Tax Case 41-62

CASE 62
COMMISSIONER OF G.R. No. 153205

INTERNAL REVENUE,
Petitioner, Present:
QUISUMBING, J.
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
BURMEISTER AND WAIN VELASCO, JR., JJ.
SCANDINAVIAN CONTRACTOR
MINDANAO, INC., Promulgated:
Respondent.
January 22, 2007
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DECISION
CARPIO, J.:
The Case
This petition for review[1] seeks to set aside the 16 April 2002 Decision[2] of the Court of Appeals in CA-G.R. SP No.
66341 affirming the 8 August 2001 Decision[3] of the Court of Tax Appeals (CTA). The CTA ordered the
Commissioner of Internal Revenue (petitioner) to issue a tax credit certificate for P6,994,659.67 in favor
of Burmeister and Wain Scandinavian Contractor Mindanao, Inc. (respondent).
The Antecedents
The CTA summarized the facts, which the Court of Appeals adopted, as follows:
[Respondent] is a domestic corporation duly organized and existing under and by virtue of the laws
of the Philippines with principal address located at Daruma Building, Jose P. Laurel
Avenue, Lanang, Davao City.
It is represented that a foreign consortium composed of Burmeister and Wain Scandinavian

Contractor A/S (BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co.,
Ltd. entered into a contract with the National Power Corporation (NAPOCOR) for the operation and
maintenance of [NAPOCORs] two power barges. The Consortium appointed BWSC-Denmark as
its coordination manager.
BWSC-Denmark established [respondent] which subcontracted the actual operation and

maintenance of NAPOCORs two power barges as well as the performance of other duties and acts
which necessarily have to be done in the Philippines.
NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen,
and Peso). The freely convertible non-Peso component is deposited directly to the Consortiums
bank accounts in Denmark and Japan, while the Peso-denominated component is deposited in a
separate and special designated bank account in the Philippines. On the other hand, the
Consortium pays [respondent] in foreign currency inwardly remitted to the Philippines through the
banking system.
Page 1 of 108
In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling
from the BIR which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring
therein that if [respondent] chooses to register as a VAT person and the consideration for its
services is paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT
at zero-rate.
[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration
bearing RDO Control No. 95-113-007556 was issued in favor of [respondent] by the Revenue
District Office No. 113 of Davao City.
For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting,
among others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14,
detailed as follows:
Qtr. Exh. Date Filed Zero-Rated Sales VAT Input Tax
----------------------------------------------------------------------------------
1st E 04-18-96 P 33,019,651.07 P608,953.48
2nd F 07-16-96 37,108,863.33 756,802.66
3rd G 10-14-96 34,196,372.35 930,279.14
4th H 01-20-97 42,992,302.87 1,065,138.86
Totals P147,317,189.62 P3,361,174.14
On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the
BIR. It allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be
applicable to its case. Revenue Regulations No. 5-96 provides in part thus:
SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95

are hereby amended to read as follows:
Section 4.102-2(b)(2) Services other than processing, manufacturing or

repacking for other persons doing business outside the Philippines for goods
which are subsequently exported, as well as services by a resident to a non-
resident foreign client such as project studies, information services, engineering
and architectural designs and other similar services, the consideration for which
is paid for in acceptable foreign currency and accounted for in accordance with
the rules and regulations of the BSP.
x x x x x x x x x x.
In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of services
to the Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to
December 1996 sales since said Revenue Regulations No. 5-96 became effective only on April
1996. The sum of P43,893,951.07, representing January to March 1996 sales was subjected to
zero rate. Consequently, [respondent] filed its 1996 amended VAT return consolidating therein the
VAT output and input taxes for the four calendar quarters of 1996. It paid the amount
of P6,994,659.67 through BIRs collecting agent, PCIBank, as its output tax liability for the year
1996, computed as follows:
Amount subject to 10% VAT P103,558,338.11

Multiply by 10%
VAT Output Tax P 10,355,833.81
Less: 1996 Input VAT P 3,361,174.14
VAT Output Tax Payable P 6,994,659.67
On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review
Committee which reconfirmed BIR Ruling No. 023-95 insofar as it held that the services being
rendered by BWSCMI is subject to VAT at zero percent (0%).
On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed a claim
for the issuance of a tax credit certificate with Revenue District No. 113 of the BIR. [Respondent]
Page 2 of 108
believed that it erroneously paid the output VAT for 1996 due to its availment of the Voluntary
Assessment Program (VAP) of the BIR.[4]
On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the running of the two-year
prescriptive period under the Tax Code.
The Ruling of the Court of Tax Appeals
In its 8 August 2001 Decision, the CTA ordered petitioner to issue a tax credit certificate for P6,994,659.67 in favor of
respondent. The CTAs ruling stated:
[Respondents] sale of services to the Consortium [was] paid for in acceptable foreign currency
inwardly remitted to the Philippines and accounted for in accordance with the rules and regulations
of Bangko Sentral ng Pilipinas. These were established by various BPI Credit Memos showing
remittances in Danish Kroner (DKK) and US dollars (US$) as payments for the specific invoices
billed by [respondent] to the consortium. These remittances were further certified by the Branch
Manager x x x of BPI-Davao Lanang Branch to represent payments for sub-contract fees that came
from Den Danske Aktieselskab Bank-Denmark for the account of [respondent]. Clearly,
[respondents] sale of services to the Consortium is subject to VAT at 0% pursuant to Section
108(B)(2) of the Tax Code.
xxxx
The zero-rating of [respondents] sale of services to the Consortium was even confirmed by the
[petitioner] in BIR Ruling No. 023-95 dated February 15, 1995, and later by VAT Ruling No. 003-99
dated January 7,1999, x x x.
Since it is apparent that the payments for the services rendered by [respondent] were indeed
subject to VAT at zero percent, it follows that it mistakenly availed of the Voluntary Assessment
Program by paying output tax for its sale of services. x x x
x x x Considering the principle of solutio indebiti which requires the return of what has been
delivered by mistake, the [petitioner] is obligated to issue the tax credit certificate prayed for by
[respondent]. x x x[5]
Petitioner filed a petition for review with the Court of Appeals, which dismissed the petition for lack of merit and
affirmed the CTA decision.[6]
Hence, this petition.
The Court of Appeals Ruling
In affirming the CTA, the Court of Appeals rejected petitioners view that since respondents services are not
destined for consumption abroad, they are not of the same nature as project studies, information services,
engineering and architectural designs, and other similar services mentioned in Section 4.102-2(b)(2) of Revenue
Page 3 of 108
Regulations No. 5-96[7] as subject to 0% VAT. Thus, according to petitioner, respondents services cannot legally
qualify for 0% VAT but are subject to the regular 10% VAT.[8]
The Court of Appeals found untenable petitioners contention that under VAT Ruling No. 040-98, respondents
services should be destined for consumption abroad to enjoy zero-rating. Contrary to petitioners
interpretation, there are two kinds of transactions or services subject to zero percent VAT under VAT Ruling No. 040-
98. These are (a) services other than repacking goods for other persons doing business outside the Philippines which
goods are subsequently exported; and (b) services by a resident to a non-resident foreign client, such as project
studies, information services, engineering and architectural designs and other similar services, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP).[9]
The Court of Appeals stated that only the first classification is required by the provision to be consumed abroad in
order to be taxed at zero rate. In x x x the absence of such express or implied stipulation in the statute, the second
classification need not be consumed abroad.[10]
The Court of Appeals further held that assuming petitioners interpretation of Section 4.102-2(b)(2) of Revenue
Regulations No. 5-96 is correct, such administrative provision is void being an amendment to the Tax
Code. Petitioner went beyond merely providing the implementing details by adding another requirement to zero-
rating. This is indicated by the additional phrase as well as services by a resident to a non-resident foreign client,
such as project studies, information services and engineering and architectural designs and other similar services. In
effect, this phrase adds not just one but two requisites: (a) services must be rendered by a resident to a non-resident;
and (b) these must be in the nature of project studies, information services, etc. [11]
The Court of Appeals explained that under Section 108(b)(2) of the Tax Code, [12] for services which were performed
in the Philippines to enjoy zero-rating, these must comply only with two requisites, to wit: (1) payment in acceptable
foreign currency and (2) accounted for in accordance with the rules of the BSP. Section 108(b)(2) of the Tax Code
does not provide that services must be destined for consumption abroad in order to be VAT zero-rated.[13]
The Court of Appeals disagreed with petitioners argument that our VAT law generally follows the destination principle
(i.e., exports exempt, imports taxable).[14] The Court of Appeals stated that if indeed the destination principle underlies
and is the basis of the VAT laws, then petitioners proper remedy would be to recommend an amendment of Section
108(b)(2) to Congress. Without such amendment, however, petitioner should apply the terms of the basic law.
Petitioner could not resort to administrative legislation, as what [he] had done in this case. [15]
The Issue
The lone issue for resolution is whether respondent is entitled to the refund of P6,994,659.67 as erroneously paid
output VAT for the year 1996.[16]
Page 4 of 108
The Ruling of the Court
We deny the petition.

At the outset, the Court declares that the denial of the instant petition is not on the ground that respondents services
are subject to 0% VAT. Rather, it is based on the non-retroactivity of the prejudicial revocation of BIR Ruling No. 023-
95[17] and VAT Ruling No. 003-99,[18] which held that respondents services are subject to 0% VAT and which
respondent invoked in applying for refund of the output VAT.
Section 102(b) of the Tax Code,[19] the applicable provision in 1996 when respondent rendered the services and paid
the VAT in question, enumerates which services are zero-rated, thus:
(b) Transactions subject to zero-rate. ― The following services performed in the Philippines by
VAT-registered persons shall be subject to 0%:
(1) Processing, manufacturing or repacking goods for other persons doing business outside
the Philippines which goods are subsequently exported, where the services are paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding sub-paragraph, the
consideration for which is paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the supply
of such services to zero rate;
(4) Services rendered to vessels engaged exclusively in international shipping; and
(5) Services performed by subcontractors and/or contractors in processing, converting, or

manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of
total annual production. (Emphasis supplied)
In insisting that its services should be zero-rated, respondent claims that it complied with the requirements of the Tax
Code for zero rating under the second paragraph of Section 102(b). Respondent asserts that (1) the payment of its
service fees was in acceptable foreign currency, (2) there was inward remittance of the foreign currency into the
Philippines, and (3) accounting of such remittance was in accordance with BSP rules. Moreover, respondent
contends that its services which constitute the actual operation and management of two (2) power barges in
Mindanao are not even remotely similar to project studies, information services and engineering and architectural
designs under Section 4.102-2(b)(2) of Revenue Regulations No. 5-96. As such, respondents services need not be
destined to be consumed abroad in order to be VAT zero-rated.
Respondent is mistaken.
Page 5 of 108
The Tax Code not only requires that the services be other than processing, manufacturing or repacking of
goods and that payment for such services be in acceptable foreign currency accounted for in accordance with BSP
rules. Another essential condition for qualification to zero-rating under Section 102(b)(2) is that the recipient of such
services is doing business outside the Philippines. While this requirement is not expressly stated in the second
paragraph of Section 102(b), this is clearly provided in the first paragraph of Section 102(b) where the listed services
must be for other persons doing business outside the Philippines. The phrase for other persons doing business
outside the Philippines not only refers to the services enumerated in the first paragraph of Section 102(b), but also
pertains to the general term services appearing in the second paragraph of Section 102(b). In short, services other
than processing, manufacturing, or repacking of goods must likewise be performed for persons doing business
outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of the other
services are both doing business in the Philippines, the payment of foreign currency is irrelevant. Otherwise, those
subject to the regular VAT under Section 102(a) can avoid paying the VAT by simply stipulating payment in foreign
currency inwardly remitted by the recipient of services. To interpret Section 102(b)(2) to apply to a payer-recipient of
services doing business in the Philippines is to make the payment of the regular VAT under Section 102(a)
dependent on the generosity of the taxpayer. The provider of services can choose to pay the regular VAT or avoid it
by stipulating payment in foreign currency inwardly remitted by the payer-recipient. Such interpretation removes
Section 102(a) as a tax measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a mandatory
exaction, not a voluntary contribution.
When Section 102(b)(2) stipulates payment in acceptable foreign currency under BSP rules, the law clearly
envisions the payer-recipient of services to be doing business outside the Philippines. Only those not doing business
in the Philippines can be required under BSP rules [20] to pay in acceptable foreign currency for their purchase of
goods or services from the Philippines. In a domestic transaction, where the provider and recipient of services are
both doing business in the Philippines, the BSP cannot require any party to make payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the payer-recipient of
services is doing business outside the Philippines. Under BSP rules,[21] the proceeds of export sales must be reported
to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the provider of services under Section 102(b) (1)
and (2) to account for the foreign currency proceeds to the BSP. The same rationale does not apply if the provider
and recipient of the services are both doing business in the Philippines since their transaction is not in the nature of
an export sale even if payment is denominated in foreign currency.
Further, when the provider and recipient of services are both doing business in the Philippines, their
transaction falls squarely under Section 102(a) governing domesticsale or exchange of services. Indeed, this is a
purely local sale or exchange of services subject to the regular VAT, unless of course the transaction falls under the
other provisions of Section 102(b).
Page 6 of 108
Thus, when Section 102(b)(2) speaks of [s]ervices other than those mentioned in the preceding
subparagraph, the legislative intent is that only the services are different between subparagraphs 1 and 2. The
requirements for zero-rating, including the essential condition that the recipient of services is doing business outside
the Philippines, remain the same under both subparagraphs.
Significantly, the amended Section 108(b)[22] [previously Section 102(b)] of the present Tax Code clarifies this
legislative intent. Expressly included among the transactions subject to 0% VAT are [s]ervices other than those
mentioned in the [first] paragraph [of Section 108(b)] rendered to a person engaged in business conducted
outside the Philippines or to a nonresident person not engaged in business who is outside the
Philippines when the services are performed, the consideration for which is paid for in acceptable foreign currency
and accounted for in accordance with the rules and regulations of the BSP.
In this case, the payer-recipient of respondents services is the Consortium which is a joint-venture doing business in
the Philippines. While the Consortiums principal members are non-resident foreign corporations, the Consortium
itself is doing business in the Philippines. This is shown clearly in BIR Ruling No. 023-95 which states that the
contract between the Consortium and NAPOCOR is for a 15-year term, thus:
This refers to your letter dated January 14, 1994 requesting for a clarification of the tax implications
of a contract between a consortium composed of Burmeister & Wain Scandinavian Contractor A/S
(BWSC), Mitsui Engineering & Shipbuilding, Ltd. (MES), and Mitsui & Co., Ltd. (MITSUI), all
referred to hereinafter as the Consortium, and the National Power Corporation (NAPOCOR) for the
operation and maintenance of two 100-Megawatt power barges (Power Barges) acquired by
NAPOCOR for a 15-year term.[23] (Emphasis supplied)
Considering this length of time, the Consortiums operation and maintenance of NAPOCORs power barges cannot be
classified as a single or isolated transaction. The Consortium does not fall under Section 102(b)(2) which requires
that the recipient of the services must be a person doing business outside the Philippines. Therefore, respondents
services to the Consortium, not being supplied to a person doing business outside the Philippines, cannot legally
qualify for 0% VAT.
Respondent, as subcontractor of the Consortium, operates and maintains NAPOCORs power barges in the
Philippines. NAPOCOR pays the Consortium, through its non-resident partners, partly in foreign currency outwardly
remitted. In turn, the Consortium pays respondent also in foreign currency inwardly remitted and accounted for in
accordance with BSP rules. This payment scheme does not entitle respondent to 0% VAT. As the Court held
in Commissioner of Internal Revenue v. American Express International, Inc. (Philippine Branch),[24] the place of
payment is immaterial, much less is the place where the output of the service is ultimately used. An essential
condition for entitlement to 0% VAT under Section 102(b)(1) and (2) is that the recipient of the services is a person
doing business outside the Philippines. In this case, the recipient of the services is the Consortium, which is
doing business not outside, but within the Philippines because it has a 15-year contract to operate and
maintain NAPOCORs two 100-megawatt power barges in Mindanao.
Page 7 of 108
The Court recognizes the rule that the VAT system generally follows the destination principle (exports are
zero-rated whereas imports are taxed). However, as the Court stated in American Express, there is an exception to
this rule.[25] This exception refers to the 0% VAT on services enumerated in Section 102 and performed in the
Philippines. For services covered by Section 102(b)(1) and (2), the recipient of the services must be a person doing
business outside the Philippines. Thus, to be exempt from the destination principle under Section 102(b)(1) and (2),
the services must be (a) performed in the Philippines; (b) for a person doing business outside the Philippines; and (c)
paid in acceptable foreign currency accounted for in accordance with BSP rules.
Respondents reliance on the ruling in American Express[26] is misplaced. That case involved a recipient of services,
specifically American Express International, Inc. (HongkongBranch), doing business outside the Philippines. There,
the Court stated:
Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered person

that facilitates the collection and payment of receivables belonging to its non-resident foreign
client [American Express International, Inc. (Hongkong Branch)], for which it gets paid in
acceptable foreign currency inwardly remitted and accounted for in accordance with BSP rules and
regulations. x x x x[27] (Emphasis supplied)
In contrast, this case involves a recipient of services the Consortium which is doing business in the
Philippines. Hence, American Express services were subject to 0% VAT, while respondents services should be
subject to 10% VAT.
Nevertheless, in seeking a refund of its excess output tax, respondent relied on VAT Ruling No. 003-99,[28] which
reconfirmed BIR Ruling No. 023-95[29] insofar as it held that the services being rendered by BWSCMI is subject to
VAT at zero percent (0%). Respondents reliance on these BIR rulings binds petitioner.
Petitioners filing of his Answer before the CTA challenging respondents claim for refund effectively serves as a
revocation of VAT Ruling No. 003-99 and BIR Ruling No. 023-95. However, such revocation cannot be given
retroactive effect since it will prejudice respondent. Changing respondents status will deprive respondent of a refund
of a substantial amount representing excess output tax. [30] Section 246 of the Tax Code provides that any revocation
of a ruling by the Commissioner of Internal Revenue shall not be given retroactive application if the revocation will
prejudice the taxpayer. Further, there is no showing of the existence of any of the exceptions enumerated in Section
246 of the Tax Code for the retroactive application of such revocation.
However, upon the filing of petitioners Answer dated 2 March 2000 before the CTA contesting respondents claim for
refund, respondents services shall be subject to the regular 10% VAT. [31] Such filing is deemed a revocation of VAT
Ruling No. 003-99 and BIR Ruling No. 023-95.
WHEREFORE, the Court DENIES the petition.
SO ORDERED.
Page 8 of 108
CASE NO. 61
COMMISSIONER OF G.R. Nos. 134587 & 134588
INTERNAL REVENUE,
Petitioner, Present:
PUNO, J.,
Chairman,
- versus - AUSTRIA-MARTINEZ,
CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.
BENGUET CORPORATION,
Respondent.
Promulgated:
July 8, 2005
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DECISION
TINGA, J.:
This is a petition for the review of a consolidated Decision of the Former Fourteenth Division of the Court of
Appeals[1] ordering the Commissioner of Internal Revenue to award tax credits to Benguet Corporation in the amount
corresponding to the input value added taxes that the latter had incurred in relation to its sale of gold to the Central
Bank during the period of 01 August 1989 to 31 July 1991.
Petitioner is the Commissioner of Internal Revenue (petitioner) acting in his official capacity as head of the
Bureau of Internal Revenue (BIR), an attached agency of the Department of Finance, [2] with the authority, inter alia, to
determine claims for refunds or tax credits as provided by law.[3]
Respondent Benguet Corporation (respondent) is a domestic corporation organized and existing by virtue of
Philippine laws, engaged in the exploration, development and operation of mineral resources, and the sale or
marketing thereof to various entities.[4] Respondent is a value added tax (VAT) registered enterprise.[5]
The transactions in question occurred during the period between 1988 and 1991. Under Sec. 99 of the
National Internal Revenue Code (NIRC),[6] as amended by Executive Order (E.O.) No. 273 s. 1987, then in effect, any
person who, in the course of trade or business, sells, barters or exchanges goods, renders services, or engages in
similar transactions and any person who imports goods is liable for output VAT at rates of either 10% or 0% (zero-
Page 9 of 108
rated) depending on the classification of the transaction under Sec. 100 of the NIRC. Persons registered under the
VAT system[7] are allowed to recognize input VAT, or the VAT due from or paid by it in the course of its trade or
business on importation of goods or local purchases of goods or service, including lease or use of properties, from a
VAT-registered person.[8]
In January of 1988, respondent applied for and was granted by the BIR zero-rated status on its sale of gold
to Central Bank.[9] On 28 August 1988, Deputy Commissioner of Internal Revenue Eufracio D. Santos issued VAT
Ruling No. 3788-88, which declared that [t]he sale of gold to Central Bank is considered as export sale subject to
zero-rate pursuant to Section 100[[10]] of the Tax Code, as amended by Executive Order No. 273. The BIR came out
with at least six (6) other issuances[11] reiterating the zero-rating of sale of gold to the Central Bank, the latest of
which is VAT Ruling No. 036-90 dated 14 February 1990.[12]
Relying on its zero-rated status and the above issuances, respondent sold gold to the Central Bank during
the period of 1 August 1989 to 31 July 1991 and entered into transactions that resulted in input VAT incurred in
relation to the subject sales of gold. It then filed applications for tax refunds/credits corresponding to input VAT for the
amounts[13] of P46,177,861.12,[14]
P19,218,738.44,[15] and P84,909,247.96.[16] Respondents applications were either unacted upon or expressly
disallowed by petitioner.[17] In addition, petitioner issued a deficiency assessment against respondent when, after
applying respondents creditable input VAT costs against the retroactive 10% VAT levy, there resulted a balance of
excess output VAT.[18]
The express disallowance of respondents application for refunds/credits and the issuance of deficiency
assessments against it were based on a BIR ruling BIR VAT Ruling No. 008-92 dated 23 January 1992 that was
issued subsequent to the consummation of the subject sales of gold to the Central Bank which provides that sales of
gold to the Central Bank shall not be considered as export sales and thus, shall be subject to 10% VAT. In addition,
BIR VAT Ruling No. 008-92 withdrew, modified, and superseded all inconsistent BIR issuances. The relevant portions
of the ruling provides, thus:
1. In general, for purposes of the term export sales only direct export sales and foreign currency
denominated sales, shall be qualified for zero-rating.
....
4. Local sales of goods, which by fiction of law are considered export sales (e.g., the Export Duty
Law considers sales of gold to the Central Bank of the Philippines, as export sale). This
transaction shall not be considered as export sale for VAT purposes.
....
[A]ll Orders and Memoranda issued by this Office inconsistent herewith are considered withdrawn,
modified or superseded. (Emphasis supplied)
Page 10 of 108
The BIR also issued VAT Ruling No. 059-92 dated 28 April 1992 and Revenue Memorandum Order No. 22-92 which
decreed that the revocation of VAT Ruling No. 3788-88 by VAT Ruling No. 008-92 would not unduly prejudice mining
companies and, thus, could be applied retroactively.[19]
Respondent filed three separate petitions for review with the Court of Tax Appeals (CTA), docketed as CTA
Case No. 4945, CTA Case No. 4627, and the consolidated cases of CTA Case Nos. 4686 and 4829.
In the three cases, respondent argued that a retroactive application of BIR VAT Ruling No. 008-92 would
violate Sec. 246 of the NIRC, which mandates the non-retroactivity of rulings or circulars issued by the Commissioner
of Internal Revenue that would operate to prejudice the taxpayer. Respondent then discussed in detail the manner
and extent by which it was prejudiced by this retroactive application. [20] Petitioner on the other hand, maintained that
BIR VAT Ruling No. 008-92 is, firstly, not void and entitled to great respect, having been issued by the body charged
with the duty of administering the VAT law, and secondly, it may validly be given retroactive effect since it was not
prejudicial to respondent.
In three separate decisions,[21] the CTA dismissed respondents respective petitions. It held, with Presiding
Judge Ernesto D. Acosta dissenting, that no prejudice had befallen respondent by virtue of the retroactive application
of BIR VAT Ruling No. 008-92, and that, consequently, the application did not violate Sec. 246 of the NIRC.[22]
The CTA decisions were appealed by respondent to the Court of Appeals. The cases were docketed therein
as CA-G.R. SP Nos. 37205, 38958, and 39435, and thereafter consolidated. The Court of Appeals, after evaluating
the arguments of the parties, rendered the questioned Decision reversing the Court of Tax Appeals insofar as the
latter had ruled that BIR VAT Ruling No. 008-92 did not prejudice the respondent and that the same could be given
retroactive effect.
In its Decision, the appellate court held that respondent suffered financial damage equivalent to the sum of
the disapproved claims. It stated that had respondent known that such sales were subject to 10% VAT, which rate
was not the prevailing rate at the time of the transactions, respondent would have passed on the cost of the input
taxes to the Central Bank. It also ruled that the remedies which the CTA supposed would eliminate any resultant
prejudice to respondent were not sufficient palliatives as the monetary values provided in the supposed remedies do
not approximate the monetary values of the tax credits that respondent lost after the implementation of the VAT ruling
in question. It cited
Page 11 of 108
Manila Mining Corporation v. Commissioner of Internal Revenue,[23] in which the Court of Appeals held[24] that BIR
VAT Ruling No. 008-92 cannot be given retroactive effect. Lastly, the Court of Appeals observed that R.A. 7716, the
The New Expanded VAT Law, reveals the intent of the lawmakers with regard to the treatment of sale of gold to the
Central Bank since the amended version therein of Sec. 100 of the NIRC expressly provides that the sale of gold to
the Bangko Sentral ng Pilipinas is an export sale subject to 0% VAT rate. The appellate court thus allowed
respondents claims, decreeing in its dispositive portion, viz:
WHEREFORE, the appealed decision is hereby REVERSED. The respondent Commissioner of

Internal Revenue is ordered to award the following tax credits to petitioner.
1) In CA-G.R. SP No. 37209 P49,611,914.00
2) in CA-G.R. SP No. 38958 - P19,218,738.44
3) in CA-G.R. SP No. 39435 - P84,909,247.96[25]
Dissatisfied with the above ruling, petitioner filed the instant Petition for Review questioning the
determination of the Court of Appeals that the retroactive application of the subject issuance was prejudicial to
respondent and could not be applied retroactively.
Apart from the central issue on the validity of the retroactive application of VAT Ruling No. 008-92, the
question of the validity of the issuance itself has been touched upon in the pleadings, including a reference made by
respondent to a Court of Appeals Decision holding that the VAT Ruling had no legal basis.[26] For its part, as the party
that raised this issue, petitioner spiritedly defends the validity of the issuance. [27]Effectively, however, the question is a
non-issue and delving into it would be a needless exercise for, as respondent emphatically pointed out in
its Comment, unlike petitioners formulation of the issues, the only real issue in this case is whether VAT Ruling No.
008-92 which revoked previous rulings of the petitioner which respondent heavily relied upon . . . may be legally
applied retroactively to respondent.[28] This Court need not invalidate the BIR issuances, which have the force and
effect of law, unless the issue of validity is so crucially at the heart of the controversy that the Court cannot resolve
the case without having to strike down the issuances. Clearly, whether the subject VAT ruling may validly be given
retrospective effect is the lis mota in the case. Put in another but specific fashion, the sole issue to be addressed is
whether respondents sale of gold to the Central Bank during the period when such was classified by BIR issuances
as zero-rated could be taxed validly at a 10% rate after the consummation of the transactions involved.
In a long line of cases,[29] this Court has affirmed that the rulings, circular, rules and regulations promulgated
by the Commissioner of Internal Revenue would have no retroactive application if to so apply them would be
prejudicial to the taxpayers. In fact, both petitioner [30] and respondent[31] agree that the retroactive application of VAT
Page 12 of 108
Ruling No. 008-92 is valid only if such application would not be prejudicial to the respondent pursuant to the explicit
mandate under Sec. 246 of the NIRC, thus:
Sec. 246. Non-retroactivity of rulings.- Any revocation, modification or reversal of any of

the rules and regulations promulgated in accordance with the preceding Section or any of the
rulings or circulars promulgated by the Commissioner shall not be given retroactive application if
the revocation, modification or reversal will be prejudicial to the taxpayers except in the following
cases: (a) where the taxpayer deliberately misstates or omits material facts from his return on any
document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently
gathered by the Bureau of Internal Revenue are materially different form the facts on which the
ruling is based; or (c) where the taxpayer acted in bad faith. (Emphasis supplied)
In that regard, petitioner submits that respondent would not be prejudiced by a retroactive application;
respondent maintains the contrary. Consequently, the determination of the issue of retroactivity hinges on whether
respondent would suffer prejudice from the retroactive application of VAT Ruling No. 008-92.
We agree with the Court of Appeals and the respondent.
To begin with, the determination of whether respondent had suffered prejudice is a factual issue. It is an
established rule that in the exercise of its power of review, the Supreme Court is not a trier of facts. Moreover, in the
exercise of the Supreme Courts power of review, the findings of facts of the Court of Appeals are conclusive and
binding on the Supreme Court.[32] An exception to this rule is when the findings of fact a quo are conflicting,[33] as is in
this case.
VAT is a percentage tax imposed at every stage of the distribution process on the sale, barter, exchange or
lease of goods or properties and rendition of services in the course of trade or business, or the importation of
goods.[34] It is an indirect tax, which may be shifted to the buyer, transferee, or lessee of the goods, properties, or
services.[35] However, the party directly liable for the payment of the tax is the seller. [36]
In transactions taxed at a 10% rate, when at the end of any given taxable quarter the output VAT exceeds
the input VAT, the excess shall be paid to the government; when the input VAT exceeds the output VAT, the excess
would be carried over to VAT liabilities for the succeeding quarter or quarters. [37] On the other hand, transactions
which are taxed at zero-rate do not result in any output tax. Input VAT attributable to zero-rated sales could be
refunded or credited against other internal revenue taxes at the option of the taxpayer. [38]
To illustrate, in a zero-rated transaction, when a VAT-registered person (taxpayer) purchases materials from
his supplier at P80.00,P7.30[39] of which was passed on to him by his supplier as the latters 10% output VAT, the
taxpayer is allowed to recover P7.30 from the BIR, in addition to other input VAT he had incurred in relation to the
zero-rated transaction, through tax credits or refunds. When the taxpayer sells his finished product in a zero-rated
Page 13 of 108
transaction, say, for P110.00, he is not required to pay any output VAT thereon. In the case of a transaction subject to
10% VAT, the taxpayer is allowed to recover both the input VAT of P7.30 which he paid to his supplier and his output
VAT of P2.70 (10% the P30.00 value he has added to the P80.00 material) by passing on both costs to the buyer.
Thus, the buyer pays the total 10% VAT cost, in this case P10.00 on the product.
In both situations, the taxpayer has the option not to carry any VAT cost because in the zero-rated
transaction, the taxpayer is allowed to recover input tax from the BIR without need to pay output tax, while in 10%
rated VAT, the taxpayer is allowed to pass on both input and output VAT to the buyer. Thus, there is an elemental
similarity between the two types of VAT ratings in that the taxpayer has the option not to take on any VAT payment
for his transactions by simply exercising his right to pass on the VAT costs in the manner discussed above.
Proceeding from the foregoing, there appears to be no upfront economic difference in changing the sale of
gold to the Central Bank from a 0% to 10% VAT rate provided that respondent would be allowed the choice to pass
on its VAT costs to the Central Bank. In the instant case, the retroactive application of VAT Ruling No. 008-92
unilaterally forfeited or withdrew this option of respondent. The adverse effect is that respondent became the
unexpected and unwilling debtor to the BIR of the amount equivalent to the total VAT cost of its product, a liability it
previously could have recovered from the BIR in a zero-rated scenario or at least passed on to the Central Bank had
it known it would have been taxed at a 10% rate. Thus, it is clear that respondent suffered economic prejudice when
its consummated sales of gold to the Central Bank were taken out of the zero-rated category. The change in the VAT
rating of respondents transactions with the Central Bank resulted in the twin loss of its exemption from payment of
output VAT and its opportunity to recover input VAT, and at the same time subjected it to the 10% VAT sans the
option to pass on this cost to the Central Bank, with the total prejudice in money terms being equivalent to the 10%
VAT levied on its sales of gold to the Central Bank.
Petitioner had made its position hopelessly untenable by arguing that the deficiency 10% that may be
assessable will only be equal to 1/11thof the amount billed to the [Central Bank] rather than 10% thereof. In short,
[respondent] may only be charged based on the tax amount actually and technically passed on to the [Central Bank]
as part of the invoiced price.[40] To the Court, the aforequoted statement is a clear recognition that respondent would
suffer prejudice in the amount actually and technically passed on to the [Central Bank] as part of the invoiced price. In
determining the prejudice suffered by respondent, it matters little how the amount charged against respondent is
computed,[41] the point is that the amount (equal to 1/11 th of the amount billed to the Central Bank) was charged
against respondent, resulting in damage to the latter.
Petitioner posits that the retroactive application of BIR VAT Ruling No. 008-92 is stripped of any prejudicial
effect when viewed in relation to several available options to recoup whatever liabilities respondent may have
Page 14 of 108
incurred, i.e., respondents input VAT may still be used (1) to offset its output VAT on the sales of gold to the Central
Bank or on its output VAT on other sales subject to 10% VAT, and (2) as deductions on its income tax under Sec. 29
of the Tax Code.[42]
On petitioners first suggested recoupment modality, respondent counters that its other sales subject to 10%
VAT are so minimal that this mode is of little value. Indeed, what use would a credit be where there is nothing to set it
off against? Moreover, respondent points out that after having been imposed with 10% VAT sans the opportunity to
pass on the same to the Central Bank, it was issued a deficiency tax assessment because its input VAT tax credits
were not enough to offset the retroactive 10% output VAT. The prejudice then experienced by respondent lies in the
fact that the tax refunds/credits that it expected to receive had effectively disappeared by virtue of its newfound output
VAT liability against which petitioner had offset the expected refund/credit. Additionally, the prejudice to respondent
would not simply disappear, as petitioner claims, when a liability (which liability was not there to begin with) is
imposed concurrently with an opportunity to reduce, not totally eradicate, the newfound liability. In sum, contrary to
petitioners suggestion, respondents net income still decreased corresponding to the amount it expected as its
refunds/credits and the deficiency assessments against it, which when summed up would be the total cost of the 10%
retroactive VAT levied on respondent.
Respondent claims to have incurred further prejudice. In computing its income taxes for the relevant years,
the input VAT cost that respondent had paid to its suppliers was not treated by respondent as part of its cost of goods
sold, which is deductible from gross income for income tax purposes, but as an asset which could be refunded or
applied as payment for other internal revenue taxes. In fact, Revenue Regulation No. 5-87 (VAT Implementing
Guidelines), requires input VAT to be recorded not as part of the cost of materials or inventory purchased but as a
separate entry called input taxes, which may then be applied against output VAT, other internal revenue taxes, or
refunded as the case may be.[43] In being denied the opportunity to deduct the input VAT from its gross income,
respondents net income was overstated by the amount of its input VAT. This overstatement was assessed tax at the
32% corporate income tax rate, resulting in respondents overpayment of income taxes in the corresponding amount.
Thus, respondent not only lost its right to refund/ credit its input VAT and became liable for deficiency VAT, it also
overpaid its income tax in the amount of 32% of its input VAT.
This leads us to the second recourse that petitioner has suggested to offset any resulting prejudice to
respondent as a consequence of giving retroactive effect to BIR VAT Ruling No. 008-92. Petitioner submits that
granting that respondent has no other sale subject to 10% VAT against which its input taxes may be used in
payment, then respondent is constituted as the final entity against which the costs of the tax passes-onshall legally
stop; hence, the input taxes may be converted as costs available as deduction for income tax purposes. [44]
Page 15 of 108
Even assuming that the right to recover respondents excess payment of income tax has not yet prescribed,
this relief would only address respondents overpayment of income tax but not the other burdens discussed above.
Verily, this remedy is not a feasible option for respondent because the very reason why it was issued a deficiency tax
assessment is that its input VAT was not enough to offset its retroactive output VAT. Indeed, the burden of having to
go through an unnecessary and cumbersome refund process is prejudice enough. Moreover, there is in fact nothing
left to claim as a deduction from income taxes.
From the foregoing it is clear that petitioners suggested options by which prejudice would be eliminated from
a retroactive application of VAT Ruling No. 008-92 are either simply inadequate or grossly unrealistic.
At the time when the subject transactions were consummated, the prevailing BIR regulations relied upon by
respondent ordained that gold sales to the Central Bank were zero-rated. The BIR interpreted Sec. 100 of the NIRC
in relation to Sec. 2 of E.O. No. 581 s. 1980 which prescribed that gold sold to the Central Bank shall be considered
export and therefore shall be subject to the export and premium duties. In coming out with this interpretation, the BIR
also considered Sec. 169 of Central Bank Circular No. 960 which states that all sales of gold to the Central Bank are
considered
constructive exports.[45] Respondent should not be faulted for relying on the BIRs interpretation of the said laws and
regulations.[46] While it is true, as petitioner alleges, that government is not estopped from collecting taxes which
remain unpaid on account of the errors or mistakes of its agents and/or officials and there could be no vested right
arising from an erroneous interpretation of law, these principles must give way to exceptions based on and in keeping
with the interest of justice and fairplay, as has been done in the instant matter. For, it is primordial that every person
must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.[47]
Page 16 of 108
The case of ABS-CBN Broadcasting Corporation v. Court of Tax Appeals[48] involved a similar factual milieu.
There the Commissioner of Internal Revenue issued Memorandum Circular No. 4-71 revoking an earlier circular for
being erroneous for lack of legal basis. When the prior circular was still in effect, petitioner therein relied on it and
consummated its transactions on the basis thereof. We held, thus:
. . . .Petitioner was no longer in a position to withhold taxes due from foreign corporations because
it had already remitted all film rentals and no longer had any control over them when the new
Circular was issued. . . .
....
This Court is not unaware of the well-entrenched principle that the [g]overnment is never
estopped from collecting taxes because of mistakes or errors on the part of its agents. But, like
other principles of law, this also admits of exceptions in the interest of justice and fairplay. . . .In
fact, in the United States, . . . it has been held that the Commissioner [of Internal Revenue] is
precluded from adopting a position inconsistent with one previously taken where injustice would
result therefrom or where there has been a misrepresentation to the taxpayer. [49]
Respondent, in this case, has similarly been put on the receiving end of a grossly unfair deal. Before
respondent was entitled to tax refunds or credits based on petitioners own issuances. Then suddenly, it found itself
instead being made to pay deficiency taxes with petitioners retroactive change in the VAT categorization of
respondents transactions with the Central Bank. This is the sort of unjust treatment of a taxpayer which the law in
Sec. 246 of the NIRC abhors and forbids.
WHEREFORE, the petition is DENIED for lack of merit. The Decision of the Court of Appeals is AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
Page 17 of 108
CASE 60
G.R. No. L-52306 October 12, 1981
ABS-CBN BROADCASTING CORPORATION, petitioner,

vs.
COURT OF TAX APPEALS and THE COMMISSIONER OF INTERNAL REVENUE, respondents.
MELENCIO-HERRERA, J.:
This is a Petition for Review on certiorari of the Decision of the Court of Tax Appeals in C.T.A. Case No. 2809, dated
November 29, 1979, which affirmed the assessment by the Commissioner of Internal Revenue, dated April 16, 1971,
of a deficiency withholding income tax against petitioner, ABS-CBN Broadcasting Corporation, for the years 1965,
1966, 1967 and 1968 in the respective amounts of P75,895.24, P99,239.18, P128,502.00 and P222, 260.64, or a
total of P525,897.06.
During the period pertinent to this case, petitioner corporation was engaged in the business of telecasting local as
well as foreign films acquired from foreign corporations not engaged in trade or business within the Philippines. for
which petitioner paid rentals after withholding income tax of 30%of one-half of the film rentals.
In so far as the income tax on non-resident corporations is concerned, section 24 (b) of the National Internal Revenue
Code, as amended by Republic Act No. 2343 dated June 20, 1959, used to provide:
(b) Tax on foreign corporations.—(1) Non-resident corporations.— There shall be levied, collected,
and paid for each taxable year, in lieu of the tax imposed by the preceding paragraph, upon the
amount received by every foreign corporation not engaged in trade or business within the
Philippines, from an sources within the Philippines, as interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable
annual or periodical gains, profits, and income, a tax equal to thirty per centum of such amount.
(Emphasis supplied)
On April 12, 1961, in implementation of the aforequoted provision, the Commissioner of Internal Revenue issued
General Circular No. V-334 reading thus:
In connection with Section 24 (b) of Tax Code, the amendment introduced by Republic Act No.
2343, under which an income tax equal to 30% is levied upon the amount received by every foreign
corporation not engaged in trade or business within the Philippines from all sources within this
country as interest, dividends, rents, salaries, wages, premiums, annuities, compensations,
remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and
income, it has been determined that the tax is still imposed on income derived from capital, or
labor, or both combined, in accordance with the basic principle of income taxation (Sec. 39, Income
Tax Regulations), and that a mere return of capital or investment is not income (Par. 5,06, 1
Mertens Law of Federal 'Taxation). Since according to the findings of the Special Team who
inquired into business of the non-resident foreign film distributors, the distribution or exhibition right
on a film is invariably acquired for a consideration, either for a lump sum or a percentage of the film
rentals, whether from a parent company or an independent outside producer, apart of the receipts
of a non-resident foreign film distributor derived from said film represents, therefore, a return of
investment.
xxx xxx xxx
4. The local distributor should withhold 30% of one-half of the film rentals paid to the non-resident
foreign film distributor and pay the same to this office in accordance with law unless the non-
resident foreign film distributor makes a prior settlement of its income tax liability. (Emphasis ours).
Page 18 of 108
Pursuant to the foregoing, petitioner dutifully withheld and turned over to the Bureau of Internal Revenue the amount
of 30% of one-half of the film rentals paid by it to foreign corporations not engaged in trade or business within the
Philippines. The last year that petitioner withheld taxes pursuant to the foregoing Circular was in 1968.
On June 27, 1968, Republic Act No. 5431 amended Section 24 (b) of the Tax Code increasing the tax rate from 30 %
to 35 % and revising the tax basis from "such amount" referring to rents, etc. to "gross income," as follows:
(b) Tax on foreign corporations.—(1) Non-resident corporations.—A foreign corporation not

engaged in trade or business in the Philippines including a foreign life insurance company not
engaged in the life insurance business in the Philippines shall pay a tax equal to thirty-five per cent
of the gross income received during each taxable year from all sources within the Philippines, as
interests, dividends, rents, royalties, salaries, wages, premiums, annuities, compensations,
remunerations for technical services or otherwise, emoluments or other fixed or determinable
annual, periodical or casual gains, profits, and income, and capital gains, Provided however, That
premiums shah not include reinsurance premiums. (Emphasis supplied)
On February 8, 1971, the Commissioner of Internal Revenue issued Revenue Memorandum Circular No. 4-71,
revoking General Circular No. V-334, and holding that the latter was "erroneous for lack of legal basis," because "the
tax therein prescribed should be based on gross income without deduction whatever," thus:
After a restudy and analysis of Section 24 (b) of the National Internal Revenue Code, as amended
by Republic Act No. 5431, and guided by the interpretation given by tax authorities to a similar
provision in the Internal Revenue Code of the United States, on which the aforementioned
provision of our Tax Code was patterned, this Office has come to the conclusion that the tax therein
prescribed should be based on gross income without t deduction whatever. Consequently, the
ruling in General Circular No. V-334, dated April 12, 1961, allowing the deduction of the
proportionate cost of production or exhibition of motion picture films from the rental income of non-
resident foreign corporations, is erroneous for lack of legal basis.
In view thereof, General Circular No. V-334, dated April 12, 1961, is hereby revoked and
henceforth, local films distributors and exhibitors shall deduct and withhold 35% of the entire
amount payable by them to non-resident foreign corporations, as film rental or royalty, or whatever
such payment may be denominated, without any deduction whatever, pursuant to Section 24 (b),
and pay the withheld taxes in accordance with Section 54 of the Tax Code, as amended.
All rulings inconsistent with this Circular is likewise revoked. (Emphasis ours)
On the basis of this new Circular, respondent Commissioner of Internal Revenue issued against petitioner a letter of
assessment and demand dated April 15, 1971, but allegedly released by it and received by petitioner on April 12,
1971, requiring them to pay deficiency withholding income tax on the remitted film rentals for the years 1965 through
1968 and film royalty as of the end of 1968 in the total amount of P525,897.06 computed as follows:
1965
Total amount remitted P 511,059.48
Withholding tax due thereon 153,318.00
Less: Amount already 89,000.00

assessed
Balance P64,318.00
Add: 1/2% mo. int. fr. 4-16-66 11,577.24

to 4-16-69
Total amount due & collectible P 75,895.24
Page 19 of 108
1966
Total amount remitted P373,492.24
Withholding tax due thereon 112,048.00

assessed
Balance 84,101.00
Add: 11/2%mo. int. fr. 4-16- 15,138.18

67 to 4-116-70
Total amount due & P99,239.18

collectible
1967
Withholding tax due 180,348.00

thereon

assessed
Balance 108,900.00
Add: 1/2% mo. int. fr. 4- 19,602.00

16-68 to 4-16-71
Total amount due & P128,502.00

collectible
1968
Withholding tax due 291,283.00

thereon

assessed
Balance P198,447.00
Add: 1/2% mo. int. fr. 4-16- 23,813.64

69 to 4-29-71
Total amount due & P222,260.44 1

collectible
On May 5, 1971, petitioner requested for a reconsideration and withdrawal of the assessment. However, without
acting thereon, respondent, on April 6, 1976, issued a warrant of distraint and levy over petitioner's personal as well
as real properties. The petitioner then filed its Petition for Review with the Court of Tax Appeals whose Decision,
dated November 29, 1979, is, in turn, the subject of this review. The Tax Court held:
Page 20 of 108
For the reasons given, the Court finds the assessment issued by respondent on April 16, 1971
against petitioner in the amounts of P75,895.24, P 99,239.18, P128,502.00 and P222,260.64 or a
total of P525,897.06 as deficiency withholding income tax for the years 1965, 1966, 1967 and
1968, respectively, in accordance with law. As prayed for, the petition for review filed in this case is
dismissed, and petitioner ABS-CBN Broadcasting Corporation is hereby ordered to pay the sum of
P525,897.06 to respondent Commissioner of Internal Revenue as deficiency withholding income
tax for the taxable years 1965 thru 1968, plus the surcharge and interest which have accrued
thereon incident to delinquency pursuant to Section 51 (e) of the National Internal Revenue Code,
as amended.
WHEREFORE, the decision appealed from is hereby affirmed at petitioner's cost.
SO ORDERED. 2
The issues raised are two-fold:
I. Whether or not respondent can apply General Circular No. 4-71 retroactively and issue a
deficiency assessment against petitioner in the amount of P 525,897.06 as deficiency withholding
income tax for the years 1965, 1966, 1967 and 1968.
II. Whether or not the right of the Commissioner of Internal Revenue to assess the deficiency
withholding income tax for the year 196,5 has prescribed. 3
Upon the facts and circumstances of the case, review is warranted.
In point is Sec. 338-A (now Sec. 327) of the Tax Code. As inserted by Republic Act No. 6110 on August 9, 1969, it
provides:
Sec. 338-A. Non-retroactivity of rulings. — Any revocation, modification, or reversal of and of the
rules and regulations promulgated in accordance with the preceding section or any of the rulings or
circulars promulgated by the Commissioner of Internal Revenue shall not be given retroactive
application if the relocation, modification, or reversal will be prejudicial to the taxpayers, except in
the following cases: (a) where the taxpayer deliberately mis-states or omits material facts from his
return or any document required of him by the Bureau of Internal Revenue: (b) where the facts
subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on
which the ruling is based; or (c) where the taxpayer acted in bad faith. (italics for emphasis)
It is clear from the foregoing that rulings or circulars promulgated by the Commissioner of Internal Revenue have no
retroactive application where to so apply them would be prejudicial to taxpayers. The prejudice to petitioner of the
retroactive application of Memorandum Circular No. 4-71 is beyond question. It was issued only in 1971, or three
years after 1968, the last year that petitioner had withheld taxes under General Circular No. V-334. The assessment
and demand on petitioner to pay deficiency withholding income tax was also made three years after 1968 for a period
of time commencing in 1965. Petitioner was no longer in a position to withhold taxes due from foreign corporations
because it had already remitted all film rentals and no longer had any control over them when the new Circular was
issued. And in so far as the enumerated exceptions are concerned, admittedly, petitioner does not fall under any of
them.
Respondent claims, however, that the provision on non-retroactivity is inapplicable in the present case in that General
Circular No. V-334 is a nullity because in effect, it changed the law on the matter. The Court of Tax Appeals
sustained this position holding that: "Deductions are wholly and exclusively within the power of Congress or the law-
making body to grant, condition or deny; and where the statute imposes a tax equal to a specified rate or percentage
of the gross or entire amount received by the taxpayer, the authority of some administrative officials to modify or
change, much less reduce, the basis or measure of the tax should not be read into law." 4 Therefore, the Tax Court
concluded, petitioner did not acquire any vested right thereunder as the same was a nullity.
The rationale behind General Circular No. V-334 was clearly stated therein, however: "It ha(d) been determined that
the tax is still imposed on income derived from capital, or labor, or both combined, in accordance with the basic
principle of income taxation ...and that a mere return of capital or investment is not income ... ." "A part of the receipts
Page 21 of 108
of a non-resident foreign film distributor derived from said film represents, therefore, a return of investment." The
Circular thus fixed the return of capital at 50% to simplify the administrative chore of determining the portion of the
rentals covering the return of capital." 5
Were the "gross income" base clear from Sec. 24 (b), perhaps, the ratiocination of the Tax Court could be upheld. It
should be noted, however, that said Section was not too plain and simple to understand. The fact that the issuance of
the General Circular in question was rendered necessary leads to no other conclusion than that it was not easy of
comprehension and could be subjected to different interpretations.
In fact, Republic Act No. 2343, dated June 20, 1959, supra, which was the basis of General Circular No. V-334, was
just one in a series of enactments regarding Sec. 24 (b) of the Tax Code. Republic Act No. 3825 came next on June
22, 1963 without changing the basis but merely adding a proviso (in bold letters).
(b) Tax on foreign corporation.—(1) Non-resident corporations. — There shall be levied, collected
Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries, wages,
premiums annuities, compensations, remunerations, emoluments, or other fixed or determinable
annual or periodical gains, profits, and income, a tax equal to thirty per centum of such amount:
PROVIDED, HOWEVER, THAT PREMIUMS SHALL NOT INCLUDE REINSURANCE PREMIUMS.
(double emphasis ours).
Republic Act No. 3841, dated likewise on June 22, 1963, followed after, omitting the proviso and inserting some
words (also in bold letters).
(b) Tax on foreign corporations.—(1) Non-resident corporations.—There shall be levied, collected

Philippines, from all sources within the Philippines, as interest, dividends, rents, salaries, wages,
premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable
annual or periodical OR CASUAL gains, profits and income, AND CAPITAL GAINS, a tax equal to
thirty per centum of such amount. 6 (double emphasis supplied)
The principle of legislative approval of administrative interpretation by re-enactment clearly obtains in this case. It
provides that "the re-enactment of a statute substantially unchanged is persuasive indication of the adoption by
Congress of a prior executive construction. 7 Note should be taken of the fact that this case involves not a mere
opinion of the Commissioner or ruling rendered on a mere query, but a Circular formally issued to "all internal
revenue officials" by the then Commissioner of Internal Revenue.
It was only on June 27, 1968 under Republic Act No. 5431, supra, which became the basis of Revenue Memorandum
Circular No. 4-71, that Sec. 24 (b) was amended to refer specifically to 35% of the "gross income."
This Court is not unaware of the well-entrenched principle that the Government is never estopped from collecting
taxes because of mistakes or errors on the part of its
agents. 8 In fact, utmost caution should be taken in this regard. 9 But, like other principles of law, this also admits of
exceptions in the interest of justice and fairplay. The insertion of Sec. 338-A into the National Internal Revenue Code,
as held in the case of Tuason, Jr. vs. Lingad, 10 is indicative of legislative intention to support the principle of good
faith. In fact, in the United States, from where Sec. 24 (b) was patterned, it has been held that the Commissioner of
Collector is precluded from adopting a position inconsistent with one previously taken where injustice would result
therefrom, 11 or where there has been a misrepresentation to the taxpayer. 12
We have also noted that in its Decision, the Court of Tax Appeals further required the petitioner to pay interest and
surcharge as provided for in Sec. 51 (e) of the Tax Code in addition to the deficiency withholding tax of P 525,897.06.
This additional requirement is much less called for because the petitioner relied in good faith and religiously complied
with no less than a Circular issued "to all internal revenue officials" by the highest official of the Bureau of Internal
Revenue and approved by the then Secretary of Finance. 13
With the foregoing conclusions arrived at, resolution of the issue of prescription becomes unnecessary.
Page 22 of 108
WHEREFORE, the judgment of the Court of Tax Appeals is hereby reversed, and the questioned assessment set
aside. No costs.
SO ORDERED.
Page 23 of 108
CASE NO. 59
[G.R. No. 112024. January 28, 1999]
PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT

OF TAX APPEALS and COURT OF APPEALS, respondents.
DECISION
QUISUMBING, J.:
This petition for review assails the Resolution[1] of the Court of Appeals dated September 22, 1993, affirming the
Decision[2] and Resolution[3] of the Court of Tax Appeals which denied the claims of the petitioner for tax refund and
tax credits, and disposing as follows:
IN VIEW OF ALL THE FOREGOING, the instant petition for review is DENIED due course. The Decision of the Court
of Tax Appeals dated May 20, 1993 and its resolution dated July 20, 1993, are hereby AFFIRMED in toto.
SO ORDERED.[4]
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, petitioners claim for refund/tax credit of overpaid income tax for 1985 in the amount of P5,299,749.95
is hereby denied for having been filed beyond the reglementary period. The 1986 claim for refund amounting
to P234,077.69 is likewise denied since petitioner has opted and in all likelihood automatically credited the same to
the succeeding year. The petition for review is dismissed for lack of merit.
SO ORDERED.[5]
The facts on record show the antecedent circumstances pertinent to this case.
Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized
under Philippine laws, filed its quarterly income tax returns for the first and second quarters of 1985, reported profits,
and paid the total income tax of P5,016,954.00. The taxes due were settled by applying PBComs tax credit memos
and accordingly, the Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85
for P3,401,701.00 and P1, 615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the
year-ended December 31, 1985, it declared a net loss of P25,317,228.00, thereby showing no income tax liability. For
the succeeding year, ending December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and
thus declared no tax payable for the year.
But during these two years, PBCom earned rental income from leased properties. The lessees withheld and
remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986.
On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit
of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985.
Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from
property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.
Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition
for Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition was docketed as CTA Case
No. 4309 entitled: Philippine Bank of Communications vs. Commissioner of Internal Revenue.
Page 24 of 108
The losses petitioner incurred as per the summary of petitioners claims for refund and tax credit for 1985 and
1986, filed before the Court of Tax Appeals, are as follows:
1985 1986
Net Income (Loss) (P25,317,228.00) (P14,129,602.00)
Tax Due NIL NIL
Quarterly tax
Payments Made 5,016,954.00 ---
Tax Withheld at Source 282,795.50 234,077.69
Excess Tax Payments P5,299,749.50*========== P234,077.69==========
==== ====
*CTAs decision reflects PBComs 1985 tax claim as P5,299,749.95. A forty-five centavo difference was noted.
On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of petitioner
for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond the two-year
reglementary period provided for by law. The petitioners claim for refund in 1986 amounting to P234,077.69 was
likewise denied on the assumption that it was automatically credited by PBCom against its tax payment in the
succeeding year.
On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTAs decision but the same was denied
due course for lack of merit.[6]
Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the Court of
Appeals. However on September 22, 1993, the Court of Appeals affirmed in toto the CTAs resolution dated July 20,
1993. Hence this petition now before us.
The issues raised by the petitioner are:
I. Whether taxpayer PBCom -- which relied in good faith on the formal assurances of BIR in RMC No. 7-85
and did not immediately file with the CTA a petition for review asking for the refund/tax credit of its
1985-86 excess quarterly income tax payments -- can be prejudiced by the subsequent BIR rejection,
applied retroactively, of its assurances in RMC No. 7-85 that the prescriptive period for the refund/tax
credit of excess quarterly income tax payments is not two years but ten (10). [7]
II. Whether the Court of Appeals seriously erred in affirming the CTA decision which denied PBComs claim
for the refund of P234,077.69 income tax overpaid in 1986 on the mere speculation, without proof, that
there were taxes due in 1987 and that PBCom availed of tax-crediting that year.[8]
Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea for tax refund
or tax credits on the ground of prescription, despite petitioners reliance on RMC No. 7-85, changing the prescriptive
period of two years to ten years?
Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying on the
applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular states that overpaid
income taxes are not covered by the two-year prescriptive period under the tax Code and that taxpayers may claim
refund or tax credits for the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the
Civil Code. The pertinent portions of the circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS CORPORATE INCOME TAX

RESULTING FROM THE FILING OF THE FINAL ADJUSTMENT RETURN
TO: All Internal Revenue Officers and Others Concerned
Sections 85 and 86 of the National Internal Revenue Code provide:
xxxxxxxxx
The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77 which provide:
Page 25 of 108
xxxxxxxxx
It has been observed, however, that because of the excess tax payments, corporations file claims for recovery of
overpaid income tax with the Court of Tax Appeals within the two-year period from the date of payment, in
accordance with Sections 292 and 295 of the National Internal Revenue Code. It is obvious that the filing of the case
in court is to preserve the judicial right of the corporation to claim the refund or tax credit.
It should be noted, however, that this is not a case of erroneously or illegally paid tax under the provisions of Sections
292 and 295 of the Tax Code.
In the above provision of the Regulations the corporation may request for the refund of the overpaid income tax or
claim for automatic tax credit. To insure prompt action on corporate annual income tax returns showing refundable
amounts arising from overpaid quarterly income taxes, this Office has promulgated Revenue Memorandum Order No.
32-76 dated June 11, 1976, containing the procedure in processing said returns. Under these procedures, the returns
are merely pre-audited which consist mainly of checking mathematical accuracy of the figures of the return. After
which, the refund or tax credit is granted, and, this procedure was adopted to facilitate immediate action on cases like
this.
In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals in order to
preserve the right to claim refund or tax credit within the two-year period. As already stated, actions hereon by
the Bureau are immediate after only a cursory pre-audit of the income tax returns. Moreover, a taxpayer may recover
from the Bureau of Internal Revenue excess income tax paid under the provisions of Section 86 of the Tax Code
within 10 years from the date of payment considering that it is an obligation created by law (Article 1144 of the Civil
Code).[9] (Emphasis supplied.)
Petitioner argues that the government is barred from asserting a position contrary to its declared circular if it
would result to injustice to taxpayers. Citing ABS-CBN Broadcasting Corporation vs. Court of Tax
Appeals[10] petitioner claims that rulings or circulars promulgated by the Commissioner of Internal Revenue have no
retroactive effect if it would be prejudicial to taxpayers. In ABS-CBN case, the Court held that the government is
precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom or
where there has been a misrepresentation to the taxpayer.
Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this rule as
follows:
Sec. 246. Non-retroactivity of rulings-- Any revocation, modification or reversal of any of the rules and regulations
promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the
Commissioner shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to
the taxpayers except in the following cases:
a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of
him by the Bureau of Internal Revenue;
b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on
which the ruling is based;
c) where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through the Solicitor General, argues that the two-year
prescriptive period for filing tax cases in court concerning income tax payments of Corporations is reckoned from the
date of filing the Final Adjusted Income Tax Return, which is generally done on April 15 following the close of the
calendar year. As precedents, respondent Commissioner cited cases which adhered to this principle, to wit: ACCRA
Investments Corp. vs. Court of Appeals, et al.,[11] and Commissioner of Internal Revenue vs. TMX Sales, Inc., et
al..[12] Respondent Commissioner also states that since the Final Adjusted Income Tax Return of the petitioner for the
taxable year 1985 was supposed to be filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief
from the court.Further, respondent Commissioner stresses that when the petitioner filed the case before the CTA on
November 18, 1988, the same was filed beyond the time fixed by law, and such failure is fatal to petitioners cause of
action.
Page 26 of 108
After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to the
petitioners contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as it disregards the two-
year prescriptive period set by law.
Basic is the principle that taxes are the lifeblood of the nation. The primary purpose is to generate funds for the
State to finance the needs of the citizenry and to advance the common weal. [13] Due process of law under the
Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upon
taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost
importance that the modes adopted to enforce the collection of taxes levied should be summary and interfered with
as little as possible.[14]
From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law
because the BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or
hampered by incidental matters.
Section 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for
the prescriptive period for filing a court proceeding for the recovery of tax erroneously or illegally collected, viz.:
Sec. 230. Recovery of tax erroneously or illegally collected. -- No suit or proceeding shall be maintained in any court
for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed
or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been
excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been
paid under protest or duress.
In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of
the tax or penalty regardless of any supervening cause that may arise after payment; Provided however, That the
Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return
upon which payment was made, such payment appears clearly to have been erroneously paid. (Italics supplied)
The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal
Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced. The two-year prescriptive
period provided, should be computed from the time of filing the Adjustment Return and final payment of the tax for the
year.
In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co.,[15] this Court explained the
application of Sec. 230 of 1977 NIRC, as follows:
Clearly, the prescriptive period of two years should commence to run only from the time that the refund is
ascertained, which can only be determined after a final adjustment return is accomplished. In the present case, this
date is April 16, 1984, and two years from this date would be April 16, 1986. x x x As we have earlier said in the TMX
Sales case, Sections 68,[16] 69,[17] and 70[18] on Quarterly Corporate Income Tax Payment and Section 321 should be
considered in conjunction with it.[19]
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of two
years to ten years on claims of excess quarterly income tax payments, such circular created a clear inconsistency
with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress.
It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of
more specific and less general interpretations of tax laws) which are issued from time to time by the Commissioner of
Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the executive officers, whose
duty is to enforce it, is entitled to great respect by the courts.Nevertheless, such interpretation is not conclusive and
will be ignored if judicially found to be erroneous. [20] Thus, courts will not countenance administrative issuances that
override, instead of remaining consistent and in harmony with, the law they seek to apply and implement. [21]
In the case of People vs. Lim,[22] it was held that rules and regulations issued by administrative officials to
implement a law cannot go beyond the terms and provisions of the latter.
Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent with but is contrary to
the provisions and spirit of Act. No. 4003 as amended, because whereas the prohibition prescribed in said Fisheries
Act was for any single period of time not exceeding five years duration, FAO No. 37-1 fixed no period, that is to say, it
Page 27 of 108
establishes an absolute ban for all time. This discrepancy between Act No. 4003 and FAO No. 37-1 was probably due
to an oversight on the part of Secretary of Agriculture and Natural Resources. Of course, in case of discrepancy, the
basic Act prevails, for the reason that the regulation or rule issued to implement a law cannot go beyond the terms
and provisions of the latter. x x x In this connection, the attention of the technical men in the offices of Department
Heads who draft rules and regulation is called to the importance and necessity of closely following the terms and
provisions of the law which they intended to implement, this to avoid any possible misunderstanding or confusion as
in the present case.[23]
Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials
or agents.[24] As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting
Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977
NIRC, for being contrary to the express provision of a statute. Hence, his interpretation could not be given weight for
to do so would, in effect, amend the statute.
As aptly stated by respondent Court of Appeals:
It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No. 7-85, is estopped by the
principle of non-retroactivity of BIR rulings. Again We do not agree. The Memorandum Circular, stating that a
taxpayer may recover the excess income tax paid within 10 years from date of payment because this is an obligation
created by law, was issued by the Acting Commissioner of Internal Revenue. On the other hand, the decision, stating
that the taxpayer should still file a claim for a refund or tax credit and the corresponding petition for review within the
two-year prescription period, and that the lengthening of the period of limitation on refund from two to ten years would
be adverse to public policy and run counter to the positive mandate of Sec. 230, NIRC, - was the ruling and judicial
interpretation of the Court of Tax Appeals. Estoppel has no application in the case at bar because it was not the
Commissioner of Internal Revenue who denied petitioners claim of refund or tax credit. Rather, it was the Court of
Tax Appeals who denied (albeit correctly) the claim and in effect, ruled that the RMC No. 7-85 issued by the
Commissioner of Internal Revenue is an administrative interpretation which is out of harmony with or contrary to the
express provision of a statute (specifically Sec. 230, NIRC), hence, cannot be given weight for to do so would in
effect amend the statute.[25]
Article 8 of the Civil Code[26] recognizes judicial decisions, applying or interpreting statutes as part of the legal
system of the country. But administrative decisions do not enjoy that level of recognition.A memorandum-circular of a
bureau head could not operate to vest a taxpayer with a shield against judicial action. For there are no vested rights
to speak of respecting a wrong construction of the law by the administrative officials and such wrong interpretation
could not place the Government in estoppel to correct or overrule the same.[27] Moreover, the non-retroactivity of
rulings by the Commissioner of Internal Revenue is not applicable in this case because the nullity of RMC No. 7-85
was declared by respondent courts and not by the Commissioner of Internal Revenue. Lastly, it must be noted that,
as repeatedly held by this Court, a claim for refund is in the nature of a claim for exemption and should be construed
in strictissimi juris against the taxpayer.[28]
On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming CTAs decision
denying its claim for refund of P 234,077.69 (tax overpaid in 1986), based on mere speculation, without proof, that
PBCom availed of the automatic tax credit in 1987.
Sec. 69 of the 1977 NIRC[29] (now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly
payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either (a)
be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the
quarters of the succeeding taxable year.
The corporation must signify in its annual corporate adjustment return (by marking the option box provided in
the BIR form) its intention, whether to request for a refund or claim for an automatic tax credit for the succeeding
taxable year. To ease the administration of tax collection, these remedies are in the alternative, and the choice of one
precludes the other.
As stated by respondent Court of Appeals:
Finally, as to the claimed refund of income tax over-paid in 1986 - the Court of Tax Appeals, after examining the
adjusted final corporate annual income tax return for taxable year 1986, found out that petitioner opted to apply for
automatic tax credit. This was the basis used (vis-avis the fact that the 1987 annual corporate tax return was not
offered by the petitioner as evidence) by the CTA in concluding that petitioner had indeed availed of and applied the
automatic tax credit to the succeeding year, hence it can no longer ask for refund, as to [sic] the two remedies of
refund and tax credit are alternative.[30]
Page 28 of 108
That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as specified
in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we must respect.Moreover, the 1987 annual
corporate tax return of the petitioner was not offered as evidence to controvert said fact. Thus, we are bound by the
findings of fact by respondent courts, there being no showing of gross error or abuse on their part to disturb our
reliance thereon.[31]
WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals appealed from is
AFFIRMED, with COSTS against the petitioner.
SO ORDERED.
Page 29 of 108
CASE 58
G.R. No. L-66653 June 19, 1986
COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
BURROUGHS LIMITED AND THE COURT OF TAX APPEALS, respondents.
Sycip, Salazar, Feliciano & Hernandez Law Office for private respondent.
PARAS, J.:
Petition for certiorari to review and set aside the Decision dated June 27, 1983 of respondent Court of Tax Appeals in
its C.T.A. Case No. 3204, entitled "Burroughs Limited vs. Commissioner of Internal Revenue" which ordered
petitioner Commissioner of Internal Revenue to grant in favor of private respondent Burroughs Limited, tax credit in
the sum of P172,058.90, representing erroneously overpaid branch profit remittance tax.
Burroughs Limited is a foreign corporation authorized to engage in trade or business in the Philippines through a
branch office located at De la Rosa corner Esteban Streets, Legaspi Village, Makati, Metro Manila.
Sometime in March 1979, said branch office applied with the Central Bank for authority to remit to its parent company
abroad, branch profit amounting to P7,647,058.00. Thus, on March 14, 1979, it paid the 15% branch profit remittance
tax, pursuant to Sec. 24 (b) (2) (ii) and remitted to its head office the amount of P6,499,999.30 computed as follows:
Amount applied for remittance................................ P7,647,058.00
Deduct: 15% branch profit
remittance tax ..............................................1,147,058.70
Net amount actually remitted.................................. P6,499,999.30
Claiming that the 15% profit remittance tax should have been computed on the basis of the amount actually remitted
(P6,499,999.30) and not on the amount before profit remittance tax (P7,647,058.00), private respondent filed on
December 24, 1980, a written claim for the refund or tax credit of the amount of P172,058.90 representing alleged
overpaid branch profit remittance tax, computed as follows:
Profits actually remitted .........................................P6,499,999.30
Remittance tax rate .......................................................15%
Branch profit remittance tax-
due thereon ......................................................P 974,999.89
Branch profit remittance
tax paid .............................................................Pl,147,058.70
Less: Branch profit remittance
tax as above computed................................................. 974,999.89
Page 30 of 108
Total amount refundable........................................... P172,058.81
On February 24, 1981, private respondent filed with respondent court, a petition for review, docketed as C.T.A. Case
No. 3204 for the recovery of the above-mentioned amount of P172,058.81.
On June 27, 1983, respondent court rendered its Decision, the dispositive portion of which reads—
ACCORDINGLY, respondent Commission of Internal Revenue is hereby ordered to grant a tax credit in favor of
petitioner Burroughs Limited the amount of P 172,058.90. Without pronouncement as to costs.
SO ORDERED.
Unable to obtain a reconsideration from the aforesaid decision, petitioner filed the instant petition before this Court
with the prayers as herein earlier stated upon the sole issue of whether the tax base upon which the 15% branch
profit remittance tax shall be imposed under the provisions of section 24(b) of the Tax Code, as amended, is the
amount applied for remittance on the profit actually remitted after deducting the 15% profit remittance tax. Stated
differently is private respondent Burroughs Limited legally entitled to a refund of the aforementioned amount of
P172,058.90.
We rule in the affirmative. The pertinent provision of the National Revenue Code is Sec. 24 (b) (2) (ii) which states:
Sec. 24. Rates of tax on corporations....
(b) Tax on foreign corporations. ...
(2) (ii) Tax on branch profits remittances. Any profit remitted abroad by a branch to its head office
shall be subject to a tax of fifteen per cent (15 %) ...
In a Bureau of Internal Revenue ruling dated January 21, 1980 by then Acting Commissioner of Internal Revenue
Hon. Efren I. Plana the aforequoted provision had been interpreted to mean that "the tax base upon which the 15%
branch profit remittance tax ... shall be imposed...(is) the profit actually remitted abroad and not on the total branch
profits out of which the remittance is to be made. " The said ruling is hereinbelow quoted as follows:
In reply to your letter of November 3, 1978, relative to your query as to the tax base upon which the
15% branch profits remittance tax provided for under Section 24 (b) (2) of the 1977 Tax Code shall
be imposed, please be advised that the 15% branch profit tax shall be imposed on the branch
profits actually remitted abroad and not on the total branch profits out of which the remittance is to
be made.
Please be guided accordingly.
Applying, therefore, the aforequoted ruling, the claim of private respondent that it made an overpayment in the
amount of P172,058.90 which is the difference between the remittance tax actually paid of Pl,147,058.70 and the
remittance tax that should have been paid of P974,999,89, computed as follows
Profits actually remitted......................................... P6,499,999.30
Remittance tax rate.............................................................. 15%
Remittance tax due................................................... P974,999.89
is well-taken. As correctly held by respondent Court in its assailed decision-
Respondent concedes at least that in his ruling dated January 21, 1980 he held that under Section
24 (b) (2) of the Tax Code the 15% branch profit remittance tax shall be imposed on the profit
actually remitted abroad and not on the total branch profit out of which the remittance is to be
Page 31 of 108
made. Based on such ruling petitioner should have paid only the amount of P974,999.89 in
remittance tax computed by taking the 15% of the profits of P6,499,999.89 in remittance tax
actually remitted to its head office in the United States, instead of Pl,147,058.70, on its net profits of
P7,647,058.00. Undoubtedly, petitioner has overpaid its branch profit remittance tax in the amount
of P172,058.90.
Petitioner contends that respondent is no longer entitled to a refund because Memorandum Circular No. 8-82 dated
March 17, 1982 had revoked and/or repealed the BIR ruling of January 21, 1980. The said memorandum circular
states—
Considering that the 15% branch profit remittance tax is imposed and collected at source,
necessarily the tax base should be the amount actually applied for by the branch with the Central
Bank of the Philippines as profit to be remitted abroad.
Petitioner's aforesaid contention is without merit. What is applicable in the case at bar is still the Revenue Ruling of
January 21, 1980 because private respondent Burroughs Limited paid the branch profit remittance tax in question
on March 14, 1979. Memorandum Circular No. 8-82 dated March 17, 1982 cannot be given retroactive effect in the
light of Section 327 of the National Internal Revenue Code which provides-
Sec. 327. Non-retroactivity of rulings. Any revocation, modification, or reversal of any of the rules
and regulations promulgated in accordance with the preceding section or any of the rulings or
circulars promulgated by the Commissioner shag not be given retroactive application if the
revocation, modification, or reversal will be prejudicial to the taxpayer except in the following cases
(a) where the taxpayer deliberately misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently
gathered by the Bureau of Internal Revenue are materially different from the facts on which the
ruling is based, or (c) where the taxpayer acted in bad faith. (ABS-CBN Broadcasting Corp. v. CTA,
108 SCRA 151-152)
The prejudice that would result to private respondent Burroughs Limited by a retroactive application of Memorandum
Circular No. 8-82 is beyond question for it would be deprived of the substantial amount of P172,058.90. And, insofar
as the enumerated exceptions are concerned, admittedly, Burroughs Limited does not fall under any of them.
WHEREFORE, the assailed decision of respondent Court of Tax Appeals is hereby AFFIRMED. No pronouncement
as to costs.
SO ORDERED.
CASE 57
G.R. No. 119761 August 29, 1996

vs.
HON. COURT OF APPEALS, HON. COURT OF TAX APPEALS and FORTUNE TOBACCO
CORPORATION, respondents.
VITUG, J.:p
The Commissioner of Internal Revenue ("CIR") disputes the decision, dated 31 March 1995, of respondent Court of
Appeals 1 affirming the 10th August 1994 decision and the 11th October 1994 resolution of the Court of Tax
Appeals 2 ("CTA") in C.T.A. Case No. 5015, entitled "Fortune Tobacco Corporation vs. Liwayway Vinzons-Chato in
her capacity as Commissioner of Internal Revenue."
Page 32 of 108
The facts, by and large, are not in dispute.
Fortune Tobacco Corporation ("Fortune Tobacco") is engaged in the manufacture of different brands of cigarettes.
On various dates, the Philippine Patent Office issued to the corporation separate certificates of trademark registration
over "Champion," "Hope," and "More" cigarettes. In a letter, dated 06 January 1987, of then Commissioner of Internal
Revenue Bienvenido A. Tan, Jr., to Deputy Minister Ramon Diaz of the Presidential Commission on Good
Government, "the initial position of the Commission was to classify 'Champion,' 'Hope,' and 'More' as foreign brands
since they were listed in the World Tobacco Directory as belonging to foreign companies. However, Fortune Tobacco
changed the names of 'Hope' to 'Hope Luxury' and 'More' to 'Premium More,' thereby removing the said brands from
the foreign brand category. Proof was also submitted to the Bureau (of Internal Revenue ['BIR']) that 'Champion' was
an original Fortune Tobacco Corporation register and therefore a local brand." 3 Ad Valorem taxes were imposed on
these brands, 4 at the following rates:
BRAND AD VALOREM TAX RATE

E.O. 22 and E.O. 273 RA 6956
06-23-86 07-25-87 06-18-90
07-01-86 01-01-88 07-05-90
Hope Luxury M. 100's

Sec. 142, (c), (2) 40% 45%
Hope Luxury M. King
Sec. 142, (c), (2) 40% 45%
More Premium M. 100's
Sec. 142, (c), (2) 40% 45%
More Premium International
Sec. 142, (c), (2) 40% 45%
Champion Int'l. M. 100's
Sec. 142, (c), (2) 40% 45%
Champion M. 100's
Sec. 142, (c), (2) 40% 45%
Champion M. King
Sec. 142, (c), last par. 15% 20%
Champion Lights
Sec. 142, (c), last par. 15% 20% 5
A bill, which later became Republic Act ("RA") No. 7654, 6 was enacted, on 10 June 1993, by the legislature
and signed into law, on 14 June 1993, by the President of the Philippines. The new law became effective on
03 July 1993. It amended Section 142(c)(1) of the National Internal Revenue Code ("NIRC") to read; as
follows:
Sec. 142. Cigars and Cigarettes. —
xxx xxx xxx
(c) Cigarettes packed by machine. — There shall be levied, assessed and collected on cigarettes
packed by machine a tax at the rates prescribed below based on the constructive manufacturer's
wholesale price or the actual manufacturer's wholesale price, whichever is higher:
(1) On locally manufactured cigarettes which are currently classified and taxed at fifty-five percent
(55%) or the exportation of which is not authorized by contract or otherwise, fifty-five (55%)
provided that the minimum tax shall not be less than Five Pesos (P5.00) per pack.
(2) On other locally manufactured cigarettes, forty-five percent (45%) provided that the minimum
tax shall not be less than Three Pesos (P3.00) per pack.
xxx xxx xxx
Page 33 of 108
When the registered manufacturer's wholesale price or the actual manufacturer's wholesale price
whichever is higher of existing brands of cigarettes, including the amounts intended to cover the
taxes, of cigarettes packed in twenties does not exceed Four Pesos and eighty centavos (P4.80)
per pack, the rate shall be twenty percent (20%). 7 (Emphasis supplied)
About a month after the enactment and two (2) days before the effectivity of RA 7654, Revenue
Memorandum Circular No. 37-93 ("RMC 37-93"), was issued by the BIR the full text of which expressed:
REPUBLIKA NG PILIPINAS
KAGAWARAN NG PANANALAPI
KAWANIHAN NG RENTAS INTERNAS
J
u
l
y
1
,
1
9
9
3
REVENUE MEMORANDUM CIRCULAR NO. 37-93
SUBJECT: Reclassification of Cigarettes Subject to Excise Tax
TO: All Internal Revenue Officers and Others Concerned.
In view of the issues raised on whether "HOPE," "MORE" and "CHAMPION" cigarettes which are
locally manufactured are appropriately considered as locally manufactured cigarettes bearing a
foreign brand, this Office is compelled to review the previous rulings on the matter.
Section 142 (c)(1) National Internal Revenue Code, as amended by R.A. No. 6956, provides:
On locally manufactured cigarettes bearing a foreign brand, fifty-five percent

(55%) Provided, That this rate shall apply regardless of whether or not the right
to use or title to the foreign brand was sold or transferred by its owner to the local
manufacturer. Whenever it has to be determined whether or not a cigarette bears
a foreign brand, the listing of brands manufactured in foreign countries appearing
in the current World Tobacco Directory shall govern.
Under the foregoing, the test for imposition of the 55% ad valorem tax on cigarettes is that the
locally manufactured cigarettes bear a foreign brand regardless of whether or not the right to use or
title to the foreign brand was sold or transferred by its owner to the local manufacturer. The brand
must be originally owned by a foreign manufacturer or producer. If ownership of the cigarette brand
is, however, not definitely determinable, ". . . the listing of brands manufactured in foreign countries
appearing in the current World Tobacco Directory shall govern. . . ."
"HOPE" is listed in the World Tobacco Directory as being manufactured by (a) Japan Tobacco,
Japan and (b) Fortune Tobacco, Philippines. "MORE" is listed in the said directory as being
manufactured by: (a) Fills de Julia Reig, Andorra; (b) Rothmans, Australia; (c) RJR-Macdonald
Canada; (d) Rettig-Strenberg, Finland; (e) Karellas, Greece; (f) R.J. Reynolds, Malaysia; (g)
Rothmans, New Zealand; (h) Fortune Tobacco, Philippines; (i) R.J. Reynolds, Puerto Rico; (j) R.J.
Reynolds, Spain; (k) Tabacalera, Spain; (l) R.J. Reynolds, Switzerland; and (m) R.J. Reynolds,
USA. "Champion" is registered in the said directory as being manufactured by (a) Commonwealth
Page 34 of 108
Bangladesh; (b) Sudan, Brazil; (c) Japan Tobacco, Japan; (d) Fortune Tobacco, Philippines; (e)
Haggar, Sudan; and (f) Tabac Reunies, Switzerland.
Since there is no showing who among the above-listed manufacturers of the cigarettes bearing the
said brands are the real owner/s thereof, then it follows that the same shall be considered foreign
brand for purposes of determining the ad valorem tax pursuant to Section 142 of the National
Internal Revenue Code. As held in BIR Ruling No. 410-88, dated August 24, 1988, "in cases where
it cannot be established or there is dearth of evidence as to whether a brand is foreign or not, resort
to the World Tobacco Directory should be made."
In view of the foregoing, the aforesaid brands of cigarettes, viz: "HOPE," "MORE" and
"CHAMPION" being manufactured by Fortune Tobacco Corporation are hereby considered locally
manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax on cigarettes.
Any ruling inconsistent herewith is revoked or modified accordingly.
(SGD)
LIWAYWAY
VINZONS-
CHATO
Commissioner
On 02 July 1993, at about 17:50 hours, BIR Deputy Commissioner Victor A. Deoferio, Jr., sent via telefax a
copy of RMC 37-93 to Fortune Tobacco but it was addressed to no one in particular. On 15 July 1993,
Fortune Tobacco received, by ordinary mail, a certified xerox copy of RMC 37-93.
In a letter, dated 19 July 1993, addressed to the appellate division of the BIR, Fortune Tobacco requested
for a review, reconsideration and recall of RMC 37-93. The request was denied on 29 July 1993. The
following day, or on 30 July 1993, the CIR assessed Fortune Tobacco for ad valorem tax deficiency
amounting to P9,598,334.00.
8
On 03 August 1993, Fortune Tobacco filed a petition for review with the CTA.
On 10 August 1994, the CTA upheld the position of Fortune Tobacco and adjudged:
WHEREFORE, Revenue Memorandum Circular No. 37-93 reclassifying the brands of

cigarettes, viz: "HOPE," "MORE" and "CHAMPION" being manufactured by Fortune Tobacco
Corporation as locally manufactured cigarettes bearing a foreign brand subject to the 55% ad
valorem tax on cigarettes is found to be defective, invalid and unenforceable, such that when R.A.
No. 7654 took effect on July 3, 1993, the brands in question were not CURRENTLY CLASSIFIED
AND TAXED at 55% pursuant to Section 1142(c)(1) of the Tax Code, as amended by R.A. No.
7654 and were therefore still classified as other locally manufactured cigarettes and taxed at 45%
or 20% as the case may be.
Accordingly, the deficiency ad valorem tax assessment issued on petitioner Fortune Tobacco
Corporation in the amount of P9,598,334.00, exclusive of surcharge and interest, is hereby
canceled for lack of legal basis.
Respondent Commissioner of Internal Revenue is hereby enjoined from collecting the deficiency
tax assessment made and issued on petitioner in relation to the implementation of RMC No. 37-93.
SO ORDERED. 9
In its resolution, dated 11 October 1994, the CTA dismissed for lack of merit the motion for reconsideration.
Page 35 of 108
The CIR forthwith filed a petition for review with the Court of Appeals, questioning the CTA's 10th August
1994 decision and 11th October 1994 resolution. On 31 March 1993, the appellate court's Special Thirteenth
Division affirmed in all respects the assailed decision and resolution.
In the instant petition, the Solicitor General argues: That —
I. RMC 37-93 IS A RULING OR OPINION OF THE COMMISSIONER OF

INTERNAL REVENUE INTERPRETING THE PROVISIONS OF THE TAX
CODE.
II. BEING AN INTERPRETATIVE RULING OR OPINION, THE PUBLICATION

OF RMC 37-93, FILING OF COPIES THEREOF WITH THE UP LAW CENTER
AND PRIOR HEARING ARE NOT NECESSARY TO ITS VALIDITY,
EFFECTIVITY AND ENFORCEABILITY.
III. PRIVATE RESPONDENT IS DEEMED TO HAVE BEEN NOTIFIED OR RMC

37-93 ON JULY 2, 1993.
IV. RMC 37-93 IS NOT DISCRIMINATORY SINCE IT APPLIES TO ALL

LOCALLY MANUFACTURED CIGARETTES SIMILARLY SITUATED AS
"HOPE," "MORE" AND "CHAMPION" CIGARETTES.
V. PETITIONER WAS NOT LEGALLY PROSCRIBED FROM RECLASSIFYING

"HOPE," "MORE" AND "CHAMPION" CIGARETTES BEFORE THE
EFFECTIVITY OF R.A. NO. 7654.
VI. SINCE RMC 37-93 IS AN INTERPRETATIVE RULE, THE INQUIRY IS NOT

INTO ITS VALIDITY, EFFECTIVITY OR ENFORCEABILITY BUT INTO ITS
CORRECTNESS OR PROPRIETY; RMC 37-93 IS CORRECT. 10
In fine, petitioner opines that RMC 37-93 is merely an interpretative ruling of the BIR which can thus become
effective without any prior need for notice and hearing, nor publication, and that its issuance is not
discriminatory since it would apply under similar circumstances to all locally manufactured cigarettes.
The Court must sustain both the appellate court and the tax court.
Petitioner stresses on the wide and ample authority of the BIR in the issuance of rulings for the effective
implementation of the provisions of the National Internal Revenue Code. Let it be made clear that such
authority of the Commissioner is not here doubted. Like any other government agency, however, the CIR
may not disregard legal requirements or applicable principles in the exercise of its quasi-legislative powers.
Let us first distinguish between two kinds of administrative issuances — a legislative rule and
an interpretative rule.
In Misamis Oriental Association of Coco Traders, Inc., vs. Department of Finance Secretary, 11 the Court
expressed:
. . . a legislative rule is in the nature of subordinate legislation, designed to implement a primary

legislation by providing the details thereof . In the same way that laws must have the benefit of
public hearing, it is generally required that before a legislative rule is adopted there must be
hearing. In this connection, the Administrative Code of 1987 provides:
Public Participation. — If not otherwise required by law, an agency shall, as far as practicable,
publish or circulate notices of proposed rules and afford interested parties the opportunity to submit
their views prior to the adoption of any rule.
Page 36 of 108
(2) In the fixing of rates, no rule or final order shall be valid unless the proposed rates shall have
been published in a newspaper of general circulation at least two (2) weeks before the first hearing
thereon.
(3) In case of opposition, the rules on contested cases shall be observed.
In addition such rule must be published. On the other hand, interpretative rules are designed to
provide guidelines to the law which the administrative agency is in charge of enforcing. 12
It should be understandable that when an administrative rule is merely interpretative in nature, its
applicability needs nothing further than its bare issuance for it gives no real consequence more than what
the law itself has already prescribed. When, upon the other hand, the administrative rule goes beyond
merely providing for the means that can facilitate or render least cumbersome the implementation of the law
but substantially adds to or increases the burden of those governed, it behooves the agency to accord at
least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new
issuance is given the force and effect of law.
A reading of RMC 37-93, particularly considering the circumstances under which it has been issued,
convinces us that the circular cannot be viewed simply as a corrective measure (revoking in the process the
previous holdings of past Commissioners) or merely as construing Section 142(c)(1) of the NIRC, as
amended, but has, in fact and most importantly, been made in order to place "Hope Luxury," "Premium
More" and "Champion" within the classification of locally manufactured cigarettes bearing foreign brands and
to thereby have them covered by RA 7654. Specifically, the new law would have its amendatory provisions
applied to locally manufactured cigarettes which at the time of its effectivity were not so classified as bearing
foreign brands. Prior to the issuance of the questioned circular, "Hope Luxury," "Premium More," and
"Champion" cigarettes were in the category of locally manufactured cigarettes not bearing foreign brand
subject to 45% ad valorem tax. Hence, without RMC 37-93, the enactment of RA 7654, would have had no
new tax rate consequence on private respondent's products. Evidently, in order to place "Hope Luxury,"
"Premium More," and "Champion" cigarettes within the scope of the amendatory law and subject them to an
increased tax rate, the now disputed RMC 37-93 had to be issued. In so doing, the BIR not simply
intrepreted the law; verily, it legislated under its quasi-legislative authority. The due observance of the
requirements of notice, of hearing, and of publication should not have been then ignored.
Indeed, the BIR itself, in its RMC 10-86, has observed and provided:
RMC NO. 10-86

Effectivity of Internal Revenue Rules and Regulations
It has been observed that one of the problem areas bearing on compliance with Internal Revenue
Tax rules and regulations is lack or insufficiency of due notice to the tax paying public. Unless there
is due notice, due compliance therewith may not be reasonably expected. And most importantly,
their strict enforcement could possibly suffer from legal infirmity in the light of the constitutional
provision on "due process of law" and the essence of the Civil Code provision concerning effectivity
of laws, whereby due notice is a basic requirement (Sec. 1, Art. IV, Constitution; Art. 2, New Civil
Code).
In order that there shall be a just enforcement of rules and regulations, in conformity with the basic
element of due process, the following procedures are hereby prescribed for the drafting, issuance
and implementation of the said Revenue Tax Issuances:
(1) This Circular shall apply only to (a) Revenue Regulations; (b) Revenue Audit
Memorandum Orders; and (c) Revenue Memorandum Circulars and Revenue
Memorandum Orders bearing on internal revenue tax rules and regulations.
(2) Except when the law otherwise expressly provides, the aforesaid internal
revenue tax issuances shall not begin to be operative until after due notice
thereof may be fairly presumed.
Page 37 of 108
Due notice of the said issuances may be fairly presumed only after the following
procedures have been taken;
xxx xxx xxx
(5) Strict compliance with the foregoing procedures is

enjoined. 13
Nothing on record could tell us that it was either impossible or impracticable for the BIR to observe and
comply with the above requirements before giving effect to its questioned circular.
Not insignificantly, RMC 37-93 might have likewise infringed on uniformity of taxation.
Article VI, Section 28, paragraph 1, of the 1987 Constitution mandates taxation to be uniform and equitable.
Uniformity requires that all subjects or objects of taxation, similarly situated, are to be treated alike or put on
equal footing both in privileges and liabilities. 14 Thus, all taxable articles or kinds of property of the same
class must be taxed at the same rate 15 and the tax must operate with the same force and effect in every
place where the subject may be found.
Apparently, RMC 37-93 would only apply to "Hope Luxury," "Premium More" and "Champion" cigarettes
and, unless petitioner would be willing to concede to the submission of private respondent that the circular
should, as in fact my esteemed colleague Mr. Justice Bellosillo so expresses in his separate opinion, be
considered adjudicatory in nature and thus violative of due process following the Ang Tibay 16 doctrine, the
measure suffers from lack of uniformity of taxation. In its decision, the CTA has keenly noted that other
cigarettes bearing foreign brands have not been similarly included within the scope of the circular, such as
—
1. Locally manufactured by ALHAMBRA INDUSTRIES, INC.
(a) "PALM TREE" is listed as manufactured by office of Monopoly, Korea (Exhibit

"R")
2. Locally manufactured by LA SUERTE CIGAR and CIGARETTE COMPANY
(a) "GOLDEN KEY" is listed being manufactured by United Tobacco, Pakistan

(Exhibit "S")
(b) "CANNON" is listed as being manufactured by Alpha Tobacco, Bangladesh

(Exhibit "T")
3. Locally manufactured by LA PERLA INDUSTRIES, INC.
(a) "WHITE HORSE" is listed as being manufactured by Rothman's, Malaysia

(Exhibit "U")
(b) "RIGHT" is listed as being manufactured by SVENSKA, Tobaks, Sweden

(Exhibit "V-1")
4. Locally manufactured by MIGHTY CORPORATION
(a) "WHITE HORSE" is listed as being manufactured by Rothman's, Malaysia

(Exhibit "U-1")
5. Locally manufactured by STERLING TOBACCO CORPORATION
Page 38 of 108
(a) "UNION" is listed as being manufactured by Sumatra Tobacco, Indonesia and
Brown and Williamson, USA (Exhibit "U-3")
(b) "WINNER" is listed as being manufactured by Alpha Tobacco, Bangladesh;

Nangyang, Hongkong; Joo Lan, Malaysia; Pakistan Tobacco Co., Pakistan;
Premier Tobacco, Pakistan and Haggar, Sudan (Exhibit "U-4"). 17
The court quoted at length from the transcript of the hearing conducted on 10 August 1993 by the
Committee on Ways and Means of the House of Representatives; viz:
THE CHAIRMAN. So you have specific information on Fortune Tobacco alone. You don't have
specific information on other tobacco manufacturers. Now, there are other brands which are
similarly situated. They are locally manufactured bearing foreign brands. And may I enumerate to
you all these brands, which are also listed in the World Tobacco Directory . . . Why were these
brand not reclassified at 55 if your want to give a level playing filed to foreign manufacturers?
MS. CHATO. Mr. Chairman, in fact, we have already prepared a Revenue Memorandum Circular
that was supposed to come after RMC No. 37-93 which have really named specifically the list of
locally manufactured cigarettes bearing a foreign brand for excise tax purposes and includes all
these brands that you mentioned at 55 percent except that at that time, when we had to come up
with this, we were forced to study the brands of Hope, More and Champion because we were given
documents that would indicate the that these brands were actually being claimed or patented in
other countries because we went by Revenue Memorandum Circular 1488 and we wanted to give
some rationality to how it came about but we couldn't find the rationale there. And we really found
based on our own interpretation that the only test that is given by that existing law would be
registration in the World Tobacco Directory. So we came out with this proposed revenue
memorandum circular which we forwarded to the Secretary of Finance except that at that point in
time, we went by the Republic Act 7654 in Section 1 which amended Section 142, C-1, it said, that
on locally manufactured cigarettes which are currently classified and taxed at 55 percent. So we
were saying that when this law took effect in July 3 and if we are going to come up with this
revenue circular thereafter, then I think our action would really be subject to question but we feel
that . . . Memorandum Circular Number 37-93 would really cover even similarly situated
brands. And in fact, it was really because of the study, the short time that we were given to study
the matter that we could not include all the rest of the other brands that would have been really
classified as foreign brand if we went by the law itself. I am sure that by the reading of the law, you
would without that ruling by Commissioner Tan they would really have been included in the
definition or in the classification of foregoing brands. These brands that you referred to or just read
to us and in fact just for your information, we really came out with a proposed revenue
memorandum circular for those brands. (Emphasis supplied)
(Exhibit "FF-2-C," pp. V-5 TO V-6, VI-1 to VI-3).
xxx xxx xxx
MS. CHATO. . . . But I do agree with you now that it cannot and in fact that is why I felt that we . . . I
wanted to come up with a more extensive coverage and precisely why I asked that revenue
memorandum circular that would cover all those similarly situated would be prepared but because
of the lack of time and I came out with a study of RA 7654, it would not have been possible to really
come up with the reclassification or the proper classification of all brands that are listed there. .
. (emphasis supplied) (Exhibit "FF-2d," page IX-1)
xxx xxx xxx
HON. DIAZ. But did you not consider that there are similarly situated?
MS. CHATO. That is precisely why, Sir, after we have come up with this Revenue Memorandum
Circular No. 37-93, the other brands came about the would have also clarified RMC 37-93 by I was
saying really because of the fact that I was just recently appointed and the lack of time, the period
that was allotted to us to come up with the right actions on the matter, we were really caught by the
Page 39 of 108
July 3 deadline. But in fact, We have already prepared a revenue memorandum circular clarifying
with the other . . . does not yet, would have been a list of locally manufactured cigarettes bearing a
foreign brand for excise tax purposes which would include all the other brands that were mentioned
by the Honorable Chairman. (Emphasis supplied) (Exhibit "FF-2-d," par. IX-4). 18
All taken, the Court is convinced that the hastily promulgated RMC 37-93 has fallen short of a valid and effective
administrative issuance.
WHEREFORE, the decision of the Court of Appeals, sustaining that of the Court of Tax Appeals, is AFFIRMED. No
costs.
SO ORDERED.
CASE 56
G.R. No. 108358 January 20, 1995

vs.
THE HON. COURT OF APPEALS, R.O.H. AUTO PRODUCTS PHILIPPINES, INC. and THE HON. COURT OF TAX
APPEALS, respondents.
VITUG, J.:
On 22 August 1986, during the period when the President of the Republic still wielded legislative powers, Executive
Order No. 41 was promulgated declaring a one-time tax amnesty on unpaid income taxes, later amended to include
estate and donor's taxes and taxes on business, for the taxable years 1981 to 1985.
Availing itself of the amnesty, respondent R.O.H. Auto Products Philippines, Inc., filed, in October 1986 and
November 1986, its Tax Amnesty Return No. 34-F-00146-41 and Supplemental Tax Amnesty Return No. 34-F-
00146-64-B, respectively, and paid the corresponding amnesty taxes due.
Prior to this availment, petitioner Commissioner of Internal Revenue, in a communication received by private
respondent on 13 August 1986, assessed the latter deficiency income and business taxes for its fiscal years ended
30 September 1981 and 30 September 1982 in an aggregate amount of P1,410,157.71. The taxpayer wrote back to
state that since it had been able to avail itself of the tax amnesty, the deficiency tax notice should forthwith be
cancelled and withdrawn. The request was denied by the Commissioner, in his letter of 22 November 1988, on the
ground that Revenue Memorandum Order No. 4-87, dated 09 February 1987, implementing Executive Order No. 41,
had construed the amnesty coverage to include only assessments issued by the Bureau of Internal Revenue after the
promulgation of the executive order on 22 August 1986 and not to assessments theretofore made. The invoked
provisions of the memorandum order read:
TO: All Internal Revenue Officers and Others Concerned:
1.0. To give effect and substance to the immunity provisions of the tax amnesty under Executive
Order No. 41, as expanded by Executive Order No. 64, the following instructions are hereby
issued:
xxx xxx xxx
1.02. A certification by the Tax Amnesty Implementation Officer of the fact of availment of the said
tax amnesty shall be a sufficient basis for:
xxx xxx xxx
Page 40 of 108
1.02.3. In appropriate cases, the cancellation/withdrawal of assessment notices and letters of
demand issued after August 21, 1986 for the collection of income, business, estate or donor's taxes
due during the same taxable years.1 (Emphasis supplied)
Private respondent appealed the Commissioner's denial to the Court of Tax Appeals. Ruling for the taxpayer, the tax
court said:
Respondent (herein petitioner Commissioner) failed to present any case or law which proves that
an assessment can withstand or negate the force and effects of a tax amnesty. This burden of
proof on the petitioner (herein respondent taxpayer) was created by the clear and express terms of
the executive order's intention — qualified availers of the amnesty may pay an amnesty tax in lieu
of said unpaid taxes which are forgiven (Section 2, Section 5, Executive Order No. 41, as
amended). More specifically, the plain provisions in the statute granting tax amnesty for unpaid
taxes for the period January 1, 1981 to December 31, 1985 shifted the burden of proof on
respondent to show how the issuance of an assessment before the date of the promulgation of the
executive order could have a reasonable relation with the objective periods of the amnesty, so as to
make petitioner still answerable for a tax liability which, through the statute, should have been
erased with the proper availment of the amnesty.
Additionally, the exceptions enumerated in Section 4 of Executive Order No. 41, as amended, do
not indicate any reference to an assessment or pending investigation aside from one arising from
information furnished by an informer. . . . Thus, we deem that the rule in Revenue Memorandum
Order No. 4-87 promulgating that only assessments issued after August 21, 1986 shall be abated
by the amnesty is beyond the contemplation of Executive Order No. 41, as amended. 2
On appeal by the Commissioner to the Court of Appeals, the decision of the tax court was affirmed. The appellate
court further observed:
In the instant case, examining carefully the words used in Executive Order No. 41, as amended, we
find nothing which justifies petitioner Commissioner's ground for denying respondent taxpayer's
claim to the benefits of the amnesty law. Section 4 of the subject law enumerates, in no uncertain
terms, taxpayers who may not avail of the amnesty granted,. . . .
Admittedly, respondent taxpayer does not fall under any of the . . . exceptions. The added
exception urged by petitioner Commissioner based on Revenue Memorandum Order No. 4-87,
further restricting the scope of the amnesty clearly amounts to an act of administrative legislation
quite contrary to the mandate of the law which the regulation ought to implement.
xxx xxx xxx
Lastly, by its very nature, a tax amnesty, being a general pardon or intentional overlooking by the
State of its authority to impose penalties on persons otherwise guilty of evasion or violation of a
revenue or tax law, partakes of an absolute forgiveness or waiver by the Government of its right to
collect what otherwise would be due it, and in this sense, prejudicial thereto, particularly to give tax
evaders, who wish to relent and are willing to reform a chance to do so and thereby become a part
of the new society with a clean slate. (Republic vs. Intermediate Appellate Court. 196 SCRA 335,
340 [1991] citing Commissioner of Internal Revenue vs. Botelho Shipping Corp., 20 SCRA 487) To
follow [the restrictive application of Revenue Memorandum Order No. 4-87 pressed by petitioner
Commissioner would be to work against the raison d'etre of E.O. 41, as amended, i.e., to raise
government revenues by encouraging taxpayers to declare their untaxed income and pay the tax
due thereon. (E.O. 41, first paragraph)]3
In this petition for review, the Commissioner raises these related issues:
1. WHETHER OR NOT REVENUE MEMORANDUM ORDER NO. 4-87, PROMULGATED TO IMPLEMENT

E.O. NO. 41, IS VALID;
Page 41 of 108
2. WHETHER OR NOT SAID DEFICIENCY ASSESSMENTS IN QUESTION WERE EXTINGUISHED BY
REASON OR PRIVATE RESPONDENT'S AVAILMENT OF EXECUTIVE ORDER NO. 41 AS AMENDED
BY EXECUTIVE ORDER NO. 64;
3. WHETHER OR NOT PRIVATE RESPONDENT HAS OVERCOME THE PRESUMPTION OF VALIDITY

OF ASSESSMENTS.4
The authority of the Minister of Finance (now the Secretary of Finance), in conjunction with the Commissioner of
Internal Revenue, to promulgate all needful rules and regulations for the effective enforcement of internal revenue
laws cannot be controverted. Neither can it be disputed that such rules and regulations, as well as administrative
opinions and rulings, ordinarily should deserve weight and respect by the courts. Much more fundamental than either
of the above, however, is that all such issuances must not override, but must remain consistent and in harmony with,
the law they seek to apply and implement. Administrative rules and regulations are intended to carry out, neither to
supplant nor to modify, the law.
The real and only issue is whether or not the position taken by the Commissioner coincides with the meaning and
intent of executive Order No. 41.
We agree with both the court of Appeals and court of Tax Appeals that Executive Order No. 41 is quite explicit and
requires hardly anything beyond a simple application of its provisions. It reads:
Sec. 1. Scope of Amnesty. — A one-time tax amnesty covering unpaid income taxes for the years
1981 to 1985 is hereby declared.
Sec. 2. Conditions of the Amnesty. — A taxpayer who wishes to avail himself of the tax amnesty
shall, on or before October 31, 1986;
a) file a sworn statement declaring his net worth as of December 31, 1985;
b) file a certified true copy of his statement declaring his net worth as of
December 31, 1980 on record with the Bureau of Internal Revenue, or if no such
record exists, file a statement of said net worth therewith, subject to verification
by the Bureau of Internal Revenue;
c) file a return and pay a tax equivalent to ten per cent (10%) of the increase in
net worth from December 31, 1980 to December 31, 1985: Provided, That in no
case shall the tax be less than P5,000.00 for individuals and P10,000.00 for
judicial persons.
Sec. 3. Computation of Net Worth. — In computing the net worths referred to in Section 2 hereof,
the following rules shall govern:
a) Non-cash assets shall be valued at acquisition cost.
b) Foreign currencies shall be valued at the rates of exchange prevailing as of

the date of the net worth statement.
Sec. 4. Exceptions. — The following taxpayers may not avail themselves of the amnesty herein
granted:
a) Those falling under the provisions of Executive Order Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court as of the effectivity hereof;
c) Those with criminal cases involving violations of the income tax already filed in
court as of the effectivity filed in court as of the effectivity hereof;
Page 42 of 108
d) Those that have withholding tax liabilities under the National Internal Revenue
Code, as amended, insofar as the said liabilities are concerned;
e) Those with tax cases pending investigation by the Bureau of Internal Revenue
as of the effectivity hereof as a result of information furnished under Section 316
of the National Internal Revenue Code, as amended;
f) Those with pending cases involving unexplained or unlawfully acquired wealth

before the Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds, Illegal Exactions and
Transactions) and Chapter Four (Malversation of Public Funds and Property) of
the Revised Penal Code, as amended.
xxx xxx xxx
Sec. 9. The Minister of finance, upon the recommendation of the Commissioner of Internal
Revenue, shall promulgate the necessary rules and regulations to implement this Executive Order.
xxx xxx xxx
Sec. 11. This Executive Order shall take effect immediately.
DONE in the City of Manila, this 22nd day of August in the year of Our Lord, nineteen hundred and
eighty-six.
The period of the amnesty was later extended to 05 December 1986 from 31 October 1986 by Executive Order No.
54, dated 04 November 1986, and, its coverage expanded, under Executive Order No. 64, dated 17 November 1986,
to include estate and honors taxes and taxes on business.
If, as the Commissioner argues, Executive Order No. 41 had not been intended to include 1981-1985 tax liabilities
already assessed (administratively) prior to 22 August 1986, the law could have simply so provided in its exclusionary
clauses. It did not. The conclusion is unavoidable, and it is that the executive order has been designed to be in the
nature of a general grant of tax amnesty subject only to the cases specifically excepted by it.
It might not be amiss to recall that the taxable periods covered by the amnesty include the years immediately
preceding the 1986 revolution during which time there had been persistent calls, all too vivid to be easily forgotten, for
civil disobedience, most particularly in the payment of taxes, to the martial law regime. It should be understandable
then that those who ultimately took over the reigns of government following the successful revolution would promptly
provide for abroad, and not a confined, tax amnesty.
Relative to the two other issued raised by the Commissioner, we need only quote from Executive Order No. 41 itself;
thus:
Sec. 6. Immunities and Privileges. — Upon full compliance with the conditions of the tax amnesty
and the rules and regulations issued pursuant to this Executive order, the taxpayer shall enjoy the
following immunities and privileges:
a) The taxpayer shall be relieved of any income tax liability on any untaxed
income from January 1, 1981 to December 31, 1985, including increments
thereto and penalties on account of the non-payment of the said tax. Civil,
criminal or administrative liability arising from the non-payment of the said tax,
which are actionable under the National Internal Revenue Code, as amended,
are likewise deemed extinguished.
b) The taxpayer's tax amnesty declaration shall not be admissible in evidence in

all proceedings before judicial, quasi-judicial or administrative bodies, in which he
Page 43 of 108
is a defendant or respondent, and the same shall not be examined, inquired or
looked into by any person, government official, bureau or office.
c) The books of account and other records of the taxpayer for the period from
January 1, 1981 to December 31, 1985 shall not be examined for income tax
purposes: Provided, That the Commissioner of Internal Revenue may authorize
in writing the examination of the said books of accounts and other records to
verify the validity or correctness of a claim for grant of any tax refund, tax credit
(other than refund on credit of withheld taxes on wages), tax incentives, and/or
exemptions under existing laws.
There is no pretension that the tax amnesty returns and due payments made by the taxpayer did not conform with the
conditions expressed in the amnesty order.
WHEREFORE, the decision of the court of Appeals, sustaining that of the court of Tax Appeals, is hereby
AFFIRMED in toto. No costs.
SO ORDERED.
CASE 55
[G.R. No. L-32409. February 27, 1971.]
BACHE & CO. (PHIL.), INC. and FREDERICK E. SEGGERMAN, Petitioners, v. HON. JUDGE VIVENCIO M. RUIZ,
MISAEL P. VERA, in his capacity as Commissioner of Internal Revenue, ARTURO LOGRONIO, RODOLFO DE
LEON, GAVINO VELASQUEZ, MIMIR DELLOSA, NICANOR ALCORDO, JOHN DOE, JOHN DOE, JOHN DOE,
and JOHN DOE, Respondents.
San Juan, Africa, Gonzales & San Agustin, for Petitioners.
Solicitor General Felix Q. Antonio, Assistant Solicitor General Crispin V . Bautista, Solicitor Pedro A. Ramirez
and Special Attorney Jaime M. Maza for Respondents.
DECISION
VILLAMOR, J.:
This is an original action of certiorari, prohibition and mandamus, with prayer for a writ of preliminary mandatory and
prohibitory injunction. In their petition Bache & Co. (Phil.), Inc., a corporation duly organized and existing under the
laws of the Philippines, and its President, Frederick E. Seggerman, pray this Court to declare null and void Search
Warrant No. 2-M-70 issued by respondent Judge on February 25, 1970; to order respondents to desist from enforcing
the same and/or keeping the documents, papers and effects seized by virtue thereof, as well as from enforcing the
tax assessments on petitioner corporation alleged by petitioners to have been made on the basis of the said
documents, papers and effects, and to order the return of the latter to petitioners. We gave due course to the petition
but did not issue the writ of preliminary injunction prayed for therein.
The pertinent facts of this case, as gathered from record, are as follows:chanrob1es virtual 1aw library
On February 24, 1970, respondent Misael P. Vera, Commissioner of Internal Revenue, wrote a letter addressed to
respondent Judge Vivencio M. Ruiz requesting the issuance of a search warrant against petitioners for violation of
Section 46(a) of the National Internal Revenue Code, in relation to all other pertinent provisions thereof, particularly
Sections 53, 72, 73, 208 and 209, and authorizing Revenue Examiner Rodolfo de Leon, one of herein respondents,
to make and file the application for search warrant which was attached to the letter.
In the afternoon of the following day, February 25, 1970, respondent De Leon and his witness, respondent Arturo
Logronio, went to the Court of First Instance of Rizal. They brought with them the following papers: respondent Vera’s
aforesaid letter-request; an application for search warrant already filled up but still unsigned by respondent De Leon;
Page 44 of 108
an affidavit of respondent Logronio subscribed before respondent De Leon; a deposition in printed form of respondent
Logronio already accomplished and signed by him but not yet subscribed; and a search warrant already
accomplished but still unsigned by respondent Judge.
At that time respondent Judge was hearing a certain case; so, by means of a note, he instructed his Deputy Clerk of
Court to take the depositions of respondents De Leon and Logronio. After the session had adjourned, respondent
Judge was informed that the depositions had already been taken. The stenographer, upon request of respondent
Judge, read to him her stenographic notes; and thereafter, respondent Judge asked respondent Logronio to take the
oath and warned him that if his deposition was found to be false and without legal basis, he could be charged for
perjury. Respondent Judge signed respondent de Leon’s application for search warrant and respondent Logronio’s
deposition, Search Warrant No. 2-M-70 was then sign by respondent Judge and accordingly issued.
Three days later, or on February 28, 1970, which was a Saturday, the BIR agents served the search warrant
petitioners at the offices of petitioner corporation on Ayala Avenue, Makati, Rizal. Petitioners’ lawyers protested the
search on the ground that no formal complaint or transcript of testimony was attached to the warrant. The agents
nevertheless proceeded with their search which yielded six boxes of documents.
On March 3, 1970, petitioners filed a petition with the Court of First Instance of Rizal praying that the search warrant
be quashed, dissolved or recalled, that preliminary prohibitory and mandatory writs of injunction be issued, that the
search warrant be declared null and void, and that the respondents be ordered to pay petitioners, jointly and
severally, damages and attorney’s fees. On March 18, 1970, the respondents, thru the Solicitor General, filed an
answer to the petition. After hearing, the court, presided over by respondent Judge, issued on July 29, 1970, an order
dismissing the petition for dissolution of the search warrant. In the meantime, or on April 16, 1970, the Bureau of
Internal Revenue made tax assessments on petitioner corporation in the total sum of P2,594,729.97, partly, if not
entirely, based on the documents thus seized. Petitioners came to this Court.
The petition should be granted for the following reasons:chanrob1es virtual 1aw library
1. Respondent Judge failed to personally examine the complainant and his witness.
The pertinent provisions of the Constitution of the Philippines and of the Revised Rules of Court
are:jgc:chanrobles.com.ph
"(3) The right of the people to be secure in their persons, houses, papers and effects against unreasonable searches
and seizures shall not be violated, and no warrants shall issue but upon probable cause, to be determined by the
judge after examination under oath or affirmation of the complainant and the witnesses he may produce, and
particularly describing the place to be searched, and the persons or things to be seized." (Art. III, Sec. 1,
Constitution.)
"SEC. 3. Requisites for issuing search warrant. — A search warrant shall not issue but upon probable cause in
connection with one specific offense to be determined by the judge or justice of the peace after examination under
oath or affirmation of the complainant and the witnesses he may produce, and particularly describing the place to be
searched and the persons or things to be seized.
"No search warrant shall issue for more than one specific offense.
"SEC. 4. Examination of the applicant. — The judge or justice of the peace must, before issuing the warrant,
personally examine on oath or affirmation the complainant and any witnesses he may produce and take their
depositions in writing, and attach them to the record, in addition to any affidavits presented to him." (Rule 126,
Revised Rules of Court.)
The examination of the complainant and the witnesses he may produce, required by Art. III, Sec. 1, par. 3, of the
Constitution, and by Secs. 3 and 4, Rule 126 of the Revised Rules of Court, should be conducted by the judge
himself and not by others. The phrase "which shall be determined by the judge after examination under oath or
affirmation of the complainant and the witnesses he may produce," appearing in the said constitutional provision, was
introduced by Delegate Francisco as an amendment to the draft submitted by the Sub-Committee of Seven. The
following discussion in the Constitutional Convention (Laurel, Proceedings of the Philippine Constitutional
Convention, Vol. III, pp. 755-757) is enlightening:jgc:chanrobles.com.ph
"SR. ORENSE. Vamos a dejar compañero los piropos y vamos al grano.
En los casos de una necesidad de actuar inmediatamente para que no se frusten los fines de la justicia mediante el
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registro inmediato y la incautacion del cuerpo del delito, no cree Su Señoria que causaria cierta demora el
procedimiento apuntado en su enmienda en tal forma que podria frustrar los fines de la justicia o si Su Señoria
encuentra un remedio para esto casos con el fin de compaginar los fines de la justicia con los derechos del individuo
en su persona, bienes etcetera, etcetera.
"SR. FRANCISCO. No puedo ver en la practica el caso hipottico que Su Señoria pregunta por la siguiente razon: el
que solicita un mandamiento de registro tiene que hacerlo por escrito y ese escrito no aparecer en la Mesa del Juez
sin que alguien vaya el juez a presentar ese escrito o peticion de sucuestro. Esa persona que presenta el registro
puede ser el mismo denunciante o alguna persona que solicita dicho mandamiento de registro. Ahora toda la
enmienda en esos casos consiste en que haya peticion de registro y el juez no se atendra solamente a sea peticion
sino que el juez examiner a ese denunciante y si tiene testigos tambin examiner a los testigos.
"SR. ORENSE. No cree Su Señoria que el tomar le declaracion de ese denunciante por escrito siempre requeriria
algun tiempo?.
"SR. FRANCISCO. Seria cuestio de un par de horas, pero por otro lado minimizamos en todo lo posible las
vejaciones injustas con la expedicion arbitraria de los mandamientos de registro. Creo que entre dos males debemos
escoger. el menor.
x x x
"MR. LAUREL. . . . The reason why we are in favor of this amendment is because we are incorporating in our
constitution something of a fundamental character. Now, before a judge could issue a search warrant, he must be
under the obligation to examine personally under oath the complainant and if he has any witness, the witnesses that
he may produce . . ."cralaw virtua1aw library
The implementing rule in the Revised Rules of Court, Sec. 4, Rule 126, is more emphatic and candid, for it requires
the judge, before issuing a search warrant, to "personally examine on oath or affirmation the complainant and any
witnesses he may produce . . ."cralaw virtua1aw library
Personal examination by the judge of the complainant and his witnesses is necessary to enable him to determine the
existence or non-existence of a probable cause, pursuant to Art. III, Sec. 1, par. 3, of the Constitution, and Sec. 3,
Rule 126 of the Revised Rules of Court, both of which prohibit the issuance of warrants except "upon probable
cause." The determination of whether or not a probable cause exists calls for the exercise of judgment after a judicial
appraisal of facts and should not be allowed to be delegated in the absence of any rule to the contrary.
In the case at bar, no personal examination at all was conducted by respondent Judge of the complainant
(respondent De Leon) and his witness (respondent Logronio). While it is true that the complainant’s application for
search warrant and the witness’ printed-form deposition were subscribed and sworn to before respondent Judge, the
latter did not ask either of the two any question the answer to which could possibly be the basis for determining
whether or not there was probable cause against herein petitioners. Indeed, the participants seem to have attached
so little significance to the matter that notes of the proceedings before respondent Judge were not even taken. At this
juncture it may be well to recall the salient facts. The transcript of stenographic notes (pp. 61-76, April 1, 1970, Annex
J-2 of the Petition) taken at the hearing of this case in the court below shows that per instruction of respondent Judge,
Mr. Eleodoro V. Gonzales, Special Deputy Clerk of Court, took the depositions of the complainant and his witness,
and that stenographic notes thereof were taken by Mrs. Gaspar. At that time respondent Judge was at the sala
hearing a case. After respondent Judge was through with the hearing, Deputy Clerk Gonzales, stenographer Gaspar,
complainant De Leon and witness Logronio went to respondent Judge’s chamber and informed the Judge that they
had finished the depositions. Respondent Judge then requested the stenographer to read to him her stenographic
notes. Special Deputy Clerk Gonzales testified as follows:jgc:chanrobles.com.ph
"A And after finishing reading the stenographic notes, the Honorable Judge requested or instructed them, requested
Mr. Logronio to raise his hand and warned him if his deposition will be found to be false and without legal basis, he
can be charged criminally for perjury. The Honorable Court told Mr. Logronio whether he affirms the facts contained
in his deposition and the affidavit executed before Mr. Rodolfo de Leon.
"Q And thereafter?
"A And thereafter, he signed the deposition of Mr. Logronio.
"Q Who is this he?
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"A The Honorable Judge.
"Q The deposition or the affidavit?
"A The affidavit, Your Honor."cralaw virtua1aw library
Thereafter, respondent Judge signed the search warrant.
The participation of respondent Judge in the proceedings which led to the issuance of Search Warrant No. 2-M-70
was thus limited to listening to the stenographer’s readings of her notes, to a few words of warning against the
commission of perjury, and to administering the oath to the complainant and his witness. This cannot be consider a
personal examination. If there was an examination at all of the complainant and his witness, it was the one conducted
by the Deputy Clerk of Court. But, as stated, the Constitution and the rules require a personal examination by the
judge. It was precisely on account of the intention of the delegates to the Constitutional Convention to make it a duty
of the issuing judge to personally examine the complainant and his witnesses that the question of how much time
would be consumed by the judge in examining them came up before the Convention, as can be seen from the record
of the proceedings quoted above. The reading of the stenographic notes to respondent Judge did not constitute
sufficient compliance with the constitutional mandate and the rule; for by that manner respondent Judge did not have
the opportunity to observe the demeanor of the complainant and his witness, and to propound initial and follow-up
questions which the judicial mind, on account of its training, was in the best position to conceive. These were
important in arriving at a sound inference on the all-important question of whether or not there was probable cause.
2. The search warrant was issued for more than one specific offense.
Search Warrant No. 2-M-70 was issued for" [v]iolation of Sec. 46(a) of the National Internal Revenue Code in relation
to all other pertinent provisions thereof particularly Secs. 53, 72, 73, 208 and 209." The question is: Was the said
search warrant issued "in connection with one specific offense," as required by Sec. 3, Rule 126?
To arrive at the correct answer it is essential to examine closely the provisions of the Tax Code referred to above.
Thus we find the following:chanrob1es virtual 1aw library
Sec. 46(a) requires the filing of income tax returns by corporations.
Sec. 53 requires the withholding of income taxes at source.
Sec. 72 imposes surcharges for failure to render income tax returns and for rendering false and fraudulent returns.
Sec. 73 provides the penalty for failure to pay the income tax, to make a return or to supply the information required
under the Tax Code.
Sec. 208 penalizes" [a]ny person who distills, rectifies, repacks, compounds, or manufactures any article subject to a
specific tax, without having paid the privilege tax therefore, or who aids or abets in the conduct of illicit distilling,
rectifying, compounding, or illicit manufacture of any article subject to specific tax . . .," and provides that in the case
of a corporation, partnership, or association, the official and/or employee who caused the violation shall be
responsible.
Sec. 209 penalizes the failure to make a return of receipts, sales, business, or gross value of output removed, or to
pay the tax due thereon.
The search warrant in question was issued for at least four distinct offenses under the Tax Code. The first is the
violation of Sec. 46(a), Sec. 72 and Sec. 73 (the filing of income tax returns), which are interrelated. The second is
the violation of Sec. 53 (withholding of income taxes at source). The third is the violation of Sec. 208 (unlawful pursuit
of business or occupation); and the fourth is the violation of Sec. 209 (failure to make a return of receipts, sales,
business or gross value of output actually removed or to pay the tax due thereon). Even in their classification the six
above-mentioned provisions are embraced in two different titles: Secs. 46(a), 53, 72 and 73 are under Title II (Income
Tax); while Secs. 208 and 209 are under Title V (Privilege Tax on Business and Occupation).
Respondents argue that Stonehill, Et. Al. v. Diokno, Et Al., L-19550, June 19, 1967 (20 SCRA 383), is not applicable,
because there the search warrants were issued for "violation of Central Bank Laws, Internal Revenue (Code) and
Revised Penal Code;" whereas, here Search Warrant No 2-M-70 was issued for violation of only one code, i.e., the
National Internal Revenue Code. The distinction more apparent than real, because it was precisely on account of the
Page 47 of 108
Stonehill incident, which occurred sometime before the present Rules of Court took effect on January 1, 1964, that
this Court amended the former rule by inserting therein the phrase "in connection with one specific offense," and
adding the sentence "No search warrant shall issue for more than one specific offense," in what is now Sec. 3, Rule
126. Thus we said in Stonehill:jgc:chanrobles.com.ph
"Such is the seriousness of the irregularities committed in connection with the disputed search warrants, that this
Court deemed it fit to amend Section 3 of Rule 122 of the former Rules of Court that ‘a search warrant shall not issue
but upon probable cause in connection with one specific offense.’ Not satisfied with this qualification, the Court added
thereto a paragraph, directing that ‘no search warrant shall issue for more than one specific offense.’"
3. The search warrant does not particularly describe the things to be seized.
The documents, papers and effects sought to be seized are described in Search Warrant No. 2-M-70 in this
manner:jgc:chanrobles.com.ph
"Unregistered and private books of accounts (ledgers, journals, columnars, receipts and disbursements books,
customers ledgers); receipts for payments received; certificates of stocks and securities; contracts, promissory notes
and deeds of sale; telex and coded messages; business communications, accounting and business records; checks
and check stubs; records of bank deposits and withdrawals; and records of foreign remittances, covering the years
1966 to 1970."cralaw virtua1aw library
The description does not meet the requirement in Art III, Sec. 1, of the Constitution, and of Sec. 3, Rule 126 of the
Revised Rules of Court, that the warrant should particularly describe the things to be seized.
In Stonehill, this Court, speaking thru Mr. Chief Justice Roberto Concepcion, said:jgc:chanrobles.com.ph
"The grave violation of the Constitution made in the application for the contested search warrants was compounded
by the description therein made of the effects to be searched for and seized, to wit:chanrob1es virtual 1aw library
‘Books of accounts, financial records, vouchers, journals, correspondence, receipts, ledgers, portfolios, credit
journals, typewriters, and other documents and/or paper showing all business transactions including disbursement
receipts, balance sheets and related profit and loss statements.’
"Thus, the warrants authorized the search for and seizure of records pertaining to all business transactions of
petitioners herein, regardless of whether the transactions were legal or illegal. The warrants sanctioned the seizure of
all records of the petitioners and the aforementioned corporations, whatever their nature, thus openly contravening
the explicit command of our Bill of Rights — that the things to be seized be particularly described — as well as
tending to defeat its major objective: the elimination of general warrants."cralaw virtua1aw library
While the term "all business transactions" does not appear in Search Warrant No. 2-M-70, the said warrant
nevertheless tends to defeat the major objective of the Bill of Rights, i.e., the elimination of general warrants, for the
language used therein is so all-embracing as to include all conceivable records of petitioner corporation, which, if
seized, could possibly render its business inoperative.
In Uy Kheytin, Et. Al. v. Villareal, etc., Et Al., 42 Phil. 886, 896, this Court had occasion to explain the purpose of the
requirement that the warrant should particularly describe the place to be searched and the things to be seized, to
wit:jgc:chanrobles.com.ph
". . . Both the Jones Law (sec. 3) and General Orders No. 58 (sec. 97) specifically require that a search warrant
should particularly describe the place to be searched and the things to be seized. The evident purpose and intent of
this requirement is to limit the things to be seized to those, and only those, particularly described in the search
warrant — to leave the officers of the law with no discretion regarding what articles they shall seize, to the end that
‘unreasonable searches and seizures’ may not be made, — that abuses may not be committed. That this is the
correct interpretation of this constitutional provision is borne out by American authorities."cralaw virtua1aw library
The purpose as thus explained could, surely and effectively, be defeated under the search warrant issued in this
case.
A search warrant may be said to particularly describe the things to be seized when the description therein is as
specific as the circumstances will ordinarily allow (People v. Rubio; 57 Phil. 384); or when the description expresses a
conclusion of fact — not of law — by which the warrant officer may be guided in making the search and seizure
(idem., dissent of Abad Santos, J.,); or when the things described are limited to those which bear direct relation to the
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offense for which the warrant is being issued (Sec. 2, Rule 126, Revised Rules of Court). The herein search warrant
does not conform to any of the foregoing tests. If the articles desired to be seized have any direct relation to an
offense committed, the applicant must necessarily have some evidence, other than those articles, to prove the said
offense; and the articles subject of search and seizure should come in handy merely to strengthen such evidence. In
this event, the description contained in the herein disputed warrant should have mentioned, at least, the dates,
amounts, persons, and other pertinent data regarding the receipts of payments, certificates of stocks and securities,
contracts, promissory notes, deeds of sale, messages and communications, checks, bank deposits and withdrawals,
records of foreign remittances, among others, enumerated in the warrant.
Respondents contend that certiorari does not lie because petitioners failed to file a motion for reconsideration of
respondent Judge’s order of July 29, 1970. The contention is without merit. In the first place, when the questions
raised before this Court are the same as those which were squarely raised in and passed upon by the court below,
the filing of a motion for reconsideration in said court before certiorari can be instituted in this Court is no longer a
prerequisite. (Pajo, etc., Et. Al. v. Ago, Et Al., 108 Phil., 905). In the second place, the rule requiring the filing of a
motion for reconsideration before an application for a writ of certiorari can be entertained was never intended to be
applied without considering the circumstances. (Matutina v. Buslon, Et Al., 109 Phil., 140.) In the case at bar time is
of the essence in view of the tax assessments sought to be enforced by respondent officers of the Bureau of Internal
Revenue against petitioner corporation, On account of which immediate and more direct action becomes necessary.
(Matute v. Court of Appeals, Et Al., 26 SCRA 768.) Lastly, the rule does not apply where, as in this case, the
deprivation of petitioners’ fundamental right to due process taints the proceeding against them in the court below not
only with irregularity but also with nullity. (Matute v. Court of Appeals, Et Al., supra.)
It is next contended by respondents that a corporation is not entitled to protection against unreasonable search and
seizures. Again, we find no merit in the contention.
"Although, for the reasons above stated, we are of the opinion that an officer of a corporation which is charged with a
violation of a statute of the state of its creation, or of an act of Congress passed in the exercise of its constitutional
powers, cannot refuse to produce the books and papers of such corporation, we do not wish to be understood as
holding that a corporation is not entitled to immunity, under the 4th Amendment, against unreasonable searches and
seizures. A corporation is, after all, but an association of individuals under an assumed name and with a distinct legal
entity. In organizing itself as a collective body it waives no constitutional immunities appropriate to such body. Its
property cannot be taken without compensation. It can only be proceeded against by due process of law, and is
protected, under the 14th Amendment, against unlawful discrimination . . ." (Hale v. Henkel, 201 U.S. 43, 50 L. ed.
652.)
"In Linn v. United States, 163 C.C.A. 470, 251 Fed. 476, 480, it was thought that a different rule applied to a
corporation, the ground that it was not privileged from producing its books and papers. But the rights of a corporation
against unlawful search and seizure are to be protected even if the same result might have been achieved in a lawful
way." (Silverthorne Lumber Company, Et. Al. v. United States of America, 251 U.S. 385, 64 L. ed. 319.)
In Stonehill, Et. Al. v. Diokno, Et Al., supra, this Court impliedly recognized the right of a corporation to object against
unreasonable searches and seizures, thus:jgc:chanrobles.com.ph
"As regards the first group, we hold that petitioners herein have no cause of action to assail the legality of the
contested warrants and of the seizures made in pursuance thereof, for the simple reason that said corporations have
their respective personalities, separate and distinct from the personality of herein petitioners, regardless of the
amount of shares of stock or the interest of each of them in said corporations, whatever, the offices they hold therein
may be. Indeed, it is well settled that the legality of a seizure can be contested only by the party whose rights have
been impaired thereby, and that the objection to an unlawful search and seizure is purely personal and cannot be
availed of by third parties. Consequently, petitioners herein may not validly object to the use in evidence against them
of the documents, papers and things seized from the offices and premises of the corporations adverted to above,
since the right to object to the admission of said papers in evidence belongs exclusively to the corporations, to whom
the seized effects belong, and may not be invoked by the corporate officers in proceedings against them in their
individual capacity . . ."cralaw virtua1aw library
In the Stonehill case only the officers of the various corporations in whose offices documents, papers and effects
were searched and seized were the petitioners. In the case at bar, the corporation to whom the seized documents
belong, and whose rights have thereby been impaired, is itself a petitioner. On that score, petitioner corporation here
stands on a different footing from the corporations in Stonehill.
The tax assessments referred to earlier in this opinion were, if not entirely — as claimed by petitioners — at least
partly — as in effect admitted by respondents — based on the documents seized by virtue of Search Warrant No. 2-
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M-70. Furthermore, the fact that the assessments were made some one and one-half months after the search and
seizure on February 25, 1970, is a strong indication that the documents thus seized served as basis for the
assessments. Those assessments should therefore not be enforced.
PREMISES CONSIDERED, the petition is granted. Accordingly, Search Warrant No. 2-M-70 issued by respondent
Judge is declared null and void; respondents are permanently enjoined from enforcing the said search warrant; the
documents, papers and effects seized thereunder are ordered to be returned to petitioners; and respondent officials
the Bureau of Internal Revenue and their representatives are permanently enjoined from enforcing the assessments
mentioned in Annex "G" of the present petition, as well as other assessments based on the documents, papers and
effects seized under the search warrant herein nullified, and from using the same against petitioners in any criminal
or other proceeding. No pronouncement as to costs.
CASE 54
G.R. No. 81446 August 18, 1988
BONIFACIA SY PO, petitioner,

vs.
HONORABLE COURT OF TAX APPEALS AND HONORABLE COMMISSIONER OF INTERNAL
REVENUE, respondents.
Basilio E. Duaban for petitioner.
SARMIENTO, J.:
This is an appeal from the decision 1 of the respondent Court of Tax Appeals, dated September 30,1987, which
affirmed an earlier decision of the correspondent Commissioner of Internal Revenue in assessment letters dated
August 16, 1972 and September 26, 1972, which ordered the payment by the petitioner of deficiency income tax for
1966 to 1970 in the amount of P7,154,685.16 and deficiency specific tax for January 2, 1964 to January 19, 1972, in
the amount of P5,595,003.68.
We adopt the respondent court's finding of facts, to wit:
Petitioner is the widow of the late Mr. Po Bien Sing who died on September 7, 1980. In the taxable
years 1964 to 1972, the deceased Po Bien Sing was the sole proprietor of Silver Cup Wine Factory
(Silver Cup for brevity), Talisay, Cebu. He was engaged in the business of manufacture and sale of
compounded liquors, using alcohol and other ingredients as raw materials.
On the basis of a denunciation against Silver Cup allegedly "for tax evasion amounting to millions
of pesos" the then Secretary of Finance Cesar Virata directed the Finance-BIR--NBI team
constituted under Finance Department Order No. 13-70 dated February 19, 1971 (Exh- 3, pp. 532-
553, Folder II, BIR rec.) to conduct the corresponding investigation in a memorandum dated April 2,
1971 (p. 528, Folder II, BIR rec.). Accordingly, a letter and a subpoena duces tecum dated April
13,1971 and May 3,1971, respectively, were issued against Silver Cup requesting production of the
accounting records and other related documents for the examination of the team. (Exh. 11, pp.
525-526, Folder II, BIR rec.). Mr. Po Bien Sing did not produce his books of accounts as requested
(Affidavit dated December 24, 1971 of Mr. Generoso. Quinain of the team, p. 525, Folder H, BIR
rec.). This prompted the team with the assistance of the PC Company, Cebu City, to enter the
factory bodega of Silver Cup and seized different brands, consisting of 1,555 cases of alcohol
products. (Exh. 22, Memorandum Report of the Team dated June 5, 1971, pp. 491-492, Folder II,
BIR rec.). The inventory lists of the seized alcohol products are contained in Volumes I, II, III, IV
and V (Exhibits 14, 15, 16, 17, and 18, respectively, BIR rec.). On the basis of the team's report of
investigation, the respondent Commissioner of Internal Revenue assessed Mr. Po Bien Sing
deficiency income tax for 1966 to 1970 in the amount of P7,154,685.16 (Exh. 6 pp. 17-19, Folder I,
Page 50 of 108
BIR rec.) and for deficiency specific tax for January 2,1964 to January 19, 1972 in the amount of
P5,595,003.68 (Exh. 8, p. 107, Folder I, BIR rec.).
Petitioner protested the deficiency assessments through letters dated October 9 and October 30,
1972 (Exhs. 7 and 9, pp. 27-28; pp. 152-159, respectively, BIR rec.), which protests were referred
for reinvestigation. The corresponding report dated August 13, 1981 (Exh. 1 0, pp. 355, Folder I,
BIR rec.) recommended the reiteration of the assessments in view of the taxpayer's persistent
failure to present the books of accounts for examination (Exh. 8, p. 107, Folder I, BIR rec.),
compelling respondent to issue warrants of distraint and levy on September 10, 1981 (Exh. 11, p.
361, Folder I, BIR rec.).
The warrants were admittedly received by petitioner on October 14, 1981 (Par. IX, Petition;
admitted par. 2, Answer), which petitioner deemed respondent's decision denying her protest on
the subject assessments. Hence, petitioner's appeal on October 29,1981. 2
The petitioner assigns the following errors:
RESPONDENT INTENTIONALLY ERRED IN HOLDING THAT PETITIONER HAS NOT PRESENTED ANY
EVIDENCE OF RELEVANCE AND COMPETENCE REQUIRED TO BASH THE TROUBLING DISCREPANCIES
AND SQUARE THE ISSUE OF ILLEGALITY POSITED ON THE SUBJECT ASSESSMENTS.
II
RESPONDENT COURT OF TAX APPEALS PALPABLY ERRED IN DECIDING THE CASE IN A WAY CONTRARY
TO THE DOCTRINES ALREADY LAID DOWN BY THIS COURT.
III
RESPONDENT COURT OF TAX APPEALS GRAVELY ERRED IN FINDING PO BEEN SING TO HAVE INCURRED
THE ALLEGED DEFICIENCY TAXES IN QUESTION. 3
We affirm.
Settled is the rule that the factual findings of the Court of Tax Appeals are binding upon this Honorable Court and can
only be disturbed on appeal if not supported by substantial evidence. 4
The assignments of errors boils down to a single issue previously raised before the respondent Court, i.e., whether or
not the assessments have valid and legal bases.
The applicable legal provision is Section 16(b) of the National Internal Revenue Code of 1977 as amended. It reads:
Sec. 16. Power of the Commissioner of Internal Revenue to make assessments.—
xxx xxx xxx
(b) Failure to submit required returns, statements, reports and other documents. - When a report
required by law as a basis for the assessment of an national internal revenue tax shall not be
forthcoming within the time fixed by law or regulation or when there is reason to believe that any
such report is false, incomplete, or erroneous, the Commissioner of Internal Revenue shall assess
the proper tax on the best evidence obtainable.
In case a person fails to file a required return or other document at the time prescribed by law, or
willfully or otherwise, files a false or fraudulent return or other documents, the Commissioner shall
make or amend the return from his own knowledge and from such information as he can obtain
Page 51 of 108
through testimony or otherwise, which shall be prima facie correct and sufficient for all legal
purposes.
The law is specific and clear. The rule on the "best evidence obtainable" applies when a tax report required by law for
the purpose of assessment is not available or when the tax report is incomplete or fraudulent.
In the instant case, the persistent failure of the late Po Bien Sing and the herein petitioner to present their books of
accounts for examination for the taxable years involved left the Commissioner of Internal Revenue no other legal
option except to resort to the power conferred upon him under Section 16 of the Tax Code.
The tax figures arrived at by the Commissioner of Internal Revenue are by no means arbitrary. We reproduce the
respondent court's findings, to wit:
As thus shown, on the basis of the quantity of bottles of wines seized during the raid and the sworn
statements of former employees Messrs. Nelson S. Po and Alfonso Po taken on May 26, and
27,1971, respectively, by the investigating team in Cebu City (Exhs. 4 and 5, pp. 514-517, pp. 511-
513, Folder 11, BIR rec.), it was ascertained that the Silver Cup for the years 1964 to 1970,
inclusive, utilized and consumed in the manufacture of compounded liquours and other products
20,105 drums of alcohol as raw materials 81,288,787 proof liters of alcohol. As determined, the
total specific tax liability of the taxpayer for 1964 to 1971 amounted to P5,593,003.68 (Exh. E,
petition, p. 10, CTA rec.)
Likewise, the team found due from Silver Cup deficiency income taxes for the years 1966 to 1970
inclusive in the aggregate sum of P7,154,685.16, as follows:
1966 P207,636.24
1967 645,335.04
1968 1,683,588.48
1969 1,589,622.48
1970 3,028,502.92
Total amount due.
and collectible P7,154,685.16
The 50% surcharge has been imposed, pursuant to Section 72 * of the Tax Code and tax 1/2% monthly interest has
likewise been imposed pursuant to the provision of Section 51(d) ** of the Tax Code (Exh. O, petition). 5
The petitioner assails these assessments as wrong.
In the case of Collector of Internal Revenue vs. Reyes, 6 we ruled:
Where the taxpayer is appealing to the tax court on the ground that the Collector's assessment is
erroneous, it is incumbent upon him to prove there what is the correct and just liability by a full and
fair disclosure of all pertinent data in his possession. Otherwise, if the taxpayer confines himself to
proving that the tax assessment is wrong, the tax court proceedings would settle nothing, and the
way would be left open for subsequent assessments and appeals in interminable succession.
Tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove
otherwise. 7 In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a
Page 52 of 108
Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. 8 All presumptions
are in favor of the correctness of tax assessments. 9
On the whole, we find that the fraudulent acts detailed in the decision under review had not been satisfactorily
rebutted by the petitioner. There are indeed clear indications on the part of the taxpayer to deprive the Government of
the taxes due. The Assistant Factory Superintendent of Silver Cup, Nelson Po gave the following testimony:
Annexes "A", "A-1 " to "A-17" show that from January to December 1970, Silver Cup had used in
production 189 drums of untaxed distilled alcohol and 3,722 drums of untaxed distilled alcohol. Can
you tell us how could this be possible with the presence of a revenue inspector in the premises of
Silver Cup during working hours?
Actually, the revenue inspector or storekeeper comes around once a week on the
average. Sometimes, when the storekeeper is around in the morning and Po
Bein Sing wants to operate with untaxed alcohol as raw materials, Po Bien Sing
tells the storekeeper to go home because the factory is not going to operate for
the day. After the storekeeper leaves, the illegal operation then begins. Untaxed
alcohol is brought in from Cebu Alcohol Plant into the compound of Silver Cup
sometimes at about 6:00 A.M. or at 12:00 noon or in the evening or even at mid-
night when the storekeeper is not around. When the storekeeper comes, he sees
nothing because untaxed alcohol is brought directly to, and stored at, a secret
tunnel within the bodega itself inside the compound of Silver Cup.
In the same vein, the factory personnel manager testified that false entries were entered in the
official register book: thus,
A — As factory personnel manager and all-around handy man of Po Bien Sing,

owner of Silver Cup, these labels were entrusted to me to make the false entries
in the official register book of Silver Cup, which I did under the direction of Po
Bien Sing. (Sworn statement, p. 512, Folder II, BIR rec.) 10 (Emphasis ours)
The existence of fraud as found by the respondents can not be lightly set aside absent substantial evidence
presented by the petitioner to counteract such finding. The findings of fact of the respondent Court of Tax Appeals are
entitled to the highest respect.11 We do not find anything in the questioned decision that should disturb this long-
established doctrine.
WHEREFORE, the Petition is DENIED. The Decision of the respondent Court of Tax Appeals is hereby AFFIRMED.
Costs against the petitioner.
SO ORDERED.
CASE 53
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P. TODA, JR.,
Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista, respondents.
DECISION
DAVIDE, JR., C.J.:
This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation
constitutes tax evasion that would justify an assessment of deficiency income tax.
The petitioner seeks the reversal of the Decision [1] of the Court of Appeals of 31 January 2001 in CA-G.R. SP
No. 57799 affirming the 3 January 2000 Decision [2] of the Court of Tax Appeals (CTA) in C.T.A. Case No.
5328,[3] which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of
Cibeles Insurance Corporation (CIC) in the amount of P79,099,999.22 for the year 1989, and ordered the cancellation
Page 53 of 108
and setting aside of the assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9
January 1995.
The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue
for deficiency income tax arising from an alleged simulated sale of a 16-storey commercial building known as Cibeles
Building, situated on two parcels of land on Ayala Avenue, Makati City.
On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an
amount of not less than P90 million.[4]
On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold
the same property on the same day to Royal Match Inc. (RMI) for P200 million. These two transactions were
evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public. [5]
For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.[6]
On 16 April 1990, CIC filed its corporate annual income tax return[7] for the year 1989, declaring, among other
things, its gain from the sale of real property in the amount of P75,728.021. After crediting withholding taxes
of P254,497.00, it paid P26,341,207[8] for its net taxable income of P75,987,725.
On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced
by a Deed of Sale of Shares of Stocks.[9] Three and a half years later, or on 16 January 1994, Toda died.
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice [10] and demand letter to
the CIC for deficiency income tax for the year 1989 in the amount of P79,099,999.22.
The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC,
and not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had
undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-
1989.[11]
On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna
Kapunan and Mario Luza Bautista, received a Notice of Assessment [12] dated 9 January 1995 from the Commissioner
of Internal Revenue for deficiency income tax for the year 1989 in the amount of P79,099,999.22, computed as
follows:
Income Tax 1989
Net Income per return P75,987,725.00

Add: Additional gain on sale
of real property taxable under
ordinary corporate income
but were substituted with
individual capital gains
(P200M 100M) 100,000,000.00
Total Net Taxable Income P175,987,725.00
per investigation
Tax Due thereof at 35% P 61,595,703.75
Less: Payment already made
1. Per return P26,595,704.00

2. Thru Capital Gains
Tax made by R.A.
Altonaga 10,000,000.00 36,595,704.00
Balance of tax due P 24,999,999.75
Add: 50% Surcharge 12,499,999.88
25% Surcharge 6,249,999.94
Total P 43,749,999.57
Add: Interest 20% from
4/16/90-4/30/94 (.808) 35,349,999.65
Page 54 of 108
TOTAL AMT. DUE & COLLECTIBLE P 79,099,999.22
============
The Estate thereafter filed a letter of protest.[13]
In the letter dated 19 October 1995,[14] the Commissioner dismissed the protest, stating that a fraudulent
scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional
gain of P100 million, which resulted in the change in the income structure of the proceeds of the sale of the two
parcels of land and the building thereon to an individual capital gains, thus evading the higher corporate income tax
rate of 35%.
On 15 February 1996, the Estate filed a petition for review[15] with the CTA alleging that the Commissioner erred
in holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the properties is
unreasonable and unsupported; and that the right of the Commissioner to assess CIC had already prescribed.
In his Answer[16] and Amended Answer,[17] the Commissioner argued that the two transactions actually
constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property from
CIC nor the seller of the same property to RMI. The additional gain of P100 million (the difference between the
second simulated sale for P200 million and the first simulated sale for P100 million) realized by CIC was taxed at the
rate of only 5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of
CIC. The income tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent.
Since such falsity or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January
1995 was well within the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code of
1986, which provides that tax may be assessed within ten years from the discovery of the falsity or fraud. With the
sale being tainted with fraud, the separate corporate personality of CIC should be disregarded. Toda, being the
registered owner of the 99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares
registered in the name of the individual directors of CIC, should be held liable for the deficiency income tax, especially
because the gains realized from the sale were withdrawn by him as cash advances or paid to him as cash dividends.
Since he is already dead, his estate shall answer for his liability.
In its decision[18] of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed
fraud to deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was
adopted by CIC, the same constituted mere tax avoidance, and not tax evasion. There being no proof of fraudulent
transaction, the applicable period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC of 1986,
which is three years after the last day prescribed by law for the filing of the return. Thus, the governments right to
assess CIC prescribed on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid.
The CTA also ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient
ground for piercing the separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable
for deficiency income tax of P79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the
Commissioner on 9 January 1995.
In its motion for reconsideration,[19] the Commissioner insisted that the sale of the property owned by CIC was
the result of the connivance between Toda and Altonaga. She further alleged that the latter was a representative,
dummy, and a close business associate of the former, having held his office in a property owned by CIC and derived
his salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda for representation services rendered. The
CTA denied[20] the motion for reconsideration, prompting the Commissioner to file a petition for review [21] with the
Court of Appeals.
In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning
that the CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is better
situated to determine the correctness, propriety, and legality of the income tax assessments assailed by the Toda
Estate.[22]
Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking the
following grounds:
I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD
WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES
INSURANCE CORPORATION.
II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE
PERSONALITY OF CIBELES INSURANCE CORPORATION.
III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS
RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED.
Page 55 of 108
The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the
Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially incapable of purchasing it.
She further points out that the documents themselves prove the fact of fraud in that (1) the two sales were done
simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI was
notarized ahead of the alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of
Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989; and the latter, as Doc. No. 92, Page 20,
Book I, Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI,
and not from Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in
Cibeles Building. The substantial portion of P40 million was withdrawn by Toda through the declaration of cash
dividends to all its stockholders.
For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of
Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property.
To resolve the grounds raised by the Commissioner, the following questions are pertinent:
1. Is this a case of tax evasion or tax avoidance?
2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and
3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any?
We shall discuss these questions in seriatim.
Is this a case of tax evasion

or tax avoidance?
Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation.
Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the
taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful
means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. [23]
Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than
that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an
accompanying state of mind which is described as being evil, in bad faith, willfull,or deliberate and not accidental; and
(3) a course of action or failure of action which is unlawful. [24]
All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the
purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million from
RMI,[25] and not from Altonaga. That P40 million was debited by RMI and reflected in its trial balance [26] as other inv.
Cibeles Bldg. Also, as of 31 July 1989, another P40 million was debited and reflected in RMIs trial balance as other
inv. Cibeles Bldg. This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga.
The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the
many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant
accountant of CIC and an old timer in the company. [27] But Mr. Prieto did not testify on this matter, hence, that
information remains to be hearsay and is thus inadmissible in evidence. It was not verified either, since the letter-
request for investigation of Altonaga was unserved, [28] Altonaga having left for the United States of America in
January 1990. Nevertheless, that Altonaga was a mere conduit finds support in the admission of respondent Estate
that the sale to him was part of the tax planning scheme of CIC. That admission is borne by the records. In its
Memorandum, respondent Estate declared:
Petitioner, however, claims there was a change of structure of the proceeds of sale. Admitted one hundred percent.
But isnt this precisely the definition of tax planning? Change the structure of the funds and pay a lower tax. Precisely,
Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of property for stock, changing the structure of the
property and the tax to be paid. As long as it is done legally, changing the structure of a transaction to achieve a
lower tax is not against the law. It is absolutely allowed.
Page 56 of 108
Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [sic] cannot be faulted
for wanting to reduce the tax from 35% to 5%.[29] [Underscoring supplied].
The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from
CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is
tainted with fraud.
Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all acts, omissions,
and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the
damage to another, or by which an undue and unconscionable advantage is taken of another. [30]
Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid
especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and
not the 35% corporate income tax. Altonagas sole purpose of acquiring and transferring title of the subject properties
on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal
benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose
and economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in
view of reducing the consequent income tax liability.
In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation
of tax liabilities than for legitimate business purposes constitutes one of tax evasion. [31]
Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated.[32] The
incidence of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a
sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the
transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation
of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using
the latter as a conduit through which to pass title. To permit the true nature of the transaction to be disguised by mere
formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax
policies of Congress.[33]
To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity
when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale
to Altonaga should be disregarded for income tax purposes. [34] The two sale transactions should be treated as a
single direct sale by CIC to RMI.
Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27
(A) of the Tax Reform Act of 1997), which stated as follows:
Sec. 24. Rates of tax on corporations. (a) Tax on domestic corporations.- A tax is hereby imposed upon the
taxable net income received during each taxable year from all sources by every corporation organized in, or existing
under the laws of the Philippines, and partnerships, no matter how created or organized but not including general
professional partnerships, in accordance with the following:
Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred thousand
pesos; and
Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand pesos.
CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains
tax provided for in Section 34 (h) of the NIRC of 1986 [35] (now 6% under Section 24 (D) (1) of the Tax Reform Act of
1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld.
Has the period of

assessment prescribed?
No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read:
Page 57 of 108
Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a false
or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in
court after the collection of such tax may be begun without assessment, at any time within ten years after the
discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and
executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for collection thereof .
Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a
return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the
case may be.
It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on
the tax consequence of the two sale transactions. [36] Thus, the BIR was amply informed of the transactions even prior
to the execution of the necessary documents to effect the transfer. Subsequently, the two sales were openly made
with the execution of public documents and the declaration of taxes for 1989. However, these circumstances do not
negate the existence of fraud. As earlier discussed those two transactions were tainted with fraud. And even
assuming arguendo that there was no fraud, we find that the income tax return filed by CIC for the year 1989 was
false. It did not reflect the true or actual amount gained from the sale of the Cibeles property. Obviously, such was
done with intent to evade or reduce tax liability.
As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the
discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been
discovered only on 8 March 1991.[37] The assessment for the 1989 deficiency income tax of CIC was issued on 9
January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the
prescriptive period.
Is respondent Estate liable

for the 1989 deficiency
income tax of Cibeles
Insurance Corporation?
A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus,
the owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation
and vice versa. There are, however, certain instances in which personal liability may arise. It has been held in a
number of cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the
corporation may validly attach when:
1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in
directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders,
or other persons;
2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith
file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or
4. He is made, by specific provision of law, to personally answer for his corporate action. [38]
It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and
voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and
1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides:
g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or obligations,
contingent or otherwise, for taxes, sums of money or insurance claims other than those reported in its audited
financial statement as of December 31, 1989, attached hereto as Annex B and made a part hereof. The business of
Cibeles has at all times been conducted in full compliance with all applicable laws, rules and regulations. SELLER
undertakes and agrees to hold the BUYER and Cibeles free from any and all income tax liabilities of Cibeles
for the fiscal years 1987, 1988 and 1989.[39][Underscoring Supplied].
When the late Toda undertook and agreed to hold the BUYER and Cibeles free from any all income tax
liabilities of Cibeles for the fiscal years 1987, 1988, and 1989, he thereby voluntarily held himself personally liable
Page 58 of 108
therefor. Respondent estate cannot, therefore, deny liability for CICs deficiency income tax for the year 1989 by
invoking the separate corporate personality of CIC, since its obligation arose from Todas contractual undertaking, as
contained in the Deed of Sale of Shares of Stock.
WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of
Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is hereby
rendered ordering respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as deficiency income tax of
Cibeles Insurance Corporation for the year 1989, plus legal interest from 1 May 1994 until the amount is fully paid.
Costs against respondent.
SO ORDERED.
CASE 52
G.R. No. L-36181 October 23, 1982
MERALCO SECURITIES CORPORATION (now FIRST PHILIPPINE HOLDINGS CORPORATION), petitioner,

vs.
HON. VICTORINO SAVELLANO and ASUNCION BARON VDA. DE MANIAGO, et al., as heirs of the late Juan G.
Maniago, respondents.
G.R. No. L-36748 October 23, 1982

vs.
HON. VICTORINO SAVELLANO and ASUNCION BARON VDA. DE MANIAGO, et al., as heirs of the late Juan G.
Maniago, respondents.
G.R. No. L-36181
San Juan, Africa, Gonzales & San Agustin for petitioner.
Ramon A. Gonzales for respondents.
TEEHANKEE, J.:
These are original actions for certiorari to set aside and annul the writ of mandamus issued by Judge Victorino A.
Savellano of the Court of First Instance of Manila in Civil Case No. 80830 ordering petitioner Meralco Securities
Corporation (now First Philippine Holdings Corporation) to pay, and petitioner Commissioner of Internal Revenue to
collect from the former, the amount of P51,840,612.00, by way of alleged deficiency corporate income tax, plus
interests and surcharges due thereon and to pay private respondents 25% of the total amount collectible as
informer's reward.
On May 22, 1967, the late Juan G. Maniago (substituted in these proceedings by his wife and children) submitted to
petitioner Commissioner of Internal Revenue confidential denunciation against the Meralco Securities Corporation for
tax evasion for having paid income tax only on 25 % of the dividends it received from the Manila Electric Co. for the
years 1962-1966, thereby allegedly shortchanging the government of income tax due from 75% of the said dividends.
Petitioner Commissioner of Internal Revenue caused the investigation of the denunciation after which he found and
held that no deficiency corporate income tax was due from the Meralco Securities Corporation on the dividends it
received from the Manila Electric Co., since under the law then prevailing (section 24[a] of the National Internal
Revenue Code) "in the case of dividends received by a domestic or foreign resident corporation liable to (corporate
income) tax under this Chapter . . . .only twenty-five per centum thereof shall be returnable for the purposes of the tax
imposed under this section." The Commissioner accordingly rejected Maniago's contention that the Meralco from
whom the dividends were received is "not a domestic corporation liable to tax under this Chapter." In a letter dated
Page 59 of 108
April 5, 1968, the Commissioner informed Maniago of his findings and ruling and therefore denied Maniago's claim for
informer's reward on a non-existent deficiency. This action of the Commissioner was sustained by the Secretary of
Finance in a 4th Indorsement dated May 11, 1971.
On August 28, 1970, Maniago filed a petition for mandamus, and subsequently an amended petition for mandamus,
in the Court of First Instance of Manila, docketed therein as Civil Case No. 80830, against the Commissioner of
Internal Revenue and the Meralco Securities Corporation to compel the Commissioner to impose the alleged
deficiency tax assessment on the Meralco Securities Corporation and to award to him the corresponding informer's
reward under the provisions of R.A. 2338.
On October 28, 1978, the Commissioner filed a motion to dismiss, arguing that since in matters of issuance and non-
issuance of assessments, he is clothed under the National Internal Revenue Code and existing rules and regulations
with discretionary power in evaluating the facts of a case and since mandamus win not lie to compel the performance
of a discretionary power, he cannot be compelled to impose the alleged tax deficiency assessment against the
Meralco Securities Corporation. He further argued that mandamus may not lie against him for that would be
tantamount to a usurpation of executive powers, since the Office of the Commissioner of Internal Revenue is
undeniably under the control of the executive department.
On the other hand, the Meralco Securities Corporation filed its answer, dated January 15, 1971, interposing as
special and/or affirmative defenses that the petition states no cause of action, that the action is premature, that
mandamus win not lie to compel the Commissioner of Internal Revenue to make an assessment and/or effect the
collection of taxes upon a taxpayer, that since no taxes have actually been recovered and/or collected, Maniago has
no right to recover the reward prayed for, that the action of petitioner had already prescribed and that respondent
court has no jurisdiction over the subject matter as set forth in the petition, the same being cognizable only by the
Court of Tax Appeals.
On January 10, 1973, the respondent judge rendered a decision granting the writ prayed for and ordering the
Commissioner of Internal Revenue to assess and collect from the Meralco Securities Corporation the sum of
P51,840,612.00 as deficiency corporate income tax for the period 1962 to 1969 plus interests and surcharges due
thereon and to pay 25% thereof to Maniago as informer's reward.
All parties filed motions for reconsideration of the decision but the same were denied by respondent judge in his order
dated April 6, 1973, with respondent judge denying respondents' claim for attorneys fees and for execution of the
decision pending appeal.
Hence, the Commissioner filed a separate petition with this Court, docketed as G.R. No. L-36748 praying that the
decision of respondent judge dated January 10, 1973 and his order dated April 6, 1973 be reconsidered for
respondent judge has no jurisdiction over the subject matter of the case and that the issuance or non-issuance of a
deficiency assessment is a prerogative of the Commissioner of Internal Revenue not reviewable by mandamus.
The Meralco Securities Corporation (now First Philippine Holdings Corporation) likewise appealed the same decision
of respondent judge in G.R. No. L-36181 and in the Court's resolution dated June 13, 1973, the two cases were
ordered consolidated.
We grant the petitions.
Respondent judge has no jurisdiction to take cognizance of the case because the subject matter thereof clearly falls
within the scope of cases now exclusively within the jurisdiction of the Court of Tax Appeals. Section 7 of Republic
Act No. 1125, enacted June 16, 1954, granted to the Court of Tax Appeals exclusive appellate jurisdiction to review
by appeal, among others, decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other
matters arising under the National Internal Revenue Code or other law or part of law administered by the Bureau of
Internal Revenue. The law transferred to the Court of Tax Appeals jurisdiction over all cases involving said
assessments previously cognizable by courts of first instance, and even those already pending in said courts. 1 The
question of whether or not to impose a deficiency tax assessment on Meralco Securities Corporation undoubtedly
comes within the purview of the words "disputed assessments" or of "other matters arising under the National Internal
Revenue Code . . . .In the case of Blaquera vs. Rodriguez, et al, 2 this Court ruled that "the determination of the
correctness or incorrectness of a tax assessment to which the taxpayer is not agreeable, falls within the jurisdiction of
the Court of Tax Appeals and not of the Court of First Instance, for under the provisions of Section 7 of Republic Act
Page 60 of 108
No. 1125, the Court of Tax Appeals has exclusive appellate jurisdiction to review, on appeal, any decision of the
Collector of Internal Revenue in cases involving disputed assessments and other matters arising under the National
Internal Revenue Code or other law or part of law administered by the Bureau of Internal Revenue."
Thus, even assuming arguendo that the right granted the taxpayers affected to question and appeal disputed
assessments, under section 7 of Republic Act No. 1125, may be availed of by strangers or informers like the late
Maniago, the most that he could have done was to appeal to the Court of Tax Appeals the ruling of petitioner
Commissioner of Internal Revenue within thirty (30) days from receipt thereof pursuant to section 11 of Republic Act
No. 1125. 3 He failed to take such an appeal to the tax court. The ruling is clearly final and no longer subject to review
by the courts. 4
It is furthermore a well-recognized rule that mandamus only lies to enforce the performance of a ministerial act or
duty 5 and not to control the performance of a discretionary power. 6 Purely administrative and discretionary functions
may not be interfered with by the courts. 7 Discretion, as thus intended, means the power or right conferred upon the
office by law of acting officially under certain circumstances according to the dictates of his own judgment and
conscience and not controlled by the judgment or conscience of others. 8 mandamus may not be resorted to so as to
interfere with the manner in which the discretion shall be exercised or to influence or coerce a particular
determination. 9
In an analogous case, where a petitioner sought to compel the Rehabilitation Finance Corporation to accept payment
of the balance of his indebtedness with his backpay certificates, the Court ruled that "mandamus does not compel the
Rehabilitation Finance Corporation to accept backpay certificates in payment of outstanding loans. Although there is
no provision expressly authorizing such acceptance, nor is there one prohibiting it, yet the duty imposed by the
Backpay Law upon said corporation as to the acceptance or discount of backpay certificates is neither clear nor
ministerial, but discretionary merely, and such special civil action does not issue to control the exercise of discretion
of a public officer." 10 Likewise, we have held that courts have no power to order the Commissioner of Customs to
confiscate goods imported in violation of the Import Control Law, R.A. 426, as said forfeiture is subject to the
discretion of the said official, 11 nor may courts control the determination of whether or not an applicant for a visa has
a non-immigrant status or whether his entry into this country would be contrary to public safety for it is not a simple
ministerial function but an exercise of discretion. 12
Moreover, since the office of the Commissioner of Internal Revenue is charged with the administration of revenue
laws, which is the primary responsibility of the executive branch of the government, mandamus may not he against
the Commissioner to compel him to impose a tax assessment not found by him to be due or proper for that would be
tantamount to a usurpation of executive functions. As we held in the case of Commissioner of Immigration vs.
Arca 13 anent this principle, "the administration of immigration laws is the primary responsibility of the executive
branch of the government. Extensions of stay of aliens are discretionary on the part of immigration authorities, and
neither a petition for mandamus nor one for certiorari can compel the Commissioner of Immigration to extend the stay
of an alien whose period to stay has expired.
Such discretionary power vested in the proper executive official, in the absence of arbitrariness or grave abuse so as
to go beyond the statutory authority, is not subject to the contrary judgment or control of others. " "Discretion," when
applied to public functionaries, means a power or right conferred upon them by law of acting officially, under certain
circumstances, uncontrolled by the judgment or consciences of others. A purely ministerial act or duty in contradiction
to a discretional act is one which an officer or tribunal performs in a given state of facts, in a prescribed manner, in
obedience to the mandate of a legal authority, without regard to or the exercise of his own judgment upon the
propriety or impropriety of the act done. If the law imposes a duty upon a public officer and gives him the right to
decide how or when the duty shall be performed, such duty is discretionary and not ministerial. The duty is ministerial
only when the discharge of the same requires neither the exercise of official discretion or judgment." 14
Thus, after the Commissioner who is specifically charged by law with the task of enforcing and implementing the tax
laws and the collection of taxes had after a mature and thorough study rendered his decision or ruling that no tax is
due or collectible, and his decision is sustained by the Secretary, now Minister of Finance (whose act is that of the
President unless reprobated), such decision or ruling is a valid exercise of discretion in the performance of official
duty and cannot be controlled much less reversed by mandamus. A contrary view, whereby any stranger or informer
would be allowed to usurp and control the official functions of the Commissioner of Internal Revenue would create
disorder and confusion, if not chaos and total disruption of the operations of the government.
Considering then that respondent judge may not order by mandamus the Commissioner to issue the assessment
against Meralco Securities Corporation when no such assessment has been found to be due, no deficiency taxes
Page 61 of 108
may therefore be assessed and collected against the said corporation. Since no taxes are to be collected, no
informer's reward is due to private respondents as the informer's heirs. Informer's reward is contingent upon the
payment and collection of unpaid or deficiency taxes. An informer is entitled by way of reward only to a percentage of
the taxes actually assessed and collected. Since no assessment, much less any collection, has been made in the
instant case, respondent judge's writ for the Commissioner to pay respondents 25% informer's reward is gross error
and without factual nor legal basis.
WHEREFORE, the petitions are hereby granted and the questioned decision of respondent judge dated January 10,
1973 and order dated April 6, 1973 are hereby reversed and set aside. With costs against private respondents.
CASE 51
[G.R. No. 120880. June 5, 1997]
FERDINAND R. MARCOS II, petitioner, vs. COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF
INTERNAL REVENUE and HERMINIA D. DE GUZMAN, respondents.
DECISION
TORRES, JR., J.:
In this Petition for Review on Certiorari, Government action is once again assailed as precipitate and unfair,
suffering the basic and oftly implored requisites of due process of law.Specifically, the petition assails the
Decision[1] of the Court of Appeals dated November 29, 1994 in CA-G.R. SP No. 31363, where the said court held:
"In view of all the foregoing, we rule that the deficiency income tax assessments and estate tax assessment, are
already final and (u)nappealable -and- the subsequent levy of real properties is a tax remedy resorted to by the
government, sanctioned by Section 213 and 218 of the National Internal Revenue Code. This summary tax remedy is
distinct and separate from the other tax remedies (such as Judicial Civil actions and Criminal actions), and is not
affected or precluded by the pendency of any other tax remedies instituted by the government.
WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the petition for certiorari with prayer
for Restraining Order and Injunction.
No pronouncements as to costs.
SO ORDERED."
More than seven years since the demise of the late Ferdinand E. Marcos, the former President of the Republic
of the Philippines, the matter of the settlement of his estate, and its dues to the government in estate taxes, are still
unresolved, the latter issue being now before this Court for resolution. Specifically, petitioner Ferdinand R. Marcos II,
the eldest son of the decedent, questions the actuations of the respondent Commissioner of Internal Revenue in
assessing, and collecting through the summary remedy of Levy on Real Properties, estate and income tax
delinquencies upon the estate and properties of his father, despite the pendency of the proceedings on probate of the
will of the late president, which is docketed as Sp. Proc. No. 10279 in the Regional Trial Court of Pasig, Branch 156.
Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari and Prohibition with an
application for writ of preliminary injunction and/or temporary restraining order on June 28, 1993, seeking to -
I. Annul and set aside the Notices of Levy on real property dated February 22, 1993 and May 20, 1993, issued by
respondent Commissioner of Internal Revenue;
II. Annul and set aside the Notices of Sale dated May 26, 1993;
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III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service), from proceeding with the Auction of
the real properties covered by Notices of Sale.
After the parties had pleaded their case, the Court of Appeals rendered its Decision [2] on November 29, 1994,
ruling that the deficiency assessments for estate and income tax made upon the petitioner and the estate of the
deceased President Marcos have already become final and unappealable, and may thus be enforced by the
summary remedy of levying upon the properties of the late President, as was done by the respondent Commissioner
of Internal Revenue.
"WHEREFORE, premises considered judgment is hereby rendered DISMISSING the petition for Certiorari with prayer
for Restraining Order and Injunction.
No pronouncements as to cost.
SO ORDERED."
Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision, assigning the
following as errors:
A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE SUMMARY TAX REMEDIES
RESORTED TO BY THE GOVERNMENT ARE NOT AFFECTED AND PRECLUDED BY THE PENDENCY OF THE
SPECIAL PROCEEDING FOR THE ALLOWANCE OF THE LATE PRESIDENT'S ALLEGED WILL. TO THE
CONTRARY, THIS PROBATE PROCEEDING PRECISELY PLACED ALL PROPERTIES WHICH FORM PART OF
THE LATE PRESIDENT'S ESTATE IN CUSTODIA LEGIS OF THE PROBATE COURT TO THE EXCLUSION OF
ALL OTHER COURTS AND ADMINISTRATIVE AGENCIES.
B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING THAT SINCE THE TAX
ASSESSMENTS OF PETITIONER AND HIS PARENTS HAD ALREADY BECOME FINAL AND UNAPPEALABLE,
THERE WAS NO NEED TO GO INTO THE MERITS OF THE GROUNDS CITED IN THE
PETITION. INDEPENDENT OF WHETHER THE TAX ASSESSMENTS HAD ALREADY BECOME FINAL,
HOWEVER, PETITIONER HAS THE RIGHT TO QUESTION THE UNLAWFUL MANNER AND METHOD IN WHICH
TAX COLLECTION IS SOUGHT TO BE ENFORCED BY RESPONDENTS COMMISSIONER AND DE
GUZMAN. THUS, RESPONDENT COURT SHOULD HAVE FAVORABLY CONSIDERED THE MERITS OF THE
FOLLOWING GROUNDS IN THE PETITION:
(1) The Notices of Levy on Real Property were issued beyond the period provided in the Revenue Memorandum
Circular No. 38-68.
(2) [a] The numerous pending court cases questioning the late President's ownership or interests in several
properties (both personal and real) make the total value of his estate, and the consequent estate tax due,
incapable of exact pecuniary determination at this time. Thus, respondents assessment of the estate tax and
their issuance of the Notices of Levy and Sale are premature, confiscatory and oppressive.
[b] Petitioner, as one of the late President's compulsory heirs, was never notified, much less served with copies
of the Notices of Levy, contrary to the mandate of Section 213 of the NIRC. As such, petitioner was never given
an opportunity to contest the Notices in violation of his right to due process of law.
C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT COURT MANIFESTLY ERRED
IN RULING THAT IT HAD NO POWER TO GRANT INJUNCTIVE RELIEF TO PETITIONER. SECTION 219 OF THE
NIRC NOTWITHSTANDING, COURTS POSSESS THE POWER TO ISSUE A WRIT OF PRELIMINARY
INJUNCTION TO RESTRAIN RESPONDENTS COMMISSIONER'S AND DE GUZMAN'S ARBITRARY METHOD OF
COLLECTING THE ALLEGED DEFICIENCY ESTATE AND INCOME TAXES BY MEANS OF LEVY.
The facts as found by the appellate court are undisputed, and are hereby adopted:
"On September 29, 1989, former President Ferdinand Marcos died in Honolulu, Hawaii, USA.
On June 27, 1990, a Special Tax Audit Team was created to conduct investigations and examinations of the tax
liabilities and obligations of the late president, as well as that of his family, associates and "cronies". Said audit team
Page 63 of 108
concluded its investigation with a Memorandum dated July 26, 1991. The investigation disclosed that the Marcoses
failed to file a written notice of the death of the decedent, an estate tax returns [sic], as well as several income tax
returns covering the years 1982 to 1986, -all in violation of the National Internal Revenue Code (NIRC).
Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before the Regional Trial of Quezon City for
violations of Sections 82, 83 and 84 (has penalized under Sections 253 and 254 in relation to Section 252- a & b) of
the National Internal Revenue Code (NIRC).
The Commissioner of Internal Revenue thereby caused the preparation and filing of the Estate Tax Return for the
estate of the late president, the Income Tax Returns of the Spouses Marcos for the years 1985 to 1986, and the
Income Tax Returns of petitioner Ferdinand 'Bongbong' Marcos II for the years 1982 to 1985.
On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax assessment no. FAC-2-89-91-002464
(against the estate of the late president Ferdinand Marcos in the amount of P23,293,607,638.00 Pesos); (2)
Deficiency income tax assessment no. FAC-1-85-91-002452 and Deficiency income tax assessment no. FAC-1-86-
91-002451 (against the Spouses Ferdinand and Imelda Marcos in the amounts of P149,551.70 and P184,009,737.40
representing deficiency income tax for the years 1985 and 1986); (3) Deficiency income tax assessment nos. FAC-1-
82-91-002460 to FAC-1-85-91-002463 (against petitioner Ferdinand 'Bongbong' Marcos II in the amounts of P258.70
pesos; P9,386.40 Pesos; P4,388.30 Pesos; and P6,376.60 Pesos representing his deficiency income taxes for the
years 1982 to 1985).
The Commissioner of Internal Revenue avers that copies of the deficiency estate and income tax assessments were
all personally and constructively served on August 26, 1991 and September 12, 1991 upon Mrs. Imelda Marcos
(through her caretaker Mr. Martinez) at her last known address at No. 204 Ortega St., San Juan, M.M. (Annexes 'D'
and 'E' of the Petition). Likewise, copies of the deficiency tax assessments issued against petitioner Ferdinand
'Bongbong' Marcos II were also personally and constructively served upon him (through his caretaker) on September
12, 1991, at his last known address at Don Mariano Marcos St. corner P. Guevarra St., San Juan, M.M. (Annexes 'J'
and 'J-1' of the Petition). Thereafter, Formal Assessment notices were served on October 20, 1992, upon Mrs.
Marcos c/o petitioner, at his office, House of Representatives, Batasan Pambansa, Quezon City. Moreover, a notice
to Taxpayer inviting Mrs. Marcos (or her duly authorized representative or counsel), to a conference, was furnished
the counsel of Mrs. Marcos, Dean Antonio Coronel - but to no avail.
The deficiency tax assessments were not protested administratively, by Mrs. Marcos and the other heirs of the late
president, within 30 days from service of said assessments.
On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on real property against certain
parcels of land owned by the Marcoses - to satisfy the alleged estate tax and deficiency income taxes of Spouses
Marcos.
On May 20, 1993, four more Notices of Levy on real property were issued for the purpose of satisfying the deficiency
income taxes.
On May 26, 1993, additional four (4) notices of Levy on real property were again issued. The foregoing tax remedies
were resorted to pursuant to Sections 205 and 213 of the National Internal Revenue Code (NIRC).
In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of herein petitioner) calling the
attention of the BIR and requesting that they be duly notified of any action taken by the BIR affecting the interest of
their client Ferdinand 'Bongbong Marcos II, as well as the interest of the late president - copies of the aforesaid
notices were served on April 7, 1993 and on June 10, 1993, upon Mrs. Imelda Marcos, the petitioner, and their
counsel of record, 'De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office'.
Notices of sale at public auction were posted on May 26, 1993, at the lobby of the City Hall of Tacloban City. The
public auction for the sale of the eleven (11) parcels of land took place on July 5, 1993.There being no bidder, the lots
were declared forfeited in favor of the government.
On June 25, 1993, petitioner Ferdinand 'Bongbong' Marcos II filed the instant petition for certiorari and prohibition
under Rule 65 of the Rules of Court, with prayer for temporary restraining order and/or writ of preliminary injunction."
Page 64 of 108
It has been repeatedly observed, and not without merit, that the enforcement of tax laws and the collection of
taxes, is of paramount importance for the sustenance of government.Taxes are the lifeblood of the government and
should be collected without unnecessary hindrance. However, such collection should be made in accordance with law
as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the
apparently conflicting interests of the authorities and the taxpayers so that the real purpose of taxation, which is the
promotion of the common good, may be achieved."[3]
Whether or not the proper avenues of assessment and collection of the said tax obligations were taken by the
respondent Bureau is now the subject of the Court's inquiry.
Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of the late President
Marcos effected by the BIR are null and void for disregarding the established procedure for the enforcement of taxes
due upon the estate of the deceased. The case of Domingo vs. Garlitos[4] is specifically cited to bolster the argument
that "the ordinary procedure by which to settle claims of indebtedness against the estate of a deceased, person, as in
an inheritance (estate) 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 therefor." This remedy is allegedly, exclusive, and cannot be effected through
any other means.
Petitioner goes further, submitting that the probate court is not precluded from denying a request by the
government for the immediate payment of taxes, and should order the payment of the same only within the period
fixed by the probate court for the payment of all the debts of the decedent. In this regard, petitioner cites the case of
Collector of Internal Revenue vs. The Administratrix of the Estate of Echarri (67 Phil 502), where it was held that:
"The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal Revenue (52 Phil 803), relied
upon by the petitioner-appellant is good authority on the proposition that the court having control over the
administration proceedings has jurisdiction to entertain the claim presented by the government for taxes due and to
order the administrator to pay the tax should it find that the assessment was proper, and that the tax was legal, due
and collectible. And the rule laid down in that case must be understood in relation to the case of Collector of Customs
vs. Haygood, supra., as to the procedure to be followed in a given case by the government to effectuate the collection
of the tax. Categorically stated, where during the pendency of judicial administration over the estate of a deceased
person a claim for taxes is presented by the government, the court has the authority to order payment by the
administrator; but, in the same way that it has authority to order payment or satisfaction, it also has the negative
authority to deny the same. While there are cases where courts are required to perform certain duties mandatory and
ministerial in character, the function of the court in a case of the present character is not one of them; and here, the
court cannot be an organism endowed with latitude of judgment in one direction, and converted into a mere
mechanical contrivance in another direction."
On the other hand, it is argued by the BIR, that the state's authority to collect internal revenue taxes is
paramount. Thus, the pendency of probate proceedings over the estate of the deceased does not preclude the
assessment and collection, through summary remedies, of estate taxes over the same. According to the respondent,
claims for payment of estate and income taxes due and assessed after the death of the decedent need not be
presented in the form of a claim against the estate. These can and should be paid immediately. The probate court is
not the government agency to decide whether an estate is liable for payment of estate of income taxes. Well-settled
is the rule that the probate court is a court with special and limited jurisdiction.
Concededly, the authority of the Regional Trial Court, sitting, albeit with limited jurisdiction, as a probate court
over estate of deceased individual, is not a trifling thing. The court's jurisdiction, once invoked, and made effective,
cannot be treated with indifference nor should it be ignored with impunity by the very parties invoking its authority.
In testament to this, it has been held that it is within the jurisdiction of the probate court to approve the sale of
properties of a deceased person by his prospective heirs before final adjudication;[5] to determine who are the heirs of
the decedent;[6] the recognition of a natural child;[7] the status of a woman claiming to be the legal wife of the
decedent;[8] the legality of disinheritance of an heir by the testator; [9] and to pass upon the validity of a waiver of
hereditary rights.[10]
The pivotal question the court is tasked to resolve refers to the authority of the Bureau of Internal Revenue to
collect by the summary remedy of levying upon, and sale of real properties of the decedent, estate tax deficiencies,
without the cognition and authority of the court sitting in probate over the supposed will of the deceased.
The nature of the process of estate tax collection has been described as follows:
"Strictly speaking, the assessment of an inheritance tax does not directly involve the administration of a decedent's
estate, although it may be viewed as an incident to the complete settlement of an estate, and, under some statutes, it
Page 65 of 108
is made the duty of the probate court to make the amount of the inheritance tax a part of the final decree of
distribution of the estate. It is not against the property of decedent, nor is it a claim against the estate as such, but it is
against the interest or property right which the heir, legatee, devisee, etc., has in the property formerly held by
decedent. Further, under some statutes, it has been held that it is not a suit or controversy between the parties, nor is
it an adversary proceeding between the state and the person who owes the tax on the inheritance. However, under
other statutes it has been held that the hearing and determination of the cash value of the assets and the
determination of the tax are adversary proceedings. The proceeding has been held to be necessarily a proceeding in
rem.[11]
In the Philippine experience, the enforcement and collection of estate tax, is executive in character, as the
legislature has seen it fit to ascribe this task to the Bureau of Internal Revenue. Section 3 of the National Internal
Revenue Code attests to this:
"Sec. 3. Powers and duties of the Bureau.-The powers and duties of the Bureau of Internal Revenue shall
comprehend the assessment and collection of all national internal revenue taxes, fees, and charges, and the
enforcement of all forfeitures, penalties, and fines connected therewith, including the execution of judgments in all
cases decided in its favor by the Court of Tax Appeals and the ordinary courts. Said Bureau shall also give effect to
and administer the supervisory and police power conferred to it by this Code or other laws."
Thus, it was in Vera vs. Fernandez[12] that the court recognized the liberal treatment of claims for taxes charged
against the estate of the decedent. Such taxes, we said, were exempted from the application of the statute of non-
claims, and this is justified by the necessity of government funding, immortalized in the maxim that taxes are the
lifeblood of the government.Vectigalia nervi sunt rei publicae - taxes are the sinews of the state.
"Taxes assessed against the estate of a deceased person, after administration is opened, need not be submitted to
the committee on claims in the ordinary course of administration. In the exercise of its control over the administrator,
the court may direct the payment of such taxes upon motion showing that the taxes have been assessed against the
estate."
Such liberal treatment of internal revenue taxes in the probate proceedings extends so far, even to allowing the
enforcement of tax obligations against the heirs of the decedent, even after distribution of the estate's properties.
"Claims for taxes, whether assessed before or after the death of the deceased, can be collected from the heirs even
after the distribution of the properties of the decedent. They are exempted from the application of the statute of non-
claims. The heirs shall be liable therefor, in proportion to their share in the inheritance." [13]
"Thus, the Government has two ways of collecting the taxes in question. One, by going after all the heirs and
collecting from each one of them the amount of the tax proportionate to the inheritance received.Another
remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights to property belong
to the taxpayer for unpaid income tax, is by subjecting said property of the estate which is in the hands of an heir or
transferee to the payment of the tax due the estate. (Commissioner of Internal Revenue vs. Pineda, 21 SCRA 105,
September 15, 1967.)
From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a settlement tribunal
over the deceased is not a mandatory requirement in the collection of estate taxes. It cannot therefore be argued that
the Tax Bureau erred in proceeding with the levying and sale of the properties allegedly owned by the late President,
on the ground that it was required to seek first the probate court's sanction. There is nothing in the Tax Code, and in
the pertinent remedial laws that implies the necessity of the probate or estate settlement court's approval of the
state's claim for estate taxes, before the same can be enforced and collected.
On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden not to
authorize the executor or judicial administrator of the decedent's estate to deliver any distributive share to any party
interested in the estate, unless it is shown a Certification by the Commissioner of Internal Revenue that the estate
taxes have been paid. This provision disproves the petitioner's contention that it is the probate court which approves
the assessment and collection of the estate tax.
If there is any issue as to the validity of the BIR's decision to assess the estate taxes, this should have been
pursued through the proper administrative and judicial avenues provided for by law.
Section 229 of the NIRC tells us how:
Page 66 of 108
"Sec. 229. Protesting of assessment.-When the Commissioner of Internal Revenue or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his findings. Within a
period to be prescribed by implementing regulations, the taxpayer shall be required to respond to said notice. If the
taxpayer fails to respond, the Commissioner shall issue an assessment based on his findings.
Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation in such
form and manner as may be prescribed by implementing regulations within (30) days from receipt of the assessment;
otherwise, the assessment shall become final and unappealable.
If the protest is denied in whole or in part, the individual, association or corporation adversely affected by the decision
on the protest may appeal to the Court of Tax Appeals within thirty (30) days from receipt of said decision; otherwise,
the decision shall become final, executory and demandable. (As inserted by P.D. 1773)"
Apart from failing to file the required estate tax return within the time required for the filing of the same,
petitioner, and the other heirs never questioned the assessments served upon them, allowing the same to lapse into
finality, and prompting the BIR to collect the said taxes by levying upon the properties left by President Marcos.
Petitioner submits, however, that "while the assessment of taxes may have been validly undertaken by the
Government, collection thereof may have been done in violation of the law.Thus, the manner and method in which
the latter is enforced may be questioned separately, and irrespective of the finality of the former, because the
Government does not have the unbridled discretion to enforce collection without regard to the clear provision of
law."[14]
Petitioner specifically points out that applying Memorandum Circular No. 38-68, implementing Sections 318 and
324 of the old tax code (Republic Act 5203), the BIR's Notices of Levy on the Marcos properties, were issued beyond
the allowed period, and are therefore null and void:
"...the Notices of Levy on Real Property (Annexes 0 to NN of Annex C of this Petition) in satisfaction of said
assessments were still issued by respondents well beyond the period mandated in Revenue Memorandum Circular
No. 38-68. These Notices of Levy were issued only on 22 February 1993 and 20 May 1993 when at least seventeen
(17) months had already lapsed from the last service of tax assessment on 12 September 1991. As no notices of
distraint of personal property were first issued by respondents, the latter should have complied with Revenue
Memorandum Circular No. 38-68 and issued these Notices of Levy not earlier than three (3) months nor later than six
(6) months from 12 September 1991. In accordance with the Circular, respondents only had until 12 March 1992 (the
last day of the sixth month) within which to issue these Notices of Levy. The Notices of Levy, having been issued
beyond the period allowed by law, are thus void and of no effect."[15]
We hold otherwise. The Notices of Levy upon real property were issued within the prescriptive period and in
accordance with the provisions of the present Tax Code. The deficiency tax assessment, having already become
final, executory, and demandable, the same can now be collected through the summary remedy of distraint or levy
pursuant to Section 205 of the NIRC.
The applicable provision in regard to the prescriptive period for the assessment and collection of tax deficiency
in this instance is Article 223 of the NIRC, which pertinently provides:
"Sec. 223. Exceptions as to a period of limitation of assessment and collection of taxes.- (a) In the case of a false or
fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in
court for the collection of such tax may be begun without assessment, at any time within ten (10) years after the
discovery of the falsity, fraud, or omission: Provided, That, in a fraud assessment which has become final and
executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection
thereof.
xxx
(c) Any internal revenue tax which has been assessed within the period of limitation above prescribed, may be
collected by distraint or levy or by a proceeding in court within three years following the assessment of the tax.
xxx
Page 67 of 108
The omission to file an estate tax return, and the subsequent failure to contest or appeal the assessment made
by the BIR is fatal to the petitioner's cause, as under the above-cited provision, in case of failure to file a return, the
tax may be assessed at any time within ten years after the omission, and any tax so assessed may be collected by
levy upon real property within three years following the assessment of the tax. Since the estate tax assessment had
become final and unappealable by the petitioner's default as regards protesting the validity of the said assessment,
there is now no reason why the BIR cannot continue with the collection of the said tax. Any objection against the
assessment should have been pursued following the avenue paved in Section 229 of the NIRC on protests on
assessments of internal revenue taxes.
Petitioner further argues that "the numerous pending court cases questioning the late president's ownership or
interests in several properties (both real and personal) make the total value of his estate, and the consequent estate
tax due, incapable of exact pecuniary determination at this time. Thus, respondents' assessment of the estate tax and
their issuance of the Notices of Levy and sale are premature and oppressive." He points out the pendency of
Sandiganbayan Civil Case Nos. 0001-0034 and 0141, which were filed by the government to question the ownership
and interests of the late President in real and personal properties located within and outside the
Philippines. Petitioner, however, omits to allege whether the properties levied upon by the BIR in the collection of
estate taxes upon the decedent's estate were among those involved in the said cases pending in the
Sandiganbayan. Indeed, the court is at a loss as to how these cases are relevant to the matter at issue. The mere
fact that the decedent has pending cases involving ill-gotten wealth does not affect the enforcement of tax
assessments over the properties indubitably included in his estate.
Petitioner also expresses his reservation as to the propriety of the BIR's total assessment
of P23,292,607,638.00, stating that this amount deviates from the findings of the Department of Justice's Panel of
Prosecutors as per its resolution of 20 September 1991. Allegedly, this is clear evidence of the uncertainty on the part
of the Government as to the total value of the estate of the late President.
This is, to our mind, the petitioner's last ditch effort to assail the assessment of estate tax which had already
become final and unappealable.
It is not the Department of Justice which is the government agency tasked to determine the amount of taxes due
upon the subject estate, but the Bureau of Internal Revenue [16] whose determinations and assessments are
presumed correct and made in good faith.[17] The taxpayer has the duty of proving otherwise. In the absence of proof
of any irregularities in the performance of official duties, an assessment will not be disturbed. Even an assessment
based on estimates is prima facie valid and lawful where it does not appear to have been arrived at arbitrarily or
capriciously. The burden of proof is upon the complaining party to show clearly that the assessment is
erroneous. Failure to present proof of error in the assessment will justify the judicial affirmance of said
assessment.[18] In this instance, petitioner has not pointed out one single provision in the Memorandum of the Special
Audit Team which gave rise to the questioned assessment, which bears a trace of falsity. Indeed, the petitioner's
attack on the assessment bears mainly on the alleged improbable and unconscionable amount of the taxes
charged. But mere rhetoric cannot supply the basis for the charge of impropriety of the assessments made.
Moreover, these objections to the assessments should have been raised, considering the ample remedies
afforded the taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court of Tax Appeals, as
described earlier, and cannot be raised now via Petition for Certiorari, under the pretext of grave abuse of
discretion. The course of action taken by the petitioner reflects his disregard or even repugnance of the established
institutions for governance in the scheme of a well-ordered society. The subject tax assessments having become
final, executory and enforceable, the same can no longer be contested by means of a disguised protest. In the
main, Certiorari may not be used as a substitute for a lost appeal or remedy. [19]This judicial policy becomes more
pronounced in view of the absence of sufficient attack against the actuations of government.
On the matter of sufficiency of service of Notices of Assessment to the petitioner, we find the respondent
appellate court's pronouncements sound and resilient to petitioner's attacks.
"Anent grounds 3(b) and (B) - both alleging/claiming lack of notice - We find, after considering the facts and
circumstances, as well as evidences, that there was sufficient, constructive and/or actual notice of assessments, levy
and sale, sent to herein petitioner Ferdinand "Bongbong" Marcos as well as to his mother Mrs. Imelda Marcos.
Even if we are to rule out the notices of assessments personally given to the caretaker of Mrs. Marcos at the latter's
last known address, on August 26, 1991 and September 12, 1991, as well as the notices of assessment personally
given to the caretaker of petitioner also at his last known address on September 12, 1991 - the subsequent notices
given thereafter could no longer be ignored as they were sent at a time when petitioner was already here in the
Philippines, and at a place where said notices would surely be called to petitioner's attention, and received by
responsible persons of sufficient age and discretion.
Page 68 of 108
Thus, on October 20, 1992, formal assessment notices were served upon Mrs. Marcos c/o the petitioner, at his office,
House of Representatives, Batasan Pambansa, Q.C. (Annexes "A", "A-1", "A-2", "A-3"; pp. 207-210,
Comment/Memorandum of OSG). Moreover, a notice to taxpayer dated October 8, 1992 inviting Mrs. Marcos to a
conference relative to her tax liabilities, was furnished the counsel of Mrs. Marcos - Dean Antonio Coronel (Annex
"B", p. 211, ibid). Thereafter, copies of Notices were also served upon Mrs. Imelda Marcos, the petitioner and their
counsel "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office", on April 7, 1993 and June 10,
1993. Despite all of these Notices, petitioner never lifted a finger to protest the assessments, (upon which the Levy
and sale of properties were based), nor appealed the same to the Court of Tax Appeals.
There being sufficient service of Notices to herein petitioner (and his mother) and it appearing that petitioner
continuously ignored said Notices despite several opportunities given him to file a protest and to thereafter appeal to
the Court of Tax Appeals, - the tax assessments subject of this case, upon which the levy and sale of properties were
based, could no longer be contested (directly or indirectly) via this instant petition for certiorari."[20]
Petitioner argues that all the questioned Notices of Levy, however, must be nullified for having been issued
without validly serving copies thereof to the petitioner. As a mandatory heir of the decedent, petitioner avers that he
has an interest in the subject estate, and notices of levy upon its properties should have been served upon him.
We do not agree. In the case of notices of levy issued to satisfy the delinquent estate tax, the delinquent
taxpayer is the Estate of the decedent, and not necessarily, and exclusively, the petitioner as heir of the deceased. In
the same vein, in the matter of income tax delinquency of the late president and his spouse, petitioner is not the
taxpayer liable. Thus, it follows that service of notices of levy in satisfaction of these tax delinquencies upon the
petitioner is not required by law, as under Section 213 of the NIRC, which pertinently states:
"xxx
...Levy shall be effected by writing upon said certificate a description of the property upon which levy is made. At the
same time, written notice of the levy shall be mailed to or served upon the Register of Deeds of the province or city
where the property is located and upon the delinquent taxpayer, or if he be absent from the Philippines, to his agent
or the manager of the business in respect to which the liability arose, or if there be none, to the occupant of the
property in question.
xxx"
The foregoing notwithstanding, the record shows that notices of warrants of distraint and levy of sale were
furnished the counsel of petitioner on April 7, 1993, and June 10, 1993, and the petitioner himself on April 12, 1993 at
his office at the Batasang Pambansa.[21] We cannot therefore, countenance petitioner's insistence that he was denied
due process. Where there was an opportunity to raise objections to government action, and such opportunity was
disregarded, for no justifiable reason, the party claiming oppression then becomes the oppressor of the orderly
functions of government. He who comes to court must come with clean hands. Otherwise, he not only taints his
name, but ridicules the very structure of established authority.
IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of the Court of Appeals
dated November 29, 1994 is hereby AFFIRMED in all respects.
SO ORDERED.
Page 69 of 108
[G.R. No. 128315. June 29, 1999]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PASCOR REALTY AND DEVELOPMENT

CORPORATION, ROGELIO A. DIO and VIRGINIA S. DIO, respondents.
DECISION
PANGANIBAN, J.:
An assessment contains not only a computation of tax liabilities, but also a demand for payment within a
prescribed period. It also signals the time when penalties and interests begin to accrue against the taxpayer. To
enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received
by the taxpayer. Accordingly, an affidavit, which was executed by revenue officers stating the tax liabilities of a
taxpayer and attached to a criminal complaint for tax evasion, cannot be deemed an assessment that can be
questioned before the Court of Tax Appeals.
Statement of the Case
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying for the
nullification of the October 30, 1996 Decision [1] of the Court of Appeals[2] in CA-GR SP No. 40853, which effectively
affirmed the January 25, 1996 Resolution[3] of the Court of Tax Appeals[4] in CTA Case No. 5271. The CTA disposed
as follows:
WHEREFORE, finding [the herein petitioners] Motion to Dismiss as UNMERITORIOUS, the same is hereby DENIED.
[The CIR] is hereby given a period of thirty (30) days from receipt hereof to file her answer.
Petitioner also seeks to nullify the February 13, 1997 Resolution [5] of the Court of Appeals denying
reconsideration.
The Facts
As found by the Court of Appeals, the undisputed facts of the case are as follows:
It appears that by virtue of Letter of Authority No. 001198, then BIR Commissioner Jose U. Ong authorized Revenue
Officers Thomas T. Que, Sonia T. Estorco and Emmanuel M. Savellano to examine the books of accounts and other
accounting records of Pascor Realty and Development Corporation. (PRDC) for the years ending 1986, 1987 and
1988. The said examination resulted in a recommendation for the issuance of an assessment in the amounts of
P7,498,434.65 and P3,015,236.35 for the years 1986 and 1987, respectively.
On March 1, 1995, the Commissioner of Internal Revenue filed a criminal complaint before the Department of Justice
against the PRDC, its President Rogelio A. Dio, and its Treasurer Virginia S. Dio, alleging evasion of taxes in the total
amount of P10,513,671.00. Private respondents PRDC, et. al. filed an Urgent Request for
Reconsideration/Reinvestigation disputing the tax assessment and tax liability.
On March 23, 1995, private respondents received a subpoena from the DOJ in connection with the criminal complaint
filed by the Commissioner of Internal Revenue (BIR) against them.
In a letter dated May 17, 1995, the CIR denied the urgent request for reconsideration/reinvestigation of the private
respondents on the ground that no formal assessment has as yet been issued by the Commissioner.
Page 70 of 108
Private respondents then elevated the Decision of the CIR dated May 17, 1995 to the Court of Tax Appeals on a
petition for review docketed as CTA Case No. 5271 on July 21, 1995. On September 6, 1995, the CIR filed a Motion
to Dismiss the petition on the ground that the CTA has no jurisdiction over the subject matter of the petition, as there
was no formal assessment issued against the petitioners. The CTA denied the said motion to dismiss in a Resolution
dated January 25, 1996 and ordered the CIR to file an answer within thirty (30) days from receipt of said
resolution. The CIR received the resolution on January 31, 1996 but did not file an answer nor did she move to
reconsider the resolution.
Instead, the CIR filed this petition on June 7, 1996, alleging as grounds that:
Respondent Court of Tax Appeals acted with grave abuse of discretion and without jurisdiction in considering the
affidavit/report of the revenue officer and the indorsement of said report to the secretary of justice as assessment
which may be appealed to the Court of Tax Appeals;
Respondent Court of Tax Appeals acted with grave abuse of discretion in considering the denial by petitioner of
private respondents Motion for Reconsideration as [a] final decision which may be appealed to the Court of Tax
Appeals.
In denying the motion to dismiss filed by the CIR, the Court of Tax Appeals stated:
We agree with petitioners contentions, that the criminal complaint for tax evasion is the assessment issued, and that
the letter denial of May 17, 1995 is the decision properly appealable to [u]s. Respondents ground of denial, therefore,
that there was no formal assessment issued, is untenable.
It is the Courts honest belief, that the criminal case for tax evasion is already an assessment. The complaint, more
particularly, the Joint Affidavit of Revenue Examiners Lagmay and Savellano attached thereto, contains the details of
the assessment like the kind and amount of tax due, and the period covered.
Petitioners are right, in claiming that the provisions of Republic Act No. 1125, relating to exclusive appellate
jurisdiction of this Court, do not, make any mention of formal assessment. The law merely states, that this Court has
exclusive appellate jurisdiction over decisions of the Commissioner of Internal Revenue on disputed assessments,
and other matters arising under the National Internal Revenue Code, other law or part administered by the Bureau of
Internal Revenue Code.
As far as this Court is concerned, the amount and kind of tax due, and the period covered, are sufficient details
needed for an assessment. These details are more than complete, compared to the following definitions of the term
as quoted hereunder. Thus:
Assessment is laying a tax. Johnson City v. Clinchfield R. Co., 43 S.W. (2d) 386, 387, 163 Tenn. 332. (Words and
Phrases, Permanent Edition, Vol. 4, p. 446)
The word assessment when used in connection with taxation, may have more than one meaning. The ultimate
purpose of an assessment to such a connection is to ascertain the amount that each taxpayer is to pay. More
commonly, the word assessment means the official valuation of a taxpayers property for purpose of taxation. State v.
New York, N.H. and H.R. Co. 22 A. 765, 768, 60 Conn. 326, 325. (Ibid. p. 445)
From the above, it can be gleaned that an assessment simply states how much tax is due from a taxpayer. Thus,
based on these definitions, the details of the tax as given in the Joint Affidavit of respondents examiners, which was
attached to the tax evasion complaint, more than suffice to qualify as an assessment. Therefore, this assessment
having been disputed by petitioners, and there being a denial of their letter disputing such assessment, this Court
unquestionably acquired jurisdiction over the instant petition for review.[6]
As earlier observed, the Court of Appeals sustained the CTA and dismissed the petition.
Hence, this recourse to this Court.[7]
Page 71 of 108
Ruling of the Court of Appeals
The Court of Appeals held that the tax court committed no grave abuse of discretion in ruling that the Criminal
Complaint for tax evasion filed by the Commissioner of Internal Revenue with the Department of Justice constituted
an assessment of the tax due, and that the said assessment could be the subject of a protest. By definition, an
assessment is simply the statement of the details and the amount of tax due from a taxpayer. Based on this
definition, the details of the tax contained in the BIR examiners Joint Affidavit, [8] which was attached to the criminal
Complaint, constituted an assessment. Since the assailed Order of the CTA was merely interlocutory and devoid of
grave abuse of discretion, a petition for certiorari did not lie.
Issues
Petitioners submit for the consideration of this Court the following issues:
(1) Whether or not the criminal complaint for tax evasion can be construed as an assessment.
(2) Whether or not an assessment is necessary before criminal charges for tax evasion may be instituted.
(3) Whether or not the CTA can take cognizance of the case in the absence of an assessment. [9]
In the main, the Court will resolve whether the revenue officers Affidavit-Report, which was attached to the
criminal Complaint filed with the Department of Justice, constituted an assessment that could be questioned before
the Court of Tax Appeals.
The Courts Ruling
The petition is meritorious.
Main Issue: Assessment
Petitioner argues that the filing of the criminal complaint with the Department of Justice cannot in any way be
construed as a formal assessment of private respondents tax liabilities. This position is based on Section 205 of the
National Internal Revenue Code[10] (NIRC), which provides that remedies for the collection of deficient taxes may be
by either civil or criminal action. Likewise, petitioner cites Section 223(a) of the same Code, which states that in case
of failure to file a return, the tax may be assessed or a proceeding in court may be begun without assessment.
Respondents, on the other hand, maintain that an assessment is not an action or proceeding for the collection
of taxes, but merely a notice that the amount stated therein is due as tax and that the taxpayer is required to pay the
same. Thus, qualifying as an assessment was the BIR examiners Joint Affidavit, which contained the details of the
supposed taxes due from respondent for taxable years ending 1987 and 1988, and which was attached to the tax
evasion Complaint filed with the DOJ. Consequently, the denial by the BIR of private respondents request for
reinvestigation of the disputed assessment is properly appealable to the CTA.
We agree with petitioner. Neither the NIRC nor the revenue regulations governing the protest of
assessments[11] provide a specific definition or form of an assessment. However, the NIRC defines the specific
functions and effects of an assessment. To consider the affidavit attached to the Complaint as a proper assessment
is to subvert the nature of an assessment and to set a bad precedent that will prejudice innocent taxpayers.
True, as pointed out by the private respondents, an assessment informs the taxpayer that he or she has tax
liabilities. But not all documents coming from the BIR containing a computation of the tax liability can be deemed
assessments.
Page 72 of 108
To start with, an assessment must be sent to and received by a taxpayer, and must demand payment of the
taxes described therein within a specific period. Thus, the NIRC imposes a 25 percent penalty, in addition to the tax
due, in case the taxpayer fails to pay the deficiency tax within the time prescribed for its payment in the notice of
assessment. Likewise, an interest of 20 percent per annum, or such higher rate as may be prescribed by rules and
regulations, is to be collected from the date prescribed for its payment until the full payment.[12]
The issuance of an assessment is vital in determining the period of limitation regarding its proper issuance and
the period within which to protest it. Section 203[13]of the NIRC provides that internal revenue taxes must be assessed
within three years from the last day within which to file the return. Section 222,[14] on the other hand, specifies a
period of ten years in case a fraudulent return with intent to evade was submitted or in case of failure to file a
return. Also, Section 228[15] of the same law states that said assessment may be protested only within thirty days
from receipt thereof. Necessarily, the taxpayer must be certain that a specific document constitutes an
assessment. Otherwise, confusion would arise regarding the period within which to make an assessment or to protest
the same, or whether interest and penalty may accrue thereon.
It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed, an assessment is
deemed made only when the collector of internal revenue releases, mails or sends such notice to the taxpayer. [16]
In the present case, the revenue officers Affidavit merely contained a computation of respondents tax liability. It
did not state a demand or a period for payment. Worse, it was addressed to the justice secretary, not to the
taxpayers.
Respondents maintain that an assessment, in relation to taxation, is simply understood to mean:
A notice to the effect that the amount therein stated is due as tax and a demand for payment thereof. [17]
Fixes the liability of the taxpayer and ascertains the facts and furnishes the data for the proper presentation of tax
rolls.[18]
Even these definitions fail to advance private respondents case. That the BIR examiners Joint Affidavit attached
to the Criminal Complaint contained some details of the tax liabilities of private respondents does not ipso facto make
it an assessment. The purpose of the Joint Affidavit was merely to support and substantiate the Criminal Complaint
for tax evasion. Clearly, it was not meant to be a notice of the tax due and a demand to the private respondents for
payment thereof.
The fact that the Complaint itself was specifically directed and sent to the Department of Justice and not to
private respondents shows that the intent of the commissioner was to file a criminal complaint for tax evasion, not to
issue an assessment. Although the revenue officers recommended the issuance of an assessment, the commissioner
opted instead to file a criminal case for tax evasion. What private respondents received was a notice from the DOJ
that a criminal case for tax evasion had been filed against them, not a notice that the Bureau of Internal Revenue had
made an assessment.
In addition, what private respondents sent to the commissioner was a motion for a reconsideration of the tax
evasion charges filed, not of an assessment, as shown thus:
This is to request for reconsideration of the tax evasion charges against my client, PASCOR Realty and Development
Corporation and for the same to be referred to the Appellate Division in order to give my client the opportunity of a fair
and objective hearing[19]
Additional Issues: Assessment Not Necessary Before Filing of Criminal Complaint
Private respondents maintain that the filing of a criminal complaint must be preceded by an assessment. This is
incorrect, because Section 222 of the NIRC specifically states that in cases where a false or fraudulent return is
submitted or in cases of failure to file a return such as this case, proceedings in court may be commenced without an
assessment. Furthermore, Section 205 of the same Code clearly mandates that the civil and criminal aspects of the
case may be pursued simultaneously. In Ungab v. Cusi,[20] petitioner therein sought the dismissal of the criminal
Complaints for being premature, since his protest to the CTA had not yet been resolved. The Court held that such
protests could not stop or suspend the criminal action which was independent of the resolution of the protest in the
CTA. This was because the commissioner of internal revenue had, in such tax evasion cases, discretion on whether
to issue an assessment or to file a criminal case against the taxpayer or to do both.
Page 73 of 108
Private respondents insist that Section 222 should be read in relation to Section 255 of the NIRC, [21] which
penalizes failure to file a return. They add that a tax assessment should precede a criminal indictment. We
disagree. To reiterate, said Section 222 states that an assessment is not necessary before a criminal charge can be
filed. This is the general rule. Private respondents failed to show that they are entitled to an exception. Moreover, the
criminal charge need only be supported by a prima facie showing of failure to file a required return. This fact need not
be proven by an assessment.
The issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment is
issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is then given a chance to
submit position papers and documents to prove that the assessment is unwarranted. If the commissioner is
unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing the latter specifically and
clearly that an assessment has been made against him or her. In contrast, the criminal charge need not go through
all these. The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified that a criminal case
had been filed against him, not that the commissioner has issued an assessment. It must be stressed that a criminal
complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code.
WHEREFORE, the petition is hereby GRANTED. The assailed Decision is REVERSED and SET ASIDE. CTA
Case No. 5271 is likewise DISMISSED. No costs.
SO ORDERED.
CASES 49
G.R. Nos. L-28502-03 April 18, 1989

vs.
ESSO STANDARD EASTERN, INC. and THE COURT OF TAX APPEALS, respondents.
NARVASA, J.:
In two (2) cases appealed to it 1 by the private respondent, hereafter simply referred to as ESSO, the Court of Tax
Appeals rendered judgment 2sustaining the decisions of the Commissioner of Internal Revenue excepted to, save
"the refund-claim .. in the amount of P39,787.94 as overpaid interest which it ordered refunded to ESSO
Reversal of this decision is sought by the Commissioner by a petition for review on certiorari filed with this Court. He
ascribes to the Tax Court one sole error: "of applying the tax credit for overpayment of the 1959 income tax of ..
ESSO, granted by the petitioner (Commissioner), to .. (ESSO's) basic 1960 deficiency income tax liability x x and
imposing the 1-1/2% monthly interests 3 only on the remaining balance thereof in the sum of P146,961.00" 4 (instead
of the full amount of the 1960 deficiency liability in the amount of P367,994.00). Reversal of the same judgment of the
Court of Tax Appeals is also sought by ESSO in its own appeal (docketed as G.R. Nos. L28508-09); but in the brief
filed by it in this case, it indicates that it will not press its appeal in the event that "the instant petition for review be
denied and that judgment be rendered affirming the decision of the Court of Tax Appeals."
The facts are simple enough and are quite quickly recounted. ESSO overpaid its 1959 income tax by P221,033.00. It
was accordingly granted a tax credit in this amount by the Comissioner on August 5,1964. However, ESSOs payment
of its income tax for 1960 was found to be short by P367,994.00. So, on July 10, 1964, the Commissioner wrote to
ESSO demanding payment of the deficiency tax, together with interest thereon for the period from April 18,1961 to
April 18,1964. On August 10, 1964, ESSO paid under protest the amount alleged to be due, including the interest as
reckoned by the Commissioner. It protested the computation of interest, contending it was more than that properly
due. It claimed that it should not have been required to pay interest on the total amount of the deficiency tax,
P367,994.00, but only on the amount of P146,961.00—representing the difference between said deficiency,
P367,994.00, and ESSOs earlier overpayment of P221,033.00 (for which it had been granted a tax credit). ESSO
thus asked for a refund.
The Internal Revenue Commissioner denied the claim for refund. ESSO appealed to the Court of Tax Appeals. As
aforestated. that Court ordered payment to ESSO of its "refund-claim x x in the amount of P39,787.94 as overpaid
interest. Hence, this appeal by the Commissioner. The CTA justified its award of the refund as follows:
Page 74 of 108
... In the letter of August 5, 1964, .. (the Commissioner) admitted that .. ESSO had overpaid its
1959 income tax by P221,033.00. Accordingly .. (the Commissioner) granted to .. ESSO a tax
credit of P221,033.00. In short, the said sum of P221,033.00 of ESSO's money was in the
Government's hands at the latest on July 15, 1960 when it ESSO paid in full its second installment
of income tax for 1959. On July 10, 1964 .. (the Commissioner) claimed that for 1960, .. ESSO
underpaid its income tax by P367,994.00. However, instead of deducting from P367,994.00 the tax
credit of P221,033.00 which .. (the Commissioner) had already admitted was due .. ESSO .. (the
Commissioner) still insists in collecting the interest on the full amount of P367,994.00 for the period
April 18, 1961 to April 18,1964 when the Government had already in its hands the sum of
P221,033.00 of .. ESSOs money even before the latter's income tax for 1960 was due and payable.
If the imposition of interest does not amount to a penalty but merely a just compensation to the
State for the delay in paying the tax, and for the concomitant use by the taxpayer of funds that
rightfully should be in the Government's hand (Castro v. Collector, G.R. No. L-1274, Dec. 28,
1962), the collection of the interest on the full amount of P367,994.00 without deducting first the tax
credit of P221,033.00, which has long been in the hands of the Government, becomes erroneous,
illegal and arbitrary.
.. (ESSO) could hardly be charged of delinquency in paying P221,033.00 out of the deficiency
income tax of P367,994.00, for which the State should be compensated by the payment of interest,
because the said amount of P221,033.00 was already in the coffers of the Government. Neither
could .. ESSO be charged for the concomitant use of funds that rightfully belong to the Government
because as early as July 15, 1960, it was the Government that was using .. ESSOs funds of
P221,033.00. In the circumstances, we find it unfair and unjust for .. (the Commissioner) to exact
the interest on the said sum of P221,033.00 which, after all, was paid to and received by the
Government even before the incidence of the deficiency income tax of P367,994.00. (Itogon-Suyoc
Mines, Inc. v. Commissioner, C.T.A. Case No. 1327, Sept. 30,1965). On the contrary, the
Government should be the first to blaze the trail and set the example of fairness and honest dealing
in the administration of tax laws.
Accordingly, we hold that the tax credit of P221,033.00 for 1959 should first be deducted from the
basic deficiency tax of P367,994.00 for 1960 and the resulting difference of P146,961.00 would be
subject to the 18% interest prescribed by Section 51 (d) of the Revenue Code. According to the
prayer of ..(ESSO) .. (the Commissioner) is hereby ordered to refund to .. (ESSO) the amount of
P39,787.94 as overpaid interest in the settlement of its 1960 income tax liability. However, as the
collection of the tax was not attended with arbitrariness because .. (ESSO) itself followed x x (the
Commissioner's) manner of computing the tax in paying the sum of P213,189.93 on August 10,
1964, the prayer of .. (ESSO) that it be granted the legal rate of interest on its overpayment of
P39,787.94 from August 10, 1964 to the time it is actually refunded is denied. (See Collector of
Internal Revenue v. Binalbagan Estate, Inc., G.R. No. 1,12752, Jan. 30, 1965).
The Commissioner's position is that income taxes are determined and paid on an annual basis, and that such
determination and payment of annual taxes are separate and independent transactions; and that a tax credit could
not be so considered until it has been finally approved and the taxpayer duly notified thereof. Since in this case, he
argues, the tax credit of P221,033.00 was approved only on August 5, 1964, it could not be availed of in reduction of
ESSOs earlier tax deficiency for the year 1960; as of that year, 1960, there was as yet no tax credit to speak of,
which would reduce the deficiency tax liability for 1960. In support of his position, the Commissioner invokes the
provisions of Section 51 of the Tax Code pertinently reading as follows:
(c) Definition of deficiency. As used in this Chapter in respect of tax imposed by this Title, the term
'deficiency' means:
(1) The amount by which the tax imposed by this Title exceeds the amount shown as the tax by the
taxpayer upon his return; but the amount so shown on the return shall first be increased by the
amounts previously assessed (or collected without assessment) as a deficiency, and decreased by
the amount previously abated credited, returned, or otherwise in respect of such tax; ..
xxx xxx xxx
(d) Interest on deficiency. — Interest upon the amount determined as deficiency shall be assessed
at the same time as the deficiency and shall be paid upon notice and demand from the
Page 75 of 108
Commissioner of Internal Revenue; and shall be collected as a part of the tax, at the rate of six per
centum per annum from the date prescribed for the payment of the tax (or, if the tax is paid in
installments, from the date prescribed for the payment of the first installment) to the date the
deficiency is assessed; Provided, That the amount that may be collected as interest on deficiency
shall in no case exceed the amount corresponding to a period of three years, the present provision
regarding prescription to the contrary notwithstanding.
The fact is that, as respondent Court of Tax Appeals has stressed, as early as July 15, 1960, the Government already
had in its hands the sum of P221,033.00 representing excess payment. Having been paid and received by mistake,
as petitioner Commissioner subsequently acknowledged, that sum unquestionably belonged to ESSO, and the
Government had the obligation to return it to ESSO That acknowledgment of the erroneous payment came some four
(4) years afterwards in nowise negates or detracts from its actuality. The obligation to return money mistakenly paid
arises from the moment that payment is made, and not from the time that the payee admits the obligation to
reimburse. The obligation of the payee to reimburse an amount paid to him results from the mistake, not from the
payee's confession of the mistake or recognition of the obligation to reimburse. In other words, since the amount of
P221,033.00 belonging to ESSO was already in the hands of the Government as of July, 1960, although the latter
had no right whatever to the amount and indeed was bound to return it to ESSO, it was neither legally nor logically
possible for ESSO thereafter to be considered a debtor of the Government in that amount of P221,033.00; and
whatever other obligation ESSO might subsequently incur in favor of the Government would have to be reduced by
that sum, in respect of which no interest could be charged. To interpret the words of the statute in such a manner as
to subvert these truisms simply can not and should not be countenanced. "Nothing is better settled than that courts
are not to give words a meaning which would lead to absurd or unreasonable consequences. That is a principle that
goes back to In re Allen (2 Phil. 630) decided on October 29, 1903, where it was held that a literal interpretation is to
be rejected if it would be unjust or lead to absurd results." 6 "Statutes should receive a sensible construction, such as
will give effect to the legislative intention and so as to avoid an unjust or absurd conclusion." 7
WHEREFORE, the petition for review is DENIED, and the Decision of the Court of Tax Appeals dated October 28,
1967 subject of the petition is AFFIRMED, without pronouncement as to costs.
CASES 49
G.R. No. L-18994 June 29, 1963
MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott Price, respondents.
Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.

Benedicto and Martinez for respondents.
LABRADOR, J.:
This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of Leyte, Ron. Lorenzo
C. Garlitos, presiding, seeking to annul certain orders of the court and for an order in this Court directing the
respondent court below to execute the judgment in favor of the Government against the estate of Walter Scott Price
for internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30, 1960, this Court
declared as final and executory the order for the payment by the estate of the estate and inheritance taxes, charges
and penalties, amounting to P40,058.55, issued by the Court of First Instance of Leyte in, special proceedings No. 14
entitled "In the matter of the Intestate Estate of the Late Walter Scott Price." In order to enforce the claims against the
estate the fiscal presented a petition dated June 21, 1961, to the court below for the execution of the judgment. The
petition was, however, denied by the court which held that the execution is not justifiable as the Government is
indebted to the estate under administration in the amount of P262,200. The orders of the court below dated August
20, 1960 and September 28, 1960, respectively, are as follows:
Page 76 of 108
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 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.
Page 77 of 108
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.
CASE 48
G.R. No. 148187 April 16, 2008
PHILEX MINING CORPORATION, petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review on certiorari of the June 30, 2000 Decision1 of the Court of Appeals in CA-G.R. SP No.
49385, which affirmed the Decision2 of the Court of Tax Appeals in C.T.A. Case No. 5200. Also assailed is the April
3, 2001 Resolution3 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 agreement4 with Baguio Gold
Mining Company ("Baguio Gold") for the former to manage and operate the latter’s 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 owner’s 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 owner’s account.
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 owner’s account
will be determined, and the corresponding proportion of the entire assets of the STO. NINO MINE,
Page 78 of 108
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.
xxxx
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.
xxxx
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.
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.
x x x x5
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 petitioner’s 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 Gold’s tangible assets to petitioner, transferring to the latter Baguio Gold’s
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 Gold’s 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.
Page 79 of 108
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.
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 Gold’s "pecuniary obligations" to petitioner. It also included payments made by petitioner as guarantor
of Baguio Gold’s long-term loans which legally entitled petitioner to be subrogated to the rights of the original creditor.
Petitioner also asserted that due to Baguio Gold’s 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 petitioner’s 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 project’s 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 petitioner’s assertion that the advances it made for the Sto. Nino mine were in the nature of a loan.
It instead characterized the advances as petitioner’s 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 petitioner’s 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,13petitioner took this recourse under Rule 45 of the Rules of Court, alleging that:
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.
Page 80 of 108
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:
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
Page 81 of 108
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. Niño 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 owner’s account plus any of its income that is left
in the project, in addition to its actual mining claim. Meanwhile, petitioner’s contribution would consist of
its expertise in the management and operation of mines, as well as the manager’s account which is comprised
of P11M in funds and property and petitioner’s "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. Niño project "(w)henever the MANAGERS shall
deem it necessary and convenient in connection with the MANAGEMENT of the STO. NIÑO MINE." 18
The wording of the parties’ agreement as to petitioner’s 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 petitioner’s 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 by petitioner who is supposedly
the agent and 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 latter’s 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 agent’s 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 one’s 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 MANAGER’S account has to the owner’s 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 mine’s assets
Page 82 of 108
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. Niño 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 manager’s account had to the owner’s
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 manager’s account had to the owner’s
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".
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 Niño 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 petitioner’s "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 Niño 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 petitioner’s "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 petitioner’s 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 Gold’s creditors, we find no reason to depart from the tax court’s factual finding
that Baguio Gold’s debts were not yet due and demandable at the time that petitioner paid the same. Verily, petitioner
pre-paid Baguio Gold’s 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
Page 83 of 108
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 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.
CASE 47
G.R. No. L-69259 January 26, 1988
DELPHER TRADES CORPORATION, and DELPHIN PACHECO, petitioners,

vs.
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, INC., respondents.
GUTIERREZ, JR., J.:
The petitioners question the decision of the Intermediate Appellate Court which sustained the private respondent's
contention that the deed of exchange whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to
Delpher Trades Corporation in exchange for 2,500 shares of stock was actually a deed of sale which violated a right
of first refusal under a lease contract.
Briefly, the facts of the case are summarized as follows:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square meters
of real estate Identified as Lot. No. 1095, Malinta Estate, in the Municipality of Polo (now
Valenzuela), Province of Bulacan (now Metro Manila) which is covered by Transfer Certificate of
Title No. T-4240 of the Bulacan land registry.
On April 3, 1974, the said co-owners leased to Construction Components International Inc. the
same property and providing that during the existence or after the term of this lease the lessor
should he decide to sell the property leased shall first offer the same to the lessee and the letter
has the priority to buy under similar conditions (Exhibits A to A-5)
On August 3, 1974, lessee Construction Components International, Inc. assigned its rights and
obligations under the contract of lease in favor of Hydro Pipes Philippines, Inc. with the signed
conformity and consent of lessors Delfin Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive)
The contract of lease, as well as the assignment of lease were annotated at he back of the title, as
per stipulation of the parties (Exhs. A to D-3 inclusive)
On January 3, 1976, a deed of exchange was executed between lessors Delfin and Pelagia
Pacheco and defendant Delpher Trades Corporation whereby the former conveyed to the latter the
leased property (TCT No.T-4240) together with another parcel of land also located in Malinta
Estate, Valenzuela, Metro Manila (TCT No. 4273) for 2,500 shares of stock of defendant
corporation with a total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
On the ground that it was not given the first option to buy the leased property pursuant to the proviso in the lease
agreement, respondent Hydro Pipes Philippines, Inc., filed an amended complaint for reconveyance of Lot. No. 1095
Page 84 of 108
in its favor under conditions similar to those whereby Delpher Trades Corporation acquired the property from Pelagia
Pacheco and Delphin Pacheco.
After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff. The dispositive portion of the decision
reads:
ACCORDINGLY, the judgment is hereby rendered declaring the valid existence of the plaintiffs
preferential right to acquire the subject property (right of first refusal) and ordering the defendants
and all persons deriving rights therefrom to convey the said property to plaintiff who may offer to
acquire the same at the rate of P14.00 per square meter, more or less, for Lot 1095 whose area is
27,169 square meters only. Without pronouncement as to attorney's fees and costs. (Appendix I;
Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p. 134, Rollo)
The lower court's decision was affirmed on appeal by the Intermediate Appellate Court.
The defendants-appellants, now the petitioners, filed a petition for certiorari to review the appellate court's decision.
We initially denied the petition but upon motion for reconsideration, we set aside the resolution denying the petition
and gave it due course.
The petitioners allege that:
The denial of the petition will work great injustice to the petitioners, in that:
1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire from petitioners a
parcel of industrial land consisting of 27,169 square meters or 2.7 hectares (located right after the
Valenzuela, Bulacan exit of the toll expressway) for only P14/sq. meter, or a total of P380,366,
although the prevailing value thereof is approximately P300/sq. meter or P8.1 Million;
2. Private respondent is allowed to exercise its right of first refusal even if there is no "sale" or
transfer of actual ownership interests by petitioners to third parties; and
3. Assuming arguendo that there has been a transfer of actual ownership interests, private
respondent will acquire the land not under "similar conditions" by which it was transferred to
petitioner Delpher Trades Corporation, as provided in the same contractual provision invoked by
private respondent. (pp. 251-252, Rollo)
The resolution of the case hinges on whether or not the "Deed of Exchange" of the properties executed by the
Pachecos on the one hand and the Delpher Trades Corporation on the other was meant to be a contract of sale
which, in effect, prejudiced the private respondent's right of first refusal over the leased property included in the "deed
of exchange."
Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia Pacheco testified that Delpher Trades
Corporation is a family corporation; that the corporation was organized by the children of the two spouses (spouses
Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and Pilar Angeles) who owned in common
the parcel of land leased to Hydro Pipes Philippines in order to perpetuate their control over the property through the
corporation and to avoid taxes; that in order to accomplish this end, two pieces of real estate, including Lot No. 1095
which had been leased to Hydro Pipes Philippines, were transferred to the corporation; that the leased property was
transferred to the corporation by virtue of a deed of exchange of property; that in exchange for these properties,
Pelagia and Delfin acquired 2,500 unissued no par value shares of stock which are equivalent to a 55% majority in
the corporation because the other owners only owned 2,000 shares; and that at the time of incorporation, he knew all
about the contract of lease of Lot. No. 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration,
they refer to this scheme as "estate planning." (p. 252, Rollo)
Under this factual backdrop, the petitioners contend that there was actually no transfer of ownership of the subject
parcel of land since the Pachecos remained in control of the property. Thus, the petitioners allege: "Considering that
the beneficial ownership and control of petitioner corporation remained in the hands of the original co-owners, there
was no transfer of actual ownership interests over the land when the same was transferred to petitioner corporation in
Page 85 of 108
exchange for the latter's shares of stock. The transfer of ownership, if anything, was merely in form but not in
substance. In reality, petitioner corporation is a mere alter ego or conduit of the Pacheco co-owners; hence the
corporation and the co-owners should be deemed to be the same, there being in substance and in effect an Identity
of interest." (p. 254, Rollo)
The petitioners maintain that the Pachecos did not sell the property. They argue that there was no sale and that they
exchanged the land for shares of stocks in their own corporation. "Hence, such transfer is not within the letter, or
even spirit of the contract. There is a sale when ownership is transferred for a price certain in money or its equivalent
(Art. 1468, Civil Code) while there is a barter or exchange when one thing is given in consideration of another thing
(Art. 1638, Civil Code)." (pp. 254-255, Rollo)
On the other hand, the private respondent argues that Delpher Trades Corporation is a corporate entity separate and
distinct from the Pachecos. Thus, it contends that it cannot be said that Delpher Trades Corporation is the Pacheco's
same alter ego or conduit; that petitioner Delfin Pacheco, having treated Delpher Trades Corporation as such a
separate and distinct corporate entity, is not a party who may allege that this separate corporate existence should be
disregarded. It maintains that there was actual transfer of ownership interests over the leased property when the
same was transferred to Delpher Trades Corporation in exchange for the latter's shares of stock.
We rule for the petitioners.
After incorporation, one becomes a stockholder of a corporation by subscription or by purchasing stock directly from
the corporation or from individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing Bole v. Fulton
[1912], 233 Pa., 609). In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original
unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently, the Pachecos became
stockholders of the corporation by subscription "The essence of the stock subscription is an agreement to take and
pay for original unissued shares of a corporation, formed or to be formed." (Rohrlich 243, cited in Agbayani,
Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980 Edition, p. 430) It is
significant that the Pachecos took no par value shares in exchange for their properties.
A no-par value share does not purport to represent any stated proportionate interest in the capital
stock measured by value, but only an aliquot part of the whole number of such shares of the
issuing corporation. The holder of no-par shares may see from the certificate itself that he is only
an aliquot sharer in the assets of the corporation. But this character of proportionate interest is not
hidden beneath a false appearance of a given sum in money, as in the case of par value shares.
The capital stock of a corporation issuing only no-par value shares is not set forth by a stated
amount of money, but instead is expressed to be divided into a stated number of shares, such as,
1,000 shares. This indicates that a shareholder of 100 such shares is an aliquot sharer in the
assets of the corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10.
Thus, by removing the par value of shares, the attention of persons interested in the financial
condition of a corporation is focused upon the value of assets and the amount of its debts.
(Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the Philippines, Vol. III,
1980 Edition, p. 107).
Moreover, there was no attempt to state the true or current market value of the real estate. Land valued at P300.00 a
square meter was turned over to the family's corporation for only P14.00 a square meter.
It is to be stressed that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of the
corporation. Their equity capital is 55% as against 45% of the other stockholders, who also belong to the same family
group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos. What they really did was to invest
their properties and change the nature of their ownership from unincorporated to incorporated form by organizing
Delpher Trades Corporation to take control of their properties and at the same time save on inheritance taxes.
As explained by Eduardo Neria:
xxx xxx xxx
Page 86 of 108
ATTY. LINSANGAN:
Q Mr. Neria, from the point of view of taxation, is there any benefit to the spouses
Hernandez and Pacheco in connection with their execution of a deed of
exchange on the properties for no par value shares of the defendant corporation?
A Yes, sir.
COURT:
Q What do you mean by "point of view"?
A To take advantage for both spouses and corporation in entering in the deed of
exchange.
ATTY. LINSANGAN:
Q (What do you mean by "point of view"?) What are these benefits to the
spouses of this deed of exchange?
A Continuous control of the property, tax exemption benefits, and other inherent
benefits in a corporation.
Q What are these advantages to the said spouses from the point of view of
taxation in entering in the deed of exchange?
A Having fulfilled the conditions in the income tax law, providing for tax free
exchange of property, they were able to execute the deed of exchange free from
income tax and acquire a corporation.
Q What provision in the income tax law are you referring to?
A I refer to Section 35 of the National Internal Revenue Code under par. C-sub-
par. (2) Exceptions regarding the provision which I quote: "No gain or loss shall
also be recognized if a person exchanges his property for stock in a corporation
of which as a result of such exchange said person alone or together with others
not exceeding four persons gains control of said corporation."
Q Did you explain to the spouses this benefit at the time you executed the deed
of exchange?
A Yes, sir
Q You also, testified during the last hearing that the decision to have no par
value share in the defendant corporation was for the purpose of flexibility. Can
you explain flexibility in connection with the ownership of the property in
question?
A There is flexibility in using no par value shares as the value is determined by

the board of directors in increasing capitalization. The board can fix the value of
the shares equivalent to the capital requirements of the corporation.
Q Now also from the point of taxation, is there any flexibility in the holding by the
corporation of the property in question?
Page 87 of 108
A Yes, since a corporation does not die it can continue to hold on to the property
indefinitely for a period of at least 50 years. On the other hand, if the property is
held by the spouse the property will be tied up in succession proceedings and the
consequential payments of estate and inheritance taxes when an owner dies.
Q Now what advantage is this continuity in relation to ownership by a particular

person of certain properties in respect to taxation?
A The property is not subjected to taxes on succession as the corporation does

not die.
Q So the benefit you are talking about are inheritance taxes?
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
The records do not point to anything wrong or objectionable about this "estate planning" scheme resorted to by the
Pachecos. "The legal right of a taxpayer to decrease the amount of what otherwise could be his taxes or altogether
avoid them, by means which the law permits, cannot be doubted." (Liddell & Co., Inc. v. The collector of Internal
Revenue, 2 SCRA 632 citing Gregory v. Helvering, 293 U.S. 465, 7 L. ed. 596).
The "Deed of Exchange" of property between the Pachecos and Delpher Trades Corporation cannot be considered a
contract of sale. There was no transfer of actual ownership interests by the Pachecos to a third party. The Pacheco
family merely changed their ownership from one form to another. The ownership remained in the same hands.
Hence, the private respondent has no basis for its claim of a light of first refusal under the lease contract.
WHEREFORE, the instant petition is hereby GRANTED, The questioned decision and resolution of the then
Intermediate Appellate Court are REVERSED and SET ASIDE. The amended complaint in Civil Case No. 885-V-79
of the then Court of First Instance of Bulacan is DISMISSED. No costs.
SO ORDERED.
CASE 44
G.R. Nos. L-33665-68 February 27, 1987

vs.
VICENTE A. RUFINO and REMEDIOS S. RUFINO, ERNESTO D. RUFINO and ELVIRA B. RUFINO, RAFAEL R.
RUFINO and JULIETA A. RUFINO, MANUEL S. GALVEZ and ESTER R. GALVEZ, and COURT OF TAX
Leonardo Abola for respondents.
CRUZ, J.:
Petition for review on certiorari of the decision of the Court of Tax Appeals absolving the private respondents from
liability for capital gains tax on the stocks received by them from the Eastern Theatrical Inc. These were originally four
cages involving appeals from the decision of the Commissioner of Internal Revenue dated July 11, 1966, holding the
said respondents, Vicente A. Rufino and Remedies S. Rufino, Ernesto D. Rufino and Elvira B. Rufino, Rafael R.
Rufino and Julieta A. Rufino, and Manuel S. Galvez and Ester R. Galvez, liable for deficiency income tax, surcharge
and interest in the sums of P44,294.88, P27,229.44, P58,082.60 and P58,074.24, respectively, for the year 1959.
The facts, as narrated by the Court of Tax Appeals, are as follows:
Page 88 of 108
The private respondents were the majority stockholders of the defunct Eastern Theatrical Co., Inc., a corporation
organized in 1934, for a period of twenty-five years terminating on January 25, 1959. It had an original capital stock of
P500,000.00, which was increased in 1949 to P2,000,000.00, divided into 200,000 shares at P10.00 per share, and
was organized to engage in the business of operating theaters, opera houses, places of amusement and other
related business enterprises, more particularly the Lyric and Capitol Theaters in Manila. The President of this
corporation (hereinafter referred to as the Old Corporation) during the year in question was Ernesto D. Rufino.
The private respondents are also the majority and controlling stockholders of another corporation, the Eastern
Theatrical Co Inc., which was organized on December 8, 1958, for a term of 50 years, with an authorized capital
stock of P200,000.00, each share having a par value of P10.00. This corporation is engaged in the same kind of
business as the Old Corporation. The General-Manager of this corporation (hereinafter referred to as the New
Corporation) at the time was Vicente A. Rufino.
In a special meeting of stockholders of the Old Corporation on December 17, 1958, to provide for the continuation of
its business after the end of its corporate life, and upon the recommendation of its board of directors, a resolution was
passed authorizing the Old Corporation to merge with the New Corporation by transferring its business, assets,
goodwill, and liabilities to the latter, which in exchange would issue and distribute to the shareholders of the Old
Corporation one share for each share held by them in the said Corporation.
It was expressly declared that the merger of the Old Corporation with the New Corporation was necessary to continue
the exhibition of moving pictures at the Lyric and Capitol Theaters even after the expiration of the corporate existence
of the former, in view of its pending booking contracts, not to mention its collective bargaining agreements with its
employees.
Pursuant to the said resolution, the Old Corporation, represented by Ernesto D. Rufino as President, and the New
Corporation, represented by Vicente A. Rufino as General Manager, signed on January 9, 1959, a Deed of
Assignment providing for the conveyance and transfer of all the business, property, assets and goodwill of the Old
Corporation to the New Corporation in exchange for the latter's shares of stock to be distributed among the
shareholders on the basis of one stock for each stock held in the Old Corporation except that no new and unissued
shares would be issued to the shareholders of the Old Corporation; the delivery by the New Corporation to the Old
Corporation of 125,005-3/4 shares to be distributed to the shareholders of the Old Corporation as their corresponding
shares of stock in the New Corporation; the assumption by the New Corporation of all obligations and liabilities of the
Old Corporation under its bargaining agreement with the Cinema Stage & Radio Entertainment Free Workers (FFW)
which included the retention of all personnel in the latter's employ; and the increase of the capitalization of the New
Corporation in compliance with their agreement. This agreement was made retroactive to January 1, 1959.
The aforesaid transfer was eventually made by the Old Corporation to the New Corporation, which continued the
operation of the Lyric and Capitol Theaters and assumed all the obligations and liabilities of the Old Corporation
beginning January 1, 1959.
The resolution of the Old Corporation of December 17, 1958, and the Deed of Assignment of January 9, 1959, were
approved in a resolution by the stockholders of the New Corporation in their special meeting on January 12, 1959. In
the same meeting, the increased capitalization of the New Corporation to P2,000,000.00 was also divided into
200,000 shares at P10.00 par value each share, and the said increase was registered on March 5, 1959, with the
Securities and Exchange Commission, which approved the same on August 20,1959.
As agreed, and in exchange for the properties, and other assets of the Old Corporation, the New Corporation issued
to the stockholders of the former stocks in the New Corporation equal to the stocks each one held in the Old
Corporation, as follows:
Mr. & Mrs. Vicente A. Rufino............... 17,083 shares
Mr. & Mrs. Rafael R. Rufino ................. 16,881 shares
Mr. & Mrs. Ernesto D. Rufino .............. 18,347 shares
Mr. & Mrs. Manuel S. Galvez ............... 16,882 shares
Page 89 of 108
It was this above-narrated series of transactions that the Bureau of Internal Revenue examined later, resulting in the
petitioner declaring that the merger of the aforesaid corporations was not undertaken for a bona fide business
purpose but merely to avoid liability for the capital gains tax on the exchange of the old for the new shares of stock.
Accordingly, he imposed the deficiency assessments against the private respondents for the amounts already
mentioned. The private respondents' request for reconsideration having been denied, they elevated the matter to the
Court of Tax Appeals, which reversed the petitioner.
We have given due course to the instant petition questioning the decision of the said court holding that there was a
valid merger between the Old Corporation and the New Corporation and declaring that:
It is well established that where stocks for stocks were exchanged, and distributed to the
stockholders of the corporations, parties to the merger or consolidation, pursuant to a plan of
reorganization, such exchange is exempt from capital gains tax . . .
In view of the foregoing, we are of the opinion and so hold that no taxable gain was derived by
petitioners from the exchange of their old stocks solely for stocks of the New Corporation pursuant
to Section 35(c) (2), in relation to (c) (5), of the National Internal Revenue Code, as amended by
Republic Act 1921. 1
The above-cited Section 35 of the Tax Code, on the proper interpretation and application of which the resolution of
this case depends, provides in material part as follows:
Sec. 35. Determination of gain or loss from the sale or other disposition of property. — The gain
derived or loss sustained from the sale or other disposition of property, real, personal or mixed,
shall be determined in accordance with the following schedule:
xxx xxx xxx
(c) Exchange of property-
(1) General Rule. — Except as herein provided upon the sale or exchange of
property, the entire amount of the gain or loss, as the case may be, shall be
recognized.
(2) Exceptions. — No gain or loss shall be recognized if in pursuance of a plan of

merger or consolidation (a) a corporation which is a party to a merger or
consolidation, exchanges property solely for stock in a corporation which is a
party to the merger or consolidation, (b) a shareholder exchanges stock in a
corporation which is a party to the merger or consolidation solely for the stock of
another corporation, also a party to the merger or consolidation, or (c) a security
holder of a corporation which is a party to the merger or consolidation exchanges
his securities in such corporation solely for stock or securities in another
corporation, a party to the merger or consolidation.
xxx xxx xxx
(5) Definitions.-(a) x x x (b) The term "merger" or "consolidation," when used in

this section, shall be understood to mean: (1) The ordinary merger or
consolidation, or (2) the acquisition by one corporation of all or substantially all
the properties of another corporation solely for stock; Provided, That for a
transaction to be regarded as a merger or consolidation within the purview of this
section, it must be undertaken for a bona fide business purpose and not solely
for the purpose of escaping the burden of taxation; Provided further, That in
determining whether a bona fide business purpose exists, each and every step of
the transaction shall be considered and the whole transaction or series of
transactions shall be treated as a single unit: ...
Page 90 of 108
In support of its position that the Deed of Assignment was concluded by the private respondents merely to evade the
burden of taxation, the petitioner points to the fact that the New Corporation did not actually issue stocks in exchange
for the properties of the Old Corporation at the time of the supposed merger on January 9, 1959. The exchange, he
says, was only on paper. The increase in capitalization of the New Corporation was registered with the Securities and
Exchange Commission only on March 5, 1959, or 37 days after the Old Corporation expired on January 25, 1959.
Prior to such registration, it was not possible for the New Corporation to effect the exchange provided for in the said
agreement because it was capitalized only at P200,000.00 as against the capitalization of the Old Corporation at
P2,000,000.00. Consequently, as there was no merger, the automatic dissolution of the Old Corporation on its expiry
date resulted in its liquidation, for which the respondents are now liable in taxes on their capital gains.
For their part, the private respondents insist that there was a genuine merger between the Old Corporation and the
New Corporation pursuant to a plan aimed at enabling the latter to continue the business of the former in the
operation of places of amusement, specifically the Capitol and Lyric Theaters. The plan was evolved through the
series of transactions above narrated, all of which could be treated as a single unit in accordance with the
requirements of Section 35. Obviously, all these steps did not have to be completed at the time of the merger, as
there were some of them, such as the increase and distribution of the stock of the New Corporation, which
necessarily had to come afterwards. Moreover, the Old Corporation was dissolved on January 1, 1959, pursuant to
the Deed of Assignment, and not on January 25, 1959, its original expiry date. As the properties of the Old
Corporation were transferred to the New Corporation before that expiry date, there could not have been any
distribution of liquidating dividends by the Old Corporation for which the private respondents should be held liable in
taxes.
We sustain the Court of Tax Appeals. We hold that it did not err in finding that no taxable gain was derived by the
private respondents from the questioned transaction.
Contrary to the claim of the petitioner, there was a valid merger although the actual transfer of the properties subject
of the Deed of Assignment was not made on the date of the merger. In the nature of things, this was not possible.
Obviously, it was necessary for the Old Corporation to surrender its net assets first to the New Corporation before the
latter could issue its own stock to the shareholders of the Old Corporation because the New Corporation had to
increase its capitalization for this purpose. This required the adoption of the resolution to this effect at the special
stockholders meeting of the New Corporation on January 12, 1959, the registration of such issuance with the SEC on
March 5, 1959, and its approval by that body on August 20, 1959. All these took place after the date of the merger but
they were deemed part and parcel of, and indispensable to the validity and enforceability of, the Deed of Assignment.
The Court finds no impediment to the exchange of property for stock between the two corporations being considered
to have been effected on the date of the merger. That, in fact, was the intention, and the reason why the Deed of
Assignment was made retroactive to January 1, 1959. Such retroaction provided in effect that all transactions set
forth in the merger agreement shall be deemed to be taking place simultaneously on January 1, 1959, when the Deed
of Assignment became operative.
The certificates of stock subsequently delivered by the New Corporation to the private respondents were only
evidence of the ownership of such stocks. Although these certificates could be issued to them only after the approval
by the SEC of the increase in capitalization of the New Corporation, the title thereto, legally speaking, was transferred
to them on the date the merger took effect, in accordance with the Deed of Assignment.
The basic consideration, of course, is the purpose of the merger, as this would determine whether the exchange of
properties involved therein shall be subject or not to the capital gains tax. The criterion laid down by the law is that the
merger" must be undertaken for a bona fide business purpose and not solely for the purpose of escaping the burden
of taxation." We must therefore seek and ascertain the intention of the parties in the light of their conduct
contemporaneously with, and especially after, the questioned merger pursuant to the Deed of Assignment of January
9, 1959.
It has been suggested that one certain indication of a scheme to evade the capital gains tax is the subsequent
dissolution of the new corporation after the transfer to it of the properties of the old corporation and the liquidation of
the former soon thereafter. This highly suspect development is likely to be a mere subterfuge aimed at circumventing
the requirements of Section 35 of the Tax Code while seeming to be a valid corporate combination. Speaking of such
a device, Justice Sutherland declared for the United States Supreme Court in Helvering v. Gregory:
Page 91 of 108
When subdivision (b) speaks of a transfer of assets by one corporation to another, it means a
transfer made 'in pursuance of a plan of reorganization' (Section 112[g]) of corporate business; and
not a transfer of assets by one corporation to another in pursuance of a plan having no relation to
the business of either, as plainly is the case here. Putting aside, then, the question of motive in
respect of taxation altogether, and fixing the character of proceeding by what actually occurred,
what do we find? Simply an operation having no business or corporate purpose — a mere devise
which put on the form of a corporate reorganization as a disguise for concealing its real character,
and the sole object and accomplishment of which was the consummation of a preconceived plan,
not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares
to the petitioner. No doubt, a new and valid corporation was created. But that corporation was
nothing more than a contrivance to the end last described. It was brought into existence for no
other purpose; it performed, as it was intended from the beginning it should perform, no other
function. When that limited function had been exercised, it immediately was put to death.
In these circumstances, the facts speak for themselves and are susceptible of but one
interpretation. The whole undertaking, though conducted according to the terms of subdivision (b),
was in fact an elaborate and devious form of conveyance masquerading as a corporate
reorganization and nothing else. The rule which excludes from consideration the motive of tax
avoidance is not pertinent to the situation, because the transaction upon its face lies outside the
plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive
the statutory provision in question of all serious purpose. 2
We see no such furtive intention in the instant case. It is clear, in fact, that the purpose of the merger was to continue
the business of the Old Corporation, whose corporate life was about to expire, through the New Corporation to which
all the assets and obligations of the former had been transferred. What argues strongly, indeed, for the New
Corporation is that it was not dissolved after the merger agreement in 1959. On the contrary, it continued to operate
the places of amusement originally owned by the Old Corporation and transfered to the New Corporation, particularly
the Capitol and Lyric Theaters, in accordance with the Deed of Assignment. The New Corporation, in fact, continues
to do so today after taking over the business of the Old Corporation twenty-seven years ago.
It may be recalled at this point that under the original provisions of the old Corporation Law, which was in effect when
the merger agreement was concluded in 1959, it was not possible for a corporation, by mere amendment of its
charter, to extend its life beyond the time fixed in the original articles; in fact, this was specifically prohibited by
Section 18, which provided that "any corporation may amend its articles of incorporation by a majority vote of its
board of directors or trustees and the vote or written assent of two-thirds of its members, if it be a non-stock
corporation, or if it be a stock corporation, by the vote or written assent of the stockholders representing at least two-
thirds of the subscribed capital stock of the corporation ... : Provided, however, That the life of said corporation shall
not be extended by said amendment beyond the fixed in the original articles ... "
This prohibition, which incidentally has since been deleted, made it necessary for the Old and New Corporations to
enter into the questioned merger, to enable the former to continue its unfinished business through the latter.
The procedure for such merger was prescribed in Section 28 1/2 of the old Corporation Law which, although not
expressly authorizing a merger by name (as the new Corporation Code now does in its Section 77), provided that "a
corporation may, by action taken at any meeting of its board of directors, sell, lease, exchange, or otherwise dispose
of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such
considerations, which may be money, stocks, bond, or other instruments for the payment of money or other property
or other considerations, as its board of directors deem expedient." The transaction contemplated in the old law
covered the second type of merger defined by Section 35 of the Tax Code as "the acquisition by one corporation of
all or substantially all of the properties of another corporation solely for stock," which is precisely what happened in
the present case.
What is also worth noting is that, as in the case of the Old Corporation when it was dissolved on December 31, 1958,
there has been no distribution of the assets of the New Corporation since then and up to now, as far as the record
discloses. To date, the private respondents have not derived any benefit from the merger of the Old Corporation and
the New Corporation almost three decades earlier that will make them subject to the capital gains tax under Section
35. They are no more liable now than they were when the merger took effect in 1959, as the merger, being genuine,
exempted them under the law from such tax.
Page 92 of 108
By this decision, the government is, of course, not left entirely without recourse, at least in the future. The fact is that
the merger had merely deferred the claim for taxes, which may be asserted by the government later, when gains are
realized and benefits are distributed among the stockholders as a result of the merger. In other words, the
corresponding taxes are not forever foreclosed or forfeited but may at the proper time and without prejudice to the
government still be imposed upon the private respondents, in accordance with Section 35(c) (4) of the Tax Code.
Then, in assessing the tax, "the basis of the property transferred in the hands of the transferee shall be the same as it
would be in the hands of the transferor, increased by the amount of gain recognized to the transferor on the transfer."
The only inhibition now is that time has not yet come.
The reason for this conclusion is traceable to the purpose of the legislature in adopting the provision of law in
question. The basic Idea was to correct the Tax Code which, by imposing taxes on corporate combinations and
expansions, discouraged the same to the detriment of economic progress, particularly the promotion of local industry.
Speaking of this problem, HB No. 7233, which was subsequently enacted into R.A. No. 1921 embodying Section 35
as now worded, declared in the Explanatory Note:
The exemption from the tax of the gain derived from exchanges of stock solely for stock of another
corporation resulting from corporate mergers or consolidations under the above provisions, as
amended, was intended to encourage corporations in pooling, combining or expanding their
resources conducive to the economic development of the country. 3
Our ruling then is that the merger in question involved a pooling of resources aimed at the continuation and
expansion of business and so came under the letter and intendment of the National Internal Revenue Code, as
amended by the abovecited law, exempting from the capital gains tax exchanges of property effected under lawful
corporate combinations.
WHEREFORE, the decision of the Court of Tax Appeals is affirmed in full, without any pronouncement as to costs.
SO ORDERED.
CASE 43
[G.R. No. 127105. June 25, 1999]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON AND SON, INC., and COURT OF
DECISION
GONZAGA-REYES, J.:
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.
Page 93 of 108
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
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.
Page 94 of 108
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-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
Page 95 of 108
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.
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.
xxx xxx xxx
(italics supplied)
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
Page 96 of 108
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:
xxxxxxxxx
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:
xxxxxxxxx
dd) royalties, as defined in paragraph 3 of Article 12;
xxxxxxxxx
c) For the purpose of the credit referred in subparagraph b) the Philippine tax shall be deemed to be
xxxxxxxxx
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.
xxxxxxxxx
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]
Page 97 of 108
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 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
Page 98 of 108
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 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.
Page 99 of 108
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 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.
CASE 42
G.R. No. L-31156 February 27, 1976
PEPSI-COLA BOTTLING COMPANY OF THE PHILIPPINES, INC., plaintiff-appellant,

vs.
MUNICIPALITY OF TANAUAN, LEYTE, THE MUNICIPAL MAYOR, ET AL., defendant appellees.
Sabido, Sabido & Associates for appellant.
Provincial Fiscal Zoila M. Redona & Assistant Provincial Fiscal Bonifacio R Matol and Assistant Solicitor General
Conrado T. Limcaoco & Solicitor Enrique M. Reyes for appellees.
MARTIN, J.:
This is an appeal from the decision of the Court of First Instance of Leyte in its Civil Case No. 3294, which was
certified to Us by the Court of Appeals on October 6, 1969, as involving only pure questions of law, challenging the
power of taxation delegated to municipalities under the Local Autonomy Act (Republic Act No. 2264, as amended,
June 19, 1959).
On February 14, 1963, the plaintiff-appellant, Pepsi-Cola Bottling Company of the Philippines, Inc., commenced a
complaint with preliminary injunction before the Court of First Instance of Leyte for that court to declare Section 2 of
Republic Act No. 2264.1 otherwise known as the Local Autonomy Act, unconstitutional as an undue delegation of
taxing authority as well as to declare Ordinances Nos. 23 and 27, series of 1962, of the municipality of Tanauan,
Leyte, null and void.
Page 100 of 108

On July 23, 1963, the parties entered into a Stipulation of Facts, the material portions of which state that, first, both
Ordinances Nos. 23 and 27 embrace or cover the same subject matter and the production tax rates imposed therein
are practically the same, and second, that on January 17, 1963, the acting Municipal Treasurer of Tanauan, Leyte, as
per his letter addressed to the Manager of the Pepsi-Cola Bottling Plant in said municipality, sought to enforce
compliance by the latter of the provisions of said Ordinance No. 27, series of 1962.
Municipal Ordinance No. 23, of Tanauan, Leyte, which was approved on September 25, 1962, levies and collects
"from soft drinks producers and manufacturers a tai of one-sixteenth (1/16) of a centavo for every bottle of soft drink
corked." 2 For the purpose of computing the taxes due, the person, firm, company or corporation producing soft drinks
shall submit to the Municipal Treasurer a monthly report, of the total number of bottles produced and corked during
the month. 3
On the other hand, Municipal Ordinance No. 27, which was approved on October 28, 1962, levies and collects "on
soft drinks produced or manufactured within the territorial jurisdiction of this municipality a tax of ONE CENTAVO
(P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity." 4 For the purpose of computing the taxes due,
the person, fun company, partnership, corporation or plant producing soft drinks shall submit to the Municipal
Treasurer a monthly report of the total number of gallons produced or manufactured during the month. 5
The tax imposed in both Ordinances Nos. 23 and 27 is denominated as "municipal production tax.'
On October 7, 1963, the Court of First Instance of Leyte rendered judgment "dismissing the complaint and upholding
the constitutionality of [Section 2, Republic Act No. 2264] declaring Ordinance Nos. 23 and 27 legal and
constitutional; ordering the plaintiff to pay the taxes due under the oft the said Ordinances; and to pay the costs."
From this judgment, the plaintiff Pepsi-Cola Bottling Company appealed to the Court of Appeals, which, in turn,
elevated the case to Us pursuant to Section 31 of the Judiciary Act of 1948, as amended.
There are three capital questions raised in this appeal:
1. — Is Section 2, Republic Act No. 2264 an undue delegation of power, confiscatory and
oppressive?
2. — Do Ordinances Nos. 23 and 27 constitute double taxation and impose percentage or specific
taxes?
3. — Are Ordinances Nos. 23 and 27 unjust and unfair?
1. The power of taxation is an essential and inherent attribute of sovereignty, belonging as a matter of right to every
independent government, without being expressly conferred by the people. 6 It is a power that is purely legislative and
which the central legislative body cannot delegate either to the executive or judicial department of the government
without infringing upon the theory of separation of powers. The exception, however, lies in the case of municipal
corporations, to which, said theory does not apply. Legislative powers may be delegated to local governments in
respect of matters of local concern. 7 This is sanctioned by immemorial practice. 8 By necessary implication, the
legislative power to create political corporations for purposes of local self-government carries with it the power to
confer on such local governmental agencies the power to tax. 9 Under the New Constitution, local governments are
granted the autonomous authority to create their own sources of revenue and to levy taxes. Section 5, Article XI
provides: "Each local government unit shall have the power to create its sources of revenue and to levy taxes, subject
to such limitations as may be provided by law." Withal, it cannot be said that Section 2 of Republic Act No. 2264
emanated from beyond the sphere of the legislative power to enact and vest in local governments the power of local
taxation.
The plenary nature of the taxing power thus delegated, contrary to plaintiff-appellant's pretense, would not suffice to
invalidate the said law as confiscatory and oppressive. In delegating the authority, the State is not limited 6 the exact
measure of that which is exercised by itself. When it is said that the taxing power may be delegated to municipalities
and the like, it is meant that there may be delegated such measure of power to impose and collect taxes as the
legislature may deem expedient. Thus, municipalities may be permitted to tax subjects which for reasons of public
policy the State has not deemed wise to tax for more general purposes. 10 This is not to say though that the
constitutional injunction against deprivation of property without due process of law may be passed over under the
Page 101 of 108

guise of the taxing power, except when the taking of the property is in the lawful exercise of the taxing power, as
when (1) the tax is for a public purpose; (2) the rule on uniformity of taxation is observed; (3) either the person or
property taxed is within the jurisdiction of the government levying the tax; and (4) in the assessment and collection of
certain kinds of taxes notice and opportunity for hearing are provided. 11 Due process is usually violated where the tax
imposed is for a private as distinguished from a public purpose; a tax is imposed on property outside the State, i.e.,
extraterritorial taxation; and arbitrary or oppressive methods are used in assessing and collecting taxes. But, a tax
does not violate the due process clause, as applied to a particular taxpayer, although the purpose of the tax will result
in an injury rather than a benefit to such taxpayer. Due process does not require that the property subject to the tax or
the amount of tax to be raised should be determined by judicial inquiry, and a notice and hearing as to the amount of
the tax and the manner in which it shall be apportioned are generally not necessary to due process of law. 12
There is no validity to the assertion that the delegated authority can be declared unconstitutional on the theory of
double taxation. It must be observed that the delegating authority specifies the limitations and enumerates the taxes
over which local taxation may not be exercised. 13 The reason is that the State has exclusively reserved the same for
its own prerogative. Moreover, double taxation, in general, is not forbidden by our fundamental law, since We have
not adopted as part thereof the injunction against double taxation found in the Constitution of the United States and
some states of the Union.14 Double taxation becomes obnoxious only where the taxpayer is taxed twice for the
benefit of the same governmental entity 15 or by the same jurisdiction for the same purpose, 16 but not in a case
where one tax is imposed by the State and the other by the city or municipality. 17
2. The plaintiff-appellant submits that Ordinance No. 23 and 27 constitute double taxation, because these two
ordinances cover the same subject matter and impose practically the same tax rate. The thesis proceeds from its
assumption that both ordinances are valid and legally enforceable. This is not so. As earlier quoted, Ordinance No.
23, which was approved on September 25, 1962, levies or collects from soft drinks producers or manufacturers a tax
of one-sixteen (1/16) of a centavo for .every bottle corked, irrespective of the volume contents of the bottle used.
When it was discovered that the producer or manufacturer could increase the volume contents of the bottle and still
pay the same tax rate, the Municipality of Tanauan enacted Ordinance No. 27, approved on October 28, 1962,
imposing a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity. The difference
between the two ordinances clearly lies in the tax rate of the soft drinks produced: in Ordinance No. 23, it was 1/16 of
a centavo for every bottle corked; in Ordinance No. 27, it is one centavo (P0.01) on each gallon (128 fluid ounces,
U.S.) of volume capacity. The intention of the Municipal Council of Tanauan in enacting Ordinance No. 27 is thus
clear: it was intended as a plain substitute for the prior Ordinance No. 23, and operates as a repeal of the latter, even
without words to that effect. 18 Plaintiff-appellant in its brief admitted that defendants-appellees are only seeking to
enforce Ordinance No. 27, series of 1962. Even the stipulation of facts confirms the fact that the Acting Municipal
Treasurer of Tanauan, Leyte sought t6 compel compliance by the plaintiff-appellant of the provisions of said
Ordinance No. 27, series of 1962. The aforementioned admission shows that only Ordinance No. 27, series of 1962
is being enforced by defendants-appellees. Even the Provincial Fiscal, counsel for defendants-appellees admits in his
brief "that Section 7 of Ordinance No. 27, series of 1962 clearly repeals Ordinance No. 23 as the provisions of the
latter are inconsistent with the provisions of the former."
That brings Us to the question of whether the remaining Ordinance No. 27 imposes a percentage or a specific tax.
Undoubtedly, the taxing authority conferred on local governments under Section 2, Republic Act No. 2264, is broad
enough as to extend to almost "everything, accepting those which are mentioned therein." As long as the text levied
under the authority of a city or municipal ordinance is not within the exceptions and limitations in the law, the same
comes within the ambit of the general rule, pursuant to the rules of exclucion attehus and exceptio firmat regulum in
cabisus non excepti 19 The limitation applies, particularly, to the prohibition against municipalities and municipal
districts to impose "any percentage tax or other taxes in any form based thereon nor impose taxes on articles subject
to specific tax except gasoline, under the provisions of the National Internal Revenue Code." For purposes of this
particular limitation, a municipal ordinance which prescribes a set ratio between the amount of the tax and the volume
of sale of the taxpayer imposes a sales tax and is null and void for being outside the power of the municipality to
enact. 20 But, the imposition of "a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity" on all soft drinks produced or manufactured under Ordinance No. 27 does not partake of the nature of a
percentage tax on sales, or other taxes in any form based thereon. The tax is levied on the produce (whether sold or
not) and not on the sales. The volume capacity of the taxpayer's production of soft drinks is considered solely for
purposes of determining the tax rate on the products, but there is not set ratio between the volume of sales and the
amount of the tax.21
Nor can the tax levied be treated as a specific tax. Specific taxes are those imposed on specified articles, such as
distilled spirits, wines, fermented liquors, products of tobacco other than cigars and cigarettes, matches firecrackers,
manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic films, playing cards,
saccharine, opium and other habit-forming drugs. 22 Soft drink is not one of those specified.
Page 102 of 108

3. The tax of one (P0.01) on each gallon (128 fluid ounces, U.S.) of volume capacity on all softdrinks, produced or
manufactured, or an equivalent of 1-½ centavos per case, 23 cannot be considered unjust and unfair. 24 an increase
in the tax alone would not support the claim that the tax is oppressive, unjust and confiscatory. Municipal corporations
are allowed much discretion in determining the reates of imposable taxes. 25 This is in line with the constutional
policy of according the widest possible autonomy to local governments in matters of local taxation, an aspect that is
given expression in the Local Tax Code (PD No. 231, July 1, 1973). 26 Unless the amount is so excessive as to be
prohibitive, courts will go slow in writing off an ordinance as unreasonable. 27 Reluctance should not deter
compliance with an ordinance such as Ordinance No. 27 if the purpose of the law to further strengthen local
autonomy were to be realized. 28
Finally, the municipal license tax of P1,000.00 per corking machine with five but not more than ten crowners or
P2,000.00 with ten but not more than twenty crowners imposed on manufacturers, producers, importers and dealers
of soft drinks and/or mineral waters under Ordinance No. 54, series of 1964, as amended by Ordinance No. 41,
series of 1968, of defendant Municipality, 29 appears not to affect the resolution of the validity of Ordinance No. 27.
Municipalities are empowered to impose, not only municipal license taxes upon persons engaged in any business or
occupation but also to levy for public purposes, just and uniform taxes. The ordinance in question (Ordinance No. 27)
comes within the second power of a municipality.
ACCORDINGLY, the constitutionality of Section 2 of Republic Act No. 2264, otherwise known as the Local Autonomy
Act, as amended, is hereby upheld and Municipal Ordinance No. 27 of the Municipality of Tanauan, Leyte, series of
1962, re-pealing Municipal Ordinance No. 23, same series, is hereby declared of valid and legal effect. Costs against
petitioner-appellant.
SO ORDERED.
CASE 41
G.R. No. L-29485 November 21, 1980

vs.
AYALA SECURITIES CORPORATION and THE HONORABLE COURT OF TAX APPEALS, respondents.
TEEHANKEE, J.:
Before the Court is petitioner Commissioner of Internal Revenue's motion for reconsideration of the Court's decision
of April 8, 1976 wherein the Court affirmed in toto the appealed decision of respondent Court of Tax Appeals, the
dispositive portion of which provides as follows:
WHEREFORE, the decision of the respondent Commissioner of Internal Revenue assessing

petitioner the amount of P758,687.04 as 25% surtax and interest is reversed. Accordingly, said
assessment of respondent for 1955 is hereby cancelled and declared of no force and effect,
Without pronouncement as to costs.
This Court's decision under reconsideration held that the assessment made on February 21, 1961 by petitioner
against respondent corporation (and received by the latter on March 22, 1961) in the sum of P758,687.04 on its
surplus of P2,758,442.37 for its fiscal year ending September 30, 1955 fell under the five-year prescriptive period
provided in section 331 of the National Internal Revenue Code and that the assessment had, therefore, been made
after the expiration of the said five-year prescriptive period and was of no binding force and effect .
Petitioner has urged that
Page 103 of 108

A perusal of Sections 331 and 332(a) will reveal that they refer to a tax, the basis of which is
required by law to be reported in a return such as for example, income tax or sales tax. However,
the surtax imposed by Section 25 of the Tax Code is not one such tax. Accumulated surplus are
never returned for tax purposes, as there is no law requiring that such surplus be reported in a
return for purposes of the 25% surtax. In fact, taxpayers resort to all means and devices to cover
up the fact that they have unreasonably accumulated surplus.
Petitioner, therefore, submits that
As there is no law requiring taxpayers to file returns of their accumulated surplus, it is obvious that
neither Section 33 nor Section 332(a) of the Tax Code applies in a case involving the 25% surtax
imposed by Section 25 of the Tax Code. ...
Petitioner cites the Court of Tax Appeals' ruling in the earlier case of United Equipment & Supply Company vs.
Commissioner of Internal Revenue (CTA Case No. 1795, October 30, 1971) which was appealed by petitioner
taxpayer to this Court in G. R. No. L-35653 bearing the same title, which appeal was denied by this Court en banc for
lack of merit as per its Resolution of October 25, 1972, In said case, the tax court squarely ruled that the provisions of
sections 331 and 332 of the National Internal Revenue Code for prescriptive periods of five 5 and ten (10) years after
the filing of the return do not apply to the tax on the taxpayer's unreasonably accumulated surplus under section 25 of
the Tax Code since no return is required to be filed by law or by regulation on such unduly ac cumulated surplus on
earnings, reasoning as follows:
In resisting the assessment amounting to P10,864.26 as accumulated earnings tax for 1957, petitioner also invoked
the defense of prescription against the right of respondent to assess the said tax. It is contended that since its income
tax return for 1957 was filed in 1958, and with the clarification by respondent in his letter dated May 14, 1963, that the
amount sought to be collected was petitioner's surtax liability under Section 25 rather than deficiency corporate
income tax under Section 24 of the National Internal Revenue Code, the assessment has already prescribed under
Section 331 of the same Code.
Section 331 of the Revenue Code provides:
SEC. 331. Period of limitation upon assessment and collection. — Except as provided in the
succeeding section, internal revenue taxes shall be assessed within five years after the return was
filed, and no proceeding in court without assessment for the collection of such taxes shall be begun
after the expiration of such period. For the purpose of this section a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed on such last day; Provided, That
this limitation shall not apply to cases already investigated prior to the approval of this Code.
Obviously, Section 331 applies to, assessment of National Internal Revenue Taxes which requires
the filing of returns. A return, the filing of which is necessary to start the running of tile five-year
period for making an assessment, must be one which is required for the particular tax.
Consequently, it has been held that the filing of an income tax return does not start the running of
the statute of limitation for assessment of the sales tax. (Butuan Sawmill, Inc. v. Court of Tax
Appeals, G.R. No. L-20601, Feb. 28, 1966, 16 SCRA 277).
Although petitioner filed an income tax return, no return was filed covering its surplus profits which
were improperly accumulated. In fact, no return could have been filed, and the law could not
possibly require, for obvious reasons, the filing of a return covering unreasonable accumulation of
corporate surplus profits. A tax imposed upon unreasonable accumulation of surplus is in the
nature of a penalty. (Helvering v. National Grocery Co., 304 U.S. 282). It would not be proper for
the law to compel a corporation to report improper accumulation of surplus. Accordingly, Section
331 limiting the right to assess internal revenue taxes within five years from the date the return was
filed or was due does not apply.
Neither does Section 332 apply. Said Section provides:
SEC. 332 Exceptions as to period of limitation of assessment and collection of taxes.— (a) In the
case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may
Page 104 of 108

be assessed, or a proceeding in court for the collection of such tax may be begun without
assessment, at any time within ten years after the discovery of the falsity, fraud, or omission.
(b) Where before the expiration of the time prescribed in the preceding section
for the assessment of the tax, both the Commissioner of Internal Revenue and
the taxpayer have consented in writing to its assessment after such time, the tax
may be assessed at any time prior to the expiration of the period agreed upon.
The period so agreed upon may be extended by subsequent agreements in
writing made before the expiration of the period previously agreed upon.
(c) Where the assessment of any internal revenue tax has been made within the
period of limitation above-prescribed such tax may be collected by distraint or
levy by a proceeding in court, but only if begun (1) within five years after the
assessment of the tax, or (2) prior to the expiration of any period for collection
agreed upon in writing by the Commissioner of Internal Revenue and the
taxpayer before the expiration of such five-year period. The period so agreed
upon may be extended by subsequent agreements in writing made before the
expiration of the period previously agreed upon.
It will be noted that Section 332 has reference to national internal revenue taxes which require the
filing of returns. This is implied, from the provision that the ten-year period for assessment specified
therein treats of the filing of a false or fraudulent return or of a failure to file a return. There can be
no failure or omission to file a return where no return is required to be filed by law or by regulation.
It is, therefore, our opinion that the ten-year period for making in assessment under Section 332
does not apply to internal revenue taxes which do not require the filing of a return.
It is well settled limitations upon the right of the government to assess and collect taxes will not be
presumed in the absence of clear legislation to the contrary. The existence of a time limit beyond
which the government may recover unpaid taxes is purely dependent upon some express statutory
provision, (51 Am. Jur. 867; 10 Mertens Law of Federal Income Taxation, par. 57. 02.). It follows
that in the absence of express statutory provision, the right of the government to assess unpaid
taxes is imprescriptible. Since there is no express statutory provision limiting the right of the
Commissioner of Internal Revenue to assess the tax on unreasonable accumulation of surplus
provided in Section 25 of the Revenue Code, said tax may be assessed at any time. (Emphasis
supplied)
Such ruling was in effect upheld by this Court en banc upon its dismissal of the taxpayer's appeal for lack of merit as
above stated.
The Court is persuaded by the fundamental principle invoked by petitioner that limitations upon the right of the
government to assess and collect taxes will not be presumed in the absence of clear legislation to the contrary and
that where the government has not by express statutory provision provided a limitation upon its right to assess unpaid
taxes, such right is imprescriptible.
The Court, therefore, reconsiders its ruling in its decision under reconsideration that the right to assess and collect
the assessment in question had prescribed after five years, and instead rules that there is no such time limit on the
right of the Commissioner of Internal Revenue to assess the 25% tax on unreasonably accumulated surplus provided
in section 25 of the Tax Code, since there is no express statutory provision limiting such right or providing for its
prescription. The underlying purpose of the additional tax in question on a corporation's improperly accumulated
profits or surplus is as set forth in the text of section 25 of the Tax Code itself 1 to avoid the situation where a
corporation unduly retains its surplus instead of declaring and paving dividends to its shareholders or members who
would then have to pay the income tax due on such dividends received by them. The record amply shows that
respondent corporation is a mere holding company of its shareholders through its mother company, a registered co-
partnership then set up by the individual shareholders belonging to the same family and that the prima facie evidence
and presumption set up by the Tax Code, therefore applied without having been adequately rebutted by the
respondent corporation.
Thus, Mr. Lamberto J. Cabral, the accountant of the corporation, testified before the court as follows:
Page 105 of 108

Atty. Garces
The investigation, Your Honor, shows that for the year 1955, the Ayala Securities
Corporation had 175,000 outstanding shares of stock and out of these shares of
Ayala Securities Corporation, the Ayala and Company owned 174,996 shares of
stock.
Q. Is that right, Mr. Cabral?
Atty. Ong
Objection, Your Honor, on the materiality of the question.
Judge Alvarez
What is the materiality of the question?
Atty. Garces
We want to prove to this honorable Court that Ayala Securities Corporation is a

holding or investment company, the parent company being Ayala and Company.
Judge Alvarez
Witness may answer.
A. I think so; yes.
Q. And Ayala and Company's owned almost wholly by the Zobel Family and the
Ayala Family?
Atty. Ong
If Your Honor please, objection again on the materiality. What would counsel for
the respondent prove on this point?
Atty. Garces
Same purpose, Your If Honor to prove that Ayala Securities corporation is a mere
investment or holding company
Atty. Ong
What is the materiality of the case if it is a mere investment company. In fact, we

are here in court to prove the reasonableness or unreasonableness of the
accumulation of profit. I think counsel for the respondent is trying to harp on
presumption; but actually we will not be delving on presumption but on actual
facts proving the reasonableness of the accumulation based on actual evidence.
Judge Alvarez
In order to determine the reasonableness or unreasonableness, there must be a

basis. witness will have to answer the question.
A. Yes.
Page 106 of 108

xxx xxx xxx
Q. As of September 30, 1955 when the Ayala Securities Corporation tiled its
income tax return, were the officers of the Ayala Securities Corporation and the
Ayala and Company housed in the same building?
A. Yes, sir; they were.
Q. And also are the employees of the Ayala Securities corporation and the Ayala
and Company the same - meaning that the employees of the Ayala Securities
Corporation are also the employees of the Ayala and Company?
A. At the time, if I remember right, Ayala and Company was the operating
company and the employees were the employees of the Ayala and Company;
(t.s.n., pp. 32-37).
Another witness, Mr. Salvador J. Lorayes the Secretary and head of the Legal Department of the corporation, also
testified that:
Judge Alvarez questions
Q. May we know from you whether Ayala Securities corporation is an affiliate of

Ayala and Company?
A. Yes, Your honor.
Q. Do we understand from you that Ayala and Company is the mother

corporation of this affiliate?
A. That is correct.
Q. And that the policy of Ayala Securities Corporation is practically governed by

the officers or partners of Ayala and company
A. They have a strong influence over the policy of Ayala Securities Corporation.
Q. So that whatever is decided by the partners of Ayala and Company for a

certain investment or project would also be followed by Ayala Securities
Corporation?
A. If the project is assigned to Ayala Securities Corporation it will be followed by

Ayala Securities Corporation; if to another affiliate, no (t.s.n., pp. 149-150). ...
Respondent corporation was therefore fully shown to fall under Revenue Regulation No. 2 implementing the
provisions of the income tax law which provides on holding and investment companies that
SEC. 20. Holding and Investment Companies. — A corporation having practically no activities
except holding property, and collecting the income therefrom or investing therein, shall be
considered a holding company within the meaning of section 25.
Petitioner commissioner's plausible alternative contention is that even if the 25% surtax were to be deemed subject to
prescription, computed from the filing of the income tax return in 1955, the intent to evade payment of the surtax is an
inherent quality of the violation and the return filed must necessarily partake of a false and/or fraudulent character
which would make applicable the 10-year prescriptive period provided in section 332(a) of the Tax Code and since
the assessment was made in 1961 (the sixth year), the assessment was clearly within the 10-year prescriptive period.
The Court sees no necessity, however, for ruling on this point in view of its adherence to the ruling in the earlier raise
Page 107 of 108

of United Equipment & Supply Co., supra, holding that the 25% surtax is not subject to any statutory prescriptive
period.
ACCORDINGLY, the Court's decision of April 8, 1976 is set aside and in lieu thereof, judgment is hereby rendered
ordering respondent corporation to pay the assessment in the sum of P758,687.04 as 25% surtax on its
unreasonably accumulated surplus, plus the 5% surcharge and 1% monthly interest thereon, pursuant to section 51
(e) of the National Internal Revenue Code, as amended by R. A. 2343. With Costs.
Page 108 of 108

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CASE 62

COMMISSIONER OF G.R. No. 153205

It is represented that a foreign consortium composed of Burmeister and Wain Scandinavian

BWSC-Denmark established [respondent] which subcontracted the actual operation and

SECTIONS 4.102-2(b)(2) and 4.103-1(B)(c) of Revenue Regulations No. 7-95

Section 4.102-2(b)(2) Services other than processing, manufacturing or

Amount subject to 10% VAT P103,558,338.11

The Ruling of the Court of Tax Appeals

Hence, this petition.

The Court of Appeals Ruling

We deny the petition.

(4) Services rendered to vessels engaged exclusively in international shipping; and

(5) Services performed by subcontractors and/or contractors in processing, converting, or

Respondent [American Express International, Inc. (Philippine Branch)] is a VAT-registered person

Bank during the period of 01 August 1989 to 31 July 1991.

determine claims for refunds or tax credits as provided by law.[3]

which is VAT Ruling No. 036-90 dated 14 February 1990.[12]

excess output VAT.[18]

of the ruling provides, thus:

companies and, thus, could be applied retroactively.[19]

respondents claims, decreeing in its dispositive portion, viz:

WHEREFORE, the appealed decision is hereby REVERSED. The respondent Commissioner of

respondent and could not be applied retroactively.

mandate under Sec. 246 of the NIRC, thus:

Sec. 246. Non-retroactivity of rulings.- Any revocation, modification or reversal of any of

We agree with the Court of Appeals and the respondent.

VAT levied on its sales of gold to the Central Bank.

against respondent, resulting in damage to the latter.

of the Tax Code.[42]

retroactive VAT levied on respondent.

left to claim as a deduction from income taxes.

observe honesty and good faith.[47]

consummated its transactions on the basis thereof. We held, thus:

Sec. 246 of the NIRC abhors and forbids.

G.R. No. L-52306 October 12, 1981

ABS-CBN BROADCASTING CORPORATION, petitioner,

xxx xxx xxx

(b) Tax on foreign corporations.—(1) Non-resident corporations.—A foreign corporation not

Total amount remitted P 511,059.48

Withholding tax due thereon 153,318.00

Less: Amount already 89,000.00

Add: 1/2% mo. int. fr. 4-16-66 11,577.24

Total amount due & collectible P 75,895.24

Total amount remitted P373,492.24

Withholding tax due thereon 112,048.00

Less: Amount already 27,947.00

Add: 11/2%mo. int. fr. 4-16- 15,138.18

Total amount due & P99,239.18

Total amount remitted P601,160.65

Withholding tax due 180,348.00

Less: Amount already 71,448.00

Add: 1/2% mo. int. fr. 4- 19,602.00

Total amount due & P128,502.00

Total amount remitted P881,816.92

Withholding tax due 291,283.00

Less: Amount already 92,886.00

Add: 1/2% mo. int. fr. 4-16- 23,813.64

Total amount due & P222,260.44 1

WHEREFORE, the decision appealed from is hereby affirmed at petitioner's cost.

The issues raised are two-fold:

Upon the facts and circumstances of the case, review is warranted.

(b) Tax on foreign corporations.—(1) Non-resident corporations.—There shall be levied, collected

[G.R. No. 112024. January 28, 1999]