage of the SSEZ to the
secured area and not to include the entire Olongapo City and other areas mentioned in Section 12 of the law. It
relied on the following deliberations in the Senate:

Senator Paterno. Thank you, Mr. President. My first question is the extent of the economic zone. Since this
will be a free port, in effect, I believe that it is important to delineate or make sure that the delineation will be
quite precise[.M]y question is: Is it the intention that the entire of Olongapo City, the Municipality of Subic and
the Municipality of Dinalupihan will be covered by the special economic zone or only portions thereof?

Senator Shahani. Only portions, Mr. President. In other words, where the actual operations of the free port
will take place.

Senator Paterno. I see. So, we should say, COVERING THE DESIGNATED PORTIONS OR CERTAIN
PORTIONS OF OLONGAPO CITY, SUBIC AND DINALUPIHAN to make it clear that it is not supposed to
cover the entire area of all of these territories.

Senator Shahani. So, the Gentleman is proposing that the words CERTAIN AREAS ...

The President. The Chair would want to invite the attention of the Sponsor and Senator Paterno to letter C,
which says: THE PRESIDENT OF THE PHILIPPINES IS HEREBY AUTHORIZED TO PROCLAIM,
DELINEATE AND SPECIFY THE METES AND BOUNDS OF OTHER SPECIAL ECONOMIC ZONES
WHICH MAY BE CREATED IN THE CLARK MILITARY RESERVATIONS AND ITS EXTENSIONS.

Probably, this provision can be expanded since, apparently, the intention is that what is referred to in
Olongapo as Metro Olongapo is not by itself ipso jure already a special economic zone.

Senator Paterno. That is correct.

The President. Someone, some authority must declare which portions of the same shall be the economic
zone. Is it the intention of the author that it is the President of the Philippines who will make such delineation?

Senator Shahani. Yes, Mr. President.

The Court of Appeals further justified the limited application of the tax incentives as being within the
prerogative of the legislature, pursuant to its avowed purpose [of serving] some public benefit or interest. It ruled
that EO 97-A merely implements the legislative purpose of [RA 7227].

Disagreeing, petitioners now seek before us a review of the aforecited Court of Appeals Decision and
Resolution.

The Issue
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Petitioners submit the following issue for the resolution of the Court:

[W]hether or not Executive Order No. 97-A violates the equal protection clause of the Constitution. Specifically
the issue is whether the provisions of Executive Order No. 97-A confining the application of R.A. 7227 within the
secured area and excluding the residents of the zone outside of the secured area is discriminatory or not.[4]

The Courts Ruling

The petition[5] is bereft of merit.

Main Issue: The Constitutionality of EO 97-A

Citing Section 12 of RA 7227, petitioners contend that the SSEZ encompasses (1) the City of Olongapo, (2)
the Municipality of Subic in Zambales, and (3) the area formerly occupied by the Subic Naval Base.However, EO
97-A, according to them, narrowed down the area within which the special privileges granted to the entire zone
would apply to the present fenced-in former Subic Naval Base only. It has thereby excluded the residents of the
first two components of the zone from enjoying the benefits granted by the law. It has effectively discriminated
against them, without reasonable or valid standards, in contravention of the equal protection guarantee.

On the other hand, the solicitor general defends, on behalf of respondents, the validity of EO 97-A, arguing
that Section 12 of RA 7227 clearly vests in the President the authority to delineate the metes and bounds of the
SSEZ. He adds that the issuance fully complies with the requirements of a valid classification.

We rule in favor of the constitutionality and validity of the assailed EO. Said Order is not violative of the
equal protection clause; neither is it discriminatory. Rather, we find real and substantive distinctions between the
circumstances obtaining inside and those outside the Subic Naval Base, thereby justifying a valid and reasonable
classification.

The fundamental right of equal protection of the laws is not absolute, but is subject to reasonable
classification. If the groupings are characterized by substantial distinctions that make real differences, one class
may be treated and regulated differently from another.[6] The classification must also be germane to the purpose of
the law and must apply to all those belonging to the same class. [7] Explaining the nature of the equal protection
guarantee, the Court in Ichong v. Hernandez[8] said:

The equal protection of the law clause is against undue favor and individual or class privilege, as well as
hostile discrimination or the oppression of inequality. It is not intended to prohibit legislation which is limited
either [by] the object to which it is directed or by [the] territory within which it is to operate. It does not demand
absolute equality among residents; it merely requires that all persons shall be treated alike, under like
circumstances and conditions both as to privileges conferred and liabilities enforced. The equal protection clause
is not infringed by legislation which applies only to those persons falling within a specified class, if it applies
alike to all persons within such class, and reasonable grounds exist for making a distinction between those who
fall within such class and those who do not.

Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane to the purpose of the law,
(3) not be limited to existing conditions only, and (4) apply equally to all members of the same class. [9]

We first determine the purpose of the law. From the very title itself, it is clear that RA 7227 aims primarily
to accelerate the conversion of military reservations into productive uses. Obviously, the lands covered under the
1947 Military Bases Agreement are its object. Thus, the law avows this policy:

SEC. 2. Declaration of Policies. -- It is hereby declared the policy of the Government to accelerate the sound and
balanced conversion into alternative productive uses of the Clark and Subic military reservations and their
extensions (John Hay Station, Wallace Air Station, ODonnell Transmitter Station, San Miguel Naval
Communications Station and Capas Relay Station), to raise funds by the sale of portions of Metro Manila military
7|Page

camps, and to apply said funds as provided herein for the development and conversion to productive civilian use
of the lands covered under the 1947 Military Bases Agreement between the Philippines and the United States of
America, as amended.

To undertake the above objectives, the same law created the Bases Conversion and Development Authority,
some of whose relevant defined purposes are:

(b) To adopt, prepare and implement a comprehensive and detailed development plan embodying a list of projects
including but not limited to those provided in the Legislative-Executive Bases Council (LEBC) framework plan
for the sound and balanced conversion of the Clark and Subic military reservations and their extensions consistent
with ecological and environmental standards, into other productive uses to promote the economic and social
development of Central Luzon in particular and the country in general;

(c) To encourage the active participation of the private sector in transforming the Clark and Subic military
reservations and their extensions into other productive uses;

Further, in creating the SSEZ, the law declared it a policy to develop the zone into a self-sustaining, industrial,
commercial, financial and investment center.[10]

From the above provisions of the law, it can easily be deduced that the real concern of RA 7227 is to convert
the lands formerly occupied by the US military bases into economic or industrial areas. In furtherance of such
objective, Congress deemed it necessary to extend economic incentives to attract and encourage investors, both
local and foreign. Among such enticements are:[11] (1) a separate customs territory within the zone, (2) tax-and-
duty-free importations, (3) restructured income tax rates on business enterprises within the zone, (4) no foreign
exchange control, (5) liberalized regulations on banking and finance, and (6) the grant of resident status to certain
investors and of working visas to certain foreign executives and workers.

We believe it was reasonable for the President to have delimited the application of some incentives to the
confines of the former Subic military base. It is this specific area which the government intends to transform and
develop from its status quo ante as an abandoned naval facility into a self-sustaining industrial and commercial
zone, particularly for big foreign and local investors to use as operational bases for their businesses and
industries. Why the seeming bias for big investors? Undeniably, they are the ones who can pour huge investments
to spur economic growth in the country and to generate employment opportunities for the Filipinos, the ultimate
goals of the government for such conversion. The classification is, therefore, germane to the purposes of the
law. And as the legal maxim goes, The intent of a statute is the law.[12]

Certainly, there are substantial differences between the big investors who are being lured to establish and
operate their industries in the so-called secured area and the present business operators outside the area. On the
one hand, we are talking of billion-peso investments and thousands of new jobs. On the other hand, definitely
none of such magnitude. In the first, the economic impact will be national; in the second, only local. Even more
important, at this time the business activities outside the secured area are not likely to have any impact in
achieving the purpose of the law, which is to turn the former military base to productive use for the benefit of the
Philippine economy. There is, then, hardly any reasonable basis to extend to them the benefits and incentives
accorded in RA 7227. Additionally, as the Court of Appeals pointed out, it will be easier to manage and monitor
the activities within the secured area, which is already fenced off, to prevent fraudulent importation of
merchandise or smuggling.

It is well-settled that the equal-protection guarantee does not require territorial uniformity of laws.[13] As long
as there are actual and material differences between territories, there is no violation of the constitutional
clause. And of course, anyone, including the petitioners, possessing the requisite investment capital can always
avail of the same benefits by channeling his or her resources or business operations into the fenced-off free port
zone.
8|Page

We believe that the classification set forth by the executive issuance does not apply merely to existing
conditions. As laid down in RA 7227, the objective is to establish a self-sustaining, industrial, commercial,
financial and investment center in the area. There will, therefore, be a long-term difference between such
investment center and the areas outside it.

Lastly, the classification applies equally to all the resident individuals and businesses within the secured
area. The residents, being in like circumstances or contributing directly to the achievement of the end purpose of
the law, are not categorized further. Instead, they are all similarly treated, both in privileges granted and in
obligations required.

All told, the Court holds that no undue favor or privilege was extended. The classification occasioned by EO
97-A was not unreasonable, capricious or unfounded. To repeat, it was based, rather, on fair and substantive
considerations that were germane to the legislative purpose.

WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision and Resolution are
hereby AFFIRMED. Costs against petitioners.SO ORDERED.

JOSE V. HERRERA and ESTER OCHANGCO HERRERA, petitioners, vs.

THE QUEZON CITY BOARD OF ASSESSMENT APPEALS, respondent.

Appeal, by petitioners Jose V. Herrera and Ester Ochangco Herrera, from a decision of the Court of Tax
Appeals affirming that of the Board of Assessment Appeals of Quezon City, which held that certain properties of
said petitioners are subject to assessment for purposes of real estate tax.

The facts and the issue are set forth in the aforementioned decision of the Court of Tax Appeals, from which we
quote:

On July 24, 1952, the Director of the Bureau of Hospitals authorized the petitioners to establish and
operate the "St. Catherine's Hospital", located at 58 D. Tuazon, Sta. Mesa Heights, Quezon City (Exhibit "F-1",
p. 7, BIR rec.). On or about January 3, 1953, the petitioners sent a letter to the Quezon City Assessor requesting
exemption from payment of real estate tax on the lot, building and other improvements comprising the hospital
stating that the same was established for charitable and humanitarian purposes and not for commercial gain
(Exhibit "F-2", pp. 8-9, BIR rec.). After an inspection of the premises in question and after a careful study of the
case, the exemption from real property taxes was granted effective the years 1953, 1954 and 1955.

Subsequently, however, in a letter dated August 10, 1955 (Exhibit "E", p. 65, CTA rec.) the Quezon City
Assessor notified the petitioners that the aforesaid properties were re-classified from exempt to "taxable" and
thus assessed for real property taxes effective 1956, enclosing therewith copies of Tax Declarations Nos. 19321
to 19322 covering the said properties. The petitioners appealed the assessment to the Quezon City Board of
Assessment Appeals, which, in a decision dated March 31, 1956 and received by the former on May 17, 1956,
affirmed the decision of the City Assessor. A motion for reconsideration thereof was denied on March 8, 1957.
From this decision, the petitioners instituted the instant appeal.1awphîl.nèt

The building involved in this case is principally used as a hospital. It is mainly a surgical and orthopedic
hospital with emphasis on obstetrical cases, the latter constituting 90% of the total number of cases registered
therein. The hospital has thirty-two (32) beds, of which twenty (20) are for charity-patients and twelve (12) for
pay-patients. From the evidence presented by petitioners, it is made to appear that there are two kinds of charity
patients — (a) those who come for consultation only ("out-charity patients"); and (b) those who remain in the
hospital for treatment ("lying-in-patients"). The out-charity patients are given free consultation and prescription,
although sometimes they are furnished with free medicines which are not costly like aspirin, sulfatiazole, etc.
9|Page

The charity lying-in-patients are given free medical service and medicine although the food served to the pay-
patients is very much better than that given to the former. Although no condition is imposed by the hospital on
the admission of charity lying-in-patients, they however, usually give donations to the hospital. On the other
hand, the pay-patients are required to pay for hospital services ranging from the minimum charge of P5.00 to
the maximum of P40.00 for each day of stay in the hospital. The income realized from pay-patients is spent for
the improvement of the charity wards. The hospital personnel is composed of three nurses, two graduate
midwives, a resident physician receiving a salary of P170.00 a month and the petitioner, Dr. Ester Ochangco
Herrera, as directress. As such directress, the latter does not receive any salary.

Petitioners also operate within the premises of the hospital the "St. Catherine's School of
Midwifery" which was granted government recognition by the Secretary of Education on February 1,
1955 (Exhibit "F-3", p. 10, BIR rec.) This school has an enrollment of about two hundred students. The
students are charged a matriculation fee of P300.00 for 1-½ years, plus P50.00 a month for board and
lodging, which includes transportation to the St. Mary's Hospital. The students practice in the St.
Catherine's Hospital, as well as in the St. Mary's Hospital, which is also owned by the petitioners. A
separate set of accounting books is maintained by the school for midwifery distinct from that kept by the
hospital. The petitioners alleged that the accounts of the school are not included in Exhibits "A", "A-1",
"A-2", "B", "B-1", "B-2", "C", "C-1" and "C-2" which relate to the hospital only. However, the petitioners
have refused to submit a separate statement of accounts of the school. A brief tabulation indicating the
amount of income of the hospital for the years 1954, 1955 and 1956, and its operational expenses, is as
follows:

1954

Income Expenses Deficit

P 5,280.04 P1,303.80
P10,803.26
Charity Ward
P14,779.50
Pay Ward

P16,083.30

(Exhibits "A", "A-1" and "A-2")

1955

Income Expenses Deficit

P 6,859.32
14,038.92
Charity Ward
P17,433.30 P3,464.94
Pay Ward

P20,898.24

(Exhibits "B", "B-1" and "B-2")

1956
10 | P a g e

Income Expenses Deficit

P 5,559.89 P 341.53
16,249.04
Charity Ward
P21,467.40
Pay Ward

P21,809.93

(Exhibits "C", "C-1" and "C-2")

Aside from the St. Catherine and St. Mary hospitals, the petitioners declared that they also own lands and coconut
plantations in Quezon Province, and other real estate in the City of Manila consisting of apartments for rent. The
petitioner, Jose V. Herrera, is an architect, actively engaged in the practice of his profession, with office at Tuason
Building, Escolta, Manila. He was formerly Chairman, Board of Examiners for Architects and Chairman, Board
of Architects connected with the United Nations. He was also connected with the Allied Technologists which
constructed the Veterans Hospital in Quezon City.

The only issue raised, is whether or not the lot, building and other improvements occupied by the St. Catherine
Hospital are exempt from the real property tax. The resolution of this question boils down to the corollary issue as
to whether or not the said properties are used exclusively for charitable or educational purposes. (Petitioners'
brief, pp. 24-29).

The Court of Tax Appeals decided the issue in the negative, upon the ground that the St. Catherine's Hospital "has
a pay ward for ... pay-patients, who are charged for the use of the private rooms, operating room, laboratory room,
delivery room, etc., like other hospitals operated for profit" and that "petitioners and their family occupy a portion
of the building for their residence." With respect to petitioners' claim for exemption based upon the operation of
the school of midwifery, the Court conceded that "the proposition might be proper if the property used for the
school of midwifery were separate and distinct from the hospital." It added, however, that, "in the instant case, the
portions of the building used for classrooms of the school of midwifery have not been shown to be exclusively for
school purposes"; that said portions "rather ... have a dual use, i.e., for classroom and for hospital use, the latter
not being a purpose that renders the property tax exempt;" that part of the building and lot in question "is used as a
hospital, part as residence of the petitioners, part as garage, part as dormitory and part as school"; and that "the
portion dedicated to educational and charitable purposes can not be identified from those destined to other uses;
and the building is itself an indivisible unit of property."

It should be noted, however, that, according to the very statement of facts made in the decision appealed
from, of the thirty-two (32) beds in the hospital, twenty (20) are for charity-patients; that "the income realized
from pay-patients is spent for improvement of the charity wards;" and that "petitioners, Dr. Ester Ochangco
Herrera, as directress" of said hospital, "does not receive any salary," although its resident physician gets a
monthly salary of P170.00. It is well settled, in this connection, that the admission of pay-patients does not detract
from the charitable character of a hospital, if all its funds are devoted "exclusively to the maintenance of the
institution" as a "public charity" (84 C.J.S., 617; see, also, 51 Am. Jur. 607; Cooley on Taxation, Vol. 2, p. 1562;
144 A.L.R., 1489-1492). "In other words, where rendering charity is its primary object, and the funds derived
from payments made by patients able to pay are devoted to the benevolent purposes of the institution, the mere
fact that a profit has been made will not deprive the hospital of its benevolent character" (Prairie Du Chien
Sanitarium Co. vs. City of Prairie Du Chien, 242 Wis. 262, 7 NW [2d] 832, 144 A.L.R. 1480).

Thus, we have held that the U.S.T. Hospital was not established for profit-making purposes, although it had 140
paying beds maintained only to partly finance the expenses of the free wards, containing 203 beds for charity
patients (U.S.T. Hospital Employees Association vs. Sto. Tomas University Hospital, L-6988, May 24, 1954), that
11 | P a g e

St. Paul's Hospital of Iloilo, a corporation organized for "charitable educational and religious purposes" can not be
considered as engaged in business merely because its pharmacy department charges paying patients the cost of
their medicine, plus 10% thereof, to partly offset the cost of medicines supplied free of charge to charity patients
(Collector of Internal Revenue vs. St. Paul's Hospital of Iloilo, L-12127, May 25, 1959), and that the amendment
of the original articles of incorporation of the University of Visayas to convert it from a non-stock to a stock
corporation and the increase of its assets from P9,000 to P50,000, distributed among the members of the original
non-stock corporation in terms of shares of stock, as well as the subsequent move of its board of trustees to double
the stock dividends of the corporation, in view of a gain of P200,000.00 in property, besides good-will, which was
not carried out, does not justify the inference that the corporation has become one for business and profit, none of
its profits having inured to the benefit of any stockholder or individual (Collector of Internal Revenue vs.
University of Visayas, L-13554, February 28, 1961).

Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is
"not limited to property actually indispensable" therefor (Cooley on Taxation, Vol. 2, p. 1430), but extends to
facilities which are "incidental to and reasonably necessary for" the accomplishment of said purposes, such as, in
the case of hospitals, "a school for training nurses, a nurses' home, property use to provide housing facilities for
interns, resident doctors, superintendents, and other members of the hospital staff, and recreational facilities for
student nurses, interns and residents" (84 C.J.S., 621), such as "athletic fields," including "a farm used for the
inmates of the institution" (Cooley on Taxation, Vol. 2, p. 1430).

Within the purview of the Constitutional exemption from taxation, the St. Catherine's Hospital is,
therefore, a charitable institution, and the fact that it admits pay-patients does not bar it from claiming that it is
devoted exclusively to benevolent purposes, it being admitted that the income derived from pay-patients is
devoted to the improvement of the charity wards, which represent almost two-thirds (2/3) of the bed capacity of
the hospital, aside from "out-charity patients" who come only for consultation.

Again, the existence of "St. Catherine's School of Midwifery", with an enrollment of about 200 students,
who practice partly in St. Catherine's Hospital and partly in St. Mary's Hospital, which, likewise, belongs to
petitioners herein, does not, and cannot, affect the exemption to which St. Catherine's Hospital is entitled under
our fundamental law. On the contrary, it furnishes another ground for exemption. Seemingly, the Court of Tax
Appeals was impressed by the fact that the size of said enrollment and the matriculation fee charged from the
students of midwifery, aside from the amount they paid for board and lodging, including transportation to St.
Mary's Hospital, warrants the belief that petitioners derive a substantial profit from the operation of the school
aforementioned. Such factor is, however, immaterial to the issue in the case at bar, for "all lands, building and
improvements used exclusively for religious, charitable or educational purposes shall be exempt from taxation,"
pursuant to the Constitution, regardless of whether or not material profits are derived from the operation of the
institutions in question. In other words, Congress may, if it deems fit to do so, impose taxes upon such "profits",
but said "lands, buildings and improvements" are beyond its taxing power.

Similarly, the garage in the building above referred to — which was obviously essential to the operation of the
school of midwifery, for the students therein enrolled practiced, not only in St. Catherine's Hospital, but, also, in
St. Mary's Hospital, and were entitled to transportation thereto — for Mrs. Herrera received no compensation as
directress of St. Catherine's Hospital — were incidental to the operation of the latter and of said school, and,
accordingly, did not affect the charitable character of said hospital and the educational nature of said school.

WHEREFORE, the decision of the Court of Tax Appeals, as well as that of the Assessment Board of Appeals of
Quezon City, are hereby reversed and set aside, and another one entered declaring that the lot, building and
improvements constituting the St. Catherine's Hospital are exempt from taxation under the provisions of the
Constitution, without special pronouncement as to costs. It is so ordered.

G.R. No. L-49336 August 31, 1981

12 | P a g e

THE PROVINCE OF ABRA, represented by LADISLAO ANCHETA, Provincial

Assessor, petitioner,vs.HONORABLE HAROLD M. HERNANDO, in his capacity as Presiding Judge of
Branch I, Court of First Instance Abra; THE ROMAN CATHOLIC BISHOP OF BANGUED, INC.,
represented by Bishop Odilo Etspueler and Reverend Felipe Flores, respondents.

On the face of this certiorari and mandamus petition filed by the Province of Abra, 1 it clearly appears that
the actuation of respondent Judge Harold M. Hernando of the Court of First Instance of Abra left much to be
desired. First, there was a denial of a motion to dismiss 2 an action for declaratory relief by private respondent
Roman Catholic Bishop of Bangued desirous of being exempted from a real estate tax followed by a summary
judgment 3 granting such exemption, without even hearing the side of petitioner. In the rather vigorous language
of the Acting Provincial Fiscal, as counsel for petitioner, respondent Judge “virtually ignored the pertinent
provisions of the Rules of Court; … wantonly violated the rights of petitioner to due process, by giving due
course to the petition of private respondent for declaratory relief, and thereafter without allowing petitioner to
answer and without any hearing, adjudged the case; all in total disregard of basic laws of procedure and basic
provisions of due process in the constitution, thereby indicating a failure to grasp and understand the law, which
goes into the competence of the Honorable Presiding Judge.” 4

It was the submission of counsel that an action for declaratory relief would be proper only before a breach or
violation of any statute, executive order or regulation. 5 Moreover, there being a tax assessment made by the
Provincial Assessor on the properties of respondent Roman Catholic Bishop, petitioner failed to exhaust the
administrative remedies available under Presidential Decree No. 464 before filing such court action. Further, it
was pointed out to respondent Judge that he failed to abide by the pertinent provision of such Presidential Decree
which provides as follows: “No court shall entertain any suit assailing the validity of a tax assessed under this
Code until the taxpayer, shall have paid, under protest, the tax assessed against him nor shall any court declare
any tax invalid by reason of irregularities or informalities in the proceedings of the officers charged with the
assessment or collection of taxes, or of failure to perform their duties within this time herein specified for their
performance unless such irregularities, informalities or failure shall have impaired the substantial rights of the
taxpayer; nor shall any court declare any portion of the tax assessed under the provisions of this Code invalid
except upon condition that the taxpayer shall pay the just amount of the tax, as determined by the court in the
pending proceeding.” 6

When asked to comment, respondent Judge began with the allegation that there “is no question that the real
properties sought to be taxed by the Province of Abra are properties of the respondent Roman Catholic Bishop of
Bangued, Inc.” 7 The very next sentence assumed the very point it asked when he categorically stated: “Likewise,
there is no dispute that the properties including their procedure are actually, directly and exclusively used by the
Roman Catholic Bishop of Bangued, Inc. for religious or charitable purposes.” 8 For him then: “The proper
remedy of the petitioner is appeal and not this special civil action.” 9 A more exhaustive comment was submitted
by private respondent Roman Catholic Bishop of Bangued, Inc. It was, however, unable to lessen the force of the
objection raised by petitioner Province of Abra, especially the due process aspect. it is to be admitted that his
opposition to the petition, pressed with vigor, ostensibly finds a semblance of support from the authorities cited. It
is thus impressed with a scholarly aspect. It suffers, however, from the grave infirmity of stating that only a pure
question of law is presented when a claim for exemption is made.

The petition must be granted.

1. Respondent Judge would not have erred so grievously had he merely compared the provisions of the present
Constitution with that appearing in the 1935 Charter on the tax exemption of “lands, buildings, and
improvements.” There is a marked difference. Under the 1935 Constitution: “Cemeteries, churches, and
parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used exclusively for
religious, charitable, or educational purposes shall be exempt from taxation.” 10 The present Constitution added
“charitable institutions, mosques, and non-profit cemeteries” and required that for the exemption of “:lands,
buildings, and improvements,” they should not only be “exclusively” but also “actually and “directly” used for
religious or charitable purposes. 11 The Constitution is worded differently. The change should not be ignored. It
13 | P a g e

must be duly taken into consideration. Reliance on past decisions would have sufficed were the words “actually”
as well as “directly” not added. There must be proof therefore of the actual and direct use of the lands, buildings,
and improvements for religious or charitable purposes to be exempt from taxation. According to Commissioner of
Internal Revenue v. Guerrero: 12 “From 1906, in Catholic Church v. Hastings to 1966, in Esso Standard Eastern,
Inc. v. Acting Commissioner of Customs, it has been the constant and uniform holding that exemption from
taxation is not favored and is never presumed, so that if granted it must be strictly construed against the taxpayer.
Affirmatively put, the law frowns on exemption from taxation, hence, an exempting provision should be
construed strictissimi juris.” 13 In Manila Electric Company v. Vera, 14 a 1975 decision, such principle was
reiterated, reference being made to Republic Flour Mills, Inc. v. Commissioner of Internal
Revenue; 15 Commissioner of Customs v. Philippine Acetylene Co. & CTA; 16 and Davao Light and Power Co.,
Inc. v. Commissioner of Customs. 17

2. Petitioner Province of Abra is therefore fully justified in invoking the protection of procedural due process. If
there is any case where proof is necessary to demonstrate that there is compliance with the constitutional
provision that allows an exemption, this is it. Instead, respondent Judge accepted at its face the allegation of
private respondent. All that was alleged in the petition for declaratory relief filed by private respondents, after
mentioning certain parcels of land owned by it, are that they are used “actually, directly and exclusively” as
sources of support of the parish priest and his helpers and also of private respondent Bishop. 18 In the motion to
dismiss filed on behalf of petitioner Province of Abra, the objection was based primarily on the lack of
jurisdiction, as the validity of a tax assessment may be questioned before the Local Board of Assessment Appeals
and not with a court. There was also mention of a lack of a cause of action, but only because, in its view,
declaratory relief is not proper, as there had been breach or violation of the right of government to assess and
collect taxes on such property. It clearly appears, therefore, that in failing to accord a hearing to petitioner
Province of Abra and deciding the case immediately in favor of private respondent, respondent Judge failed to
abide by the constitutional command of procedural due process.

WHEREFORE, the petition is GRANTED and the resolution of June 19, 1978 is SET ASIDE. Respondent
Judge, or who ever is acting on his behalf, is ordered to hear the case on the merit. No costs.

G.R. No. L-39086 June 15, 1988

ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner, vs.

HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M. CARIAGA, Provincial
Treasurer, Abra; GASPAR V. BOSQUE, Municipal Treasurer, Bangued, Abra; HEIRS OF PATERNO
MILLARE, respondents.

This is a petition for review on certiorari of the decision * of the defunct Court of First Instance of Abra,
Branch I, dated June 14, 1974, rendered in Civil Case No. 656, entitled "Abra Valley Junior College, Inc.,
represented by Pedro V. Borgonia, plaintiff vs. Armin M. Cariaga as Provincial Treasurer of Abra, Gaspar V.
Bosque as Municipal Treasurer of Bangued, Abra and Paterno Millare, defendants," the decretal portion of which
reads:

IN VIEW OF ALL THE FOREGOING, the Court hereby declares:

That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra, the Provincial Treasurer of
said province against the lot and building of the Abra Valley Junior College, Inc., represented by Director Pedro
Borgonia located at Bangued, Abra, is valid;

That since the school is not exempt from paying taxes, it should therefore pay all back taxes in the amount of
P5,140.31 and back taxes and penalties from the promulgation of this decision;

That the amount deposited by the plaintaff him the sum of P60,000.00 before the trial, be confiscated to apply
for the payment of the back taxes and for the redemption of the property in question, if the amount is less than
P6,000.00, the remainder must be returned to the Director of Pedro Borgonia, who represents the plaintiff
herein;
14 | P a g e

That the deposit of the Municipal Treasurer in the amount of P6,000.00 also before the trial must be returned to
said Municipal Treasurer of Bangued, Abra;

And finally the case is hereby ordered dismissed with costs against the plaintiff.SO ORDERED.
(Rollo, pp. 22-23)

Petitioner, an educational corporation and institution of higher learning duly incorporated with the Securities and
Exchange Commission in 1948, filed a complaint (Annex "1" of Answer by the respondents Heirs of Paterno
Millare; Rollo, pp. 95-97) on July 10, 1972 in the court a quo to annul and declare void the "Notice of Seizure'
and the "Notice of Sale" of its lot and building located at Bangued, Abra, for non-payment of real estate taxes and
penalties amounting to P5,140.31. Said "Notice of Seizure" of the college lot and building covered by Original
Certificate of Title No. Q-83 duly registered in the name of petitioner, plaintiff below, on July 6, 1972, by
respondents Municipal Treasurer and Provincial Treasurer, defendants below, was issued for the satisfaction of
the said taxes thereon. The "Notice of Sale" was caused to be served upon the petitioner by the respondent
treasurers on July 8, 1972 for the sale at public auction of said college lot and building, which sale was held on
the same date. Dr. Paterno Millare, then Municipal Mayor of Bangued, Abra, offered the highest bid of P6,000.00
which was duly accepted. The certificate of sale was correspondingly issued to him.

On August 10, 1972, the respondent Paterno Millare (now deceased) filed through counstel a motion to dismiss
the complaint.

On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer, through then Provincial Fiscal
Loreto C. Roldan, filed their answer (Annex "2" of Answer by the respondents Heirs of Patemo Millare; Rollo,
pp. 98-100) to the complaint. This was followed by an amended answer (Annex "3," ibid, Rollo, pp. 101-103) on
August 31, 1972.

On September 1, 1972 the respondent Paterno Millare filed his answer (Annex "5," ibid; Rollo, pp. 106-108).

On October 12, 1972, with the aforesaid sale of the school premises at public auction, the respondent Judge, Hon.
Juan P. Aquino of the Court of First Instance of Abra, Branch I, ordered (Annex "6," ibid; Rollo, pp. 109-110) the
respondents provincial and municipal treasurers to deliver to the Clerk of Court the proceeds of the auction sale.
Hence, on December 14, 1972, petitioner, through Director Borgonia, deposited with the trial court the sum of
P6,000.00 evidenced by PNB Check No. 904369.

On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied by the trial court in its
questioned decision. Said Stipulations reads:

STIPULATION OF FACTS

COME NOW the parties, assisted by counsels, and to this Honorable Court respectfully enter into the following
agreed stipulation of facts:

1. That the personal circumstances of the parties as stated in paragraph 1 of the complaint is admitted; but the
particular person of Mr. Armin M. Cariaga is to be substituted, however, by anyone who is actually holding the
position of Provincial Treasurer of the Province of Abra;

2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and buildings thereon located in
Bangued, Abra under Original Certificate of Title No. 0-83;

3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued, Abra caused to be served upon the
Abra Valley Junior College, Inc. a Notice of Seizure on the property of said school under Original Certificate of
Title No. 0-83 for the satisfaction of real property taxes thereon, amounting to P5,140.31; the Notice of Seizure
being the one attached to the complaint as Exhibit A;

4. That on June 8, 1972 the above properties of the Abra Valley Junior College, Inc. was sold at public auction
for the satisfaction of the unpaid real property taxes thereon and the same was sold to defendant Paterno Millare
who offered the highest bid of P6,000.00 and a Certificate of Sale in his favor was issued by the defendant
Municipal Treasurer.
15 | P a g e

5. That all other matters not particularly and specially covered by this stipulation of facts will be the subject of
evidence by the parties.

WHEREFORE, it is respectfully prayed of the Honorable Court to consider and admit this stipulation of facts
on the point agreed upon by the parties.

Bangued, Abra, April 12, 1973.

Sgd. Agripino Brillantes -Typ AGRIPINO BRILLANTES -Attorney for Plaintiff

Sgd. Loreto Roldan - Typ LORETO ROLDAN - Provincial Fiscal -Counsel for Defendants
Provincial Treasurer of Abra and the Municipal ,Treasurer of Bangued, Abra

Sgd. Demetrio V. Pre - Typ. DEMETRIO V. PRE Attorney for Defendant

Paterno Millare (Rollo, pp. 17-18)

Aside from the Stipulation of Facts, the trial court among others, found the following: (a) that the school
is recognized by the government and is offering Primary, High School and College Courses, and has a school
population of more than one thousand students all in all; (b) that it is located right in the heart of the town of
Bangued, a few meters from the plaza and about 120 meters from the Court of First Instance building; (c) that the
elementary pupils are housed in a two-storey building across the street; (d) that the high school and college
students are housed in the main building; (e) that the Director with his family is in the second floor of the main
building; and (f) that the annual gross income of the school reaches more than one hundred thousand pesos.

From all the foregoing, the only issue left for the Court to determine and as agreed by the parties, is
whether or not the lot and building in question are used exclusively for educational purposes. (Rollo, p. 20)

The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon. Eustaquio Z. Montero,
filed a Memorandum for the Government on March 25, 1974, and a Supplemental Memorandum on May 7, 1974,
wherein they opined "that based on the evidence, the laws applicable, court decisions and jurisprudence, the
school building and school lot used for educational purposes of the Abra Valley College, Inc., are exempted from
the payment of taxes." (Annexes "B," "B-1" of Petition; Rollo, pp. 24-49; 44 and 49).

Nonetheless, the trial court disagreed because of the use of the second floor by the Director of petitioner
school for residential purposes. He thus ruled for the government and rendered the assailed decision.

After having been granted by the trial court ten (10) days from August 6, 1974 within which to perfect its
appeal (Per Order dated August 6, 1974; Annex "G" of Petition; Rollo, p. 57) petitioner instead availed of the
instant petition for review on certiorari with prayer for preliminary injunction before this Court, which petition
was filed on August 17, 1974 (Rollo, p.2).

In the resolution dated August 16, 1974, this Court resolved to give DUE COURSE to the petition (Rollo,
p. 58). Respondents were required to answer said petition (Rollo, p. 74).

Petitioner raised the following assignments of error:

I. THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF THE
COLLEGE LOT AND BUILDING USED FOR EDUCATIONAL PURPOSES OF THE PETITIONER.

II. THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE
PETITIONER ARE NOT USED EXCLUSIVELY FOR EDUCATIONAL PURPOSES MERELY BECAUSE
THE COLLEGE PRESIDENT RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.

III. THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF THE
PETITIONER ARE NOT EXEMPT FROM PROPERTY TAXES AND IN ORDERING PETITIONER TO PAY
P5,140.31 AS REALTY TAXES.
16 | P a g e

IV. THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00 DEPOSIT
MADE IN THE COURT BY PETITIONER AS PAYMENT OF THE P5,140.31 REALTY TAXES. (See Brief
for the Petitioner, pp. 1-2)

The main issue in this case is the proper interpretation of the phrase "used exclusively for educational purposes."

Petitioner contends that the primary use of the lot and building for educational purposes, and not the incidental
use thereof, determines and exemption from property taxes under Section 22 (3), Article VI of the 1935
Constitution. Hence, the seizure and sale of subject college lot and building, which are contrary thereto as well as
to the provision of Commonwealth Act No. 470, otherwise known as the Assessment Law, are without legal basis
and therefore void.

On the other hand, private respondents maintain that the college lot and building in question which were subjected
to seizure and sale to answer for the unpaid tax are used: (1) for the educational purposes of the college; (2) as the
permanent residence of the President and Director thereof, Mr. Pedro V. Borgonia, and his family including the
in-laws and grandchildren; and (3) for commercial purposes because the ground floor of the college building is
being used and rented by a commercial establishment, the Northern Marketing Corporation (See photograph
attached as Annex "8" (Comment; Rollo, p. 90]).

Due to its time frame, the constitutional provision which finds application in the case at bar is Section 22,
paragraph 3, Article VI, of the then 1935 Philippine Constitution, which expressly grants exemption from realty
taxes for "Cemeteries, churches and parsonages or convents appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious, charitable or educational purposes ...

Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by Republic Act No. 409,
otherwise known as the Assessment Law, provides:

The following are exempted from real property tax under the Assessment Law:

(c) churches and parsonages or convents appurtenant thereto, and all lands, buildings, and improvements used
exclusively for religious, charitable, scientific or educational purposes.

In this regard petitioner argues that the primary use of the school lot and building is the basic and controlling
guide, norm and standard to determine tax exemption, and not the mere incidental use thereof.

As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217 [1916], this Court ruled that
while it may be true that the YMCA keeps a lodging and a boarding house and maintains a restaurant for its
members, still these do not constitute business in the ordinary acceptance of the word, but an institution used
exclusively for religious, charitable and educational purposes, and as such, it is entitled to be exempted from
taxation.

In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352 [1972], this Court
included in the exemption a vegetable garden in an adjacent lot and another lot formerly used as a cemetery. It
was clarified that the term "used exclusively" considers incidental use also. Thus, the exemption from payment of
land tax in favor of the convent includes, not only the land actually occupied by the building but also the adjacent
garden devoted to the incidental use of the parish priest. The lot which is not used for commercial purposes but
serves solely as a sort of lodging place, also qualifies for exemption because this constitutes incidental use in
religious functions.

The phrase "exclusively used for educational purposes" was further clarified by this Court in the cases of Herrera
vs. Quezon City Board of assessment Appeals, 3 SCRA 186 [1961] and Commissioner of Internal Revenue vs.
Bishop of the Missionary District, 14 SCRA 991 [1965], thus —

Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is 'not
limited to property actually indispensable' therefor (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities
which are incidental to and reasonably necessary for the accomplishment of said purposes, such as in the case of
hospitals, "a school for training nurses, a nurses' home, property use to provide housing facilities for interns,
resident doctors, superintendents, and other members of the hospital staff, and recreational facilities for student
17 | P a g e

nurses, interns, and residents' (84 CJS 6621), such as "Athletic fields" including "a firm used for the inmates of
the institution. (Cooley on Taxation, Vol. 2, p. 1430).

The test of exemption from taxation is the use of the property for purposes mentioned in the Constitution
(Apostolic Prefect v. City Treasurer of Baguio, 71 Phil, 547 [1941]).

It must be stressed however, that while this Court allows a more liberal and non-restrictive interpretation of the
phrase "exclusively used for educational purposes" as provided for in Article VI, Section 22, paragraph 3 of the
1935 Philippine Constitution, reasonable emphasis has always been made that exemption extends to facilities
which are incidental to and reasonably necessary for the accomplishment of the main purposes. Otherwise stated,
the use of the school building or lot for commercial purposes is neither contemplated by law, nor by
jurisprudence. Thus, while the use of the second floor of the main building in the case at bar for residential
purposes of the Director and his family, may find justification under the concept of incidental use, which is
complimentary to the main or primary purpose—educational, the lease of the first floor thereof to the Northern
Marketing Corporation cannot by any stretch of the imagination be considered incidental to the purpose of
education.

It will be noted however that the aforementioned lease appears to have been raised for the first time in this Court.
That the matter was not taken up in the to court is really apparent in the decision of respondent Judge. No mention
thereof was made in the stipulation of facts, not even in the description of the school building by the trial judge,
both embodied in the decision nor as one of the issues to resolve in order to determine whether or not said
properly may be exempted from payment of real estate taxes (Rollo, pp. 17-23). On the other hand, it is
noteworthy that such fact was not disputed even after it was raised in this Court.

Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up for the first time on appeal.
Nonetheless, as an exception to the rule, this Court has held that although a factual issue is not squarely raised
below, still in the interest of substantial justice, this Court is not prevented from considering a pivotal factual
matter. "The Supreme Court is clothed with ample authority to review palpable errors not assigned as such if it
finds that their consideration is necessary in arriving at a just decision." (Perez vs. Court of Appeals, 127 SCRA
645 [1984]).

Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school building as well as
the lot where it is built, should be taxed, not because the second floor of the same is being used by the Director
and his family for residential purposes, but because the first floor thereof is being used for commercial purposes.
However, since only a portion is used for purposes of commerce, it is only fair that half of the assessed tax be
returned to the school involved.

PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, Branch I, is hereby AFFIRMED
subject to the modification that half of the assessed tax be returned to the petitioner.SO ORDERED.

LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and CONSTANTINO P. ROSAS,
in his capacity as City Assessor of Quezon City, respondents.

This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended, of the
Decision[1] dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which affirmed the decision of
the Central Board of Assessment Appeals holding that the lot owned by the petitioner and its hospital building
constructed thereon are subject to assessment for purposes of real property tax.

The Antecedents

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity established on January 16,
1981 by virtue of Presidential Decree No. 1823.[2] It is the registered owner of a parcel of land, particularly
described as Lot No. RP-3-B-3A-1-B-1, SWO-04-000495, located at Quezon Avenue corner Elliptical Road,
Central District, Quezon City. The lot has an area of 121,463 square meters and is covered by Transfer Certificate
of Title (TCT) No. 261320 of the Registry of Deeds of Quezon City. Erected in the middle of the aforesaid lot is a
hospital known as the LungCenter of the Philippines. A big space at the ground floor is being leased to private
parties, for canteen and small store spaces, and to medical or professional practitioners who use the same as their
18 | P a g e

private clinics for their patients whom they charge for their professional services. Almost one-half of the entire
area on the left side of the building along Quezon Avenue is vacant and idle, while a big portion on the right side,
at the corner of Quezon Avenue and Elliptical Road, is being leased for commercial purposes to a private
enterprise known as the Elliptical Orchids and Garden Center.

The petitioner accepts paying and non-paying patients. It also renders medical services to out-patients, both
paying and non-paying. Aside from its income from paying patients, the petitioner receives annual subsidies from
the government.

On June 7, 1993, both the land and the hospital building of the petitioner were assessed for real property
taxes in the amount of P4,554,860 by the City Assessor of Quezon City.[3] Accordingly, Tax Declaration Nos. C-
021-01226 (16-2518) and C-021-01231 (15-2518-A) were issued for the land and the hospital building,
respectively.[4] On August 25, 1993, the petitioner filed a Claim for Exemption[5] from real property taxes with the
City Assessor, predicated on its claim that it is a charitable institution. The petitioners request was denied, and a
petition was, thereafter, filed before the Local Board of Assessment Appeals of Quezon City (QC-LBAA, for
brevity) for the reversal of the resolution of the City Assessor. The petitioner alleged that under Section 28,
paragraph 3 of the 1987 Constitution, the property is exempt from real property taxes. It averred that a minimum
of 60% of its hospital beds are exclusively used for charity patients and that the major thrust of its hospital
operation is to serve charity patients. The petitioner contends that it is a charitable institution and, as such, is
exempt from real property taxes. The QC-LBAA rendered judgment dismissing the petition and holding the
petitioner liable for real property taxes.[6]

The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board of Assessment Appeals of
Quezon City (CBAA, for brevity)[7] which ruled that the petitioner was not a charitable institution and that its real
properties were not actually, directly and exclusively used for charitable purposes; hence, it was not entitled to
real property tax exemption under the constitution and the law. The petitioner sought relief from the Court of
Appeals, which rendered judgment affirming the decision of the CBAA.[8]

Undaunted, the petitioner filed its petition in this Court contending that:

A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO REALTY

TAX EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING AND
IMPROVEMENTS, SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND
EXCLUSIVELY DEVOTED FOR CHARITABLE PURPOSES.

B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER ITS
CHARTER, PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE EXTENDED UPON
PROPER APPLICATION.

The petitioner avers that it is a charitable institution within the context of Section 28(3), Article VI of the
1987 Constitution. It asserts that its character as a charitable institution is not altered by the fact that it admits
paying patients and renders medical services to them, leases portions of the land to private parties, and rents out
portions of the hospital to private medical practitioners from which it derives income to be used for operational
expenses. The petitioner points out that for the years 1995 to 1999, 100% of its out-patients were charity patients
and of the hospitals 282-bed capacity, 60% thereof, or 170 beds, is allotted to charity patients. It asserts that the
fact that it receives subsidies from the government attests to its character as a charitable institution. It contends
that the exclusivity required in the Constitution does not necessarily mean solely. Hence, even if a portion of its
real estate is leased out to private individuals from whom it derives income, it does not lose its character as a
charitable institution, and its exemption from the payment of real estate taxes on its real property. The petitioner
cited our ruling in Herrera v. QC-BAA[9] to bolster its pose. The petitioner further contends that even if P.D. No.
1823 does not exempt it from the payment of real estate taxes, it is not precluded from seeking tax exemption
under the 1987 Constitution.
19 | P a g e

In their comment on the petition, the respondents aver that the petitioner is not a charitable entity. The
petitioners real property is not exempt from the payment of real estate taxes under P.D. No. 1823 and even under
the 1987 Constitution because it failed to prove that it is a charitable institution and that the said property is
actually, directly and exclusively used for charitable purposes. The respondents noted that in a newspaper report,
it appears that graft charges were filed with the Sandiganbayan against the director of the petitioner, its
administrative officer, and Zenaida Rivera, the proprietress of the Elliptical Orchids and Garden Center, for
entering into a lease contract over 7,663.13 square meters of the property in 1990 for only P20,000 a month, when
the monthly rental should be P357,000 a month as determined by the Commission on Audit; and that instead of
complying with the directive of the COA for the cancellation of the contract for being grossly prejudicial to the
government, the petitioner renewed the same on March 13, 1995 for a monthly rental of only P24,000. They
assert that the petitioner uses the subsidies granted by the government for charity patients and uses the rest of its
income from the property for the benefit of paying patients, among other purposes. They aver that the petitioner
failed to adduce substantial evidence that 100% of its out-patients and 170 beds in the hospital are reserved for
indigent patients. The respondents further assert, thus:

13. That the claims/allegations of the Petitioner LCP do not speak well of its record of service. That before a
patient is admitted for treatment in the Center, first impression is that it is pay-patient and required to pay a certain
amount as deposit. That even if a patient is living below the poverty line, he is charged with high hospital
bills. And, without these bills being first settled, the poor patient cannot be allowed to leave the hospital or be
discharged without first paying the hospital bills or issue a promissory note guaranteed and indorsed by an
influential agency or person known only to the Center; that even the remains of deceased poor patients suffered
the same fate. Moreover, before a patient is admitted for treatment as free or charity patient, one must undergo a
series of interviews and must submit all the requirements needed by the Center, usually accompanied by
endorsement by an influential agency or person known only to the Center. These facts were heard and admitted by
the Petitioner LCP during the hearings before the Honorable QC-BAA and Honorable CBAA. These are the
reasons of indigent patients, instead of seeking treatment with the Center, they prefer to be treated at the Quezon
Institute. Can such practice by the Center be called charitable?[10]

The Issues

The issues for resolution are the following: (a) whether the petitioner is a charitable institution within the
context of Presidential Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic Act
No. 7160; and (b) whether the real properties of the petitioner are exempt from real property taxes.

The Courts Ruling

The petition is partially granted.

On the first issue, we hold that the petitioner is a charitable institution within the context of the 1973 and
1987 Constitutions. To determine whether an enterprise is a charitable institution/entity or not, the elements which
should be considered include the statute creating the enterprise, its corporate purposes, its constitution and by-
laws, the methods of administration, the nature of the actual work performed, the character of the services
rendered, the indefiniteness of the beneficiaries, and the use and occupation of the properties.[11]

In the legal sense, a charity may be fully defined as a gift, to be applied consistently with existing laws, for
the benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence of
education or religion, by assisting them to establish themselves in life or otherwise lessening the burden of
government.[12] It may be applied to almost anything that tend to promote the well-doing and well-being of social
man. It embraces the improvement and promotion of the happiness of man.[13] The word charitable is not
restricted to relief of the poor or sick.[14] The test of a charity and a charitable organization are in law the
same. The test whether an enterprise is charitable or not is whether it exists to carry out a purpose reorganized in
law as charitable or whether it is maintained for gain, profit, or private advantage.
20 | P a g e

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which, subject to the
provisions of the decree, is to be administered by the Office of the President of the Philippineswith the Ministry of
Health and the Ministry of Human Settlements. It was organized for the welfare and benefit of the Filipino people
principally to help combat the high incidence of lung and pulmonary diseases in the Philippines. The raison
detre for the creation of the petitioner is stated in the decree, viz:

Whereas, for decades, respiratory diseases have been a priority concern, having been the leading cause of illness
and death in the Philippines, comprising more than 45% of the total annual deaths from all causes, thus, exacting
a tremendous toll on human resources, which ailments are likely to increase and degenerate into serious lung
diseases on account of unabated pollution, industrialization and unchecked cigarette smoking in the country;

Whereas, the more common lung diseases are, to a great extent, preventable, and curable with early and adequate
medical care, immunization and through prompt and intensive prevention and health education programs;

Whereas, there is an urgent need to consolidate and reinforce existing programs, strategies and efforts at
preventing, treating and rehabilitating people affected by lung diseases, and to undertake research and training on
the cure and prevention of lung diseases, through a Lung Center which will house and nurture the above and
related activities and provide tertiary-level care for more difficult and problematical cases;

Whereas, to achieve this purpose, the Government intends to provide material and financial support towards the
establishment and maintenance of a Lung Center for the welfare and benefit of the Filipino people.[15]

The purposes for which the petitioner was created are spelled out in its Articles of Incorporation, thus:

SECOND: That the purposes for which such corporation is formed are as follows:

1. To construct, establish, equip, maintain, administer and conduct an integrated medical institution which shall
specialize in the treatment, care, rehabilitation and/or relief of lung and allied diseases in line with the concern of
the government to assist and provide material and financial support in the establishment and maintenance of a
lung center primarily to benefit the people of the Philippines and in pursuance of the policy of the State to secure
the well-being of the people by providing them specialized health and medical services and by minimizing the
incidence of lung diseases in the country and elsewhere.

2. To promote the noble undertaking of scientific research related to the prevention of lung or pulmonary ailments
and the care of lung patients, including the holding of a series of relevant congresses, conventions, seminars and
conferences;

3. To stimulate and, whenever possible, underwrite scientific researches on the biological, demographic, social,
economic, eugenic and physiological aspects of lung or pulmonary diseases and their control; and to collect and
publish the findings of such research for public consumption;

4. To facilitate the dissemination of ideas and public acceptance of information on lung consciousness or
awareness, and the development of fact-finding, information and reporting facilities for and in aid of the general
purposes or objects aforesaid, especially in human lung requirements, general health and physical fitness, and
other relevant or related fields;

5. To encourage the training of physicians, nurses, health officers, social workers and medical and technical
personnel in the practical and scientific implementation of services to lung patients;

6. To assist universities and research institutions in their studies about lung diseases, to encourage advanced
training in matters of the lung and related fields and to support educational programs of value to general health;
21 | P a g e

7. To encourage the formation of other organizations on the national, provincial and/or city and local levels; and
to coordinate their various efforts and activities for the purpose of achieving a more effective programmatic
approach on the common problems relative to the objectives enumerated herein;

8. To seek and obtain assistance in any form from both international and local foundations and organizations; and
to administer grants and funds that may be given to the organization;

9. To extend, whenever possible and expedient, medical services to the public and, in general, to promote and
protect the health of the masses of our people, which has long been recognized as an economic asset and a social
blessing;

10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and maladies of the people in any and
all walks of life, including those who are poor and needy, all without regard to or discrimination, because of race,
creed, color or political belief of the persons helped; and to enable them to obtain treatment when such disorders
occur;

11. To participate, as circumstances may warrant, in any activity designed and carried on to promote the general
health of the community;

12. To acquire and/or borrow funds and to own all funds or equipment, educational materials and supplies by
purchase, donation, or otherwise and to dispose of and distribute the same in such manner, and, on such basis as
the Center shall, from time to time, deem proper and best, under the particular circumstances, to serve its general
and non-profit purposes and objectives;

13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose of properties, whether real or
personal, for purposes herein mentioned; and

14. To do everything necessary, proper, advisable or convenient for the accomplishment of any of the powers
herein set forth and to do every other act and thing incidental thereto or connected therewith.[16]

Hence, the medical services of the petitioner are to be rendered to the public in general in any and all walks
of life including those who are poor and the needy without discrimination. After all, any person, the rich as well
as the poor, may fall sick or be injured or wounded and become a subject of charity.[17]

As a general principle, a charitable institution does not lose its character as such and its exemption from taxes
simply because it derives income from paying patients, whether out-patient, or confined in the hospital, or
receives subsidies from the government, so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money inures to the private benefit of the persons
managing or operating the institution.[18] In Congregational Sunday School, etc. v. Board of Review,[19] the State
Supreme Court of Illinois held, thus:

[A]n institution does not lose its charitable character, and consequent exemption from taxation, by reason of the
fact that those recipients of its benefits who are able to pay are required to do so, where no profit is made by the
institution and the amounts so received are applied in furthering its charitable purposes, and those benefits are
refused to none on account of inability to pay therefor. The fundamental ground upon which all exemptions in
favor of charitable institutions are based is the benefit conferred upon the public by them, and a consequent relief,
to some extent, of the burden upon the state to care for and advance the interests of its citizens. [20]

As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital Association of South
Dakota v. Baker:[21]

[T]he fact that paying patients are taken, the profits derived from attendance upon these patients being exclusively
devoted to the maintenance of the charity, seems rather to enhance the usefulness of the institution to the poor; for
it is a matter of common observation amongst those who have gone about at all amongst the suffering classes, that
22 | P a g e

the deserving poor can with difficulty be persuaded to enter an asylum of any kind confined to the reception of
objects of charity; and that their honest pride is much less wounded by being placed in an institution in which
paying patients are also received. The fact of receiving money from some of the patients does not, we think, at all
impair the character of the charity, so long as the money thus received is devoted altogether to the charitable
object which the institution is intended to further.[22]

The money received by the petitioner becomes a part of the trust fund and must be devoted to public trust
purposes and cannot be diverted to private profit or benefit.[23]

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does not lose its character
as a charitable institution simply because the gift or donation is in the form of subsidies granted by the
government. As held by the State Supreme Court of Utah in Yorgason v. County Board of Equalization of Salt
Lake County:[24]

Second, the government subsidy payments are provided to the project. Thus, those payments are like a gift or
donation of any other kind except they come from the government. In both Intermountain Health Care and the
present case, the crux is the presence or absence of material reciprocity. It is entirely irrelevant to this analysis that
the government, rather than a private benefactor, chose to make up the deficit resulting from the exchange
between St. Marks Tower and the tenants by making a contribution to the landlord, just as it would have been
irrelevant in Intermountain Health Care if the patients income supplements had come from private individuals
rather than the government.

Therefore, the fact that subsidization of part of the cost of furnishing such housing is by the government rather
than private charitable contributions does not dictate the denial of a charitable exemption if the facts otherwise
support such an exemption, as they do here.[25]

In this case, the petitioner adduced substantial evidence that it spent its income, including the subsidies from
the government for 1991 and 1992 for its patients and for the operation of the hospital. It even incurred a net loss
in 1991 and 1992 from its operations.

Even as we find that the petitioner is a charitable institution, we hold, anent the second issue, that those
portions of its real property that are leased to private entities are not exempt from real property taxes as these are
not actually, directly and exclusively used for charitable purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are construed strictissimi
juris against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the
exception. The effect of an exemption is equivalent to an appropriation. Hence, a claim for exemption from tax
payments must be clearly shown and based on language in the law too plain to be mistaken. [26] As held
in Salvation Army v. Hoehn:[27]

An intention on the part of the legislature to grant an exemption from the taxing power of the state will never be
implied from language which will admit of any other reasonable construction. Such an intention must be
expressed in clear and unmistakable terms, or must appear by necessary implication from the language used, for it
is a well settled principle that, when a special privilege or exemption is claimed under a statute, charter or act of
incorporation, it is to be construed strictly against the property owner and in favor of the public. This principle
applies with peculiar force to a claim of exemption from taxation . [28]

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically provides that the
petitioner shall enjoy the tax exemptions and privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation organized primarily
to help combat the high incidence of lung and pulmonary diseases in the Philippines, all donations, contributions,
endowments and equipment and supplies to be imported by authorized entities or persons and by the Board of
Trustees of the Lung Center of the Philippines, Inc., for the actual use and benefit of the Lung Center, shall be
23 | P a g e

exempt from income and gift taxes, the same further deductible in full for the purpose of determining the
maximum deductible amount under Section 30, paragraph (h), of the National Internal Revenue Code, as
amended.

The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and fees imposed by the
Government or any political subdivision or instrumentality thereof with respect to equipment purchases made by,
or for the Lung Center.[29]

It is plain as day that under the decree, the petitioner does not enjoy any property tax exemption privileges
for its real properties as well as the building constructed thereon. If the intentions were otherwise, the same should
have been among the enumeration of tax exempt privileges under Section 2:

It is a settled rule of statutory construction that the express mention of one person, thing, or consequence implies
the exclusion of all others. The rule is expressed in the familiar maxim, expressio unius est exclusio alterius.

The rule of expressio unius est exclusio alterius is formulated in a number of ways. One variation of the rule is
principle that what is expressed puts an end to that which is implied. Expressium facit cessare tacitum.Thus,
where a statute, by its terms, is expressly limited to certain matters, it may not, by interpretation or construction,
be extended to other matters.

...

The rule of expressio unius est exclusio alterius and its variations are canons of restrictive interpretation. They are
based on the rules of logic and the natural workings of the human mind. They are predicated upon ones own
voluntary act and not upon that of others. They proceed from the premise that the legislature would not have made
specified enumeration in a statute had the intention been not to restrict its meaning and confine its terms to those
expressly mentioned.[30]

The exemption must not be so enlarged by construction since the reasonable presumption is that the State has
granted in express terms all it intended to grant at all, and that unless the privilege is limited to the very terms of
the statute the favor would be intended beyond what was meant.[31]

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

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used for religious,
charitable or educational purposes shall be exempt from taxation.[32]

The tax exemption under this constitutional provision covers property taxes only.[33] As Chief Justice Hilario
G. Davide, Jr., then a member of the 1986 Constitutional Commission, explained: . . . what is exempted is not the
institution itself . . .; those exempted from real estate taxes are lands, buildings and improvements actually,
directly and exclusively used for religious, charitable or educational purposes.[34]

Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No. 7160
(otherwise known as the Local Government Code of 1991) as follows:

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

...

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious
cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious,
charitable or educational purposes.[35]
24 | P a g e

We note that under the 1935 Constitution, ... all lands, buildings, and improvements used exclusively for
charitable purposes shall be exempt from taxation.[36] However, under the 1973 and the present Constitutions, for
lands, buildings, and improvements of the charitable institution to be considered exempt, the same should not only
be exclusively used for charitable purposes; it is required that such property be used actually and directly for such
purposes.[37]

In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely on our ruling
in Herrera v. Quezon City Board of Assessment Appeals which was promulgated on September 30, 1961 before
the 1973 and 1987 Constitutions took effect.[38] As this Court held in Province of Abra v. Hernando:[39]

Under the 1935 Constitution: Cemeteries, churches, and parsonages or convents appurtenant thereto, and all
lands, buildings, and improvements used exclusively for religious, charitable, or educational purposes shall be
exempt from taxation. The present Constitution added charitable institutions, mosques, and non-profit cemeteries
and required that for the exemption of lands, buildings, and improvements, they should not only be exclusively
but also actually and directly used for religious or charitable purposes. The Constitution is worded
differently. The change should not be ignored. It must be duly taken into consideration. Reliance on past decisions
would have sufficed were the words actually as well as directly not added. There must be proof therefore of
the actual and direct use of the lands, buildings, and improvements for religious or charitable purposes to be
exempt from taxation.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the
petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its
real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. Exclusive is
defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and
exclusively is defined, in a manner to exclude; as enjoying a privilege exclusively.[40] If real property is used for
one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to
taxation.[41] The words dominant use or principal use cannot be substituted for the words used exclusively without
doing violence to the Constitutions and the law.[42] Solely is synonymous with exclusively.[43]

What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and
immediate and actual application of the property itself to the purposes for which the charitable institution is
organized. It is not the use of the income from the real property that is determinative of whether the property is
used for tax-exempt purposes.[44]

The petitioner failed to discharge its burden to prove that the entirety of its real property is actually, directly
and exclusively used for charitable purposes. While portions of the hospital are used for the treatment of patients
and the dispensation of medical services to them, whether paying or non-paying, other portions thereof are being
leased to private individuals for their clinics and a canteen.Further, a portion of the land is being leased to a
private individual for her business enterprise under the business name Elliptical Orchids and Garden Center.
Indeed, the petitioners evidence shows that it collected P1,136,483.45 as rentals in 1991 and P1,679,999.28 for
1992 from the said lessees.

Accordingly, we hold that the portions of the land leased to private entities as well as those parts of the
hospital leased to private individuals are not exempt from such taxes.[45] On the other hand, the portions of the
land occupied by the hospital and portions of the hospital used for its patients, whether paying or non-paying, are
exempt from real property taxes.

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The respondent
Quezon City Assessor is hereby DIRECTED to determine, after due hearing, the precise portions of the land and
the area thereof which are leased to private persons, and to compute the real property taxes due thereon as
provided for by law.SO ORDERED.

[G.R. No. 127105. June 25, 1999]

25 | P a g e

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON AND SON, INC., and
COURT OF APPEALS, respondents.

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the
decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming the decision of the
Court of Tax Appeals in CTA Case No. 5136.

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

[Respondent], a domestic corporation organized and operating under the Philippine laws, entered into a license
agreement with SC Johnson and Son, United States of America (USA), a non-resident foreign corporation based
in the U.S.A. pursuant to which the [respondent] was granted the right to use the trademark, patents and
technology owned by the latter including the right to manufacture, package and distribute the products covered by
the Agreement and secure assistance in management, marketing and production from SC Johnson and Son, U. S.
A.

The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents,
Trade Marks and Technology Transfer under Certificate of Registration No. 8064 (Exh. A).

For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson and Son, USA royalties
based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which
[respondent] paid for the period covering July 1992 to May 1993 in the total amount of P1,603,443.00 (Exhs. B to
L and submarkings).

On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD) of the BIR a claim
for refund of overpaid withholding tax on royalties arguing that, the antecedent facts attending [respondents] case
fall squarely within the same circumstances under which said MacGeorge and Gillete rulings were issued. Since
the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to
the [respondent]. We therefore submit that royalties paid by the [respondent] to SC Johnson and Son, USA is only
subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty [Article 13
Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)] (Petition for Review
[filed with the Court of Appeals], par. 12). [Respondents] claim for the refund of P963,266.00 was computed as
follows:

Gross 25% 10%

Month/ Royalty Withholding Withholding

Year Fee Tax Paid Tax Balance

______ _______ __________ __________ ______

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

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

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

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

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

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

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

26 | P a g e

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

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

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

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

P6,421,770 P1,605,443 P642,177 P963,266[1]

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

The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc. (S.C.
Johnson) then filed a petition for review before the Court of Tax Appeals (CTA) where the case was docketed as
CTA Case No. 5136, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to
May 1993.

On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and ordered the
Commissioner of Internal Revenue to issue a tax credit certificate in the amount of P963,266.00 representing
overpaid withholding tax on royalty payments beginning July, 1992 to May, 1993.[2]

The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals which
rendered the decision subject of this appeal on November 7, 1996 finding no merit in the petition and affirming in
toto the CTA ruling.[3]

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

THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS ENTITLED TO
THE MOST FAVORED NATION TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US
TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY.

Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the most
favored nation clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties derived by a
resident of the United States from sources within the Philippines only if the circumstances of the resident of the
United States are similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains no
matching credit provision as that provided under Article 24 of the RP-West Germany Tax Treaty, the tax on
royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West
Germany Tax Treaty. Even assuming that the phrase paid under similar circumstances refers to the payment of
royalties, and not taxes, as held by the Court of Appeals, still, the most favored nation clause cannot be invoked
for the reason that when a tax treaty contemplates circumstances attendant to the payment of a tax, or royalty
remittances for that matter, these must necessarily refer to circumstances that are tax-related. Finally, petitioner
argues that since S.C. Johnsons invocation of the most favored nation clause is in the nature of a claim for
exemption from the application of the regular tax rate of 25% for royalties, the provisions of the treaty must be
construed strictly against it.

In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied (1) because
it contains a defective certification against forum shopping as required under SC Circular No. 28-91, that is, the
certification was not executed by the petitioner herself but by her counsel; and (2) that the most favored nation
clause under the RP-US Tax Treaty refers to royalties paid under similar circumstances as those royalties subject
to tax in other treaties; that the phrase paid under similar circumstances does not refer to payment of the tax but to
the subject matter of the tax, that is, royalties, because the most favored nation clause is intended to allow the
taxpayer in one state to avail of more liberal provisions contained in another tax treaty wherein the country of
residence of such taxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation
in that other tax treaty is the same as that in the original tax treaty under which the taxpayer is liable; thus, the RP-
27 | P a g e

US Tax Treaty speaks of royalties of the same kind paid under similar circumstances. S.C. Johnson also contends
that the Commissioner is estopped from insisting on her interpretation that the phrase paid under similar
circumstances refers to the manner in which the tax is paid, for the reason that said interpretation is embodied in
Revenue Memorandum Circular (RMC) 39-92 which was already abandoned by the Commissioners predecessor
in 1993; and was expressly revoked in BIR Ruling No. 052-95 which stated that royalties paid to an American
licensor are subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation
to the RP-West Germany Tax Treaty. Said ruling should be given retroactive effect except if such is prejudicial to
the taxpayer pursuant to Section 246 of the National Internal Revenue Code.

Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed by
petitioners counsel is not a fatal defect as to warrant the dismissal of this petition since Circular No. 28-91 applies
only to original actions and not to appeals, as in the instant case. Moreover, the requirement that the certification
should be signed by petitioner and not by counsel does not apply to petitioner who has only the Office of the
Solicitor General as statutory counsel. Petitioner reiterates that even if the phrase paid under similar circumstances
embodied in the most favored nation clause of the RP-US Tax Treaty refers to the payment of royalties and not
taxes, still the presence or absence of a matching credit provision in the said RP-US Tax Treaty would constitute a
material circumstance to such payment and would be determinative of the said clauses application.

We address first the objection raised by private respondent that the certification against forum shopping was
not executed by the petitioner herself but by her counsel, the Office of the Solicitor General (O.S.G.) through one
of its Solicitors, Atty. Tomas M. Navarro.

SC Circular No. 28-91 provides:

SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE SUPREME COURT AND THE
COURT OF APPEALS TO PREVENT FORUM SHOPPING OR MULTIPLE FILING OF PETITIONS AND
COMPLAINTS

TO : xxx xxx xxx

The attention of the Court has been called to the filing of multiple petitions and complaints involving the same
issues in the Supreme Court, the Court of Appeals or other tribunals or agencies, with the result that said courts,
tribunals or agencies have to resolve the same issues.

(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court of Appeals, the petitioner
aside from complying with pertinent provisions of the Rules of Court and existing circulars, must certify under
oath to all of the following facts or undertakings: (a) he has not theretofore commenced any other action or
proceeding involving the same issues in the Supreme Court, the Court of Appeals, or any tribunal or agency; xxx

(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall be a cause for the
summary dismissal of the multiple petitions or complaints; xxx

The circular expressly requires that a certificate of non-forum shopping should be attached to petitions filed
before this Court and the Court of Appeals. Petitioners allegation that Circular No. 28-91 applies only to original
actions and not to appeals as in the instant case is not supported by the text nor by the obvious intent of the
Circular which is to prevent multiple petitions that will result in the same issue being resolved by different courts.

Anent the requirement that the party, not counsel, must certify under oath that he has not commenced any
other action involving the same issues in this Court or the Court of Appeals or any other tribunal or agency, we
are inclined to accept petitioners submission that since the OSG is the only lawyer for the petitioner, which is a
government agency mandated under Section 35, Chapter 12, title III, Book IV of the 1987 Administrative
Code[4] to be represented only by the Solicitor General, the certification executed by the OSG in this case
constitutes substantial compliance with Circular No. 28-91.
28 | P a g e

With respect to the merits of this petition, the main point of contention in this appeal is the interpretation of
Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be imposed by the Philippines upon
royalties received by a non-resident foreign corporation. The provision states insofar as pertinent that-

1) Royalties derived by a resident of one of the Contracting States from sources within the other
Contracting State may be taxed by both Contracting States.

2) However, the tax imposed by that Contracting State shall not exceed.

a) In the case of the United States, 15 percent of the gross amount of the royalties, and

b) In the case of the Philippines, the least of:

(i) 25 percent of the gross amount of the royalties;

(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with
the Philippine Board of Investments and engaged in preferred areas of activities; and

(iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar
circumstances to a resident of a third State.

Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is entitled to the
concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the RP-Germany Tax Treaty which
provides:

(2) However, such royalties may also be taxed in the Contracting State in which they arise, and
according to the law of that State, but the tax so charged shall not exceed:

xxx

b) 10 percent of the gross amount of royalties arising from the use of, or the right to use, any patent,
trademark, design or model, plan, secret formula or process, or from the use of or the right to use,
industrial, commercial, or scientific equipment, or for information concerning industrial, commercial
or scientific experience.

For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate
mentioned under b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the
contract giving rise to such royalties has been approved by the Philippine competent authorities.

Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the gross
amount of such royalties against German income and corporation tax for the taxes payable in the Philippines on
such royalties where the tax rate is reduced to 10 or 15 percent under such treaty. Article 24 of the RP-Germany
Tax Treaty states-

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

b) Subject to the provisions of German tax law regarding credit for foreign tax, there shall be allowed as a credit
against German income and corporation tax payable in respect of the following items of income arising in the
Republic of the Philippines, the tax paid under the laws of the Philippines in accordance with this Agreement on:

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

c) For the purpose of the credit referred in subparagraph b) the Philippine tax shall be deemed to be
29 | P a g e

cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent according to paragraph 2 of Article 12,
20 percent of the gross amount of such royalties.

According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under
circumstances similar to those in the RP-West Germany Tax Treaty since there is no provision for a 20 percent
matching credit in the former convention and private respondent cannot invoke the concessional tax rate on the
strength of the most favored nation clause in the RP-US Tax Treaty. Petitioners position is explained thus:

Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on income from
sources within the Philippines is allowed as a credit against German income and corporation tax on the same
income. In the case of royalties for which the tax is reduced to 10 or 15 percent according to paragraph 2 of
Article 12 of the RP-West Germany Tax Treaty, the credit shall be 20% of the gross amount of such royalty. To
illustrate, the royalty income of a German resident from sources within the Philippines arising from the use of, or
the right to use, any patent, trade mark, design or model, plan, secret formula or process, is taxed at 10% of the
gross amount of said royalty under certain conditions. The rate of 10% is imposed if credit against the German
income and corporation tax on said royalty is allowed in favor of the German resident. That means the rate of
10% is granted to the German taxpayer if he is similarly granted a credit against the income and corporation tax of
West Germany. The clear intent of the matching credit is to soften the impact of double taxation by different
jurisdictions.

The RP-US Tax Treaty contains no similar matching credit as that provided under the RP-West Germany Tax
Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those
obtaining in the RP-West Germany Tax Treaty. Therefore, the most favored nation clause in the RP-West
Germany Tax Treaty cannot be availed of in interpreting the provisions of the RP-US Tax Treaty.[5]

The petition is meritorious.

We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of
Appeals, that the phrase paid under similar circumstances in Article 13 (2) (b), (iii) of the RP-US Tax Treaty
should be interpreted to refer to payment of royalty, and not to the payment of the tax, for the reason that the
phrase paid under similar circumstances is followed by the phrase to a resident of a third state. The respondent
court held that Words are to be understood in the context in which they are used, and since what is paid to a
resident of a third state is not a tax but a royalty logic instructs that the treaty provision in question should refer to
royalties of the same kind paid under similar circumstances.

The above construction is based principally on syntax or sentence structure but fails to take into account the
purpose animating the treaty provisions in point. To begin with, we are not aware of any law or rule pertinent to
the payment of royalties, and none has been brought to our attention, which provides for the payment of royalties
under dissimilar circumstances. The tax rates on royalties and the circumstances of payment thereof are the same
for all the recipients of such royalties and there is no disparity based on nationality in the circumstances of such
payment.[6] On the other hand, a cursory reading of the various tax treaties will show that there is no similarity in
the provisions on relief from or avoidance of double taxation[7] as this is a matter of negotiation between the
contracting parties.[8] As will be shown later, this dissimilarity is true particularly in the treaties between the
Philippines and the United States and between the Philippines and West Germany.

The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for
the avoidance of double taxation.[9] The purpose of these international agreements is to reconcile the national
fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two
different jurisdictions.[10] More precisely, the tax conventions are drafted with a view towards the elimination
of international juridical double taxation, which is defined as the imposition of comparable taxes in two or
more states on the same taxpayer in respect of the same subject matter and for identical periods. [11], citing the
Committee on Fiscal Affairs of the Organization for Economic Co-operation and Development (OECD).11 The
apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the
30 | P a g e

movement of capital, technology and persons between countries, conditions deemed vital in creating robust and
dynamic economies.[12] Foreign investments will only thrive in a fairly predictable and reasonable international
investment climate and the protection against double taxation is crucial in creating such a climate.[13]

Double taxation usually takes place when a person is resident of a contracting state and derives income from,
or owns capital in, the other contracting state and both states impose tax on that income or capital. In order to
eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the
state of source or situs and of the state of residence with regard to certain classes of income or capital. In some
cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or
capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of
source is limited.[14]

The second method for the elimination of double taxation applies whenever the state of source is given a full
or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the
state of residence to allow relief in order to avoid double taxation. There are two methods of relief- the exemption
method and the credit method. In the exemption method, the income or capital which is taxable in the state of
source or situs is exempted in the state of residence, although in some instances it may be taken into account in
determining the rate of tax applicable to the taxpayers remaining income or capital. On the other hand, in the
credit method, although the income or capital which is taxed in the state of source is still taxable in the state of
residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between
the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit
method focuses upon the tax.[15]

In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give
up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the other
country.[16] Thus the petitioner correctly opined that the phrase royalties paid under similar circumstances in the
most favored nation clause of the US-RP Tax Treaty necessarily contemplated circumstances that are tax-related.

In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use
property or rights, i.e. trademarks, patents and technology, located within the Philippines. [17] The United States is
the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax
Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a restraint on the
tax that may be collected by the state of source.[18] Furthermore, the method employed to give relief from double
taxation is the allowance of a tax credit to citizens or residents of the United States (in an appropriate
amount based upon the taxes paid or accrued to the Philippines) against the United States tax, but such amount
shall not exceed the limitations provided by United States law for the taxable year. [19] Under Article 13 thereof,
the Philippines may impose one of three rates- 25 percent of the gross amount of the royalties; 15 percent when
the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in
preferred areas of activities; or the lowest rate of Philippine tax that may be imposed on royalties of the same kind
paid under similar circumstances to a resident of a third state.

Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the
concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes
imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar
circumstances. This would mean that private respondent must prove that the RP-US Tax Treaty grants similar tax
reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from sources
within the Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty.

The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax
crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against German income
and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other
hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for double
31 | P a g e

taxation, does not provide for similar crediting of 20% of the gross amount of royalties paid. Said Article 23
reads:

Article 23-Relief from double taxation

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

1) In accordance with the provisions and subject to the limitations of the law of the United States (as it
may be amended from time to time without changing the general principle thereof), the United States
shall allow to a citizen or resident of the United States as a credit against the United States tax the
appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States
corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it
receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or
accrued to the Philippines by the Philippine corporation paying such dividends with respect to the
profits out of which such dividends are paid. Such appropriate amount shall be based upon the
amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for
the purpose of limiting the credit to the United States tax on income from sources within the
Philippines or on income from sources outside the United States) provided by United States law for
the taxable year. xxx.

The reason for construing the phrase paid under similar circumstances as used in Article 13 (2) (b) (iii) of the
RP-US Tax Treaty as referring to taxes is anchored upon a logical reading of the text in the light of the
fundamental purpose of such treaty which is to grant an incentive to the foreign investor by lowering the tax and
at the same time crediting against the domestic tax abroad a figure higher than what was collected in the
Philippines.

In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to be
achieved and that the general purpose is a more important aid to the meaning of a law than any rule which
grammar may lay down.[20] It is the duty of the courts to look to the object to be accomplished, the evils to be
remedied, or the purpose to be subserved, and should give the law a reasonable or liberal construction which will
best effectuate its purpose.[21] The Vienna Convention on the Law of Treaties states that a treaty shall be
interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their
context and in the light of its object and purpose.[22]

As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors to invest
in the Philippines - a crucial economic goal for developing countries.[23] The goal of double taxation conventions
would be thwarted if such treaties did not provide for effective measures to minimize, if not completely eliminate,
the tax burden laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the state of
source, in this case, by the Philippines, there should be a concomitant commitment on the part of the state of
residence to grant some form of tax relief, whether this be in the form of a tax credit or exemption. [24] Otherwise,
the tax which could have been collected by the Philippine government will simply be collected by another state,
defeating the object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If
the state of residence does not grant some form of tax relief to the investor, no benefit would redound to the
Philippines, i.e., increased investment resulting from a favorable tax regime, should it impose a lower tax rate on
the royalty earnings of the investor, and it would be better to impose the regular rate rather than lose much-needed
revenues to another country.

At the same time, the intention behind the adoption of the provision on relief from double taxation in the two
tax treaties in question should be considered in light of the purpose behind the most favored nation clause.

The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable
than that which has been or may be granted to the most favored among other countries. [25] The most favored
nation clause is intended to establish the principle of equality of international treatment by providing that the
32 | P a g e

citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the
most favored nation.[26] The essence of the principle is to allow the taxpayer in one state to avail of more liberal
provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided
that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the
taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax
Treaty, above-quoted, speaks of tax on royalties for the use of trademark, patent, and technology. The entitlement
of the 10% rate by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from
the design behind the most favored nation clause to grant equality of international treatment since the tax burden
laid upon the income of the investor is not the same in the two countries. The similarity in the circumstances of
payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the
need for equality of treatment.

We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax credit of
20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty,
private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason
that there is no payment of taxes on royalties under similar circumstances.

It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation
of sovereign authority and to be construed strictissimi juris against the person or entity claiming the
exemption.[27] The burden of proof is upon him who claims the exemption in his favor and he must be able to
justify his claim by the clearest grant of organic or statute law.[28] Private respondent is claiming for a refund of
the alleged overpayment of tax on royalties; however, there is nothing on record to support a claim that the tax on
royalties under the RP-US Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-
West Germany Tax Treaty.

WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of
the Court of Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals are hereby SET
ASIDE.SO ORDERED.

GREPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs.

MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.

From the decision of the Court of First Instance of Manila (in Civil Case No. 34100) ordering it to pay to
plaintiff Republic of the Philippines the sum of P4,802.37 with 6% interest thereon from the date of the filing of
the complaint until fully paid, plus costs, defendant Mambulao Lumber Company interposed the present appeal.1

The facts of the case are briefly stated in the decision of the trial court, to wit: .

The facts of this case are not contested and may be briefly summarized as follows: (a) under the first
cause of action, for forest charges covering the period from September 10, 1952 to May 24, 1953, defendants
admitted that they have a liability of P587.37, which liability is covered by a bond executed by defendant
General Insurance & Surety Corporation for Mambulao Lumber Company, jointly and severally in character, on
July 29, 1953, in favor of herein plaintiff; (b) under the second cause of action, both defendants admitted a joint
and several liability in favor of plaintiff in the sum of P296.70, also covered by a bond dated November 27,
1953; and (c) under the third cause of action, both defendants admitted a joint and several liability in favor of
plaintiff for P3,928.30, also covered by a bond dated July 20, 1954. These three liabilities aggregate to
P4,802.37. If the liability of defendants in favor of plaintiff in the amount already mentioned is admitted, then
what is the defense interposed by the defendants? The defense presented by the defendants is quite unusual in
more ways than one. It appears from Exh. 3 that from July 31, 1948 to December 29, 1956, defendant
Mambulao Lumber Company paid to the Republic of the Philippines P8,200.52 for 'reforestation charges' and
for the period commencing from April 30, 1947 to June 24, 1948, said defendant paid P927.08 to the Republic
of the Philippines for 'reforestation charges'. These reforestation were paid to the plaintiff in pursuance of
Section 1 of Republic Act 115 which provides that there shall be collected, in addition to the regular forest
33 | P a g e

charges provided under Section 264 of Commonwealth Act 466 known as the National Internal Revenue Code,
the amount of P0.50 on each cubic meter of timber... cut out and removed from any public forest for
commercial purposes. The amount collected shall be expended by the director of forestry, with the approval of
the secretary of agriculture and commerce, for reforestation and afforestation of watersheds, denuded areas ...
and other public forest lands, which upon investigation, are found needing reforestation or afforestation .... The
total amount of the reforestation charges paid by Mambulao Lumber Company is P9,127.50, and it is the
contention of the defendant Mambulao Lumber Company that since the Republic of the Philippines has not
made use of those reforestation charges collected from it for reforesting the denuded area of the land covered by
its license, the Republic of the Philippines should refund said amount, or, if it cannot be refunded, at least it
should be compensated with what Mambulao Lumber Company owed the Republic of the Philippines for
reforestation charges. In line with this thought, defendant Mambulao Lumber Company wrote the director of
forestry, on February 21, 1957 letter Exh. 1, in paragraph 4 of which said defendant requested "that our account
with your bureau be credited with all the reforestation charges that you have imposed on us from July 1, 1947 to
June 14, 1956, amounting to around P2,988.62 ...". This letter of defendant Mambulao Lumber Company was
answered by the director of forestry on March 12, 1957, marked Exh. 2, in which the director of forestry quoted
an opinion of the secretary of justice, to the effect that he has no discretion to extend the time for paying the
reforestation charges and also explained why not all denuded areas are being reforested.

The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by defendant-appellant company
to plaintiff-appellee as reforestation charges from 1947 to 1956 may be set off or applied to the payment of the
sum of P4,802.37 as forest charges due and owing from appellant to appellee. It is appellant's contention that said
sum of P9,127.50, not having been used in the reforestation of the area covered by its license, the same is
refundable to it or may be applied in compensation of said sum of P4,802.37 due from it as forest
charges.1äwphï1.ñët

We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides:

SECTION 1. There shall be collected, in addition to the regular forest charges provided for under Section
two hundred and sixty-four of Commonwealth Act Numbered Four Hundred Sixty-six, known as the
National Internal Revenue Code, the amount of fifty centavos on each cubic meter of timber for the first
and second groups and forty centavos for the third and fourth groups cut out and removed from any public
forest for commercial purposes. The amount collected shall be expended by the Director of Forestry, with
the approval of the Secretary of Agriculture and Natural Resources (commerce), for reforestation and
afforestation of watersheds, denuded areas and cogon and open lands within forest reserves, communal
forest, national parks, timber lands, sand dunes, and other public forest lands, which upon investigation,
are found needing reforestation or afforestation, or needing to be under forest cover for the growing of
economic trees for timber, tanning, oils, gums, and other minor forest products or medicinal plants, or for
watersheds protection, or for prevention of erosion and floods and preparation of necessary plans and
estimate of costs and for reconnaisance survey of public forest lands and for such other expenses as may
be deemed necessary for the proper carrying out of the purposes of this Act.

All revenues collected by virtue of, and pursuant to, the provisions of the preceding paragraph and from
the sale of barks, medical plants and other products derived from plantations as herein provided shall
constitute a fund to be known as Reforestation Fund, to be expended exclusively in carrying out the
purposes provided for under this Act. All provincial or city treasurers and their deputies shall act as agents
of the Director of Forestry for the collection of the revenues or incomes derived from the provisions of
this Act. (Emphasis supplied.)

Under this provision, it seems quite clear that the amount collected as reforestation charges from a timber licenses
or concessionaire shall constitute a fund to be known as the Reforestation Fund, and that the same shall be
expended by the Director of Forestry, with the approval of the Secretary of Agriculture and Natural Resources for
the reforestation or afforestation, among others, of denuded areas which, upon investigation, are found to be
needing reforestation or afforestation. Note that there is nothing in the law which requires that the amount
34 | P a g e

collected as reforestation charges should be used exclusively for the reforestation of the area covered by the
license of a licensee or concessionaire, and that if not so used, the same should be refunded to him. Observe too,
that the licensee's area may or may not be reforested at all, depending on whether the investigation thereof by the
Director of Forestry shows that said area needs reforestation. The conclusion seems to be that the amount paid by
a licensee as reforestation charges is in the nature of a tax which forms a part of the Reforestation Fund, payable
by him irrespective of whether the area covered by his license is reforested or not. Said fund, as the law expressly
provides, shall be expended in carrying out the purposes provided for thereunder, namely, the reforestation or
afforestation, among others, of denuded areas needing reforestation or afforestation.

Appellant maintains that the principle of a compensation in Article 1278 of the new Civil Code2 is applicable,
such that the sum of P9,127.50 paid by it as reforestation charges may compensate its indebtedness to appellee in
the sum of P4,802.37 as forest charges. But in the view we take of this case, appellant and appellee are not
mutually creditors and debtors of each other. Consequently, the law on compensation is inapplicable. On this
point, the trial court correctly observed: .

Under Article 1278, NCC, compensation should take place when two persons in their own right are
creditors and debtors of each other. With respect to the forest charges which the defendant Mambulao
Lumber Company has paid to the government, they are in the coffers of the government as taxes
collected, and the government does not owe anything, crystal clear that the Republic of the Philippines
and the Mambulao Lumber Company are not creditors and debtors of each other, because compensation
refers to mutual debts. ..

And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in question, can
be the subject of set-off or compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the
statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in
an action or any indebtedness of the state or municipality to one who is liable to the state or municipality
for taxes. Neither are they a proper subject of recoupment since they do not arise out of the contract or
transaction sued on. ... (80 C.J.S. 73-74. ) .

The general rule, based on grounds of public policy is well-settled that no set-off is admissible against
demands for taxes levied for general or local governmental purposes. The reason on which the general
rule is based, is that taxes are not in the nature of contracts between the party and party but grow out of a
duty to, and are the positive acts of the government, to the making and enforcing of which, the personal
consent of individual taxpayers is not required. ... If the taxpayer can properly refuse to pay his tax when
called upon by the Collector, because he has a claim against the governmental body which is not included
in the tax levy, it is plain that some legitimate and necessary expenditure must be curtailed. If the
taxpayer's claim is disputed, the collection of the tax must await and abide the result of a lawsuit, and
meanwhile the financial affairs of the government will be thrown into great confusion. (47 Am. Jur. 766-
767.)

WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all respects, with costs against
the defendant-appellant. So ordered.

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

HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte, and
SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott Price, respondents.

This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of Leyte, Ron.
Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and for an order in this Court directing
the respondent court below to execute the judgment in favor of the Government against the estate of Walter Scott
Price for internal revenue taxes.
35 | P a g e

It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30, 1960, this
Court declared as final and executory the order for the payment by the estate of the estate and inheritance taxes,
charges and penalties, amounting to P40,058.55, issued by the Court of First Instance of Leyte in, special
proceedings No. 14 entitled "In the matter of the Intestate Estate of the Late Walter Scott Price." In order to
enforce the claims against the estate the fiscal presented a petition dated June 21, 1961, to the court below for the
execution of the judgment. The petition was, however, denied by the court which held that the execution is not
justifiable as the Government is indebted to the estate under administration in the amount of P262,200. The orders
of the court below dated August 20, 1960 and September 28, 1960, respectively, are as follows:

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

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

The petition to set aside the above orders of the court below and for the execution of the claim of the
Government against the estate must be denied for lack of merit. The ordinary procedure by which to settle claims
of indebtedness against the estate of a deceased person, as an inheritance tax, is for the claimant to present a claim
before the probate court so that said court may order the administrator to pay the amount thereof. To such effect is
the decision of this Court in Aldamiz vs. Judge of the Court of First Instance of Mindoro, G.R. No. L-2360, Dec.
29, 1949, thus:

. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the payment of debts and
expenses of administration. The proper procedure is for the court to order the sale of personal estate or the sale
or mortgage of real property of the deceased and all debts or expenses of administrator and with the written
notice to all the heirs legatees and devisees residing in the Philippines, according to Rule 89, section 3, and Rule
90, section 2. And when sale or mortgage of real estate is to be made, the regulations contained in Rule 90,
section 7, should be complied with.1äwphï1.ñët

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

The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle the
estate of a deceased person, the properties belonging to the estate are under the jurisdiction of the court and such
jurisdiction continues until said properties have been distributed among the heirs entitled thereto. During the
36 | P a g e

pendency of the proceedings all the estate is in custodia legis and the proper procedure is not to allow the sheriff,
in case of the court judgment, to seize the properties but to ask the court for an order to require the administrator
to pay the amount due from the estate and required to be paid.

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

ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes effect by
operation of law, and extinguished both debts to the concurrent amount, eventhough the creditors and
debtors are not aware of the compensation.

It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against the estate of the
deceased Walter Scott Price. Furthermore, the petition for certiorari and mandamus is not the proper remedy for
the petitioner. Appeal is the remedy.

The petition is, therefore, dismissed, without costs.

G.R. No. L-67649 June 28, 1988

ENGRACIO FRANCIA, petitioner, vs.

INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate
Appellate Court, to set aside the auction sale of his property which took place on December 5, 1977, and to allow
him to recover a 203 square meter lot which was, sold at public auction to Ho Fernandez and ordered titled in the
latter's name.

The antecedent facts are as follows:

Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at
Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square
meters, is described and covered by Transfer Certificate of Title No. 4739 (37795) of the Registry of Deeds of
Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic
of the Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value of
the aforesaid portion.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977,
his property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential
Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of P2,400.00. Ho
Fernandez was the highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship
bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for
Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795) and
the issuance in his name of a new certificate of title. Upon verification through his lawyer, Francia discovered that
37 | P a g e

a Final Bill of Sale had been issued in favor of Ho Fernandez by the City Treasurer on December 11, 1978. The
auction sale and the final bill of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of
Deeds.

On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint
on January 24, 1980.

On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended complaint and
ordering:

(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in favor of the defendant Ho
Fernandez over the parcel of land including the improvements thereon, subject to whatever encumbrances
appearing at the back of TCT No. 4739 (37795) and ordering the same TCT No. 4739 (37795) cancelled.

(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's fees. (p. 30, Record on
Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.

Hence, this petition for review.

Francia prefaced his arguments with the following assignments of grave errors of law:

I. RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW IN

NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX DELINQUENCY
WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS INDEBTED TO THE
FORMER.

II. RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS

ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED THAT AN
AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977 TO SATISFY AN
ALLEGED TAX DELINQUENCY OF P2,400.00.

III. RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS ERROR

AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY
RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO SHOCK ONE'S CONSCIENCE
AMOUNTING TO FRAUD AND A DEPRIVATION OF PROPERTY WITHOUT DUE PROCESS OF LAW,
AND CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)

We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that his
property was sold at public auction without notice to him and that the price paid for the property was shockingly
inadequate, amounting to fraud and deprivation without due process of law.

A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his
petition upon himself. While we commiserate with him at the loss of his property, the law and the facts militate
against the grant of his petition. We are constrained to dismiss it.

Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He claims
that the government owed him P4,116.00 when a portion of his land was expropriated on October 15, 1977.
Hence, his tax obligation had been set-off by operation of law as of October 15, 1977.
38 | P a g e

There is no legal basis for the contention. By legal compensation, obligations of persons, who in their
own right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The
circumstances of the case do not satisfy the requirements provided by Article 1279, to wit:

(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the
other;

(3) that the two debts be due.

This principal contention of the petitioner has no merit. We have consistently ruled that there can be no
off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse
to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being
collected. The collection of a tax cannot await the results of a lawsuit against the government.

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue
Taxes can not be the subject of set-off or compensation. We stated that:

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the
statutes of set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an
action or any indebtedness of the state or municipality to one who is liable to the state or municipality for taxes.
Neither are they a proper subject of recoupment since they do not arise out of the contract or transaction sued
on. ... (80 C.J.S., 7374). "The general rule based on grounds of public policy is well-settled that no set-off
admissible against demands for taxes levied for general or local governmental purposes. The reason on which
the general rule is based, is that taxes are not in the nature of contracts between the party and party but grow out
of duty to, and are the positive acts of the government to the making and enforcing of which, the personal
consent of individual taxpayers is not required. ..."

We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a
claim against the governmental body not included in the tax levy.

This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "... internal revenue
taxes can not be the subject of compensation: Reason: government and taxpayer are not mutually creditors and
debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such a debt, demand,
contract or judgment as is allowed to be set-off."

There are other factors which compel us to rule against the petitioner. The tax was due to the city
government while the expropriation was effected by the national government. Moreover, the amount of P4,116.00
paid by the national government for the 125 square meter portion of his lot was deposited with the Philippine
National Bank long before the sale at public auction of his remaining property. Notice of the deposit dated
September 28, 1977 was received by the petitioner on September 30, 1977. The petitioner admitted in his
testimony that he knew about the P4,116.00 deposited with the bank but he did not withdraw it. It would have
been an easy matter to withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus aborting
the sale at public auction.

Petitioner had one year within which to redeem his property although, as well be shown later, he claimed
that he pocketed the notice of the auction sale without reading it.

Petitioner contends that "the auction sale in question was made without complying with the mandatory
provisions of the statute governing tax sale. No evidence, oral or otherwise, was presented that the procedure
outlined by law on sales of property for tax delinquency was followed. ... Since defendant Ho Fernandez has the
affirmative of this issue, the burden of proof therefore rests upon him to show that plaintiff was duly and properly
notified ... .(Petition for Review, Rollo p. 18; emphasis supplied)
39 | P a g e

We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the burden of proof
to show that there was compliance with all the prescribed requisites for a tax sale.

The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:

... [D]ue process of law to be followed in tax proceedings must be established by proof and the general rule is
that the purchaser of a tax title is bound to take upon himself the burden of showing the regularity of all
proceedings leading up to the sale. (emphasis supplied)

There is no presumption of the regularity of any administrative action which results in depriving a
taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government,
19 Phil. 261). This is actually an exception to the rule that administrative proceedings are presumed to be regular.

But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been
complied with, the petitioner can not, however, deny that he did receive the notice for the auction sale. The
records sustain the lower court's finding that:

[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly notified of the
auction sale. Surprisingly, however, he admitted in his testimony that he received the letter dated November 21,
1977 (Exhibit "I") as shown by his signature (Exhibit "I-A") thereof. He claimed further that he was not present
on December 5, 1977 the date of the auction sale because he went to Iligan City. As long as there was
substantial compliance with the requirements of the notice, the validity of the auction sale can not be assailed ...
.

We quote the following testimony of the petitioner on cross-examination, to wit:

Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you that the property in
question shall be sold at public auction to the highest bidder on December 5, 1977 pursuant to Sec. 74 of PD
464. Will you tell the Court whether you received the original of this letter?

A. I just signed it because I was not able to read the same. It was just sent by mail carrier.

Q. So you admit that you received the original of Exhibit I and you signed upon receipt thereof but you did not
read the contents of it?

A. Yes, sir, as I was in a hurry.

Q. After you received that original where did you place it?

A. I placed it in the usual place where I place my mails.

Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he ignored such
notice. By his very own admission that he received the notice, his now coming to court assailing the validity of
the auction sale loses its force.

Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy of price is
not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance Corporation, 36
SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon v. Court of
Appeals (109 SCRA 388) we held that "alleged gross inadequacy of price is not material when the law gives the
owner the right to redeem as when a sale is made at public auction, upon the theory that the lesser the price, the
easier it is for the owner to effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:

... [R]espondent treasurer now claims that the prices for which the lands were sold are unconscionable
considering the wide divergence between their assessed values and the amounts for which they had been
40 | P a g e

actually sold. However, while in ordinary sales for reasons of equity a transaction may be invalidated on the
ground of inadequacy of price, or when such inadequacy shocks one's conscience as to justify the courts to
interfere, such does not follow when the law gives to the owner the right to redeem, as when a sale is made at
public auction, upon the theory that the lesser the price the easier it is for the owner to effect the redemption.
And so it was aptly said: "When there is the right to redeem, inadequacy of price should not be material,
because the judgment debtor may reacquire the property or also sell his right to redeem and thus recover the
loss he claims to have suffered by reason of the price obtained at the auction sale."

The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et al. (188 Wash.
162, 61 P. 2d, 1290):

If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of taxes in this
manner would be greatly embarrassed, if not rendered altogether impracticable. In Black on Tax Titles (2nd
Ed.) 238, the correct rule is stated as follows: "where land is sold for taxes, the inadequacy of the price given is
not a valid objection to the sale." This rule arises from necessity, for, if a fair price for the land were essential to
the sale, it would be useless to offer the property. Indeed, it is notorious that the prices habitually paid by
purchasers at tax sales are grossly out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32
Wash. 307, 73 P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P. 555):

Like most cases of this character there is here a certain element of hardship from which we would be glad
to relieve, but do so would unsettle long-established rules and lead to uncertainty and difficulty in the collection
of taxes which are the life blood of the state. We are convinced that the present rules are just, and that they bring
hardship only to those who have invited it by their own neglect.

We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in value.
Precisely because of the widening of Buendia Avenue in Pasay City, which necessitated the expropriation of
adjoining areas, real estate values have gone up in the area. However, the price quoted by the petitioner for a 203
square meter lot appears quite exaggerated. At any rate, the foregoing reasons which answer the petitioner's
claims lead us to deny the petition.

And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no
strong considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963
up to the date of the auction sale. He claims to have pocketed the notice of sale without reading it which, if true, is
still an act of inexplicable negligence. He did not withdraw from the expropriation payment deposited with the
Philippine National Bank an amount sufficient to pay for the back taxes. The petitioner did not pay attention to
another notice sent by the City Treasurer on November 3, 1978, during the period of redemption, regarding his tax
delinquency. There is furthermore no showing of bad faith or collusion in the purchase of the property by Mr.
Fernandez. The petitioner has no standing to invoke equity in his attempt to regain the property by belatedly
asking for the annulment of the sale.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision
of the respondent court is affirmed.SO ORDERED.

CALTEX PHILIPPINES, INC., petitioner, vs.THE HONORABLE COMMISSION ON AUDIT,

HONORABLE COMMISSIONER BARTOLOME C. FERNANDEZ and HONORABLE
COMMISSIONER ALBERTO P. CRUZ, respondents.

This is a petition erroneously brought under Rule 44 of the Rules of Court 1 questioning the authority of
the Commission on Audit (COA) in disallowing petitioner's claims for reimbursement from the Oil Price
Stabilization Fund (OPSF) and seeking the reversal of said Commission's decision denying its claims for recovery
of financing charges from the Fund and reimbursement of underrecovery arising from sales to the National Power
41 | P a g e

Corporation, Atlas Consolidated Mining and Development Corporation (ATLAS) and Marcopper Mining
Corporation (MAR-COPPER), preventing it from exercising the right to offset its remittances against its
reimbursement vis-a-vis the OPSF and disallowing its claims which are still pending resolution before the Office
of Energy Affairs (OEA) and the Department of Finance (DOF).

Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the Constitutional
Commissions 3 may be brought to this Court on certiorari by the aggrieved party within thirty (30) days from
receipt of a copy thereof. The certiorari referred to is the special civil action for certiorari under Rule 65 of the
Rules of Court. 4

Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the findings and rulings
of the administrator of the fund itself and in disallowing a claim which is still pending resolution at the OEA
level, and (b) "grave abuse of discretion and completely without jurisdiction" 5 in declaring that petitioner cannot
avail of the right to offset any amount that it may be required under the law to remit to the OPSF against any
amount that it may receive by way of reimbursement therefrom are sufficient to bring this petition within Rule 65
of the Rules of Court, and, considering further the importance of the issues raised, the error in the designation of
the remedy pursued will, in this instance, be excused.

The issues raised revolve around the OPSF created under Section 8 of Presidential Decree (P.D.) No. 1956, as
amended by Executive Order (E.O.) No. 137. As amended, said Section 8 reads as follows:

Sec. 8 . There is hereby created a Trust Account in the books of accounts of the Ministry of Energy to be
designated as Oil Price Stabilization Fund (OPSF) for the purpose of minimizing frequent price changes
brought about by exchange rate adjustments and/or changes in world market prices of crude oil and imported
petroleum products. The Oil Price Stabilization Fund may be sourced from any of the following:

a) Any increase in the tax collection from ad valorem tax or customs duty imposed on petroleum products
subject to tax under this Decree arising from exchange rate adjustment, as may be determined by the Minister of
Finance in consultation with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax exemptions of government corporations, as
may be determined by the Minister of Finance in consultation with the Board of Energy;

c) Any additional amount to be imposed on petroleum products to augment the resources of the Fund through an
appropriate Order that may be issued by the Board of Energy requiring payment by persons or companies
engaged in the business of importing, manufacturing and/or marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs paid by oil companies in the importation of
crude oil and petroleum products is less than the peso costs computed using the reference foreign exchange rate
as fixed by the Board of Energy.

The Fund herein created shall be used for the following:

1) To reimburse the oil companies for cost increases in crude oil and imported petroleum products resulting
from exchange rate adjustment and/or increase in world market prices of crude oil;

2) To reimburse the oil companies for possible cost under-recovery incurred as a result of the reduction of
domestic prices of petroleum products. The magnitude of the underrecovery, if any, shall be determined by the
Ministry of Finance. "Cost underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of Energy without the corresponding reduction in the
landed cost of oil inventories in the possession of the oil companies at the time of the price change;
42 | P a g e

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.

The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of Energy.

The material operative facts of this case, as gathered from the pleadings of the parties, are not disputed.

On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to as
Petitioner, directing the latter to remit to the OPSF its collection, excluding that unremitted for the years 1986 and
1988, of the additional tax on petroleum products authorized under the aforesaid Section 8 of P.D. No. 1956
which, as of 31 December 1987, amounted to P335,037,649.00 and informing it that, pending such remittance, all
of its claims for reimbursement from the OPSF shall be held in abeyance. 6

On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification with the
OEA showed that the grand total of its unremitted collections of the above tax is P1,287,668,820.00, broken down
as follows:

1986 — P233,190,916.00
1987 — 335,065,650.00
1988 — 719,412,254.00;

directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from receipt of the
letter; advising it that the COA will hold in abeyance the audit of all its claims for reimbursement from the OPSF;
and directing it to desist from further offsetting the taxes collected against outstanding claims in 1989 and
subsequent periods. 7

In its letter of 3 May 1989, petitioner requested the COA for an early release of its reimbursement
certificates from the OPSF covering claims with the Office of Energy Affairs since June 1987 up to March 1989,
invoking in support thereof COA Circular No. 89-299 on the lifting of pre-audit of government transactions of
national government agencies and government-owned or controlled corporations. 8

In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the
reimbursement certificates from the OPSF and repeated its earlier directive to petitioner to forward
payment of the latter's unremitted collections to the OPSF to facilitate COA's audit action on the
reimbursement claims. 9

By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal for the payment of
the collections and the recovery of claims, since the outright payment of the sum of P1.287 billion to the OEA as
a prerequisite for the processing of said claims against the OPSF will cause a very serious impairment of its cash
position. 10 The proposal reads:

We, therefore, very respectfully propose the following:

(1) Any procedural arrangement acceptable to COA to facilitate monitoring of payments and reimbursements
will be administered by the ERB/Finance Dept./OEA, as agencies designated by law to administer/regulate
OPSF.

(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as payment to OPSF, similarly OEA
will deliver to Caltex the same amount in cash reimbursement from OPSF.

(3) The COA audit will commence immediately and will be conducted expeditiously.
43 | P a g e

(4) The review of current claims (1989) will be conducted expeditiously to preclude further accumulation of
reimbursement from OPSF.

On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921 accepting the above-
stated proposal but prohibiting petitioner from further offsetting remittances and reimbursements for the current
and ensuing years. 11 Decision No. 921 reads:

This pertains to the within separate requests of Mr. Manuel A. Estrella, President, Petron Corporation,
and Mr. Francis Ablan, President and Managing Director, Caltex (Philippines) Inc., for reconsideration of this
Commission's adverse action embodied in its letters dated February 2, 1989 and March 9, 1989, the former
directing immediate remittance to the Oil Price Stabilization Fund of collections made by the firms pursuant to
P.D. 1956, as amended by E.O. No. 137, S. 1987, and the latter reiterating the same directive but further
advising the firms to desist from offsetting collections against their claims with the notice that "this
Commission will hold in abeyance the audit of all . . . claims for reimbursement from the OPSF."

It appears that under letters of authority issued by the Chairman, Energy Regulatory Board, the
aforenamed oil companies were allowed to offset the amounts due to the Oil Price Stabilization Fund against
their outstanding claims from the said Fund for the calendar years 1987 and 1988, pending with the then
Ministry of Energy, the government entity charged with administering the OPSF. This Commission, however,
expressing serious doubts as to the propriety of the offsetting of all types of reimbursements from the OPSF
against all categories of remittances, advised these oil companies that such offsetting was bereft of legal basis.
Aggrieved thereby, these companies now seek reconsideration and in support thereof clearly manifest their
intent to make arrangements for the remittance to the Office of Energy Affairs of the amount of collections
equivalent to what has been previously offset, provided that this Commission authorizes the Office of Energy
Affairs to prepare the corresponding checks representing reimbursement from the OPSF. It is alleged that the
implementation of such an arrangement, whereby the remittance of collections due to the OPSF and the
reimbursement of claims from the Fund shall be made within a period of not more than one week from each
other, will benefit the Fund and not unduly jeopardize the continuing daily cash requirements of these firms.

Upon a circumspect evaluation of the circumstances herein obtaining, this Commission perceives no
further objectionable feature in the proposed arrangement, provided that 15% of whatever amount is due from
the Fund is retained by the Office of Energy Affairs, the same to be answerable for suspensions or
disallowances, errors or discrepancies which may be noted in the course of audit and surcharges for late
remittances without prejudice to similar future retentions to answer for any deficiency in such surcharges, and
provided further that no offsetting of remittances and reimbursements for the current and ensuing years shall be
allowed.

Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive Director Wenceslao
R. De la Paz of the Office of Energy Affairs: 12

Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and based on our initial
verification of documents submitted to us by your Office in support of Caltex (Philippines), Inc. offsets (sic) for
the year 1986 to May 31, 1989, as well as its outstanding claims against the Oil Price Stabilization Fund (OPSF)
as of May 31, 1989, we are pleased to inform your Office that Caltex (Philippines), Inc. shall be required to
remit to OPSF an amount of P1,505,668,906, representing remittances to the OPSF which were offset against its
claims reimbursements (net of unsubmitted claims). In addition, the Commission hereby authorize (sic) the
Office of Energy Affairs (OEA) to cause payment of P1,959,182,612 to Caltex, representing claims initially
allowed in audit, the details of which are presented hereunder: . . .
44 | P a g e

As presented in the foregoing computation the disallowances totalled P387,683,535, which included
P130,420,235 representing those claims disallowed by OEA, details of which is (sic) shown in Schedule 1 as
summarized as follows:

Disallowance of COA
ParticularsAmount

Recovery of financing charges P162,728,475 /a

Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558
——————
P257,263,300

Disallowances of OEA 130,420,235

————————— ——————
Total P387,683,535

The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate that recovery of financing
charges by oil companies is not among the items for which the OPSF may be utilized. Therefore, it is our view
that recovery of financing charges has no legal basis. The mechanism for such claims is provided in DOF
Circular 1-87.

b. Product Sales –– Sales to International Vessels/Airlines

BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order No. 87-03-095 indicating
that (sic) February 7, 1987 as the effectivity date that (sic) oil companies should pay OPSF impost on export
sales of petroleum products. Effective February 7, 1987 sales to international vessels/airlines should not be
included as part of its domestic sales. Changing the effectivity date of the resolution from February 7, 1987 to
October 20, 1987 as covered by subsequent ERB Resolution No. 88-12 dated November 18, 1988 has allowed
Caltex to include in their domestic sales volumes to international vessels/airlines and claim the corresponding
reimbursements from OPSF during the period. It is our opinion that the effectivity of the said resolution should
be February 7, 1987.

c. Inventory losses –– Settlement of Ad Valorem

We reviewed the system of handling Borrow and Loan (BLA) transactions including the related BLA
agreement, as they affect the claims for reimbursements of ad valorem taxes. We observed that oil companies
immediately settle ad valorem taxes for BLA transaction (sic). Loan balances therefore are not tax paid
inventories of Caltex subject to reimbursements but those of the borrower. Hence, we recommend reduction of
the claim for July, August, and November, 1987 amounting to P14,034,786.

d. Sales to Atlas/Marcopper

LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the suspension of payment of all
taxes, duties, fees, imposts and other charges whether direct or indirect due and payable by the copper mining
companies in distress to the national and local governments." It is our opinion that LOI 1416 which implements
the exemption from payment of OPSF imposts as effected by OEA has no legal basis.
45 | P a g e

Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the amount as herein authorized
shall be subject to availability of funds of OPSF as of May 31, 1989 and applicable auditing rules and
regulations. With regard to the disallowances, it is further informed that the aggrieved party has 30 days within
which to appeal the decision of the Commission in accordance with law.

On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the decision based on the
following grounds: 13

A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES, ORDERS,

RESOLUTIONS, CIRCULARS ISSUED BY THE DEPARTMENT OF FINANCE AND THE ENERGY
REGULATORY BOARD PURSUANT TO EXECUTIVE ORDER NO. 137.

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF EXECUTIVE POWER

BY DEPARTMENT OF FINANCE AND ENERGY REGULATORY BOARD ARE LEGAL AND SHOULD
BE RESPECTED AND APPLIED UNLESS DECLARED NULL AND VOID BY COURTS OR REPEALED
BY LEGISLATION.

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS AUTHORIZED BY THE

EXECUTIVE BRANCH OF GOVERNMENT, REMAINS VALID.

On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request for
Reconsideration. 14

On 16 February 1990, the COA, with Chairman Domingo taking no part and with Commissioner
Fernandez dissenting in part, handed down Decision No. 1171 affirming the disallowance for recovery of
financing charges, inventory losses, and sales to MARCOPPER and ATLAS, while allowing the recovery of
product sales or those arising from export sales. 15 Decision No. 1171 reads as follows:

Anent the recovery of financing charges you contend that Caltex Phil. Inc. has the .authority to recover
financing charges from the OPSF on the basis of Department of Finance (DOF) Circular 1-87, dated February
18, 1987, which allowed oil companies to "recover cost of financing working capital associated with crude oil
shipments," and provided a schedule of reimbursement in terms of peso per barrel. It appears that on November
6, 1989, the DOF issued a memorandum to the President of the Philippines explaining the nature of these
financing charges and justifying their reimbursement as follows:

As part of your program to promote economic recovery, . . . oil companies (were authorized) to refinance
their imports of crude oil and petroleum products from the normal trade credit of 30 days up to 360 days
from date of loading . . . Conformably . . ., the oil companies deferred their foreign exchange remittances for
purchases by refinancing their import bills from the normal 30-day payment term up to the desired 360 days.
This refinancing of importations carried additional costs (financing charges) which then became, due to
government mandate, an inherent part of the cost of the purchases of our country's oil requirement.

We beg to disagree with such contention. The justification that financing charges increased oil costs and the
schedule of reimbursement rate in peso per barrel (Exhibit 1) used to support alleged increase (sic) were not
validated in our independent inquiry. As manifested in Exhibit 2, using the same formula which the DOF used
in arriving at the reimbursement rate but using comparable percentages instead of pesos, the ineluctable
conclusion is that the oil companies are actually gaining rather than losing from the extension of credit
because such extension enables them to invest the collections in marketable securities which have much
higher rates than those they incur due to the extension. The Data we used were obtained from CPI (CALTEX)
Management and can easily be verified from our records.

With respect to product sales or those arising from sales to international vessels or airlines, . . ., it is
believed that export sales (product sales) are entitled to claim refund from the OPSF.
46 | P a g e

As regard your claim for underrecovery arising from inventory losses, . . . It is the considered view of
this Commission that the OPSF is not liable to refund such surtax on inventory losses because these are paid
to BIR and not OPSF, in view of which CPI (CALTEX) should seek refund from BIR. . . .

Finally, as regards the sales to Atlas and Marcopper, it is represented that you are entitled to claim
recovery from the OPSF pursuant to LOI 1416 issued on July 17, 1984, since these copper mining companies
did not pay CPI (CALTEX) and OPSF imposts which were added to the selling price.

Upon a circumspect evaluation, this Commission believes and so holds that the CPI (CALTEX) has no
authority to claim reimbursement for this uncollected OPSF impost because LOI 1416 dated July 17, 1984,
which exempts distressed mining companies from "all taxes, duties, import fees and other charges" was issued
when OPSF was not yet in existence and could not have contemplated OPSF imposts at the time of its
formulation. Moreover, it is evident that OPSF was not created to aid distressed mining companies but rather
to help the domestic oil industry by stabilizing oil prices.

Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it imputes to the
COA the commission of the following errors: 16

I.RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF FINANCING CHARGES

FROM THE OPSF.

II. RESPONDENT COMMISSION ERRED IN DISALLOWING

CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM SALES TO NPC.

III. RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR REIMBURSEMENT ON

SALES TO ATLAS AND MARCOPPER.

IV. RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING ITS LEGAL RIGHT
TO OFFSET ITS REMITTANCES AGAINST ITS REIMBURSEMENT VIS-A-VIS THE OPSF.

V. RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH ARE STILL

PENDING RESOLUTION BY (SIC) THE OEA AND THE DOF.

In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition within ten (10)
days from notice. 18

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the Office
of the Solicitor General, filed their Comment. 19

This Court resolved to give due course to this petition on 30 May 1991 and required the parties to file
their respective Memoranda within twenty (20) days from notice. 20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment filed on
6 September 1990 be considered as the Memorandum for respondents. 21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.

I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:

(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added a second
purpose, to wit:

2) To reimburse the oil companies for possible cost underrecovery incurred as a result of the reduction of
domestic prices of petroleum products. The magnitude of the underrecovery, if any, shall be determined by the
Ministry of Finance. "Cost underrecovery" shall include the following:
47 | P a g e

i. Reduction in oil company take as directed by the Board of Energy without the corresponding reduction in the
landed cost of oil inventories in the possession of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.

the "other factors" mentioned therein that may be determined by the Ministry (now Department) of Finance may
include financing charges for "in essence, financing charges constitute unrecovered cost of acquisition of crude oil
incurred by the oil companies," as explained in the 6 November 1989 Memorandum to the President of the
Department of Finance; they "directly translate to cost underrecovery in cases where the money market placement
rates decline and at the same time the tax on interest income increases. The relationship is such that the presence
of underrecovery or overrecovery is directly dependent on the amount and extent of financing charges."

(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on the basis of
Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of financing working capital associated with crude oil shipments,
the following guidelines on the utilization of the Oil Price Stabilization Fund pertaining to the payment of the
foregoing (sic) exchange risk premium and recovery of financing charges will be implemented:

1. The OPSF foreign exchange premium shall be reduced to a flat rate of one (1) percent for the first (6) months
and 1/32 of one percent per month thereafter up to a maximum period of one year, to be applied on crude oil'
shipments from January 1, 1987. Shipments with outstanding financing as of January 1, 1987 shall be charged
on the basis of the fee applicable to the remaining period of financing.

2. In addition, for shipments loaded after January 1987, oil companies shall be allowed to recover financing
charges directly from the OPSF per barrel of crude oil based on the following schedule:

Financing Period

Reimbursement Rate
Pesos per Barrel

Less than 180 days None

180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28

The above rates shall be subject to review every sixty

days.

Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised the Office of
Energy Affairs as follows:

HON. VICENTE T. PATERNO

Deputy Executive Secretary
For Energy Affairs
48 | P a g e

Office of the President

Makati, Metro Manila

D ear Sir:

This refers to the letters of the Oil Industry dated December 4, 1986 and February 5, 1987 and subsequent
discussions held by the Price Review committee on February 6, 1987.

On the basis of the representations made, the Department of Finance recognizes the necessity to reduce the
foreign exchange risk premium accruing to the Oil Price Stabilization Fund (OPSF). Such a reduction would
allow the industry to recover partly associated financing charges on crude oil imports. Accordingly, the OPSF
foreign exchange risk fee shall be reduced to a flat charge of 1% for the first six (6) months plus 1/32% of 1%
per month thereafter up to a maximum period of one year, effective January 1, 1987. In addition, since the
prevailing company take would still leave unrecovered financing charges, reimbursement may be secured from
the OPSF in accordance with the provisions of the attached Department of Finance circular. 23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the guidelines for the
computation of the foreign exchange risk fee and the recovery of financing charges from the OPSF, to wit:

B. FINANCE CHARGES

1. Oil companies shall be allowed to recover financing charges directly from the OPSF for both crude and
product shipments loaded after January 1, 1987 based on the following rates:

Financing Period Reimbursement Rate

(PBbl.)

Less than 180 days None

180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28

2. The above rates shall be subject to review every sixty days. 24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing further guidelines
on the recoverability of financing charges, to wit:

Following are the supplemental rules to Department of Finance Circular No. 1-87 dated February 18, 1987
which allowed the recovery of financing charges directly from the Oil Price Stabilization Fund. (OPSF):

1. The Claim for reimbursement shall be on a per shipment basis.

2. The claim shall be filed with the Office of Energy Affairs together with the claim on peso cost differential for
a particular shipment and duly certified supporting documents providedfor under Ministry of Finance No. 11-
85.

3. The reimbursement shall be on the form of reimbursement certificate (Annex A) to be issued by the Office of
Energy Affairs. The said certificate may be used to offset against amounts payable to the OPSF. The oil
companies may also redeem said certificates in cash if not utilized, subject to availability of funds. 25

The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-12-017. 26

The COA can neither ignore these issuances nor formulate its own interpretation of the laws in the light of the
determination of executive agencies. The determination by the Department of Finance and the OEA that
49 | P a g e

financing charges are recoverable from the OPSF is entitled to great weight and consideration. 27 The function
of the COA, particularly in the matter of allowing or disallowing certain expenditures, is limited to the
promulgation of accounting and auditing rules for, among others, the disallowance of irregular, unnecessary,
excessive, extravagant, or unconscionable expenditures, or uses of government funds and properties. 28

(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's claim that
petitioner is gaining, instead of losing, from the extension of credit, is belatedly raised and not supported by
expert analysis.

In impeaching the validity of petitioner's assertions, the respondents argue that:

1. The Constitution gives the COA discretionary power to disapprove irregular or unnecessary government
expenditures and as the monetary claims of petitioner are not allowed by law, the COA acted within its
jurisdiction in denying them;

2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges from the OPSF;

3. Under the principle of ejusdem generis, the "other factors" mentioned in the second purpose of the OPSF
pursuant to E.O. No. 137 can only include "factors which are of the same nature or analogous to those
enumerated;"

4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of the Department of Finance
violates P.D. No. 1956 and E.O. No. 137; and

5. Department of Finance rules and regulations implementing P.D. No. 1956 do not likewise allow
reimbursement of financing
charges. 29

We find no merit in the first assigned error.

As to the power of the COA, which must first be resolved in view of its primacy, We find the theory of
petitioner –– that such does not extend to the disallowance of irregular, unnecessary, excessive, extravagant, or
unconscionable expenditures, or use of government funds and properties, but only to the promulgation of
accounting and auditing rules for, among others, such disallowance –– to be untenable in the light of the
provisions of the 1987 Constitution and related laws.

Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:

Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to examine, audit, and settle all
accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and property, owned or
held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities,
including government-owned and controlled corporations with original charters, and on a post-audit basis: (a)
constitutional bodies, commissions and offices that have been granted fiscal autonomy under this Constitution;
(b) autonomous state colleges and universities; (c) other government-owned or controlled corporations and their
subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly or indirectly, from or
through the government, which are required by law or the granting institution to submit to such audit as a
condition of subsidy or equity. However, where the internal control system of the audited agencies is
inadequate, the Commission may adopt such measures, including temporary or special pre-audit, as are
necessary and appropriate to correct the deficiencies. It shall keep the general accounts, of the Government and,
for such period as may be provided by law, preserve the vouchers and other supporting papers pertaining
thereto.

(2) The Commission shall have exclusive authority, subject to the limitations in this Article, to define the scope
of its audit and examination, establish the techniques and methods required therefor, and promulgate accounting
50 | P a g e

and auditing rules and regulations, including those for the prevention and disallowance of irregular,
unnecessary, excessive, extravagant, or, unconscionable expenditures, or uses of government funds and
properties.

These present powers, consistent with the declared independence of the Commission, 30 are broader and more
extensive than that conferred by the 1973 Constitution. Under the latter, the Commission was empowered to:

Examine, audit, and settle, in accordance with law and regulations, all accounts pertaining to the revenues, and
receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the
Government, or any of its subdivisions, agencies, or instrumentalities including government-owned or
controlled corporations, keep the general accounts of the Government and, for such period as may be provided
by law, preserve the vouchers pertaining thereto; and promulgate accounting and auditing rules and regulations
including those for the prevention of irregular, unnecessary, excessive, or extravagant expenditures or uses of
funds and property. 31

Upon the other hand, under the 1935 Constitution, the power and authority of the COA's precursor, the General
Auditing Office, were, unfortunately, limited; its very role was markedly passive. Section 2 of Article XI
thereofprovided:

Sec. 2. The Auditor General shall examine, audit, and settle all accounts pertaining to the revenues and receipts
from whatever source, including trust funds derived from bond issues; and audit, in accordance with law and
administrative regulations, all expenditures of funds or property pertaining to or held in trust by the Government
or the provinces or municipalities thereof. He shall keep the general accounts of the Government and the
preserve the vouchers pertaining thereto. It shall be the duty of the Auditor General to bring to the attention of
the proper administrative officer expenditures of funds or property which, in his opinion, are irregular,
unnecessary, excessive, or extravagant. He shall also perform such other functions as may be prescribed by law.

As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant expenditures or uses of
funds, the 1935 Constitution did not grant the Auditor General the power to issue rules and regulations to
prevent the same. His was merely to bring that matter to the attention of the proper administrative officer.

The ruling on this particular point, quoted by petitioner from the cases of Guevarra vs. Gimenez 32 and Ramos
vs.Aquino, 33 are no longer controlling as the two (2) were decided in the light of the 1935 Constitution.

There can be no doubt, however, that the audit power of the Auditor General under the 1935 Constitution and
the Commission on Audit under the 1973 Constitution authorized them to disallow illegal expenditures of funds
or uses of funds and property. Our present Constitution retains that same power and authority, further
strengthened by the definition of the COA's general jurisdiction in Section 26 of the Government Auditing Code
of the Philippines 34 and Administrative Code of 1987. 35 Pursuant to its power to promulgate accounting and
auditing rules and regulations for the prevention of irregular, unnecessary, excessive or extravagant
expenditures or uses of funds, 36 the COA promulgated on 29 March 1977 COA Circular No. 77-55. Since the
COA is responsible for the enforcement of the rules and regulations, it goes without saying that failure to
comply with them is a ground for disapproving the payment of the proposed expenditure. As observed by one of
the Commissioners of the 1986 Constitutional Commission, Fr. Joaquin G. Bernas: 37

It should be noted, however, that whereas under Article XI, Section 2, of the 1935 Constitution the Auditor
General could not correct "irregular, unnecessary, excessive or extravagant" expenditures of public funds but
could only "bring [the matter] to the attention of the proper administrative officer," under the 1987 Constitution,
as also under the 1973 Constitution, the Commission on Audit can "promulgate accounting and auditing rules
and regulations including those for the prevention and disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures or uses of government funds and properties." Hence, since the
Commission on Audit must ultimately be responsible for the enforcement of these rules and regulations, the
51 | P a g e

failure to comply with these regulations can be a ground for disapproving the payment of a proposed
expenditure.

Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more active role and
invested it with broader and more extensive powers, they did not intend merely to make the COA a toothless
tiger, but rather envisioned a dynamic, effective, efficient and independent watchdog of the Government.

The issue of the financing charges boils down to the validity of Department of Finance Circular No. 1-87,
Department of Finance Circular No. 4-88 and the implementing circulars of the OEA, issued pursuant to
Section 8, P.D. No. 1956, as amended by E.O. No. 137, authorizing it to determine "other factors" which may
result in cost underrecovery and a consequent reimbursement from the OPSF.

The Solicitor General maintains that, following the doctrine of ejusdem generis, financing charges are not
included in "cost underrecovery" and, therefore, cannot be considered as one of the "other factors." Section 8 of
P.D. No. 1956, as amended by E.O. No. 137, does not explicitly define what "cost underrecovery" is. It merely
states what it includes. Thus:

. . . "Cost underrecovery" shall include the following:

i. Reduction in oil company takes as directed by the Board of Energy without the corresponding reduction in the
landed cost of oil inventories in the possession of the oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.

These "other factors" can include only those which are of the same class or nature as the two specifically
enumerated in subparagraphs (i) and (ii). A common characteristic of both is that they are in the nature of
government mandated price reductions. Hence, any other factor which seeks to be a part of the enumeration, or
which could qualify as a cost underrecovery, must be of the same class or nature as those specifically
enumerated.

Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance broad and
unrestricted authority to determine or define "other factors."

Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here general words follow an enumeration of persons or things, by
words of a particular and specific meaning, such general words are not to be construed in their widest extent,
but are held to be as applying only to persons or things of the same kind or class as those specifically
mentioned. 38 A reading of subparagraphs (i) and (ii) easily discloses that they do not have a common
characteristic. The first relates to price reduction as directed by the Board of Energy while the second refers to
reduction in internal ad valoremtaxes. Therefore, subparagraph (iii) cannot be limited by the enumeration in
these subparagraphs. What should be considered for purposes of determining the "other factors" in
subparagraph (iii) is the first sentence of paragraph (2) of the Section which explicitly allows cost
underrecovery only if such were incurred as a result of the reduction of domestic prices of petroleum products.

Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in the sense that
such were incurred as a result of the inability to fully offset financing expenses from yields in money market
placements, they do not, however, fall under the foregoing provision of P.D. No. 1956, as amended, because the
same did not result from the reduction of the domestic price of petroleum products. Until paragraph (2), Section
8 of the decree, as amended, is further amended by Congress, this Court can do nothing. The duty of this Court
is not to legislate, but to apply or interpret the law. Be that as it may, this Court wishes to emphasize that as the
facts in this case have shown, it was at the behest of the Government that petitioner refinanced its oil import
52 | P a g e

payments from the normal 30-day trade credit to a maximum of 360 days. Petitioner could be correct in its
assertion that owing to the extended period for payment, the financial institution which refinanced said
payments charged a higher interest, thereby resulting in higher financing expenses for the petitioner. It would
appear then that equity considerations dictate that petitioner should somehow be allowed to recover its
financing losses, if any, which may have been sustained because it accommodated the request of the
Government. Although under Section 29 of the National Internal Revenue Code such losses may be deducted
from gross income, the effect of that loss would be merely to reduce its taxable income, but not to actually wipe
out such losses. The Government then may consider some positive measures to help petitioner and others
similarly situated to obtain substantial relief. An amendment, as aforestated, may then be in order.

Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the Department of
Finance to determine or define "other factors" is to uphold an undue delegation of legislative power, it clearly
appearing that the subject provision does not provide any standard for the exercise of the authority. It is a
fundamental rule that delegation of legislative power may be sustained only upon the ground that some standard
for its exercise is provided and that the legislature, in making the delegation, has prescribed the manner of the
exercise of the delegated authority. 39

Finally, whether petitioner gained or lost by reason of the extensive credit is rendered irrelevant by reason of the
foregoing disquisitions. It may nevertheless be stated that petitioner failed to disprove COA's claim that it had
in fact gained in the process. Otherwise stated, petitioner failed to sufficiently show that it incurred a loss. Such
being the case, how can petitioner claim for reimbursement? It cannot have its cake and eat it too.

II. Anent the claims arising from sales to the National Power Corporation, We find for the petitioner. The
respondents themselves admit in their Comment that underrecovery arising from sales to NPC are reimbursable
because NPC was granted full exemption from the payment of taxes; to prove this, respondents trace the laws
providing for such exemption. 40 The last law cited is the Fiscal Incentives Regulatory Board's Resolution No.
17-87 of 24 June 1987 which provides, in part, "that the tax and duty exemption privileges of the National
Power Corporation, including those pertaining to its domestic purchases of petroleum and petroleum products . .
. are restored effective March 10, 1987." In a Memorandum issued on 5 October 1987 by the Office of the
President, NPC's tax exemption was confirmed and approved.

Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum products to the NPC is
evident in the recently passed Republic Act No. 6952 establishing the Petroleum Price Standby Fund to support
the OPSF. 41 The pertinent part of Section 2, Republic Act No. 6952 provides:

Sec. 2. Application of the Fund shall be subject to the following conditions:

(1) That the Fund shall be used to reimburse the oil companies for (a) cost increases of imported crude oil and
finished petroleum products resulting from foreign exchange rate adjustments and/or increases in world market
prices of crude oil; (b) cost underrecovery incurred as a result of fuel oil sales to the National Power
Corporation (NPC); and (c) other cost underrecoveries incurred as may be finally decided by the Supreme
Court; . . .

Hence, petitioner can recover its claim arising from sales of petroleum products to the National Power
Corporation.

III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER, petitioner relies on
Letter of Instruction (LOI) 1416, dated 17 July 1984, which ordered the suspension of payments of all taxes,
duties, fees and other charges, whether direct or indirect, due and payable by the copper mining companies in
distress to the national government. Pursuant to this LOI, then Minister of Energy, Hon. Geronimo Velasco,
issued Memorandum Circular No. 84-11-22 advising the oil companies that Atlas Consolidated Mining
Corporation and Marcopper Mining Corporation are among those declared to be in distress.
53 | P a g e

In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18 August 1989 letter
to Executive Director Wenceslao R. de la Paz, states that "it is our opinion that LOI 1416 which implements the
exemption from payment of OPSF imposts as effected by OEA has no legal basis;" 42 in its Decision No. 1171,
it ruled that "the CPI (CALTEX) (Caltex) has no authority to claim reimbursement for this uncollected impost
because LOI 1416 dated July 17, 1984, . . . was issued when OPSF was not yet in existence and could not have
contemplated OPSF imposts at the time of its formulation." 43 It is further stated that: "Moreover, it is evident
that OPSF was not created to aid distressed mining companies but rather to help the domestic oil industry by
stabilizing oil prices."

In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have intended to exempt
said distressed mining companies from the payment of OPSF dues for the following reasons:

a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956 creating the OPSF was
promulgated on October 10, 1984, while E.O. 137, amending P.D. 1956, was issued on February 25, 1987.

b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in line with the government's
effort to prevent the collapse of the copper industry. P.D No. 1956, as amended, was issued for the purpose of
minimizing frequent price changes brought about by exchange rate adjustments and/or changes in world market
prices of crude oil and imported petroleum product's; and

c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other charges, whether direct or
indirect, due and payable by the copper mining companies in distress to the Notional and Local Governments . .
." On the other hand, OPSF dues are not payable by (sic) distressed copper companies but by oil companies. It
is to be noted that the copper mining companies do not pay OPSF dues. Rather, such imposts are built in or
already incorporated in the prices of oil products. 44

Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed mining companies,
it does not accord petitioner the same privilege with respect to its obligation to pay OPSF dues.

We concur with the disquisitions of the respondents. Aside from such reasons, however, it is apparent that LOI
1416 was never published in the Official Gazette 45 as required by Article 2 of the Civil Code, which reads:

Laws shall take effect after fifteen days following the completion of their publication in the Official Gazette,
unless it is otherwise provided. . . .

In applying said provision, this Court ruled in the case of Tañada vs. Tuvera: 46

WHEREFORE, the Court hereby orders respondents to publish in the Official Gazette all unpublished
presidential issuances which are of general application, and unless so published they shall have no binding force
and effect.

Resolving the motion for reconsideration of said decision, this Court, in its Resolution promulgated on 29
December 1986, 47 ruled:

We hold therefore that all statutes, including those of local application and private laws, shall be published as a
condition for their effectivity, which shall begin fifteen days after publication unless a different effectivity date
is fixed by the legislature.

Covered by this rule are presidential decrees and executive orders promulgated by the President in the exercise
of legislative powers whenever the same are validly delegated by the legislature or, at present, directly
conferred by the Constitution. Administrative rules and regulations must also be published if their purpose is to
enforce or implement existing laws pursuant also to a valid delegation.

xxx xxx xxx

54 | P a g e

WHEREFORE, it is hereby declared that all laws as above defined shall immediately upon their approval, or as
soon thereafter as possible, be published in full in the Official Gazette, to become effective only after fifteen
days from their publication, or on another date specified by the legislature, in accordance with Article 2 of the
Civil Code.

LOI 1416 has, therefore, no binding force or effect as it was never published in the Official Gazette after its
issuance or at any time after the decision in the abovementioned cases.

Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued on 18 June 1987.
As amended, the said provision now reads:

Laws shall take effect after fifteen days following the completion of their publication either in the Official
Gazette or in a newspaper of general circulation in the Philippines, unless it is otherwise provided.

We are not aware of the publication of LOI 1416 in any newspaper of general circulation pursuant to Executive
Order No. 200.

Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim must still fail. Tax
exemptions as a general rule are construed strictly against the grantee and liberally in favor of the taxing
authority. 48The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by
the exemption so claimed. The party claiming exemption must therefore be expressly mentioned in the
exempting law or at least be within its purview by clear legislative intent.

In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to ATLAS and
MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though LOI 1416 may suspend the
payment of taxes by copper mining companies, it does not give petitioner the same privilege with respect to the
payment of OPSF dues.

IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the Department of
Finance has still to issue a final and definitive ruling thereon; accordingly, it was premature for COA to
disallow it. By doing so, the latter acted beyond its jurisdiction. 49 Respondents, on the other hand, contend that
said amount was already disallowed by the OEA for failure to substantiate it. 50 In fact, when OEA submitted
the claims of petitioner for pre-audit, the abovementioned amount was already excluded.

An examination of the records of this case shows that petitioner failed to prove or substantiate its contention
that the amount of P130,420,235.00 is still pending before the OEA and the DOF. Additionally, We find no
reason to doubt the submission of respondents that said amount has already been passed upon by the OEA.
Hence, the ruling of respondent COA disapproving said claim must be upheld.

V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF from petitioner may
be offset against petitioner's outstanding claims from said fund. Petitioner contends that it should be allowed to
offset its claims from the OPSF against its contributions to the fund as this has been allowed in the past,
particularly in the years 1987 and 1988. 51

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on compensation and
Section 21, Book V, Title I-B of the Revised Administrative Code which provides for "Retention of Money for
Satisfaction of Indebtedness to Government." 52 Petitioner also mentions communications from the Board of
Energy and the Department of Finance that supposedly authorize compensation.

Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that there can be no
offsetting of taxes against the claims that a taxpayer may have against the government, as taxes do not arise
from contracts or depend upon the will of the taxpayer, but are imposed by law. Respondents also allege that
petitioner's reliance on Section 21, Book V, Title I-B of the Revised Administrative Code, is misplaced because
"while this provision empowers the COA to withhold payment of a government indebtedness to a person who is
55 | P a g e

also indebted to the government and apply the government indebtedness to the satisfaction of the obligation of
the person to the government, like authority or right to make compensation is not given to the private
person." 54 The reason for this, as stated in Commissioner of Internal Revenue vs. Algue, Inc., 55 is that money
due the government, either in the form of taxes or other dues, is its lifeblood and should be collected without
hindrance. Thus, instead of giving petitioner a reason for compensation or set-off, the Revised Administrative
Code makes it the respondents' duty to collect petitioner's indebtedness to the OPSF.

Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a result of
taxation because "P.D. 1956, amended, did not create a source of taxation; it instead established a special fund .
. .," 56 and that the OPSF contributions do not go to the general fund of the state and are not used for public
purpose, i.e., not for the support of the government, the administration of law, or the payment of public
expenses. This alleged lack of a public purpose behind OPSF exactions distinguishes such from a tax. Hence,
the ruling in the Francia case is inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support the OPSF; the said
law provides in part that:

Sec. 2. Application of the fund shall be subject to the following conditions:

xxx xxx xxx

(3) That no amount of the Petroleum Price Standby Fund shall be used to pay any oil company which has
an outstanding obligation to the Government without said obligation being offset first, subject to the
requirements of compensation or offset under the Civil Code.

We find no merit in petitioner's contention that the OPSF contributions are not for a public purpose
because they go to a special fund of the government. Taxation is no longer envisioned as a measure merely to
raise revenue to support the existence of the government; taxes may be levied with a regulatory purpose to
provide means for the rehabilitation and stabilization of a threatened industry which is affected with public
interest as to be within the police power of the state. 57 There can be no doubt that the oil industry is greatly
imbued with public interest as it vitally affects the general welfare. Any unregulated increase in oil prices could
hurt the lives of a majority of the people and cause economic crisis of untold proportions. It would have a chain
reaction in terms of, among others, demands for wage increases and upward spiralling of the cost of basic
commodities. The stabilization then of oil prices is of prime concern which the state, via its police power, may
properly address.

Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF is
taxation. No amount of semantical juggleries could dim this fact.

It is settled that a taxpayer may not offset taxes due from the claims that he may have against the
government. 58Taxes cannot be the subject of compensation because the government and taxpayer are not
mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off. 59

We may even further state that technically, in respect to the taxes for the OPSF, the oil companies merely
act as agents for the Government in the latter's collection since the taxes are, in reality, passed unto the end-
users –– the consuming public. In that capacity, the petitioner, as one of such companies, has the primary
obligation to account for and remit the taxes collected to the administrator of the OPSF. This duty stems from
the fiduciary relationship between the two; petitioner certainly cannot be considered merely as a debtor. In
respect, therefore, to its collection for the OPSF vis-a-vis its claims for reimbursement, no compensation is
likewise legally feasible. Firstly, the Government and the petitioner cannot be said to be mutually debtors and
creditors of each other. Secondly, there is no proof that petitioner's claim is already due and liquidated. Under
Article 1279 of the Civil Code, in order that compensation may be proper, it is necessary that:
56 | P a g e

(1) each one of the obligors be bound principally, and that he be at the same time a principal creditor of the
other;

(2) both debts consist in a sum of :money, or if the things due are consumable, they be of the same kind, and
also of the same quality if the latter has been stated;

(3) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention or controversy, commenced by third persons and communicated
in due time to the debtor.

That compensation had been the practice in the past can set no valid precedent. Such a practice has no
legal basis. Lastly, R.A. No. 6952 does not authorize oil companies to offset their claims against their OPSF
contributions. Instead, it prohibits the government from paying any amount from the Petroleum Price Standby
Fund to oil companies which have outstanding obligations with the government, without said obligation being
offset first subject to the rules on compensation in the Civil Code.

WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the challenged decision of
the Commission on Audit, except that portion thereof disallowing petitioner's claim for reimbursement of
underrecovery arising from sales to the National Power Corporation, which is hereby allowed.With costs
against petitioner.SO ORDERED.

PHILEX MINING CORPORATION vs COMMISSIONER OF INTERNAL REVENUE,

This is a petition for review on certiorari of the June 30, 2000 Decision [1] of the Court of Appeals in CA-G.R. SP
No. 49385, which affirmed the Decision[2] of the Court of Tax Appeals in C.T.A. Case No. 5200. Also assailed is
the April 3, 2001 Resolution[3] denying the motion for reconsideration.

The facts of the case are as follows:

On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an
agreement[4] with Baguio Gold Mining Company (Baguio Gold) for the former to manage and operate the latters
mining claim, known as the Sto. Nino mine, located in Atok and Tublay, Benguet Province. The parties
agreement was denominated as Power of Attorney and provided for the following terms:

4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall make available
to the MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS (P11,000,000.00), in
such amounts as from time to time may be required by the MANAGERS within the said 3-year
period, for use in the MANAGEMENT of the STO. NINO MINE. The said ELEVEN MILLION
PESOS (P11,000,000.00) shall be deemed, for internal audit purposes, as the owners account in
the Sto. Nino PROJECT. Any part of any income of the PRINCIPAL from the STO. NINO
MINE, which is left with the Sto. Nino PROJECT, shall be added to such owners account.
57 | P a g e

5. Whenever the MANAGERS shall deem it necessary and convenient in connection with the
MANAGEMENT of the STO. NINO MINE, they may transfer their own funds or property to the
Sto. Nino PROJECT, in accordance with the following arrangements:

(a) The properties shall be appraised and, together with the cash, shall be carried by the Sto. Nino
PROJECT as a special fund to be known as the MANAGERS account.

(b) The total of the MANAGERS account shall not exceed P11,000,000.00, except with prior
approval of the PRINCIPAL; provided, however, that if the compensation of the MANAGERS as
herein provided cannot be paid in cash from the Sto. Nino PROJECT, the amount not so paid in
cash shall be added to the MANAGERS account.

(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino PROJECT until
termination of this Agency.

(d) The MANAGERS account shall not accrue interest. Since it is the desire of the PRINCIPAL
to extend to the MANAGERS the benefit of subsequent appreciation of property, upon a
projected termination of this Agency, the ratio which the MANAGERS account has to the owners
account will be determined, and the corresponding proportion of the entire assets of the STO.
NINO MINE, excluding the claims, shall be transferred to the MANAGERS, except that such
transferred assets shall not include mine development, roads, buildings, and similar property
which will be valueless, or of slight value, to the MANAGERS. The MANAGERS can, on the
other hand, require at their option that property originally transferred by them to the Sto. Nino
PROJECT be re-transferred to them. Until such assets are transferred to the MANAGERS, this
Agency shall remain subsisting.

12. The compensation of the MANAGER shall be fifty per cent (50%) of the net profit of the Sto.
Nino PROJECT before income tax. It is understood that the MANAGERS shall pay income tax
on their compensation, while the PRINCIPAL shall pay income tax on the net profit of the Sto.
Nino PROJECT after deduction therefrom of the MANAGERS compensation.

16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS and, in the
future, may incur other obligations in favor of the MANAGERS. This Power of Attorney has
been executed as security for the payment and satisfaction of all such obligations of the
PRINCIPAL in favor of the MANAGERS and as a means to fulfill the same. Therefore, this
Agency shall be irrevocable while any obligation of the PRINCIPAL in favor of the
MANAGERS is outstanding, inclusive of the MANAGERS account. After all obligations of the
PRINCIPAL in favor of the MANAGERS have been paid and satisfied in full, this Agency shall
be revocable by the PRINCIPAL upon 36-month notice to the MANAGERS.
58 | P a g e

17. Notwithstanding any agreement or understanding between the PRINCIPAL and the
MANAGERS to the contrary, the MANAGERS may withdraw from this Agency by giving 6-
month notice to the PRINCIPAL. The MANAGERS shall not in any manner be held liable to the
PRINCIPAL by reason alone of such withdrawal. Paragraph 5(d) hereof shall be operative in case
of the MANAGERS withdrawal.

In the course of managing and operating the project, Philex Mining made advances of cash and property in
accordance with paragraph 5 of the agreement. However, the mine suffered continuing losses over the years
which resulted to petitioners withdrawal as manager of the mine on January 28, 1982 and in the eventual cessation
of mine operations on February 20, 1982.[6]

Thereafter, on September 27, 1982, the parties executed a Compromise with Dation in Payment [7] wherein Baguio
Gold admitted an indebtedness to petitioner in the amount of P179,394,000.00 and agreed to pay the same in three
segments by first assigning Baguio Golds tangible assets to petitioner, transferring to the latter Baguio Golds
equitable title in its Philodrill assets and finally settling the remaining liability through properties that Baguio
Gold may acquire in the future.

On December 31, 1982, the parties executed an Amendment to Compromise with Dation in Payment[8] where the
parties determined that Baguio Golds indebtedness to petitioner actually amounted to P259,137,245.00, which
sum included liabilities of Baguio Gold to other creditors that petitioner had assumed as guarantor. These
liabilities pertained to long-term loans amounting to US$11,000,000.00 contracted by Baguio Gold from the Bank
of America NT & SA and Citibank N.A. This time, Baguio Gold undertook to pay petitioner in two segments by
first assigning its tangible assets for P127,838,051.00 and then transferring its equitable title in its Philodrill assets
for P16,302,426.00. The parties then ascertained that Baguio Gold had a remaining outstanding indebtedness to
petitioner in the amount of P114,996,768.00.

Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding indebtedness of Baguio
Gold by charging P112,136,000.00 to allowances and reserves that were set up in 1981 and P2,860,768.00 to the
1982 operations.

In its 1982 annual income tax return, petitioner deducted from its gross income the amount of P112,136,000.00 as
loss on settlement of receivables from Baguio Gold against reserves and allowances. [9] However, the Bureau of
Internal Revenue (BIR) disallowed the amount as deduction for bad debt and assessed petitioner a deficiency
income tax of P62,811,161.39.

Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites for a bad debt
deduction were satisfied, to wit: (a) there was a valid and existing debt; (b) the debt was ascertained to be
worthless; and (c) it was charged off within the taxable year when it was determined to be worthless.
59 | P a g e

Petitioner emphasized that the debt arose out of a valid management contract it entered into with Baguio
Gold. The bad debt deduction represented advances made by petitioner which, pursuant to the management
contract, formed part of Baguio Golds pecuniary obligations to petitioner. It also included payments made by
petitioner as guarantor of Baguio Golds long-term loans which legally entitled petitioner to be subrogated to the
rights of the original creditor.

Petitioner also asserted that due to Baguio Golds irreversible losses, it became evident that it would not be
able to recover the advances and payments it had made in behalf of Baguio Gold. For a debt to be considered
worthless, petitioner claimed that it was neither required to institute a judicial action for collection against the
debtor nor to sell or dispose of collateral assets in satisfaction of the debt. It is enough that a taxpayer exerted
diligent efforts to enforce collection and exhausted all reasonable means to collect.

On October 28, 1994, the BIR denied petitioners protest for lack of legal and factual basis. It held that the
alleged debt was not ascertained to be worthless since Baguio Gold remained existing and had not filed a petition
for bankruptcy; and that the deduction did not consist of a valid and subsisting debt considering that, under the
management contract, petitioner was to be paid fifty percent (50%) of the projects net profit. [10]

Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment, as follows:

WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby DENIED for
lack of merit. The assessment in question, viz: FAS-1-82-88-003067 for deficiency income tax in the
amount of P62,811,161.39 is hereby AFFIRMED.

ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to PAY

respondent Commissioner of Internal Revenue the amount of P62,811,161.39, plus, 20% delinquency
interest due computed from February 10, 1995, which is the date after the 20-day grace period given by
the respondent within which petitioner has to pay the deficiency amount x x x up to actual date of
payment.SO ORDERED.[11]

The CTA rejected petitioners assertion that the advances it made for the Sto. Nino mine were in the nature
of a loan. It instead characterized the advances as petitioners investment in a partnership with Baguio Gold for the
development and exploitation of the Sto. Nino mine. The CTA held that the Power of Attorney executed by
petitioner and Baguio Gold was actually a partnership agreement. Since the advanced amount partook of the
nature of an investment, it could not be deducted as a bad debt from petitioners gross income.

The CTA likewise held that the amount paid by petitioner for the long-term loan obligations of Baguio
Gold could not be allowed as a bad debt deduction. At the time the payments were made, Baguio Gold was not in
default since its loans were not yet due and demandable. What petitioner did was to pre-pay the loans as
evidenced by the notice sent by Bank of America showing that it was merely demanding payment of the
installment and interests due. Moreover, Citibank imposed and collected a pre-termination penalty for the pre-
payment.

The Court of Appeals affirmed the decision of the CTA.[12] Hence, upon denial of its motion for
reconsideration,[13] petitioner took this recourse under Rule 45 of the Rules of Court, alleging that:
60 | P a g e

I. The Court of Appeals erred in construing that the advances made by Philex in the management of the
Sto. Nino Mine pursuant to the Power of Attorney partook of the nature of an investment rather than a
loan.

II. The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of the Sto. Nino Mine
indicates that Philex is a partner of Baguio Gold in the development of the Sto. Nino Mine
notwithstanding the clear absence of any intent on the part of Philex and Baguio Gold to form a
partnership.

III. The Court of Appeals erred in relying only on the Power of Attorney and in completely disregarding
the Compromise Agreement and the Amended Compromise Agreement when it construed the nature of
the advances made by Philex.

IV. The Court of Appeals erred in refusing to delve upon the issue of the propriety of the bad debts write-
off.[14]

Petitioner insists that in determining the nature of its business relationship with Baguio Gold, we should
not only rely on the Power of Attorney, but also on the subsequent Compromise with Dation in Payment and
Amended Compromise with Dation in Payment that the parties executed in 1982. These documents, allegedly
evinced the parties intent to treat the advances and payments as a loan and establish a creditor-debtor relationship
between them.

The petition lacks merit.

The lower courts correctly held that the Power of Attorney is the instrument that is material in
determining the true nature of the business relationship between petitioner and Baguio Gold. Before resort may be
had to the two compromise agreements, the parties contractual intent must first be discovered from the expressed
language of the primary contract under which the parties business relations were founded. It should be noted that
the compromise agreements were mere collateral documents executed by the parties pursuant to the termination of
their business relationship created under the Power of Attorney. On the other hand, it is the latter which
established the juridical relation of the parties and defined the parameters of their dealings with one another.

The execution of the two compromise agreements can hardly be considered as a subsequent or
contemporaneous act that is reflective of the parties true intent. The compromise agreements were executed
eleven years after the Power of Attorney and merely laid out a plan or procedure by which petitioner could
recover the advances and payments it made under the Power of Attorney. The parties entered into the compromise
agreements as a consequence of the dissolution of their business relationship. It did not define that relationship or
indicate its real character.

An examination of the Power of Attorney reveals that a partnership or joint venture was indeed intended
by the parties. Under a contract of partnership, two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among themselves.[15] While a
corporation, like petitioner, cannot generally enter into a contract of partnership unless authorized by law or its
charter, it has been held that it may enter into a joint venture which is akin to a particular partnership:
61 | P a g e

The legal concept of a joint venture is of common law origin. It has no precise legal definition, but
it has been generally understood to mean an organization formed for some temporary purpose. x x x It
is in fact hardly distinguishable from the partnership, since their elements are similar community of
interest in the business, sharing of profits and losses, and a mutual right of control. x x x The main
distinction cited by most opinions in common law jurisdictions is that the partnership contemplates a
general business with some degree of continuity, while the joint venture is formed for the execution of a
single transaction, and is thus of a temporary nature. x x x This observation is not entirely accurate in
this jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a
particular partnership may have for its object a specific undertaking. x x x It would seem therefore that
under Philippine law, a joint venture is a form of partnership and should be governed by the law of
partnerships. The Supreme Court has however recognized a distinction between these two business
forms, and has held that although a corporation cannot enter into a partnership contract, it may however
engage in a joint venture with others. x x x (Citations omitted) [16]

Perusal of the agreement denominated as the Power of Attorney indicates that the parties had intended to
create a partnership and establish a common fund for the purpose. They also had a joint interest in the profits of
the business as shown by a 50-50 sharing in the income of the mine.

Under the Power of Attorney, petitioner and Baguio Gold undertook to contribute money, property and
industry to the common fund known as the Sto. Nio mine.[17] In this regard, we note that there is a substantive
equivalence in the respective contributions of the parties to the development and operation of the mine. Pursuant
to paragraphs 4 and 5 of the agreement, petitioner and Baguio Gold were to contribute equally to the joint venture
assets under their respective accounts. Baguio Gold would contribute P11M under its owners account plus any of
its income that is left in the project, in addition to its actual mining claim. Meanwhile, petitioners contribution
would consist of its expertise in the management and operation of mines, as well as the managers account which
is comprised of P11M in funds and property and petitioners compensation as manager that cannot be paid in
cash.

However, petitioner asserts that it could not have entered into a partnership agreement with Baguio Gold
because it did not bind itself to contribute money or property to the project; that under paragraph 5 of the
agreement, it was only optional for petitioner to transfer funds or property to the Sto. Nio project (w)henever the
MANAGERS shall deem it necessary and convenient in connection with the MANAGEMENT of the STO. NIO
MINE.[18]

The wording of the parties agreement as to petitioners contribution to the common fund does not detract
from the fact that petitioner transferred its funds and property to the project as specified in paragraph 5, thus
rendering effective the other stipulations of the contract, particularly paragraph 5(c) which prohibits petitioner
from withdrawing the advances until termination of the parties business relations. As can be seen, petitioner
became bound by its contributions once the transfers were made. The contributions acquired an obligatory nature
as soon as petitioner had chosen to exercise its option under paragraph 5.

There is no merit to petitioners claim that the prohibition in paragraph 5(c) against withdrawal of
advances should not be taken as an indication that it had entered into a partnership with Baguio Gold; that the
stipulation only showed that what the parties entered into was actually a contract of agency coupled with an
interest which is not revocable at will and not a partnership.

In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the
principal due to an interest of a third party that depends upon it, or the mutual interest of both principal and
agent.[19] In this case, the non-revocation or non-withdrawal under paragraph 5(c) applies to the advances made
62 | P a g e

by petitioner who is supposedly the agentand not the principal under the contract. Thus, it cannot be inferred from
the stipulation that the parties relation under the agreement is one of agency coupled with an interest and not a
partnership.

Neither can paragraph 16 of the agreement be taken as an indication that the relationship of the parties
was one of agency and not a partnership. Although the said provision states that this Agency shall be irrevocable
while any obligation of the PRINCIPAL in favor of the MANAGERS is outstanding, inclusive of the
MANAGERS account, it does not necessarily follow that the parties entered into an agency contract coupled with
an interest that cannot be withdrawn by Baguio Gold.

It should be stressed that the main object of the Power of Attorney was not to confer a power in favor of
petitioner to contract with third persons on behalf of Baguio Gold but to create a business relationship between
petitioner and Baguio Gold, in which the former was to manage and operate the latters mine through the
parties mutual contribution of material resources and industry. The essence of an agency, even one that is coupled
with interest, is the agents ability to represent his principal and bring about business relations between the latter
and third persons.[20] Where representation for and in behalf of the principal is merely incidental or necessary for
the proper discharge of ones paramount undertaking under a contract, the latter may not necessarily be a contract
of agency, but some other agreement depending on the ultimate undertaking of the parties.[21]

In this case, the totality of the circumstances and the stipulations in the parties agreement indubitably lead
to the conclusion that a partnership was formed between petitioner and Baguio Gold.

First, it does not appear that Baguio Gold was unconditionally obligated to return the advances made by
petitioner under the agreement. Paragraph 5 (d) thereof provides that upon termination of the parties business
relations, the ratio which the MANAGERS account has to the owners account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO MINE, excluding the claims shall be transferred
to petitioner.[22] As pointed out by the Court of Tax Appeals, petitioner was merely entitled to a proportionate
return of the mines assets upon dissolution of the parties business relations. There was nothing in the agreement
that would require Baguio Gold to make payments of the advances to petitioner as would be recognized as an item
of obligation or accounts payable for Baguio Gold.

Thus, the tax court correctly concluded that the agreement provided for a distribution of assets of the Sto.
Nio mine upon termination, a provision that is more consistent with a partnership than a creditor-debtor
relationship. It should be pointed out that in a contract of loan, a person who receives a loan or money or any
fungible thing acquires ownership thereof and is bound to pay the creditor an equal amount of the same kind and
quality.[23] In this case, however, there was no stipulation for Baguio Gold to actually repay petitioner the cash and
property that it had advanced, but only the return of an amount pegged at a ratio which the managers account had
to the owners account.

In this connection, we find no contractual basis for the execution of the two compromise agreements in
which Baguio Gold recognized a debt in favor of petitioner, which supposedly arose from the termination of their
business relations over the Sto. Nino mine. The Power of Attorney clearly provides that petitioner would only be
entitled to the return of a proportionate share of the mine assets to be computed at a ratio that the managers
account had to the owners account. Except to provide a basis for claiming the advances as a bad debt deduction,
there is no reason for Baguio Gold to hold itself liable to petitioner under the compromise agreements, for any
amount over and above the proportion agreed upon in the Power of Attorney.
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Next, the tax court correctly observed that it was unlikely for a business corporation to lend hundreds of
millions of pesos to another corporation with neither security, or collateral, nor a specific deed evidencing the
terms and conditions of such loans. The parties also did not provide a specific maturity date for the advances to
become due and demandable, and the manner of payment was unclear. All these point to the inevitable conclusion
that the advances were not loans but capital contributions to a partnership.

The strongest indication that petitioner was a partner in the Sto Nio mine is the fact that it would receive
50% of the net profits as compensation under paragraph 12 of the agreement. The entirety of the parties
contractual stipulations simply leads to no other conclusion than that petitioners compensation is actually its share
in the income of the joint venture.

Article 1769 (4) of the Civil Code explicitly provides that the receipt by a person of a share in the profits
of a business is prima facie evidence that he is a partner in the business. Petitioner asserts, however, that no such
inference can be drawn against it since its share in the profits of the Sto Nio project was in the nature of
compensation or wages of an employee, under the exception provided in Article 1769 (4) (b).[24]

On this score, the tax court correctly noted that petitioner was not an employee of Baguio Gold who will
be paid wages pursuant to an employer-employee relationship. To begin with, petitioner was the manager of the
project and had put substantial sums into the venture in order to ensure its viability and profitability. By pegging
its compensation to profits, petitioner also stood not to be remunerated in case the mine had no income. It is hard
to believe that petitioner would take the risk of not being paid at all for its services, if it were truly just an ordinary
employee.

Consequently, we find that petitioners compensation under paragraph 12 of the agreement actually
constitutes its share in the net profits of the partnership. Indeed, petitioner would not be entitled to an equal share
in the income of the mine if it were just an employee of Baguio Gold.[25] It is not surprising that petitioner was to
receive a 50% share in the net profits, considering that the Power of Attorney also provided for an almost equal
contribution of the parties to the St. Nino mine. The compensation agreed upon only serves to reinforce the notion
that the parties relations were indeed of partners and not employer-employee.

All told, the lower courts did not err in treating petitioners advances as investments in a partnership
known as the Sto. Nino mine. The advances were not debts of Baguio Gold to petitioner inasmuch as the latter
was under no unconditional obligation to return the same to the former under the Power of Attorney. As for the
amounts that petitioner paid as guarantor to Baguio Golds creditors, we find no reason to depart from the tax
courts factual finding that Baguio Golds debts were not yet due and demandable at the time that petitioner paid
the same. Verily, petitioner pre-paid Baguio Golds outstanding loans to its bank creditors and this conclusion is
supported by the evidence on record.[26]

In sum, petitioner cannot claim the advances as a bad debt deduction from its gross income. Deductions
for income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer,
who must prove by convincing evidence that he is entitled to the deduction claimed. [27] In this case, petitioner
failed to substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be deducted
from its gross income. Consequently, it could not claim the advances as a valid bad debt deduction.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP No. 49385
dated June 30, 2000, which affirmed the decision of the Court of Tax Appeals in C.T.A. Case No. 5200
64 | P a g e

is AFFIRMED. Petitioner Philex Mining Corporation is ORDERED to PAY the deficiency tax on its 1982
income in the amount of P62,811,161.31, with 20% delinquency interest computed from February 10, 1995,
which is the due date given for the payment of the deficiency income tax, up to the actual date of payment. SO
ORDERED.