THIRD DIVISION

G.R. No. 185622, October 17, 2018

INTERNATIONAL CONTAINER TERMINAL SERVICES, INC., Petitioner, v. THE CITY OF MANILA;

LIBERTY M. TOLEDO, IN HER CAPACITY AS TREASURER OF MANILA; GABRIEL ESPINO, IN HIS
CAPACITY AS RESIDENT AUDITOR OF MANILA; AND THE CITY COUNCIL OF
MANILA, Respondents.

DECISION

LEONEN, J.:

If a party can prove that the resort to an administrative remedy would be an idle ceremony such that it
will be absurd and unjust for it to continue seeking relief that evidently will not be granted to it, then
the doctrine of exhaustion of administrative remedies will not apply.

This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court, assailing the September
5, 2008 Decision2 and December 12, 2008 Resolution3 of the Court of Tax Appeals En Banc in C.T.A. EB
No. 277. The Court of Tax Appeals En Banc dismissed the Petition for Review 4 filed by International
Container Terminal Services, Inc. (International Container), and affirmed the May 17, 2006
Decision5 and February 22, 2007 Resolution6 of the Court of Tax Appeals Second Division.

The Court of Tax Appeals Second Division found that the City of Manila committed direct double taxation
when it imposed a local business tax under Section 21 (A) of Manila Ordinance No. 7794, as amended
by Section 1(G) of Ordinance No. 7807, in addition to the business tax already imposed under Section
18 of Manila Ordinance No. 7794, as amended.7 It ordered a partial refund of P6,224,250.00,
representing the erroneously paid business taxes for the third quarter of taxable year 1999. However,
it did not order the City of Manila to refund the business taxes paid by International Container
subsequent to the first three (3) quarters of 1999.8

International Container, a corporation with its principal place of business in Manila, renewed its business
license for 1999. It was assessed for two (2) business taxes: one for which it was already paying, and
another for which it was newly assessed. It was already paying a local annual business tax for
contractors equivalent to 75% of 1% of its gross receipts for the preceding calendar year pursuant to
Section 18 of Manila Ordinance No. 7794. The newly assessed business tax was computed at 50% of
1% of its gross receipts for the previous calendar year, pursuant to Section 21 (A) of Manila Ordinance
No. 7794, as amended by Section 1(G) of Manila Ordinance No. 7807. It paid the additional assessment,
but filed a protest letter9 dated July 15, 1999 before the City Treasurer of Manila.10

When the City Treasurer failed to decide International Container's protest within 60 days from the
protest, International Container filed before the Regional Trial Court of Manila its Petition for Certiorari
and Prohibition with Prayer for the Issuance of a Temporary Restraining Order against the City Treasurer
and Resident Auditor of Manila.11 The City Treasurer and the Resident Auditor of Manila moved for the
dismissal12 of the Petition for Certiorari and Prohibition on the ground that International Container had
no cause of action, since it had failed to comply with the requirements of Section 187 of Republic Act
No. 7160, otherwise known as the Local Government Code of 1991.13

The Regional Trial Court granted the City Treasurer and the Resident Auditor's motion and dismissed
International Container's Petition for Certiorari and Prohibition. 14 International Container appealed the
dismissal to the Court of Appeals, which set aside the Regional Trial Court's dismissal and ordered the
case remanded to the Regional Trial Court for further proceedings.15

While the Petition for Certiorari and Prohibition was pending, the City of Manila continued to impose the
business tax under Section 21 (A), in addition to the business tax under Section 18, on International
Container so that it would be issued business permits. On June 17, 2003, International Container sent
a letter16 addressed to the City Treasurer of Manila, reiterating its protest to the business tax under
Section 21 (A) and requesting for a refund of its payments in the amount of P27,800,674.36 "in
accordance with Section 196 of the Local Government Code,"17 which states:

Section 196. Claim for Refund of Tax Credit. — No case or proceeding shall be maintained in any court
for the recovery of any tax, fee, or charge erroneously or illegally collected until a written claim for
refund or credit has been filed with the local treasurer. No case or proceeding shall be entertained in
any court after the expiration of two (2) years from the date of the payment of such tax, fee, or charge,
or from the date the taxpayer is entitled to a refund or credit.

On July 11, 2003, International Container filed an Amended and Supplemental Petition, 18 alleging,
among others, that since the payment of both business taxes was a pre-condition to the renewal of
International Container's business permit, it was compelled to pay, and had been paying under protest.
It amended its prayer to include not only the refund of business taxes paid for the first three (3) quarters
of 1999, but also the taxes continuously paid afterwards.19 The Regional Trial Court admitted its
Amended and Supplemental Petition.20

In its February 28, 2005 Decision,21 the Regional Trial Court dismissed the Amended and Supplemental
Petition, again finding that International Container failed to comply with the requirements of Section
195 of the Local Government Code. It found that when the City Treasurer failed to act on International
Container's protest and continued to collect the business tax under Section 21 (A), it could be
determined that the protest was denied. Under Section 195 of the Local Government Code, International
Container had 60 days to appeal the denial to a competent court. However, instead of appealing the
denial, it resorted to a Petition for Certiorari and Prohibition, which was not a remedy prescribed under
Section 195 of the Local Government Code. By failing to avail of the proper remedy, the assessments
made against it became conclusive and unappealable.22

International Container filed a Petition for Review23 against the City of Manila, its City Treasurer, its
Resident Auditor, and its City Council (the City of Manila and its Officials) before the Court of Tax
Appeals, docketed as C.T.A. AC No. 11. It prayed that the Court of Tax Appeals set aside the Regional
Trial Court February 28, 2005 Decision, and order the City of Manila and its Officials to refund the
business taxes assessed, demanded, and collected under Section 21 (A) in the amount of
P39,268,772.41. This amount corresponded to the periods from 1999 to the first quarter of 2004 plus
any and all subsequent payments until the case would have been finally decided. Finally, it prayed that
the Court of Tax Appeals order the City of Manila and its Officials to desist from imposing and collecting
the business tax under Section 21 (A), and to pay attorney's fees.24

On August 18, 2005, International Container sent another letter 25 addressed to the City Treasurer of
Manila, reiterating its protest against the business tax under Section 21 (A), and claiming a refund for
the third quarter of 2003 up to the second quarter of 2005.

The Court of Tax Appeals Second Division issued its May 17, 2006 Decision 26 setting aside the Regional
Trial Court February 28, 2005 Decision and partially granting International Container's prayer for a
refund. It found that imposing the business tax under Section 21 (A) in addition to the contractors' tax
under Section 18 constituted direct double taxation.27 It ordered the City of Manila and its Officials to
refund the amount of P6,224,250.00, representing the additional taxes paid for the first three (3)
quarters of 1999. The claims corresponding to the subsequent periods were denied, since the Court of
Tax Appeals Second Division found that International Container failed to substantiate its claims and to
comply with Section 195 of the Local Government Code. It found that International Container failed to
submit to the court its protest dated June 17, 2003, and thus, the court could not verify the total amount
of taxes paid and the taxing period covered in this protest.28

International Container moved to partially reconsider 29 the May 17, 2006 Decision, praying, among
others, that the Court of Tax Appeals Second Division elevate the records of the case so that it may
verify the June 17, 2003 protest. It further argued that Section 196 of the Local Government Code
should be applied to its claim, and not Section 195. The City of Manila and its Officials filed their own
Motion for Reconsideration.30 The Court of Tax Appeals Second Division directed the elevation of the
records.31

International Container sent a letter32 dated January 10, 2007 addressed to the City Treasurer of Manila,
reiterating its protest, this time, covering the period from the third quarter of 2005 to the fourth quarter
of 2006.

On February 22, 2007, the Court of Tax Appeals Second Division denied the parties' respective Motions
for Reconsideration.33 It found that International Container raised the applicability of Section 196 of the
Local Government Code for the first time on appeal. Further, it held that International Container's failure
to file a written protest for each assessment in the mayor's permit after the first three (3) quarters of
1999 rendered these assessments final and executory.

International Container filed a Petition for Review with Prayer for Temporary Restraining Order and/or
Preliminary Injunction before the Court of Tax Appeals En Banc.34 It argued that the Court of Tax Appeals
Second Division should have applied Section 196 of the Local Government Code for the payments that
it had made subsequent to the third quarter of 1999, pointing out that it had prayed for a refund as
early as the proceedings in the Regional Trial Court.35 Moreover, Sections 195 and 196 pertain to
separate and independent remedies; to resort to Section 195 as a condition precedent to availing of the
remedy under Section 196 was illogical.36

On June 22, 2007, International Container filed an Urgent Motion to Suspend Collection, 37 claiming that
the City of Manila and its Officials still collected the business tax under Section 21 (A) despite the Court
of Tax Appeals Second Division May 17, 2006 Decision. The Urgent Motion was granted by the Court of
Tax Appeals En Banc to preserve the status quo and upon the filing by International Container of a
surety bond.38

On September 5, 2008, the Court of Tax Appeals En Banc issued its Decision, 39 dismissing the Petition
for Review for lack of merit. Contrary to the claim of International Container, the Court of Tax Appeals
En Banc found that International Container's causes of action in the Regional Trial Court and Court of
Tax Appeals Second Division were different from each other. In. the Regional Trial Court, International
Container's action was for the annulment of the assessment and collection of additional local business
tax. In its Amended and Supplemental Petition, International Container discussed the propriety of the
imposition of the business tax under Section 21 (A) to support the annulment of the
assessment.40According to the Court of Tax Appeals En Banc, this meant that International Container
chose to protest the assessment pursuant to Section 195 of the Local Government Code, and not to
request for a refund as provided by Section 196.41 Notably, International Container prayed for, and was
granted, the opportunity to amend its Petition for Certiorari and Prohibition, but still failed to include an
argument in support of its alleged claim under Section 196 of the Local Government Code.

The Court of Tax Appeals En Banc further found that Sections 195 and 196 of the Local Government
Code are two (2) separate and distinct remedies granted to taxpayers, with different requirements and
conditions. International Container cannot merely claim that by complying with the reglementary period
of protesting an assessment under Section 195, it had already complied with the two (2)-year period
stated in Section 196. The Court of Tax Appeals found that since International Container paid the taxes
under the assessment, its claim for refund assumed that the assessment was wrong. The claim for
refund should be understood as a logical and necessary consequence of the allegedly improper
assessment such that if the assessment were cancelled, the taxes paid under it should be refunded. This
should not be understood as the claim for refund under Section 196 of the Local Government Code. 42

Moreover, even if the applicability of Section 195 did not preclude the availability of Section 196 as a
remedy, International Container only made its protest to the City Treasurer's assessment without
expressly stating that it intended to claim a refund under Section 196 for taxes paid after the first three
(3) quarters of 1999. As pointed out by the Court of Tax Appeals Second Division, its attempt to invoke
Section 196 on appeal was due to its failure to recover under Section 195, not having made timely
written protests of the assessments made against it.43
Having found that only Section 195 applied, the Court of Tax Appeals En Banc found that it was no
longer necessary to determine whether International Container complied with the requirements of
Section 196 for the periods after the first three (3) quarters of 1999. It reiterated the Court of Tax
Appeals Second Division's ruling that International Container should have filed a written protest within
60 days from receipt of each and every assessment made by the City of Manila and its Officials, as
embodied in the Mayor's Permit, regardless of its belief that the written protest would have been futile.
Writing "paid under protest" on the face of municipal license receipts upon payment of the taxes is not
the administrative protests contemplated by law.44

Court of Tax Appeals Associate Justice Caesar A. Casanova (Associate Justice Casanova) wrote a
Concurring and Dissenting Opinion.45 He noted that the notice of assessment in Section 195 of the Local
Government Code was the same as a notice of assessment under Section 228 of the 1997 National
Internal Revenue Code. He opined that no notice for deficiency taxes subsequent to the third quarter of
1999 up to the present was ever issued by the City of Manila and its Officials; thus, Section 195 of the
Local Government Code did not apply.46

Moreover, according to Associate Justice Casanova, International Container partially complied with the
requirements of Section 196 of the Local Government Code, from the third quarter of 2001 up to the
fourth quarter of 2006. Following its July 15, 1999 protest for the first three (3) quarters of 1999, it
filed claims for refund before the City Treasurer on June 17, 2003, August 19, 2005, and January 11,
2007. The payments from October 19, 1999 to April 19, 2001, in the total amount of P15,539,727.90,
could no longer be refunded as the period to claim the refund had prescribed since its earliest claim was
on June 17, 2003. Similarly, the claim for refund for the first and second quarters of 2007 could not be
allowed since it did not file a claim with the City Treasurer. Associate Justice Casanova voted to partially
grant the petition and to order the City of Manila and its Officials to refund P44,134,449.68 in its favor.47

On December 12, 2008, the Court of Tax Appeals En Banc denied International Container's Motion for
Reconsideration48 for lack of merit.49 In its Resolution, it addressed the City of Manila and its Officials'
claim in their Comment to the Motion for Reconsideration50 that the Court of Tax Appeals had no
jurisdiction over International Container's claim for refund from the fourth quarter of 1999 onwards due
to non-payment of docket fees before the Regional Trial Court.51 It noted that in Sun Insurance Office,
Ltd. v. Asuncion,52 the error of non-payment or insufficiency of docket fees may be rectified by the
payment by the filing party of the correct amount within a reasonable time but in no case beyond the
applicable prescriptive or reglementary period. However, it held that Sun Insurance was inapplicable to
this case, as there was no showing that International Container had paid the additional docket fees. The
applicable ruling should be Manchester Development Corp. v. Court of Appeals ,53 which held that the
non-payment or insufficiency of docket fees would result in the court not acquiring jurisdiction over the
case, rendering void the ruling of the Regional Trial Court on the additional claims of International
Container.54

On December 24, 2008, International Container filed a Motion for Extension of Time to file Petition for
Review55 with this Court, praying for an additional 30 days, or until February 2, 2009 within which to
file its Petition for Review. This Court granted the Motion for Extension in its January 14, 2009
Resolution.

On February 2, 2009, International Container filed its Petition for Review on Certiorari under Rule 45 of
the Rules of Court, assailing the September 5, 2008 Decision and December 12, 2008 Resolution of the
Court of Tax Appeals En Banc.56

In its Petition for Review, International Container claims that it is entitled to a refund of P6,224,250.000
plus P57,865,901.68 in payments of taxes under Section 21 (A) of Manila Ordinance No. 7764, as
amended by Section 1(G) of Manila Ordinance No. 7807.57

First, it argues that it raised the issue of the refund at the earliest possible instance at the administrative
level, and later, before the Regional Trial Court, and not only on appeal. It points out that in its July 15,
1999 Letter to the City of Manila and its Officials, it requested that if the questioned assessment had
already been paid, then the amount paid should be refunded. For the amounts paid for the fourth quarter
of 1999 up to the second quarter of 2003, it demanded a refund and expressly cited Section 196 of the
Local Government Code in its June 17, 2003 Letter. The City Treasurer, in its September 1, 2005 Letter,
even acknowledged that International Container had made a claim for refund or tax credit.58

Petitioner included prayers for refund of the taxes paid under protest both in its original Petition for
Certiorari and Prohibition, and in its Amended and Supplemental Petition before the Regional Trial
Court.59

Second, petitioner argues that when it filed its Petition before the Regional Trial Court, it availed of two
(2) remedies: a protest under Section 195 of the Local Government Code for the assessments made by
the City of Manila and its Officials for the first three (3) quarters of 1999, and a refund under Section
196 of the Local Government Code for its subsequent payments.60

The P6,224,250.00 ordered refunded by the Court of Tax Appeals Second Division represented the taxes
that petitioner paid under the assessment issued not only for the taxes for the third quarter of 1999,
but also back taxes for the first and second quarters of 1999. Since the assessment was issued on July
5, 1999, after the taxes for these quarters were already due, then the assessment was for deficiency
tax assessments. According to petitioner, this was within the scope of Section 195 of the Local
Government Code, which it claims covers only deficiency tax assessments.61

As for the additional business taxes paid by petitioner, these were not deficiency taxes, but taxes due
for the current taxable periods. Since these taxes were required for the issuance of its business permit,
it was forced to pay the assessments under protest. This was the situation contemplated by Section 196
of the Local Government Code, which involves the recovery of any tax, fee, or charge erroneously or
illegally collected.62

Petitioner argues that it complied with the requirements of Section 196, namely, that it filed the requisite
written claims for refund, and the judicial claim was filed within two (2) years from payment or from the
date of entitlement to the refund or credit.63

For the amounts paid after the third quarter of 1999 up to the second quarter of 2003, petitioner filed
a claim for refund before the City Treasurer in its June 17, 2003 Letter. Then, it filed its Amended and
Supplemental Petition before the Regional Trial Court, among the prayers of which was the recovery of
all payments made under Section 21 (A) of Manila Ordinance No. 7794 subsequent to the first three (3)
quarters of 1999. It also filed claims for refund for the third quarter of 2003 up to the second quarter
of 2005 on August 19, 2005, and from the third quarter of 2005 up to the fourth quarter of 2006 on
January 11, 2007.64

Petitioner claims that there was no longer a need to make separate written claims for the taxes paid but
not covered by these claims for refund. Citing Central Azucarera Don Pedro v. Central Bank,65 it points
out that this Court has previously dispensed with the filing of the subsequent claims because it would
have been an exercise in futility since the claims were based on common grounds that the taxing
authority had already rejected. Moreover, as petitioner's basis for its claims for refund is a pure question
of law, there is no need for it to exhaust its administrative remedies.66

As for the prescriptive period, petitioner avers that it became entitled to a refund or credit only on July
2, 2007, when the dismissal of its appeal of the May 17, 2006 Decision and February 22, 2007 Resolution
of the Court of Tax Appeals Second Division became final and executory. It points out that these
judgments declared that Section 21 (A) of Manila Ordinance No. 7764 was illegal double taxation. Thus,
it had until July 2, 2009 to file its judicial claim for refund for its payments. While it agrees with some
portions of Justice Casanova's Concurring and Dissenting Opinion in the Court of Tax Appeals En Banc
September 5, 2008 Decision, it argues that all of its payments were covered by its claims for refund
since the two (2)-year period for a judicial refund ended on July 2, 2009 and the administrative claim
may be dispensed with.67
Third, petitioner asserts that the joinder of its protest to the deficiency tax assessment and the refund
of its tax payments are in accordance with the Rules of Court. Since both are premised on the same
cause of action, namely, the illegal collection of business taxes under Section 21 (A) of Manila Ordinance
No. 7794, to file separate cases would be to split this cause of action and would produce a multiplicity
of suits.68

Finally, petitioner claims that when it filed its Amended and Supplemental Petition, it was not ordered
by the Regional Trial Court to pay additional docket and filing fees. Citing Lu v. Lu Ym,69 it argues that
cases should not be automatically dismissed when there is no showing of bad faith on the part of the
filing party when insufficient docket fees were paid. In any event, it undertakes to pay any additional
docket fees that may be found due by this Court.70

On February 18, 2009,71 this Court ordered respondents to comment on the Petition for Review, with
which they complied on April 16, 2009.72

In their Comment, respondents argue that the Regional Trial Court did not acquire jurisdiction over this
case because petitioner failed to pay the docket fees for the additional claims within the reglementary
period. They claim that petitioner purposefully avoided paying these docket fees.73

On August 26, 2009, petitioner filed its Reply to the Comment,74 in compliance with this Court's July 1,
2009 Resolution.75

In its Reply, petitioner reiterates its argument that the insufficiency of the docket fees paid for the
Amended and Supplemental Petition does not warrant its dismissal. Citing United Overseas Bank
(formerly Westmont Bank) v. Ros,76 it argues that a case should not be dismissed simply because a
party failed to file the docket fees, if no bad faith is shown.77 It claims that it did not act with malice or
deliberately intend to evade payment of docket fees.78 Moreover, it points out that respondents raised
the issue of insufficient docket fees for the first time in its October 25, 2008 Comment before the Court
of Tax Appeals En Banc. Respondents should be deemed estopped from questioning the jurisdiction of
the Regional Trial Court and of the Court of Tax Appeals.79

On December 9, 2009, the parties were ordered to submit their respective memoranda. 80 Petitioner filed
its Memorandum on April 5, 2010,81 while respondents filed their Memorandum on June 10, 2010.82

In their Memorandum, respondents argue that petitioner invoked Section 195 of the Local Government
Code when it filed its original action, and only belatedly introduced its cause of action under Section 196
before the Court of Tax Appeals. Moreover, even if it may validly invoke Section 196, it failed to comply
with the requirement of filing a written claim prior to the institution of its action with the Regional Trial
Court since it already filed the case for refund even before it paid the taxes owed to respondents
beginning the fourth quarter of 1999. Finally, it claims that not only is there non¬payment of docket
fees, petitioner is already barred from paying the deficiency docket fees, since the period within which
to pay is only within the applicable prescriptive or reglementary period, which has already lapsed. 83

The issues for this Court's resolution are:

First, whether or not the Regional Trial Court has jurisdiction over petitioner International Container
Terminal Services, Inc.'s claims for refund from the fourth quarter of 1999 onwards, despite its non-
payment of additional docket fees to the Regional Trial Court;

Second, whether or not Section 195 or Section 196 of the Local Government Code govern petitioner
International Container Terminal Services, Inc.'s claims for refund from the fourth quarter of 1999
onwards; and

Finally, whether or not petitioner International Container Terminal Services, Inc. complied with the
requirements that would entitle it to the refund it claims.
I

It is an established rule that the payment of the prescribed docket fees is essential for a court to acquire
jurisdiction over a case.84 Nonetheless, in Sun Insurance Office,85 this Court laid down the principles
concerning the payment of docket fees for initiatory pleadings:

Nevertheless, petitioners contend that the docket fee that was paid is still insufficient considering the
total amount of the claim. This is a matter which the clerk of court of the lower court and/or his duly
authorized docket clerk or clerk in-charge should determine and, thereafter, i[f] any amount is found
due, he must require the private respondent to pay the same.

Thus, the Court rules as follows:

1. It is not simply the filing of the complaint or appropriate initiatory pleading, but the payment of the
prescribed docket fee, that vests a trial court with jurisdiction over the subject matter or nature of the
action. Where the filing of the initiatory pleading is not accompanied by payment of the docket fee, the
court may allow payment of the fee within a reasonable time but in no case beyond the applicable
prescriptive or reglementary period.

2. The same rule applies to permissive counterclaims, third-party claims and similar pleadings, which
shall not be considered filed until and unless the filing fee prescribed therefor is paid. The court may
also allow payment of said fee within a reasonable time but also in no case beyond its applicable
prescriptive or reglementary period.

3. Where the trial court acquires jurisdiction over a claim by the filing of the appropriate pleading and
payment of the prescribed filing fee but, subsequently, the judgment awards a claim not specified in the
pleading, or if specified the same has been left for determination by the court, the additional filing fee
therefor shall constitute a lien on the judgment. It shall be the responsibility of the Clerk of Court or his
duly authorized deputy to enforce said lien and assess and collect the additional fee.86

Should the docket fees paid be found insufficient considering the value of the claim, the filing party shall
be required to pay the deficiency, but jurisdiction is not automatically lost. The clerk of court involved,
or his or her duly authorized deputy, is responsible for making the deficiency assessment. 87

If a party pays the correct amount of docket fees for its original initiatory pleading, but later amends
the pleading and increases the amount prayed for, the failure to pay the corresponding docket fees for
the increased amount should not be deemed to have curtailed the court's jurisdiction. In PNOC Shipping
and Transport Corp. v. Court of Appeals:88

With respect to petitioner's contention that the lower court did not acquire jurisdiction over the amended
complaint increasing the amount of damages claimed to P600,000.00, we agree with the Court of
Appeals that the lower court acquired jurisdiction over the case when private respondent paid the docket
fee corresponding to its claim in its original complaint. Its failure to pay the docket fee corresponding to
its increased claim for damages under the amended complaint should not be considered as having
curtailed the lower court's jurisdiction. Pursuant to the ruling in Sun Insurance Office, Ltd. (SIOL) v.
Asuncion, the unpaid docket fee should be considered as a lien on the judgment even though private
respondent specified the amount of P600,000.00 as its claim for damages in its amended
complaint.89 (Citation omitted)

When it is not shown that the party deliberately intended to defraud the court of the full payment of
docket fees, the principles enumerated in Sun Insurance should apply. In United Overseas Bank:90

This Court is not inclined to adopt the petitioner's piecemeal construction of our rulings
in Manchester and Sun Insurance. Its attempt to strip the said landmark cases of one or two lines and
use them to bolster its arguments and clothe its position with jurisprudential blessing must be struck
down by this Court.
All told, the rule is clear and simple. In case where the party does not deliberately intend to defraud the
court in payment of docket fees, and manifests its willingness to abide by the rules by paying additional
docket fees when required by the court, the liberal doctrine enunciated in Sun Insurance and not the
strict regulations set in Manchester will apply.91

Here, contrary to the findings of the Court of Tax Appeals En Banc, the circumstances dictate the
application of Sun Insurance.

First, it is undisputed that petitioner paid the correct amount of docket fees when it filed its original
Petition for Certiorari and Prohibition before the Regional Trial Court. It was when it filed its Amended
and Supplemental Petition, where it prayed for refund of all the tax payments it had made and would
make after the first three (3) quarters of 1999,92 that the issue of deficient payment of docket fees
arose.

As pointed out by petitioner, in its July 18, 2003 Order admitting the Amended and Supplemental
Petition, the Regional Trial Court did not order petitioner to pay any additional docket fees corresponding
to its amended prayer:

The Court admits the Amended and Supplemental Petition. The respondents are ordered to file their
responsive pleading to said Amended Petition. In view of this development, respondents are given a
new period of ten (10) days from receipt of this Order, to submit said responsive pleading.

SO ORDERED.93

Notably, as argued by petitioner, the amount it claims under its amended prayer for refund in the
Amended and Supplemental Petition cannot be determined with absolute certainty, as it continued to
pay the taxes due to respondents during the course of the proceedings.94

Second, it is clear that respondents never assailed petitioner's insufficient payment of docket fees before
the Regional Trial Court and the Court of Tax Appeals Second Division. They only raised this issue in
their October 25, 2008 Comment to petitioner's Motion for Reconsideration95 of the September 5, 2008
Decision of the Court of Tax Appeals En Banc. Respondents have not denied this.

If a party fails to seasonably raise the other party's failure to pay sufficient docket fees, then estoppel
will set in. In Lu v. Lu Ym, Sr:96

Assuming arguendo that the docket fees were insufficiently paid, the doctrine of estoppel already
applies.

The assailed August 4, 2009 Resolution cited Vargas v. Caminas on the non-applicability of
the Tijam doctrine where the issue of jurisdiction was, in fact, raised before the trial court rendered its
decision. Thus the Resolution explained:

Next, the Lu Ym father and sons filed a motion for the lifting of the receivership order, which the trial
court had issued in the interim. David, et al., brought the matter up to the CA even before the trial court
could resolve the motion. Thereafter, David, at al., filed their Motion to Admit Complaint to Conform to
the Interim Rules Governing Intra-Corporate Controversies. It was at this point that the Lu Ym father
and sons raised the question of the amount of filing fees paid. They also raised this point again in the
CA when they appealed the trial court's decision in the case below.

We find that, in the circumstances, the Lu Ym father and sons are not estopped from challenging the
jurisdiction of the trial court. They raised the insufficiency of the docket fees before the trial court
rendered judgment and continuously maintained their position even on appeal to the CA. Although the
manner of challenge was erroneous—they should have addressed this issue directly to the trial court
instead of the OCA—they should not be deemed to have waived their right to assail the jurisdiction of
the trial court.

Lu Ym father and sons did not raise the issue before the trial court. The narration of facts in the Court's
original decision shows that Lu Ym father and sons merely inquired from the Clerk of Court on the
amount of paid docket fees on January 23, 2004. They thereafter still "speculated] on the fortune of
litigation. " Thirty-seven days later or on March 1, 2004 the trial court rendered its decision adverse to
them.

Meanwhile, Lu Ym father and sons attempted to verify the matter of docket fees from the Office of the
Court Administrator (OCA). In their Application for the issuance [of] a writ of preliminary injunction filed
with the Court of Appeals, they still failed to question the amount of docket fees paid by David Lu, el al.
It was only in their Motion for Reconsideration of the denial by the appellate court of their application
for injunctive writ that they raised such issue.

Lu Ym father and sons' further inquiry from the OCA cannot redeem them. A mere inquiry from an
improper office at that, could not, by any stretch, be considered as an act of having raised the
jurisdictional question prior to the rendition of the trial court's decision. In one case, it was held:

Here it is beyond dispute that respondents paid the full amount of docket fees as assessed by the Clerk
of Court of the Regional Trial Court of Malolos, Bulacan, Branch 17, where they filed the complaint. If
petitioners believed that the assessment was incorrect, they should have questioned it before the trial
court. Instead, petitioners belatedly question the alleged underpayment of docket fees through this
petition, attempting to support their position with the opinion and certification of the Clerk of Court of
another judicial region. Needless to state, such certification has no bearing on the instant case.

The inequity resulting from the abrogation of the whole proceedings at this late stage when the decision
subsequently rendered was adverse to the father and sons is precisely the evil being avoided by the
equitable principle of estoppel.97 (Emphasis supplied, citations omitted)

In this case, respondents failed to explain why they belatedly raised the issue of insufficient payment of
docket fees before the Court of Tax Appeals En Banc in 2008, even though the issue arose as early as
2003, when petitioner filed its Amended and Supplemental Petition. As such, they are now estopped
from assailing the jurisdiction of the Regional Trial Court due to petitioner's insufficient payment of
docket fees.

Finally, there is no showing that petitioner intended to deliberately defraud the court when it did not
pay the correct docket fees for its Amended and Supplemental Petition. Respondents have not provided
any proof to substantiate their allegation that petitioner purposely avoided the payment of the docket
fees for its additional claims. On the contrary, petitioner has been consistent in its assertion that it will
undertake to pay any additional docket fees that may be found due by this Court. Further, it is well
settled that any additional docket fees shall constitute a lien on the judgment that may be awarded. 98

II

Sections 195 and 196 of the Local Government Code govern the remedies of a taxpayer for taxes
collected by local government units, except for real property taxes:

Section 195. Protest of Assessment. — When the local treasurer or his duly authorized representative
finds that correct taxes, fees, or charges have not been paid, he shall issue a notice of assessment
stating the nature of the tax, fee, or charge, the amount of deficiency, the surcharges, interests and
penalties. Within sixty (60) days from the receipt of the notice of assessment, the taxpayer may file a
written protest with the local treasurer contesting the assessment; otherwise, the assessment shall
become final and executory. The local treasurer shall decide the protest within sixty (60) days from the
time of its filing. If the local treasurer finds the protest to be wholly or partly meritorious, he shall issue
a notice cancelling wholly or partially the assessment. However, if the local treasurer finds the
assessment to be wholly or partly correct, he shall deny the protest wholly or partly with notice to the
taxpayer. The taxpayer shall have thirty (30) days from the receipt of the denial of the protest or from
the lapse of the sixty (60)-day period prescribed herein within which to appeal with the court of
competent jurisdiction otherwise the assessment becomes conclusive and unappealable.

Section 196. Claim for Refund of Tax Credit. — No case or proceeding shall be maintained in any court
for the recovery of any tax, fee, or charge erroneously or illegally collected until a written claim for
refund or credit has been filed with the local treasurer. No case or proceeding shall be entertained in
any court after the expiration of two (2) years from the date of the payment of such tax, fee, or charge,
or from the date the taxpayer is entitled to a refund or credit.

In City of Manila v. Cosmos Bottling Corp.,99 this Court distinguished between these two (2) remedies:

The first provides the procedure for contesting an assessment issued by the local treasurer; whereas,
the second provides the procedure for the recovery of an erroneously paid or illegally collected tax, fee
or charge. Both Sections 195 and 196 mention an administrative remedy that the taxpayer should first
exhaust before bringing the appropriate action in court. In Section 195, it is the written protest with the
local treasurer that constitutes the administrative remedy; while in Section 196, it is the written claim
for refund or credit with the same office. As to form, the law does not particularly provide any for a
protest or refund claim to be considered valid. It suffices that the written protest or refund is addressed
to the local treasurer expressing in substance its desired relief. The title or denomination used in
describing the letter would not ordinarily put control over the content of the letter.

Obviously, the application of Section 195 is triggered by an assessment made by the local treasurer or
his duly authorized representative for nonpayment of the correct taxes, fees or charges. Should the
taxpayer find the assessment to be erroneous or excessive, he may contest it by filing a written protest
before the local treasurer within the reglementary period of sixty (60) days from receipt of the notice;
otherwise, the assessment shall become conclusive. The local treasurer has sixty (60) days to decide
said protest. In case of denial of the protest or inaction by the local treasurer, the taxpayer may appeal
with the court of competent jurisdiction; otherwise, the assessment becomes conclusive and
unappealable.

On the other hand, Section 196 may be invoked by a taxpayer who claims to have erroneously paid a
tax, fee or charge, or that such tax, fee or charge had been illegally collected from him. The provision
requires the taxpayer to first file a written claim for refund before bringing a suit in court which must
be initiated within two years from the date of payment. By necessary implication, the administrative
remedy of claim for refund with the local treasurer must be initiated also within such two-year
prescriptive period but before the judicial action.

Unlike Section 195, however, Section 196 does not expressly provide a specific period within which the
local treasurer must decide the written claim for refund or credit. It is, therefore, possible for a taxpayer
to submit an administrative claim for refund very early in the two-year period and initiate the judicial
claim already near the end of such two-year period due to an extended inaction by the local treasurer.
In this instance, the taxpayer cannot be required to await the decision of the local treasurer any longer,
otherwise, his judicial action shall be barred by prescription.

Additionally, Section 196 does not expressly mention an assessment made by the local treasurer. This
simply means that its applicability does not depend upon the existence of an assessment notice. By
consequence, a taxpayer may proceed to the remedy of refund of taxes even without a prior protest
against an assessment that was not issued in the first place. This is not to say that an application for
refund can never be precipitated by a previously issued assessment, for it is entirely possible that the
taxpayer, who had received a notice of assessment, paid the assessed tax, fee or charge
believing it to be erroneous or illegal. Thus, under such circumstance, the taxpayer may
subsequently direct his claim pursuant to Section 196 of the LGC.100 (Emphasis in the original,
citation omitted)
If the taxpayer receives an assessment and does not pay the tax, its remedy is strictly confined to
Section 195 of the Local Government Code.101 Thus, it must file a written protest with the local treasurer
within 60 days from the receipt of the assessment. If the protest is denied, or if the local treasurer fails
to act on it, then the taxpayer must appeal the assessment before a court of competent jurisdiction
within 30 days from receipt of the denial, or the lapse of the 60-day period within which the local
treasurer must act on the protest.102 In this case, as no tax was paid, there is no claim for refund in the
appeal.103

If the taxpayer opts to pay the assessed tax, fee, or charge, it must still file the written protest within
the 60-day period, and then bring the case to court within 30 days from either the decision or inaction
of the local treasurer. In its court action, the taxpayer may, at the same time, question the validity and
correctness of the assessment and seek a refund of the taxes it paid.104 "Once the assessment is set
aside by the court, it follows as a matter of course that all taxes paid under the erroneous or invalid
assessment are refunded to the taxpayer."105

On the other hand, if no assessment notice is issued by the local treasurer, and the taxpayer claims that
it erroneously paid a tax, fee, or charge, or that the tax, fee, or charge has been illegally collected from
him, then Section 196 applies.106

Here, there is no dispute on the refund of P6,224,250.00, representing the additional taxes paid for the
first three (3) quarters of 1999, as ordered by the Court of Tax Appeals Second Division in its May 17,
2006 Decision on to petitioner's entitlement to a refund of the taxes paid subsequent to the third quarter
of 1999, which was denied by the Court of Tax Appeals Second Division on the ground that petitioner
failed to comply with the requirements of Section 195.

When petitioner raised the applicability of Section 196 to the claim for refund of these subsequent
payments, the Court of Tax Appeals Second Division, as affirmed by the Court of Tax Appeals En Banc,
held that Section 196 cannot apply as petitioner previously anchored its claims under Section 195. As
ruled by the Court of Tax Appeals En Banc:

Unmistakably, Section 195 and Section 196 of the LGC are two separate and diverse remedies granted
to taxpayers, calling for different requirements and conditions for their application. Considering so,
petitioner should have been clear on the basis of its action. It cannot be allowed to resort to an all-
encompassing remedy so that in case it is disqualified under once, it can immediately shift to the other.

When petitioner appealed to the Second Division, the following issues were raised:

1. Whether or not the Petition of petitioner were prematurely filed, or, whether or not the
said petition is the "appeal" contemplated in Section 195 of the Local Government Code.
2. Whether or not petitioner is taxable under Section 21 (A) of Manila Ordinance No. 7794,
as amended by Manila Ordinance No. 7807, given the fact that it is already taxed as a
contractor under Section 18 of the same ordinance.

Again, a cursory reading of the above as well as the arguments, discussions and theories in the Petition
for Review and Memorandum filed before the Second Division shows that petitioner's argument/theory
on the applicability of Section 196 to its claim after the first three quarters of 1999 was not ascertainable.
In contrast, the petition is enclosed with supporting arguments on petitioner's protest to the imposition
of the additional local business tax. There was no mention or discussion of Section 196.

From the RTC until the filing of a petition before the Second Division, emphasis had been given on
petitioner's arguments questioning the assessment.107 (Emphasis in the original)

The nature of an action is determined by the allegations in the complaint and the character of the relief
sought.108 Here, petitioner seeks a refund of taxes that respondents had collected. Following City of
Manila,109 refund is available under both Sections 195 and 196 of the Local Government Code: for
Section 196, because it is the express remedy sought, and for Section 195, as a consequence of the
declaration that the assessment was erroneous or invalid. Whether the remedy availed of was under
Section 195 or Section 196 is not determined by the taxpayer paying the tax and then claiming a refund.

What determines the appropriate remedy is the local government's basis for the collection of the tax. It
is explicitly stated in Section 195 that it is a remedy against a notice of assessment issued by the local
treasurer, upon a finding that the correct taxes, fees, or charges have not been paid. The notice of
assessment must state "the nature of the tax, fee, or charge, the amount of deficiency, the surcharges,
interests and penalties."110 In Yamane v. BA Lepanto Condominium Corp.:111

Ostensibly, the notice of assessment, which stands as the first instance the taxpayer is officially made
aware of the pending tax liability, should be sufficiently informative to apprise the taxpayer the legal
basis of the tax. Section 195 of the Local Government Code does not go as far as to expressly require
that the notice of assessment specifically cite the provision of the ordinance involved but it does require
that it state the nature of the tax, fee or charge, the amount of deficiency, surcharges, interests and
penalties. In this case, the notice of assessment sent to the Corporation did state that the assessment
was for business taxes, as well as the amount of the assessment. There may have been prima
facie compliance with the requirement under Section 195. However in this case, the Revenue Code
provides multiple provisions on business taxes, and at varying rates. Hence, we could appreciate the
Corporation's confusion, as expressed in its protest, as to the exact legal basis for the tax. Reference to
the local tax ordinance is vital, for the power of local government units to impose local taxes is exercised
through the appropriate ordinance enacted by the sanggunian, and not by the Local Government Code
alone. What determines tax liability is the tax ordinance, the Local Government Code being the enabling
law for the local legislative body.112 (Citations omitted)

No such precondition is necessary for a claim for refund pursuant to Section 196.113

Here, no notice of assessment for deficiency taxes was issued by respondent City Treasurer to petitioner
for the taxes collected after the first three (3) quarters of 1999. As observed by Court of Tax Appeals
Justice Casanova in his Concurring and Dissenting Opinion to the September 5, 2008 Decision:

In order to apply Section 195 of the LGC, there is a need for the issuance of a notice of assessment
stating the nature of the tax, fee or charge, the amount of deficiency, the surcharges, interests and
penalties. It is only upon receipt of this notice of assessment that a taxpayer is required to file a protest
within sixty (60) days from receipt thereof.

Given the nature of a notice of assessment, it is my opinion that no notice pertaining to deficiency taxes
for the periods subsequent to the 3rd Quarter of 1999 up to the present were ever issued or sent by
respondents to ICTSI.

In ICTSI's case, as correctly found by the Second Division, viz:

"Records disclose in the instant case that petitioner filed a protest pursuant to Section 195 of the LGC
only with respect to the assessment of the amount of P6,224,250.00, which covers the [first three
quarters] of 1999. Petitioner protested the said assessment on July 15, 1999 and paid the same amount
under protest. This is not controverted by the respondents."

Hence, Section 195 of the LGC cannot apply to the period subsequent to the 3 rd Quarter of 1999 because
ICTSI did not receive any notice of assessment thereafter that states the nature of the tax[,] amount
of deficiency[,] and charges.114

The "assessments" from the fourth quarter of 1999 onwards were Municipal License Receipts; Mayor's
Permit, Business Taxes, Fees & Charges Receipts; and Official Receipts issued by the Office of the City
Treasurer for local business taxes, which must be paid as prerequisites for the renewal of petitioner's
business permit in respondent City of Manila.115 While these receipts state the amount and nature of
the tax assessed, they do not contain any amount of deficiency, surcharges, interests, and penalties
due from petitioner. They cannot be considered the "notice of assessment" required under Section 195
of the Local Government Code.

When petitioner paid these taxes and filed written claims for refund before respondent City Treasurer,
the subsequent denial of these claims should have prompted resort to the remedy laid down in Section
196, specifically the filing of a judicial case for the recovery of the allegedly erroneous or illegally
collected tax within the two (2)-year period.

Petitioner appealed the denial of the protest against respondent City Treasurer's assessment and the
action against the denial of its claims for refund. For both issues, petitioner's arguments are based on
the common theory that the additional tax under Section 21 (A) of Manila Ordinance No. 7794, as
amended by Section 1(G) of Manila Ordinance No. 7807, is illegal double taxation. Hence, their joinder
in one (1) suit was legally appropriate and avoided a multiplicity of suits.116

III

A tax refund or credit is in the nature of a tax exemption,117 construed strictissimi juris against the
taxpayer and liberally in favor of the taxing authority.118 Claimants of a tax refund must prove the
factual basis of their claims with sufficient evidence.119

To be entitled to a refund under Section 196 of the Local Government Code, the taxpayer must comply
with the following procedural requirements: first, file a written claim for refund or credit with the local
treasurer; and second, file a judicial case for refund within two (2) years from the payment of the tax,
fee, or charge, or from the date when the taxpayer is entitled to a refund or credit. 120

As to the first requirement, the records show that the following written claims for refund were made by
petitioner:

In its June 17, 2003 Letter to the City Treasurer, it claimed a refund of P27,800,674.36 for taxes paid
from the fourth quarter of 1999 up to the second quarter of 2003.121

In its August 18, 2005 Letter to the City Treasurer, it claimed a refund of P14,190,092.90 for taxes paid
for the third quarter of 2003 up to the second quarter of 2005.122

In her September 1, 2005 Response123 to the August 18, 2005 Letter, City Treasurer Liberty M. Toledo
denied the claim, stating in part:

With respect to the alleged final and executory decision of the Regional Trial Court, Branch 21, Manila
in Civil Case No. 00-97081, please be informed that as of this writing, there is no decision yet rendered
by the Supreme [Court] on the appeal made by the City. Hence, the decision has not attained finality.

In view thereof and considering that the issue on whether or not Golden Arches is liable under Section
21 or not and that the same constitute double taxation is sub-judice due to the case filed in court by
your company, this Office, cannot, much to our regret, act favorably on your claim for refund or credit
of the tax collected as mentioned above. Rest assured that upon receipt of any decision from the
Supreme Court declaring Section 21 illegal and unconstitutional, this Office shall act accordingly. 124

Thereafter, petitioner sent its January 10, 2007 Letter to the City Treasurer claiming a refund of taxes
paid for the third quarter of 2005 until the fourth quarter of 2006, pursuant to the Court of Tax Appeals
Second Division May 17, 2006 Decision.125

As for the taxes paid thereafter and were not covered by these letters, petitioner readily admits that it
did not make separate written claims for refund, citing that "there was no further necessity"126 to make
these claims. It argues that to file further claims before respondent City Treasurer would have been
"another exercise in futility"127 as it would have merely raised the same grounds that it already raised
in its June 17, 2003 Letter:

In the present controversy, it can be gleaned from the foregoing discussion that to file a written claim
before the Respondent City Treasurer would have been another exercise in futility because the grounds
for claiming a refund for the subsequent years would have been the very same grounds cited by
petitioner in support of its 17 June 2003 letter that was not acted upon by Respondent City Treasurer.
Thus, it would have been reasonable to expect that any subsequent written claim would have likewise
been denied or would similarly not be acted upon. This is bolstered by the fact that during the pendency
of the instant case, from its initial stages before the Regional Trial Court up to the present, Respondents
have continued and unceasingly assessed and collected the questioned local business tax. . . . 128

The doctrine of exhaustion of administrative remedies requires recourse to the pertinent administrative
agency before resorting to court action.129 This is under the theory that the administrative agency, by
reason of its particular expertise, is in a better position to resolve particular issues:

One of the reasons for the doctrine of exhaustion is the separation of powers, which enjoins upon the
Judiciary a becoming policy of non-interference with matters coming primarily (albeit not exclusively)
within the competence of the other departments. The theory is that the administrative authorities are
in a better position to resolve questions addressed to their particular expertise and that errors committed
by subordinates in their resolution may be rectified by their superiors if given a chance to do so. A no
less important consideration is that administrative decisions are usually questioned in the special civil
actions of certiorari, prohibition and mandamus, which are allowed only when there is no other plain,
speedy and adequate remedy available to the petitioner. It may be added that strict enforcement of the
rule could also relieve the courts of a considerable number of avoidable cases which otherwise would
burden their heavily loaded dockets.130(Citation omitted)

When there is an adequate remedy available with the administrative remedy, then courts will decline to
interfere when the party refuses, or fails, to avail of it.131

Nonetheless, the failure to exhaust administrative remedies is not always fatal to a party's cause. This
Court has admitted of several exceptions to the doctrine:

As correctly suggested by the respondent court, however, there are a number of instances when the
doctrine may be dispensed with and judicial action validly resorted to immediately. Among these
exceptional cases are: 1) when the question raised is purely legal; 2) when the administrative body is
in estoppel; 3) when the act complained of is patently illegal; 4) when there is urgent need for judicial
intervention; 5) when the claim involved is small; 6) when irreparable damage will be suffered; 7) when
there is [no] other plain, speedy and adequate remedy; 8) when strong public interest is involved; 9)
when the subject of the controversy is private land; and 10) in quo warranto proceedings. 132(Citations
omitted)

If the party can prove that the resort to the administrative remedy would be an idle ceremony such that
it will be absurd and unjust for it to continue seeking relief that evidently will not be granted to it, then
the doctrine would not apply. In Central Azucarera:133

On the failure of the appellee to exhaust administrative remedies to secure the refund of the special
excise tax on the second importation sought to be recovered, we are of the same opinion as the trial
court that it would have been an idle ceremony to make a demand on the administrative officer and
after denial thereof to appeal to the Monetary Board of the Central Bank after the refund of the first
excise tax had been denied.134

As correctly pointed out by petitioner, the filing of written claims with respondent City Treasurer for
every collection of tax under Section 21 (A) of Manila Ordinance No. 7764, as amended by Section 1(G)
of Ordinance No. 7807, would have yielded the same result every time. This is bolstered by respondent
City Treasurer's September 1, 2005 Letter, in which it stated that it could not act favorably on
petitioner's claim for refund until there would have been a final judicial determination of the invalidity
of Section 21 (A).

Further, the issue at the core of petitioner's claims for refund, the validity of Section 21 (A) of Manila
Ordinance No. 7794, as amended by Section 1(G) of Manila Ordinance No. 7807, is a question of
law.135When the issue raised by the taxpayer is purely legal and there is no question concerning the
reasonableness of the amount assessed, then there is no need to exhaust administrative remedies. 136

Thus, petitioner's failure to file written claims of refund for all of the taxes under Section 21 (A) with
respondent City Treasurer is warranted under the circumstances.

Similarly, petitioner complied with the second requirement under Section 196 of the Local Government
Code that it must file its judicial action for refund within two (2) years from the date of payment, or the
date that the taxpayer is entitled to the refund or credit. Among the reliefs it sought in its Amended and
Supplemental Petition before the Regional Trial Court is the refund of any and all subsequent payments
of taxes under Section 21 (A) from the time of the filing of its Petition until the finality of the case:

WHEREFORE, premises considered, it is respectfully prayed –

....

c) after trial, a decision be rendered ordering the respondents

to refund the local business taxes assessed, demanded and
collected by them and paid under protest by petitioner, in
the amount of P6,224,250.00, corresponding to the first
three (3) quarters of 1999 plus any and all subsequent
payments of taxes under Section 21 (A) of Manila Ordinance
No. 7794, as amended, made by petitioner from the time of
the filing of this Petition until this case is finally decided,
together with legal interest thereon, as well as the
attorney's fees and costs of suit.137

As acknowledged by respondent City Treasurer in her September 1, 2005 Letter, petitioner's entitlement
to the refund would only arise upon a judicial declaration of the invalidity of Section 21 (A) of Manila
Ordinance No. 7794, as amended by Section 1(G) of Manila Ordinance No. 7807. This only took place
when the Court of Tax Appeals En Banc dismissed respondents' Petition for Review of the May 17, 2006
Decision of the Court of Tax Appeals Second Division, rendering the judgment on the invalidity of Section
21 (A) final and executory on July 2, 2007.138 Therefore, the judicial action for petitioner's claim for
refund had not yet expired as of the filing of the Amended and Supplemental Petition.

WHEREFORE, the Petition for Review on Certiorari is GRANTED. The September 5, 2008 Decision and
December 12, 2008 Resolution of the Court of Tax Appeals En Banc in C.T.A. EB No. 277 are
hereby REVERSED and SET ASIDE. The Court of Tax Appeals En Banc is DIRECTED to proceed with
the resolution on the merits of C.T.A. EB No. 277 with due and deliberate dispatch.

SO ORDERED.

Peralta (Chairperson), J. Reyes, Jr., and Hernando, JJ., concur.

Gesmundo, J., on leave.
December 10, 2018

NOTICE OF JUDGMENT

Sirs / Mesdames:

Please take notice that on October 17, 2018 a Decision, copy attached hereto, was rendered by the
Supreme Court in the above-entitled case, the original of which was received by this Office on December
10, 2018 at 2:34 p.m.

FIRST DIVISION

G.R. No. 219340, November 07, 2018

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. STANDARD INSURANCE CO.,

INC., Respondent.

DECISION

BERSAMIN, J.:

At issue is the authority of the Regional Trial Court (RTC) to enjoin the enforcement or implementation
of Section 108 and Section 184 of the National Internal Revenue Code of 1997 (NIRC) through an
original action for declaratory relief.

The Case

This appeal by petition for review on certiorari is being directly brought by the Commissioner of Internal
Revenue (petitioner)1 to challenge the judgment rendered on May 8, 20152 and the order issued on July
10, 2015,3 whereby the Regional Trial Court (RTC), Branch 66, in Makati City in Civil Case No. 14-1330,
an action for declaratory relief initiated by the respondent, respectively permanently enjoined the
petitioner, or any persons acting on her behalf from proceeding with the implementation or enforcement
of Section 108 and Section 184 of the NIRC against the respondent, and denied her motion for
reconsideration.

Antecedents

On February 13, 2014, the respondent received from the Bureau of Internal Revenue (BIR) a Preliminary
Assessment Notice (PAN) regarding its liability amounting to P377,038,679.55 arising from a deficiency
in the payment of documentary stamp taxes (DST) for taxable year 2011. The respondent contested
the PAN through its letter dated February 27, 2014, but the petitioner nonetheless sent to it a formal
letter of demand dated March 27, 2014. Although the respondent requested reconsideration on April 22,
2014,4 it received on December 4, 2014 the Final Decision on Disputed Assessment (FDDA) dated
November 25, 2014, declaring its liability for the DST deficiency, including interest and compromise
penalty, totaling P418,830,567.46.5 On December 11, 2014, it sought reconsideration of the FDDA, and
objected to the tax imposed pursuant to Section 184 of the NIRC as violative of the constitutional
limitations on taxation.6
Meanwhile, the respondent also received a demand for the payment of its deficiency income tax, value-
added tax, premium tax, DST, expanded withholding tax, and fringe benefit tax for taxable year
2012,7and deficiency DST for taxable year 2013.8

On December 19, 2014, the respondent commenced Civil Case No. 14-1330 in the RTC (with prayer for
issuance of a temporary restraining order (TRO) or of a writ of preliminary injunction) for the judicial
determination of the constitutionality of Section 108 and Section 184 of the NIRC with respect to the
taxes to be paid by non-life insurance companies. In its petition, the respondent contended that the
facts of the case must be appreciated in light of the effectivity of Republic Act (R.A.) No. 1000 I
entitled An Act Reducing the Taxes on Life Insurance Policies, whereby the tax rate for life insurance
premiums was reduced from 5% to 2%; and the pendency of deliberations on House Bill (H.B.) No.
3235 entitled An Act Rationalizing the Taxes Imposed on Non-Life Insurance Policies, whereby an equal
treatment for both life and non-life companies was being sought as a response to the supposed inequality
generated by the enactment of R.A. No. 10001.

On December 23, 2014, the RTC issued the TRO prayed for by enjoining the BIR, its agents,
representatives, assignees, or any persons acting for and in its behalf from implementing the provisions
of the NIRC adverted to with respect to the FDDA for the respondent's taxable year 2011, and to the
pending assessments for taxable years 2012 and 2013.

Later, on January 13, 2015, the RTC issued the writ of preliminary injunction.

On May 8, 2015, the RTC rendered the assailed judgment wherein it opined that although taxes were
self-assessing, the tax system merely created liability on the part of the taxpayers who still retained the
right to contest the particular application of the tax laws; and holding that the exercise of such right to
contest was not considered a breach of the provision itself as to deter the action for declaratory
relief,9and decreed thusly:
WHEREFORE, premises considered, the respondent, its agents, representatives, or any persons acting
on its behalf is hereby permanently enjoined from proceeding with the implementation or enforcement
of Sections 108 and 184 of the National Internal Revenue Code against petitioner Standard Insurance
Co., Inc. until the Congress shall have enacted and passed into law House Bill No. 3235 in conformity
with the provisions of the Constitution.

SO ORDERED.10
The petitioner moved for reconsideration of the judgment, but on July 10, 2015 the RTC denied the
motion for reconsideration.11

Hence, the petitioner has appealed directly to the Court,12 stating that:
I.

THE TRIAL COURT ERRED IN TAKING COGNIZANCE OF THE INSTANT CASE BECAUSE A PETITION FOR
DECLARATORY RELIEF IS NOT APPLICABLE TO CONTEST TAX ASSESSMENTS.

II.

THE TRIAL COURT ERRED IN TAKING COGNIZANCE OF THE INSTANT CASE BECAUSE THE PETITION
FOR DECLARATORY RELIEF IS FATALLY DEFECTIVE FOR FAILING TO SATISFY THE BASIC REQUISITES
UNDER RULE 63 OF THE RULES OF COURT.

III.

THE TRIAL COURT ERRED IN ADJUDGING SECTIONS 108 AND 184 OF THE NIRC AS VIOLATIVE OF THE
EQUAL PROTECTION CLAUSE.

IV.

THE TRIAL COURT GRAVELY ERRED IN GRANTING INJUNCTIVE RELIEF IN FAVOR OF RESPONDENT, THE
SAME (I) BEING SPECIFICALLY PROHIBITED BY SECTION 218 OF THE NIRC; AND (II} HAVING BEEN
GRANTED WITHOUT FACTUAL OR LEGAL BASIS.

V.

THE TRIAL COURT ERRED IN ACCORDING THE RELIEF ADJUDGED, GIVEN THAT: (A) THE RESULTANT
REMEDY FALLS OUTSIDE THE PURVIEW OF AN ACTION FOR DECLARATORY RELIEF; AND (II) IT IS
VIOLATIVE OF THE RULE THAT JUDICIAL DECISIONS MUST FINALLY DETERMINE THE RIGHTS,
OBLIGATIONS AND RESPONSIBILITIES OF PARTIES.13
Two substantial issues are presented for resolution. The first is the propriety of the action for declaratory
relief; the other, the legal competence of the RTC to take cognizance of the action for declaratory relief.

Ruling of the Court

The appeal is meritorious.

1.

The injunctive relief is not available as a remedy to assail the collection of a tax

The more substantial reason that should have impelled the RTC to desist from taking cognizance of the
respondent's petition for declaratory relief except to dismiss the petition was its lack of jurisdiction.

We start by reminding the respondent about the inflexible policy that taxes, being the lifeblood of the
Government, should be collected promptly and without hindrance or delay. Obeisance to this policy is
unquestionably dictated by law itself. Indeed, Section 218 of the NIRC expressly provides that "[n]o
court shall have the authority to grant an injunction to restrain the collection of any national internal
revenue tax, fee or charge imposed by th[e] [NIRC]."14 Also, pursuant to Section 1115 of R.A. No. 1125,
as amended, the decisions or rulings of the Commissioner of Internal Revenue, among others, assessing
any tax, or levying, or distraining, or selling any property of taxpayers for the satisfaction of their tax
liabilities are immediately executory, and their enforcement is not to be suspended by any appeals
thereof to the Court of Tax Appeals unless "in the opinion of the Court [of Tax Appeals] the collection
by the Bureau of Internal Revenue or the Commissioner of Customs may jeopardize the interest of the
Government and/or the taxpayer," in which case the Court of Tax Appeals "at any stage of the
proceeding may suspend the said collection and require the taxpayer either to deposit the amount
claimed or to file a surety bond for not more than double the amount."

In view of the foregoing, the RTC not only grossly erred in giving due course to the petition for
declaratory relief, and in ultimately deciding to permanently enjoin the enforcement of the specified
provisions of the NIRC against the respondent, but even worse acted without jurisdiction.

2.

Action for declaratory relief was procedurally improper as a remedy

We further indicate that even assuming, arguendo, that the RTC had jurisdiction to act on the petition
in Civil Case No. 14-1330, it nevertheless misappreciated the propriety of declaratory relief as a remedy.

An action for declaratory relief is governed by Section 1, Rule 63 of the Rules of Court.16 It is predicated
on the attendance of several requisites, specifically: (1) the subject matter of the controversy must be
a deed, will, contract or other written instrument, statute, executive order or regulation, or ordinance;
(2) the terms of said documents and the validity thereof are doubtful and require judicial construction;
(3) there must have been no breach of the documents in question; (4) there must be an actual justiciable
controversy or the "ripening seeds" of one between persons whose interests are adverse; (5) the issue
must be ripe for judicial determination; and (6) adequate relief is not available through other means or
other forms of action or proceeding.17

The third, fourth, fifth and sixth requisites were patently wanting.
Firstly, the third requisite was not met due to the subject of the action (i.e. statute) having been
infringed or transgressed prior to the institution of the action.18 We observe in this regard that the RTC
seemed to believe that the tax assessments issued had merely created a liability against the respondent
as the taxpayer, and that its suit for declaratory relief was but consistent with protesting the
assessments. The RTC's belief was absolutely devoid of legal foundation, however, simply because
internal revenue taxes, being self-assessing, required no further assessment to give rise to the liability
of the taxpayer.19

Specifically, the assessments for DST deficiencies of the respondent for the years 2011, 2012 and 2013,
as imposed pursuant to Section 184 of the NIRC were the subject of the respondent's petition for
declaratory relief. Said legal provision states:
Section 184. Stamp Tax on Policies of Insurance Upon Property. - On all policies of insurance or other
instruments by whatever name the same may be called, by which insurance shall be made or renewed
upon property of any description, including rents or profits, against peril by sea or on inland waters, or
by fire or lightning, there shall be collected a documentary stamp tax of Fifty centavos (P0.50) on each
Four pesos (P4.00), or fractional part thereof, of the amount of premium charged: Provided, however,
That no documentary stamp tax shall be collected on reinsurance contracts or on any instrument by
which cession or acceptance of insurance risks under any reinsurance agreement is effected or recorded.
What was being thereby taxed was the privilege of issuing insurance policies; hence, the taxes accrued
at the time the insurance policies were issued. Verily, the violation of Section 184 of the NIRC occurred
upon the taxpayer's failure or refusal to pay the correct DST due at the time of issuing the non-life
insurance policies. Inasmuch as the cause of action for the payment of the DSTs pursuant to Section
10820 and Section 184 of the NIRC accrued upon the respondent's failure to pay the DST at least for
taxable year 2011 despite notice and demand, the RTC could not procedurally take cognizance of the
action for declaratory relief.

Secondly, the apprehension of the respondent that it could be rendered technically insolvent through
the imposition of the iniquitous taxes imposed by Section 108 and Section 184 of the NIRC, 21 laws that
were valid and binding, did not render the action for declaratory relief fall within the purview of an actual
controversy that was ripe for judicial determination. The respondent was thereby engaging in
speculation or conjecture, or arguing on probabilities, not actualities. Therein lay the prematurity of its
action, for a justiciable controversy refers to an existing case or controversy that is appropriate or ripe
for judicial determination, not one that is conjectural or merely anticipatory. 22

Admittedly, the respondent sought in the RTC the determination of its right to be assessed the correct
taxes under Section 108 and Section 184 of the NIRC by contending said tax provisions to be invalid
and unconstitutional for their unequal treatment of life and non-life insurance policies. The respondent
cited R.A. No. 10001 and House Bill No. 3235 in support of its contention. Obviously, the challenge
mounted by the respondent against the tax provisions in question could be said to be based on a
contingency that might or might not occur. This is because the Congress has not yet addressed the
difference in tax treatment of the life and non-life insurance policies. Under the circumstances, the
respondent would not be entitled to declaratory relief because its right - still dependent upon contingent
legislation - was still inchoate.

Lastly, the respondent's adequate remedy upon receipt of the FDDA for the DST deficiency for taxable
year 2011 was not the action for declaratory relief but an appeal taken in due course to the Court of
Tax Appeals. Instead of appealing in due course to the CTA, however, it resorted to the RTC to seek and
obtain declaratory relief. By choosing the wrong remedy, the respondent lost its proper and true
recourse. Worse, the choice of the wrong remedy rendered the assessment for the DST deficiency for
taxable year 2011 final as a consequence. As such, the petition for declaratory relief, assuming its
propriety as a remedy for the respondent, became mooted by the finality of the assessment.

With not all the requisites for the remedy of declaratory relief being present, the respondent's petition
for declaratory relief had no legal support and should have been dismissed by the RTC.

WHEREFORE, the Court GRANTS the petition for review on certiorari; ANNULS and SETS ASIDE the
decision rendered in Civil Case No. 14-1330 on May 8, 2015 by the Regional Trial Court, Branch 66, in
Makati City; DISMISSES Civil Case No. 14-1330 on the ground of lack of jurisdiction; QUASHES the
writ of preliminary injunction issued against the Commissioner of Internal Revenue in Civil Case No. 14-
1330 for being issued without jurisdiction; and ORDERS the respondent to pay the costs of suit.

SO ORDERED.

Jardeleza, Tijam, and A. Reyes, Jr.,*JJ., concur.

Gesmundo,**J., on wellness leave.

Endnotes:

*In lieu of Associate Justice Mariano C. Del Castillo, who inhibited due to close relations to the lawyer
of a party, per the raffle of September 24, 2018.

** Additional Member, per Special Order No. 2607 dated October 10, 2018; on wellness leave.

1 Hon. Commissioner Kim Jacinto-Henares.

2Rollo, pp. 76-85; penned by Presiding Judge Joselito C. Villarosa.

3 Id. at 73-75.

4 Id. at 76.

5 Id. at 135.

6 Id.

7 Id.

8
Id. at 136.

9 Id. at 76-85.

10 Id. at 85.

11 Id. at 73-75.

12 Id. at 25-68.

13 Id. at 32-33.

14Angeles City v. Angeles Electric Corporation, G.R. No. 166134, June 29, 2010, 622 SCRA 43, 51-52.

15 Section 11. Who may appeal; effect of appeal. - Any person association or corporation adversely
affected by a decision or ruling of the Collector of Internal Revenue, the Collector of Customs or any
provincial or city Board of Assessment Appeals may file an appeal in the Court of Tax Appeals within
thirty days after the receipt of such decision or ruling.

No appeal taken to the Court of Tax Appeals from the decision of the Collector of Internal Revenue or
the Collector of Customs shall suspend the payment, levy, distraint, and or sale of any property of the
taxpayer for the satisfaction of his tax liability as provided by existing law; Provided, however, That
when in the opinion of the Court the collection by the Bureau of Internal Revenue or the Commissioner
of Customs may jeopardize the interest of the Government and/or the taxpayer the Court at any stage
of the proceeding may suspend the said collection and require the taxpayer either to deposit the amount
claimed or to file a surety bond for not more than double the amount with the Court.

16 Section 1. Who May File Petition. - Any person interested under a deed, will, contract or other written
instrument, or whose rights are affected by a statute, executive order or regulation, ordinance, or any
other governmental regulation may, before breach or violation thereof, bring an action in the appropriate
Regional Trial Court to determine any question of construction or validity arising, and for a declaration
of his rights or duties, thereunder.

x x x x

17Republic v. Roque, G.R. No. 204603, September 24, 2013, 706 SCRA 273, 283.

18Tambunting, Jr. v. Sumabat, G.R. No. 144101, September 16, 2005, 470 SCRA 92, 96.

19Tupaz v. Ulep, G.R. No. 127777, October 1, 1999, 316 SCRA 118, 126.

20 SECTION 108. Value-added Tax on Sale of Services and Use or Lease of Properties.-

(A) Rate and Base of Tax. - There shall be levied, assessed and collected, a value-added tax equivalent
to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use
or lease of properties.

The phrase 'sale or exchange of services' means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or rendered
by construction and service contractors; stock, real estate, commercial, customs and immigration
brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for
others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including
clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport
of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic
common carriers by land, air and water relative to their transport of goods or cargoes; services of
franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise
grantees except those under Section 119 of this Code; services of banks, non-bank financial
intermediaries and finance companies; and non-life insurance companies (except their crop insurances),
including surety, fidelity, indemnity and bonding companies; and similar services regardless of whether
or not the performance thereof calls for the exercise or use of the physical or mental faculties. The
phrase 'sale or exchange of services' shall likewise include:

(1) The lease or the use of or the right or privilege to use any copyright, patent, design or model, plan,
secret formula or process, goodwill, trademark, trade brand or other like property or right;

(2) The lease or the use of, or the right to use of any industrial, commercial or scientific equipment;

(3) The supply of scientific, technical, industrial or commercial knowledge or information;

(4) The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of
enabling the application or enjoyment of any such property, or right as is mentioned in subparagraph
(2) or any such knowledge or information as is mentioned in subparagraph (3);

(5) The supply of services by a nonresident person or his employee in connection with the use of property
or rights belonging to, or the installation or operation of any brand, machinery or other apparatus
purchased from such nonresident person;

(6) The supply of technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking, venture, project
or scheme;

(7) The lease of motion picture films, films, tapes and discs; and

(8) The lease or the use of or the right to use radio, television, satellite transmission and cable television
time.

Lease of properties shall be subject to the tax herein imposed irrespective of the place where the contract
of lease or licensing agreement was executed if the property is leased or used in the Philippines.

The term 'gross receipts' means the total amount of money or its equivalent representing the contract
price, compensation, service fee, rental or royalty, including the amount charged for materials supplied
with the services and deposits and advanced payments actually or constructively received during the
taxable quarter for the services performed or to be performed for another person, excluding value-
added tax.

(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:

(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 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 percent (0%) 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. x x x

21Rollo, p. 144.

22Republic v. Roque, supra, note 17, at 284.

FIRST DIVISION

G.R. No. 230861, September 19, 2018

ASIAN TRANSMISSION CORPORATION, Petitioner, v. COMMISSIONER

OF INTERNAL REVENUE, Respondent.

DECISION

BERSAMIN, J.:
We reiterate through this decision that the taxpayer has the primary responsibility for the proper
preparation of the waiver of the prescriptive period for assessing deficiency taxes. Hence, the
Commissioner of Internal Revenue (CIR) may not be blamed for any defects in the execution of the
waiver.

The Case

This appeal seeks the review and reversal of the decision promulgated on August 9, 2016, 1 whereby the
Court of Tax Appeals En Banc (CTA En Banc) reversed and set aside the decision rendered by its Second
Division (CTA in Division) holding that the waivers executed by petitioner Asian Transmission
Corporation (ATC) were invalid and did not operate to extend the three-year period of prescription to
assess deficiency taxes for the calendar year 2002.2

Antecedents

As found by the CTA in Division, the factual and procedural antecedents are as follows:

[ATC] is a corporation duly organized and existing under Philippine Laws and with business address at
Carmelray Industrial Park, Canlubang, Calamba City, Laguna. ATC is a manufacturer of motor vehicle
transmission component parts and engines of Mitsubishi vehicles. It was organized and registered with
the Securities and Exchange Commission on August 29, 1973 as evidenced by its Certificate of
Incorporation.

[The CIR] is the Commissioner of the Bureau of Internal Revenue (BIR) with office address at BIR
National Office Bldg., Agham Road, Diliman, Quezon City.

On January 3, 2003 and March 3, 2003, ATC filed its Annual Information Return of Income Taxes
Withheld on Compensation and Final Withholding Taxes and Annual Information Return of Creditable
Income Taxed Withheld (Expanded)/Income Payments Exempt from Withholding Tax, respectively.

On August 11, 2004, ATC received Letter of Authority [(LOA)] No. 200000003557 where [the CIR]
informed ATC that its revenue officers from the Large Taxpayers Audit and Investigation Division II shall
examine its books of accounts and other accounting records for the taxable year 2002.

Thereafter, [the CIR] issued a Preliminary Assessment Notice (PAN) to ATC.

Consequently, on various dates, ATC, through its Vice President for Personnel and Legal Affairs, Mr.
Roderick M. Tan, executed several documents denominated as "Waiver of the Defense of Prescription
Under the Statute of Limitations of the National Internal Revenue Code" (Waiver), as follows:

Source of Date of Date of

Waiver
Document Execution Extension

First Page 415, BIR September 8,

June 30, 2005
Waiver Records 2004

Second Page 419, BIR December 31,

March 3, 2005
Waiver Records 2005

Third Page 422, BIR November 10,

June 30, 2006
Waiver Records 2005
 Fourth Page 429, BIR March 21, December 31,
Waiver Records 2006 2006

Fifth Page 767, BIR March 21,

June 30, 2007
Waiver Records 2006

Sixth Page 349, BIR December 31,

April 18, 2007
Waiver Records 2007

Seventh Page 354, BIR October 25,

June 30, 2008
Waiver Records 2007

Eight[h] Page 1176, BIR December 31,

May 30, 2008
Waiver Records 2008

Meanwhile, on February 28, 2008, ATC availed of the Tax Amnesty [P]rogram under Republic Act No.
9480.

On July 15, 2008, ATC received a Formal Letter of Demand from [the] CIR for deficiency [WTC] in the
amount of P[hp]62,977,798.02, [EWT] in the amount of P[hp]6,916,910.51, [FWT] in the amount of
P[hp]501,077.72. On August 14, 2008, ATC filed its Protest Letter in regard thereto.

Accordingly, on April 14, 2009, ATC received the Final Decision on Disputed Assessment where [the]
CIR found ATC liable to pay deficiency tax in the amount of P[hp]75,696,616.75. Thus, on May 14,
2009, ATC filed an appeal letter/request for reconsideration with [the] CIR.

On April 10, 2012, ATC received the Decision of [the] CIR dated November 15, 2011, denying its request
for reconsideration. As such, on April 23, 2012, ATC filed the instant Petition for Review (with Application
for Preliminary Injunction and Temporary Restraining Order).3

Ruling of the CTA in Division

On November 28, 2014, the CTA in Division rendered its decision granting the petition for review of
ATC. It held that ATC was not estopped from raising the invalidity of the waivers inasmuch as the Bureau
of Internal Revenue (BIR) had itself caused the defects thereof, namely: (a) the waivers were notarized
by its own employee despite not being validly commissioned to perform notarial acts; (b) the BIR did
not indicate the date of its acceptance; (c) the BIR did not specify the amounts of and the particular
taxes involved; and (d) respondent CIR did not sign the waivers despite the clear mandate of RMO 20-
90 to that effect. It ruled that the waivers, being invalid, did not operate to toll or extend the three-year
period of prescription.4

The CTA in Division disposed:

WHEREFORE, in view thereof, the Petition for Review is hereby GRANTED. Accordingly, the deficiency
[WTC] in the amount of P[hp]67,722,419.38, [EWT] in the amount of P[hp]7,436,545.83 and [FWT] in
the amount of P[hp]537,651.55, or in the total amount of P[hp]75,696,616.75 for the taxable year
2002, are hereby declared CANCELLED, WITHDRAWN and WITH NO FORCE AND EFFECT.
SO ORDERED.5

On December 16, 2014, the CIR moved for reconsideration, and ATC opposed.

On March 13, 2015, the CTA in Division denied the CIR's motion for reconsideration, 6 to wit:

WHEREFORE, premises considered, [the CIR's] Motion for Reconsideration is hereby DENIED for lack
of merit.

SO ORDERED.7

On April 20, 2015, the CIR filed a petition for review in the CTA En Banc.

Decision of the CTA En Banc

On August 9, 2016, the CTA En Banc promulgated the assailed decision reversing and setting aside the
decision of the CTA in Division, and holding that the waivers were valid. It observed that the CIR's right
to assess deficiency withholding taxes for CY 2002 against ATC had not yet prescribed. It disposed:

WHEREFORE, premises considered, the Court hereby GRANTS the Petition for Review. Accordingly,
the Decision promulgated on November 28, 2014 and the Resolution on March 13, 2015 by the Second
Division are REVERSED and SET ASIDE. Let the case be REMANDED to the Court in Division for
further proceedings in order to determine and rule on the merits of respondent's petition seeking the
cancellation of the deficiency tax assessments for calendar year 2002 for withholding tax on
compensation, expanded withholding tax, and final withholding tax in the aggregate amount of
Php75,696,616.75.

SO ORDERED.8

On September 9 and September 16, 2016, ATC filed its motion for reconsideration9 and supplemental
motion for reconsideration,10 respectively, but the CTA En Banc denied the motions for lack of merit.

Issue

In this appeal, ATC insists that the CTA En Banc acted in excess of jurisdiction or with grave abuse of
discretion amounting to lack or excess of jurisdiction in applying the ruling in Commissioner of Internal
Revenue v. Next Mobile Inc.11 as well as the equitable principles of in pari delicto, unclean hands,
and estoppel.

Ruling of the Court

The appeal has no merit.

To be noted is that the CTA En Banc cited Commissioner of Internal Revenue v. Kudos Metal
Corporation,12 whereby the Court reiterated that RMO 20-90 and RDAO 05-01 governed the proper
execution of a valid waiver of the statute of limitations; and pointed to Commissioner of Internal
Revenue v. Next Mobile Inc., supra, to highlight the recognized exception to the strict application of
RMO 20-90 and RDAO 05-01.

In Commissioner of Internal Revenue v. Next Mobile Inc., the Court declared that as a general rule a
waiver that did not comply with the requisites for validity specified in RMO No. 20-90 and RDAO 01-05
was invalid and ineffective to extend the prescriptive period to assess the deficiency taxes. However,
due to peculiar circumstances obtaining, the Court treated the case as an exception to the rule, and
considered the waivers concerned as valid for the following reasons, viz.:
First, the parties in this case are in pari delicto or "in equal fault." In pari delicto connotes that the two
parties to a controversy are equally culpable or guilty and they shall have no action against each other.
However, although the parties are in pari delicto, the Court may interfere and grant relief at the suit of
one of them, where public policy requires its intervention, even though the result may be that a benefit
will be derived by one party who is in equal guilt with the other.

Here, to uphold the validity of the Waivers would be consistent with the public policy embodied in the
principle that taxes are the lifeblood of the government, and their prompt and certain availability is an
imperious need. Taxes are the nation's lifeblood through which government agencies continue to operate
and which the State discharges its functions for the welfare of its constituents. As between the parties,
it would be more equitable if petitioner's lapses were allowed to pass and consequently uphold the
Waivers in order to support this principle and public policy.

Second, the Court has repeatedly pronounced that parties must come to court with clean hands. Parties
who do not come to court with clean hands cannot be allowed to benefit from their own wrongdoing.
Following the foregoing principle, respondent should not be allowed to benefit from the flaws in its own
Waivers and successfully insist on their invalidity in order to evade its responsibility to pay taxes.

Third, respondent is estopped from questioning the validity of its Waivers. While it is true that the Court
has repeatedly held that the doctrine of estoppel must be sparingly applied as an exception to the
statute of limitations for assessment of taxes, the Court finds that the application of the doctrine is
justified in this case. Verily, the application of estoppel in this case would promote the administration of
the law, prevent injustice and avert the accomplishment of a wrong and undue advantage. Respondent
executed five Waivers and delivered them to petitioner, one after the other. It allowed petitioner to rely
on them and did not raise any objection against their validity until petitioner assessed taxes and
penalties against it. Moreover, the application of estoppel is necessary to prevent the undue injury that
the government would suffer because of the cancellation of petitioner's assessment of respondent's tax
liabilities.

Finally, the Court cannot tolerate this highly suspicious situation. In this case, the taxpayer, on the one
hand, after voluntarily executing waivers, insisted on their invalidity by raising the very same defects it
caused. On the other hand, the BIR miserably failed to exact from respondent compliance with its rules.
The BIR's negligence in the performance of its duties was so gross that it amounted to malice and bad
faith. Moreover, the BIR was so lax such that it seemed that it consented to the mistakes in the Waivers.
Such a situation is dangerous and open to abuse by unscrupulous taxpayers who intend to escape their
responsibility to pay taxes by mere expedient of hiding behind technicalities.

It is true that petitioner was also at fault here because it was careless in complying with the requirements
of RMO No. 20-90 and RDAO 01-05. Nevertheless, petitioner's negligence may be addressed by
enforcing the provisions imposing administrative liabilities upon the officers responsible for these errors.
The BIR's right to assess and collect taxes should not be jeopardized merely because of the mistakes
and lapses of its officers, especially in cases like this where the taxpayer is obviously in bad faith. 13

In this case, the CTA in Division noted that the eight waivers of ATC contained the following defects, to
wit:

1. The notarization of the Waivers was not in accordance with the 2004 Rules on Notarial Practice;

2. Several waivers clearly failed to indicate the date of acceptance by the Bureau of Internal
Revenue;

3. The Waivers were not signed by the proper revenue officer; and

4. The Waivers failed to specify the type of tax and the amount of tax due.14
We agree with the holding of the CTA En Banc that ATC's case was similar to the case of the taxpayer
involved in Commissioner of Internal Revenue v. Next Mobile Inc. The foregoing defects noted in the
waivers of ATC were not solely attributable to the CIR. Indeed, although RDAO 01-05 stated that the
waiver should not be accepted by the concerned BIR office or official unless duly notarized, a careful
reading of RDAO 01-05 indicates that the proper preparation of the waiver was primarily the
responsibility of the taxpayer or its authorized representative signing the waiver. Such responsibility did
not pertain to the BIR as the receiving party. Consequently, ATC was not correct in insisting that the
act or omission giving rise to the defects of the waivers should be ascribed solely to the respondent CIR
and her subordinates.

Moreover, the principle of estoppel was applicable. The execution of the waivers was to the advantage
of ATC because the waivers would provide to ATC the sufficient time to gather and produce voluminous
records for the audit. It would really be unfair, therefore, were ATC to be permitted to assail the waivers
only after the final assessment proved to be adverse. Indeed, the Court observed in Commissioner of
Internal Revenue v. Next Mobile Inc. that:

In this case, respondent, after deliberately executing defective waivers, raised the very same
deficiencies it caused to avoid the tax liability determined by the BIR during the extended assessment
period. It must be remembered that by virtue of these Waivers, respondent was given the opportunity
to gather and submit documents to substantiate its claims before the CIR during investigation. It was
able to postpone the payment of taxes, as well as contest and negotiate the assessment against it. Yet,
after enjoying these benefits, respondent challenged the validity of the Waivers when the consequences
thereof were not in its favor. In other words, respondent's act of impugning these Waivers after
benefiting therefrom and allowing petitioner to rely on the same is an act of bad faith.15

Thus, the CTA En Banc did not err in ruling that ATC, after having benefitted from the defective waivers,
should not be allowed to assail them. In short, the CTA En Banc properly applied the equitable principles
of in pari delicto, unclean hands, and estoppel as enunciated in Commissioner of Internal Revenue v.
Next Mobile case.

WHEREFORE, the Court DENIES the petition for review on certiorari; AFFIRMS the decision
promulgated on August 9, 2016 by the Court of Tax Appeals En Banc in CTA EB No. 1289 (CTA Case
No. 8476); and ORDERS the petitioner to pay the costs of suit.

SO ORDERED.

FIRST DIVISION

G.R. No. 210894, September 12, 2018

NOEMI S. CRUZ AND HEIRS OF HERMENEGILDO T. CRUZ, REPRESENTED BY NOEMI S.

CRUZ, Petitioners, v. CITY OF MAKATI, CITY TREASURER OF MAKATI, THE REGISTER OF DEEDS
OF MAKATI, LAVERNE REALTY AND DEVELOPMENT CORPORATION, Respondents.

DECISION

DEL CASTILLO, J.:

This Petition for Review on Certiorari1 assails the July 22, 2013 Decision2 of the Court of Appeals (CA)
in CA-G.R. SP No. 128390 affirming the March 29, 2012 and December 27, 2012 Orders3 of the Regional
Trial Court of Makati City, Branch 62 (Makati RTC Branch 62) in Civil Case No. 07-1155, and the CA's
subsequent January 15, 2014 Resolution4 denying herein petitioners' Motion for Reconsideration.

Factual Antecedents

Petitioner Noemi Cruz and her husband, Hermenegildo T. Cruz, were the registered owners of a 124.38-
square meter condominium unit, Unit 407, Cityland Condominium 10, Tower II, 146 H.V. Dela Costa
Street, Makati City (subject property) which was levied upon by the respondent City of Makati for non-
payment of real property taxes thereon after their designated employee-representative failed to remit
the entrusted tax payments amounting to P201,231.17 to the city and appeared to have absconded with
the money instead. Eventually, the subject property was auctioned off and sold to respondent Laverne
Realty and Development Corporation (Laverne) as the highest bidder for P370,000.00.

Petitioners failed to redeem the subject property, prompting Laverne to file in 2009, before the Makati
RTC Branch 148, LRC Case No. M-5237 a petition to surrender the owner's duplicate copy of the title to
the subject property (Condominium Certificate of Title No. 44793).

Previously, or in 2007, petitioners filed before Makati RTC Branch 62 Civil Case No. 07-1155, a
Complaint5 for annulment of the Laverne sale with prayer for injunctive relief and damages and costs.
Petitioners alleged that the levy and sale by the respondent city to Laverne were null and void because
the notice of billing statements for real property were mistakenly sent to Unit 1407 instead of Unit 407;
no warrant of levy was ever received by them; the notice of delinquency sale was not posted as required
by the Local Government Code (LGC); the Makati Treasurer's Office did not notify petitioners of the
warrant of levy as required by the LGC; and respondents did not remit the excess of the proceeds of
the sale to petitioners as required by the LGC.

The Makati City government and the City Treasurer filed their answer, and petitioners filed their reply.
Petitioners sought to declare Laverne and the Makati Registrar of Deeds in default for failure to file their
respective responsive pleadings.

On August 26, 2009, the Makati RTC Branch 62 granted petitioners' application for injunctive relief but
denied their motion to declare Laverne in default.

On November 18, 2011, petitioners filed an Omnibus Motion to consolidate Civil Case No. 07-1155 with
LRC Case No. M-5237 and to declare Laverne in default. Laverne opposed the motion.

On November 25, 2011, the Makati RTC Branch 62 issued an Order,6 stating as follows:

Before this Court is an omnibus motion to approve the consolidation of a case pending in Branch 148
with this case pending in this Court. Before the court rules on this motion, the court awaits the resolution
of Branch 148 regarding the motion filed with this court.

On the other hand, before the Court rules on the motion to declare defendant in default, the court awaits
the return on the summons sent by registered mail. The Court takes note of the service by publication
attached to the omnibus motion of the plaintiff in compliance with the order of publication to form part
of the case. Set this incident for hearing on December 15, 2011 at 8:30a.m.

The petitioner is given the opportunity to inform the court if there are any developments prior to the
same.

SO ORDERED.

The Assailed Orders of the Makati RTC Branch 62

On March 29, 2012, the Makati RTC Branch 62 issued an Order 7 denying petitioners' motion to
consolidate and to declare Laverne in default. It held:

The Court noted that the answer for Laverne was filed without any motion asking leave for its belated
admission contrary to Section 11, Rule 11 Revised Rules of Court. x x x

xxxx

Under this provision, the Court cannot simply admit an answer belatedly filed without any motion [for
admission] accompanying the same x x x as evident from the wordings ' upon like terms' which
explicitly means 'upon motion and on such terms as may be just'. x x x [S]ince it is within the
discretion of the court to permit the filing of defendant's answer even beyond the reglementary period,
the Court should be provided with justification for the belated action, and x x x the defendant must
show that it intended no delay x x x. In fine, to admit or to reject an answer filed after the prescribed
period is addressed to the sound discretion of the court. Admittedly, since the filing of the Answer was
done [beyond the reglementary period, its filing cannot be considered as] a matter of right.

However, plaintiffs are not faultless either, [since] they have not complied with the order for them to
inform this Court of the developments in their motion for consolidation [despite lapse of more than three
(3) months]. The foregoing is more than sufficient reason for the Court to take severe sanction against
the plaintiffs pursuant to Section 3 Rule 17 Revised Rules of Court, i.e., failure to prosecute for
unreasonable length of time and comply with an order of the court. However, in the interest of justice,
plaintiffs are afforded one last opportunity to continue prosecuting their case.

Anent the motion to Consolidate and Declare the defendant in default, the Court is constrained to deny
the same for failure to comply with Section 6 Rule 15 in relation to Section 13 Rule 13 of the Revised
Rules of Court. The instant motion failed to show any affidavit of personal service attesting the personal
delivery of the motion to the adverse parties and of the affidavit of mailing to the other party which was
served through registered mail service. Likewise, the Motion to Declare in Default Laverne Realty is
denied on the basis of non-compliance with Section 19 Rule 14 Revised Rules of Court.

Anent the previous orders of this Court requiring the sheriff or process server of the Court to send a
copy of the alias summons as well as a copy of the order granting leave to serve summons for
publication, the same must be recalled pursuant to the declaration of the Supreme Court in Santos v.
PNOC Exploration, that 'the rules, however, do not require that the affidavit of complementary service
be executed by the clerk of court. While the trial court ordinarily does the mailing of copies of its orders
and processes, the duty to make the complementary service by registered mail' under Section 19, Rule
14 of the Rules of Court 'is imposed on the party who resorts to service by publication.' The reason is
plain, the affidavit referred to in the rules must be executed by the person who mailed the required
documents in Section 19 Rule 14, Revised Rules of Court.

WHEREFORE, the Court hereby Orders that:

1) Laverne Realty's Answer with Compulsory [C]ounterclaim be EXPUNGED from the record pursuant
to Section 12 Rule 8 Revised Rules of Court;

2) Plaintiffs' Motions to Consolidate and to Declare the Defendant in Default are both DENIED;

3) Any orders inconsistent with this, particularly [the] order dated September 19, 2011 are hereby
recalled and/or modified accordingly;

4) No setting shall be given in the meantime, but the Court shall await further action to be taken by the
concerned parties and shall act accordingly.
Furnish copies of this Order all the parties concerned, including defendant Laverne, through its retained
counsel, Atty. De Belen who has voluntarily appeared in court.

SO ORDERED.8 (Emphasis in the original; citations omitted)

On June 26, 2012, the Makati RTC Branch 62 issued another Order 9 dismissing Civil Case No. 07-1155
for petitioners' failure to comply with the Order of November 25, 2011, and pursuant to Section 3, Rule
17 of the 1997 Rules of Civil Procedure.10

Petitioners filed an omnibus motion for reconsideration and to declare Laverne in default. However, the
Makati RTC Branch 62 denied the same in its Order11 of December 27, 2012, ruling thus:

Plaintiff plead[ed] liberality but strongly asserted that their failure to comply with the orders of this
Court was due to excusable negligence. They claim[ed] that 'non-compliance' with the Court's orders
'was brought about by mere mistake and excusable negligence of awaiting for the finality of the
resolution of Branch 148 of the Regional Trial Court of Makati City regarding the approval of consolidation
before informing this Court.'

The Court is not persuaded.

First. [P]laintiffs were afforded more than the required opportunity and were even guided through the
Court's orders for their prompt compliance. [They failed to comply] not only once but multiple [times].

Second. The Court finds it hard to understand why the 'developments' before the RTC Branch 148 would
depend on the outcome of the motion for consolidation before this Court. Plainly, if plaintiffs would want
the case before another branch consolidated with the pending case before this Court, all that they have
to do is to ask such relief from the court trying the other case, x x x. This Court would only be confronted
to rule (to refuse or grant consolidation) if and when the other case before another court [is] already
ordered consolidated and transmitted in this Court. It would be premature for this Court to act on
something that has not yet happened. This is how things [are] properly done.

Yet again, for failure of the plaintiff spouses Cruz's Omnibus Motion to comply with Section 13 Rule
1312 in relation to Section 6 Rule 1513 of the Revised Rules of Court, the same is hereby DENIED. It
must be observed that these lapses (along with failure to comply with Section 19 Rule 14 14 [were] the
same grounds [relied upon by this Court] in its denial of the previous motion to default per its order
dated March 29, 2012. Sadly, plaintiffs did not learn their lesson.

Plaintiffs also lament[ed] that the non-filing of defendant's answer should have prompted the Court to
declare it in default. True, if the Court was provided by plaintiff with full compliance on proof of service
by publication pursuant to Section 19 Rule 14 of the Revised Rules. Even in the present motion, the
plaintiffs again have been oblivious of their duty under the rules. How can the Court declare the
defendant in default?

xxxx

WHEREFORE, the Omnibus Motion: (i) For Reconsideration and (ii) Declare Defendant Laverne Realty
and Development Corporation in Default is DENIED for utter lack of merit.

SO ORDERED.15 (Emphasis in the original; citations omitted)

Proceedings in LRC Case No. M-5237

Meanwhile, in LRC Case No. M-5237 or Laverne's petition to surrender the owner's copy of the title to
the subject property, petitioners filed a demurrer to evidence, which the Makati RTC Branch 148 granted
in an Order16 dated May 26, 2015, where it was stated that –
x x x In the instant demurrer, respondents move for the dismissal of the present petition based on the
following grounds:

a) Billing Statements were not received by respondents Sps. Cruz[;]

b) Notice of Tax Delinquency was defective or non-compliant[;]

c) Warrant of Levy was likewise defective or non-compliant[;]

d) The public auction was defective and non-compliant[.]

xxxx

Sections 254 and 260 of the Code17 [require] that the Notice of Tax Delinquency and Notice or
Advertisement of Sale respectively be posted in the main entrance of the provincial, city or municipal
building, and in publicly accessible and conspicuous place in the barangay where the real property is
located. Proof of compliance with the said requirement is wanting in the evidence presented.

The actual notice of tax delinquency and the advertisement of public sale or public auction posted in the
City of Makati and in a conspicuous place in the barangay where the property is located was not
presented. There [was] no evidence presented that the Notice of Tax Delinquency was posted in the
City Hall of Makati and in the barangay where the property is located in compliance with Section 254 of
the Code. On the other hand, Exhibit "F" states that the City of Makati requested the Barangay where
the property was located to issue a Certification indicating that the list of properties for public auction
were posted in the said Barangay, but the Barangay Certification itself was not presented in court. Mere
request for a Certification is not sufficient compliance with the law. Also, what was presented is the
Certification issued by the City of Makati that the list of properties for public auction was posted in the
bulletin Board of the City Hall. There [was] no showing that a notice of tax delinquency was posted. The
Notice of Tax Delinquency under Section 254 is different from the Notice or Advertisement of Sale under
Section 260 of R.A. 7160.

The law provides that the Notice of Tax Delinquency must be published twice in a newspaper of general
circulation; the evidence presented shows that the Notice of Tax Delinquency was published only once
on March 25, 2006. While the Notice of Public Auction was published thrice, it must be again remembered
that the Notice of Public Auction is different from the Notice of Tax Delinquency.

The law provides that the advertisement for the public sale of the delinquent property must be made at
least thirty days from the service of warrant of levy to the delinquent taxpayer. In the case at bar, the
warrant of levy was mailed to the delinquent taxpayer, Noemi Cruz, as shown in the registry receipt
attached to the warrant of levy. However, there [was] no showing that the same [was] actually served
or received by the said taxpayer. The law requires service of the warrant of levy to the taxpayers. The
registry receipt merely proves that the same was mailed but the actual service or receipt of the same
by the delinquent taxpayer cannot be deduced therefrom. Likewise, there is also doubt as to whether
the billings were sent to the correct address of the respondents as the notations in the upper portion of
the billings pertain to a Unit "1407" instead of Unit "407".

Verily, the evidence presented [was] insufficient to establish compliance with the requirements laid out
in Sections 254, 258 and 260 of the R.A. 7160. Be it noted, that the aforesaid sections [use] the word
'shall' which [means] that compliance with the same is mandatory in character. x x x

xxxx

Further, considering that what is at stake here is a possible loss of private property, compliance with
the above said requirements must be strictly complied with in order to ensure that petitioner is not
deprived of property without due process of law.
In view thereof, the Court is of the view that petitioner failed to sufficiently establish the basis for the
granting of the present petition.

Meanwhile, the records show that there is an action for Annulment of Sale pending before another Court
relating to the same subject property. Hence, it should be clarified that the present resolution is only
for the purpose of resolving the present Petition to surrender and/or cancellation of an owner's duplicate
copy with prayer for a writ of possession.

WHEREFORE, premises considered, the Demurrer to Evidence is GRANTED.

Accordingly, the instant case is dismissed.

No costs.

SO ORDERED.18 (Emphasis in the original; citations omitted)

Laverne moved to reconsider, but the trial court denied the motion in a July 30, 2015 Order. 19

Laverne filed an appeal before the CA which was docketed as CA-G.R. CV No. 105623. In a July 21,
2016 Resolution,20 the appellate court dismissed the same for non-filing of the required brief. Laverne
filed a motion for reconsideration but the CA denied the same in a January 27, 2017 Resolution. 21

Ruling of the Court of Appeals

Reverting to the instant case, Civil Case No. 07-1155, petitioners filed an original petition
for certioraribefore the CA questioning the March 29, 2012 and December 27, 2012 Orders of the Makati
RTC Branch 62. On July 22, 2013, the CA rendered the assailed Decision containing the following
pronouncement:

In view of the foregoing, herein petitioners come before this Court contending that the lower court
gravely abused its discretion in denying their Omnibus Motion.

We are not persuaded.

xxxx

[T]he trial court acted in the exercise of its sound judicial discretion in denying the motion of the
petitioners for the consolidation of LRC Case No. M-5237 with Civil Case No. 07-1155. The proceedings
in LRC Case No. M-5237 is not, strictly speaking, a judicial process and is a non-litigious proceeding; it
is summary in nature. In contrast, the action in Civil Case No. 07-1155 is an ordinary civil action and
adversarial in character. The rights of the respondent Laverne in LRC Case No. M-5237 would be
prejudiced if the said case were to be consolidated with Civil Case No. 07-1155, especially since it had
already adduced its evidence.

xxxx

In the same manner, it is the Court's opinion that it was within the sound discretion of the trial court
when it denied petitioners' motion to declare respondent Laverne in default. It is a hornbook rule that
default judgments are generally disfavored as long as no prejudice was caused to plaintiff.

xxxx

Clearly, there are three requirements which must be complied with by the claiming party before the
court may declare the defending party in default, to wit: (1) the claiming party must file a motion asking
the court to declare the defending party in default; (2) the defending party must be notified of the
motion to declare him in default; and (3) the claiming party must prove that the defending party has
failed to answer within the period provided by the Rule.

xxxx

Prior to the present rule on default introduced by the 1997 Rules of Civil Procedure, as amended, Section
1 of the former Rule 18 on default is silent on whether or not there is need for a notice of a motion to
declare defendant in default. The Supreme Court then ruled that there is no need. However, the
present rule expressly requires that the motion of the claiming party should be with notice
to the defending party. The purpose of a notice of a motion is to avoid surprises on the opposite party
and to give him time to study and meet the arguments. The notice of a motion is required when the
party has the right to resist the relief sought by the motion and principles of natural justice demand that
his right be not affected without an opportunity to be heard. Therefore, as the present rule on default
requires the filing of a motion and notice of such motion to the defending party, it is not enough that
the defendant failed to answer the complaint within the reglementary period to be a sufficient ground
for declaration in default. The motion must also be heard.

In the case at bench, it was precisely because of petitioners' failure to show any proof or affidavit of
personal service attesting the personal delivery to respondent Laverne of such Omnibus Motion to
Declare in Default x x x.

xxxx

WHEREFORE, premises considered, the instant petition is DENIED. Accordingly, the Orders dated
March 29, 2012 and December 27, 2012 of the Makati City Regional Trial Court, Branch 62 in Civil Case
No. 07-1155 are hereby AFFIRMED.

Costs against petitioners.

SO ORDERED.22 (Emphasis in the original; citations omitted)

Petitioners filed their motion for reconsideration, which was denied by the CA via its January 15, 2014
Resolution. Hence, the instant Petition.

Issues

The issues for resolution are:

1) Whether the CA committed reversible error in affirming the March 29, 2012, and December 27, 2012
Orders of the trial court, dismissing the complaint for annulment of sale in Civil Case No. 07-1155
considering the gross and inexcusable negligence of their erstwhile counsel which led to the dismissal
of their case and consequent deprivation of their property without due process of law.

2) Whether the CA erred in dismissing their petition for certiorari in CA-G.R. SP No. 128390 on the
ground of erroneous mode of appeal, despite the fact that their case for annulment of sale is meritorious
and thus should be decided on its merits rather than on technicalities.

Petitioners' Arguments

Praying that the assailed CA dispositions be set aside and that the case be remanded to the trial court
for consideration on its merits, petitioners essentially contend that their case deserves the Court's
attention, considering that the delinquency sale of their property was null and void for failure to observe
the procedure outlined in the LGC; that is, for lack of compliance with the LGC relative to the sending,
publication, and posting of the notice of tax delinquency, the service of the warrant of levy, and the
sending of billing statements; that the trial court dismissed Civil Case No. 07-1155 for their failure to
comply with the order for them to inform the trial court of the developments in their pending motion for
consolidation in LRC Case No. M- 5237, for which they may not be faulted, as it was the result of gross
and inexcusable negligence on the part of their counsel which could not bind them; that if the
incompetence, ignorance or inexperience of counsel is so great and the error committed is so serious
that the client, who otherwise has a good cause, is prejudiced and denied his day in court, the litigation
may be reopened to give the client another chance to present his case;23 that their case should be
decided on its merits rather than on technicalities, as they have been deprived of their property without
due process of law on account of the illegal sale of the same to Laverne; that the illegal sale of their
property amounts to an injustice; and that the dismissal of their petition before the CA due to an
erroneous mode of appeal and the gross negligence of their counsel is not commensurate with the illegal
deprivation of their property.

Respondents' Arguments

In its Comment,24 the City of Makati and Makati City Treasurer maintain that the mistake of petitioners'
counsel binds the latter, and that the CA committed no reversible error in affirming the trial court's
questioned orders, which were not arrived at with grave abuse of discretion.

On the other hand, Laverne argued in its Comment 25 that petitioners availed of the wrong remedy in
filing an original petition for certiorari instead of taking an ordinary appeal; that as stated in Section 3,
Rule 17 of the 1997 Rules, dismissal of the case shall have the effect of an adjudication on the merits,
which thus merits the remedy of an appeal; that since petitioners failed to appeal, the questioned orders
of the trial court attained finality; that Civil Case No. 07-1155 was dismissed not because of an
invalidated claim, a misdiagnosed argument, or a mistaken appreciation of fact, but due to petitioners'
repeated failure to comply with lawful orders of the trial court; that the right to appeal is not a natural
right but one allowed by statute and the exercise of which must be in accordance with the requisites of
law; and that for the foregoing reasons, the instant petition has no leg to stand on.

Our Ruling

The Petition must be granted.

The trial court's sole reason for dismissing Civil Case No. 07-1155 was petitioners' repeated failure to
comply with the trial court's orders for them to inform it of the developments in their motion for
consolidation filed before the Makati RTC Branch 148, in LRC Case No. M-5237. The trial court, per its
June 26, 2012 Order of dismissal, relied upon Section 3, Rule 17 of the 1997 Rules using as ground for
dismissal petitioners' repeated failure to comply with its directives to apprise it of the developments in
LRC Case No. M-5237.

However, with the developments in LRC Case No. M-5237, that is, its dismissal by the Makati RTC Branch
148 for lack of compliance with the LGC relative to the sending, publication, and posting of the notice
of tax delinquency, the service of the warrant of levy, and the sending of billing statements, and the
corresponding dismissal of respondent's appeal before the CA, it has become obvious that there is
nothing to consolidate with the case before Makati RTC Branch 62, or Civil Case No. 07-1155. There is
no more ground to compel petitioners to comply with the Makati RTC Branch 62's orders; they have
been overtaken by events. In other words, the mandate contained in those orders have lost relevance
and petitioners' repeated failure to comply could no longer be used as ground for dismissal of the case.

More importantly, with the disposition of the court in LRC Case No. M-5237, there is ground to believe
that the levy by the City of Makati and subsequent auction sale to Laverne should be annulled. Petitioners
are in danger of losing their property without benefit of due process of law owing to the apparently
irregular conduct by the City of Makati of proceedings relative to the levy and sale of their property.
In Genato Investments, Inc. v. Barrientos,26 a case which involved the very same respondent (Laverne)
in this case, this Court held that a buyer of real property, herein respondent Laverne, at a real property
tax delinquency sale conducted by the City of Caloocan did not acquire any valid right to petition the
trial court for the cancellation of the owner's title and take possession of the latter's property, on the
ground, among others, that the notice and warrant of levy were sent by the city to the wrong address
and the owner was thus never made aware of the levy and delinquency sale of its property by the city.
Thus, the Court held therein that –

Petitioner not only puts in question the complete lack of due process in the conduct of the auction sale
and the proceedings before the RTC Caloocan, but the absolute lack of basis for the declaration by the
Office of the City Treasurer that it had been delinquent in the payment of real property taxes due on its
property, particularly Lot 13-B-1.

Technicalities aside, we are particularly alarmed by the material allegations and serious charges brought
up by petitioner in its pleadings, which go into the very core of the action for annulment of judgment
and, more importantly, which none of the respondents dispute.

xxxx

It certainly is unallowable that petitioner be deprived of his property, or a portion thereof,

without any lawful court order or process. x x x

xxxx

As mentioned above, the Notice of Levy and Warrant of Levy, were sent to an inexistent office
of petitioner at Tondo, Manila and were, thus, returned unserved. Further, the Order dated 13
June 2011, setting the initial hearing on the petition, was neither posted nor properly served upon
petitioner. Clearly, petitioner was deprived of its property without due process of law. Inasmuch as it
had sufficiently shown that it fully paid its real estate taxes up to 2011, there was no basis to collect
any tax liability, and no obligation arose on the part of petitioner to pay the amount of real property
taxes sought to be collected. Consequently, petitioner should not have been declared delinquent in the
payment of the said taxes to Caloocan City, and the latter did not acquire any right to sell Lot 13-B-1 in
a public auction. Besides, it appears that private respondent acted hastily in filing LRC-Case No. C-5748
by failing to ascertain the actual principal office of petitioner to enable the RTC Caloocan to properly
acquire jurisdiction over the person of petitioner.

Considering the foregoing, private respondent did not acquire any valid right to petition the RTC
Caloocan for the cancellation of TCT No. 33341 and, more importantly, take possession of Lot 13-B-1,
much less Lot 1-A. We reiterate the principle that strict adherence to the statutes governing
tax sales is imperative, not only for the protection of the taxpayers, but also to allay any
possible suspicion of collusion between the buyer and the public officials called upon to
enforce the laws.27(Emphasis supplied; citations omitted)

The Court must protect private property owners from undue application of the law authorizing the levy
and sale of their properties for non-payment of the real property tax. This power of local government
units is prone to great abuse, in that owners of valuable real property are liable to lose them on account
of irregularities committed by these local government units or officials, done intentionally with the
collusion of third parties and with the deliberate unscrupulous intent to appropriate these valuable
properties for themselves and profit therefrom. These unscrupulous parties can commit a simple,
seemingly irrelevant technicality such as deliberately sending billing statements, notices of delinquency
and levy to wrong addresses under the guise of typographical lapses, as what happened here and in
the Genato Investments case, and then proceed with the levy and auction sale of these valuable
properties without the knowledge and consent of the owners. Before the owners realize it, their precious
properties have already been confiscated and sold by the local government units or officials to so-called
"innocent third parties" who are in fact their cohorts in the unscrupulous scheme. This is barefaced
robbery that the Court cannot sanction.

Having disposed of the case in the foregoing manner, the Court finds unnecessary to tackle the
procedural issues and the lapses committed by petitioners in the prosecution of their case. The public
interest involved here mandates that technicalities should take a backseat to the substantive issues.
There is a grave danger that taxpayers may unwittingly lose their real properties to unscrupulous local
government units, officials, or private individuals or entities as a result of an irregular application of the
LGC provisions authorizing the levy and delinquency sale of real property for non-payment of the real
property tax. This is a reality that cannot be ignored. For this reason, the Court must excuse petitioners
for their procedural lapses, as it must address instead the issue of irregular conduct of levies and
delinquency sales of real properties for non-payment of the real property tax, which is alarming
considering that of the two cases that this Court is made aware of, there appears to be one common
denominator, and that is the respondent herein, Laverne Realty and Development Corporation. Needless
to state, petitioners are liable to lose their property without due process of law to Laverne which was
previously involved in an irregular sale conducted under similar circumstances.

The Court constantly warns of the possible abuse of this taxing power. The premise is that no
presumption of regularity exists in any administrative action which results in depriving a taxpayer of his
property; due process of law must be followed in tax proceedings, because a sale of land for tax
delinquency is in derogation of private property and the registered owner's constitutional rights.

The public auction of land to satisfy delinquency in the payment of real estate tax derogates or impinges
on property rights and due process. Thus, the steps prescribed by law are mandatory and must be
strictly followed; if not, the sale of the real property is invalid and does not make its purchaser the new
owner. Strict adherence to the statutes governing tax sales is imperative not only for the protection of
the taxpayers, but also to allay any possible suspicion of collusion between the buyer and the public
officials called upon to enforce the laws.28

Under Section 254 of the LGC, it is required that the notice of delinquency must be posted at the main
hall and in a publicly accessible and conspicuous place in each barangay of the local government unit
concerned. It shall also be published once a week for two (2) consecutive weeks, in a newspaper of
general circulation in the province, city, or municipality.

Section 258 of the LGC further requires that should the treasurer issue a warrant of levy, the same shall
be mailed to or served upon the delinquent owner of the real property or person having legal interest
therein, or in case he is out of the country or cannot be located, the administrator or occupant of the
property. At the same time, the written notice of the levy with the attached warrant shall be mailed to
or served upon the assessor and the Registrar of Deeds of the province, city or municipality within the
Metropolitan Manila Area where the property is located, who shall annotate the levy on the tax
declaration and certificate of title of the property, respectively.

Section 260 of the LGC also mandates that within thirty (30) days after service of the warrant of levy,
the local treasurer shall proceed to publicly advertise for sale or auction the property or a usable portion
thereof as may be necessary to satisfy the tax delinquency and expenses of sale. Such advertisement
shall be effected by posting a notice at the main entrance of the provincial, city or municipal building,
and in a publicly accessible and conspicuous place in the barangay where the real property is located,
and by publication once a week for two (2) weeks in a newspaper of general circulation in the province,
city or municipality where the property is located.

Respondent utterly failed to show compliance with the aforestated requirements. First, no evidence was
adduced to prove that the notice of levy was ever received by the CSDC. There was no proof either that
such notice was served on the occupant of the property. It is essential that there be an actual notice to
the delinquent taxpayer, otherwise, the sale is null and void although preceded by proper advertisement
or publication. This proceeds from the principle of administrative proceedings for the sale of private
lands for non-payment of taxes being in personam.

Second, the notice of tax delinquency was not proven to have been posted at the Makati City Hall and
in Barangay Dasmariñas, Makati City, where the property is located. It was not proven either that the
required advertisements were effected in accordance with law. x x x

xxxx
Respondent must be reminded that the requirements for a tax delinquency sale under the LGC are
mandatory. Strict adherence to the statutes governing tax sales is imperative not only for the protection
of the taxpayers, but also to allay any possible suspicion of collusion between the buyer and the public
officials called upon to enforce the laws. Particularly, the notice of sale to the delinquent land owners
and to the public in general is an essential and indispensable requirement of law, the non-fulfilment of
which vitiates the sale. Thus, the holding of a tax sale despite the absence of the requisite notice, as in
this case, is tantamount to a violation of the delinquent taxpayer's substantial right to due process.29

We cannot overemphasize that strict adherence to the statutes governing tax sales is imperative not
only for the protection of the taxpayers, but also to allay any possible suspicion of collusion between
the buyer and the public officials called upon to enforce the laws. Notice of sale to the delinquent land
owners and to the public in general is an essential and indispensable requirement of law, the non-
fulfillment of which vitiates the sale. Thus, the holding of a tax sale despite the absence of the requisite
notice is tantamount to a violation of delinquent taxpayer's substantial right to due process.
Administrative proceedings for the sale of private lands for nonpayment of taxes being in personam, it
is essential that there be actual notice to the delinquent taxpayer, otherwise the sale is null and void
although preceded by proper advertisement or publication.

xxxx

There can be no presumption of the regularity of any administrative action which results in depriving a
taxpayer of his property through a tax sale. This is an exception to the rule that administrative
proceedings are presumed to be regular. x x x

xxxx

As the tax sale was null and void, the title of the buyer therein (Mr. Puzon) was also null and void x x
x.30

The procedural faults committed by petitioners no longer deserve consideration. Their choice of remedy
is irrelevant given the spectre of patent illegality that surrounds the levy and sale of petitioners' property
by the City of Makati to Laverne. A fundamental characteristic of void or inexistent contracts is that the
action for the declaration of their inexistence does not prescribe; 31 nor may the right to set up the
defense of their inexistence or absolute nullity be waived or renounced. Void contracts are equivalent
to nothing and are absolutely wanting in civil effects; they cannot be validated either by ratification or
prescription.

On the other hand, the court trying Civil Case No. 07-1155 is admonished to tread carefully and choose
its actions with deliberate thought and consideration in light of the above disquisition. It would not have
arrived at the conclusion it did if it placed petitioners' substantive rights ahead of the convenience of
procedural rules. It is not beholden to the City of Makati, where its court sits; justice and truth are its
only masters.

WHEREFORE, the Petition is GRANTED. The July 22, 2013 Decision and January 15, 2014 Resolution
of the Court of Appeals in CA-G.R. SP No. 128390 are REVERSED AND SET ASIDE. The June 26, 2012
and December 27, 2012 Orders of the Regional Trial Court of Makati City, Branch 62 in Civil Case No.
07-1155 are likewise REVERSED AND SET ASIDE, except for its ruling denying petitioners' motion to
declare Laverne in default, which remains.

Civil Case No. 07-1155 is hereby REINSTATED and the Regional Trial Court of Makati City, Branch. 62
is ordered to continue with the proceedings therein with dispatch.

SO ORDERED.

Leonardo-De Castro, C.J., (Chairperson), Bersamin, and Jardeleza JJ., concur.

Tijam, J., on official leave.
THIRD DIVISION

G.R. No. 210736, September 05, 2018

HERARC CORPORATION, REALTY Petitioner, v. THE PROVINCIAL TREASURER OF BATANGAS,

THE PROVINCIAL ASSESSOR OF BATANGAS, THE MUNICIPAL ASSESSOR AND MUNICIPAL
TREASURER OF CALATAGAN, BATANGAS, DR. RAFAEL A. MANALO, GRACE OLIVA, AND FREIDA
RIVERA YAP, Respondent.

DECISION

PERALTA, J.:

This petition for review on certiorari under Rule 45 of the Rules of Court (Rules) seeks to reverse and
set aside the November 18, 2013 Decision1 and January 7, 2014 Resolution2 of the Regional Trial
Court (RTC), Branch 8, Pallocan West, Batangas City in Civil Case No. 9428, which held that petitioner
Herarc Realty Corporation is liable to pay the deficiency real property tax for the years 2007, 2008, and
January to August 12, 2009.

Stripped of non-essentials, the facts of the present controversy are simple and undisputed.

Upon acquisition via execution sale in August 2004, thirteen ( 13) parcels of land located in Sta. Ana,
Calatagan, Batangas are registered since 2006 in the name of petitioner Herarc Realty Corporation
under Transfer Certificate of Title (TCT) Nos. T-105907 to T-105919 (subject property). From March 2,
2006 up to August 12, 2009, the Subject Property had been in actual possession of private respondents
Dr. Rafael A. Manalo, Grace Oliva, and Freida Rivera Yap in their capacity as assignees in an involuntary
insolvency proceeding against the Spouses Rosario and Saturnino Baladjay pending before the
Muntinlupa City RTC Br. 204.3 It was only on August 13, 2009 that petitioner was able to take full
possession and control of the subject property by virtue of the July 31, 2009 Order of the Makati City
RTC Br. 56 granting the issuance of a writ of execution, which, in tum, was based on the final and
executory Decision of the Court of Appeals in CA G.R. SP Nos. 93818 and 93823.4

In a letter dated October 9, 2012, public respondent Provincial Treasurer of Batangas sent to petitioner
a Statement of Real Property Tax (RPT) Liabilities to collect the amount of P8,093,256.89, which
included the unpaid RPT on the subject property for 2007, 2008, and January to August 2009 (covered
period).5The demand was reiterated in letters dated October 23, 2012 and November 21, 2012.6

The assessment was paid under protest on November 20, 2012.7 Less than a month after, petitioner
filed a petition for prohibition and mandamus8 against respondents, praying the trial court to:

i. [declare], as null and void, the assessments for unpaid real property taxes made against
Petitioner Herarc over the Subject Property for the years 2007, 2008 until 12 August
2009;

ii. [declare], the questioned assessments to be chargeable against Dr. Rafael Manalo, et
al., they being in possession of the Subject Property [during] the [Covered] Period;

iii. [require] Public Respondents to issue the corresponding tax clearances in favor of
Petitioner Herarc for the Subject Property over the period beginning 2007 up to 2012;
and
 iv. [require] Public Respondents to refund Petitioner Herarc of whatever amount it has paid
under protest that is in excess of the real property taxes legally chargeable against
Petitioner Herarc .9

For petitioner, the RPT assessment is illegal and erroneous, because the subject property was not in its
possession during the covered period. Citing Testate Estate of Concordia T. Lim v. City of
Manila10 andGovernment Service Insurance System v. City Treasurer and City Assessor of the City of
Manila,11 which ruled that unpaid tax is chargeable against the taxable person who had actual or
beneficial use and possession of it regardless of whether or not he is the owner, it contended that private
respondents should be the one charged therefor as they had its actual or beneficial use and possession
at the time.

On November 18, 2013, the RTC denied the petition. In ruling that petitioner is liable to pay the RPT for
the covered period, it held:
While it may be true that[,] as stated by the Honorable Supreme Court[,] the unpaid tax attaches to
the property and is chargeable against the taxable person who had actual or beneficial use and
possession of it regardless of whether or not he is the owner, it does not follow that the position of the
Provincial Treasurer does not [hold] true. The doctrine laid down by the Honorable Supreme Court as
mentioned by the [herein] Petitioner to substantiate one's position has been predicated on the theory
that the registered owner is a tax exempt entity.

In this case under consideration[,] the registered owner is a juridical person subject to tax. Logic dictates
that the pronouncement made by the Supreme Court in the two case[s] quoted by Herarc Realty
Corporation is not applicable in this case under consideration.

An entity not exempt from payment of taxes must be responsible for the payment of the deficiency
taxes under the theory that unpaid taxes attach to the land. This may be the reason why the doctrine
of beneficial user of the property owned by tax exempt entity must be answerable for the payment of
real property taxes on the real estate property owned by tax exempt entity.

It may be appropriate to state that this rule of law has been modified in the case of City of Pasig versus
Republic of the Philippines, G.R. No. 185023, August 24, 2011[.] The Highest Magistrate of the Land
made a pronouncement - In sum, only those portions of the properties leased to taxable entities are
subject to real estate tax for the period of such leases. Pasig City must, therefore, issue to respondent
new real property tax assessments covering the portions of the properties leased to taxable entities. If
the Republic of the Philippines fails to pay the real property tax on the portions of the properties leased
to taxable entities, then such portions may be sold at public auction to satisfy the tax delinquency.

An [in-depth] examination of the doctrine of the Premier Magistrate of the Philippines in the case of
Pasig versus Republic of the Philippines cited above, the owner of the real estate property must be the
one who would be responsible for the payment of real property tax if the

beneficial user failed to pay the required real property tax. It goes without saying that the Petition filed
by Herarc Realty Corporation has to be denied.12
When its motion for reconsideration was denied on January 7, 2014, petitioner directly filed before Us
a Rule 45 petition.

We deny.

Petitioner's direct recourse to the RTC is warranted since the issue of the legality or validity of the
assessment is a question of law.13 However, as a taxpayer not satisfied with the RTC decision, it should
have filed a petition for review before the Court of Tax Appeals (CTA).14 The decision, ruling or resolution
of the CTA, sitting as Division, may further be reviewed by the CTA En Banc. 15 It is only after this
procedure has been exhausted that the case may be elevated to this Court.

Under Section 7 (a) (3) of Republic Act (R.A.) No. 9282,16 the appellate jurisdiction of the C TA over
decisions, orders, or resolutions of the RTC becomes operative when the latter has ruled on a local tax
case, i.e., one which is in the nature of a tax case or which primarily involves a tax issue. 17 Local tax
cases include those involving RPT, which is governed by Book II, Title II of R.A No. 7160, or Local
Government Code (LGC) of 1991.18 Among the possible issues are the legality or validity of the RPT
assessment; protests of assessments; disputed assessments, surcharges, or penalties; legality or
validity of a tax ordinance; claims for tax refund/credit; claims for tax exemption; actions to collect the
tax due; and even prescription of assessments.19

Evidently, petitioner erred in its appeal. If the taxpayer fails to appeal in due course, the right of the
local government to collect the taxes due with respect to the property becomes absolute upon the
expiration of the period to appeal.20 The assessment becomes final, executory and demandable,
precluding the taxpayer from assailing the legality/validity (or reasonableness/correctness) of the
assessment.21

Time and again, the Court stresses that perfection of an appeal in the manner and within the period
permitted by law is mandatory and jurisdictional such that failure to do so renders the judgment of the
court final and executory.22 The right to appeal is a statutory right, not a natural nor a constitutional
right. The party who intends to appeal must comply with the procedures and rules governing appeals;
otherwise, the right of appeal may be lost or squandered. 23

Even if this case is resolved on its substantive merit, the disposition remains the same. As the RTC
correctly opined, in real estate taxation, the unpaid tax attaches to the property.24 The personal liability
for the tax delinquency is generally on whoever is the owner of the real property at the time the tax
accrues.25 This is a necessary consequence that proceeds from the fact of ownership. 26 Nonetheless,
where the tax liability is imposed on the beneficial use of the real property, such as those owned but
leased to private persons or entities by the government, or when the assessment is made on the basis
of the actual use thereof, the personal liability is on any person who has such beneficial or actual use at
the time of the accrual of the tax.27 Beneficial use means that the person or entity has the use and
possession of the property.28 Actual use refers to the purpose for which the property is principally or
predominantly utilized by the person in possession thereof. 29

As a general rule, real properties are subject to the RPT since the LGC has withdrawn exemptions from
real property taxes of all persons, whether natural or juridical.30 Entities may be exempt from payment
of the RPT if their charters, which were enacted or reenacted after the effectivity of the LGC, exempt
them payment of the RPT.31 Likewise, exceptions to the rule are provided in Section 133(o) 32 of the
LGC, which states that local government units have no power to levy taxes of any kind on the national
government, its agencies and instrumentalities and local government units. Particularly on the RPT,
Section 23433 enumerates the persons and real property exempt therefrom. The tax exemption of real
property owned by the Republic, its political subdivisions, agencies or instrumentalities carries, however,
ceases if the beneficial use of the real property has been granted, for a consideration or otherwise, to a
taxable person. In such case, the corresponding liability for the payment of the RPT devolves on the
taxable beneficial user.34 As applied in subsequent cases,35 it is in this context that our ruling in Testate
Estate of Concordia T. Lim36 should be understood. Moreover, in said case, the taxpayer that was being
assessed with the unpaid RPT was neither the registered owner nor the possessor of the subject property
when the tax became due and demandable. In contrast, petitioner herein, an entity that is not tax
exempt under the law, is the registered owner of the real property. Therefore, it is personally liable for
the RPT at the time it accrued.

WHEREFORE, premises considered, the petition for review on certiorari under Rule 45 of the Rules of
Court, which seeks to reverse and set aside the November 18, 2013 Decision and January 7, 2014
Resolution of the Regional Trial Court, Branch 8, Pallocan West, Batangas City, is DENIED.

SO ORDERED.

Leonen, Gesmundo, Reyes, A., Jr. and Reyes, J., Jr. JJ., concur.

THIRD DIVISION
G.R. No. 206362, August 01, 2018

RHOMBUS ENERGY, INC., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

BERSAMIN, J.:

At issue is whether or not the taxpayer is barred by the irrevocability rule in claiming for the refund of
its excess and/or unutilized creditable withholding tax.

The Case

This appeal assails the decision promulgated on October 11, 2012 in CTA EB Case No. 803, 1 whereby
the Court of Tax Appeals En Banc (CTA En Banc) reversed and set aside the decision dated March 23,
2011 of the CTA First Division granting the c1aim for refund of excess and/or unutilized creditable
withholding tax in the total amount of P1,500,653.00 filed by Rhombus Energy, Inc. (Rhombus).2

Antecedents

The factual and procedural antecedents are synthesized by the CTA En Banc in its assailed decision as
follows:
Records show that from October 1998 to July 2007, respondent was registered with and was under the
jurisdiction of Revenue Region No. 8, Revenue District Office ("RDO") No. 50 (South Makati) of the BIR
with Taxpayer Identification No. 005-650-790-000. However, due to respondent's change of address
from Suite 1402, BDO Plaza, 8737 Paseo de Roxas, Salcedo Village, Makati City to Suite 208, 2nd Floor,
the Manila Bank Corporation Condominium Building, 6772 Ayala Avenue, Makati City, respondent filed
an application for change of home RDO.

Thus, on July 18, 2007, respondent was transferred to the jurisdiction of RDO No. 47, with Certificate
of Registration No. OCN9RC0000211342.

In the meantime, on April 17, 2006, respondent filed its Annual Income Tax Return ("ITR") for taxable
year 2005, detailed, as follows:

Sales/Revenues/Receipts/Fees
P59,551,116.00
Less: Cost of Sales
22,351,923.00
Gross Income from Operations
37,199,193.00
Add: Non-Operating and Other Income
209,320,181.00
Gross Income
P246,519,374.00
Less: Deductions
144,421,350.00
Taxable Income
P102,098,024.00
Income Tax
33,181,858.00
Less: Prior year's Excess Credits
P0.00
Tax Payments for the First 3 Quarters
6,159,215.00
Creditable Tax Withheld for the 1st 3 Quarters
28,523,296.00
Total Tax Credits/Payments
P34,682,511.00
Tax Payable/(Overpayment)
1,500,653.00

In said Annual ITR for taxable year 2005, respondent indicated that its excess creditable withholding
tax ("CWT") for the year 2005 was "To be refunded".

On May 29, 2006, respondent filed its Quarterly Income Tax Return for the first qumicr of taxable year
2006 showing prior year's excess credits of P1,500.653.00.

On August 25, 2006, respondent filed its Quarterly Income Tax Return for the second quarter of taxable
year 2006 showing prior year's excess credits of P1,500,653.00.

On November 27, 2006, respondent filed its Quarterly Income Tax Return for the third quarter of taxable
year 2006 showing prior year's excess credits of P1,500,653.00.

On December 29, 2006, respondent filed with the Revenue Region No. 8 an administrative claim for
refund of its alleged excess/unutilized CWT for the year 2005 in the amount of P1,500,653.00.

On April 2, 2007, respondent filed its Annual Income Tax Return for taxable year 2006 showing prior
year's excess credits of P0.00.

On December 7, 2007, pending petitioner's action on respondent's claim for refund or issuance of a tax
credit certificate of its excess/unutilized CWT for the year 2005 and before the lapse of the period for
filing an appeal, respondent filed the instant Petition for Review.

In her Answer, by way of special and affirmative defenses, the CIR alleged: assuming without admitting
that respondent filed a claim for refund, the same is subject to investigation by the BIR; respondent
failed to demonstrate that the tax was erroneously or illegally collected; taxes paid and collected are
presumed to have been made in accordance with laws and regulations, hence, not refundable; it is
incumbent upon respondent to show that it has complied with the provisions of Section 204(C), in
relation to Section 229 of the Tax Code, as amended, upon which its claim for refund was premised; in
an action for tax refund the burden is upon the taxpayer to prove that he is entitled thereto, and failure
to discharge said burden is fatal to the claim; and claims for refund are construed strictly against the
claimant, as the same partake of the nature of exemption from taxation.

After trial on the merits, on March 23, 2011, the First Division rendered the assailed Decision granting
the Petition for Review.

On April 14, 2011, petitioner CIR filed a "Motion for Reconsideration", which was denied for lack of merit
by the First Division in a Resolution dated June 30, 2011.

Not satisfied, petitioner CIR filed the instant Petition for Review x x x.3
Decision of the CTA En Banc

Citing Commissioner of Internal Revenue v. Mirant (Philippines) Operations, Corporation,4 the CTA En
Banc reversed and set aside the decision dated March 23, 2011 of the CTA First Division, explaining and
holding thusly:
x x x Section 76 is clear and unequivocal. Once the carry-over option is taken, actually or constructively,
it becomes irrevocable. It mentioned no exception or qualification to the irrevocability rule
(Commissioner of Internal Revenue vs. Bank of the Philippine Islands 592 SCRA 231). Hence, the
controlling faCtor for the operation of the irrevocability rule is that the taxpayer chose an option; and
once it had already done so, it could no longer make another one. Consequently, after the taxpayer opts
to carry-over its excess tax credit to the following taxable period, the question of whether or not it
actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997 is explicit in stating
that once the option to carry over has been made[,] no application for tax refund or issuance of a tax
credit certificate shall be allowed therefor' (supra).

Applying the foregoing rulings to the instant case, considering that petitioner opted to carry-over its
unutilized creditable withholding tax of P1,500,653.00 for taxable year 2005 to the first, second and
third quarters of taxable year 2006 when it had actually carried-over said excess creditable withholding
tax to the first, second and third quarters in its Quarterly Income Tax Returns for taxable year 2006,
said option to carryover becomes irrevocable. Petitioner's act of reporting in its Annual Income Tax
Return for taxable year 2006 of prior year's excess credits other than MCIT as 0.00, will not change the
fact that petitioner had already opted the carry-over option in its first, second and third quarters
Quarterly Income Tax Returns for taxable year 2006, and said choice is irrevocable. As previously
mentioned, whether or not petitioner actually gets to apply said excess tax credit is irrelevant and would
not change the carry-over option already made.

Thus, the present petition praying for refund or issuance of a TCC of its unutilized creditable withholding
tax for taxable year 2005 in the amount of P1,500,653.00 must perforce be denied in view of the
irrevocability rule on carry-over option of unutilized creditable withholding tax.

WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED. Accordingly,
the Decision of the First Division dated March 23, 2011 and Resolution dated June 30, 2011 are
hereby REVERSED and SET ASIDE, and another one is hereby entered DISMISSING the Petition for
Review filed in C.T.A. Case No. 7711.

SO ORDERED.5
On March 13, 2013, the CTA En Banc denied Rhombus' motion for reconsideration.6

Hence, Rhombus appeals to resolve whether or not it has proved its entitlement to the refund.

Ruling of the Court

The appeal is meritorious.

The irrevocability rule is enunciated m Section 76 of the National Internal Revenue Code (NIRC), viz.:
Section 76. Final Adjusted Return. - Every corporation liable to tax under Section 27 shall file a final
adjustment return covering the total taxable income for the preceding calendar of fiscal year. If the sum
of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the
entire taxable income of that year, the corporation shall either:

(A) Pay the balance of the tax still due; or

(B) Carry over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income
taxes paid, the excess amount shown on its final adjustment return may be carried over and credited
against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable
years. Once the option to carry over and apply the excess quarterly income tax against income
tax due for the taxable years of the succeeding taxable years has been made, such option
shall be considered irrevocable for that taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed therefor. (Bold underscoring supplied to
highlight the relevant portion)
The application of the irrevocability rule is explained in Republic v. Team (Phils.) Energy Corporation
(formerly Mirant [Phils.] Energy Corporation,7 where the Court stated:
In Commissioner of Internal Revenue v. Bank of the Philippine Isands, the Court, citing the
pronouncement in Philam Asset Management, Inc., points out that Section 76 of the NIRC of 1997 is
clear and unequivocal in providing that the carry-over option, once actually or constructively chosen by
a corporate taxpayer, becomes irrevocable. The Court explains:
Hence, the controlling factor for the operation of the irrevocability rule is that the taxpayer chose an
option; and once it had already done so, it could no longer make another one. Consequently, after the
taxpayer opts to carry-over its excess tax credit to the following taxable period, the question of whether
or not it actually gets to apply said tax credit is irrelevant. Section 76 of the NIRC of 1997 is explicit in
stating that once the option to carry over has been made, "no application for tax refund or issuance of
a tax credit certificate shall be allowed therefor."

The last sentence of Section 76 of the NIRC of 1997 reads: "Once the option to carry-over and apply
the excess quarterly income tax against income tax due for the taxable quarters of the succeeding
taxable years has been made, such option shall be considered irrevocable for that taxable
period and no application for tax refund or issuance of a tax credit certificate shall be allowed therefor."
The phrase "for that taxable period" merely identifies the excess income tax, subject of the option, by
referring to the taxable period when it was acquired by the taxpayer. In the present case, the excess
income tax credit, which BPI opted to carry over, was acquired by the said bank during the taxable year
1998. The option of BPI to carry over its 1998 excess income tax credit is irrevocable; it cannot later on
opt to apply for a refund of the very same 1998 excess income tax credit.

The Court of Appeals mistakenly understood the phrase "for that taxable period" as a prescriptive period
for the irrevocability rule. This would mean that since the tax credit in this case was acquired in 1998,
and BPI opted to carry it over to 1999, then the irrevocability of the option to carry over expired by the
end of 1999, leaving BPI free to again take another option as regards its 1998 excess income tax credit.
This construal effectively renders nugatory the irrevocability rule. The evident intent of the legislature,
in adding the last sentence to Section 76 of the NIRC of 1997, is to keep the taxpayer from flip-flopping
on its options, and avoid confusion and complication as regards said taxpayer's excess tax credit. The
interpretation of the Court of Appeals only delays the flip-flopping to the end of each succeeding taxable
period.

The Court similarly disagrees in the declaration of the Court of Appeals that to deny the claim for refund
of BPI, because of the irrevocability rule, would be tantamount to unjust enrichment on the part of the
government. The Court addressed the very same argument in Philam, where it elucidated that there
would be no unjust enrichment in the event of denial of the claim for refund under such circumstances,
because there would be no forfeiture of any amount in favor of the government. The amount being
claimed as a refund would remain in the account of the taxpayer until utilized in succeeding taxable
years, as provided in Section 76 of the NIRC of 1997. It is worthy to note that unlike the option for
refund of excess income tax, which prescribes after two years from the filing of the FAR, there is no
prescriptive period tor the carrying over of the same. Therefore, the excess income tax credit of BPI,
which it acquired in 1998 and opted to carry over, may be repeatedly carried over to succeeding taxable
years, i.e., to 1999, 2000, 2001, and so on and so forth, until actually applied or credited to a tax
liability of BPI.8
The CTA First Division duly noted the exercise of the option by Rhombus in the following manner:
The evidence on record shows that petitioner clearly signified its intention to be refunded of its
excess creditable tax withheld for calendar year 2005 in its Annual ITR for the said year.
Petitioner under Line 31 of the said ITR marked "x" on the box "To be refunded". Moreover,
petitioner's 2006 and 2007 Annual ITRs do not have any entries in Line 28A "Prior Year's Excess Credits"
which only prove that petitioner did not carry-over its 2005 excess/unutilized creditable withholding tax
to the succeeding taxable years or quarters.9 (Bold underscoring is supplied for emphasis)
Although the CTA En Banc recognized that Rhombus had actually exercised the option to be refunded,
it nonetheless maintained that Rhombus was not entitled to the refund for having reported the prior
year's excess credits in its quarterly ITRs for the year 2006, viz.:
Based on the records, it is clear that respondent marked the box "To be refunded" in its
Annual Income Tax Return. It is also clear that the 2005 excess CWT were included in the prior year's
excess credits reported in the 2006 Quarter ITRs. The 2006 Annual ITR did not reflect the 2005 excess
CWT in the prior year's excess credits.10(Emphasis supplied)
The CTA En Banc thereby misappreciated the fact that Rhombus had already exercised the option for its
unutilized creditable withholding tax for the year 2005 to be refunded when it filed its annual ITR for
the taxable year ending December 31, 2005. Based on the disquisition in Republic v. Team (Phils.)
Energy Corporation, supra, the irrevocability rule took effect when the option was exercised. In the case
of Rhombus, therefore, its marking of the box "To be refunded" in its 2005 annual ITR constituted its
exercise of the option, and from then onwards Rhombus became precluded from carrying-over the
excess creditable withholding tax. The fact that the prior year's excess credits were reported in its 2006
quarterly ITRs did not reverse the option to be refunded exercised in its 2005 annual ITR. As such, the
CTA En Banc erred in applying the irrevocability rule against Rhombus.

It is relevant to mention the requisites for entitlement to the refund as listed in Republic v. Team (Phils.)
Energy Corporation, supra,11 to wit:

1. That the claim for refund was filed within the two-year reglementary period pursuant to
Section 229 of the NIRC;

2. When it is shown on the ITR that the income payment received is being declared part of
the taxpayer's gross income; and

3. When the fact of withholding is established by a copy of the withholding tax statement,
duly issued by the payor to the payee, showing the amount paid and income tax withheld
from that amount.

Finding that Rhombus n:et the foregoing requisites based on its examination of the documents
submitted, the CTA First Division rendered the following findings:
x x x [P]etitioner filed its Annual ITR for the year 2005 on April 17, 2006. Counting from the said date,
petitioner had until April 17, 2008, within which to file both its administrative and judicial claim for
refund or issuance of a tax credit certificate. Clearly, petitioner's administrative claim filed on December
29, 2006 and judicial claim via the instant Petition for Review filed on December 07, 2007, were within
the two-year prescriptive limit.

To comply with the second requisite, petitioner presented Certificates of Creditable Tax Withheld at
Source issued by its sole customer Distileria Bago, Inc., a wholly owned subsidiary of La Tondeña, Inc.
(now Ginebra San Miguel, Inc.). The details of the said certificates are summarized as follows:

x x x x

To show compliance with the third requisite that petitioner declared in its return the income related to
the creditable withholding taxes of Php28,523,295.45, it presented the following documents:

1. Annual Income tax Return for the year ended December 31, 2005 with attached audited
financial statements and Account Information Form marked as Exhibit "B";

2. Certificates of Creditable Tax Withheld at Source issued to petitioner for the first three
quarters of taxable year 2005 marked as Exhibits "J", "Y", "L" and "K";

3. Summary of invoices issued for taxable year 2005 marked as Exhibit "M"; and

4. The sales invoices issued for taxable year 2005 marked as Exhibits "O-1" to "O-14".

The withholding tax certificates reveal that the creditable income taxes of Php28,523,295.45 were
withheld from petitioner's energy service fees of Php9,313,272.54 and from the sale of its generation
facility amounting to Php472,283,838.00. The energy fees paid by Distileria Bago, Inc. in the amount
of Php9,313,272.54 from which creditable withholding tax in the aggregate amount of Php186,265.45
was withheld was reported by petitioner as part of its "Sales/Revenues/Receipts/Fees" amounting to
Php59,551,116.00 in Item No. 15A of its 2005 Annual ITR.

As regards the income from the sale of power generation facility in the amount of Php472,283,838.00
from which the amount of Php28,337,030.00 creditable withholding tax was withheld, petitioner
reported a gain of only Php209,320,181.00 as appearing under Item 18B (Non-Operating and Other
Income) of petitioner's Annual ITR marked as Exhibit B. There was nothing fallacious in doing so for
petitioner could deduct valid cost (i.e. Book Value of the asset) from the selling price to arrive at the
amount of "Non-operating and Other Income" to be reported in its 2005 Annual ITR.12
The members of the CTA First Division were in the best position as trial judges to examine the documents
submitted in relation thereto,13 and to make the proper findings thereon. Given their expertise on the
matter, we accord weight and respect to their finding that Rhombus had satisfied the requirements for
its claim for refund of its excess creditable withholding taxes for the year 2005.

WHEREFORE, the Court REVERSES and SETS ASIDE the decision promulgated on October 11, 2012
and the resolution issued on March 13, 2013 by the Court of Tax Appeals En Banc in CTA EB Case No.
803; REINSTATES the decision rendered on March 23, 2011 and the resolution issued on June 30,
2011 by the Court of Tax Appeals, First Division, in CTA Case No. 7711; and DIRECTS the Commissioner
of the Bureau of Internal Revenue to refund to or to issue a tax credit certificate in favor of petitioner
Rhombus Energy, Inc. in the amount of P1,500,653.00 representing excess creditable withholding tax
for the year 2005.

No pronouncement on costs of suit.

SO ORDERED.

Velasco, Jr., Leonen, and Gesmundo, JJ., concur.

Martires, J., on leave.

August 9, 2018

NOTICE OF JUDGMENT

Sirs / Mesdames:

Please take notice that on August 1, 2018 a Decision, copy attached hereto, was rendered by the
Supreme Court in the above-entitled case, the original of which was received by this Office on August
9, 2018 at 11:02 a.m.

Very truly yours,

(SGD)

WILFREDO V. LAPITAN

Division Clerk of Court

THIRD DIVISION

G.R. No. 203249, July 23, 2018

SAN ROQUE POWER CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondent.
DECISION

MARTIRES, J.:

The application of the 120-day and 30-day periods provided in Section 112 (D) [later renumbered as
Section 112 (C)] of the National Internal Revenue Code (NIRC) is at the heart of the present case.

In Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc. (Aichi), 1 the Court
considered whether the simultaneous filing of both the administrative claim (before the Bureau of
Internal Revenue [BIR]) and judicial claim (before the Court of Tax Appeals [CTA]) for refund/credit of
input VAT under the cited law is permissible. In that case, the respondent asserted that the non-
observance of the 120-day period is not fatal to the filing of a judicial claim as long as both the
administrative and the judicial claims are filed within the two-year prescriptive period. We held that the
premature filing of respondent's claim for refund/credit before the CTA warrants a dismissal inasmuch
as no jurisdiction was acquired by that court.

In the case before us, San Roque Power Corporation (petitioner) brought its judicial claims before the
CTA prior to the promulgation of the Aichi ruling. Yet, the lower court (CTA En Banc) dismissed the
petitioner's judicial claims on the ground of prematurity, a decision that happily coincided with the
Court's ruling in Aichi. In its petition, San Roque Power Corporation rues the retroactive application
of Aichi to taxpayers who merely relied on the alleged prevailing rule of procedure antecedent
to Aichi that allowed the filing of judicial claims before the expiration of the 120-day period.

We hold that there is no established precedence prior to Aichi that permits the simultaneous filing of
administrative and judicial claims for refund/credit under Section 112 of the NIRC. Nonetheless, we
concede that the CTA has jurisdiction over the claims in this case in view of our pronouncement
in Commissioner of Internal Revenue v. San Roque Power Corporation (San Roque). 2 In said case, the
Court, while upholding Aichi, recognized an exception to the mandatory and jurisdictional character of
the 120-day period: taxpayers who relied on BIR Ruling DA-489-03, issued on 10 December 2003, until
its reversal in Aichi on 6 October 2010, are shielded from the vice of prematurity. The said ruling
expressly stated that "a taxpayer-claimant need not wait for the lapse of the 120-day period before it
could seek judicial relief with the CTA by way of a Petition for Review."

THE FACTS

This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the 4 April 2012
Decision3 of the CTA En Banc in CTA EB No. 657. The CTA En Banc dismissed the petitioner's judicial
claims on the ground of prematurity, thus, setting aside the CTA Second Division's partial grant of the
refund claims in the consolidated CTA Case Nos. 7424 and 7492. In the subsequent 17 August 2012
Resolution4 of the CTA En Banc, the court a quo denied the petitioner's motion for reconsideration.

The Antecedents

San Roque Power Corporation is a VAT-registered taxpayer which was granted by the BIR a zero-rating
on its sales of electricity to National Power Corporation (NPC) effective 14 January 2004, up to 31
December 2004.5

On 22 December 2005 and 27 February 2006, the petitioner filed two separate administrative claims
for refund of its alleged unutilized input tax for the period 1 January 2004 up to 31 March 2004, and 1
April 2004 up to 31 December 2004, respectively. 6

Due to the inaction of respondent CIR, the petitioner filed petitions for review before the CTA (raffled to
the Second Division): (1) on 30 March 2006, for its unutilized input VAT for the period 1 January 2004
to 31 March 2004, amounting to P17,017,648.31, docketed as CTA Case No. 7424; and (2) on 20 June
2006, for the unutilized input VAT for the period 1 April 2004 to 31 December 2004, amounting to
P14,959,061.57, docketed as CTA Case No. 7492.
The Ruling of the CTA Division

During trial, the petitioner presented documentary and testimonial evidence to prove its claim. On the
other hand, respondent CIR was deemed to have waived its right to present evidence due to its failure
to appear in the two scheduled hearings on the presentation of evidence for the defense. In due course,
the CTA Division partially granted the refund claim of the petitioner in the total amount of
P29,931,505.18 disposing as follows:

WHEREFORE, premises considered, the instant Petitions for Review are hereby PARTIALLY
GRANTED. Accordingly, respondent Commissioner of Internal Revenue is hereby ORDERED TO
REFUND or TO ISSUE A TAX CREDIT CERTIFICATE in the reduced amount of TWENTY-NINE
MILLION NINE HUNDRED THIRTY-ONE THOUSAND FIVE HUNDRED FIVE PESOS AND 18/100
(P29,931,505.18) in favor of petitioner, representing unutilized input VAT attributable effectively zero-
rated sales of electricity to NPC for the four quarters of 2004.

SO ORDERED.7

The CIR moved for reconsideration but to no avail. Thus, on 4 August 2010, the CIR filed a petition for
review with the CTA En Banc.

The Petition for Review before

the CTA En Banc

Among other issues, the CIR questioned the claimant's judicial recourse to the CTA as inconsistent with
the procedure prescribed in Section 112 (D) of the NIRC. The CIR asserted that the petitions for review
filed with the CTA were premature, and thus, should be dismissed.

The Ruling of the CTA En Banc

The CTA En Banc sided with the CIR in ruling that the judicial claims of the petitioner were prematurely
filed in violation of the 120-day and 30-day periods prescribed in Section 112 (D) of the NIRC. The court
held that by reason of prematurity of its petitions for review, San Roque Power Corporation failed to
exhaust administrative remedies which is fatal to its invocation of the court's power of review. The
dispositive portion of the CTA En Banc's assailed decision reads:

WHEREFORE, the Petition for Review filed by petitioner Commissioner of Internal Revenue is
hereby GRANTED. Accordingly, the Petition for Review filed by respondent on March 30, 2006 docketed
as CTA Case No. 7424, as well as the Petition tor Review filed on June 20, 2006 docketed as CTA Case
No. 7492 are hereby DISMISSED on ground of prematurity.

SO ORDERED.8

The Present Petition for Review

The petitioner argues that at the time it filed the petitions for review before the CTA on 30 March 2006
and 20 June 2006, no ruling yet was laid down by the Supreme Court concerning the 120-day and 30-
day periods provided in Section 112 of the NIRC. Instead, taxpayers such as the petitioner were guided
only by the rulings of the CTA9 which consistently adopted the interpretation that a claimant is not bound
by the 120-day and 30-day periods but by the two-year prescriptive period as provided in Section 112
(A) of the NIRC. Such CTA decisions, according to the petitioner, are recognized interpretations of
Philippines' tax laws.

The petitioner also asserts that the CTA En Banc erred in applying retroactively the Aichi ruling as
regards the 120-day and 30-day periods under Section 112 of the NIRC for the following
reasons: (1) the Aichi ruling laid down a new rule of procedure which cannot be given retroactive effect
without impairing vested rights; (2) a judicial ruling overruling a previous one cannot be applied
retroactively before its abandonment; and (3) a judicial decision which declares an otherwise
permissible act as impermissible violates the ex post facto rule under the Constitution.

THE COURT'S RULING

We grant the petition.

I.

No retroactive application of
the Aichi ruling

At the outset, it bears stressing that while Aichi was already firmly established at the time the CTA En
Banc promulgated the assailed decision, nowhere do we find in such assailed decision, however, that
the court a quo cited or mentioned the Aichi case as basis for dismissing the subject petitions for review.
As we see it, the CTA En Banc merely relied on Section 112 (D) of the NIRC, which provides –

SEC. 112. Refunds or Tax Credits of Input Tax. –

(A) Zero-rated or Effectively Zero-rated Sales.- Any VAT-registered person, whose sales are zero-rated
or effectively zero-rated may, within two (2) years after the close of the taxable quarter when
the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax
due or paid attributable to such sales, except transitional input tax, to the extent that such input tax
has not been applied against output tax:
xxxx

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within
one hundred twenty (120) days from the date of submission of complete documents in support
of the application filed in accordance with Subsections (A) and (B) hereof:

In case of full or partial denial of the claim tor tax refund or tax credit, or the failure on the part of
the Commissioner to act on the application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the decision denying the claim or
after the expiration of the one hundred twenty-day period, appeal the decision or the unacted
claim with the Court of Tax Appeals. (emphases supplied)

– correctly interpreting the 120-day and 30-day periods prescribed therein as mandatory and
jurisdictional. Thus, it cannot appropriately be insisted that the CTA En Banc's imputed error may be
traced to a misplaced invocation of Aichi.

Be that as it may, the petitioner cannot find solace in the various CTA decisions that allegedly dispense
with the timeliness of the judicial claim for as long as it is within the two-year prescriptive period. Such
legal posturing has already been passed upon.

Thus, in San Roque,10 a case involving the same parties and substantially the same factual antecedents
as in the present petition, we rejected the claim that the CTA decisions may be relied upon as binding
precedents. We said –

There is also the claim that there are numerous CTA decisions allegedly supporting the argument that
the filing dates of the administrative and judicial claims are inconsequential, as long as they are within
the two-year prescriptive period. Suffice it to state that CTA decisions do not constitute precedents, and
do not bind this Court or the public. That is why CTA decisions are appealable to this Court, which may
affirm, reverse or modify the CTA decisions as the facts and the law may warrant. Only decisions of this
Court constitute binding precedents, forming part of the Philippine legal system. As held by this Court
in The Philippine Veterans Affairs Office v. Segundo:

x x x Let it be admonished that decisions or the Supreme Court "applying or interpreting the laws or the
Constitution . . . form part of the legal system of the Philippines," and, as it were, "laws" by their own
right because they interpret what the laws say or mean. Unlike rulings of the lower courts, which
bind the parties to specific cases alone, our judgments are universal in their scope and
application, and equally mandatory in character. Let it be warned that to defy our decisions is to
court contempt.11 (emphasis supplied)

We further held in said case that Article 8 of the Civil Code 12 enjoins adherence to judicial precedents.
The law requires courts to follow a rule already established in a final decision of the Supreme
Court.Contrary to the petitioner's view, the decisions of the CTA are not given the same level of
recognition.

Concerning the 120-day period in Section 112 (D) of the NIRC, there was no jurisprudential rule prior
to Aichi interpreting such provision as permitting the premature filing of a judicial claim before the
expiration of the 120-day period. The alleged CTA decisions that entertained the judicial claims despite
their prematurity are not to be relied upon because they are not final decisions of the Supreme Court
worthy of according binding precedence. That Aichi was yet to be promulgated at that time did not mean
that the premature filing of a petition for review before the CTA was a permissible act.

It was only in Aichi that this Court directly tackled the 120-day period in Section 112 (D) of the NIRC
and declared it to be mandatory and jurisdictional. In particular, Aichi brushed aside the contention that
the non-observance of the 120-day period is not fatal to the filing of a judicial claim as long as both the
administrative and judicial claims are filed within the two-year prescriptive period provided in Section
112 (A) of the NIRC.

The mandatory and jurisdictional nature of the 120-day period first expressed in Aichi, however, is not
a new rule of procedure to be followed in pursuit of a refund claim of unutilized creditable input VAT
attributable to zero-rated sales. As suggested above, the pronouncement in Aichi regarding the
mandatory and jurisdictional nature of the 120-day period was the Court's interpretation of Section
112 (D) of the NIRC. It is that law, Section 112 (D) of the NIRC, that laid the rule of procedure for
maintaining a refund claim of unutilized creditable input VAT attributable to zero-rated sales. In said
provision, the Commissioner has 120 days to act on an administrative claim.

Hence, from the effectivity of the 1997 NIRC on 1 January 1998, the procedure has always been definite:
the 120-day period is mandatory and jurisdictional. Accordingly, a taxpayer can file a judicial claim
(1)only within thirty days after the Commissioner partially or fully denies the claim within the
120-day period, or (2) only within thirty days from the expiration of the 120- day period if the
Commissioner does not act within such period.13 This is the rule of procedure beginning 1 January 1998
as interpreted in Aichi.

Given all the foregoing, it is indubitable that, subject to our discussion below on the reason why the
present petition should nonetheless be granted, the petitioner's arguments have no leg to stand on –

(1)
The Aichi ruling laid down a new rule of procedure which cannot be given retroactive effect without
impairing vested rights.

-
Section 112 (D) of the NIRC, not the Aichi ruling, lays down the rule of procedure governing refund
claims of unutilized creditable input VAT attributable to zero-rated sales; Aichi is merely an
interpretation of an existing law; there is no vested right to speak of respecting a wrong construction of
the law[14 (permitting a premature filing of judicial claim);
(2)
A judicial ruling overruling a previous one cannot be applied retroactively before its abandonment.

-
There was no established doctrine abandoned or overturned by Aichi; the petitioner merely harps on
CTA decisions that cannot be relied on as binding precedents; and

(3)
A judicial decision which declares an otherwise permissible act as impermissible violates the ex post
facto rule under the Constitution –

-
Prior to Aichi, there was no law or jurisprudence permitting the premature filing of a judicial claim of
creditable input VAT; Aichi did not declare as impermissible that which was previously recognized by
law or jurisprudence as a permissible act; it is, therefore, inconsequential to consider the ex post
facto provision of the Constitution.

To reiterate, the 120-day and 30-day periods, as held in the case

of Aichi, are mandatory and jurisdictional. Thus, noncompliance with the mandatory 120+30-day
period renders the petition before the CTA void. The ruling in said case as to the mandatory and
jurisdictional character of said periods was reiterated in San Roque and a host of succeeding similar
cases.

Significantly, a taxpayer can file a judicial claim only within thirty (30) days from the expiration
of the 120-day period if the Commissioner does not act within the 120-day period. The taxpayer
cannot file such judicial claim prior to the lapse of the 120-day period, unless the CIR partially or wholly
denies the claim within such period. The taxpayer-claimant must strictly comply with the mandatory
period by filing an appeal to the CTA within thirty days from such inaction; otherwise, the court cannot
validly acquire jurisdiction over it.

In this case, the petitioner timely filed its administrative claims for refund/credit of its unutilized input
VAT for the first quarter of 2004, and for the second to fourth quarters of the same year, on 22
December 2005 and 27 February 2006, respectively, or within the two-year prescriptive period.
Counted from such dates of submission of the claims (with supporting documents), the CIR had 120
days, or until 13 April 2006, with respect to the first administrative claim, and until 27 June 2006, on
the second administrative claim, to decide.

However, the petitioner, without waiting for the full expiration of the 120-day periods and without any
decision by the CIR, immediately filed its petitions for review with the CTA on 30 March 2006, or a
mere ninety-eight (98) days for the first administrative claim; and on 20 June 2006, or only one
hundred thirteen (113) days for the second administrative claim, from the submission of the said
claims. In other words, the judicial claims of the petitioner were prematurely filed as correctly found by
the CTA En Banc.

II.

Ordinarily, a prematurely filed appeal is to be dismissed for lack of jurisdiction in line with our ruling
in Aichi. But, as stated in the premises, we shall accord to the CTA jurisdiction over the claims in this
case due to our ruling in San Roque.

BIR Ruling No. DA-489-03

constitutes an exception to
the mandatory and
jurisdictional nature of the
120+30-day period.

In the consolidated cases of San Roque , the Court en banc recognized an exception to the mandatory
and jurisdictional nature of the 120+30-day period. It was noted that BIR Ruling No. DA-489-03, which
expressly stated –

[A] taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial
relief with the CTA by way of Petition for Review.

– is a general interpretative rule issued by the CIR pursuant to its power under Section 4 of the NIRC,
hence, applicable to all taxpayers. Thus, taxpayers can rely on this ruling from the time of its issuance
on 10 December 2003. The conclusion is impelled by the principle of equitable estoppel enshrined in
Section 24615 of the NIRC which decrees that a BIR regulation or ruling cannot adversely prejudice a
taxpayer who in good faith relied on the BIR regulation or ruling prior to its reversal.

Then, in Taganito Mining Corporation v. CIR,16 the Court further clarified the doctrines in Aichi and San
Roque explaining that during the window period from 10 December 2003, upon the issuance of BIR
Ruling No. DA-489-03 up to 6 October 2010, or date of promulgation of Aichi, taxpayers need not
observe the stringent 120-day period.17

In other words, the 120+30-day period is generally mandatory and jurisdictional from the effectivity of
the 1997 NIRC on 1 January 1998, up to the present. By way of an exception, judicial claims filed during
the window period from 10 December 2003 to 6 October 2010, need not wait for the exhaustion of the
120-day period. The exception in San Roque has been applied consistently in numerous decisions of this
Court.

In this case, the two judicial claims filed by the petitioner fell within the window period, thus, the CTA
can take cognizance over them.

The petitioner is similarly situated as Taganito Mining Corporation (Taganito) in the consolidated cases
of San Roque. In that case, Taganito prematurely filed on 14 February 2007 its petition for review with
the CTA, or within the window period from 10 December 2003, with the issuance of BIR Ruling DA-489-
03 and 6 October 2010, when Aichi was promulgated. The Court considered Taganito to have filed its
administrative claim on time. Similarly, the judicial claims in this case were filed on 30 March 2006 and
20 June 2006, or within the said window period. Consequently, the exception to the mandatory and
jurisdictional character of the 120-day and 30-day periods is applicable.

What this means is that the CTA can validly take cognizance over the two judicial claims filed in this
case. The CTA Division, in fact, did this, which eventually led to the partial grant of the refund claims in
favor of the petitioner. In reversing the CTA Division for lack of jurisdiction, the CTA En Banc failed to
consider BIR Ruling No. DA-489-03.

III.

It is imperative, however, to point out that the petitioner did not actually invoke BIR Ruling No. DA-
489-03 in all its pleadings to justify the timeliness of its judicial claims with the CTA. To recall, the
petitioner vociferously insisted on the propriety of its judicial claims in view of the prevailing
interpretations of the CTA prior to Aichi that allowed premature filing of petitions for review before the
CTA. This apparently also explains the silence on the end of the CTA En Banc regarding such BIR ruling
in disposing of the matter on jurisdiction.
Hence, whether the petitioner can benefit from BIR Ruling DA-489-03 even if it did not invoke it is a
question worthy of consideration.

The beneficiaries of BIR

Ruling No. DA-489-03 include
those who did not specifically
invoke it.

We resolve to apply the exception recognized in San Roque, which we quote, viz:

x x x BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers can rely on BIR
Ruling No. DA-489-03 from the time of its issuance on 10 December 2003 up to its reversal by this
Court in Aichi on 6 October 2010, where this Court held that the 120+30-day periods are mandatory
and jurisdictional.18 (emphasis supplied)

As previously stated, San Roque has been consistently applied in a long line of cases that recognized
the exception to the mandatory and jurisdictional nature of the 120+30-day period. To limit the
application of BIR Ruling No. DA-489-03 only to those who invoked it specifically would unduly strain
the pronouncements in San Roque. To provide jurisprudential stability, it is best to apply the benefit of
BIR Ruling No. DA-489-03 to all taxpayers who filed their judicial claims within the window period from
10 December 2003 until 6 October 2010.

We said the same in Commissioner of Internal Revenue v. Air Liquide Philippines. Inc.,19 thus –

The Court agrees with ALPI in its survey of cases which shows that BIR Ruling No. DA-489-03 was
applied even though the taxpayer did not specifically invoke the same. As long as the judicial claim was
filed between December 10, 2003 and October 6, 2010, then the taxpayer would not be required to wait
for the lapse of 120-day period. This doctrine has been consistently upheld in the recent decisions of
the Court. On the other hand, in Nippon Express v. CIR, Applied Food Ingredients v. CIR and Silicon
Philippines v. CIR, the taxpayer did not benefit from BIR Ruling No. DA-489-03 because they filed their
precipitate judicial claim before December 10, 2003.

Indeed, BIR Ruling No. DA-489-03 is a general interpretative law and it applies to each and every
taxpayer. To subscribe to the contention of the CIR would alter the Court's ruling in San Roque. It will
lead to an unreasonable classification of the beneficiaries of BIR Ruling No. DA-489-03 and further
complicate the doctrine. ALPI cannot be faulted for not specifically invoking BIR Ruling No. DA-489-03
as the rules for its application were not definite until the San Roque case was promulgated.

In the furtherance of the doctrinal pronouncements in San Roque, the better approach would be to apply
BIR Ruling No. DA-489-03 to all taxpayers who filed their judicial claim for VAT refund within the period
of exception from December 10, 2003 to October 6, 2010.20 (citations omitted)

Moreover, in Procter and Gamble Asia Pte Ltd. v. Commissioner of Internal Revenue, 21 we considered
as insignificant the failure of a taxpayer to invoke BIR Ruling No. DA-489-03 before the CTA. Our reason
was that the said ruling is an official act emanating from the BIR. We can take judicial notice of such
issuance and its consistent application in past rulings of the Court relating to the timeliness of judicial
claims which makes it even more mandatory in taking cognizance of the same.

All told, the CTA has jurisdiction over the judicial claims filed by the petitioner in this case. The CTA En
Banc, thus, erred in setting aside the decision of the CTA Division on the ground of lack of jurisdiction.
Consequently, the decision of the CTA Division partially granting the claim for refund/credit in favor of
the petitioner must be reinstated.

WHEREFORE, the petition is GRANTED. The 4 April 2012 Decision and 17 August 2012 Resolution of
the Court of Tax Appeals En Banc in CTA EB No. 657 are REVERSED and SET ASIDE. The 8 January
2010 Decision and 28 June 2010 Resolution of the CTA Former Second Division in CTA Cases Nos. 7424
and 7492 are hereby REINSTATED.

The public respondent Commissioner of Internal Revenue is hereby ORDERED TO REFUND or, in the
alternative, TO ISSUE A TAX CREDIT CERTIFICATE in favor of the petitioner in the total sum of
Twenty-Nine Million Nine Hundred Thirty-One Thousand Five Hundred Five Pesos and 18/100 Centavos
(P29,931,505.18) representing unutilized input VAT attributable to zero-rated sales to the NPC for the
four taxable quarters of2004.

SO ORDERED.

Velasco, Jr., (Chairperson), Bersamin, Leonen, and Gesmundo, JJ., concur.

August 13, 2018

NOTICE OF JUDGMENT

Sirs / Mesdames:

Please take notice that on July 23, 2018 a Decision, copy attached hereto, was rendered by the
Supreme Court in the above-entitled case, the original of which was received by this Office on August
13, 2018 at 10:20 a.m.

Very truly yours,

(SGD.) WILFREDO V. LAPITAN

Division Clerk of Court

Endnotes:

1 646 Phil. 710 (2010).

2 703 Phil. 310 (2013)

3Rollo, pp. 7-28.

4 Id. at 35-42.

5
Id. at 9 (Decision of the CTA En Banc in CTA EB No. 657, p. 3).

6 Id. at 10 (Decision of the CTA En Banc in CTA EB No. 657, p. 4).

7 Id. at 363.

8 Id. at 26-27.

9The CTA cases cited were: CIR v. Visayas Geothermal Power Company, Inc., CTA EB Case No. 282, 20
November 2007; CIR v. CE Cebu Geothermal Power Company, Inc., CTA EB Nos. 426 and 427 (CTA
Case Nos. 6791 and 6836). 29 May 2009; CIR v. Accenture, Inc., CTA EB No. 410, 18 March 2009; CE
Luzon Geothermal Power Company, Inc. v. CIR, CTA Case No. 7393, 2 March 2010; and Eastern
Telecommunications Philippines, Inc. v. CIR, CTA EB Case No. 11 (CTA Case No.6255), 19 April 2005.
10 Supra note 2.

11 Id. at 382.

12 ART. 8. Judicial decisions applying or interpreting the laws or the Constitution shall form a part of the
legal system of the Philippines.

13CIR v. San Roque, supra note 2 at 386-387.

14Philippine Bank of Communications v. CIR, 361 Phil. 916, 931 (1999).

15SEC. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any or the rules
and regulations promulgated in accordance with the preceding Sections 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 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.

G.R. No. 191495, July 23, 2018

NIPPON EXPRESS (PHILIPPINES) CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondent.

DECISION

MARTIRES, J.:

In a claim for refund under Section 112 of the National Internal Revenue Code (NIRC), the claimant
must show that: (1) it is engaged in zero-rated sales of goods or services; and (2) it paid input VAT that
are attributable to such zero-rated sales. Otherwise stated, the claimant must prove that it made
a purchaseof taxable goods or services for which it paid VAT (input), and later on engaged in the sale of
goods or services subject to VAT (output) but at zero rate. There is a refundable sum when the amount
of input (VAT (attributable to zero-rated sale) is higher than the claimant's output VAT during one
taxable period (quarter).

The issue in the present petition concerns the proof that the claimant, petitioner Nippon Express
(Philippines) Corporation (Nippon Express), is engaged in zero-rated sales of services (not goods or
properties).

THE FACTS

Petitioner Nippon Express repaired to the Court via its petition for review on certiorari under Rule 45 of
the Rules of Court to assail the 15 December 2009 Decision of the Court of Tax Appeals (CTA) En Banc
in CTA EB No. 492. The CTA En Banc affirmed the ruling of the CTA Second Division in CTA Case No.
7429 denying the refund claim of Nippon Express.

The present controversy stemmed from an application for the issuance of a tax credit certificate (TCC) of
Nippon Express' excess or unutilized input tax attributable to its zero-rated sales for all four taxable
quarters in 2004 pursuant to Section 112 of the National Internal Revenue Code (NIRC).

The Antecedents

Nippon Express is a domestic corporation registered with the Large Taxpayer District Office (LTDO) of
the Bureau of Internal Revenue (BIR), Revenue Region No. 8–Makati, as a Value Added
Tax (VAT) taxpayer.1

On 30 March 2005, Nippon Express filed with the LTDO, Revenue Region No. 8, an application for tax
credit of its excess/unused input taxes attributable to zero-rated sales for the taxable year 2004 in the
total amount of P27,828,748.95.

By reason of the inaction by the BIR, Nippon Express filed a Petition for Review before the CTA on 31
March 2006.2 In its Answer, respondent Commissioner of Internal Revenue (CIR) interposed the
defense, among others, that Nippon Express' excess input VAT paid for its domestic purchases of goods
and services attributable to zero-rated sales for the four quarters of taxable year 2004 was not fully
substantiated by proper documents.3

The Ruling of the CTA Division

After trial, the CTA Division (the court) found that Nippon Express' evidentiary proof of its zero-rated
sale of services to PEZA-registered entities consisted of documents other than official receipts. Invoking
Section 113 of the NIRC, as amended by Section 11 of Republic Act (R.A.) No. 9337, the court held the
view that the law provided for invoicing requirements of VAT-registered persons to issue a VAT invoice
for every sale, barter or exchange of goods or properties, and a VAT official receipt for every lease of
goods or properties, and for every sale, barter or exchange of services. Noting that Nippon Express is
engaged in the business of providing services, the court denied the latter's claim for failure to submit
the required VAT official receipts as proof of zero-rated sales. The dispositive portion of the CTA
Division's Decision, dated 5 December 2008, reads:

WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED DUE COURSE,
and accordingly, DISMISSED for lack of merit.

SO ORDERED.4

Aggrieved, Nippon Express moved for reconsideration or new trial but was rebuffed by the CTA Division
in its Resolution5 of 5 May 2009. Hence, Nippon Express filed on 10 June 2009 a petition for review with
the CTA En Banc.

The Petition for Review before

the CTA En Banc

In its appeal before the CTA En Banc, Nippon Express alleged that it had fully complied with the invoicing
requirements when it submitted sales invoices to support its claim of zero-rated sales. Nippon argued
that there is nothing in the tax laws and regulations that requires the sale of goods or properties to be
supported only by sales invoices, or the sale of services by official receipts only. Thus, as Nippon Express
put it, the CTA Division erred in holding that the sales invoices and their supporting documents are
insufficient to prove Nippon Express' zero-rated sales.

The Ruling of the CTA En Banc

As stated at the outset, the CTA En Banc affirmed the decision of the CTA Division. The CTA En Banc
disposed as follows:
"WHEREFORE, the Petition for Review is DISMISSED. Accordingly, the impugned Decision of the
Court in Division dated December 5, 2008 and its Resolution promulgated on May 5, 2009 in CTA Case
No. 7429 are AFFIRMED.

SO ORDERED."6

Worth mentioning is the lone dissent registered by Presiding Justice (PJ) Ernesto D. Acosta who opined
that an official receipt is not the only acceptable evidence to prove zero-rated sales of services. He
ratiocinated:

Sections 113 and 237 of the 1997 National Internal Revenue Code (NIRC) x x x made use of
the disjunctive term "or" which connotes that either act qualifies as two different evidences of input
VAT. x x x It is indicative of the intention of the lawmakers to use the same interchangeably in the sale
of goods or services.

This is bolstered by the fact that Section 113 of the 1997 NIRC has been amended by Section 11 of
Republic Act (RA) No. 9337, wherein the amendatory provisions of the law categorically required that
VAT invoice shall be issued for sale of goods while VAT official receipt for the sale of services, which is
absent in the amended law. Since this amendment took effect on July 1, 2005, the same cannot be
applied in the instant case which involves a claim tor refund for taxable year 2004. RA 9337 cannot
apply retroactively to the prejudice of petitioner given the well-entrenched principle that statutes,
including administrative rules and regulations operate prospectively only, unless the legislative intent to
the contrary is manifest by express terms or by necessary implication.

Equally relevant are Section 110 of the 1997 NIRC and Section 4.106-5 of Revenue Regulations
No. 7-95. x x x A reading of both provisions would show the intention to accept other evidence to
substantiate claims for VAT refund, particularly the use of either a VAT invoice or official receipt. 7

Nippon Express opted to forego the filing of a motion for reconsideration; hence, the direct appeal before
the Court.

The Present Petition for Review

In its petition, Nippon Express reiterated its stance that nowhere is it expressly stated in the laws or
implementing regulations that only official receipts can support the sale of services, or that only sales
invoices can support the sale of goods or properties. Nippon Express also adopted at length the
dissenting opinion of PJ Acosta, viz the use of the disjunctive term "or" in Section 237 of the NIRC
connoting the interchangeable nature of either VAT invoice or official receipt as evidence of sale of goods
or services; the lack of any statutory basis for the exclusivity of official receipts as proof of sale of
service; and the non-retroactivity of R.A. No. 9337, enacted in 2005, to the petitioner's case.

In addition, Nippon Express posed the query on whether it may still be allowed to submit official receipts,
in addition to those already produced during trial, in order to prove the existence of its zero-rated sales.

By way of Comment,8 the CIR impugns the petition as it essentially seeks the re-evaluation of the
evidence presented during trial which cannot be done in a petition for review under Rule 45. Likewise,
the CIR argues that the evidence of the sale of service, as the CTA held, is none other than an official
receipt. In contrast, the sales invoice is the evidence of a sale of goods. Since the petitioner's
transactions involve sales of services, they should have been properly supported by official receipts and
not merely by sales invoices.

THE COURT'S RULING

We deny the petition.

I.

The judicial claim of Nippon

Express was belatedly filed.
The thirty (30)-day period of
appeal is mandatory and
jurisdictional, hence, the
CTA did not acquire
jurisdiction over Nippon
Express' judicial claim.

First, we observe that much of the CTA's discussion in the assailed decision dwelt on the substantiation
of the petitioner's claim for refund of unutilized creditable input VAT. It did not touch on the subject of
the court's jurisdiction over the petition for review filed before it by Nippon Express. Neither did the CIR
bring the matter to the attention of the court a quo.

Nonetheless, even if not raised in the present petition, the Court is not prevented from considering the
issue on the court's jurisdiction consistent with the well-settled principle that when a case is on appeal,
the Court has the authority to review matters not specifically raised or assigned as error if their
consideration is necessary in reaching a just conclusion of the case. 9 The matter of jurisdiction cannot
be waived because it is conferred by law and is not dependent on the consent or objection or the acts
or omissions of the parties or any one of them.10 Besides, courts have the power to motu
proprio dismiss an action over which it has no jurisdiction pursuant to Section 1, Rule 9 of the Revised
Rules of Court.11

Concerning the claim for refund of excess or unutilized creditable input VAT attributable to zero-rated
sales, the pertinent law is Section 112 of the NIRC12 which reads:

SEC. 112. Refunds or Tax Credits of Input Tax. –

(A) Zero-rated or Effectively Zero-rated Sales.- Any VAT-registered person, whose sales are zero-rated
or effectively zero-rated may, within two (2) years after the close of the taxable quarter when
the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax
due or paid attributable to such sales, except transitional input tax, to the extent that such input tax
has not been applied against output tax:

xxxx

(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) and (8) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of
the Commissioner to act on the application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the decision denying the claim or
after the expiration of the one hundred twenty-day period, appeal the decision or the unacted
claim with the Court of Tax Appeals. (emphases supplied)

Under the aforequoted provision, a VAT-registered taxpayer who has excess and unutilized creditable
input VAT attributable to zero-rated sales may file an application for cash refund or issuance of TCC
(administrative claim) before the CIR who has primary jurisdiction to decide such application. 13 The
period within which to file the administrative claim is two (2) years reckoned from the close of the
taxable quarter when the pertinent zero-rated sales were made.

From the submission of complete documents to support the administrative claim, the CIR is given a
120-day period to decide. In case of whole or partial denial of or inaction on the administrative claim,
the taxpayer may bring his judicial claim, through a petition for review, before the CTA who has exclusive
and appellate jurisdiction.14 The period to appeal is thirty (30) days counted from the receipt of the
decision or inaction by the CIR.

The 30-day period is further emphasized in Section 11 of R.A. No. 1125, as amended by R.A. No. 9282,
or the CTA charter, which reads:

SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a
decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the
Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Central
Board of Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty
(30) days after the receipt of such decision or ruling or after the expiration of the period fixed by
law for action as referred to in Section 7(a)(2) herein. (emphases supplied)

In the seminal cases of Commissioner of Internal Revenue (Commissioner) v. Aichi Forging Company of
Asia, Inc.15 and Commissioner v. San Roque Power Corporation/Taganito Mining Corporation v.
Commissioner/Phi/ex Mining Corporation v. Commissioner (San Roque),[16 the Court interpreted the 30-
day period of appeal as mandatory and jurisdictional. Thus, noncompliance with the mandatory 30-
day period renders the petition before the CTA void. The ruling in said cases as to the mandatory and
jurisdictional character of the 30-day period of appeal was reiterated in a litany of cases thereafter.

Pertinently, the CTA law expressly provides that when the CIR fails to take action on the administrative
claim, the "inaction shall be deemed a denial" of the application for tax refund or credit. The taxpayer-
claimant must strictly comply with the mandatory period by filing an appeal with the CTA within thirty
days from such inaction, otherwise, the court cannot validly acquire jurisdiction over it.

In this case, Nippon Express timely filed its administrative claim on 30 March 2005, or within the two-
year prescriptive period. Counted from such date of submission of the claim with supporting documents,
the CIR had 120 days, or until 28 July 2005, the last day of the 120-day period, to decide the claim. As
the records reveal, the CIR did not act on the application of Nippon Express. Thus, in accordance with
law and the cited jurisprudence, the claimant, Nippon Express, had thirty days from such inaction
"deemed a denial," or until 27 August 2005, the last day of the 30-day period, within which to appeal
to the CTA.

However, Nippon Express filed its petition for review with the CTA only on 31 March 2006, or two
hundred forty-six (246) days from the inaction by the CIR. In other words, the petition of Nippon
Express was belatedly filed with the CTA and, following the doctrine above, the court ought to have
dismissed it for lack of jurisdiction.

The present case is similar to the case of Philex Mining Corporation (Philex) in the consolidated cases
of San Roque. In that case, Philex: (1) filed on 21 October 2005 its original VAT return for the third
quarter of taxable year 2005; (2) filed on 20 March 2006 its administrative claim for refund or credit;
(3) filed on 17 October 2007, its petition for review with the CTA.17 As in this case, the CIR did not act
on Philex's claim.

The Court considered Philex to have timely filed its administrative claim on 20 March 2006, or within
the two-year period; but, its petition for review with the CTA on 17 October 2007, was late by 426 days.
Thus, the Court ruled that the CTA Division did not acquire jurisdiction.

Due to the lack of jurisdiction of the CTA over the Nippon Express petition before it, all the proceedings
held in that court must be void. The rule is that where there is want of jurisdiction over a subject matter,
the judgment is rendered null and void.18 It follows that the decision and the resolution of the CTA
Division, as well as the decision rendered by the CTA En Banc on appeal, should be vacated or set aside.

As noted previously, Nippon Express asked leave from this Court to allow it to submit in evidence the
official receipts of its zero-rated sales in addition to the sales invoices and other documents already
presented before the CTA. Considering our finding as to the CTA's lack of jurisdiction, it is thus futile to
even consider or allow such official receipts of Nippon Express.
II.

In view of the lack of jurisdiction of the CTA, we shall clarify and resolve, if only for academic purposes,
the focal issue presented in this petition, i.e., whether the sales invoices and documents other than
official receipts are proper in substantiating zero-rated sales of services in connection with a claim for
refund under Section 112 of the NIRC.

Substantiation requirements
to be entitled to refund or tax
credit under Sec. 112, NIRC

As stated in our introduction, the burden of a claimant who seeks a refund of his excess or unutilized
creditable input VAT pursuant to Section 112 of the NIRC is two-fold: (1) prove payment of input VAT
to suppliers; and (2) prove zero-rated sales to purchasers. Additionally, the taxpayer claimant has to
show that the VAT payment made, called input VAT, is attributable to his zero-rated sales.

Be it noted that under the law on VAT, as contained in Title IV of the NIRC, there are three known
taxable transactions, namely: (i) sale of goods or properties (Section 106); (ii) importation (Section
107); and (iii) sale of services and lease of properties (Section 108). Both sale transactions in Section
106 and 108 are qualified by the phrase 'in the course of trade or business,' whereas importation in
Section 107 is not.

At this juncture, it is imperative to point out that the law had set apart the sale of goods or properties,
as contained in Section 106, from the sale of services in Section 108.

In establishing the fact that taxable transactions like sale of goods or properties or sale of services were
made, the law provided for invoicing and accounting requirements, to wit:

Section 113. Invoicing and Accounting Requirement for VAT-Registered Persons. –

(A) Invoicing Requirements. – A VAT-registered person shall, for every sale, issue
an invoice or receipt. In addition to the information required under Section 237, the following
information shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification
number (TIN); and

(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication
that such amount includes the value-added tax.

(B) Accounting Requirements. – Notwithstanding the provisions of Section 233, all persons subject to
the value-added tax under Sections 106 and 108 shall, in addition to the regular accounting records
required, maintain a subsidiary sales journal and subsidiary purchase journal on which the daily sales
and purchases are recorded. The subsidiary journals shall contain such information as may be required
by the Secretary of Finance.

xxxx

Section 237. Issuance of Receipts or Sale or Commercial Invoices. – All persons subject to an internal
revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at Twenty-
five pesos (P25.00) or more, issue duly registered receipts or sales or commercial invoices, prepared
at least in duplicate, showing the date of transaction, quantity, unit cost and description of merchandise
or nature of service: Provided, however, That in the case of sales, receipts or transfers in the amount
of One hundred pesos (P100.00) or more, or regardless of the amount, where the sale or transfer is
made by a person liable to value-added tax to another person also liable to value-added tax; or where
the receipt is issued to cover payment made as rentals, commissions, compensations or
fees, receipts or invoices shall be issued which shall show the name, business style, if any, and
address of the purchaser, customer or client: Provided, further, That where the purchaser is a VAT-
registered person, in addition to the information herein required, the invoice or receipt shall further
show the Taxpayer Identification Number (TIN) of the purchaser.

The original of each receipt or invoice shall be issued to the purchaser, customer or client at the time
the transaction is effected, who, if engaged in business or in the exercise of profession, shall keep and
preserve the same in his place of business for a period of three (3) years from the close of the taxable
year in which such invoice or receipt was issued, while the duplicate shall be kept and preserved by
the issuer, also in his place of business, for a like period. (emphases supplied)

The CTA En Banc held the view that while Sections 113 and 237 used the disjunctive term "or," it must
not be interpreted as giving a taxpayer an unconfined choice to select between issuing an invoice or an
official receipt.19 To the court a quo, sales invoices must support sales of goods or properties while
official receipts must support sales of services.20

We agree.

Actually, the issue is no longer novel.

In AT&T Communications Services Philippines, Inc. v. Commissioner (AT&T),21 we interpreted Sections

106 and 108 in conjunction with Sections 113 and 237 of the NIRC relative to the significance of the
difference between a sales invoice and an official receipt as evidence for zero-rated transactions. For
better appreciation, we simply quote the pertinent discussion, viz:

Although it appears under [Section 113] that there is no clear distinction on the evidentiary value of an
invoice or official receipt, it is worthy to note that the said provision is a general provision which covers
all sales of a VAT registered person, whether sale of goods or services. It does not necessarily follow
that the legislature intended to use the same interchangeably. The Court therefore cannot conclude that
the general provision of Section 113 of the NIRC of 1997, as amended, intended that the invoice and
official receipt can be used for either sale of goods or services, because there are specific provisions of
the Tax Code which clearly delineates the difference between the two transactions.

In this instance, Section 108 of the NIRC of 1997, as amended, provides:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.-

x x x x

(C) Determination of the Tax -The tax shall be computed by multiplying the total amount indicated in
the official receipt by one-eleventh (1/11)(emphases supplied)

Comparatively, Section 106 of the same Code covers sale of goods, thus:

SEC. 106. Value-added Tax on Sale of Goods or Properties,-

x x x x

(D) Determination of the Tax. The tax shall be computed by multiplying the total amount indicated in
the invoice by one-eleventh (1/11). (emphases supplied)

Apparently, the construction of the statute shows that the legislature intended to distinguish the use of
an invoice from an official receipt. It is more logical therefore to conclude that subsections of a statute
under the same heading should be construed as having relevance to its beading. The legislature
separately categorized VAT on sale of goods from VAT on sale of services, not only by its treatment with
regard to tax but also with respect to substantiation requirements. Having been grouped under Section
108, its subparagraphs, (A) to (C), and Section 106, its subparagraphs (A) to (D), have significant
relations with each other.

xxxx

Settled is the rule that every part of the statute must be considered with the other parts. Accordingly,
the whole of Section 108 should be read in conjunction with Sections 113 and 237 so as to give life to
all the provisions intended for the sale of services. There is no contlict between the provisions of the law
that cover sale of services that are subject to zero rated sales; thus, it should be read altogether to
reveal the true legislative intent.22

Contrary to the petitioner's position, invoices and official receipts are not used interchangeably for
purposes of substantiating input VAT;[23 cites Commissioner v. Manila Mining Corporation (Manila
Mining)24 as its authority in arguing that the law made no distinction between an invoice and an official
receipt. We have read said case and therein found just quite the opposite. The Manila Mining case in
fact recognized a difference between the two, to wit:

A "sales or commercial invoice" is a written account of goods sold or services rendered indicating the
prices charged therefor or a list by whatever name it is known which is used in the ordinary course of
business evidencing sale and transfer or agreement to sell or transfer goods and services.

A "receipt" on the other hand is a written acknowledgment of the fact of payment in money or other
settlement between seller and buyer of goods, debtor or creditor, or person rendering services and client
or customer. 25

At this point, it is worth mentioning that the VAT law at issue in Manila Mining was Presidential Decree
No. 1158 (National Internal Revenue Code of 1977). That a distinction between an invoice and receipt
was recognized even as against the NIRC of 1977 as the legal backdrop is authority enough to dispel
any notion harbored by the petitioner that a distinction between the two, with the legal effects that
follow, arose only after the enactment of R.A. No. 9337. For emphasis, even prior to the enactment of
R.A. No. 9337, which clearly delineates the invoice and official receipt, our Tax Code has already made
the distinction.26

The Manila Mining case proceeded to state –

These sales invoices or receipts issued by the supplier are necessary to substantiate the actual amount
or quantity of goods sold and their selling price, and taken collectively are the best means to prove the
input VAT payments.27

While the words "invoice" and "receipt" in said decision are seemingly used without distinction, it cannot
be rightfully interpreted as allowing either document as substantiation for any kind of taxable sale,
whether of goods/properties or of services. A closer reading of Manila Mining indeed shows that the
question on whether an invoice is the proper documentary proof of a sale of goods or properties to the
exclusion of an official receipt, and vice versa, official receipt as the proof of sale of services to the
exclusion of an invoice, was not the pivotal issue.

It was in Kepco Philippines Corporation v. Commissioner (Kepco)28 that the Court was directly
confronted with the adequacy of a sales invoice as proof of the purchase of services and official receipt
as evidence of the purchase of goods. The Court initially cited the distinction between an invoice and an
official receipt as expressed in the Manila Mining case. We then declared for the first time that a VAT
invoice is necessary for every sale, barter or exchange of goods or properties while a VAT official
receipt properly pertains to every lease of goods or properties, and for every sale, barter or exchange
of services. Thus, we held that a VAT invoice and a VAT receipt should not be confused as referring to
one and the same thing; the law did not intend the two to be used alternatively. We stated:
[T]he VAT invoice is the seller's best proof of the sale of the goods or services to the buyer while the
VAT receipt is the buyer's best evidence of the payment of goods or services received from the seller.
Even though VAT invoices and receipts are normally issued by the supplier/seller alone, the said invoices
and receipts, taken collectively, are necessary to substantiate the actual amount or quantity of goods
sold and their selling price (proof of transaction), and the best means to prove the input VAT
payments (proof of payment).Hence, VAT invoice and VAT receipt should not be confused as referring
to one and the same thing. Certainly, neither does the law intend the two to be used alternatively. 29

In Kepco, the taxpayer tried to substantiate its input VAT on purchases of goods with official
receipts and on purchases of services with invoices. The claim was appropriately denied for not
complying with the required standard of substantiation. The Court reasoned that the invoicing and
substantiation requirements should be followed because it is the only way to determine the veracity of
the taxpayer's claims. Unmistakably, the indispensability of an official receipt to substantiate a sale of
service had already been illustrated jurisprudentially as early as Kepco.

The doctrinal teaching in Kepco was further reiterated and applied in subsequent cases.

Thus, in Luzon Hydro Corp. v. Commissioner,30 the claim for refund/tax credit was denied because the
proof for the zero-rated sale consisted of secondary evidence like financial statements.

Subsequently, in AT&T,31 the Court rejected the petitioner's assertion that there is no distinction in the
evidentiary value of the supporting documents; hence, invoices or receipts may be used interchangeably
to substantiate VAT. Apparently, the taxpayer-claimant presented a number of bank credit advice in lieu
of valid VAT official receipts to demonstrate its zero-rated sales of services. The CTA denied the claim;
we sustained the denial.

Then, in Takenaka Corporation-Philippine Branch v. Commissioner,32 the proofs for zero-rated sales of
services were sales invoices. The claim was likewise denied.

Most recently, in Team Energy Corporation v. Commissioner of Internal Revenue/Republic of the

Philippines v. Team Energy Corporation,33 we sustained the CTA En Banc's disallowance of the
petitioner's claim for input taxes after finding that the claimed input taxes on local purchase
of goodswere supported by documents other than VAT invoices; and, similarly, on local purchase
of services, by documents other than VAT official receipts.

Irrefutably, when a VAT-taxpayer claims to have zero-rated sales of services, it must substantiate the
same through valid VAT official receipts, not any other document, not even a sales invoice which properly
pertains to a sale of goods or properties.

In this case, the documentary proofs presented by Nippon Express to substantiate its zero-rated sales
of services consisted of sales invoices and other secondary evidence like transfer slips, credit memos,
cargo manifests, and credit notes.34 It is very clear that these are inadequate to support the petitioner's
sales of services. Consequently, the CTA, albeit without jurisdiction, correctly ruled that Nippon Express
is not entitled to its claim.

In sum, the CTA did not acquire jurisdiction over Nippon Express' judicial claim considering that its
petition was filed beyond the mandatory 30-day period of appeal. Logically, there is no reason to allow
the petitioner to submit further evidence by way of official receipts to substantiate its zero-rated sales
of services. Likewise, there is no need to pass upon the issue on whether sales invoices or documents
other than official receipts can support a sale of service considering the CTA's lack of jurisdiction. Even
so, we find that VAT official receipts are indispensable to prove sales of services by a VAT-registered
taxpayer. Consequently, the petitioner is not entitled to the claimed refund or TCC.

WHEREFORE, for lack of jurisdiction, the 5 December 2008 Decision and 5 May 2009 Resolution of the
Court of Tax Appeals Second Division in CTA Case No. 7429, and the 15 December 2009 Decision of the
Court of Tax Appeals En Banc in CTA-EB Case No. 492, are hereby VACATED and SET ASIDE.

SO ORDERED.
Velasco, Jr., (Chairperson), Bersamin, Leonen, and Gesmundo, JJ., concur.

August 13, 2018

NOTICE OF JUDGMENT

Sirs / Mesdames:

Please take notice that on July 23, 2018 a Decision, copy attached hereto, was rendered by the
Supreme Court in the above-entitled case, the original of which was received by this Office on August
13, 2018 at 10:20 a.m.

Very truly yours,

(SGD.) WILFREDO V. LAPITAN

Division Clerk of Court

Endnotes:

1Rollo, pp. 94-95. see Decision, dated 15 December 2009, promulgated by CTA En Banc in CTA EB No.
492, pp. 2-3.

2 Id. at 80.

3 Id. at 96.

4 Id. at 142.

5 Id. at 145-150.

6 Id. at 111.

7 Id. at 113-115.

8 Id. at 205-224.

9
See Aichi Forging Company of Asia v. CTA, G.R. No. 193625, 30 August 2017, citing Silicon Philippines,
Inc. (formerly Intel Philippines Manufacturing. Inc.) v. CIR, 757 Phil. 54, 69 (2015); Silicon Philippines,
Inc. (formerly Intel Philippines Manufacturing, Inc.) v. CIR. 727 Phil. 487, 499 (2014).

10 Id., citing Nippon Express (Philippines) Corporation v. CIR, 706 Phil. 442, 450-451 (2013).

11 SECTION 1. Defenses and objections not pleaded - Defenses and objections not pleaded either in a
motion to dismiss or in the answer are deemed waived. However, when it appears from the pleadings
or the evidence on record that the court has no jurisdiction over the subject matter, that there is
another action pending between the same parties for the same cause, or that the action is barred by a
prior judgment or by statute of limitations, the court shall dismiss the claim. (emphasis supplied)

12 Before the amendments introduced by R.A. No. 9337 and R.A. No. 9361. R.A. No. 9337 took effect
on 1 November 2005; R.A. No. 9361 on 28 November 2006. Recently, R.A. No. 10963 (or the TRAIN
Law) amended Section 112 of the NIRC. Notably, the 120-day period was shortened to ninety (90) days.

13 Based on the second paragraph of Section 4 of the NlRC which states:

Section 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. – The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions
thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.

14 Based on Section 7 (a) of R.A. No. 1125, as amended by R.A. No. 9282. It reads:

Sec. 7. Jurisdiction.- The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising
under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue;

2. Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges, penalties in relations thereto, or other matters arising
under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue,
where the National internal Revenue Code provides a specific period of action, in which case the inaction
shall be deemed a denial; x x x

G.R. No. 222837, July 23, 2018

MACARIO LIM GAW, JR., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

TIJAM, J.:

Before Us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court filed by Macario Lim
Gaw, Jr. (petitioner) assailing the Decision2 dated December 22, 2014 and Resolution3 dated February
2, 2016 of the Court of Tax Appeals (CTA) En Banc in CTA EB Criminal Case No. 026.

Antecedent Facts

Sometime in November 2007, petitioner acquired six (6) parcels of land. To finance its acquisition,
petitioner applied for, and was granted a Short Term Loan (STL) Facility from Banco De Oro (BDO) in
the amount of P2,021,154,060.00.4

From April to June 2008, petitioner acquired four (4) more parcels of land. Again, petitioner applied for
and was granted an STL Facility from BDO in the amount of P2,732,666,785. 5

Petitioner entered into an Agreement to Sell6 with Azure Corporation for the sale and transfer of real
properties to a joint venture company, which at the time was still to be formed and incorporated. Then
on July 11, 2008, petitioner conveyed the 10 parcels of land to Eagle I Landholdings, Inc. (Eagle I), the
joint venture company referred to in the Agreement to Sell. 7

In compliance with Revenue Memorandum Order No. 15-2003,8 petitioner requested the Bureau of
Internal Revenue (BIR)-Revenue District Office (RDO) No. 52 for the respective computations of the tax
liabilities due on the sale of the 10 parcels of land to Eagle I. 9

In accordance with the One Time Transactions (ONETT) Computation sheets, petitioner paid Capital
Gains Tax amounting to P505,177,213.8110 and Documentary Stamp Tax amounting to P330,390.00.11

On July 23, 2008, the BIR-RDO No. 52 issued the corresponding Certificates Authorizing Registration
and Tax Clearance Certificates.12

Two years later, Commissioner of Internal Revenue (respondent) opined that petitioner was not liable
for the 6% capital gains tax but for the 32% regular income tax and 12% value added tax, on the theory
that the properties petitioner sold were ordinary assets and not capital assets. Further, respondent found
petitioner to have misdeclared his income, misclassified the properties and used multiple tax
identification numbers to avoid being assessed the correct amount of taxes. 13

Thus, on August 25, 2010, respondent issued a Letter of Authority 14 to commence investigation on
petitioner's tax account.

The next day, respondent filed before the Department of Justice (DOJ) a Joint Complaint Affidavit 15 for
tax evasion against petitioner for violation of Sections 254 16 and 25517 of the National Internal Revenue
Code (NIRC).

The DOJ then filed two criminal informations for tax evasion against petitioner docketed as CTA Criminal
Case Nos. O-206 and O-207.18 At the time the Informations were filed, the respondent has not issued
a final decision on the deficiency assessment against petitioner. Halfway through the trial, the
respondent issued a Final Decision on Disputed Assessment (FDDA)19 against petitioner, assessing him
of deficiency income tax and VAT covering taxable years 2007 and 2008.

With respect to the deficiency assessment against petitioner for the year 2007, petitioner filed a petition
for review with the CTA, docketed as CTA Case No. 8502. The clerk of court of the CTA assessed
petitioner for filing fees which the latter promptly paid.20

However, with respect to the deficiency assessment against petitioner for the year 2008, the same
involves the same tax liabilities being recovered in the pending criminal cases. Thus, petitioner was
confused as to whether he has to separately file an appeal with the CTA and pay the corresponding filing
fees considering that the civil action for recovery of the civil liability for taxes and penalties was deemed
instituted in the criminal case.21

Thus, petitioner filed before the CTA a motion to clarify as to whether petitioner has to file a separate
petition to question the deficiency assessment for the year 2008. 22

On June 6, 2012, the CTA issued a Resolution23 granting petitioner's motion and held that the recovery
of the civil liabilities for the taxable year 2008 was deemed instituted with the consolidated criminal
cases, thus:

WHEREFORE, in light of the foregoing considerations, the prosecution's Motion for Leave of Court to
Amend Information and Admit Attached Amended Information filed on May 16, 2012
is GRANTED. Accordingly, the Amended Information for CTA Crim. No. O-206 attached thereto is
hereby ADMITTED. Re-arraignment of [petitioner] in said case is set on June 13, 2012 at 9:00 a.m.

As regards, [petitioner's] Urgent Motion (With Leave of Court for Confirmation that the Civil Action for
Recovery of Civil Liability for Taxes and Penalties is Deemed Instituted in the Consolidated Criminal
Cases) filed on May 30, 2012, the same is hereby GRANTED.The civil action for recovery of the civil
liabilities of [petitioner] for taxable year 2008 stated in the [FDDA] dated May 18, 2012 is DEEMED
INSTITUTED with the instant consolidated criminal cases, without prejudice to the right of the
[petitioner] to avail of whatever additional legal remedy he may have, to prevent the said FDDA from
becoming final and executory for taxable year 2008.

Additionally, [petitioner] is not precluded from instituting a Petition for Review to assail the assessments
for taxable year 2007, as reflected in the said FDDA dated May 18, 2012.

SO ORDERED.24

However, as a caution, petitioner still filed a Petition for Review Ad Cautelam (with Motion for
Consolidation with CTA Criminal Case Nos. O-206 and O-207).25 Upon filing of the said petition, the clerk
of court of the CTA assessed petitioner with "zero filing fees."26

Meanwhile, the CTA later acquitted petitioner in Criminal Case Nos. O-206 and O-207 and directed the
litigation of the civil aspect in CTA Case No. 8503 in its Resolution27 dated January 3, 2013, to wit:

WHEREFORE, all the foregoing considered, the [petitioner's] "DEMURRER TO EVIDENCE" is

hereby GRANTED and CTA Crim. Case Nos. O-206 and O-207 are hereby DISMISSED. Accordingly,
[petitioner] is hereby ACQUITTED on reasonable doubt in said criminal cases.

As regards CTA Case No. 8503, an Answer having been filed in this case on August 17, 2012, let this
case be set for Pre-Trial on January 23, 2013 at 9:00 a.m.

SO ORDERED.28

Thereafter, respondent filed a Motion to Dismiss29 the Petition for Review Ad Cautelam on the ground
that the CTA First Division lacks jurisdiction to resolve the case due to petitioner's non-payment of the
filing fees.

On March 1, 2013, the CTA First Division issued a Resolution 30 granting the Motion to Dismiss. His
motion for reconsideration being denied, petitioner elevated the case to the CTA En Banc. The latter
however affirmed the dismissal of the case in its Decision31 dated December 22, 2014, thus:

WHEREFORE, premises considered, the instant Petition for Review is DENIED for lack of merit. The
Resolutions of the First Division of this Court promulgated on 01 March 2013 and 24 June 2013 are
hereby AFFIRMED.

Costs against the petitioner.

SO ORDERED.32

Petitioner's motion for reconsideration was likewise denied by the CTA En Banc in its Resolution33 dated
February 2, 2016.

Hence, this petition.

Issues

Petitioner raises the following arguments:

IN RESOLVING CTA EB CRIM. CASE NO. 026, THE CTA EN BANC HAS NOT ONLY DECIDED QUESTIONS
OF SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW OR WITH THE APPLICABLE DECISIONS OF THIS
HONORABLE COURT, BUT HAS ALSO DEPRIVED PETITIONER OF HIS RIGHT TO DUE PROCESS AS TO
CALL FOR AN EXERCISE OF SUPERVISION, CONSIDERING THAT:
I

THE CTA EN BANC COMMITTED SERIOUS REVERSIBLE ERROR AND EFFECTIVELY DENIED PETITIONER
DUE PROCESS BY DISMISSING THE PETITION FOR REVIEW AD CAUTELAM SUPPOSEDLY FOR LACK OF
JURISDICTION DUE TO PETITIONER'S FAILURE TO PAY DOCKET AND OTHER LEGAL FEES.

BASED ON APPLICABLE LAWS AND JURISPRUDENCE, AS AFFIRMED BY THE CTA IN ITS PAST
PRONOUNCEMENTS IN THE CONSOLIDATED CASES, IT HAD ALREADY ACQUIRED JURISDICTION OVER
CTA CASE NO. 8503, AND THEREFORE COULD NOT BE DIVESTED OF SUCH JURISDICTION UNTIL FINAL
JUDGMENT.

THE ZERO-FILING-FEE ASSESSMENT IN CTA CASE NO. 8503 ISSUED BY THE CLERK OF COURT OF THE
CTA WAS CONSISTENT WITH APPLICABLE LAWS AND JURISPRUDENCE, AS AFFIRMED BY THE CTA IN
ITS PAST PRONOUNCEMENTS IN THE CONSOLIDATED CASES.

PETITIONER WAS DEPRIVED OF DUE PROCESS WHEN HIS PETITION WAS DISMISSED WITHOUT FIRST
BEING AFFORDED A FAIR OPPORTUNITY TO PAY PROPERLY ASSESSED FILING FEES.

II

THE CTA EN BANC COMMITTED SERIOUS REVERSIBLE ERROR IN DEPRIVING PETITIONER OF HIS
RIGHT TO ASSAIL THE DEFICIENCY ASSESSMENTS AGAINST HIM FOR TAXABLE YEAR 2008 AND
SANCTIONING RESPONDENT'S DENIAL OF PETITIONER'S RIGHT TO DUE PROCESS DESPITE THE
FOLLOWING FACTUAL CIRCUMSTANCES WHICH RENDER THE ASSESSMENTS NULL AND VOID:

THE LETTER OF AUTHORITY NO. 2009-00044669 WHICH COVERS THE AUDIT OF "UNVERIFIED PRIOR
YEARS" IS INVALID, BEING IN DIRECT CONTRAVENTION OF SECTION C OF REVENUE MEMORANDUM
ORDER NO. 43-90.

THE FORMAL LETTER OF DEMAND DATED 08 APRIL 2011 AND FINAL DECISION ON DISPUTED
ASSESSMENT NO. 2012-0001 DATED 18 MAY 2012 WERE IMPROPERLY SERVED ON PETITIONER.

RESPONDENT DISREGARDED PETITIONER'S PROTEST LETTER DATED 07 JUNE 2011 AND ADDITIONAL
SUBMISSIONS IN SUPPORT OF HIS PROTEST.

THE DEFICIENCY TAX ASSESSMENTS AGAINST PETITIONER FOR TAXABLE YEAR 2008 HAVE NO
FACTUAL AND LEGAL BASES.

IT HAS BEEN A CASE OF PERSECUTION RATHER THAN PROSECUTION ON THE PART OF THE
RESPONDENT AGAINST PETITIONER, WARRANTING NOT ONLY AN ACQUITTAL BUT ALSO THE
DISMISSAL OF THE CIVIL ASPECT OF CTA CRIMINAL CASE NOS. O-206 AND O-207.
III

IN THE INTEREST OF THE EXPEDITIOUS ADMINISTRATION OF JUSTICE, THIS HONORABLE COURT MAY
ALREADY RESOLVE THE CIVIL ASPECT OF CTA CRIMINAL CASE NOS. O-206 AND O-207 ON THE
MERITS.34

Ultimately, the issues for Our resolution are: 1) whether the CTA erred in dismissing CTA Case No. 8503
for failure of the petitioner to pay docket fees; 2) in the event that the CTA erred in dismissing the case,
whether this Court can rule on the merits of the case; and 3) whether the petitioner is liable for the
assessed tax deficiencies.

Arguments of the Petitioner

Petitioner claims that since the FDDA covering the year 2008 was also the subject of the tax evasion
cases, the civil action for the recovery of civil liability for taxes and penalties was deemed instituted in
the consolidated criminal cases as a matter of law. Thus, if the civil liability for recovery of taxes and
penalties is deemed instituted in the criminal case, it is the State, not the taxpayer that files the
Information and pays the filing fee. Petitioner claims that there is no law or rule that requires petitioner
to pay filing fees in order for the CTA to rule on the civil aspect of the consolidated criminal cases filed
against him.35

Petitioner likewise asserts that when they filed the Petition for Review Ad Cautelam the clerk of court
made a "zero filing fee" assessment. It is therefore a clear evidence that the civil action for recovery of
taxes was deemed instituted in the criminal actions. Thus, the CTA has long acquired jurisdiction over
the civil aspect of the consolidated criminal cases.36 Therefore, the CTA erred in dismissing the case for
nonpayment of docket fees.

Petitioner further argues that in order not to prolong the resolution of the issues and considering that
the records transmitted to this Court are sufficient to determine and resolve whether petitioner is indeed
liable for deficiency income tax, this Court can exercise its prerogative to rule on the civil aspect of the
CTA Criminal Case Nos. O-206 and O-207.37

Arguments of the Respondent

Respondent, through the Office of the Solicitor General (OSG) argues that the tax evasion cases filed
against petitioner were instituted based on Sections 254 and 255 of the NIRC, that in all criminal cases
instituted before the CTA, the civil aspect of said cases, which constitutes the recovery by the
government of the taxes and penalties relative to the criminal action shall not be subject to reservation
for a separate civil action.38 On the other hand, the civil remedy to contest the correctness or validity of
disputed tax assessment is covered by Section 939 of Republic Act (R.A.) No. 9282.40 The difference
between the criminal case for tax evasion filed by the government for the imposition of criminal liability
on the taxpayer and the Petition for Review filed by the petitioner for the purpose of questioning the
FDDA is glaringly apparent. The mere appearance of the word "civil action" does not give rise to the
conclusion that all "civil" remedies pertain to the same reliefs. The petitioner cannot simultaneously
allege that the petition for review is the civil action that is deemed instituted with the criminal action
and at the same time avail of the separate taxpayer's remedy to contest the FDDA through a petition
for review.41

Respondent further argues that in ruling upon the merits of the Petition for Review Ad Cautelam would
prompt this Court to become a trier of facts, which is improper, especially in a Petition for Review under
Rule 45 of the Rules of Court. Additionally, assuming that the CTA En Banc erred in affirming the
dismissal ordered by the CTA First Division due to non-payment of docket fees, the correct remedy is to
remand the case and order the CTA to compute the required docket fees and reinstate the case upon
payment of the same.42
Ruling of the Court

The petition is partly granted.

The civil action filed by the

petitioner to question the FDDA is
not deemed instituted with the
criminal case for tax evasion

Rule 9, Section 11 of A.M. No. 05-11-07-CTA,43 otherwise known as the Revised Rules of the Court of
Tax Appeals (RRCTA), states that:

SEC. 11. Inclusion of civil action in criminal action. – In cases within the jurisdiction of the Court, the
criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties
shall be deemed jointly instituted in the same proceeding. The filing of the criminal action shall
necessarily carry with it the filing of the civil action. No right to reserve the filing of such civil action
separately from the criminal action shall be allowed or recognized.

Petitioner claimed that by virtue of the above provision, the civil aspect of the criminal case, which is
the Petition for Review Ad Cautelam, is deemed instituted upon the filing of the criminal action. Thus,
the CTA had long acquired jurisdiction over the civil aspect of the consolidated criminal cases. Therefore,
the CTA erred in dismissing the case.

We do not agree.
Rule 111, Section 1(a)44 of the Rules of Court provides that what is deemed instituted with the criminal
action is only the action to recover civil liability arising from the crime. 45 Civil liability arising from a
different source of obligation, such as when the obligation is created by law, such civil liability is not
deemed instituted with the criminal action.

It is well-settled that the taxpayer's obligation to pay the tax is an obligation that is created by law and
does not arise from the offense of tax evasion, as such, the same is not deemed instituted in the criminal
case.46

In the case of Republic of the Philippines v. Patanao,47 We held that:

Civil liability to pay taxes arises from the fact, for instance, that one has engaged himself in
business, and not because of any criminal act committed by him. The criminal liability arises
upon failure of the debtor to satisfy his civil obligation. The incongruity of the factual premises and
foundation principles of the two cases is one of the reasons for not imposing civil indemnity on the
criminal infractor of the income tax law. x x x Considering that the Government cannot seek satisfaction
of the taxpayer's civil liability in a criminal proceeding under the tax law or, otherwise stated, since the
said civil liability is not deemed included in the criminal action, acquittal of the taxpayer in the criminal
proceeding does not necessarily entail exoneration from his liability to pay the taxes. It is error to hold,
as the lower court has held that the judgment in the criminal cases Nos. 2089 and 2090 bars the action
in the present case. The acquittal in the said criminal cases cannot operate to discharge
defendant appellee from the duty of paying the taxes which the law requires to be paid, since
that duty is imposed by statute prior to and independently of any attempts by the taxpayer
to evade payment. Said obligation is not a consequence of the felonious acts charged in the
criminal proceeding nor is it a mere civil liability arising from crime that could be wiped out
by the judicial declaration of non existence of the criminal acts charged. x x x.48(Citations
omitted and emphasis ours)

Further, in a more recent case of Proton Pilipinas Corp. v. Republic of the Phils.,49 We ruled that:
While it is true that according to the aforesaid Section 4, of Republic Act No. 8249, the institution of the
criminal action automatically carries with it the institution of the civil action for the recovery of civil
liability, however, in the case at bar, the civil case for the collection of unpaid customs duties
and taxes cannot be simultaneously instituted and determined in the same proceedings as
the criminal cases before the Sandiganbayan, as it cannot be made the civil aspect of the
criminal cases filed before it. It should be borne in mind that the tax and the obligation to pay
the same are all created by statute; so are its collection and payment governed by
statute. The payment of taxes is a duty which the law requires to be paid. Said obligation is
not a consequence of the felonious acts charged in the criminal proceeding nor is it a mere
civil liability arising from crime that could be wiped out by the judicial declaration of non-
existence of the criminal acts charged. Hence, the payment and collection of customs duties
and taxes in itself creates civil liability on the part of the taxpayer. Such civil liability to pay
taxes arises from the fact, for instance, that one has engaged himself in business, and not
because of any criminal act committed by him.50 (Citations omitted and emphasis ours)

The civil action for the recovery of

civil liability for taxes and penalties
that is deemed instituted with the
criminal action is not the Petition
for Review Ad Cautelam filed by
petitioner

Under Sections 254 and 255 of the NIRC, the government can file a criminal case for tax evasion against
any taxpayer who willfully attempts in any manner to evade or defeat any tax imposed in the tax code
or the payment thereof. The crime of tax evasion is committed by the mere fact that the taxpayer
knowingly and willfully filed a fraudulent return with intent to evade and defeat a part or all of the tax.
It is therefore not required that a tax deficiency assessment must first be issued for a criminal
prosecution for tax evasion to prosper.51

While the tax evasion case is pending, the BIR is not precluded from issuing a final decision on a disputed
assessment, such as what happened in this case. In order to prevent the assessment from becoming
final, executory and demandable, Section 9 of R.A. No. 9282 allows the taxpayer to file with the CTA, a
Petition for Review within 30 days from receipt of the decision or the inaction of the respondent.

The tax evasion case filed by the government against the erring taxpayer has, for its purpose, the
imposition of criminal liability on the latter. While the Petition for Review filed by the petitioner was
aimed to question the FDDA and to prevent it from becoming final. The stark difference between them
is glaringly apparent. As such, the Petition for Review Ad Cautelam is not deemed instituted with the
criminal case for tax evasion.

In fact, in the Resolution52 dated June 6, 2012, the CTA recognized the separate and distinct character
of the Petition for Review from the criminal case, to wit:

As regards, [petitioner's] Urgent Motion (With Leave of Court for Confirmation that the Civil Action for
Recovery of Civil Liability for Taxes and Penalties is Deemed Instituted in the Consolidated Criminal
Cases) filed on May 30, 2012, the same is hereby GRANTED.The civil action for recovery of the civil
liabilities of [petitioner] for taxable year 2008 stated in the [FDDA] dated May 18, 2012 is DEEMED
INSTITUTED with the instant consolidated criminal cases, without prejudice to the right of the
[petitioner] to avail of whatever additional legal remedy he may have, to prevent the said
FDDA from becoming final and executory for taxable year 2008.53 (Emphasis ours)

In the said resolution, what is deemed instituted with the criminal action is only the government's
recovery of the taxes and penalties relative to the criminal case. The remedy of the taxpayer to appeal
the disputed assessment is not deemed instituted with the criminal case. To rule otherwise would be to
render nugatory the procedure in assailing the tax deficiency assessment.

The CTA En Banc erred in

affirming the dismissal of the case
for nonpayment of docket fees

While it is true that the Petition for Review Ad Cautelam is not deemed instituted with the criminal case,
We hold that the CTA En Banc still erred in affirming the dismissal of the case.

Rule 6, Section 3 of the RRCTA provides that:

SEC. 3. Payment of docket fees. – The Clerk of Court shall not receive a petition for review for filing
unless the petitioner submits proof of payment of the docket fees. Upon receipt of the petition or the
complaint, it will be docketed and assigned a number, which shall be placed by the parties on all papers
thereafter filed in the proceeding. The Clerk of Court will then issue the necessary summons to the
respondent or defendant.

Basic is the rule that the payment of docket and other legal fees is both mandatory and jurisdictional.
The court acquires jurisdiction over the case only upon the payment of the prescribed fees.54

However, the mere failure to pay the docket fees at the time of the filing of the complaint, or in this
case the Petition for Review Ad Cautelam, does not necessarily cause the dismissal of the case. As this
Court held in Camaso v. TSM Shipping (Phils.), Inc.,55 while the court acquires jurisdiction over any case
only upon the payment of the prescribed docket fees, its nonpayment at the time of filing of the initiatory
pleading does not automatically cause its dismissal so long as the docket fees are paid within a
reasonable period; and that the party had no intention to defraud the government. 56

In this case, records reveal that petitioner has no intention to defraud the government in not paying the
docket fees. In fact, when he appealed the FDDA insofar as the taxable year 2007 was concerned, he
promptly paid the docket fees when he filed his Petition for Review.

Confusion resulted when the FDDA also covered tax deficiencies pertaining to taxable year 2008 which
was also the subject of the consolidated criminal cases for tax evasion. To guide the petitioner, he
sought the advise of the CTA First Division on whether he was still required to pay the docket fees. The
CTA First Division issued its Resolution57 dated June 6, 2012 ruling that the civil action for recovery of
the civil liabilities of petitioner for taxable year 2008 stated in the FDDA was deemed instituted with the
consolidated criminal cases. Pursuant to said CTA Resolution, the Clerk of Court issued a computed "zero
filing fees"58 when petitioner filed his Petition for Review Ad Cautelam.

Petitioner merely relied on good faith on the pronouncements of the CTA First Division that he is no
longer required to pay the docket fees. As such, the CTA cannot just simply dismiss the case on the
ground of nonpayment of docket fees. The CTA should have instead directed the clerk of court to assess
the correct docket fees and ordered the petitioner to pay the same within a reasonable period. It should
be borne in mind that technical rules of procedure must sometimes give way, in order to resolve the
case on the merits and prevent a miscarriage of justice.

This Court will not however rule on

the merits of the CTA Case No.
8503

Rule 4, Section 3(a), paragraph 1 of the RRCTA provides that the CTA First Division has exclusive
appellate jurisdiction over decisions of the Commissioner of Internal Revenue on disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters
arising under the NIRC or other laws administered by the BIR, to wit:

SEC. 3. Cases within the jurisdiction of the Court in Divisions. – The Court in Divisions shall exercise:

(a) Exclusive original or appellate jurisdiction to review by appeal the following:

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation
thereto, or other matters arising under the National Internal Revenue Code or other laws
administered by the Bureau of Internal Revenue;

The above provision means that the CTA exercises exclusive appellate jurisdiction to resolve decisions
of the commissioner of internal revenue. There is no other court that can exercise such jurisdiction. "[I]t
should be noted that the CTA has developed an expertise on the subject of taxation because it is a
specialized court dedicated exclusively to the study and resolution of tax problems." 59 Thus, this Court
has no jurisdiction to review tax cases at the first instance without first letting the CTA to study and
resolve the same.

Under Rule 16, Section 160 of the RRCTA, this Court's review of the decision of the CTA En Banc is limited
in determining whether there is grave abuse of discretion on the part of the CTA in resolving the case.
Basic is the rule that delving into factual issues in a petition for review on certiorari is not a proper
recourse, since a Rule 45 petition is only limited to resolutions on questions of law. 61

Here, petitioner insists that the 10 parcels of idle land he sold on July 11, 2008 in a single transaction
to Eagle I are capital assets. Thus, the said parcels of land are properly subject to capital gains tax and
documentary stamp tax and not to the regular income tax and value-added tax. The CIR, on the other
hand argues that the 10 parcels of land sold by petitioner are ordinary assets, hence should be subject
to income tax and value-added tax. The CIR reasoned that the sole purpose of petitioner in acquiring
the said lots was for the latter to make a profit. Further, the buying and selling of the said lots all
occurred within the period of eight months and it involved sale transactions with a ready buyer. 62

Section 39(A)(1) of the National Internal Revenue Code (NIRC) provides that:

(1) Capital Assets. - the term 'capital assets' means property held by the taxpayer (whether or not
connected with his trade or business), but does not include stock in trade of the taxpayer or other
property of a kind which would properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business, or property used in the trade or business, of a character which is subject
to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade
or business of the taxpayer.

The distinction between capital asset and ordinary asset was further defined in Section 2(a) and (b)
Revenue Regulations No. 7-2003,63 thus:

a. Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his
trade or business, and which are not included among the real properties considered as ordinary assets
under Sec. 39(A)(1) of the Code.
b. Ordinary assets shall refer to all real properties specifically excluded from the definition of capital
assets under Sec. 39(A)(1) of the Code, namely:
1. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year; or

2. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade
or business; or

3. Real property used in trade or business (i.e., buildings and/or improvements) of a character which is
subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or

4. Real property used in trade or business of the taxpayer.

The statutory definition of capital assets is negative in nature. Thus, if the property or asset is not among
the exceptions, it is a capital asset; conversely, assets falling within the exceptions are ordinary assets. 64
To determine as to whether the transaction between petitioner and Eagle I is an isolated transaction or
whether the 10 parcels of land sold by petitioner is classified as capital assets or ordinary assets should
properly be resolved by the CTA. Thus, it would be more prudent for Us to remand the case to CTA for
the latter to conduct a full-blown trial where both parties are given the chance to present evidence of
their claim. Well-settled is the rule that this Court is not a trier of facts.

Considering Our foregoing disquisitions, the proper remedy is to remand the case to the CTA First
Division and to order the Clerk of Court to assess the correct docket fees for the Petition for Review Ad
Cautelam and for petitioner to pay the same within ten (10) days from receipt of the correct assessment
of the clerk of court.

WHEREFORE, the Petition is hereby PARTIALLY GRANTED. The Decision dated December 22, 2014
and Resolution dated February 2, 2016 of the Court of Tax Appeals En Banc in CTA EB Criminal Case
No. 026 are REVERSED and SET ASIDE. The case is REMANDED to the Court of Tax Appeals First
Division to conduct futher proceedings in CTA Case No. 8503 and to ORDER the Clerk of Court to assess
the correct docket fees. Petitioner Mariano Lim Gaw, Jr., is likewise ORDERED to pay the correct docket
fees within ten (10) days from the receipt of the correct assessment of the Clerk of Court.

SO ORDERED.

Leonardo-De Castro, (Chairperson), Peralta,*Del Castillo, and Gesmundo,**JJ., concur.

Endnotes:

* Designated additional Member per Raffle dated July 9, 2018 vice Associate Justice Francis H. Jardeleza.

** Designated as Acting Member pursuant to Special Order No. 2560 dated May 11, 2018.

1Rollo, pp. 38-122.

2Penned by Associate Justice Ma. Belen M. Ringpis-Liban, concurred in by Associate Justices, Juanito C.
Castañeda, Jr., Lovell R. Bautista, Erlinda P. Uy, Caesar A. Casanova, Esperanza R. Fabon-Victorino,
Cielito N. Mindaro-Grulla, Amelia R. Cotangco-Manalastas and Roman G. Del Rosario (Inhibited); id. at
11-27.

3 Id. at 28-35.

4 Id. at 43.

5 Id.

6 Id. at 326-332.

7 Id. at 354-356.

8 Policies, Guidelines and Procedures in the Processing and Monitoring of One-Time Transactions
(ONETT) and the Issuance of Certificates Authorizing Registration (CARs) Covering Transactions Subject
to Final Capital Gains Tax on Sale of Real Properties Considered as Capital Assets as well as Capital
Gains Tax on the Net Capital Gain on Sale, Transfer or Assignment of Stocks Not Traded in the Stock
Exchange(s), Expanded Withholding Tax on Sale of Real Properties Considered as Ordinary Assets,
Donor's Tax, Estate Tax and Other Taxes including Documentary Stamp Tax Related to the Sale/transfer
of Properties.

9Rollo, p. 45.

10 Id. at 424, 426, 429, 431, 433, 435, 437, 439, 441 and 443.
11
Id. at 425, 428, 430, 432, 434, 436, 438, 440, 442 and 444.

12 Id. at 445-454.

13 Id. at 458, 460-462.

14 Id. at 455.

15 Id. at 456-465.

16SEC. 254. Attempt to Evade or Defeat Tax. - Any person who willfully attempts in any manner to
evade or defeat any tax imposed under this Code or the payment thereof shall, in addition to other
penalties provided by law, upon conviction thereof, be punished by a fine not less than Thirty thousand
(P30,000) but not more than One hundred thousand pesos (P100,000) and suffer imprisonment of not
less than two (2) years but not more than four (4) years: Provided, That the conviction or acquittal
obtained under this Section shall not be a bar to the filing of a civil suit for the collection of taxes.

17SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax Withhold and
Remit Tax and Refund Excess Taxes Withheld on Compensation. - Any person required under this Code
or by rules and regulations promulgated thereunder to pay any tax make a return, keep any record, or
supply correct the accurate information, who willfully fails to pay such tax, make such return, keep such
record, or supply correct and accurate information, or withhold or remit taxes withheld, or refund excess
taxes withheld on compensation, at the time or times required by law or rules and regulations shall, in
addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not less
than Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (1) year but not more
than ten (10) years.

Any person who attempts to make it appear for any reason that he or another has in fact filed a return
or statement, or actually files a return or statement and subsequently withdraws the same return or
statement after securing the official receiving seal or stamp of receipt of internal revenue office wherein
the same was actually filed shall, upon conviction therefor, be punished by a fine of not less than Ten
thousand pesos (P10,000) but not more than Twenty thousand pesos (P20,000) and suffer
imprisonment of not less than one (1) year but not more than three (3) years.

18Rollo, p. 13.

19 Id. at 517-527.

20 Id. at 51.

21 Id.

22 Id.

23 Id. at 546-554.

24 Id. at 553.

25 Id. at 555-589.

26 Id. at 184.

27 Id. at 626-639

28 Id. at 639.

29 Id. at 674-683.

30 Id. at 151-167.
31 Id. at 11-27.

32 Id. at 141.

33 Id. at 28-35.

34 Id. at 58-61.

35 Id. at 62.

36 Id. at 79-80.

37 Id. at 116-117.

38 Id. at 1955.

39 Sec. 9. Section 11 of the same Act is hereby amended to read as follows:

SEC. 11. Who May Appeal; Mode of Appeal; Effect of Appeal. - Any party adversely affected by a
decision, ruling or inaction of the Commissioner of Internal Revenue, the Commissioner of Customs, the
Secretary of Finance, the Secretary of Trade and Industry or the Secretary of Agriculture or the Central
Board of Assessment Appeals or the Regional Trial Courts may file an appeal with the CTA within thirty
(30) days after the receipt of such decision or ruling or after the expiration of the period fixed by law
for action as referred to in Section 7(a)(2) herein.

Appeal shall be made by filing a petition for review under a procedure analogous to that provided for
under Rule 42 of the 1997 Rules of Civil Procedure with the CTA within thirty (30) days from the receipt
of the decision or ruling or in the case of inaction as herein provided, from the expiration of the period
fixed by law to act thereon. A Division of the CTA shall hear the appeal: Provided, however, That with
respect to decisions or rulings of the Central Board of Assessment Appeals and the Regional Trial Court
in the exercise of its appellate jurisdiction appeal shall be made by filing a petition for review under a
procedure analogous to that provided for under rule 43 of the 1997 Rules of Civil Procedure with the
CTA, which shall hear the case en banc.

All other cases involving rulings, orders or decisions filed with the CTA as provided for in Section 7 shall
be raffled to its Divisions. A party adversely affected by a ruling, order or decision of a Division of the
CTA may file a motion for reconsideration of new trial before the same Division of the CTA within fifteen
(15) days from notice thereof: Provided, however, That in criminal cases, the general rule applicable in
regular Courts on matters of prosecution and appeal shall likewise apply.

No appeal taken to the CTA from the decision of the Commissioner of Internal Revenue or the
Commissioner of Customs or the Regional Trial Court, provincial, city or municipal treasurer or the
Secretary of Finance, the Secretary of Trade and Industry and Secretary of Agriculture, as the case may
be shall suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the
satisfaction of his tax liability as provided by existing law: Provided, however, That when in the opinion
of the Court the collection by the aforementioned government agencies may jeopardize the interest of
the Government and/or the taxpayer the Court any stage of the proceeding may suspend the said
collection and require the taxpayer either to deposit the amount claimed or to file a surety bond for not
more than double the amount with the Court.

In criminal and collection cases covered respectively by Section 7(b) and (c) of this Act, the Government
may directly file the said cases with the CTA covering amounts within its exclusive and original
jurisdiction.

40AN ACT EXPANDING THE JURISDICTION OF THE COURT OF TAX APPEALS (CTA), ELEVATING ITS
RANK TO THE LEVEL OF A COLLEGIATE COURT WITH SPECIAL JURISDICTION AND ENLARGING ITS
MEMBERSHIP, AMENDING FOR THE PURPOSE CERTAIN SECTIONS OR REPUBLIC ACT NO. 1125, AS
AMENDED, OTHERWISE KNOWN AS THE LAW CREATING THE COURT OF TAX APPEALS, AND FOR OTHER
PURPOSES. Approved on March 30, 2004.

41Rollo, p. 1965.

42 Id. at 1977.

43 REVISED RULES OF THE COURT OF TAX APPEALS.

44Sec. 1. Institution of criminal and civil actions. — (a) When a criminal action is instituted, the
civil action for the recovery of civil liability arising from the offense charged shall be deemed
instituted with the criminal action unless the offended party waives the civil action, reserves
the right to institute it separately or institutes the civil action prior to the criminal
action. (Emphasis ours)

45Casupanan v. Laroya, 436 Phil. 582, 595 (2002).

46Proton Pilipinas Corp. v. Republic of the Phils., 535 Phil. 521, 533 (2006).

47 127 Phil. 105 (1967).

48 Id. at 108-109.

49 535 Phil. 521 (2006).

50 Id. at 532-533.

51Ungab v. Judge Cusi, Jr., 186 Phil. 604, 610-611 (1980).

52Rollo, pp. 546-554.

53 Id. at 553.

54Gipa, et al. v. Southern Luzon Institute, 736 Phil. 515, 527 (2014).

55 G.R. No. 223290, November 7, 2016, 807 SCRA 204.

56 Id. at 210.

57Rollo, pp. 546-554.

58 Id. at 184.

59Eastern Telecommunications Phils., Inc. v. Commissioner of Internal Revenue, 757 Phil. 136, 143
(2015).

60SEC. 1. Appeal to Supreme Court by petition for review on certiorari. – A party adversely affected
by a decision or ruling of the Court en banc may appeal therefrom by filing with the Supreme
Court a verified petition for review on certiorari within fifteen days from receipt of a copy of the
decision or resolution, as provided in Rule 45 of the Rules of Court. If such party has filed a motion for
reconsideration or for new trial, the period herein fixed shall run from the party's receipt of a copy of
the resolution denying the motion for reconsideration or for new trial. (Emphasis ours)

61Nenita Quality Foods Corp. v. Galabo, et al., 702 Phil. 506, 515 (2013).

62Rollo, p. 524.

63 Providing the Guidelines in Determining Whether a Particular Real Property is a Capital Asset or an
Ordinary Asset Pursuant to Section 39(A)(1) of the National Internal Revenue Code of 1997 for Purposes
of Imposing the Capital Gains Tax under Sections 24(D), 25(A)(3), 25(B) and 27(D)(5), or the Ordinary
Income Tax under Sections 24(A), 25(A) & (B), 27(A), 28(A)(1) and 28(B)(1), or the Minimum Corporate
Income Tax (MCIT) under Sections 27(E) and 28(A)(2) of the same Code.

FIRST DIVISION

G.R. No. 197945, July 09, 2018

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. PILIPINAS SHELL PETROLEUM

CORPORATION, Respondent

[G.R. Nos. 204119-20]

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. PILIPINAS SHELL PETROLEUM

CORPORATION AND PETRON CORPORATION, Respondents.

DECISION

LEONARDO-DE CASTRO,*J.:

Before the Court are consolidated petitions for review on certiorari under Rule 45 of the Rules of Court,
as amended, filed by petitioner Commissioner of Internal Revenue (CIR):

1. G.R. No. 197945 assailing the Decision1 dated February 22, 2011 and Resolution2 dated July
27, 2011 of the Court of Tax Appeals (CTA) in CTA En Banc Case No. 535; and

2. G.R. Nos. 204119-20 assailing the Decision3 dated March 21, 2012 and Resolution4 dated
October 10, 2012 of the Court of Appeals in CA-G.R. SP Nos. 55329-30.

Respondents Pilipinas Shell Petroleum Corporation (Shell) and Petron Corporation (Petron) are domestic
corporations engaged in the production of petroleum products and are duly registered with the Board of
Investments (BOI) under the Omnibus Investments Code of 1987.5

On different occasions during 1988 to 1996, respondents separately sold bunker oil and other fuel
products to other BOT-registered entities engaged in the export of their own manufactured goods (BOI
export entities).6 These BOT-registered export entities used Tax Credit Certificates (TCCs) originally
issued in their name to pay for these purchases.

To proceed with this mode of payment, the BOT-registered export entities executed Deeds of
Assignment in favor of respondents, transferring the TCCs to the latter. Subsequently, the Department
of Finance (DOF), through its One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center (DOF
Center), approved the Deeds of Assignment.7

Thereafter, respondents sought the DOF Center's permission to use the assigned TCCs in settling
respondents' own excise tax liabilities. The DOF Center issued Tax Debit Memoranda (DOF TDMs)
addressed to the Collection Program Division of the Bureau of Internal Revenue (BIR), 8 allowing
respondents to do so.

Thus, to pay for their excise tax liabilities from 1992 to 1997 (Covered Years),9 respondents presented
the DOF TDMs to the BIR. The BIR accepted the TDMs and issued the following: (a) TDMs signed by the
BIR Assistant Commissioner for Collection Service10 (BIR TDMs); (b) Authorities to Accept Payment for
Excise Taxes (ATAPETs) signed by the BIR Regional District Officer; and (c) corresponding instructions
to BIR's authorized agent banks to accept respondents' payments in the form of BIR TDMs. 11
Three significant incidents arising from the foregoing antecedents resulted in the filing of several
petitions before this Court, viz.:

Resultant Petition/s before the

Significant Incidents
Court

(a) 1998 Collection G.R. Nos. 204119-20 (one of the pr

Letters issued by the sent petitions)
BIR against
respondents

(b) 1999 Assessments Pilipinas Shell Petroleum Corporation

issued by the BIR v. Commissioner of Internal Revenue,
against respondents G.R. No. 172598, December 21, 2007
(2007 Shell Case)

Petron Corporation v. Commissioner

of Internal Revenue, G.R. No.
180385, July 28, 2010 (2010 Petron
Case)

(c) 2002 Collection G.R. No. 197945 (one of the present

Letter issued by the BIR petitions)
against respondent
Shell
Said incidents and petitions are discussed in detail below.

A. 1998 Collection Letters

(G.R. Nos. 204119-20)

In its collection letters12 dated April 22, 1998 (1998 Collection Letters) addressed to respondents'
respective presidents, the BIR13 pointed out that respondents partly paid for their excise tax liabilities
during the Covered Years using TCCs issued in the names of other companies; invalidated respondents'
tax payments using said TCCs; and requested respondent Shell and respondent Petron to pay their
delinquent tax liabilities amounting to P1,705,028,008.06 and P1,107,542,547.08, respectively. The
1998 Collection Letters similarly read:
Our records show that for the years x x x, you have been paying part of your excise tax liabilities in the
form of Tax Credit Certificate (TCC) which bear the name of a company other than yours in violation of
Rule IX of the Rules and Regulations issued by the Board of Investments to implement P.D. No. 1789
and B.P. 391. Accordingly, your payment through the aforesaid TCC's are considered invalid
and therefore, you are hereby requested to pay the amount of x x x inclusive of delinquency for
late payments as of even date, covering the years heretofore mentioned within thirty days (30) from
receipt hereof, lest we will be constrained to resort to administrative and legal remedies
available in accordance with law. (Emphasis supplied.)
Respondents separately filed their administrative protests14 against the 1998 Collection Letters, but the
BIR denied15 said protests. The BIR maintained that the transfers of the TCCs from the BOI-registered
export entities to respondents and the use of the same TCCs by respondents to pay for their self-
assessed specific tax liabilities were invalid, and reiterated its demand that respondents pay their
delinquent taxes.

This prompted respondent Petron to file a Petition for Review16 before the CTA docketed as CTA Case
No. 5657.

As for respondent Shell, it first requested for reconsideration of the denial of its protest by the
BIR.17However, while said request for reconsideration was pending, the BIR issued a Warrant of
Garnishment18against respondent Shell. Taking this as a denial of its request for reconsideration,
respondent Shell likewise filed a Petition for Review19 before the CTA docketed as CTA Case No. 5728.

In their respective petitions before the CTA, respondents raised similar arguments against petitioner, to
wit: (a) The collection of tax without prior assessment was a denial of the taxpayer's right to due
process; (b) The use of TCCs as payment of excise tax liabilities was valid; (c) Since the BIR approved
the transfers and subsequent use of the TCCs, it was estopped from questioning the validity thereof;
and (d) The BIR's right to collect the alleged delinquent taxes had already prescribed.

The CTA granted respondents' petitions in separate Decisions both dated July 23, 1999, decreeing as
follows:
CTA Case No. 5657

WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby GRANTED. The collection
of the alleged delinquent excise taxes in the amount of P1,107,542,547.08 is hereby CANCELLED AND
SET ASIDE for being contrary to law. Accordingly, [herein petitioner and BIR Regional Director of Makati,
Region No. 8] are ENJOINED from collecting the said amount of taxes against [herein respondent
Petron].20

CTA Case No. 5728

IN LIGHT OF ALL THE FOREGOING, the instant petition for review is GRANTED. The collection letter
issued by [herein petitioner] dated April 22, 1998 is considered withdrawn and he is ENJOINED from
any attempts to collect from [herein respondent Shell] the specific tax, surcharge and interest subject
of this petition.21
In both Decisions, the CTA upheld the validity of the TCC transfers from the BOI-registered export
entities to respondents, the latter having complied with the requirements of transferability. The CTA
further ruled that the BIR's attempt to collect taxes without an assessment was a denial of due process
and a violation of Section 22822 of the National Internal Revenue Code of the Philippines of 1997 (Tax
Code). The CTA also noted that the BIR might have purposely avoided the issuance of a for;mal
assessment because its right to assess majority of respondents' alleged delinquent taxes had already
prescribed.

Petitioner's motions for reconsideration of the above-mentioned decisions were denied by the
CTA.23Thus, petitioner CIR sought recourse before the Court of Appeals 24 through the consolidated
petitions docketed as CA-G.R. SP Nos. 55329-30.

However, the Court of Appeals dismissed the petitions and found the transfer and utilization of the
subject TCCs were valid, in accordance with the 2007 Shell Case.25 The appellate court eventually denied
petitioner's motion for reconsideration.

Undaunted, petitioner CIR filed the present petition docketed as G.R. Nos. 204119-20.

B. 1999 Assessments (The 2007 Shell Case and 2010 Petron Case)

During the pendency of the consolidated petitions in CA-G.R. SP Nos. 55329-30 before the Court of
Appeals, the DOF Center conducted separate post-audit procedures26 on all of the TCCs acquired and
used by respondents during the Covered Years, requiring them to submit documents to support their
acquisition of the TCCs from the BOI-registered export entities. As a result of its post-audit procedures,
the DOF Center cancelled the first batch of the transferred TCCs27 used by respondent Shell and Petron,
with aggregate amount of P830,560,791.00 and P284,390,845.00, respectively.

Following the cancellation of the TCCs, petitioner issued separate assessment letters to respondents in
November 1999 (1999 Assessments) for the payment of deficiency excise taxes, surcharges, and
interest for the Covered Years, which were also covered by the 1998 Collection Letters. Respondents
filed their respective administrative protests against said assessments. While petitioner denied
respondent Shell's protest, he did not act upon that of respondent Petron.

B.1 The 2007 Shell Case

Respondent Shell raised petitioner's denial of its protest through a petition for review before the CTA,
docketed as CTA Case No. 6003. The CTA Division rendered a Decision dated August 2, 2004 granting
said petition and cancelled and set aside the assessment against respondent Shell; but then the CTA en
banc, in its Decision dated April 28, 2006, set aside the CTA Division's judgment and ordered respondent
Shell to pay petitioner deficiency excise tax, surcharges, and interest. Hence, respondent Shell filed a
petition for review before this Court docketed as G.R. No. 172598, the 2007 Shell Case.

In its Decision in the 2007 Shell Case, the Court cancelled the 1999 assessment against respondent
Shell and disposed thus:
WHEREFORE, the petition is GRANTED. The April 28, 2006 CTA En Banc Decision in CTA EB No. 64 is
hereby REVERSED and SET ASIDE, and the August 2, 2004 CTA Decision in CTA Case No. 6003
disallowing the assessment is hereby REINSTATED. The assessment of respondent for deficiency excise
taxes against petitioner for 1992 and 1994 to 1997 inclusive contained in the April 22, 1998 letter of
respondent is cancelled and declared without force and effect for lack of legal basis. No pronouncement
as to costs.28
In nullifying petitioner's assessments, the Court upheld the TCCs' validity, respondent Shell's
qualifications as transferees of said TCCs, respondent Shell's status as a transferee in good faith and for
value, and respondent Shell's right to due process.

The 2007 Shell Case became final and executory on March 17, 2008.29

B.2 The 2010 Petron Case

Considering petitioner's inaction on its protest, respondent Petron likewise filed a petition for review
with the CTA, docketed as CTA Case No. 6136, to challenge the assessment. In a Decision dated August
23, 2006, the CTA Division denied the petition and ordered respondent Petron to pay petitioner
deficiency excise taxes, surcharges, and interest. Said judgment was subsequently affirmed by the
CTA En Banc in. its Decision dated October 30, 2007. This prompted respondent Petron to seek relief
from this Court through a petition for review, docketed as G.R. No. 180385, the 2010 Petron Case.30

Citing the 2007 Shell Case, the Court similarly cancelled the 1999 assessment against respondent Petron
and decided the 2010 Petron Case as follows:
WHEREFORE, premises considered, the petition is GRANTED and the October 30, 2007 CTA En
Banc Decision in CTA EB No. 238 is, accordingly, REVERSED and SET ASIDE. In lieu thereof, another is
entered invalidating respondent's Assessment of petitioner's deficiency excise taxes for the years 1995
to 1997 for lack of legal bases. No pronouncement as to costs.31
Entry of Judgment32 was made in the 2010 Petron Case on November 2, 2010.

C. 2002 Collection Letter

(G.R. No. 197945)

Meanwhile, during the pendency of respondent Shell's CTA Case No. 6003 (which was eventually
elevated to this Court in the 2007 Shell Case), the BIR requested respondent Shell to pay its purported
excise tax liabilities amounting to P234,555,275.48, in a collection letter 33 dated June 17, 2002 (2002
Collection Letter), which read:
Collection Letter

x x x x
Our records show that a letter dated January 30, 2002 was served to you by our Collection Service, for
the collection of cancelled Tax Credit Certificates and Tax Debit Memos which were used to pay your
1995 to 1998 excise tax liabilities. Said cancellation was embodied in EXCOM Resolution No. 03-05-99
of the Tax & Duty Drawback Center of the Department of Finance. Upon verification by this Office,
however, some of these TCCs/TDMs were already included in the tax case previously filed in [the] Court
of Tax Appeals. Accordingly, the collectible amount has been reduced from P691,508,005.82 to
P234,555,275.48, the summary of which is hereto attached for your ready reference.

Basic P 87,893,876.00

Surcharge 21,973,469.00

Interest 124,687,930.48

TOTAL P 234,555,275.48
In view thereof, you are hereby requested to pay the aforesaid tax liability/ties within ten (10)
days from receipt hereof thru any authorized agent bank x x x Should you fail to do so, this Office,
much to our regret, will be constrained to enforce the collection of the said amount thru
the summary administrative remedies provided by law, without any further notice. (Emphasis
supplied.)
DOF Executive Committee Resolution No. 03-05-99 referred to in the aforequoted Collection Letter
prescribed the guidelines and procedures for the cancellation, recall, and recovery of fraudulently-issued
TCCs.

Respondent Shell filed on July 11, 2002 its administrative protest 34 to the 2002 Collection Letter.
However, without resolving said protest, petitioner35 issued a Warrant of Distraint and/or Levy dated
September 12, 2002 for the satisfaction of the following alleged tax delinquency of respondent Shell:
WHEREAS, THERE IS DUE FROM:

PILIPINAS SHELL PETROLEUM CORP. x x x x

The sum of TWO HUNDRED THIRTY[-]FOUR MILLION FIVE HUNDRED FIFTY[-]FIVE THOUSAND TWO
HUNDRED TWENTY[-]FIVE PESOS AND 48 CENTAVOS as Internal Revenue Taxes shown hereunder, plus
all increments incident to delinquency.

Assessment Notice
: Unnumbered
No.

Date Issued : January 30, 2002

Tax Type : Excise Tax

Various Dates (December 18, 1995 to

Period Covered :
July 03, 1997)

Amount : P234,555,275.48
WHEREAS, the said taxpayer failed and refused and still fails and refuses to pay the same
notwithstanding demands made by this Office.36
Aggrieved, respondent Shell filed a petition for review37 before the CTA docketed as CTA Case No. 6547,
arguing that: (a) the issuance of the 2002 Collection Letter and Warrant of Distraint and/or Levy and
enforcement of DOF Center's Executive Committee Resolution No. 03-05-99 violated its right to due
process; (b) The DOF Center did not have authority to cancel the TCCs; (c) The TCCs' transfers and
utilizations were valid and legal; (d) It was an innocent purchaser for value; (e) The HIR was estopped
from invalidating the transfer and utilization of the TCCs; and (f) The HIR's right to collect had already
prescribed.

The CTA Second Division ruled in favor of respondent Shell in its Decision38 dated April 30, 2009:
WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED. The Collection
Letters and Warrant of Distraint and/or Levy are CANCELLED and declared without force and effect for
lack of legal basis.39
After the CTA Division denied40 his motion for reconsideration, petitioner elevated the case to the CTA En
Banc via a petition for review41 docketed as CTA EB No. 535.

In its Decision dated February 22, 2011, the CTA En Banc denied the petition and affirmed the judgment
of the CTA Division.

The CTA En Banc resolved the issues relying on the 2007 Shell Case. Pursuant to this ruling, the real
issue is not whether the BOI-registered export entities validly procured the TCCs from the DOF Center,
but whether respondent Shell fraudulently obtained the TCCs from said BOI-registered export entities.

The CTA En Banc brushed aside petitioner's argument that respondent Shell was aware that the
transferred TCCs were subject to post-audit procedures. It explained that the TCCs were valid and
effective upon issuance and were not subject to post-audit procedures as a suspensive condition.
Further, the TCCs could no longer be cancelled once these had been fully utilized or duly applied against
any outstanding tax liability of an innocent transferee for value.

In this regard, the CTA En Banc found that respondent Shell did not participate in any fraud attending
the issuance of the TCCs, as well as its subsequent transfers. Thus, respondent Shell is an innocent
transferee in good faith and for value and could not be prejudiced by fraud attending the TCCs'
procurement.

In the absence of fraud, petitioner could only reassess Shell for deficiency tax within the three-year
prescriptive period under Section 203 of the Tax Code, not the 10-year period under Section 222(a) of
the same Code. Further, petitioner violated respondent Shell's right to due process when he issued the
2002 Collection Letter without a Notice of Informal Conference (NIC) or a Preliminary Assessment Notice
as required by Revenue Regulations No. (RR) 12-99.

The CIR moved for reconsideration but was denied.

Hence, petitioner now comes before this Court citing in the petitions at bar the following errors allegedly
committed by the courts a quo in G.R. Nos. 204119-20 and G.R. No. 197945:

G.R. Nos. 204119-20

The Court of Appeals erred:

I.

IN NOT HOLDING THAT RESPONDENTS SHELL AND PETRON WERE NOT QUALIFIED TRANSFEREES OF
THE TAX CREDIT CERTIFICATES (TCCs) SINCE THEY WERE NOT SUPPLIERS OF DOMESTIC CAPITAL
EQUIPMENT OR OF RAW MATERIAL AND/OR COMPONENTS TO THEIR TRANSFERORS.

II.

IN NOT HOLDING THAT SINCE RESPONDENTS WERE NOT QUALIFIED TRANSFEREES OF THE TCCs, THE
SAME COULD NOT BE VALIDLY USED IN PAYING THEIR EXCISE TAX LIABILITIES.
III.

IN NOT HOLDING THAT GOVERNMENT IS NOT ESTOPPED FROM COLLECTING TAXES DUE TO THE
MISTAKES OF ITS AGENTS.

IV.

IN NOT HOLDING THAT SHELL WAS ACCORDED DUE PROCESS IN PETITIONER'S ATTEMPT TO COLLECT
ITS EXCISE TAX LIABILITIES.42

G.R. No. 197945

I. The CTA EN BANC COMMITTED GRIEVOUS ERROR IN NOT RULING ON THE VALIDITY OF THE TCCs
AND ITS CONSEQUENT EFFECTS ON THE RIGHTS AND OBLIGATIONS ASSUMED BY RESPONDENT.

II. THE CTA EN BANC COMMITTED GRIEVOUS ERROR IN HOLDING THAT RESPONDENT IS AN INNOCENT
TRANSFEREE OF THE DISPUTED TCCs IN GOOD FAITH.

III. THE CTA EN BANC COMMITTED GRIEVOUS ERROR IN RULING THAT RESPONDENT IS NOT LIABLE
TO PAY EXCISE TAXES.

IV. THE CTA EN BANC COMMITTED GRIEVOUS ERROR IN HOLDING THAT THE GOVERNMENT IS
ESTOPPED FROM NULLIFYING THE TCCs, AND DECLARING THEIR USE, TRANSFER AND UTILIZATION
AS FRAUDULENT.

V. THE CTA EN BANC COMMITTED GRIEVOUS ERROR IN RULING THAT RESPONDENT WAS DENIED DUE
PROCESS.

VI. THE CTA EN BANC COMMITTED A GRIEVOUS ERROR IN DECLARING THAT THE PERIOD TO COLLECT
RESPONDENT'S UNPAID EXCISE TAXES HAS ALREADY PRESCRIBED.

VII. THE CTA EN BANC COMMITTED A GRIEVOUS ERROR IN RULING THAT,RESPONDENT IS NOT LIABLE
TO PAY SURCHARGES AND INTERESTS.43
The Ruling of the Court

The petitions are without merit.

The issues concerning the transferred TCCs' validity, respondents' qualifications as

transferees of said TCCs, and the respondents' valid use of the TCCs to pay for their excise
tax liabilities for the Covered Years had been finally settled in the 2007 Shell Case and 2010
Petron Case and are already barred from being re-litigated herein by the doctrine of res
judicata in the concept of conclusiveness of judgment.

While the present petitions, on one hand, and the 2007 Shell Case and 2010 Petron Case, on the other
hand, involve identical parties and originate from the same factual antecedents, there are also
substantial distinctions between these cases, for which reason, the Court cannot simply dismiss the
former on account of the latter based on the doctrine of res judicata in the concept of "barby prior
judgment."

The 2007 Shell Case and 2010 Petron Case were assessment cases. These initiated from respondents'
protests of the 1999 Assessments issued by petitioner CIR against them for deficiency excise taxes,
surcharges, and interest, following cancellation of the transferred TCCs and the corresponding TDMs
which respondents used to pay for said excise taxes. Said cases were primarily concerned with the
legality and propriety of petitioner's issuance of the 1999 Assessments against respondents.

In contrast, the consolidated petitions now before the Court arose from respondents' protests of
petitioner's 1998 and 2002 Collection Letters for essentially the same excise tax deficiencies covered
by the 1999
Assessments, but apparently issued and pursued by the petitioner and BIR separately from and
concurrently with the assessment cases. At the crux of these cases is petitioner's right to collect the
deficiency excise taxes from respondents.

In the instant petitions, petitioner asserts his right to collect as excise tax deficiencies the excise tax
liabilities which respondents had previously settled using the transferred TCCs, impugning the TCCs'
validity on account of fraud as well as respondents' qualifications as transferees of said TCCs. However,
respondents already raised the same arguments and the Court definitively ruled thereon in its final and
executory decisions in the 2007 Shell Case and 2010 Petron Case.

The re-litigation of these issues in the present petitions, when said issues had already been settled with
finality in the 2007 Shell Case and 2010 Petron Case, is precluded by res judicata in the concept of
"conclusiveness of judgment."

In Ocho v. Calos,44 the Court extensively explained the doctrine of res judicata in the concept of
"conclusiveness of judgment," thus:
The doctrine of res judicata as embodied in Section 47, Rule 39 of the Rules of Court states:
SECTION 47. Effect of judgments or final orders. - The effect of a judgment or final order rendered by
a court of the Philippines, having jurisdiction to pronom:tce the judgment or final order, may be as
follows:

x x x x

(b) In other cases, the judgment or final order is, with respect to the matter directly adjudged or as to
any other matter that could have been raised in relation thereto, conclusive between the parties and
their successors-in interest by title subsequent to the commencement of the action or special
proceeding, litigating for the same thing and under the same title and in the same capacity; and

(c) In any other litigation between the same parties or their successors-in-interest, that only is deemed.
to have been adjudged in a former judgment or final order which appears upon its face to have been so
adjudged, or which was actually and necessarily included therein or necessary thereto.
It must be pointed out at this point that, contrary to the insistence of the Caloses, the doctrine of res
judicata applies to both judicial and quasi-judiCial proceedings. The doctrine actually embraces two (2)
concepts: the first is "bar by prior judgment" under paragraph (b) of Rule 39, Section 47, and the second
is "conclusiveness of judgment" under paragraph (c) thereof. In the present case, the second
concept - conclusiveness of judgment- applies. The said concept is explained in this manner:
[A] fact or question which was in issue in a former suit and was there judicially passed upon
and determined by a court of competent jurisdiction, is conclusively settled by the judgment
therein as far as the parties to that action and persons in privity with them are concerned
and cannot be again litigated in any future action between such parties or their privies, in the
same court or any other court of concurrent jurisdiction on either the same or different cause
of action, while the judgment remains unreversed by proper authority. It has been held that in
order. that a judgment in one action can be conclusive as to a particular matter in another action
between the same parties or their privies, it is essential that the issue be identical. If a particular
point or question is in issue in the second action, and the judgment will depend on the determination of
that particular point or question, a former judgment between the same parties or their privies will
be final and conclusive in the second if that same point or question was in issue and adjudicated in
the first suit. x x x.
Although the action instituted by the Caloses in Adm. Case No. 006-90 (Anomalies/Irregularities in OLT
Transfer Action and Other Related Activities) is different from the action in Adm. Case No. (X)-014
(Annulment of Deeds of Assignment, Emancipation Patents and Transfer Certificate of Titles, Retention
and Recovery of Possession and Ownership), the concept of conclusiveness of judgment still applies
because under this principle "the identity of causes of action is not required but merely identity
of issues."

[Simply] put, conclusiveness of judgment bars the relitigation of particular facts or issues in
another litigation between the same parties on a different claim or cause of action. In Lopez
vs. Reyes, we expounded on the concept of conclusiveness of judgment as follows:
The general rule precluding the relitigation of material facts or questions which were in issue and
adjudicated in former action are commonly applied to all matters essentially connected with the subject
matter of litigation. Thus it extends to questions necessarily involved in an issue, and necessarily
adjudicated, or necessarily implied in the final judgment, although no specific finding may have been
made in reference thereto, and although such matters were directly referred to in the pleadings and
were not actually or formally presented. Under this rule, if the record of the former trial shows that the
judgment could not have been rendered without deciding the particular matter, it will be considered as
having settled that matter as to all future actions between the parties, and if a judgment necessarily
presupposes certain premises, they are as conclusive as the judgment itself. Reasons for the rule are
that a judgment is an adjudication on all the matters which are essential to support it, and that every
proposition assumed or decided by the court leading up to the final conclusion upon which such
conclusion is based is as effectually passed upon as the ultimate question which is solved.

xxxx
As held in Legarda vs. Savellano:
x x x It is a general rule common to all civilized system of jurisprudence, that the solemn and deliberate
sentence of the law, pronounced by its appointed organs, upon a disputed fact or a state of facts, should
be regarded as a final and conclusive determination of the question litigated, and should forever set the
controversy at rest. Indeed, it has been well said that this maxim is more than a mere rule of law; more
even than an important principle of public policy; and that it is not too much to say that it is a
fundamental concept in the organization of every jural system. Public policy and sound practice demand
that, at the risk of occasional errors, judgments of courts should become final at some definite date
fixed by law. The very object for which courts were constituted was to put an end to controversies.
The findings of the Hearing Officer in Adm. Case No. 006-90, which had long attained finality, that
petitioner is not the owner of other agricultural lands foreclosed any inquiry on the same issue involving
the same parties and property. The CA thus erred in still making a finding that petitioner is not qualified
to be a farmer-beneficiary because he owns other agricultural lands. (Emphases supplied, citations
omitted.)
In the 2007 Shell Case, the Court affirmed the validity of the TCCs, the transfer of the TCCs to
respondent Shell, and the use of the transfe ed TCCs by respondent Shell to partly pay for its excise tax
liabilities for the Covered Years. The Court ratiocinated as follows: First, the results of postaudit
procedures conducted in connection with the TCCs should not operate as a suspensive condition to the
TCCs' validity. Second, while it was one of the conditions appearing on the face of the TCCs, the post-
audit contemplated therein did not pertain to the TCCs' genuineness or validity, but to computational
discrepancies that might have resulted from their utilization and transfer. Third, the DOF Center or DOF
could not compel respondent Shell to submit sales documents for the purported post-audit. As a BOI-
registered enterprise, respondent Shell was a qualified transferee of the subject TCCs, pursuant to
existing rules and regulations.45Fourth, respondent Shell was a transferee in good faith and for value as
it secured the necessary approvals from various government agencies before it used and applied the
transferred TCCs against its tax liabilities and it did not participate in the perpetuation of fraudulent acts
in the procurement of the said TCCs. As a transferee in good faith, respondent Shell could not be
prejudiced with a re-assessment of excise tax liabilities it had already settled when due using the subject
TCCs nor by any fraud attending the procurement of the subject TCCs. Fifth, while the DOF Center was
authorized to cancel TCCs it might have erroneously issued, it could no longer exercise such authority
after the subject TCCs have already been utilized and accepted as payment for respondent Shell's excise
tax liabilities. What had been used up, debited, and cancelled could no longer be voided and cancelled
anew. While the State was not estopped by the neglect or omission of its agents, this principle could
not be applied to the prejudice of an innocent transferee in good faith and for value.

And finally, the Court found in the 2007 Shell Case that respondent Shell's right to due process was
violated. Petitioner did not issue a Notice of Informal Conference (NIC) and Preliminary Assessment
Notice (PAN) to respondent Shell, in violation of the formal assessment procedure required by Revenue
Regulations No. (RR) 12-99.46 Petitioner merely relied on the DOF Center's findings supporting the
cancellation of respondent Shell's TCCs. Thus, the Court voided the assessment dated November 15,
1999 issued by the CIR against herein respondent Shell.

On the other hand, the Court resolved the 2010 Petron Case in accordance with its ruling in the 2007
Shell Case, reiterating that: First, the subject TCCs' validity and effectivity should be immediate and
should not be dependent on the outcome of a post-audit as a suspensive condition. Second, respondent
Petron could not be prejudiced by fraud alleged to have attended such issuance as it was not privy to
the issuance of the subject TCCs and it had already used said TCCs in settling its tax liabilities. Third,
respondent Petron was also an innocent transferee in good faith and for value because it was a qualified
transferee of the TCCs based on existing rules and regulations and the TCCs' transfers were approved
by the appropriate government agencies. And fourth, while the government cannot be estopped from
collecting taxes by the mistake, negligence, or omission of its agents, the rights of a transferee in good
faith and for value should be protected.

The Court's aforementioned findings in the 2007 Shell Case and 2010 Petron Case are conclusive and
binding upon this Court in the petitions at bar. Res judicata by conclusiveness of judgment bars the
Court from relitigating the issues on the TCCs' validity and respondents' qualifications as transferees in
these cases. As a result of such findings in the 2007 Shell Case and 2010 Petron Case, then respondents
could not have had excise tax deficiencies for the Covered Years as they had validly paid for and settled
their excise tax liabilities using the transferred TCCs.

In any case, the present petitions are dismissed as petitioner violated respondents' right to
due process for failing to observe the prescribed procedure for collection of unpaid taxes
through summary administrative remedies.

The Court dismisses the present petitions for it cannot allow petitioner to collect any excise tax deficiency
from respondents by mere issuance of the 1998 and 2002 Collection Letters. Petitioner had failed to
comply with the prescribed procedure for collection of unpaid taxes through summary administrative
remedies and, thus, violated respondents' right to due process.

That taxation is an essential attribute of sovereignty and the lifeblood of every nation are doctrines well-
entrenched in our jurisdiction. Taxes are the government's primary means to generate funds needed to
fulfill its mandate of promoting the general welfare and well-being of the people47 and so should be
collected without unnecessary hindrance.48

While taxation per se is generally legislative in nature, collection of tax is administrative in

character.49Thus, Congress delegated the assessment and collection of all national internal revenue
taxes, fees, and charges to the BIR.50 And as the BIR's chief, the CIR has the power to make
assessments and prescribe additional requirements for tax administration and enforcement.51

The Tax Code provides two types of remedies to enforce the collection of unpaid taxes, to wit:
(a) summary administrative remedies, such as the distraint and/or levy of taxpayer's
property;52 and/or (b) judicial remedies, such as the filing of a criminal or civil action against the
erring taxpayer.53

Verily, pursuant to the lifeblood doctrine, the Court has allowed tax authorities ample discretion to avail
themselves of the most expeditious way to collect the taxes,54including summary processes, with as
little interference as possible.55 However, the Court, at the same time, has not hesitated to strike down
these processes in cases wherein tax authorities disregarded due process. 56 The BIR's power to collect
taxes must yield to the fundamental rule that no person shall be deprived of his/her property without
due process of law.57The rule is that taxes must be collected reasonably and in accordance with
the prescribed procedure.58

In the normal course of tax administration and enforcement, the BIR must first make
an assessmentthen enforce the collection of the amounts so assessed. "An assessment is not an
action or proceeding for the collection of taxes. x x x It is a step preliminary, but essential to warrant
distraint, if still feasible, and, also, to establish a cause for judicial action." 59 The BIR may summarily
enforce collection only when it has accorded the taxpayer administrative due process, which vitally
includes the issuance of a valid assessment.60 A valid assessment sufficiently informs the taxpayer in
writing of the legal and factual bases of the said assessment, thereby allowing the taxpayer to effectively
protest the assessment and adduce supporting evidence in its behalf.

In Commissioner of Internal Revenue v. Reyes61 (Reyes Case), the petitioner issued an assessment
notice and a demand letter for alleged deficiency estate tax against the taxpayer estate. The assessment
notice and demand letter. simply notified the taxpayer estate of petitioner's findings, without stating
the factual and legal bases for said assessment. The Court, absent a valid assessment, refused to accord
validity and effect to petitioner's collection efforts - which involved, among other things, the successive
issuances of a collection letter, a final notice before seizure, and a warrant of distraint and/or levy
against the taxpayer estate - and declared that:
x x x [P]etitioner violated the cardinal rule in administrative law that the taxpayer be accorded due
process. Not only was the law here disregarded, but no valid notice was sent, either. A void assessment
bears no valid fruit.

The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with
tax collection without first establishing a valid assessment is evidently violative of the
cardinal principle in administrative investigations: that taxpayers should be able to present
their case and adduce supporting evidence.In the instant case, respondent has not been informed
of the basis of the estate tax liability. Without complying with the unequivocal mandate of first informing
the taxpayer of the government's claim, there can be no deprivation of property, because no effective
protest can be made. The haphazard shot at slapping an assessment, supposedly based on estate
taxation's general provisions that are expected to be known by the taxpayer, is utter chicanery.

Even a cursory review of the preliminary assessment notice, as well as the demand letter sent, reveals
the lack of basis for - not to mention the insufficiency of - the gross figures and details of the itemized
deductions indicated in the notice and the letter. This Court cannot countenance an assessment based
on estimates that appear to have been arbitrarily or capriciously arrived at. Although taxes are the
lifeblood of the government, their assessment and collection "should be made in accordance with law
as any arbitrariness will negate the very reason for government itself."62 (Emphasis supplied.)
The Court similarly found that there was no valid assessment in Commissioner of Internal Revenue v.
BASF Coating + Inks Phils., Inc.63 (BASF Coating Case) as the assessment notice therein was sent to
the taxpayer company's former address. Without a valid assessment, the Court pronounced that
petitioner's issuance of a First Notice Before Issuance of Warrant of Distraint and Levy to be in violation
of the taxpayer company's right to due process and effectively blocked any further efforts by petitioner
to collect by virtue thereof. The Court ratiocinated that:
It might not also be amiss to point out that petitioner's issuance of the First Notice Before Issuance of
Warrant of Distraint and Levy violated respondent's right to due process because no valid notice of
assessment was sent to it. An invalid assessment bears no valid fruit. The law imposes a substantive,
not merely a formal, requirement. To proceed heedlessly with tax collection without first establishing a
valid assessment is evidently violative of the cardinal principle in administrative investigations: that
taxpayers should be able to present their case and adduce supporting evidence. In the instant case,
respondent has not properly been informed of the basis of its tax liabilities. Without complying with the
unequivocal mandate of first informing the taxpayer of the government's claim, there can be no
deprivation of property, because no effective protest can be made.

x x x x

It is an elementary rule enshrined in the 1987 Constitution that no person shall be deprived of property
without due process of law. In balancing the scales between the power of the State to tax and its
inherent right to prosecute perceived transgressors of the law on one side, and the constitutional rights
of a citizen to due process of law and the equal protection of the laws on the other, the scales must tilt
in favor of the individual, for a citizen's right is amply protected by the Bill of Rights under the
Constitution.64
It is worthy to note that in the Reyes Case and BASF Coating Case, there were assessments actually
issued against the taxpayers therein, except that said assessments were adjudged invalid for different
reasons (i.e., for failing to state the factual and legal bases for the assessment in the Reyes Case and
for sending the assessment to the wrong address in the BASF Coating Case). In the instant cases,
petitioner did not issue at all an assessment against respondents prior to his issuance of the 1998 and
2002 Collection Letters. Thus, there is even more reason for the Court to bar petitioner's attempts to
collect the alleged deficiency excise taxes through any summary administrative remedy.

In the present case, it is clear from the wording of the 1998 and 2002 Collection Letters that petitioner
intended to pursue, through said collection letters, summary administrative remedies for the
collection of respondents' alleged excise tax deficiencies for the Covered Years. In fact, in the respondent
Shell's case, the collection letters were already followed by the BIR's issuance of Warrants of
Garnishment and Distraint and/or Levy against it.

That the BIR proceeded with the collection of respondents' alleged unpaid taxes without a previous
valid assessment is evident from the following: First, petitioner admitted in CTA Case Nos. 572865 and
6547 that: (a) the collections letters were not tax assessment notices; (b) the letters were issued solely
based on the DOF Center's findings; and (c) the BIR never issued any preliminary assessment notice
prior to the issuance of the collection letters. Second, although the 1998 and 2002 Collection Letters
and the 1999 Assessments against respondents were for the same excise taxes for the Covered Years,
the former were evidently not based on the latter. The 1998 Collection Letters against respondents were
issued prior to the 1999 Assessments; while the 2002 Collection Letter against respondent Shell was
issued even while respondent Shell's protest of the 1999 Assessment was still pending before the CTA.
And third, assuming arguendo that the 1998 and 2002 Collection Letters were intended to implement
the 1999 Assessments against respondents, the 1999 Assessments were already nullified in the 2007
Shell Case and 2010 Petron Case.

Absent a previously issued assessment supporting the 1998 and 2002 Collection Letters, it is clear that
petitioner's attempts to collect through said collection letters as well as the subsequent Warrants of
Garnishment and Distraint and/or Levy are void and ineffectual. If an invalid assessment bears no valid
fruit, with more reason will no such fruit arise if there was no assessment in the first place.

The period for petitioner to collect the alleged deficiency excise taxes from respondents
through judicial remedies had already prescribed.

After establishing that petitioner could not collect respondents' alleged deficiency excise taxes for the
covered years through summary administrative remedies without a valid assessment, the Court next
determines whether petitioner could still resort to judicial remedies to enforce collection.

The Court answers in the negative as the period for collection o£ the respondents' alleged deficiency
excise taxes for the Covered Years through judicial remedies had already prescribed.

The alleged deficiency excise taxes petitioner seeks to collect from respondents in the cases at bar
pertain to the Covered Years, i.e., 1992 to 1997, during which, the National Internal Revenue Code of
the Philippines of 197766 (1977 NIRC) was the governing law. Pertinent provisions of the 1977 NIRC
read:
Sec. 318. 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 purposes of this section, a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed on such last day: Provided, That this
limitation shall not apply to cases already investigated prior to the approval of this Code. (Emphasis
Supplied)

Sec. 319. 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 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 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.

(b) Where before the expiration of the time prescribed in the preceding section for the assessment of
the tax, both the Commissioner 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 or by a proceeding in court, but only if
began (1) within five years after assessment of the tax, or (2) prior to the expiration of any period for
collection agreed upon in writing by the Commissioner 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.
Under Section 318 of the 1977 NIRC, petitioner had five years 67 from the time respondents filed their
excise tax returns in question to: (a) issue an assessment; and/or (b) file a court action for collection
without an assessment. In the petitions at bar, respondents filed their returns for the Covered Years
from 1992 to 1997, and the five-year prescriptive period under Section 319 of the 1977 NIRC would
have prescribed accordingly from 1997 to 2002.

As the Court has explicitly found herein as well as in the 2007 Shell Case and 2010 Petron Case,
petitioner failed to issue any valid assessment against respondents for the latter's alleged deficiency
excise taxes for the Covered Years. Without a valid assessment, the five-year prescriptive period to
assess continued to run and had, in fact, expired in these cases. Irrefragably, petitioner is already
barred by prescription from issuing an assessment against respondents for deficiency excise taxes for
the Covered Years. Resultantly, this also bars petitioner from undertaking any summary
administrative remedies, i.e., distraint and/or levy, against respondents for collection of the same
taxes.

Unlike summary administrative remedies, the government's power to enforce the collection
through judicial action is not conditioned upon a previous valid assessment. Sections 318 and
319(a) of the 1977 NIRC expressly allowed the institution of court proceedings for collection of taxes
without assessment within five years from the filing of the tax return and 10 years from the discovery
of falsity, fraud, or omission, respectively.68

A judicial action for the collection of a tax is begun: (a) by the filing of a complaint with the court of
competent jurisdiction, or (b) where the assessment is appealed to the Court of Tax Appeals, by filing
an answer to the taxpayer's petition for review wherein payment of the tax is prayed for.69

From respondents' filing of their excise tax returns in the years 1992 to 1997 until the lapse of the five-
year prescriptive period under Section 318 of the 1977 NIRC in the years 1997 to 2002, petitioner did
not institute any judicial action for collection of tax as aforedescribed. Instead, petitioner relied
solely on summary administrative remedies by issuing the collection letters and warrants of garnishment
and distraint and/or levy without prior assessment against respondents. Sifting through records, it can
be said that petitioner's earliest attempts to judicially enforce collection of respondents' alleged
deficiency excise taxes were his Answers to respondents' Petitions for Review filed before the CTA in
Case Nos. 5657, 5728, and 6547 on August 6, 1998, 70 March 2, 1999,71 and November 29,
2002,72 respectively.

Verily, in a long line of jurisprudence, the Court deemed the filing of such pleadings as effective tax
collection suits so as to stop the running of the prescriptive period in cases where: (a) the CIR issued
an assessment and the taxpayer appealed the same to the CTA; 73 (b) the CIR filed the answer praying
for the payment of tax within five years after the issuance of the assessment; 74 and (c) at the time of
its filing, jurisdiction over judicial actions for collection of internal revenue taxes was vested in the CTA,
not in the regular courts.75

However, judging by the foregoing conditions, even petitioner's Answers in CTA Case Nos. 5657, 5728,
and 6547 cannot be deemed judicial actions for collection of tax. First, CTA Case Nos. 5657, 5728, and
6547 were not appeals of assessments. Respondents went before the CTA to challenge the 1998 and
2002 Collection Letters, which, by petitioner's own admission, are not assessments. Second, by the time
petitioner filed. his Answers before the CTA on August 6, 1998, March 2, 1999, and November 29, 2002,
his power to collect alleged deficiency excise taxes, the returns for which were filed from 1992 to 1997,
had already partially prescribed, particularly those pertaining to the earlier portion of the Covered
Years.Third, at the time petitioner filed his Answers before the CTA, the jurisdiction over judicial actions
for collection of internal revenue taxes was vested in the regular courts, not the CTA. 76 Original
jurisdiction over collection cases77 was transferred to the CTA only on April 23, 2004, upon the effectivity
of Republic Act No. 9282.78

Without either a formal tax collection suit filed before the court of competent jurisdiction or
ananswer deemed as a judicial action for collection of tax within the prescribed five-year period under
Section 318 of the 1977 NIRC, petitioner's power to institute a court proceeding for the collection
of respondents' alleged deficiency excise taxes without an assessment had already
prescribedin 1997 to 2002.

The Court's ruling remains the same even if the 10-year prescriptive period under Section 319(a) of the
1977 NIRC, in case of falsity, fraud, or omission in the taxpayer's return, is applied to the present cases.

Even if the Court concedes, for the sake of argument, that respondents' returns for the Covered Years
were false or fraudulent, Section 319(a) of the 1977 NIRC similarly required petitioner to (a) issue an
assessment; and/or (b) file a court action for collection without an assessment, but within 10 years after
the discovery of the falsity, fraud, or omission in the taxpayer's return. As early as the 1998 Collection
Letters, petitioner could already be charged with knowledge of the alleged falsity or fraud in respondents'
excise tax returns, which precisely led petitioner to invalidate respondents' payments using the
transferred TCCs and to demand payment of deficiency excise taxes through said letters. The 10-year
prescriptive period under Section 319(a) of the 1977 NIRC wholly expired in 2008 without petitioner
issuing a valid assessment or instituting judicial action for collection.

The Court cannot countenance the tax authorities' non-performance of their duties in the present cases.
The law provides for a statute of limitations on the assessment and collection of internal revenue taxes
in order to safeguard the interest of the taxpayer against unreasonable investigation. 79

While taxes are the lifeblood of the nation, the Court cannot allow tax authorities indefinite periods to
assess and/or collect alleged unpaid taxes. Certainly, it is an injustice to leave any taxpayer in perpetual
uncertainty whether he will be made liable for deficiency or delinquent taxes.

In sum, petitioner's attempts to collect the alleged deficiency excise taxes from respondents are void
and ineffectual because (a) the Issues regarding the transferred TCCs' validity, respondents'
qualifications as transferees of said TCCs, and respondents' use of the TCCs to pay for their excise tax
liabilities for the Covered Years, had already been settled with finality in the 2007 Shell Case and 2010
Petron Case, and could no longer be re-litigated on the ground of res judicata in the concept of
conclusiveness of judgment; (b) petitioner's resort to summary administrative remedies without a valid
assessment was not in accordance with the prescribed procedure and was in violation of respondents'
right to substantive due process; and (c) none of petitioner's collection efforts constitute a valid
institution of a judicial remedy for collection of taxes without an assessment, and any such judicial
remedy is now barred by prescription.

WHEREFORE, premises considered, the Court DENIES the petition of the Commissioner of Internal
Revenue in G.R. No. 197945 and AFFIRMS the Decision dated February 22, 2011 and Resolution dated
July 27, 2011 of the Court of Tax Appeals en banc in CTA En Banc Case No. 535.

The Court likewise DENIES the petition of the Commissioner of Internal Revenue in G.R. Nos. 204119-
20 and AFFIRMS the Decision dated March 21, 2012 and Resolution dated October 10, 2012 of the
Court of Appeals in CA-G.R. SP Nos. 55329-30.

SO ORDERED.

Peralta,**Del Castillo, Tijam, and Gesmundo,***JJ., concur.

Endnotes:

* Per Special Order No. 2559 dated May 11, 2018.

** Per Raffle dated February 26, 2018.

*** Per Special Order No. 2560 dated May 11, 2018.

1Rollo (G.R. No. 197945), pp. 62-109; penned by Associate Justice Cielito N. Mindaro-Grulla with
Presiding Justice Ernesto D. Acosta and Associate Justices Juanito C. Castañeda, Jr., Lovell R. Bautista,
Erlinda P. Uy, Caesar A. Casanova, Olga Palanca-Enriquez, Esperanza R. Fabon-Victorino and Amelia R.
Cotangco-Manalastas concurring.

2 Id. at 110-117.

3Rollo (G.R. Nos. 204119-20), pp. 52-68; penned by Associate Justice Ramon A. Cruz with Associate
Justices Rosalinda Asuncion-Vicente and Antonio L. Villamor concurring.

4 Id. at 70-71.

5 Executive Order No. 226 dated July 16, 1987.

6Rollo (G.R.. Nos. 204119-20), p. 213.

7 The DOF Center was created pursuant to Administrative Order No. 266 dated February 7, 1992, in
relation to EO 226, to centralize tax credit availment processing. It is composed of representatives from
the DOF, the BOI, the Bureau of Customs, and the Bureau of Internal Revenue.

8See Joint Stipulation of Facts and Issues in CTA Case No. 5728; rollo (G.R. Nos. 204119-20), pp. 579-
580.

9Inclusive of the years 1992, 1994 to 1997 for respondent Shell and 1993 to 1997 for respondent
Petron.

10See Joint Stipulation of Facts and Issues in CTA Case No. 5728; rollo (G.R. Nos. 204119-20), p. 579,
and Amended Joint Stipulation of Facts and Issues in CTA Case No. 6547; rollo(G.R. No. 197945), p.
882. See also petitioner's Memorandum dated April 27, 2015; rollo(G.R. No. 197945), pp. 931, 934.

11See Amended Joint Stipulation of Facts and Issues in CTA Case No. 6547; rollo (G.R. No. 197945), p.
883.

12Rollo (G.R. Nos. 204119-20), pp. 141, 269.

13 Through its Revenue District Officer Ruperto P. Somera.

14Rollo (G.R. Nos. 2041 19-20), pp. 152-156, 289-301, and 302-307.

15 Id. at 161, 308-318.

16 Id. at 247-266.

17 Id. at 161-165.

18Signed by BIR Regional Director Antonio I. Ortega and received by Shell on July 17, 1998. (Id. at
166.)

19 Id. at 113-140.

20 Id. at 477.

21 Id. at 109.

22 As amended by the Tax Reform Act of 1997, Republic Act No. 8424 (December 11, 1997).

23 In Resolutions dated September 7, 1999. Rollo (G.R. Nos. 204119-20), p. 112 and 246.

24Prior to the effectivity of Republic Act No. 9282, a CTA decision is appealable to the Court of Appeals.
After its enactment, the CTA became an appellate court of equal rank to the Court of Appeals. Thus, a
decision of a CTA Division is appealable to the CTA En Banc.
25Pilipinas Shell Petroleum Corp. v. Commissioner of Internal Revenue, 565 Phil. 613 (2007).

26 In letters dated August 31, 1999 and September 1, 1999 [Rollo (G.R. No. 197945), pp. 732-734].

27In a letter addressed to respondent Shell dated November 3, 1999 [Rollo (G.R. No. 197945), pp. 736-
742] and a letter addressed to respondent Petron dated October 24, 1999.

28Pilipinas Shell Petroleum Corp. v. Commissioner of Internal Revenue, supra note 25 at 657.

29 As per Entry of Judgment, Supreme Court of the Philippines Second Division.

30Petron Corporation v. Commissioner of Internal Revenue, 640 Phil. 163 (2010).

31 Id. at 188.

32 Supreme Court of the Philippines, First Division.

33Rollo (G.R. No. 197945), p. 765.

34 Id. at 767-773.

35 Through BIR Assistant Commissioner Edwin R. Abella.

36Rollo (G.R. No. 197945), p. 731.

37 Id. at 681-730.

38 Id. at 174-216.

39 Id. at 215.

40 In a Resolution dated August 18, 2009. (Id. at 239-242.)

41 Id. at 243-301.

42Rollo (G.R. Nos. 204119-20), pp. 24-25.

43Rollo (G.R. No. 197945), pp. 25-26.

44 399 Phil. 205, 215-218 (2000).

October 5, 1982 Memorandum of Agreement between DOF and BOI, and the rules implementing the
45

Omnibus Investments Code of 1987.

46Dated September 6, 1999. Subject: Implementing the Provisions of the National Internal Revenue
Code of 1997 Governing the Rules on Assessment of National Internal Revenue Taxes, Civil Penalties
and Interest and the Extra-judicial Settlement of a Taxpayer's Criminal Violation of the Code Through
Payment of a Suggested Compromise Penalty.

47See Philippine Bank of Communications v. Commissioner of Internal Revenue, 361 Phil. 916, 927
(1999); Commissioner of Internal Revenue v. Bank of the Philippine Islands, 549 Phil. 886, 903 (2007).

48Commissioner of Internal Revenue v. Algue, Inc., 241 Phil. 829, 830 (1988).

49 De Leon, Hector S., Fundamentals of Taxation (2004 Ed.), p. 7.

50Section 2 of the Tax Code provides, "Powers and Duties of the Bureau of Internal Revenue. -
The Bureau of Internal Revenue shall be under the supervision and control of the Department of Finance
and its powers and duties 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. The Bureau shall give effect to and administer the supervisory and
police powers conferred to it by this Code or other laws." This section amended Section 3 of the National
Internal Revenue Code of the Philippines of 1977.

51 Section 6, Tax Code.

52See Section 207, Tax Code. Formerly Sections 304 and 310 of the National Internal Revenue Code of
the Philippines of 1977.

53See Sections 203 and 220, Tax Code. Formerly Sections 318 and 319 of the National Internal Revenue
Code of the Philippines of 1977.

54Commissioner of Internal Revenue v. Pineda, 128 Phil. 146, 150 (1967).

55Philippine Bank of Communications v. Commissioner of Internal Revenue, supra note 47 at 927.

56See Commissioner of Internal Revenue v. Metro Star Superama, Inc., 652 Phil. 172, 188
(2010), Commissioner of Internal Revenue v. Algue, Inc., supra note 48 at 836; Commissioner of
Internal Revenue v. Reyes, 516 Phil. 176, 190 (2006); Commissioner of Internal Revenue v. BASF
Coating + INKS Phils., Inc., 748 Phil. 760, 772 (2014).

57SeeArticle III, Section 1, 1987 Constitution. Also see Commissioner of Internal Revenue v. Metro Star
Superama, Inc., id. at 187.

58See Commissioner of Internal Revenue v. BASF Coating + INKS Phils., Inc., supra note 56 at 772
citing Commissioner of Internal Revenue v. Algue, Inc., supra note 48 at 836.

59Alhambra Cigar & Cigarette Manufacturing Co. v. Collector of Internal Revenue, 105 Phil. 1337 (1959),
as quoted in Republic v. De Yu, 119 Phil. 1013, 1017 (1964).

60Commissioner of Internal Revenue v. BASF Coating + INKS Phils., Inc., supra note 56. Also see
Remedies of the Bureau in the Audit Process and Collection of Delinquent
Accounts, https://www.bir.gov.ph/index.php/taxpayer-bill-of-rights.html#remedies-of-the-bureau-in-
theaudit-process-and-collection-of-delinquent-accounts. (Last visited January 11, 2018.)

61 Supra note 56.

62 Id. at 189-190.

63 Supra note 56.

64 Id. at 771-772.

65Rollo (G.R. Nos. 204119-20), p. 580.

66Section 318 of the National Internal Revenue Code of 1977 (Presidential Decree No. 1158, [June 3,
1977]) was previously Section 331 of the National Internal Revenue Code of 1939 (Commonwealth Act
No. 466, [June 15, 1939]).

67Section 318 was amended by Republic Act No. 8424, shortening the prescriptive period to assess and
collect national internal revenue taxes from five to three years, to quote: "SECTION 203. Period of
Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal revenue taxes
shall be assessed within three (3) years after the last day prescribed by law for the filing of the return,
and no proceeding in court without assessment for the collection of such taxes shall be begun after the
expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed
by law, the three (3)-year period shall be counted from the day the return was filed. For purposes of
this Section, a return filed before the last day prescribed by law for the filing thereof shall be considered
as filed on such last day." (Emphasis supplied.)

68In case an assessment had been timely issued, Section 319(c) of the 1977 NIRC provided: "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 or by a proceeding in court, but only if began
(1) within five years after assessment of the tax, or (2) prior to the expiration of any period for collection
agreed upon in writing by the Commissioner and the taxpayer before the expiration of such five-year
period. x x x"

69Palanca v. Commissioner of Internal Revenue, 114 Phil. 203, 207 (1962).

70Rollo (G.R. Nos. 204119-20), p. 199.

71 Id. at 72.

72Rollo (G.R. No. 197945), p. 181.

73See Philippine National Oil Company v. Court of Appeals, 496 Phil. 506 (2005); Fernandez Hermanos,
Inc. v. Commissioner of Internal Revenue, 140 Phil. 31, 47 (1969); Palanca v. Commissioner of Internal
Revenue, supra note 69.

74Bank of the Philippine Islands v. Commissioner of Internal Revenue, 510 Phil. 1 (2005).

75China Banking Corporation v. Commissioner of Internal Revenue, 753 Phil. 58 (2015).

76Bank of the Philippine Islands v. Commissioner of internal Revenue, supra note 74.

77 In which the principal amount involved is one million pesos or more.

78Entitled, "An Act Expanding the Jurisdiction of the Court of Tax Appeals (CTA), Elevating Its Rank to
the Level of a Collegiate Court with Special Jurisdiction and Enlarging Its Membership, Amending for the
Purpose Certain Sections of Republic Act No. 1125, as Amended, Otherwise Known as the Law Creating
the Court of Tax Appeals, and for Other Purposes."

79Philippine Journalists, Inc. v. Commissioner of Internal Revenue, 488 Phil. 218, 229-230 (2004).

EN BANC

G.R. No. 213446, July 03, 2018

CONFEDERATION FOR UNITY, RECOGNITION AND ADVANCEMENT OF GOVERNMENT

EMPLOYEES (COURAGE); JUDICIARY EMPLOYEES ASSOCIATION OF THE PHILIPPINES
(JUDEA-PHILS); SANDIGANBAYAN EMPLOYEES ASSOCIATION (SEA); SANDIGAN NG MGA
EMPLEYADONG NAGKAKAISA SA ADHIKAIN NG DEMOKRATIKONG ORGANISASYON
(S.E.N.A.D.O.); ASSOCIATION OF COURT OF APPEALS EMPLOYEES (ACAE); DEPARTMENT OF
AGRARIAN REFORM EMPLOYEES ASSOCIATION (DAREA); SOCIAL WELFARE EMPLOYEES
ASSOCIATION OF THE PHILIPPINES-DEPARTMENT OF SOCIAL WELFARE AND DEVELOPMENT
(SWEAP-DSWD); DEPARTMENT OF TRADE AND INDUSTRY EMPLOYEES UNION (DTI-EU);
KAPISANAN PARA SA KAGALINGAN NG MGA KAWANI NG METRO MANILA DEVELOPMENT
AUTHORITY (KKK-MMDA); WATER SYSTEM EMPLOYEES RESPONSE (WATER); CONSOLIDATED
UNION OF EMPLOYEES OF THE NATIONAL HOUSING AUTHORITIES (CUE-NHA); AND
KAPISANAN NG MGA MANGGAGAWA AT KAWANI NG QUEZON CITY (KASAMA KA-
QC), Petitioners, v. COMMISSIONER, BUREAU OF INTERNAL REVENUE AND THE SECRETARY,
DEPARTMENT OF FINANCE, Respondents.

NATIONAL FEDERATION OF EMPLOYEES ASSOCIATIONS OF THE DEPARTMENT OF

AGRICULTURE (NAFEDA), REPRESENTED BY ITS EXECUTIVE VICE PRESIDENT ROMAN M.
SANCHEZ, DEPARTMENT OF AGRICULTURE EMPLOYEES ASSOCIATION OFFICE OF THE
SECRETARY (DAEA-OSEC), REPRESENTED BY ITS ACTING PRESIDENT ROWENA GENETE,
NATIONAL AGRICULTURAL AND FISHERIES COUNCIL EMPLOYEES ASSOCIATION (NAFCEA),
REPRESENTED BY ITS PRESIDENT SOLIDAD B. BERNARDO, COMMISSION ON ELECTIONS
EMPLOYEES UNION (COMELEC EU), REPRESENTED BY ITS PRESIDENT MARK CHRISTOPHER
D. RAMIREZ, MINES AND GEOSCIENCES BUREAU EMPLOYEES ASSOCIATION CENTRAL OFFICE
(MGBEA CO), REPRESENTED BY ITS PRESIDENT MAYBELLYN A. ZEPEDA, LIVESTOCK
DEVELOPMENT COUNCIL EMPLOYEES ASSOCIATION (LDCEA), REPRESENTED BY ITS
PRESIDENT JOVITA M. GONZALES, ASSOCIATION OF CONCERNED EMPLOYEES OF
PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY (ACE OF PFDA), REPRESENTED BY ITS
PRESIDENT ROSARIO DEBLOIS, Intervenors.

G.R. No. 213658, July 3, 2018

JUDGE ARMANDO A. YANGA, IN HIS PERSONAL CAPACITY AND IN HIS CAPACITY AS

PRESIDENT OF THE RTC JUDGES ASSOCIATION OF MANILA, AND MA. CRISTINA CARMELA I.
JAPZON, IN HER PERSONAL CAPACITY AND IN HER CAPACITY AS PRESIDENT OF THE
PHILIPPINE ASSOCIATION OF COURT EMPLOYEES-MANILA CHAPTER, Petitioners, v. HON.
COMMISSIONER KIM S. JACINTO-HENARES, IN HER CAPACITY AS COMMISSIONER OF THE
BUREAU OF INTERNAL REVENUE, Respondent.

THE MEMBERS OF THE ASSOCIATION OF REGIONAL TRIAL COURT JUDGES IN ILOILO

CITY,Intervenors.

DECISION

CAGUIOA, J.:

G.R. Nos. 213446 and 213658 are petitions for Certiorari, Prohibition and/or Mandamus under Rule 65
of the Rules of Court, with Application for Issuance of Temporary Restraining Order and/or Writ of
Preliminary Injunction, uniformly seeking to: (a) issue a Temporary Restraining Order to enjoin the
implementation of Revenue Memorandum Order (RMO) No. 23- 2014 dated June 20, 2014 issued by
the Commissioner of Internal Revenue (CIR); and (b) declare null, void and unconstitutional paragraphs
A, B, C, and D of Section III, and Sections IV, VI and VII of RMO No. 23-2014. The petition in G.R. No.
213446 also prays for the issuance of a Writ of Mandamus to compel respondents to upgrade the
P30,000.00 non-taxable ceiling of the 13th month pay and other benefits for the concerned officials and
employees of the government.

The Antecedents

On June 20, 2014, respondent CIR issued the assailed RMO No. 23-2014, in furtherance of Revenue
Memorandum Circular (RMC) No. 23-2012 dated February 14, 2012 on the "Reiteration of the
Responsibilities of the Officials and Employees of Government Offices for the Withholding of Applicable
Taxes on Certain Income Payments and the Imposition of Penalties for Non-Compliance Thereof," in
order to clarify and consolidate the responsibilities of the public sector to withhold taxes on its
transactions as a customer (on its purchases of goods and services) and as an employer (on
compensation paid to its officials and employees) under the National Internal Revenue Code (NIRC or
Tax Code) of 1997, as amended, and other special laws.

The Petitions

G.R. No. 213446

On August 6, 2014, petitioners Confederation for Unity, Recognition and Advancement of Government
Employees (COURAGE), et al., organizations/unions of government employees from the Sandiganbayan,
Senate of the Philippines, Court of Appeals, Department of Agrarian Reform, Department of Social
Welfare and Development, Department of Trade and Industry, Metro Manila Development Authority,
National Housing Authority and local government of Quezon City, filed a Petition for Prohibition and
Mandamus,1 imputing grave abuse of discretion on the part of respondent CIR in issuing RMO No. 23-
2014. According to petitioners, RMO No. 23-2014 classified as taxable compensation, the following
allowances, bonuses, compensation for services granted to government employees, which they alleged
to be considered by law as non-taxable fringe and de minimis benefits, to wit:

I. Legislative Fringe Benefits

a. Anniversary Bonus
b. Additional Food Subsidy
c. 13th Month Pay
d. Food Subsidy
e. Cash Gift
f. Cost of Living Assistance
g. Efficiency Incentive Bonus
h. Financial Relief Assistance
i. Grocery Allowance
j. Hospitalization
k. Inflationary Assistance Allowance
l. Longevity Service Pay
m. Medical Allowance
n. Mid-Year Eco. Assistance
o. Productivity Incentive Benefit
p. Transition Allowance
q. Uniform Allowance

II. Judiciary Benefits

a. Additional Compensation Income

b. Extraordinary & Miscellaneous Expenses
c. Monthly Special Allowance
d. Additional Cost of Living Allowance (from Judiciary Development Fund)
e. Productivity Incentive Benefit
f. Grocery Allowance
g. Clothing Allowance
h. Emergency Economic Assistance
i. Year-End Bonus (13th Month Pay)
j. Cash Gift
k. Loyalty Cash Award (Milestone Bonus)
l. Christmas Allowance m. Anniversary Bonus2

Petitioners further assert that the imposition of withholding tax on these allowances, bonuses and
benefits, which have been allotted by the Government to its employees free of tax for a long time,
violates the prohibition on non-diminution of benefits under Article 100 of the Labor Code; 3 and infringes
upon the fiscal autonomy of the Legislature, Judiciary, Constitutional Commissions and Office of the
Ombudsman granted by the Constitution.4

Petitioners also claim that RMO No. 23-2014 (1) constitutes a usurpation of legislative power and
diminishes the delegated power of local government units inasmuch as it defines new offenses and
prescribes penalty therefor, particularly upon local government officials;5 and (2) violates the equal
protection clause of the Constitution as it discriminates against government officials and employees by
imposing fringe benefit tax upon their allowances and benefits, as opposed to the allowances and
benefits of employees of the private sector, the fringe benefit tax of which is borne and paid by their
employers.6

Further, the petition also prays for the issuance of a writ of mandamus ordering respondent CIR to
perform its duty under Section 32(B)(7)(e)(iv) of the NIRC of 1997, as amended, to upgrade the ceiling
of the 13th month pay and other benefits for the concerned officials and employees of the government,
including petitioners.7

G.R. No. 213658

On August 19, 2014, petitioners Armando A. Yanga, President of the Regional Trial Court (RTC) Judges
Association of Manila, and Ma. Cristina Carmela I. Japzon, President of the Philippine Association of
Court Employees – Manila Chapter, filed a Petition for Certiorari and Prohibition 8 as duly authorized
representatives of said associations, seeking to nullify RMO No. 23-2014 on the following grounds: (1)
respondent CIR is bereft of any authority to issue the assailed RMO. The NIRC of 1997, as amended,
expressly vests to the Secretary of Finance the authority to promulgate all needful rules and regulations
for the effective enforcement of tax provisions;9 and (2) respondent CIR committed grave abuse of
discretion amounting to lack or excess of jurisdiction in the issuance of RMO No. 23-2014 when it
subjected to withholding tax benefits and allowances of court employees which are tax-exempt such as:
(a) Special Allowance for Judiciary (SAJ) under Republic Act (RA) No. 9227 and additional cost of living
allowance (AdCOLA) granted under Presidential Decree (PD) No. 1949 which are considered as non-
taxable fringe benefits under Section 33(A) of the NIRC of 1997, as amended; (b) cash gift, loyalty
awards, uniform and clothing allowance and additional compensation (ADCOM) granted to court
employees which are considered de minimis under Section 33(C)(4) of the same Code; (c) allowances
and benefits granted by the Judiciary which are not taxable pursuant to Section 32(7)(E) of the NIRC of
1997, as amended; and (d) expenses for the Judiciary provided under Commission on Audit (COA)
Circular 2012-001.10

Petitioners further assert that RMO No. 23-2014 violates their right to due process of law because while
it is ostensibly denominated as a mere revenue issuance, it is an illegal and unwarranted legislative
action which sharply increased the tax burden of officials and employees of the Judiciary without the
benefit of being heard.11

On October 21, 2014, the Court resolved to consolidate the foregoing cases.12

Respondents, through the Office of the Solicitor General (OSG), filed their Consolidated Comment 13 on
December 23, 2014. They argue that the petitions are barred by the doctrine of hierarchy of courts and
petitioners failed to present any special and important reasons or exceptional and compelling
circumstance to justify direct recourse to this Court.14

Maintaining that RMO No. 23-2014 was validly issued in accordance with the power of the CIR to make
rulings and opinion in connection with the implementation of internal revenue laws, respondents aver
that unlike Revenue Regulations (RRs), RMOs do not require the approval or signature of the Secretary
of Finance, as these merely provide directives or instructions in the implementation of stated policies,
goals, objectives, plans and programs of the Bureau.15 According to them, RMO No. 23-2014 is in fact
a mere reiteration of the Tax Code and previous RMOs, and can be traced back to RR No. 01-87 dated
April 2, 1987 implementing Executive Order No. 651 which was promulgated by then Secretary of
Finance Jaime V. Ongpin upon recommendation of then CIR Bienvenido A. Tan, Jr. Thus, the CIR never
usurped the power and authority of the legislature in the issuance of the assailed RMO. 16 Also, contrary
to petitioners' assertion, the due process requirements of hearing and publication are not applicable to
RMO No. 23-2014.17

Respondents further argue that petitioners' claim that RMO No. 23-2014 is unconstitutional has no leg
to stand on. They explain that the constitutional guarantee of fiscal autonomy to Judiciary and
Constitutional Commissions does not include exemption from payment of taxes, which is the lifeblood
of the nation.18 They also aver that RMO No. 23-2014 never intended to diminish the powers of local
government units. It merely reiterates the obligation of the government as an employer to withhold
taxes, which has long been provided by the Tax Code.19

Moreover, respondents assert that the allowances and benefits enumerated in Section III A, B, C, and
D, are not fringe benefits which are exempt from taxation under Section 33 of the Tax Code, nor de
minimis benefits excluded from employees' taxable basic salary. They explain that the SAJ under RA
No. 9227 and AdCOLA under PD No. 1949 are additional allowances which form part of the employee's
basic salary; thus, subject to withholding taxes.20

Respondents also claim that RMO No. 23-2014 does not violate petitioners' right to equal protection of
laws as it covers all employees and officials of the government. It does not create a new category of
taxable income nor make taxable those which are not taxable but merely reflect those incomes which
are deemed taxable under existing laws.21

Lastly, respondents aver that mandamus will not lie to compel respondents to increase the ceiling for
tax exemptions because the Tax Code does not impose a mandatory duty on the part of respondents to
do the same.22

The Petitions-in-Intervention

Meanwhile, on September 11, 2014, the National Federation of Employees Associations of the
Department of Agriculture (NAFEDA) et al., duly registered union/association of employees of the
Department of Agriculture, National Agricultural and Fisheries Council, Commission on Elections, Mines
and Geosciences Bureau, and Philippine Fisheries Development Authority, claiming similar interest as
petitioners in G.R. No. 213446, filed a Petition-in-Intervention23 seeking the nullification of items III, VI
and VII of RMO No. 23-2014 based on the following grounds: (1) that respondent CIR acted with grave
abuse of discretion and usurped the power of the Legislature in issuing RMO No. 23-2014 which imposes
additional taxes on government employees and prescribes penalties for government official's failure to
withhold and remit the same;24 (2) that RMO No. 23-2014 violates the equal protection clause because
the Commission on Human Rights (CHR) was not included among the constitutional commissions
covered by the issuance and the ADCOM of employees of the Judiciary was subjected to withholding tax
but those received by employees of the Legislative and Executive branches are not;25 and (3) that
respondent CIR failed to upgrade the tax exemption ceiling for benefits under Section 32(B)(7) of the
NIRC of 1997, as amended.26

In its Comment,27 respondents, through the OSG, sought the denial of the Petition-in-Intervention for
failure of the intervenors to seek prior leave of Court and to demonstrate that the existing consolidated
petitions are not sufficient to protect their interest as parties affected by the assailed RMO. 28 They
further contend that, contrary to the intervenors' position, the CHR is not exempt from the applicability
of RMO No. 23-2014.29 They explain that the enumeration of government offices and constitutional
bodies covered by RMO No. 23-2014 is not exclusive; Section III thereof in fact states that RMO No. 23-
2014 covers all employees of the public sector.30 They also allege that the ADCOM referred to in Section
III(B) of the assailed RMO is unique to the Judiciary; employees and officials in the executive and
legislative do not receive this specific type of ADCOM enjoyed by the employees and officials of the
Judicial branch.31

On October 10, 2014, a Motion for Intervention with attached Complaint in Intervention 32 was filed, in
G.R. No. 213658, by the Members of the Association of Regional Trial Court Judges in Iloilo City. Claiming
that they are similarly situated with petitioners, said intervenors pray that the Court declare null and
void RMO No. 23-2014 and direct the Bureau of Internal Revenue (BIR) to refund the amount illegally
exacted from the salaries/compensations of the judges by virtue of the implementation of RMO No. 23-
2014.33The intervenors claim that RMO No. 23-2014 violates their right to due process as it takes away
a portion of their salaries and compensation without giving them the opportunity to be heard.34 They
also aver that the implementation of RMO No. 23-2014 resulted in the diminution of their
salaries/compensation in violation of Sections 3 and 10, Article VIII of the Constitution. 35

In their Comment36 to the Motion, respondents adopted the arguments in their Consolidated Comment
and further stated that: (1) RMO No. 23-2014 does not diminish the salaries and compensation of
members of the judiciary as it has been judicially settled that the imposition of taxes on salaries and
compensation of judges and justices is not equivalent to diminution of the same; 37 (2) the allowances
and benefits enumerated under Section III(B) of RMO No. 23-2014 are not fringe benefits exempt from
taxation;38 (3) the AdCOLA and SAJ are not fringe benefits as these are considered part of the basic
salary of government employees subject to income tax;39 and (4) there is no valid ground for the refund
of the taxes withheld pursuant to RMO No. 23-2014.40

In sum, petitioners and intervenors (collectively referred to as petitioners) argue that:

1. RMO No. 23-2014 is ultra vires insofar as:

a. Sections III and IV of RMO No. 23-2014, for subjecting to withholding taxes non-taxable
allowances, bonuses and benefits received by government employees;

b. Sections VI and VII, for defining new offenses and prescribing penalties therefor,
particularly upon government officials;

2. RMO No. 23-2014 violates the equal protection clause as it discriminates against government
employees;

3. RMO No. 23-2014 violates fiscal autonomy enjoyed by government agencies;

4. The implementation of RMO No. 23-2014 results in diminution of benefits of government

employees, a violation of Article 100 of the Labor Code; and

5. Respondents may be compelled through a writ of mandamus to increase the tax-exempt ceiling
for 13th month pay and other benefits.

On the other hand, respondents counter that:

1. The instant consolidated petitions are barred by the doctrine of hierarchy of courts;

2. The CIR did not abuse its discretion in the issuance of RMO No. 23-2014 because:

a. It was issued pursuant to the CIR's power to interpret the NIRC of 1997, as amended,
and other tax laws, under Section 4 of the NIRC of 1997, as amended;

b. RMO No. 23-2014 does not discriminate against government employees. It does not
create a new category of taxable income nor make taxable those which are exempt;

c. RMO No. 23-2014 does not result in diminution of benefits;

d. The allowances, bonuses or benefits listed under Section III of the assailed RMO are not
fringe benefits;

e. The fiscal autonomy granted by the Constitution does not include tax exemption; and

3. Mandamus does not lie against respondents because the NIRC of 1997, as amended, does not
impose a mandatory duty upon them to increase the tax-exempt ceiling for 13th month pay and
other benefits.

Incidentally, in a related case docketed as A.M. No. 16-12-04-SC, the Court, on July 11, 2017, issued a
Resolution directing the Fiscal Management and Budget Office of the Court to maintain the status quo by
the non-withholding of taxes from the benefits authorized to be granted to judiciary officials and
personnel, namely, the Mid-year Economic Assistance, the Year-end Economic Assistance, the Yuletide
Assistance, the Special Welfare Assistance (SWA) and the Additional SWA, until such time that a decision
is rendered in the instant consolidated cases.

The Court's Ruling

I.

Procedural

Non-exhaustion of administrative remedies.

It is an unquestioned rule in this jurisdiction that certiorari under Rule 65 will only lie if there is no
appeal, or any other plain, speedy and adequate remedy in the ordinary course of law against the
assailed issuance of the CIR.41 The plain, speedy and adequate remedy expressly provided by law is an
appeal of the assailed RMO with the Secretary of Finance under Section 4 of the NIRC of 1997, as
amended, to wit:

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. – The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions
thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.42

The CIR's exercise of its power to interpret tax laws comes in the form of revenue issuances, which
include RMOs that provide "directives or instructions; prescribe guidelines; and outline processes,
operations, activities, workflows, methods and procedures necessary in the implementation of stated
policies, goals, objectives, plans and programs of the Bureau in all areas of operations, except
auditing."43 These revenue issuances are subject to the review of the Secretary of Finance. In relation
thereto, Department of Finance Department Order No. 007-0244 issued by the Secretary of Finance laid
down the procedure and requirements for filing an appeal from the adverse ruling of the CIR to the said
office. A taxpayer is granted a period of thirty (30) days from receipt of the adverse ruling of the CIR to
file with the Office of the Secretary of Finance a request for review in writing and under oath.45

In Asia International Auctioneers, Inc. v. Parayno, Jr.,46 the Court dismissed the petition seeking the
nullification of RMC No. 31-2003 for failing to exhaust administrative remedies. The Court held:

x x x It is settled that the premature invocation of the court's intervention is fatal to one's cause of
action. If a remedy within the administrative machinery can still be resorted to by giving the
administrative officer every opportunity to decide on a matter that comes within his jurisdiction, then
such remedy must first be exhausted before the court's power of judicial review can be sought. The
party with an administrative remedy must not only initiate the prescribed administrative procedure to
obtain relief but also pursue it to its appropriate conclusion before seeking judicial intervention in order
to give the administrative agency an opportunity to decide the matter itself correctly and prevent
unnecessary and premature resort to the court.47

The doctrine of exhaustion of administrative remedies is not without practical and legal reasons. For one
thing, availment of administrative remedy entails lesser expenses and provides for a speedier disposition
of controversies. It is no less true to state that courts of justice for reasons of comity and convenience
will shy away from a dispute until the system of administrative redress has been completed and complied
with so as to give the administrative agency concerned every opportunity to correct its error and to
dispose of the case.48 While there are recognized exceptions to this salutary rule, petitioners have failed
to prove the presence of any of those in the instant case.

Violation of the rule on hierarchy of courts.

Moreover, petitioners violated the rule on hierarchy of courts as the petitions should have been initially
filed with the CTA, having the exclusive appellate jurisdiction to determine the constitutionality or
validity of revenue issuances.
In The Philippine American Life and General Insurance Co. v. Secretary of Finance,49 the Court held that
rulings of the Secretary of Finance in its exercise of its power of review under Section 4 of the NIRC of
1997, as amended, are appealable to the CTA.50 The Court explained that while there is no law which
explicitly provides where rulings of the Secretary of Finance under the adverted to NIRC provision are
appealable, Section 7(a)51 of RA No. 1125, the law creating the CTA, is nonetheless sufficient, albeit
impliedly, to include appeals from the Secretary's review under Section 4 of the NIRC of 1997, as
amended.

Moreover, echoing its pronouncements in City of Manila v. Grecia-Cuerdo,52 that the CTA has the power
of certiorari within its appellate jurisdiction, the Court declared that "it is now within the power of the
CTA, through its power of certiorari, to rule on the validity of a particular administrative rule or regulation
so long as it is within its appellate jurisdiction. Hence, it can now rule not only on the propriety of an
assessment or tax treatment of a certain transaction, but also on the validity of the revenue regulation
or revenue memorandum circular on which the said assessment is based."53

Subsequently, in Banco de Oro v. Republic,54 the Court, sitting En Banc, further held that the CTA has
exclusive appellate jurisdiction to review, on certiorari, the constitutionality or validity of revenue
issuances, even without a prior issuance of an assessment. The Court En Banc reasoned:

We revert to the earlier rulings in Rodriguez, Leal, and Asia International Auctioneers, Inc. The Court of
Tax Appeals has exclusive jurisdiction to determine the constitutionality or validity of tax laws, rules and
regulations, and other administrative issuances of the Commissioner of Internal Revenue.

Article VIII, Section 1 of the 1987 Constitution provides the general definition of judicial power:

ARTICLE [VIII]
JUDICIAL DEPARTMENT

Section 1. The judicial power shall be vested in one Supreme Court and in such lower courts as may be
established by law.

Judicial power includes the duty of the courts of justice to settle actual controversies involving rights
which are legally demandable and enforceable, and to determine whether or not there has been a grave
abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or
instrumentality of the Government. (Emphasis supplied)

Based on this constitutional provision, this Court recognized, for the first time, in The City of Manila v.
Hon. Grecia-Cuerdo, the Court of Tax Appeals' jurisdiction over petitions for certiorari assailing
interlocutory orders issued by the Regional Trial Court in a local tax case. Thus:

[W]hile there is no express grant of such power, with respect to the CTA, Section 1, Article VIII of the
1987 Constitution provides, nonetheless, that judicial power shall be vested in one Supreme Court and
in such lower courts as may be established by law and that judicial power includes the duty of the courts
of justice to settle actual controversies involving rights which are legally demandable and enforceable,
and to determine whether or not there has been a grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of any branch or instrumentality of the Government.

On the strength of the above constitutional provisions, it can be fairly interpreted that the power of the
CTA includes that of determining whether or not there has been grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of the RTC in issuing an interlocutory order in cases falling
within the exclusive appellate jurisdiction of the tax court. It, thus, follows that the CTA, by constitutional
mandate, is vested with jurisdiction to issue writs of certiorari in these cases. (Emphasis in the original)

This Court further explained that the Court of Tax Appeals' authority to issue writs of certiorari is
inherent in the exercise of its appellate jurisdiction:
A grant of appellate jurisdiction implies that there is included in it the power necessary to exercise it
effectively, to make all orders that will preserve the subject of the action, and to give effect to the final
determination of the appeal. It carries with it the power to protect that jurisdiction and to make the
decisions of the court thereunder effective. The court, in aid of its appellate jurisdiction, has authority
to control all auxiliary and incidental matters necessary to the efficient and proper exercise of that
jurisdiction. For this purpose, it may, when necessary, prohibit or restrain the performance of any act
which might interfere with the proper exercise of its rightful jurisdiction in cases pending before it.

Lastly, it would not be amiss to point out that a court which is endowed with a particular jurisdiction
should have powers which are necessary to enable it to act effectively within such jurisdiction. These
should be regarded as powers which are inherent in its jurisdiction and the court must possess them in
order to enforce its rules of practice and to suppress any abuses of its process and to defeat any
attempted thwarting of such process.

In this regard, Section 1 of RA 9282 states that the CTA shall be of the same level as the CA and shall
possess all the inherent powers of a court of justice.

Indeed, courts possess certain inherent powers which may be said to be implied from a general grant
of jurisdiction, in addition to those expressly conferred on them. These inherent powers are such powers
as are necessary for the ordinary and efficient exercise of jurisdiction; or are essential to the existence,
dignity and functions of the courts, as well as to the due administration of justice; or are directly
appropriate, convenient and suitable to the execution of their granted powers; and include the power
to maintain the court's jurisdiction and render it effective in behalf of the litigants.

Thus, this Court has held that "while a court may be expressly granted the incidental powers necessary
to effectuate its jurisdiction, a grant of jurisdiction, in the absence of prohibitive legislation, implies the
necessary and usual incidental powers essential to effectuate it, and, subject to existing laws and
constitutional provisions, every regularly constituted court has power to do all things that are reasonably
necessary for the administration of justice within the scope of its jurisdiction and for the enforcement of
its judgments and mandates." Hence, demands, matters or questions ancillary or incidental to, or
growing out of, the main action, and coming within the above principles, may be taken cognizance of
by the court and determined, since such jurisdiction is in aid of its authority over the principal matter,
even though the court may thus be called on to consider and decide matters which, as original causes
of action, would not be within its cognizance. (Citations omitted)

Judicial power likewise authorizes lower courts to determine the constitutionality or validity of a law or
regulation in the first instance. This is contemplated in the Constitution when it speaks of appellate
review of final judgments of inferior courts in cases where such constitutionality is in issue.

On June 16, 1954, Republic Act No. 1125 created the Court of Tax Appeals not as another superior
administrative agency as was its predecessor — the former Board of Tax Appeals — but as a part of the
judicial system with exclusive jurisdiction to act on appeals from:

(1) Decisions of the Collector 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;
 (2) Decisions of the Commissioner of Customs in cases
involving liability for customs duties, fees or other money
charges; seizure, detention or release of property affected
fines, forfeitures or other penalties imposed in relation
thereto; or other matters arising under the Customs Law
or other law or part of law administered by the Bureau of
Customs; and

(3) Decisions of provincial or city Boards of Assessment

Appeals in cases involving the assessment and taxation of
real property or other matters arising under the
Assessment Law, including rules and regulations relative
thereto.

Republic Act No. 1125 transferred to the Court of Tax Appeals jurisdiction over all matters involving
assessments that were previously cognizable by the Regional Trial Courts (then courts of first instance).

In 2004, Republic Act No. 9282 was enacted. It expanded the jurisdiction of the Court of Tax Appeals
and elevated its rank to the level of a collegiate court with special jurisdiction. Section 1 specifically
provides that the Court of Tax Appeals is of the same level as the Court of Appeals and possesses "all
the inherent powers of a Court of Justice."

Section 7, as amended, grants the Court of Tax Appeals the exclusive jurisdiction to resolve all tax-
related issues:

Section 7. Jurisdiction. — The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as

herein provided:

1) Decisions of the Commissioner of Internal Revenue in

cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matters arising
under the National Internal Revenue Code or other
laws administered by the Bureau of Internal Revenue;
2) Inaction by the Commissioner of Internal Revenue in
cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matters arising
under the National Internal Revenue Code or other
laws administered by the Bureau of Internal Revenue,
where the National Internal Revenue Code provides a
specific period of action, in which case the inaction
shall be deemed a denial;

3) Decisions, orders or resolutions of the Regional Trial

Courts in local tax cases originally decided or resolved
by them in the exercise of their original or appellate
jurisdiction;

4) Decisions of the Commissioner of Customs in cases

involving liability for customs duties, fees or other
money charges, seizure, detention or release of
property affected, fines, forfeitures or other penalties
in relation thereto, or other matters arising under the
Customs Law or other laws administered by the
Bureau of Customs;

5) Decisions of the Central Board of Assessment Appeals

in the exercise of its appellate jurisdiction over cases
involving the assessment and taxation of real property
originally decided by the provincial or city board of
assessment appeals;
 6) Decisions of the Secretary of Finance on customs cases
elevated to him automatically for review from
decisions of the Commissioner of Customs which are
adverse to the Government under Section 2315 of the
Tariff and Customs Code;

7) Decisions of the Secretary of Trade and Industry, in

the case of nonagricultural product, commodity or
article, and the Secretary of Agriculture in the case of
agricultural product, commodity or article, involving
dumping and countervailing duties under Section 301
and 302, respectively, of the Tariff and Customs Code,
and safeguard measures under Republic Act No. 8800,
where either party may appeal the decision to impose
or not to impose said duties.

The Court of Tax Appeals has undoubted jurisdiction to pass upon the constitutionality or
validity of a tax law or regulation when raised by the taxpayer as a defense in disputing or
contesting an assessment or claiming a refund. It is only in the lawful exercise of its power
to pass upon all matters brought before it, as sanctioned by Section 7 of Republic Act No.
1125, as amended.

This Court, however, declares that the Court of Tax Appeals may likewise take cognizance of
cases directly challenging the constitutionality or validity of a tax law or regulation or
administrative issuance (revenue orders, revenue memorandum circulars, rulings).

Section 7 of Republic Act No. 1125, as amended, is explicit that, except for local taxes, appeals from
the decisions of quasi-judicial agencies (Commissioner of Internal Revenue, Commissioner of Customs,
Secretary of Finance, Central Board of Assessment Appeals, Secretary of Trade and Industry) on tax-
related problems must be brought exclusively to the Court of Tax Appeals.

In other words, within the judicial system, the law intends the Court of Tax Appeals to have exclusive
jurisdiction to resolve all tax problems. Petitions for writs of certiorari against the acts and omissions of
the said quasi-judicial agencies should, thus, be filed before the Court of Tax Appeals.

Republic Act No. 9282, a special and later law than Batas Pambansa Blg. 129 provides an exception to
the original jurisdiction of the Regional Trial Courts over actions questioning the constitutionality or
validity of tax laws or regulations. Except for local tax cases, actions directly challenging the
constitutionality or validity of a tax law or regulation or administrative issuance may be filed directly
before the Court of Tax Appeals.

Furthermore, with respect to administrative issuances (revenue orders, revenue

memorandum circulars, or rulings), these are issued by the Commissioner under its power to
make rulings or opinions in connection with the implementation of the provisions of internal
revenue laws. Tax rulings, on the other hand, are official positions of the Bureau on inquiries
of taxpayers who request clarification on certain provisions of the National Internal Revenue
Code, other tax laws, or their implementing regulations. Hence, the determination of the
validity of these issuances clearly falls within the exclusive appellate jurisdiction of the Court
of Tax Appeals under Section 7(1) of Republic Act No. 1125, as amended, subject to prior
review by the Secretary of Finance, as required under Republic Act No. 8424.55

A direct invocation of this Court's jurisdiction should only be allowed when there are special, important
and compelling reasons clearly and specifically spelled out in the petition.56

Nevertheless, despite the procedural infirmities of the petitions that warrant their outright dismissal,
the Court deems it prudent, if not crucial, to take cognizance of, and accordingly act on, the petitions
as they assail the validity of the actions of the CIR that affect thousands of employees in the different
government agencies and instrumentalities. The Court, following recent jurisprudence, avails itself of its
judicial prerogative in order not to delay the disposition of the case at hand and to promote the vital
interest of justice. As the Court held in Bloomberry Resorts and Hotels, Inc. v. Bureau of Internal
Revenue:57

From the foregoing jurisprudential pronouncements, it would appear that in questioning the validity of
the subject revenue memorandum circular, petitioner should not have resorted directly before this Court
considering that it appears to have failed to comply with the doctrine of exhaustion of administrative
remedies and the rule on hierarchy of courts, a clear indication that the case was not yet ripe for judicial
remedy. Notably, however, in addition to the justifiable grounds relied upon by petitioner for its
immediate recourse (i.e., pure question of law, patently illegal act by the BIR, national interest, and
prevention of multiplicity of suits), we intend to avail of our jurisdictional prerogative in order not to
further delay the disposition of the issues at hand, and also to promote the vital interest of substantial
justice. To add, in recent years, this Court has consistently acted on direct actions assailing
the validity of various revenue regulations, revenue memorandum circulars, and the likes,
issued by the CIR. The position we now take is more in accord with latest jurisprudence. x x x 58

II.

Substantive

The petitions assert that the CIR's issuance of RMO No. 23-2014, particularly Sections III, IV, VI and
VII thereof, is tainted with grave abuse of discretion. "By grave abuse of discretion is meant, such
capricious and whimsical exercise of judgment as is equivalent to lack of jurisdiction." 59 It is an evasion
of a positive duty or a virtual refusal to perform a duty enjoined by law or to act in contemplation of law
as when the judgment rendered is not based on law and evidence but on caprice, whim and despotism. 60

As earlier stated, Section 4 of the NIRC of 1997, as amended, grants the CIR the power to issue rulings
or opinions interpreting the provisions of the NIRC or other tax laws. However, the CIR cannot, in the
exercise of such power, issue administrative rulings or circulars inconsistent with the law sought to be
applied. Indeed, administrative issuances must not override, supplant or modify the law, but must
remain consistent with the law they intend to carry out.61 The courts will not countenance administrative
issuances that override, instead of remaining consistent and in harmony with the law they seek to apply
and implement.62 Thus, in Philippine Bank of Communications v. Commissioner of Internal
Revenue,63the Court upheld the nullification of RMC No. 7-85 issued by the Acting Commissioner of
Internal Revenue because it was contrary to the express provision of Section 230 of the NIRC of 1977.

Also, in Banco de Oro v. Republic,64 the Court nullified BIR Ruling Nos. 370-2011 and DA 378-2011
because they completely disregarded the 20 or more-lender rule added by Congress in the NIRC of
1997, as amended, and created a distinction for government debt instruments as against those issued
by private corporations when there was none in the law.65
Conversely, if the assailed administrative rule conforms with the law sought to be implemented, the
validity of said issuance must be upheld. Thus, in The Philippine American Life and General Insurance
Co. v. Secretary of Finance,66 the Court declared valid Section 7 (c.2.2) of RR No. 06-08 and RMC No.
25-11, because they merely echoed Section 100 of the NIRC that the amount by which the fair market
value of the property exceeded the value of the consideration shall be deemed a gift; thus, subject to
donor's tax.67

In this case, the Court finds the petitions partly meritorious only insofar as Section VI of the assailed
RMO is concerned. On the other hand, the Court upholds the validity of Sections III, IV and VII thereof
as these are in fealty to the provisions of the NIRC of 1997, as amended, and its implementing rules.

Sections III and IV of RMO No. 23-2014 are valid.

Compensation income is the income of the individual taxpayer arising from services rendered pursuant
to an employer-employee relationship.68 Under the NIRC of 1997, as amended, every form of
compensation for services, whether paid in cash or in kind, is generally subject to income tax and
consequently to withholding tax.69 The name designated to the compensation income received by an
employee is immaterial.70 Thus, salaries, wages, emoluments and honoraria, allowances, commissions,
fees, (including director's fees, if the director is, at the same time, an employee of the
employer/corporation), bonuses, fringe benefits (except those subject to the fringe benefits tax under
Section 33 of the Tax Code), pensions, retirement pay, and other income of a similar nature, constitute
compensation income71that are taxable and subject to withholding.

The withholding tax system was devised for three primary reasons, namely: (1) to provide the taxpayer
a convenient manner to meet his probable income tax liability; (2) to ensure the collection of income
tax which can otherwise be lost or substantially reduced through failure to file the corresponding returns;
and (3) to improve the government's cash flow.72 This results in administrative savings, prompt and
efficient collection of taxes, prevention of delinquencies and reduction of governmental effort to collect
taxes through more complicated means and remedies.73

Section 79(A) of the NIRC of 1997, as amended, states:

SEC. 79. Income Tax Collected at Source. –

(A) Requirement of Withholding - Except in the case of a minimum wage earner as defined in Section
22(HH) of this Code, every employer making payment of wages shall deduct and withhold upon
such wages a tax determined in accordance with the rules and regulations to be prescribed
by the Secretary of Finance, upon recommendation of the Commissioner.74

In relation to the foregoing, Section 2.78 of RR No. 2-98,75 as amended, issued by the Secretary of
Finance to implement the withholding tax system under the NIRC of 1997, as amended, provides:

SECTION 2.78. Withholding Tax on Compensation. — The withholding of tax on compensation income
is a method of collecting the income tax at source upon receipt of the income. It applies to all
employed individuals whether citizens or aliens, deriving income from compensation for
services rendered in the Philippines. The employer is constituted as the withholding agent.76

Section 2.78.3 of RR No. 2-98 further states that the term employee "covers all employees, including
officers and employees, whether elected or appointed, of the Government of the Philippines, or any
political subdivision thereof or any agency or instrumentality"; while an employer, as Section 2.78.4 of
the same regulation provides, "embraces not only an individual and an organization engaged in trade
or business, but also includes an organization exempt from income tax, such as charitable and religious
organizations, clubs, social organizations and societies, as well as the Government of the Philippines,
including its agencies, instrumentalities, and political subdivisions."
The law is therefore clear that withholding tax on compensation applies to the Government of the
Philippines, including its agencies, instrumentalities, and political subdivisions. The Government, as an
employer, is constituted as the withholding agent, mandated to deduct, withhold and remit the
corresponding tax on compensation income paid to all its employees.

However, not all income payments to employees are subject to withholding tax. The following
allowances, bonuses or benefits, excluded by the NIRC of 1997, as amended, from the employee's
compensation income, are exempt from withholding tax on compensation:

1. Retirement benefits received under RA No. 7641 and those received by officials and employees
of private firms, whether individual or corporate, under a reasonable private benefit plan
maintained by the employer subject to the requirements provided by the Code [Section
32(B)(6)(a) of the NIRC of 1997, as amended and Section 2.78.1(B)(1)(a) of RR No. 2-98];

2. Any amount received by an official or employee or by his heirs from the employer due to death,
sickness or other physical disability or for any cause beyond the control of the said official or
employee, such as retrenchment, redundancy, or cessation of business [Section 32(B)(6)(b) of
the NIRC of 1997, as amended and Section 2.78.1(B)(1)(b) of RR No. 2-98];

3. Social security benefits, retirement gratuities, pensions and other similar benefits received by
residents or non-resident citizens of the Philippines or aliens who come to reside permanently
in the Philippines from foreign government agencies and other institutions private or public
[Section 32(B)(6)(c) of the NIRC of 1997, as amended and Section 2.78.1(B)(1)(c) of RR No.
2-98];

4. Payments of benefits due or to become due to any person residing in the Philippines under the
law of the United States administered by the United States Veterans Administration [Section
32(B)(6)(d) of the NIRC of 1997, as amended and Section 2.78.1(B)(1)(d) of RR No. 2-98];

5. Payments of benefits made under the Social Security System Act of 1954 as amended [Section
32(B)(6)(e) of the NIRC of 1997, as amended and Section 2.78.1(B)(1)(e) of RR No. 2-98];

6. Benefits received from the GSIS Act of 1937, as amended, and the retirement gratuity received
by government officials and employees [Section 32(B)(6)(f) of the NIRC of 1997, as amended
and Section 2.78.1(B)(1)(f) of RR No.2- 98];

7. Thirteenth (13th) month pay and other benefits received by officials and employees of public
and private entities not exceeding P82,000.00 [Section 32(B)(7)(e) of the NIRC of 1997, as
amended, and Section 2.78.1(8)(11) of RR No. 2-98, as amended by RR No. 03-15];

8. GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individual employees
[Section 32(B)(7)(f) of the NIRC of 1997, as amended and Section 2.78.1(8)(12) of RR No. 2-
98];

9. Remuneration paid for agricultural labor [Section 2.78.1 (B)(2) of RR No. 2-98];

10. Remuneration for domestic services [Section 28, RA No. 10361 and Section 2.78.1 (B)(3) of RR
No. 2-98];

11. Remuneration for casual labor not in the course of an employer's trade or business [Section
2.78.1(8)(4) of RR No. 2-98];

12. Remuneration not more than the statutory minimum wage and the holiday pay, overtime pay,
night shift differential pay and hazard pay received by Minimum Wage Earners [Section 24(A)(2)
of the NIRC of 1997, as amended];
 13. Compensation for services by a citizen or resident of the Philippines for a foreign government
or an international organization [Section 2.78.1(8)(5) of RR No. 2-98];

14. Actual, moral, exemplary and nominal damages received by an employee or his heirs pursuant
to a final judgment or compromise agreement arising out of or related to an employer-employee
relationship [Section 32(B)(4) of the NIRC of 1997, as amended and Section 2.78.1 (B)(6) of
RR No. 2-98];

15. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the
insured, whether in a single sum or otherwise, provided however, that interest payments agreed
under the policy for the amounts which are held by the insured under such an agreement shall
be included in the gross income [Section 32(B)(1) of the NIRC of 1997, as amended and Section
2.78.1 (B)(7) of RR No. 2-98];

16. The amount received by the insured, as a return of premium or premiums paid by him under
life insurance, endowment, or annuity contracts either during the term or at the maturity of the
term mentioned in the contract or upon surrender of the contract [Section 32(8)(2) of the NIRC
of 1997, as amended and Section 2.78.1(B)(8) of RR No. 2-98];

17. Amounts received through Accident or Health Insurance or under Workmen's Compensation
Acts, as compensation for personal injuries or sickness, plus the amount of any damages
received whether by suit or agreement on account of such injuries or sickness [Section 32(8)(4)
of the NIRC of 1997, as amended and Section 2.78.1(8)(9) of RR No. 2-98];

18. Income of any kind to the extent required by any treaty obligation binding upon the Government
of the Philippines [Section 32(8)(5) of the NIRC of 1997, as amended and Section 2.78.1(B)(10)
of RR No. 2-98];

19. Fringe and De minimis Benefits. [Section 33(C) of the NIRC of 1997, as amended); and

20. Other income received by employees which are exempt under special laws (RATA granted to
public officers and employees under the General Appropriations Act and Personnel Economic
Relief Allowance granted to government personnel).

Petitioners assert that RMO No. 23-2014 went beyond the provisions of the NIRC of 1997, as amended,
insofar as Sections III and IV thereof impose new or additional taxes to allowances, benefits or bonuses
granted to government employees. A closer look at the assailed Sections, however, reveals otherwise.

For reference, Sections III and IV of RMO No. 23-2014 read, as follows:

III. OBLIGATION TO WITHHOLD ON COMPENSATION PAID TO GOVERNMENT OFFICIALS AND

EMPLOYEES

As an employer, government offices including government-owned or controlled corporations (such as

but not limited to the Bangko Sentral ng Pilipinas, Metropolitan Waterworks and Sewerage System,
Philippine Deposit Insurance Corporation, Government Service Insurance System, Social Security
System), as well as provincial, city and municipal governments are constituted as withholding agents
for purposes of the creditable tax required to be withheld from compensation paid for services of its
employees.

Under Section 32(A) of the NIRC of 1997, as amended, compensation for services, in whatever form
paid and no matter how called, form part of gross income. Compensation income includes, among
others, salaries, fees, wages, emoluments and honoraria, allowances, commissions (e.g. transportation,
representation, entertainment and the like); fees including director's fees, if the director is, at the same
time, an employee of the employer/corporation; taxable bonuses and fringe benefits except those which
are subject to the fringe benefits tax under Section 33 of the NIRC; taxable pensions and retirement
pay; and other income of a similar nature.
The foregoing also includes allowances, bonuses, and other benefits of similar nature received by officials
and employees of the Government of the Republic of the Philippines or any of its branches, agencies
and instrumentalities, its political subdivisions, including government-owned and/or controlled
corporations (herein referred to as officials and employees in the public sector) which are composed of
(but are not limited to) the following:

A. Allowances, bonuses, honoraria or benefits received by employees and officials in the

Legislative Branch, such as anniversary bonus, Special Technical Assistance Allowance,
Efficiency Incentive Benefits, Additional Food Subsidy, Eight[h] (8th) Salary Range Level
Allowance, Hospitalization Benefits, Medical Allowance, Clothing Allowance, Longevity
Pay, Food Subsidy, Transition Allowance, Cost of Living Allowance, Inflationary
Adjustment Assistance, Mid-Year Economic Assistance, Financial Relief Assistance,
Grocery Allowance, Thirteenth (13th Month Pay, Cash Gift and Productivity Incentive
Benefit and other allowances, bonuses and benefits given by the Philippine Senate and
House of Representatives to their officials and employees, subject to the exemptions
enumerated herein.

B. Allowances, bonuses, honoraria or benefits received by employees and officials in the

Judicial Branch, such as the Additional Compensation (ADCOM), Extraordinary and
Miscellaneous Expenses (EME), Monthly Special Allowance from the Special Allowance
for the Judiciary, Additional Cost of Living Allowance from the Judiciary Development
Fund, Productivity Incentive Benefit, Grocery Allowance, Clothing Allowance, Emergency
Economic Allowance, Year-End Bonus, Cash Gift, Loyalty Cash Award (Milestone Bonus),
SC Christmas Allowance, anniversary bonuses and other allowances, bonuses and
benefits given by the Supreme Court of the Philippines and all other courts and offices
under the Judicial Branch to their officials and employees, subject to the exemptions
enumerated herein.

C. Compensation for services in whatever form paid, including, but not limited to
allowances, bonuses, honoraria or benefits received by employees and officials in the
Constitutional bodies (Commission on Election, Commission on Audit, Civil Service
Commission) and the Office of the Ombudsman, subject to the exemptions
enumerated herein.

D. Allowances, bonuses, honoraria or benefits received by employees and officials in the

Executive Branch, such as the Productivity Enhancement Incentive (PEI), Performance-
Based Bonus, anniversary bonus and other allowances, bonuses and benefits given by
the departments, agencies and other offices under the Executive Branch to their officials
and employees, subject to the exemptions enumerated herein.

Any amount paid either as advances or reimbursements for expenses incurred or reasonably expected
to be incurred by the official and employee in the performance of his/her duties are not compensation
subject to withholding, if the following conditions are satisfied:

1. The employee was duly authorized to incur such expenses on behalf of the government;
and

2. Compliance with pertinent laws and regulations on accounting and liquidation of

advances and reimbursements, including, but not limited to withholding tax rules. The
expenses should be duly receipted for and in the name of the government office
concerned.

Other than those pertaining to intelligence funds duly appropriated and liquidated, any amount not in
compliance with the foregoing requirements shall be considered as part of the gross taxable
compensation income of the taxpayer. Intelligence funds not duly appropriated and not properly
liquidated shall form part of the compensation of the government officials/personnel concerned, unless
returned.
IV. NON-TAXABLE COMPENSATION INCOME – Subject to existing laws and issuances, the following
income received by the officials and employees in the public sector are not subject to income tax and
withholding tax on compensation:

A.
A. Thirteenth (13th Month Pay and Other Benefits not exceeding Thirty Thousand Pesos
(P30,000.00) paid or accrued during the year. Any amount exceeding Thirty Thousand
Pesos (P30,000.00) are taxable compensation. This includes:

1. Benefits received by officials and employees of the national and local

government pursuant to Republic Act no. 6686 ("An Act Authorizing Annual
Christmas Bonus to National and Local Government Officials and Employees
Starting CY 1998");

2. Benefits received by employees pursuant to Presidential Decree No. 851

("Requiring All Employers to Pay Their Employees a 13th Month Pay"), as
amended by Memorandum Order No. 28, dated August 13, 1986;

3. Benefits received by officials and employees not covered by Presidential Decree

No. 851, as amended by Memorandum Order No. 28, dated August 19, 1986;

4. Other benefits such as Christmas bonus, productivity incentive bonus, loyalty

award, gift in cash or in kind and other benefits of similar nature actually
received by officials and employees of government offices, including the
additional compensation allowance (ACA) granted and paid to all officials and
employees of the National Government Agencies (NGAs) including state
universities and colleges (SUCs), government-owned and/or controlled
corporations (GOCCs), government financial institutions (GFIs) and Local
Government Units (LGUs).

B. Facilities and privileges of relatively small value or "De Minimis Benefits" as defined in
existing issuances and conforming to the ceilings prescribed therein;

C. Fringe benefits which are subject to the fringe benefits tax under Section 33 of the NIRC,
as amended;

D. Representation and Transportation Allowance (RATA) granted to public officers and

employees under the General Appropriations Act;

E. Personnel Economic Relief Allowance (PERA) granted to government personnel;

F. The monetized value of leave credits paid to government officials and employees;

G. Mandatory/compulsory GSIS, Medicare and Pag-Ibig Contributions, provided that,

voluntary contributions to these institutions in excess of the amount considered
mandatory/compulsory are not excludible from the gross income of the taxpayer and
hence, not exempt from Income Tax and Withholding Tax;

H. Union dues of individual employees;

I. Compensation income of employees in the public sector with compensation income of

not more than the Statutory Minimum Wage (SMW) in the non-agricultural sector
applicable to the place where he/she is assigned;

J. Holiday pay, overtime pay, night shift differential pay, and hazard pay received by
Minimum Wage Earners (MWEs);
 K. Benefits received from the GSIS Act of 1937, as amended, and the retirement
gratuity/benefits received by government officials and employees under pertinent
retirement laws;

L. All other benefits given which are not included in the above enumeration but are
exempted from income tax as well as withholding tax on compensation under existing
laws, as confirmed by BIR.77

Clearly, Sections III and IV of the assailed RMO do not charge any new or additional tax. On the contrary,
they merely mirror the relevant provisions of the NIRC of 1997, as amended, and its implementing rules
on the withholding tax on compensation income as discussed above. The assailed Sections simply
reinforce the rule that every form of compensation for personal services received by all employees
arising from employer-employee relationship is deemed subject to income tax and, consequently, to
withholding tax,78 unless specifically exempted or excluded by the Tax Code; and the duty of the
Government, as an employer, to withhold and remit the correct amount of withholding taxes due
thereon.

While Section III enumerates certain allowances which may be subject to withholding tax, it does not
exclude the possibility that these allowances may fall under the exemptions identified under Section IV
– thus, the phrase, "subject to the exemptions enumerated herein." In other words, Sections III and IV
articulate in a general and broad language the provisions of the NIRC of 1997, as amended, on the
forms of compensation income deemed subject to withholding tax and the allowances, bonuses and
benefits exempted therefrom. Thus, Sections III and IV cannot be said to have been issued by the CIR
with grave abuse of discretion as these are fully in accordance with the provisions of the NIRC of 1997,
as amended, and its implementing rules.

Furthermore, the Court finds untenable petitioners' contention that the assailed provisions of RMO No.
23-2014 contravene the equal protection clause, fiscal autonomy, and the rule on non-diminution of
benefits.

The constitutional guarantee of equal protection is not violated by an executive issuance which was
issued to simply reinforce existing taxes applicable to both the private and public sector. As discussed,
the withholding tax system embraces not only private individuals, organizations and corporations, but
also covers organizations exempt from income tax, including the Government of the Philippines, its
agencies, instrumentalities, and political subdivisions. While the assailed RMO is a directive to the
Government, as a reminder of its obligation as a withholding agent, it did not, in any manner or form,
alter or amend the provisions of the Tax Code, for or against the Government or its employees.

Moreover, the fiscal autonomy enjoyed by the Judiciary, Ombudsman, and Constitutional Commissions,
as envisioned in the Constitution, does not grant immunity or exemption from the common burden of
paying taxes imposed by law. To borrow former Chief Justice Corona's words in his Separate Opinion
in Francisco, Jr. v. House of Representatives,79 "fiscal autonomy entails freedom from outside control
and limitations, other than those provided by law. It is the freedom to allocate and utilize funds
granted by law, in accordance with law and pursuant to the wisdom and dispatch its needs may
require from time to time."80

It bears to emphasize the Court's ruling in Nitafan v. Commissioner of Internal Revenue81 that the
imposition of taxes on salaries of Judges does not result in diminution of benefits. This applies to all
government employees because the intent of the framers of the Organic Law and of the people adopting
it is "that all citizens should bear their aliquot part of the cost of maintaining the government
and should share the burden of general income taxation equitably."82

Determination of existence of fringe benefits is a question of

fact.
Petitioners, nonetheless, insist that the allowances, bonuses and benefits enumerated in Section III of
the assailed RMO are, in fact, fringe and de minimis benefits exempt from withholding tax on
compensation. The Court cannot, however, rule on this issue as it is essentially a question of fact that
cannot be determined in this petition questioning the constitutionality of the RMO.

To be sure, settled is the rule that exemptions from tax are construed strictissimi juris against the
taxpayer and liberally in favor of the taxing authority.83 One who claims tax exemption must point to a
specific provision of law conferring, in clear and plain terms, exemption from the common burden 84 and
prove, through substantial evidence, that it is, in fact, covered by the exemption so claimed.85 The
determination, therefore, of the merits of petitioners' claim for tax exemption would necessarily require
the resolution of both legal and factual issues, which this Court, not being a trier of facts, has no
jurisdiction to do; more so, in a petition filed at first instance.

Among the factual issues that need to be resolved, at the first instance, is the nature of the fringe
benefits granted to employees. The NIRC of 1997, as amended, does not impose income tax, and
consequently a withholding tax, on payments to employees which are either (a) required by the nature
of, or necessary to, the business of the employer; or (b) for the convenience or advantage of the
employer.86 This, however, requires proper documentation. Without any documentary proof that the
payment ultimately redounded to the benefit of the employer, the same shall be considered as a taxable
benefit to the employee, and hence subject to withholding taxes.87

Another factual issue that needs to be confirmed is the recipient of the alleged fringe benefit. Fringe
benefits furnished or granted, in cash or in kind, by an employer to its managerial or supervisory
employees, are not considered part of compensation income; thus, exempt from withholding tax on
compensation.88 Instead, these fringe benefits are subject to a fringe benefit tax equivalent to 32% of
the grossed-up monetary value of the benefit, which the employer is legally required to pay. 89 On the
other hand, fringe benefits given to rank and file employees, while exempt from fringe benefit tax,90form
part of compensation income taxable under the regular income tax rates provided in Section 24(A)(2)
of the NIRC, of 1997, as amended;91 and consequently, subject to withholding tax on compensation.

Furthermore, fringe benefits of relatively small value furnished by the employer to his employees (both
managerial/supervisory and rank and file) as a means of promoting health, goodwill, contentment, or
efficiency, otherwise known as de minimis benefits, that are exempt from both income tax on
compensation and fringe benefit tax; hence, not subject to withholding tax, 92 are limited and exclusive
only to those enumerated under RR No. 3-98, as amended.93 All other benefits given by the employer
which are not included in the said list, although of relatively small value, shall not be considered as de
minimis benefits; hence, shall be subject to income tax as well as withholding tax on compensation
income, for rank and file employees, or fringe benefits tax for managerial and supervisory employees,
as the case may be.94

Based on the foregoing, it is clear that to completely determine the merits of petitioners' claimed
exemption from withholding tax on compensation, under Section 33 of the NIRC of 1997, there is a need
to confirm several factual issues. As such, petitioners cannot but first resort to the proper courts and
administrative agencies which are better equipped for said task.

All told, the Court finds Sections III and IV of the assailed RMO valid. The NIRC of 1997, as amended,
is clear that all forms of compensation income received by the employee from his employer are
presumed taxable and subject to withholding taxes. The Government of the Philippines, its agencies,
instrumentalities, and political subdivisions, as an employer, is required by law to withhold and remit to
the BIR the appropriate taxes due thereon. Any claims of exemption from withholding taxes by an
employee, as in the case of petitioners, must be brought and resolved in the appropriate administrative
and judicial proceeding, with the employee having the burden to prove the factual and legal bases
thereof.
 Section VII of RMO No. 23-2014 is valid; Section VI
contravenes, in part, the provisions of the NIRC of 1997, as
amended, and its implementing rules.

Petitioners claim that RMO No. 23-2014 is ultra vires insofar as Sections VI and VII thereof define new
offenses and prescribe penalties therefor, particularly upon government officials.

The NIRC of 1997, as amended, clearly provides the offenses and penalties relevant to the obligation of
the withholding agent to deduct, withhold and remit the correct amount of withholding taxes on
compensation income, to wit:

TITLE X
Statutory Offenses and Penalties

CHAPTER I
Additions to the Tax

SEC. 247. General Provisions. –

(a) The additions to the tax or deficiency tax prescribed in this Chapter shall apply to all taxes, fees and
charges imposed in this Code. The amount so added to the tax shall be collected at the same time, in
the same manner and as part of the tax.

(b) If the withholding agent is the Government or any of its agencies, political subdivisions or
instrumentalities, or a government owned or -controlled corporation, the employee thereof responsible
for the withholding and remittance of the tax shall be personally liable for the additions to the tax
prescribed herein.

(c) The term "person", as used in this Chapter, includes an officer or employee of a corporation who as
such officer, employee or member is under a duty to perform the act in respect of which the violation
occurs.

SEC. 248. Civil Penalties. — x x x95

SEC. 249. Interest. – x x x96

xxxx

SEC. 251. Failure of a Withholding Agent to Collect and Remit Tax. – Any person required to withhold,
account for, and remit any tax imposed by this Code or who willfully fails to withhold such tax, or account
for and remit such tax, or aids or abets in any manner to evade any such tax or the payment thereof,
shall, in addition to other penalties provided for under this Chapter, be liable upon conviction to a penalty
equal to the total amount of the tax not withheld, or not accounted for and remitted. 97

SEC. 252. Failure of a Withholding Agent to Refund Excess Withholding Tax. – Any employer/withholding
agent who fails or refuses to refund excess withholding tax shall, in addition to the penalties provided
in this Title, be liable to a penalty equal to the total amount of refunds which was not refunded to the
employee resulting from any excess of the amount withheld over the tax actually due on their return.

CHAPTER II
Crimes, Other Offenses and Forfeitures
xxxx

SEC. 255. Failure to File Return, Supply Correct and Accurate Information, Pay Tax, Withhold and Remit
Tax and Refund Excess Taxes Withheld on Compensation. – Any person required under this Code or by
rules and regulations promulgated thereunder to pay any tax, make a return, keep any record, or supply
correct and accurate information, who willfully fails to pay such tax, make such return, keep such record,
or supply such correct and accurate information, or withhold or remit taxes withheld, or refund excess
taxes withheld on compensation, at the time or times required by law or rules and regulations shall, in
addition to other penalties provided by law, upon conviction thereof, be punished by a fine of not less
than Ten thousand pesos (P10,000) and suffer imprisonment of not less than one (l) year but not more
than ten (10) years.

CHAPTER III
Penalties Imposed on Public Officers

xxxx

SEC. 272. Violation of Withholding Tax Provision. – Every officer or employee of the Government of the
Republic of the Philippines or any of its agencies and instrumentalities, its political subdivisions, as well
as government-owned or -controlled corporations, including the Bangko Sentral ng Pilipinas (BSP), who,
under the provisions of this Code or rules and regulations promulgated thereunder, is charged with the
duty to deduct and withhold any internal revenue tax and to remit the same in accordance with the
provisions of this Code and other laws is guilty of any offense hereinbelow specified shall, upon
conviction for each act or omission be punished by a fine of not less than Five thousand pesos (P5,000)
but not more than Fifty thousand pesos (P50,000) or suffer imprisonment of not less than six (6) months
and one day (1) but not more than two (2) years, or both:

(a) Failing or causing the failure to deduct and withhold any internal revenue tax under any of the
withholding tax laws and implementing rules and regulations;

(b) Failing or causing the failure to remit taxes deducted and withheld within the time prescribed by
law, and implementing rules and regulations; and

(c) Failing or causing the failure to file return or statement within the time prescribed, o rendering or
furnishing a false or fraudulent return or statement required under the withholding tax laws and rules
and regulations.98

Based on the foregoing, and similar to Sections III and IV of the assailed RMO, the Court finds that
Section VII thereof was issued in accordance with the provisions of the NIRC of 1997, as amended, and
RR No. 2-98. For easy reference, Section VII of RMO No. 23-2014 states:

VII. PENALTY PROVISION

In case of non-compliance with their obligation as withholding agents, the abovementioned persons
shall be liable for the following sanctions:

A. Failure to Collect and Remit Taxes (Section 251, NIRC) "Any person required to withhold,
account for, and remit any tax imposed by this Code or who willfully fails to withhold
such tax, or account for and remit such tax, or aids or abets in any manner to evade
any such tax or the payment thereof, shall, in addition to other penalties provided for
under this Chapter, be liable upon conviction to a penalty equal to the total amount of
the tax not withheld, or not accounted for and remitted."

B. Failure to File Return, Supply Correct and Accurate Information, Pay Tax Withhold and
Remit Tax and Refund Excess Taxes Withheld on Compensation (Section 255, NIRC)
"Any person required under this Code or by rules and regulations promulgated
 thereunder to pay any tax make a return, keep any record, or supply correct the
accurate information, who willfully fails to pay such tax, make such return, keep such
record, or supply correct and accurate information, or withhold or remit taxes withheld,
or refund excess taxes withheld on compensation, at the time or times required by law
or rules and regulations shall, in addition to other penalties provided by law, upon
conviction thereof, be punished by a fine of not less than Ten thousand pesos (P10,000)
and suffer imprisonment of not less than one (1) year but not more than ten (10) years.

Any person who attempts to make it appear for any reason that he or another has in
fact filed a return or statement, or actually files a return or statement and subsequently
withdraws the same return or statement after securing the official receiving seal or
stamp of receipt of internal revenue office wherein the same was actually filed shall,
upon conviction therefor, be punished by a fine of not less than Ten thousand pesos
(P10,000) but not more than Twenty thousand pesos (P20,000) and suffer imprisonment
of not less than one (1) year but not more than three (3) years."

C. Violation of Withholding Tax Provisions (Section 272, NIRC)

"Every officer or employee of the Government of the Republic of the Philippines or any of its agencies
and instrumentalities, its political subdivisions, as well as government-owned or controlled corporations,
including the Bangko Sentral ng Pilipinas (BSP), who is charged with the duty to deduct and withhold
any internal revenue tax and to remit the same is guilty of any offense herein below specified shall,
upon conviction for each act or omission be punished by a fine of not less than Five thousand pesos
(P5,000) but not more than Fifty thousand pesos (P50,000) or suffer imprisonment of not less than six
(6) months and one (1) day but not more than two (2) years, or both:

1. Failing or causing the failure to deduct and withhold any internal revenue tax
under any of the withholding tax laws and implementing rules and regulations;
or

2. Failing or causing the failure to remit taxes deducted and withheld within the
time prescribed by law, and implementing rules and regulations; or

3. Failing or causing the failure to file return or statement within the time
prescribed, or rendering or furnishing a false or fraudulent return or statement
required under the withholding tax laws and rules and regulations."

All revenue officials and employees concerned shall take measures to ensure the full enforcement of the
provisions of this Order and in case of any violation thereof, shall commence the appropriate legal action
against the erring withholding agent.

Verily, tested against the provisions of the NIRC of 1997, as amended, Section VII of RMO No. 23-2014
does not define a crime and prescribe a penalty therefor. Section VII simply mirrors the relevant
provisions of the NIRC of 1997, as amended, on the penalties for the failure of the withholding agent to
withhold and remit the correct amount of taxes, as implemented by RR No. 2-98.

However, with respect to Section VI of the assailed RMO, the Court finds that the CIR overstepped the
boundaries of its authority to interpret existing provisions of the NIRC of 1997, as amended.

Section VI of RMO No. 23-2014 reads:

VI. PERSONS RESPONSIBLE FOR WITHHOLDING

The following officials are duty bound to deduct, withhold and remit taxes:
 a) For Office of the Provincial Government-province- the Chief
Accountant, Provincial Treasurer and the Governor;

b) For Office of the City Government-cities- the Chief

Accountant, City Treasurer and the City Mayor;

c) For Office of the Municipal Government-municipalities- the

Chief Accountant, Municipal Treasurer and the Mayor;

d) Office of the Barangay-Barangay Treasurer and Barangay

Captain

e) For NGAs, GOCCs and other Government Offices, the Chief

Accountant and the Head of Office or the Official holding the
highest position (such as the President, Chief Executive
Officer, Governor, General Manager).

To recall, the Government of the Philippines, or any political subdivision or agency thereof, or any GOCC,
as an employer, is constituted by law as the withholding agent, mandated to deduct, withhold and remit
the correct amount of taxes on the compensation income received by its employees. In relation thereto,
Section 82 of the NIRC of 1997, as amended, states that the return of the amount deducted and withheld
upon any wage paid to government employees shall be made by the officer or employee having control
of the payments or by any officer or employee duly designated for such purpose. 99 Consequently, RR
No. 2-98 identifies the Provincial Treasurer in provinces, the City Treasurer in cities, the Municipal
Treasurer in municipalities, Barangay Treasurer in barangays, Treasurers of government-owned or -
controlled corporations (GOCCs), and the Chief Accountant or any person holding similar position and
performing similar function in national government offices, as persons required to deduct and withhold
the appropriate taxes on the income payments made by the government.100

However, nowhere in the NIRC of 1997, as amended, or in RR No. 2-98, as amended, would one find
the Provincial Governor, Mayor, Barangay Captain and the Head of Government Office or the "Official
holding the highest position (such as the President, Chief Executive Officer, Governor, General
Manager)" in an Agency or GOCC as one of the officials required to deduct, withhold and remit the
correct amount of withholding taxes. The CIR, in imposing upon these officials the obligation not found
in law nor in the implementing rules, did not merely issue an interpretative rule designed to provide
guidelines to the law which it is in charge of enforcing; but instead, supplanted details thereon — a
power duly vested by law only to respondent Secretary of Finance under Section 244 of the NIRC of
1997, as amended.

Moreover, respondents' allusion to previous issuances of the Secretary of Finance designating the
Governor in provinces, the City Mayor in cities, the Municipal Mayor in municipalities, the Barangay
Captain in barangays, and the Head of Office (official holding the highest position) in departments,
bureaus, agencies, instrumentalities, government-owned or -controlled corporations, and other
government offices, as officers required to deduct and withhold,101 is bereft of legal basis. Since the
1977 NIRC and Executive Order No. 651, which allegedly breathed life to these issuances, have already
been repealed with the enactment of the NIRC of 1997, as amended, and RR No. 2-98, these previous
issuances of the Secretary of Finance have ceased to have the force and effect of law.

Accordingly, the Court finds that the CIR gravely abused its discretion in issuing Section VI of RMO No.
23-2014 insofar as it includes the Governor, City Mayor, Municipal Mayor, Barangay Captain, and Heads
of Office in agencies, GOCCs, and other government offices, as persons required to withhold and remit
withholding taxes, as they are not among those officials designated by the 1997 NIRC, as amended,
and its implementing rules.

Petition for Mandamus is moot and academic.

As regards the prayer for the issuance of a writ of mandamus to compel respondents to increase the
P30,000.00 non-taxable income ceiling, the same has already been rendered moot and academic due
to the enactment of RA No. 10653.102

The Court takes judicial notice of RA No. 10653, which was signed into law on February 12, 2015, which
increased the income tax exemption for 13th month pay and other benefits, under Section 32(B)(7)(e)
of the NIRC of 1997, as amended, from P30,000.00 to P82,000.00. 103 Said law also states that every
three (3) years after the effectivity of said Act, the President of the Philippines shall adjust the amount
stated therein to its present value using the Consumer Price Index, as published by the National
Statistics Office.104

Recently, RA No. 10963,105 otherwise known as the "Tax Reform for Acceleration and Inclusion (TRAIN)"
Act, further increased the income tax exemption for 13th month pay and other benefits to P90,000.00.106

A case is considered moot and academic if it ceases to present a justiciable controversy by virtue of
supervening events, so that an adjudication of the case or a declaration on the issue would be of no
practical value or use. Courts generally decline jurisdiction over such case or dismiss it on the ground
of mootness.107

With the enactment of RA Nos. 10653 and 10963, which not only increased the tax exemption ceiling
for 13th month pay and other benefits, as petitioners prayed, but also conferred upon the President the
power to adjust said amount, a supervening event has transpired that rendered the resolution of the
issue on whether mandamus lies against respondents, of no practical value. Accordingly, the petition
for mandamus should be dismissed for being moot and academic.

As a final point, the Court cannot turn a blind eye to the adverse effects of this Decision on ordinary
government employees, including petitioners herein, who relied in good faith on the belief that the
appropriate taxes on all the income they receive from their respective employers are withheld and paid.
Nor does the Court ignore the situation of the relevant officers of the different departments of
government that had believed, in good faith, that there was no need to withhold the taxes due on the
compensation received by said ordinary government employees. Thus, as a measure of equity and
compassionate social justice, the Court deems it proper to clarify and declare, pro hac vice, that its
ruling on the validity of Sections III and IV of the assailed RMO is to be given only prospective effect. 108
WHEREFORE, premises considered, the Petitions and Petitions-in Interventions are PARTIALLY
GRANTED. Section VI of Revenue Memorandum Order No. 23-2014 is DECLARED null and void insofar
as it names the Governor, City Mayor, Municipal Mayor, Barangay Captain, and Heads of Office in
government agencies, government-owned or -controlled corporations, and other government offices, as
persons required to withhold and remit withholding taxes.

Sections III, IV and VII of RMO No. 23-2014 are DECLARED valid inasmuch as they merely mirror the
provisions of the National Internal Revenue Code of 1997, as amended. However, the Court cannot rule
on petitioners' claims of exemption from withholding tax on compensation income because these involve
issues that are essentially factual or evidentiary in nature, which must be raised in the appropriate
administrative and/or judicial proceeding.

The Court's Decision upholding the validity of Sections III and IV of the assailed RMO is to be applied
only prospectively.

Finally, the Petition for Mandamus in G.R. No. 213446 is hereby DENIED on the ground of mootness.

SO ORDERED.

Carpio, Velasco, Jr., Leonardo-De Castro, Peralta, Bersamin, Del Castillo, Perlas-Bernabe, Leonen,
Martires, Tijam, Reyes, Jr., and Gesmundo, JJ., concur.
Jardeleza, J., no part prior OSG action.

NOTICE OF JUDGMENT

Sirs/Mesdames:

Please take notice that on July 3, 2018 a Decision, copy attached herewith, was rendered by the
Supreme Court in the above-entitled cases, the original of which was received by this Office on July 31,
2018 at 3:44 p.m.

Very truly yours,

(SGD.) EDGAR O. ARICHETA

Clerk of Court

Endnotes:

1Rollo (G.R. No. 213446), pp. 3-81.

2 Id. at 29-33.

3 Id. at 27-28.
4
Id. at 28-29.

5 Id. at 21, 33-35.

6 Id. at 108-110.

7 Id. at 42-43.

8Rollo (G.R. No. 213658), pp. 3-61.

9 Id. at 17-20.

10 Id. at 20-42.

11 Id. at 43.

12 Id. at 159-160.

13Id. at 212-265.

14 Id. at 218-220.

15 Id. at 220.

16 Id. at 224.

17 Id. at 222.

18 Id. at 227-229.

19 Id. at 229-230.

20 Id. at 231-245.

21 Id. at 246-248.

22 Id. at 249-252.

23Rollo (G.R. No. 213446), pp. 117-143.

24Id. at 130-135.

25 Id. at 135-137.

26 Id. at 137-139.

27 Id. at 307-324.

28 Id. at 312.

29 Id. at 316.
30
Id.

31 Id. at 317.

32Rollo (G.R. No. 213658), pp. 147-158.

33 Id. at 154.

34 Id. at 153.

35 Id.

36 Id. at 273-294.

37 Id. at 278-279.

38 Id. at 280-283.

39 Id. at 284-290.

40 Id. at 291.

41Estrada v. Office of the Ombudsman, 751 Phil. 821, 890 (2015), citing Interorient Maritime
Enterprises, Inc. v. NLRC, 330 Phil. 493, 502 (1996).

42 Emphasis and underscoring supplied.

43"Revenue Issuances," < https://www.bir.gov.ph/index.php/revenue-issuances.html > (last accessed

on June 28, 2018).

44PROVIDING FOR THE IMPLEMENTING RULES OF THE FIRST PARAGRAPH OF SECTION 4 OF THE
NATIONAL INTERNAL REVENUE CODE OF 1997, REPEALING FOR THIS PURPOSE DEPARTMENT ORDER
No. 005-99 AND REVENUE ADMINISTRATIVE ORDER NO. 1-99, May 7, 2002.

45 DOF Department Order No. 007-02, Sec. 3.

46 565 Phil. 255 (2007).

47 Id. at 270-271.

48The Iloilo City Zoning Board of Adjustment and Appeals v. Gegato-Abecia Funeral Homes. Inc., 462
Phil. 803, 812 (2003), citing Paat v. Court of Appeals, 334 Phil. 146, 152-153 (1997).

49 747 Phil. 811 (2014).

50Id. at 823-824.

51 SEC. 7. Jurisdiction. The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising
under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue[.]
(Underscoring supplied)

52 726 Phil. 9 (2014).

53The Philippine American Life and General Insurance Co. v. Secretary of Finance, supra note 49, at 831.

54 793 Phil. 97 (2016).

55 Id. at 118-125. Emphasis supplied; citations omitted.

56Dagan v. Office of the Ombudsman, 721 Phil. 400, 413 (2013).

57 792 Phil. 751 (2016).

58 Id. at 760-761. Emphasis and underscoring supplied.

59Republic v. Rambuyong, 646 Phil. 373, 382 (2010), citing Banal III v. Panganiban, 511 Phil. 605, 614
(2005).

60Id. at 382, citing Ferrer v. Office of the Ombudsman, 583 Phil. 50, 63-64 (2008).

61Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc., 453 Phil. 1043, 1052 (2003).

62Philippine Bank of Communications v. Commissioner of Internal Revenue, 361 Phil. 916, 929 (1999).

63 Id. at 928-930.

64 750 Phil. 349 (2015).

65 Id. at 399, 412.

66 Supra note 49.

67 Id. at 831-832.

68Recalde, E.R., A Treatise on Philippine Internal Revenue Taxes (2014), pp. 257-258, citing RR No. 2-
98, Sec. 2.78.1(A).

69ING Bank N.V. v. Commissioner of Internal Revenue, 764 Phil. 418, 443 (2015).

70 Id. at 446.

71 See RR No. 2-98, Sec. 2.78.1(A).

72Chamber of Real Estate and Builders Associations, Inc. v. Romulo, 628 Phil. 508, 535-536 (2010).

73Id. at 536.

74 Emphasis supplied.
75
IMPLEMENTING REPUBLIC ACT NO. 8424, "AN ACT AMENDING THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED" RELATIVE TO THE WITHHOLDING ON INCOME SUBJECT TO THE EXPANDED
WITHHOLDING TAX AND FINAL WITHHOLDING TAX, WITHHOLDING OF INCOME TAX ON
COMPENSATION, WITHHOLDING OF CREDITABLE VALUE-ADDED TAX AND OTHER PERCENTAGE TAXES,
April 17, 1998.

76 Emphasis supplied.

77 Emphasis and underscoring supplied.

78ING Bank N.V. v. Commissioner of Internal Revenue, supra note 69, at 443.

79 460 Phil. 830, 1006-1028 (2003).

80 Id. at 1028. Emphasis and underscoring supplied.

81 236 Phil. 307 (1987).

82 Id. at 315-316. Emphasis and underscoring supplied.

83Diageo Philippines, Inc. v. Commissioner of Internal Revenue, 698 Phil. 385, 395 (2012), citing Quezon
City v. ABS-CBN Broadcasting Corp., 588 Phil. 785, 803 (2008).

84The City of Iloilo v. Smart Communications, Inc. (SMART), 599 Phil. 492, 497 (2009).

85Quezon City v. ABS-CBN Broadcasting Corp., supra note 83, at 803, citing Agpalo, R.E., Statutory
Construction (2003 ed.), p. 301.

86 Recalde, E.R., supra note 68, at 266, citing Section 33(A) of the NIRC of 1997, as amended.

87See id. at 267, citing First Lepanto Taisho Insurance Corp. v. Commissioner of Internal Revenue, 708
Phil. 616, 624 (2013). See also Commissioner of Internal Revenue v. Secretary of Justice, 799 Phil. 13,
38-39 (2016).

88 See RR No. 2-98, Sec. 2.79(8).

89See Section 33(A) of the NIRC of 1997, as implemented by Section 2.33(A) of RR No. 03-98 on
IMPLEMENTING SECTION 33 OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED BY REPUBLIC
ACT NO. 8424 RELATIVE TO THE SPECIAL TREATMENT OF FRINGE BENEFITS, May 21, 1998.

90 See Section 33(C)(3) of the NIRC of 1997, as amended.

91 See Recalde, E.R., supra note 68, at 262.

92 See Section 33(C)(4) of the NIRC of 1997, as amended. See also RR 3-98.

93 Section 2.33(C) of RR 3-98, as last amended by RR No. 5-2008, 5-2011, 8-2012 and 1-2015, states:

SEC. 2.33. Special Treatment of Fringe Benefits. -

xxxx

(C) Fringe Benefits Not Subject to Fringe Benefits Tax – x x x

xxxx

(a) Monetized unused vacation leave credits of private employees not exceeding ten (10) days during
the year;

(b) Monetized value of vacation and sick leave credits paid to government officials and employees;

(c) Medical cash allowance to dependents of employees, not exceeding P750 per employee per semester
or P125 per month;

(d) Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not more than P1,500;

(e) Uniform and Clothing allowance not exceeding P5,000 per annum;

(f) Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual
medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000
per annum;

(g) Laundry allowance not exceeding P300 per month;

(h) Employees achievement awards, e.g., tor length of service or safety achievement, which must be in
the form of a tangible personal property other than cash or gift certificate, with an annual monetary
value not exceeding P10,000 received by the employee under an established written plan which does
not discriminate in favor of highly paid employees;

(i) Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee
per annum;

(j) Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five percent
(25%) of the basic minimum wage on a per region basis; and

(k) Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and
productivity incentive schemes provided that the total annual monetary value received from both CBA
and productivity incentive schemes combined, do not exceed ten thousand pesos (P10,000) per
employee, per taxable year.

94See Section 2 of RR No. 5-2011; see also "Additional P10,000 nontaxable De Minimis Benefits effective
January 1, 2015" by Orlando Calundan on Jan 10th, 2015 < http://philcpa.org/2015/01/additional-
p10000-nontaxable-de-minimis-benefits-effective-january-1-2015/ > (last accessed on June 28, 2018).

95 RR No. 2-98, Sec. 2.80(C)(3) states:

(C) Additions to Tax. —

xxxx

(3) Deficiency Interest — Any deficiency in the basic tax due, as the term is defined in the Code, shall
be subject to the interest prescribed in paragraph (a) hereof, which interest shall be assessed and
collected from the date prescribed for its payment until the full payment thereof.

If the withholding agent is the government or any of its agencies, political subdivisions, or
instrumentalities, or a government-owned or controlled corporation, the employee thereof responsible
for the withholding and remittance of tax shall be personally liable for the surcharge and interest
imposed herein.
96
RR No. 2-98, Sec. 2.80(C)(2) states:

(C) Additions to Tax. —

xxxx

(2) Interest — There shall be assessed and collected on any unpaid amount of tax, an interest at the
rate of twenty percent (20%) per annum, or such higher rate as may be prescribed for payment until
the amount is fully paid.

97 RR No. 2-98, Sec. 2.80(A) provides:

(A) Employer. —

(1) In general, the employer shall be responsible for the withholding and remittance of the correct
amount of tax required to be deducted and withheld from the compensation income of his employees.
If the employer fails to withhold and remit the correct amount of tax, such tax shall be collected from
the employer together with the penalties or additions to the tax otherwise applicable.

(2) The employer who required to collect, account for and remit any tax imposed by the NIRC, as
amended, who willfully fails to collect such tax, or account for and remit such tax or willfully assist in
any manner to evade any payment thereof, shall in addition to other penalties, provided for in the Code,
as amended, be liable, upon conviction, to a penalty equal to the amount of the tax not collected nor
accounted for or remitted.

(3) Any employer/withholding agent who fails, or refuses to refund excess withholding tax not later than
January 25 of the succeeding year shall, in addition to any penalties provided in Title X of the Code, as
amended, be liable to a penalty equal to the total amount of refund which was not refunded to the
employee resulting from any excess of the amount withheld over the tax actually due on their return.

98 See RR No. 2-98, Secs. 4.114(E) and 5.116(D).

99 See RR No. 2-98, Sec. 2.58(C), 2.82 and 2.83.1.

100 See RR No. 2-98, Secs. 4.114(B), 4.114(E)(1) and 5.116(D)(1).

101 Respondents' Consolidated Comment, rollo (G.R. No. 213658), pp. 222-226.

AN ACT ADJUSTING THE 13TH MONTH PAY AND OTHER BENEFITS CEILING EXCLUDED FROM THE
102

COMPUTATION OF GROSS INCOME FOR PURPOSES OF INCOME TAXATION, AMENDING FOR THE
PURPOSE SECTION 32(8) CHAPTER VI OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS
AMENDED, February 12, 2015.

103 RA No. 10653, Sec. 1.

104 Id.

105AN ACT AMENDING SECTIONS 5, 6, 24, 25, 27, 31, 32, 33, 34, 51, 52, 56, 57, 58, 74, 79, 84, 86,
90, 91, 97, 99, 100, 101, 106, 107, 108, 109, 110, 112, 114, 116, 127, 128, 129, 145, 148, 149, 151,
155, 171, 174, 175, 177, 178, 179, 180, 181, 182, 183, 186, 188, 189, 190, 191, 192, 193, 194, 195,
196, 197, 232, 236, 237, 249, 254, 264, 269, AND 288; CREATING NEW SECTIONS 51-A, 148-A, 150-
A, 150-B, 237-A, 264-A, 264-B, AND 265-A; AND REPEALING SECTIONS 35, 62, AND 89; ALL UNDER
REPUBLIC ACT NO. 8424, OTHERWISE KNOWN AS THE NATIONAL INTERNAL REVENUE CODE OF 1997,
AS AMENDED AND FOR OTHER PURPOSES, December 19, 2017.
106
RA No. 10963, Sec. 9.

107 Jacinto-Henares v. St. Paul College of Makati, G.R. No. 215383, March 8, 2017, 820 SCRA 92, 101.

108See Development Bank of the Philippines v. Commission on Audit, G.R. No. 221706, March 13,
2018; National Transmission Corp. v. Commission on Audit, G.R. No. 227796, February 20,
2018; Nayong Pilipino Foundation, Inc. v. Pulido Tan, G.R. No. 213200, September 19, 2017; National
Transmission Corporation v. Commission on Audit, G.R. No. 223625, November 22, 2016, 809 SCRA
562; Silang v. Commission on Audit, 769 Phil. 327 (2015).

EN BANC

G.R. No. 199802, July 03, 2018

CONGRESSMAN HERMILANDO I. MANDANAS; MAYOR EFREN B.

DIONA; MAYOR ANTONINO A. AURELIO; KAGAWAD MARIO
ILAGAN; BARANGAY CHAIR PERLITO MANALO; BARANGAY CHAIR
MEDEL MEDRANO; BARANGAY KAGAWAD CRIS RAMOS;
BARANGAY KAGAWAD ELISA D. BALBAGO, AND ATTY. JOSE
MALVAR VILLEGAS, Petitioners, v. EXECUTIVE SECRETARY PAQUITO
N. OCHOA, JR.; SECRETARY CESAR PURISIMA, DEPARTMENT OF
FINANCE; SECRETARY FLORENCIO H. ABAD, DEPARTMENT OF
BUDGET AND MANAGEMENT; COMMISSIONER KIM JACINTO-
HENARES, BUREAU OF INTERNAL REVENUE; AND NATIONAL
TREASURER ROBERTO TAN, BUREAU OF THE
TREASURY, Respondents.

G.R. No. 208488, July 3, 2018

HONORABLE ENRIQUE T. GARCIA, JR., IN HIS PERSONAL AND

OFFICIAL CAPACITY AS REPRESENTATIVE OF THE 2ND DISTRICT
OF THE PROVINCE OF BATAAN, Petitioner, v.HONORABLE [PAQUITO]
N. OCHOA, JR., EXECUTIVE SECRETARY; HONORABLE CESAR V.
PURISIMA, SECRETARY, DEPARTMENT OF FINANCE; HONORABLE
FLORENCIO H. ABAD, SECRETARY, DEPARTMENT OF BUDGET AND
MANAGEMENT; HONORABLE KIM S. JACINTO-HENARES,
COMMISSIONER, BUREAU OF INTERNAL REVENUE; AND
HONORABLE ROZZANO RUFINO B. BIAZON, COMMISSIONER,
BUREAU OF CUSTOMS, Respondents.

DECISION

BERSAMIN, J.:

The petitioners hereby challenge the manner in which the just share in the national
taxes of the local government units (LGUs) has been computed.

Antecedents

One of the key features of the 1987 Constitution is its push towards decentralization
of government and local autonomy. Local autonomy has two facets, the
administrative and the fiscal. Fiscal autonomy means that local governments have
the power to create their own sources of revenue in addition to their equitable share
in the national taxes released by the National Government, as well as the power to
allocate their resources in accordance with their own priorities. 1 Such autonomy is
as indispensable to the viability of the policy of decentralization as the other.

Implementing the constitutional mandate for decentralization and local autonomy,

Congress enacted Republic Act No. 7160, otherwise known as the Local
Government Code (LGC), in order to guarantee the fiscal autonomy of the LGUs by
specifically providing that:

SECTION 284. Allotment of Internal Revenue Taxes. — Local government units

shall have a share in the national internal revenue taxes based on the collection of
the third fiscal year preceding the current fiscal year as follows:

(a) On the first year of the effectivity of this Code, thirty percent (30%);

(b) On the second year, thirty-five percent (35%); and

(c) On the third year and thereafter, forty percent (40%).

Provided, That in the event that the National Government incurs an unmanageable
public sector deficit, the President of the Philippines is hereby authorized, upon the
recommendation of Secretary of Finance, Secretary of Interior and Local
Government, and Secretary of Budget and Management, and subject to consultation
with the presiding officers of both Houses of Congress and the presidents of the
"liga", to make the necessary adjustments in the internal revenue allotment of local
government units but in no case shall the allotment be less than thirty percent (30%)
of the collection of national internal revenue taxes of the third fiscal year preceding
the current fiscal year: Provided, further, That in the first year of the effectivity of
this Code, the local government units shall, in addition to the thirty percent (30%)
internal revenue allotment which shall include the cost of devolved functions for
essential public services, be entitled to receive the amount equivalent to the cost of
devolved personal services.

The share of the LGUs, heretofore known as the Internal Revenue Allotment (IRA),
has been regularly released to the LGUs. According to the implementing rules and
regulations of the LGC, the IRA is determined on the basis of the actual collections
of the National Internal Revenue Taxes (NIRTs) as certified by the Bureau of
Internal Revenue (BIR).2

G.R. No. 199802 (Mandanas, et al.) is a special civil action for certiorari,
prohibition and mandamusassailing the manner the General Appropriations Act
(GAA) for FY 2012 computed the IRA for the LGUs.

Mandanas, et al. allege herein that certain collections of NIRTs by the Bureau of
Customs (BOC) – specifically: excise taxes, value added taxes (VATs) and
documentary stamp taxes (DSTs) – have not been included in the base amounts for
the computation of the IRA; that such taxes, albeit collected by the BOC, should
form part of the base from which the IRA should be computed because they
constituted NIRTs; that, consequently, the release of the additional amount of
P60,750,000,000.00 to the LGUs as their IRA for FY 2012 should be ordered; and
that for the same reason the LGUs should also be released their unpaid IRA for FY
1992 to FY 2011, inclusive, totaling P438,103,906,675.73.

In G.R. No. 208488, Congressman Enrique Garcia, Jr., the lone petitioner, seeks the
writ of mandamus to compel the respondents thereat to compute the just share of the
LGUs on the basis of all national taxes. His petition insists on a literal reading of
Section 6, Article X of the 1987 Constitution. He avers that the insertion by Congress
of the words internal revenue in the phrase national taxes found in Section 284 of
the LGC caused the diminution of the base for determining the just share of the
LGUs, and should be declared unconstitutional; that, moreover, the exclusion of
certain taxes and accounts pursuant to or in accordance with special laws was
similarly constitutionally untenable; that the VATs and excise taxes collected by the
BOC should be included in the computation of the IRA; and that the respondents
should compute the IRA on the basis of all national tax collections, and thereafter
distribute any shortfall to the LGUs.
It is noted that named as common respondents were the then incumbent Executive
Secretary, Secretary of Finance, the Secretary of the Department of Budget and
Management (DBM), and the Commissioner of Internal Revenue. In addition,
Mandanas, et al. impleaded the National Treasurer, while Garcia added the
Commissioner of Customs.

The cases were consolidated on October 22, 2013.3 In the meanwhile, Congressman
Garcia, Jr. passed away. Jose Enrique Garcia III, who was subsequently elected to
the same congressional post, was substituted for Congressman Garcia, Jr. as the
petitioner in G.R. No. 208488 under the resolution promulgated on August 23,
2016.4

In response to the petitions, the several respondents, represented by the Office of the
Solicitor General (OSG), urged the dismissal of the petitions upon procedural and
substantive considerations.

Anent the procedural considerations, the OSG argues that the petitions are
procedurally defective because, firstly, mandamus does not lie in order to achieve
the reliefs sought because Congress may not be compelled to appropriate the sums
allegedly illegally withheld for to do so will violate the doctrine of separation of
powers; and, secondly, mandamus does not also lie to compel the DBM to release
the amounts to the LGUs because such disbursements will be contrary to the
purposes specified in the GAA; that Garcia has no clear legal right to sustain his suit
for mandamus; that the filing of Garcia's suit violates the doctrine of hierarchy of
courts; and that Garcia's petition seeks declaratory relief but the Court cannot grant
such relief in the exercise of its original jurisdiction.

On the substantive considerations, the OSG avers that Article 284 of the LGC is
consistent with the mandate of Section 6, Article X of the 1987 Constitution to the
effect that the LGUs shall have a just share in the national taxes; that the
determination of the just share is within the discretion of Congress; that the
limitation under the LGC of the basis for the just share in the NIRTs was within the
powers granted to Congress by the 1987 Constitution; that the LGUs have been
receiving their just share in the national taxes based on the correct base amount; that
Congress has the authority to exclude certain taxes from the base amount in
computing the IRA; that there is a distinction between the VATs, excise taxes and
DSTs collected by the BIR, on one hand, and the VATs, excise taxes and DSTs
collected by the BOC, on the other, thereby warranting their different treatment; and
that Development Budget Coordination Committee (DBCC) Resolution No. 2003-
02 dated September 4, 2003 has limited the base amount for the computation of the
IRA to the "cash collections based on the BIR data as reconciled with the Bureau of
Treasury;" and that the collection of such national taxes by the BOC should be
excluded.

Issues

The issues for resolution are limited to the following, namely:

I.

Whether or not mandamus is the proper vehicle to assail the constitutionality of the
relevant provisions of the GAA and the LGC;

II.

Whether or not Section 284 of the LGC is unconstitutional for being repugnant to
Section 6, Article X of the 1987 Constitution;

III.

Whether or not the existing shares given to the LGUs by virtue of the GAA is
consistent with the constitutional mandate to give LGUs a "just share" to national
taxes following Article X, Section 6 of the 1987 Constitution;

IV.

Whether or not the petitioners are entitled to the reliefs prayed for.

Simply stated, the petitioners raise the novel question of whether or not the exclusion
of certain national taxes from the base amount for the computation of the just
share of the LGUs in the national taxes is constitutional.

Ruling of the Court

The petitions are partly meritorious.

I
Mandamus is an improper remedy

Mandanas, et al. seek the writs of certiorari, prohibition and mandamus, while
Garcia prays for the writ of mandamus. Both groups of petitioners impugn the
validity of Section 284 of the LGC.
The remedy of mandamus is defined in Section 3, Rule 65 of the Rules of Court,
which provides:

Section 3. Petition for mandamus. — When any tribunal, corporation, board, officer
or person unlawfully neglects the performance of an act which the law specifically
enjoins as a duty resulting from an office, trust, or station, or unlawfully excludes
another from the use and enjoyment of a right or office to which such other is
entitled, and there is no other plain, speedy and adequate remedy in the ordinary
course of law, the person aggrieved thereby may file a verified petition in the proper
court, alleging the facts with certainty and praying that judgment be rendered
commanding the respondent, immediately or at some other time to be specified by
the court, to do the act required to be done to protect the rights of the petitioner, and
to pay the damages sustained by the petitioner by reason of the wrongful acts of the
respondent.

The petition shall also contain a sworn certification of non-forum shopping as

provided in the third paragraph of section 3, Rule 46.

For the writ of mandamus to issue, the petitioner must show that the act sought to be
performed or compelled is ministerial on the part of the respondent. An act is
ministerial when it does not require the exercise of judgment and the act is performed
pursuant to a legal mandate. The burden of proof is on the mandamus petitioner to
show that he is entitled to the performance of a legal right, and that the respondent
has a corresponding duty to perform the act. The writ of mandamus may not issue to
compel an official to do anything that is not his duty to do, or that is his duty not to
do, or to obtain for the petitioner anything to which he is not entitled by law.5

Considering that its determination of what constitutes the just share of the LGUs in
the national taxes under the 1987 Constitution is an entirely discretionary power,
Congress cannot be compelled by writ of mandamus to act either way. The
discretion of Congress thereon, being exclusive, is not subject to external direction;
otherwise, the delicate balance underlying our system of government may be unduly
disturbed. This conclusion should at once then demand the dismissal of the Garcia
petition in G.R. No. 208488, but we do not dismiss it. Garcia has attributed the non-
release of some portions of their IRA balances to an alleged congressional
indiscretion – the diminution of the base amount for computing the LGU's just share.
He has asserted that Congress altered the constitutional base not only by limiting the
base to the NIRTs instead of including therein all national taxes, but also by
excluding some national taxes and revenues that only benefitted a few LGUs to the
detriment of the rest of the LGUs.
Garcia's petition, while dubbed as a petition for mandamus, is also a petition
for certiorari because it alleges that Congress thereby committed grave abuse of
discretion amounting to lack or excess of jurisdiction. It is worth reminding that the
actual nature of every action is determined by the allegations in the body of the
pleading or the complaint itself, not by the nomenclature used to designate the
same.6Moreover, neither should the prayer for relief be controlling; hence, the courts
may still grant the proper relief as the facts alleged in the pleadings and the evidence
introduced may warrant even without a prayer for specific remedy.7

In this regard, Garcia's allegation of the unconstitutionality of the insertion by

Congress of the words internal revenue in the phrase national taxes justifies treating
his petition as one for certiorari. It becomes our duty, then, to assume jurisdiction
over his petition. In Araullo v. Aquino III,8 the Court has emphatically opined that
the Court's certiorari jurisdiction under the expanded judicial power as stated in the
second paragraph of Section 1, Article VIII of the Constitution can be asserted:

xxxx to set right and undo any act of grave abuse of discretion amounting to lack or
excess of jurisdiction by any branch or instrumentality of the Government, the Court
is not at all precluded from making the inquiry provided the challenge was properly
brought by interested or affected parties. The Court has been thereby entrusted
expressly or by necessary implication with both the duty and the obligation of
determining, in appropriate cases, the validity of any assailed legislative or executive
action. This entrustment is consistent with the republican system of checks and
balances.9

Further, observing that one of the reliefs being sought by Garcia is identical to the
main relief sought by Mandanas, et al., the Court should rightly dwell on the
substantive arguments posited by Garcia to the extent that they are relevant to the
ultimate resolution of these consolidated suits.

II.
Municipal corporations and
their relationship with Congress

The correct resolution and fair disposition of the issues interposed for our
consideration require a review of the basic principles underlying our system of local
governments, and of the extent of the autonomy granted to the LGUs by the 1987
Constitution.

Municipal corporations are now commonly known as local governments. They are
the bodies politic established by law partly as agencies of the State to assist in the
civil governance of the country. Their chief purpose has been to regulate and
administer the local and internal affairs of the cities, municipalities or districts. They
are legal institutions formed by charters from the sovereign power, whereby the
populations within communities living within prescribed areas have formed
themselves into bodies politic and corporate, and assumed their corporate names
with the right of continuous succession and for the purposes and with the authority
of subordinate self-government and improvement and the local administration of the
affairs of the State.10

Municipal corporations, being the mere creatures of the State, are subject to the will
of Congress, their creator. Their continued existence and the grant of their powers
are dependent on the discretion of Congress. On this matter, Judge John F. Dillon of
the State of Iowa in the United States of America enunciated in Merriam v. Moody's
Executors11 the rule of statutory construction that came to be oft-mentioned as
Dillon's Rule, to wit:

[A] municipal corporation possesses and can exercise the following powers and no
others: First, those granted in express words; second, those necessarily implied or
necessarily incident to the powers expressly granted; third, those absolutely essential
to the declared objects and purposes of the corporation-not simply convenient but
indispensible; fourth, any fair doubt as to the existence of a power is resolved by the
courts against the corporation-against the existence of the powers.12

The formulation of Dillon's Rule has since undergone slight modifications. Judge
Dillon himself introduced some of the modifications through his post-
Merriam writings with the objective of alleviating the original formulation's
harshness. The word fairly was added to the second proviso; the word absolutely
was deleted from the third proviso; and the words reasonable and substantial were
added to the fourth proviso, thusly:

x x x second, those necessarily or fairly implied in or incident to the powers

expressly granted; third, those essential to x x x. Any fair, reasonable, doubt.13

The modified Dillon's Rule has been followed in this jurisdiction, and has remained
despite both the 1973 Constitution and the 1987 Constitution mandating autonomy
for local governments. This has been made evident in several rulings of the Court,
one of which was that handed down in Magtajas v. Pryce Properties Corporation,
Inc.:14

In light of all the above considerations, we see no way of arriving at the conclusion
urged on us by the petitioners that the ordinances in question are valid. On the
contrary, we find that the ordinances violate P.D. 1869, which has the character and
force of a statute, as well as the public policy expressed in the decree allowing the
playing of certain games of chance despite the prohibition of gambling in general.

The rationale of the requirement that the ordinances should not contravene a statute
is obvious. Municipal governments are only agents of the national government.
Local councils exercise only delegated legislative powers conferred on them by
Congress as the national lawmaking body. The delegate cannot be superior to
the principal or exercise powers higher than those of the latter. It is a heresy to
suggest that the local government units can undo the acts of Congress, from
which they have derived their power in the first place, and negate by mere
ordinance the mandate of the statute.

Municipal corporations owe their origin to, and derive their powers and rights
wholly from the legislature. It breathes into them the breath of life, without
which they cannot exist. As it creates, so it may destroy. As it may destroy, it
may abridge and control. Unless there is some constitutional limitation on the
right, the legislature might, by a single act, and if we can suppose it capable of
so great a folly and so great a wrong, sweep from existence all of the municipal
corporations in the State, and the corporation could not prevent it. We know of
no limitation on the right so far as to the corporation themselves are concerned.
They are, so to phrase it, the mere tenants at will of the legislature.

This basic relationship between the national legislature and the local
government units has not been enfeebled by the new provisions in the
Constitution strengthening the policy of local autonomy. Without meaning to
detract from that policy, we here confirm that Congress retains control of the
local government units although in significantly reduced degree now than
under our previous Constitutions. The power to create still includes the power
to destroy. The power to grant still includes the power to withhold or
recall. True, there are certain notable innovations in the Constitution, like the
direct conferment on the local government units of the power to tax, which
cannot now be withdrawn by mere statute. By and large, however, the national
legislature is still the principal of the local government units, which cannot defy
its will or modify or violate it. [Bold underscoring supplied for emphasis]

Also, in the earlier ruling in Ganzon v. Court of Appeals,15 the Court has pointed out
that the 1987 Constitution, in mandating autonomy for the LGUs, did not intend to
deprive Congress of its authority and prerogatives over the LGUs.
Nonetheless, the LGC has tempered the application of Dillon's Rule in the
Philippines by providing a norm of interpretation in favor of the LGUs in its Section
5(a), to wit:

xxxx

(a) Any provision on a power of a local government unit shall

be liberally interpreted in its favor, and in case of doubt,
any question thereon shall be resolved in favor of
devolution of powers and of the local government
unit. Any fair and reasonable doubt as to the
existence of the power shall be interpreted in favor
of the local government unit concerned; [Bold
underscoring supplied for emphasis]

xxxx

III.
The extent of local autonomy in the Philippines

Regardless, there remains no question that Congress possesses and wields plenary
power to control and direct the destiny of the LGUs, subject only to the Constitution
itself, for Congress, just like any branch of the Government, should bow down to the
majesty of the Constitution, which is always supreme.

The 1987 Constitution limits Cong.ress' control over the LGUs by ordaining in
Section 25 of its Article II that: "The State shall ensure the autonomy of local
governments." The autonomy of the LGUs as thereby ensured does not contemplate
the fragmentation of the Philippines into a collection of mini-states,16 or the creation
of imperium in imperio.17 The grant of autonomy simply means that Congress will
allow the LGUs to perform certain functions and exercise certain powers in order
not for them to be overly dependent on the National Government subject to the
limitations that the 1987 Constitution or Congress may impose. 18 Local autonomy
recognizes the wholeness of the Philippine society in its ethnolinguistic, cultural,
and even religious diversities.19

The constitutional mandate to ensure local autonomy refers to decentralization. 20 In

its broad or general sense, decentralization has two forms in the Philippine setting,
namely: the decentralization of power and the decentralization of administration.
The decentralization of power involves the abdication of political power in favor of
the autonomous LGUs as to grant them the freedom to chart their own destinies and
to shape their futures with minimum intervention from the central government. This
amounts to self-immolation because the autonomous LGUs thereby become
accountable not to the central authorities but to their constituencies. On the other
hand, the decentralization of administration occurs when the central government
delegates administrative powers to the LGUs as the means of broadening the base of
governmental powers and of making the LGUs more responsive and accountable in
the process, and thereby ensure their fullest development as self-reliant communities
and more effective partners in the pursuit of the goals of national development and
social progress. This form of decentralization further relieves the central government
of the burden of managing local affairs so that it can concentrate on national
concerns.21

Two groups of LGUs enjoy decentralization in distinct ways. The decentralization

of power has been given to the regional units (namely, the Autonomous Region for
Muslim Mindanao [ARMM] and the constitutionally-mandated Cordillera
Autonomous Region [CAR]). The other group of LGUs (i.e., provinces, cities,
municipalities and barangays) enjoy the decentralization of administration. 22 The
distinction can be reasonably understood. The provinces, cities, municipalities and
barangays are given decentralized administration to make governance at the local
levels more directly responsive and effective. In turn, the economic, political and
social developments of the smaller political units are expected to propel social and
economic growth and development.23 In contrast, the regional autonomy of the
ARMM and the CAR aims to permit determinate groups with common traditions
and shared social-cultural characteristics to freely develop their ways of life and
heritage, to exercise their rights, and to be in charge of their own affairs through the
establishment of a special governance regime for certain member communities who
choose their own authorities from within themselves, and exercise the jurisdictional
authority legally accorded to them to decide their internal community affairs.24

It is to be underscored, however, that the decentralization of power in favor of the

regional units is not unlimited but involves only the powers enumerated by Section
20, Article X of the 1987 Constitution and by the acts of Congress. For, with various
powers being devolved to the regional units, the grant and exercise of such powers
should always be consistent with and limited by the 1987 Constitution and the
national laws.25 In other words, the powers are guardedly, not absolutely, abdicated
by the National Government.
Illustrative of the limitation is what transpired in Sema v. Commission on
Elections,26 where the Court struck down Section 19, Article VI of Republic Act No.
9054 (An Act to Strengthen and Expand the Organic Act for the Autonomous Region
in Muslim Mindanao, Amending for the Purpose Republic Act No. 6734, entitled "An
Act Providing for the Autonomous Region in Muslim Mindanao, " as Amended)
insofar as the provision granted to the ARMM the power to create provinces and
cities, and consequently declared as void Muslim Mindanao Autonomy Act No. 201
creating the Province of Shariff Kabunsuan for being contrary to Section 5, Article
VI and Section 20, Article X of the 1987 Constitution, as well as Section 3 of the
Ordinance appended to the 1987 Constitution. The Court clarified therein that only
Congress could create provinces and cities. This was because the creation of
provinces and cities necessarily entailed the creation of legislative districts, a power
that only Congress could exercise pursuant to Section 5, Article VI of the 1987
Constitution and Section 3 of the Ordinance appended to the Constitution; as such,
the ARMM would be thereby usurping the power of Congress to create legislative
districts and national offices.27

The 1987 Constitution has surely encouraged decentralization by mandating that a

system of decentralization be instituted through the LGC in order to enable a more
responsive and accountable local government structure.28 It has also delegated the
power to tax to the LGUs by authorizing them to create their own sources of income
that would make them self-reliant.29 It further ensures that each and every LGU will
have a just share in national taxes as well in the development of the national wealth.30

The LGC has further delineated in its Section 3 the different operative principles of
decentralization to be adhered to consistently with the constitutional policy on local
autonomy, viz.:

Sec. 3. Operative Principles of Decentralization –

The formulation and implementation of policies and measures on local autonomy

shall be guided by the following operative principles:

(a) There shall be an effective allocation among the different local government units
of their respective powers, functions, responsibilities, and resources;

(b) There shall be established in every local government unit an accountable,

efficient, and dynamic organizational structure and operating mechanism that will
meet the priority needs and service requirements of its communities;
(c) Subject to civil service law, rules and regulations, local officials and employees
paid wholly or mainly from local funds shall be appointed or removed, according to
merit and fitness, by the appropriate appointing authority;

(d) The vesting of duty, responsibility, and accountability in local government units
shall be accompanied with provision for reasonably adequate resources to discharge
their powers and effectively carry out their functions: hence, they shall have the
power to create and broaden their own sources of revenue and the right to a just share
in national taxes and an equitable share in the proceeds of the utilization and
development of the national wealth within their respective areas;

(e) Provinces with respect to component cities and municipalities, and cities and
municipalities with respect to component barangays, shall ensure that the acts of
their component units are within the scope of their prescribed powers and functions;

(f) Local government units may group themselves, consolidate or coordinate their
efforts, services, and resources commonly beneficial to them;

(g) The capabilities of local government units, especially the municipalities and
barangays, shall be enhanced by providing them with opportunities to participate
actively in the implementation of national programs and projects;

(h) There shall be a continuing mechanism to enhance local autonomy not only by
legislative enabling acts but also by administrative and organizational reforms;

(i) Local government units shall share with the national government the
responsibility in the management and maintenance of ecological balance within their
territorial jurisdiction, subject to the provisions of this Code and national policies;

(j) Effective mechanisms for ensuring the accountability of local government units
to their respective constituents shall be strengthened in order to upgrade continually
the quality of local leadership;

(k) The realization of local autonomy shall be facilitated through improved

coordination of national government policies and programs an extension of adequate
technical and material assistance to less developed and deserving local government
units;

(l) The participation of the private sector in local governance, particularly in the
delivery of basic services, shall be encouraged to ensure the viability of local
autonomy as an alternative strategy for sustainable development; and
(m) The national government shall ensure that decentralization contributes to the
continuing improvement of the performance of local government units and the
quality of community life.

Based on the foregoing delineation, decentralization can be considered as the

decision by the central government to empower its subordinates, whether
geographically or functionally constituted, to exercise authority in certain areas. It
involves decision-making by subnational units, and is typically a delegated power,
whereby a larger government chooses to delegate authority to more local
governments.31 It is also a process, being the set of policies, electoral or
constitutional reforms that transfer responsibilities, resources or authority from the
higher to the lower levels of government.32 It is often viewed as a shift of authority
towards local governments and away from the central government, with total
government authority over society and economy imagined as fixed.33

As a system of transferring authority and power from the National Government to

the LGUs, decentralization in the Philippines may be categorized into four, namely:
(1) political decentralization or devolution; (2) administrative decentralization or
deconcentration; (3) fiscal decentralization; and (4) policy or decision-making
decentralization.

Political decentralization or devolution occurs when there is a transfer of powers,

responsibilities, and resources from the central government to the LGUs for the
performance of certain functions. It is a more liberal form of decentralization
because there is an actual transfer of powers and responsibilities. It aims to grant
greater autonomy to the LGUs in cognizance of their right to self-government, to
make them self-reliant, and to improve their administrative and technical
capabilities.34 It is an act by which the National Government confers power and
authority upon the various LGUs to perform specific functions and
responsibilities.35 It encompasses reforms to open sub-national representation and
policies to "devolve political authority or electoral capacities to subnational
actors."36 Section 16 to Section 19 of the LGC characterize political decentralization
in the LGC as different LGUs empowered to address the different needs of their
constituents. In contrast, devolution in favor of the regional units is more expansive
because they are given the authority to regulate a wider array of subjects, including
personal, family and property relations.

Administrative decentralization or deconcentration involves the transfer of functions

or the delegation of authority and responsibility from the national office to the
regional and local offices.37 Consistent with this concept, the LGC has created the
Local School Boards,38 the Local Health Boards39 and the Local Development
Councils,40 and has transferred some of the authority from the agencies of the
National Government, like the Department of Education and the Department of
Health, to such bodies to better cope up with the needs of particular localities.

Fiscal decentralization means that the LGUs have the power to create their own
sources of revenue in addition to their just share in the national taxes released by the
National Government. It includes the power to allocate their resources in accordance
with their own priorities. It thus extends to the preparation of their budgets, so that
the local officials have to work within the constraints of their budgets. The budgets
are not formulated at the national level and imposed on local governments, without
regard as to whether or not they are relevant to local needs and resources. Hence, the
necessity of a balancing of viewpoints and the harmonization of proposals from both
local and national officials, who in any case are partners in the attainment of national
goals, is recognized and addressed.41

Fiscal decentralization emanates from a specific constitutional mandate that is

expressed in several provisions of Article X (Local Government) of the 1987
Constitution, specifically: Section 5;42 Section 6;43 and Section 7.44

The constitutional authority extended to each and every LGU to create its own
sources of income and revenue has been formalized from Section 128 to Section 133
of the LGC. To implement the LGUs' entitlement to the just share in the national
taxes, Congress has enacted Section 284 to Section 288 of the LGC. Congress has
further enacted Section 289 to Section 294 of the LGC to define the share of the
LGUs in the national wealth. Indeed, the requirement for the automatic release to
the LGUs of their just share in the national taxes is but the consequence of the
constitutional mandate for fiscal decentralization.45

For sure, fiscal decentralization does not signify the absolute freedom of the LGUs
to create their own sources of revenue and to spend their revenues unrestrictedly or
upon their individual whims and caprices. Congress has subjected the LGUs' power
to tax to the guidelines set in Section 130 of the LGC and to the limitations stated in
Section 133 of the LGC. The concept of local fiscal autonomy does not exclude any
manner of intervention by the National Government in the form of supervision if
only to ensure that the local programs, fiscal and otherwise, are consistent with the
national goals.46
Lastly, policy- or decision-making decentralization exists if at least one sub-national
tier of government has exclusive authority to make decisions on at least one policy
issue.47

In fine, certain limitations are and can be imposed by Congress in all the forms of
decentralization, for local autonomy, whether as to power or as to administration, is
not absolute. The LGUs remain to be the tenants of the will of Congress subject to
the guarantees that the Constitution itself imposes.

IV.
Section 284 of the LGC deviates from
the plain language of Section 6
of Article X of the 1987 Constitution

Section 6, Article X the 1987 Constitution textually commands the allocation to the
LGUs of a just share in the national taxes, viz.:

Section 6. Local government units shall have a just share, as determined by law, in
the national taxes which shall be automatically released to them.

Section 6, when parsed, embodies three mandates, namely: (1) the LGUs shall have
a just share in the national taxes; (2) the just share shall be determined by law; and
(3) the just share shall be automatically released to the LGUs.48

Congress has sought to carry out the second mandate of Section 6 by enacting
Section 284, Title III (Shares of Local Government Units in the Proceeds of National
Taxes), of the LGC, which is again quoted for ready reference:

Section 284. Allotment of Internal Revenue Taxes. - Local government units shall
have a share in the national internal revenue taxes based on the collection of the
third fiscal year preceding the current fiscal year as follows:

(a) On the first year of the effectivity of this Code, thirty percent (30%);

(b) On the second year, thirty-five percent (35%); and

(c) On the third year and thereafter, forty percent (40%).

Provided, That in the event that the national government incurs an unmanageable
public sector deficit, the President of the Philippines is hereby authorized, upon the
recommendation of Secretary of Finance, Secretary of Interior and Local
Government and Secretary of Budget and Management, and subject to consultation
with the presiding officers of both Houses of Congress and the presidents of the
"liga", to make the necessary adjustments in the internal revenue allotment of local
government units but in no case shall the allotment be less than thirty percent (30%)
of the collection of national internal revenue taxes of the third fiscal year preceding
the current fiscal year: Provided, further, That in the first year of the effectivity of
this Code, the local government units shall, in addition to the thirty percent (30%)
internal revenue allotment which shall include the cost of devolved functions for
essential public services, be entitled to receive the amount equivalent to the cost of
devolved personal services.

There is no issue as to what constitutes the LGUs' just share expressed in

percentages of the national taxes (i.e., 30%, 35% and 40% stipulated in
subparagraphs (a), (b), and (c) of Section 284). Yet, Section 6, supra,
mentions national taxes as the source of the just share of the LGUs while Section
284 ordains that the share of the LGUs be taken from national internal
revenue taxes instead.

Has not Congress thereby infringed the constitutional provision?

Garcia contends that Congress has exceeded its constitutional boundary by limiting
to the NIRTs the base from which to compute the just share of the LGUs.

We agree with Garcia's contention.

Although the power of Congress to make laws is plenary in nature, congressional

lawmaking remains subject to the limitations stated in the 1987 Constitution. 49 The
phrase national internal revenue taxesengrafted in Section 284 is undoubtedly more
restrictive than the term national taxes written in Section 6. As such, Congress has
actually departed from the letter of the 1987 Constitution stating that national
taxes should be the base from which the just share of the LGU comes. Such
departure is impermissible. Verba legis non est recedendum (from the words of a
statute there should be no departure).50 Equally impermissible is that Congress has
also thereby curtailed the guarantee of fiscal autonomy in favor of the LGUs under
the 1987 Constitution.

Taxes are the enforced proportional contributions exacted by the State from persons
and properties pursuant to its sovereignty in order to support the Government and to
defray all the public needs. Every tax has three elements, namely: (a) it is an enforced
proportional contribution from persons and properties; (b) it is imposed by the State
by virtue of its sovereignty; and (c) it is levied for the support of the
Government.51 Taxes are classified into national and local. National taxes are those
levied by the National Government, while local taxes are those levied by the LGUs.52

What the phrase national internal revenue taxes as used in Section 284 included are
all the taxes enumerated in Section 21 of the National Internal Revenue Code
(NIRC), as amended by R.A. No. 8424, viz.:

Section 21. Sources of Revenue. — The following taxes, fees and charges are
deemed to be national internal revenue taxes:

(a) Income tax;

(b) Estate and donor's taxes;
(c) Value-added tax;
(d) Other percentage taxes;
(e) Excise taxes;
(f) Documentary stamp taxes; and
(g) Such other taxes as are or hereafter may be imposed and collected by the Bureau
of Internal Revenue.

In view of the foregoing enumeration of what are the national internal revenue taxes,
Section 284 has effectively deprived the LGUs from deriving their just
share from other national taxes, like the customs duties.

Strictly speaking, customs duties are also taxes because they are exactions whose
proceeds become public funds. According to Garcia v. Executive
Secretary,53 customs duties is the nomenclature given to taxes imposed on the
importation and exportation of commodities and merchandise to or from a foreign
country. Although customs duties have either or both the generation of revenue and
the regulation of economic or social activity as their moving purposes, it is often
difficult to say which of the two is the principal objective in a particular instance,
for, verily, customs duties, much like internal revenue taxes, are rarely designed to
achieve only one policy objective.54 We further note that Section 102(oo) of R.A.
No. 10863 (Customs Modernization and Tariff Act) expressly includes all fees and
charges imposed under the Act under the blanket term of taxes.

It is clear from the foregoing clarification that the exclusion of other national taxes
like customs duties from the base for determining the just share of the LGUs
contravened the express constitutional edict in Section 6, Article X the 1987
Constitution.
Still, the OSG posits that Congress can manipulate, by law, the base of the allocation
of the just share in the national taxes of the LGUs.

The position of the OSG cannot be sustained. Although it has the primary discretion
to determine and fix the just share of the LGUs in the national taxes (e.g., Section
284 of the LGC), Congress cannot disobey the express mandate of Section 6, Article
X of the 1987 Constitution for the just share of the LGUs to be derived from
the national taxes. The phrase as determined by law in Section 6 follows and
qualifies the phrase just share, and cannot be construed as qualifying the succeeding
phrase in the national taxes. The intent of the people in respect of Section 6 is really
that the base for reckoning the just share of the LGUs should includes all national
taxes. To read Section 6 differently as requiring that the just share of LGUs in the
national taxes shall be determined by law is tantamount to the unauthorized revision
of the 1987 Constitution.

V.
Congress can validly exclude taxes
that will constitute the base amount
for the computation of the IRA only if
a Constitutional provision allows such exclusion

Garcia submits that even assuming that the present version of Section 284 of the
LGC is constitutionally valid, the implementation thereof has been erroneous
because Section 284 does not authorize any exclusion or deduction from the
collections of the NIRTs for purposes of the computation of the allocations to the
LGUs. He further submits that the exclusion of certain NIRTs diminishes the fiscal
autonomy granted to the LGUs. He claims that the following NIRTs have been
illegally excluded from the base for determining the fair share of the LGUs in the
IRA, to wit:

(1) NIRTs collected by the cities and provinces and divided

exclusively among the LGUs of the Autonomous Region for
Muslim Mindanao (ARMM), the regional government and
the central government, pursuant to Section 1555 in
relation to Section 9,56 Article IX of R.A. No. 9054 (An Act
to Strengthen and Expand the Organic Act for the
Autonomous Region in Muslim Mindanao, amending for the
purpose Republic Act No. 6734, entitled An Act providing
 for an Organic Act for the Autonomous Region in Muslim
Mindanao);

(2) The shares in the excise taxes on mineral products of the

different LGUs, as provided in Section 287 of the NIRC57 in
relation to Section 290 of the LGC;58

(3) The shares of the relevant LGUs in the franchise taxes paid
by Manila Jockey Club, Inc.59 and Philippine Racing Club,
Inc.;60

(4) The shares of various municipalities in VAT collections

under R.A. No. 7643 (An Act to Empower the
Commissioner of Internal Revenue to Require the Payment
of the Value Added Tax Every Month and to Allow Local
Government Units to Share in VAT Revenue, Amending for
this Purpose Certain Sections of the National Internal
Revenue Code) as embodied in Section 283 of the NIRC;61

(5) The shares of relevant LGUs in the proceeds of the sale and
conversion of former military bases in accordance with R.A.
No. 7227 (Bases Conversion and Development Act of
1992);62

(6) The shares of different LGUs in the excise taxes imposed

on locally manufactured Virginia tobacco products as
provided in Section 3 of R.A. No. 7171 (An Act to Promote
the Development of the Farmers in the Virginia Tobacco
 Producing Provinces), and as now provided in Section 289
of the NIRC;63

(7) The shares of different LGUs in the incremental revenues

from Burley and native tobacco products under Section 8
of R.A. No. 8240 (An Act Amending Sections 138, 140 and
142 of the National Internal Revenue Code as Amended
and for Other Purposes) and as now provided in Section
288 of the NIRC;64 and

(8) The share of the Commission of Audit (COA) in the NIRTs

as provided in Section 24(3) of P.D. No. 1445 (Government
Auditing Code of the Philippines)65 in relation to Section
284 of the NIRC.66

Garcia insists that the foregoing taxes and revenues should have been included by
Congress and, by extension, the BIR in the base for computing the IRA on the
strength of the cited provisions; that the LGC did not authorize such exclusion; and
that the continued exclusion has undermined the fiscal autonomy guaranteed by the
1987 Constitution.

The insistence of Garcia is valid to an extent.

An examination of the above-enumerated laws confirms that the following have

been excluded from the base for reckoning the just share of the LGUs as required by
Section 6, Article X of the 1987 Constitution, namely:

(a) The share of the affected LGUs in the proceeds of the sale
and conversion of former military bases in accordance with
R.A. No. 7227;
(b) The share of the different LGUs in the excise taxes imposed
on locally manufactured Virginia tobacco products as
provided for in Section 3, R.A. No. 7171, and as now
provided in Section 289of the NIRC;

(c) The share of the different LGUs in incremental revenues

from Burley and native tobacco products under Section 8
of R.A. No. 8240, and as now provided for in Section 288
of the NIRC;

(d) The share of the COA in the NIRTs as provided in Section

24(3) of P.D. No. 144567 in relation to Section 284 of the
NIRC;

(e) The shares of the different LGUs in the excise taxes on

mineral products, as provided in Section 287 of the NIRC
in relation to Section 290 of the LGC;

(f) The NIRTs collected by the cities and provinces and divided
exclusively among the LGUs of the ARMM, the regional
government and the central government, pursuant to
Section 1568 in relation to Section 9,69 Article IX of R. A.
No. 9054; and

(g) The shares of the relevant LGUs in the franchise taxes paid
by Manila Jockey Club, Inc., and the Philippine Racing Club,
Inc.
Anent the share of the affected LGUs in the proceeds of the sale and conversion of
the former military bases pursuant to R.A. No. 7227, the exclusion is warranted for
the reason that such proceeds do not come from a tax, fee or exaction imposed on
the sale and conversion.

As to the share of the affected LGUs in the excise taxes imposed on locally
manufactured Virginia tobacco products under R.A. No. 7171 (now Section 289 of
the NIRC); the share of the affected LGUs in incremental revenues from Burley and
native tobacco products under Section 8, R.A. No. 8240 (now Section 288 of the
NIRC); the share of the COA in the NIRTs pursuant to Section 24(3) of P.D. No.
1445 in relation to Section 284 of the NIRC; and the share of the host LGUs in the
franchise taxes paid by the Manila Jockey Club, Inc., and Philippine Racing Club,
Inc., under Section 6 of R.A. No. 6631 and Section 8 of R.A. No. 6632, respectively,
the exclusion is also justified. Although such shares involved national taxes as
defined under the NIRC, Congress had the authority to exclude them by virtue of
their being taxes imposed for special purposes. A reading of Section 288 and Section
289 of the NIRC and Section 24(3) of P.D. No. 1445 in relation to Section 284 of
the NIRC reveals that all such taxes are levied and collected for a special
purpose.70 The same is true for the franchise taxes paid under Section 6 of R.A. No.
6631 and Section 8 of R.A. No. 6632, inasmuch as certain percentages of the
franchise taxes go to different beneficiaries. The exclusion conforms to Section
29(3), Article VI of the 1987 Constitution, which states:

Section 29. x x x

xxxx

(3) All money collected on any tax levied for a special purpose shall be treated
as a special fund and paid out for such purpose only. If the purpose for which a
special fund was created has been fulfilled or abandoned, the balance, if any, shall
be transferred to the general funds of the Government. [Bold emphasis supplied]

The exclusion of the share of the different LGUs in the excise taxes imposed on
mineral products pursuant to Section 287 of the NIRC in relation to Section 290 of
the LGC is premised on a different constitutional provision. Section 7, Article X of
the 1987 Constitution allows affected LGUs to have an equitable share in the
proceeds of the utilization of the nation's national wealth "within their respective
areas," to wit:

Section 7. Local governments shall be entitled to an equitable share in the proceeds

of the utilization and development of the national wealth within their respective
areas, in the manner provided by law, including sharing the same with the inhabitants
by way of direct benefits.

This constitutional provision is implemented by Section 287 of the NIRC and

Section 290 of the LGC thusly:

SEC. 287. Shares of Local Government Units in the Proceeds from the Development
and Utilization of the National Wealth. - Local Government units shall have an
equitable share in the proceeds derived from the utilization and development of the
national wealth, within their respective areas, including sharing the same with the
inhabitants by way of direct benefits.

(A) Amount of Share of Local Government Units. - Local government units shall,
in addition to the internal revenue allotment, have a share of forty percent
(40%) of the gross collection derived by the national government from the
preceding fiscal year from excise taxes on mineral products, royalties, and such
other taxes, fees or charges, including related surcharges, interests or fines, and
from its share in any co-production, joint venture or production sharing
agreement in the utilization and development of the national wealth within their
territorial jurisdiction.

(B) Share of the Local Governments from Any Government Agency or Government-
owned or - Controlled Corporation. - Local Government Units shall have a share,
based on the preceding fiscal year, from the proceeds derived by any government
agency or government owned or controlled corporation engaged in the utilization
and development of the national wealth based on the following formula, whichever
will produce a higher share for the local government unit:

(1) One percent (1%) of the gross sales or receipts of the preceding calendar year, or

(2) Forty percent (40%) of the excise taxes on mineral products, royalties, and such
other taxes, fees or charges, including related surcharges, interests or fines the
government agency or government owned or -controlled corporations would have
paid if it were not otherwise exempt. [Bold emphasis supplied]

SEC. 290. Amount of Share of Local Government Units. - Local government units
shall, in addition to the internal revenue allotment, have a share of forty percent
(40%) of the gross collection derived by the national government from the
preceding fiscal year from mining taxes, royalties, forestry and fishery charges,
and such other taxes, fees, or charges, including related surcharges, interests, or
fines, and from its share in any co-production, joint venture or production sharing
agreement in the utilization and development of the national wealth within their
territorial jurisdiction. [Bold emphasis supplied]

Lastly, the NIRTs collected by the provinces and Cities within the ARMM whose
portions are distributed to the ARMM's provincial, city and regional governments
are also properly excluded for such taxes are intended to truly enable a sustainable
and feasible autonomous region as guaranteed by the 1987 Constitution. The
mandate under Section 15 to Section 21, Article X of the 1987 Constitution is to
allow the separate development of peoples with distinctive cultures and traditions in
the autonomous areas.71The grant of autonomy to the autonomous regions includes
the right of self determination – which in turn ensures the right of the peoples
residing therein to the necessary level of autonomy that will guarantee the support
of their own cultural identities, the establishment of priorities by their respective
communities' internal decision-making processes and the management of collective
matters by themselves.72 As such, the NIRTs collected by the provinces and cities
within the ARMM will ensure local autonomy and their very existence with a
continuous supply of funding sourced from their very own areas. The ARMM will
become self-reliant and dynamic consistent with the dictates of the 1987
Constitution.

The shares of the municipalities in the VATs collected pursuant to R.A. No. 7643
should be included in determining the base for computing the just share because
such VATs are national taxes, and nothing can validly justify their exclusion.

In recapitulation, the national taxes to be included in the base for computing the just
share the LGUs shall henceforth be, but shall not be limited to, the following:

1. The NIRTs enumerated in Section 21 of the NIRC, as amended, to be

inclusive of the VATs, excise taxes, and DSTs collected by the BIR and the
BOC, and their deputized agents;

2. Tariff and customs duties collected by the BOC;

3. 50% of the VATs collected in the ARMM, and 30% of all other national taxes
collected in the ARMM; the remaining 50% of the VATs and 70% of the
collections of the other national taxes in the ARMM shall be the exclusive
share of the ARMM pursuant to Section 9 and Section 15 of R.A. No. 9054;

4. 60% of the national taxes collected from the exploitation and development of
the national wealth; the remaining 40% will exclusively accrue to the host
LGUs pursuant to Section 290 of the LGC;
 5. 85% of the excise taxes collected from locally manufactured Virginia and
other tobacco products; the remaining 15% shall accrue to the special purpose
funds pursuant created in R.A. No. 7171 and R.A. No. 7227;

6. The entire 50% of the national taxes collected under Section 106, Section 108
and Section 116 of the NIRC in excess of the increase in collections for the
immediately preceding year; and

7. 5% of the franchise taxes in favor of the national government paid by

franchise holders in accordance with Section 6 of R.A. No. 6631 and Section
8 of R.A. No. 6632.

VI.
Entitlement to the reliefs sought

The petitioners' prayer for the payment of the arrears of the LGUs' just share on the
theory that the computation of the base amount had been unconstitutional all along
cannot be granted.

It is true that with our declaration today that the IRA is not in accordance with the
constitutional determination of the just share of the LGUs in the national taxes, logic
demands that the LGUs should receive the difference between the just share they
should have received had the LGC properly reckoned such just share from all
national taxes, on the one hand, and the share – represented by the IRA – the LGUs
have actually received since the effectivity of the IRA under the LGC, on the other.
This puts the National Government in arrears as to the just share of the LGUs. A
legislative or executive act declared void for being unconstitutional cannot give rise
to any right or obligation.73

Yet, the Court has conceded in Araullo v. Aquino III74 that:

x x x the generality of the rule makes us ponder whether rigidly applying the
rule may at times be impracticable or wasteful. Should we not recognize the
need to except from the rigid application of the rule the instances in which the
void law or executive act produced an almost irreversible result?

The need is answered by the doctrine of operative fact. The doctrine, definitely
not a novel one, has been exhaustively explained in De Agbayani v. Philippine
National Bank:
The decision now on appeal reflects the orthodox view that an unconstitutional act,
for that matter an executive order or a municipal ordinance likewise suffering from
that infirmity, cannot be the source of any legal rights or duties. Nor can it justify
any official act taken under it. Its repugnancy to the fundamental law once judicially
declared results in its being to all intents and purposes a mere scrap of paper. As the
new Civil Code puts it: 'When the courts declare a law to be inconsistent with the
Constitution, the former shall be void and the latter shall govern.' Administrative or
executive acts, orders and regulations shall be valid only when they are not contrary
to the laws of the Constitution. It is understandable why it should be so, the
Constitution being supreme and paramount. Any legislative or executive act contrary
to its terms cannot survive.

Such a view has support in logic and possesses the merit of simplicity. It may
not however be sufficiently realistic. It does not admit of doubt that prior to the
declaration of nullity such challenged legislative or executive act must have
been in force and had to be complied with. This is so as until after the judiciary,
in an appropriate case, declares its invalidity, it is entitled to obedience and
respect. Parties may have acted under it and may have changed their positions.
What could be more fitting than that in a subsequent litigation regard be had
to what has been done while such legislative or executive act was in operation
and presumed to be valid in all respects. It is now accepted as a doctrine that
prior to its being nullified, its existence as a fact must be reckoned with. This is
merely to reflect awareness that precisely because the judiciary is the
governmental organ which has the final say on whether or not a legislative or
executive measure is valid, a period of time may have elapsed before it can
exercise the power of judicial review that may lead to a declaration of nullity.
It would be to deprive the law of its quality of fairness and justice then, if there
be no recognition of what had transpired prior to such adjudication.

In the language of an American Supreme Court decision: 'The actual existence of a

statute, prior to such a determination [of unconstitutionality], is an operative fact and
may have consequences which cannot justly be ignored. The past cannot always be
erased by a new judicial declaration. The effect of the subsequent ruling as to
invalidity may have to be considered in various aspects, with respect to particular
relations, individual and corporate, and particular conduct, private and official.'

The doctrine of operative fact recognizes the existence of the law or executive
act prior to the determination of its unconstitutionality as an operative fact that
produced consequences that cannot always be erased, ignored or disregarded.
In short, it nullifies the void law or executive act but sustains its effects. It
provides an exception to the general rule that a void or unconstitutional law
produces no effect.75 But its use must be subjected to great scrutiny and
circumspection, and it cannot be invoked to validate an unconstitutional law or
executive act, but is resorted to only as a matter of equity and fair play. 76 It applies
only to cases where extraordinary circumstances exist, and only when the
extraordinary circumstances have met the stringent conditions that will permit its
application.

Conformably with the foregoing pronouncements in Araullo v. Aquino III, the effect
of our declaration through this decision of the unconstitutionality of Section 284 of
the LGC and its related laws as far as they limited the source of the just share of the
LGUs to the NIRTs is prospective. It cannot be otherwise.

VII.
Automatic release of the LGUs'
just share in the National Taxes

Section 6, Article X of the 1987 Constitution commands that the just share of the
LGUs in national taxes shall be automatically released to them. The
term automatic connotes something mechanical, spontaneous and perfunctory; and,
in the context of this case, the LGUs are not required to perform any act or thing in
order to receive their just share in the national taxes.77

Before anything, we must highlight that the 1987 Constitution includes several
provisions that actually deal with and authorize the automatic release of funds by the
National Government.

To begin with, Section 3 of Article VIII favors the Judiciary with the automatic and
regular release of its appropriations:

Section 3. The Judiciary shall enjoy fiscal autonomy. Appropriations for the
Judiciary may not be reduced by the legislature below the amount appropriated for
the previous year and, after approval, shall be automatically and regularly released.

Then there is Section 5 of Article IX(A), which contains the common provision in
favor of the Constitutional Commissions:

Section 5. The Commission shall enjoy fiscal autonomy. Their approved annual
appropriations shall be automatically and regularly released.

Section 14 of Article XI extends to the Office of the Ombudsman a similar privilege:

Section 14. The Office of the Ombudsman shall enjoy fiscal autonomy. Its approved
annual appropriations shall be automatically and regularly released.

Section 17(4) of Article XIII replicates the privilege in favour of the Commission on
Human Rights:

Section 17(4) The approved annual appropriations of the Commission shall be

automatically and regularly released.

The foregoing constitutional provisions share two aspects. The first relates to the
grant of fiscal autonomy, and the second concerns the automatic release of
funds.78 The common denominator of the provisions is that the automatic release of
the appropriated amounts is predicated on the approval of the annual appropriations
of the offices or agencies concerned.

Directly contrasting with the foregoing provisions is Section 6, Article X of the 1987
Constitution because the latter provision forthrightly ordains that the "(l)ocal
government units shall have a just share, as determined by law, in the national
taxes which shall be automatically released to them." Section 6 does not mention
of appropriation as a condition for the automatic release of the just share to the
LGUs. This is because Congress not only already determined the just share through
the LGC's fixing the percentage of the collections of the NIRTs to constitute
such fair share subject to the power of the President to adjust the same in order to
manage public sector deficits subject to limitations on the adjustments, but also
explicitly authorized such just share to be "automatically released" to the LGUs in
the proportions and regularity set under Section 28579 of the LGC without need of
annual appropriation. To operationalize the automatic release without need of
appropriation, Section 286 of the LGC clearly provides that the automatic release of
the just share directly to the provincial, city, municipal or barangay treasurer, as the
case may be, shall be "without need of any further action," viz.:

Section 286. Automatic Release of Shares.— (a) The share of each local
government unit shall be released, without need of any further action; directly
to the provincial, city, municipal or barangay treasurer, as the case may be, on
a quarterly basis within five (5) days after the end of each quarter, and which
shall not be subject to any lien or holdback that may be imposed by the National
Government for whatever purpose. x x x (Bold emphasis supplied)

The 1987 Constitution is forthright and unequivocal in ordering that the just share of
the LGUs in the national taxes shall be automatically released to them. With
Congress having established the just sharethrough the LGC, it seems to be beyond
debate that the inclusion of the just share of the LGUs in the annual GAAs is
unnecessary, if not superfluous. Hence, the just share of the LGUs in the national
taxes shall be released to them without need of yearly appropriation.

WHEREFORE, the petitions in G.R. No. 199802 and G.R. No. 208488
are PARTIALLY GRANTED, and, ACCORDINGLY, the Court:

1. DECLARES the phrase "internal revenue" appearing in Section 284 of Republic

Act No. 7160 (Local Government Code) UNCONSTITUTIONAL,
and DELETES the phrase from Section 284.

Section 284, as hereby modified, shall henceforth read as follows:

Section 284. Allotment of Taxes. – Local government units shall have a share in the
national taxes based on the collection of the third fiscal year preceding the current
fiscal year as follows:

(a) On the first year of the effectivity of this Code, thirty percent (30%);

(b) On the second year, thirty-five percent (35%); and

(c) On the third year and thereafter, forty percent (40%).

Provided, That in the event that the national government incurs an unmanageable
public sector deficit, the President of the Philippines is hereby authorized, upon the
recommendation of Secretary of Finance, Secretary of Interior and Local
Government and Secretary of Budget and Management, and subject to consultation
with the presiding officers of both Houses of Congress and the presidents of the
"liga", to make the necessary adjustments in the allotment of local government units
but in no case shall the allotment be less than thirty percent (30%) of the collection
of national taxes of the third fiscal year preceding the current fiscal year; Provided,
further, That in the first year of the effectivity of this Code, the local government
units shall, in addition to the thirty percent (30%) allotment which shall include the
cost of devolved functions for essential public services, be entitled to receive the
amount equivalent to the cost of devolved personal services.

The phrase "internal revenue" is likewise hereby DELETED from the related
sections of Republic Act No. 7160 (Local Government Code), specifically Section
285, Section 287, and Section 290, which provisions shall henceforth read as
follows:
Section 285. Allocation to Local Government Units. – The share of local
government units in the allotment shall be collected in the following manner:

(a) Provinces – Twenty-three percent (23%);

(b) Cities – Twenty-three percent (23%);

(c) Municipalities –Thirty-four percent (34%); and

(d) Barangays – Twenty percent (20%)

Provided, however, That the share of each province, city, and municipality shall be
determined on the basis of the following formula:

(a) Population – Fifty percent (50%);

(b) Land Area – Twenty-five percent (25%); and

(c) Equal sharing – Twenty-five percent (25%)

Provided, further, That the share of each barangay with a population of not less than
one hundred (100) inhabitants shall not be less than Eighty thousand (P80,000.00)
per annum chargeable against the twenty percent (20%) share of the barangay from
the allotment, and the balance to be a1located on the basis of the following formula:

(a) On the first year of the effectivity of this Code:

(1) Population Forty percent (40%); and

(2) Equal sharing – Sixty percent (50%)

(b) On the second year:

(1) Population – Fifty percent (50%); and

(2) Equal sharing – Fifty percent (50%)

(c) On the third year and thereafter:

(1) Population – Sixty percent (60%); and

(2) Equal sharing – Forty percent (40%).

Provided, finally, That the financial requirements of barangays created by local
government units after the effectivity of this Code shall be the responsibility of the
local government unit concerned.

xxxx

Section 287. Local Development Projects. – Each local government unit shall
appropriate in its annual budget no less than twenty percent (20%) of its annual
allotment for development projects. Copies of the development plans of local
government units shall be furnished the Department of Interior and Local
Government.

xxxx

Section 290. Amount of Share of Local Government Units. – Local government units
shall, in addition to the allotment, have a share of forty percent (40%) of the gross
collection derived by the national government from the preceding fiscal year from
mining taxes, royalties, forestry and fishery charges, and such other taxes, fees, or
charges, including related surcharges, interests, or fines, and from its share in any
co-production, joint venture or production sharing agreement in the utilization and
development of the national wealth within their territorial jurisdiction.

Article 378, Article 379, Article 380, Article 382, Article 409, Article 461, and
related provisions of the Implementing Rules and Regulations of R.A. No. 7160 are
hereby MODIFIED to reflect the deletion of the phrase "internal revenue" as
directed herein.

Henceforth, any mention of "Internal Revenue Allotment" or "IRA" in Republic Act

No. 7160 (Local Government Code) and its Implementing Rules and Regulations
shall be understood as pertaining to the allotment of the Local Government Units
derived from the national taxes;

2. ORDERS the SECRETARY OF THE DEPARTMENT OF FINANCE; the

SECRETARY OF THE DEPARTMENT OF BUDGET AND
MANAGEMENT; the COMMISSIONER OF INTERNAL REVENUE; the
COMMISSIONER OF CUSTOMS; and the NATIONAL TREASURER to
include ALL COLLECTIONS OF NATIONAL TAXES in the computation of
the base of the just share of the Local Government Units according to the ratio
provided in the now-modified Section 284 of Republic Act No. 7160 (Local
Government Code) except those accruing to special purpose funds and special
allotments for the utilization and development of the national wealth.
For this purpose, the collections of national taxes for inclusion in the base of the just
share the Local Government Units shall include, but shall not be limited to, the
following:

(a) The national internal revenue taxes enumerated in Section 21 of the National
Internal Revenue Code, as amended, collected by the Bureau of Internal Revenue
and the Bureau of Customs;

(b) Tariff and customs duties collected by the Bureau of Customs;

(c) 50% of the value-added taxes collected in the Autonomous Region in Muslim
Mindanao, and 30% of all other national tax collected in the Autonomous Region in
Muslim Mindanao.

The remaining 50% of the collections of value-added taxes and 70% of the
collections of the other national taxes in the Autonomous Region in Muslim
Mindanao shall be the exclusive share of the Autonomous Region in Muslim
Mindanao pursuant to Section 9 and Section 15 of Republic Act No. 9054.

(d) 60% of the national taxes collected from the exploitation and development of the
national wealth.

The remaining 401% of the national taxes collected from the exploitation and
development of the national wealth shall exclusively accrue to the host Local
Government Units pursuant to Section 290 of Republic Act No. 7160 (Local
Government Code);

(e) 85% of the excise taxes collected from locally manufactured Virginia and other
tobacco products.

The remaining 15% shall accrue to the special purpose funds created by Republic
Act No. 7171 and Republic Act No. 7227;

(f) The entire 50% of the national taxes collected under Sections 106, 108 and 116
of the NIRC as provided under Section 283 of the NIRC; and

(g) 5% of the 25% franchise taxes given to the National Government under Section
6 of Republic Act No. 6631 and Section 8 of Republic Act No. 6632.

3. DECLARES that:
(a) The apportionment of the 25% of the franchise taxes collected from the Manila
Jockey Club and Philippine Racing Club, Inc. – that is, five percent (5%) to the
National Government; five percent (5%) to the host municipality or city; seven
percent (7%) to the Philippine Charity Sweepstakes Office; six percent (6%) to the
Anti-Tuberculosis Society; and two percent (2%) to the White Cross pursuant to
Section 6 of Republic Act No. 6631 and Section 8 of Republic Act No. 6632 –
is VALID;

(b) Section 8 and Section 12 of Republic Act No. 7227 are VALID;
and, ACCORDINGLY, the proceeds from the sale of the former military bases
converted to alienable lands thereunder are EXCLUDED from the computation of
the national tax allocations of the Local Government Units; and

(c) Section 24(3) of Presidential Decree No. 1445, in relation to Section 284 of the
National Internal Revenue Code, apportioning one-half of one percent (1/2 of 1%)
of national tax collections as the auditing fee of the Commission on Audit is VALID;

4. DIRECTS the Bureau of Internal Revenue and the Bureau of Customs and their
deputized collecting agents to certify all national tax collections, pursuant to Article
378 of the Implementing Rules and Regulations of R.A. No. 7160;

5. DISMISSES the claims of the Local Government Units for the settlement by the
National Government of arrears in the just share on the ground that this decision
shall have PROSPECTIVE APPLICATION; and

6. COMMANDS the AUTOMATIC RELEASE WITHOUT NEED OF

FURTHER ACTION of the just shares of the Local Government Units in the
national taxes, through their respective provincial, city, municipal, or barangay
treasurers, as the case may be, on a quarterly basis but not beyond five (5) days from
the end of each quarter, as directed in Section 6, Article X of the 1987 Constitution
and Section 286 of Republic Act No. 7160 (Local Government Code), and
operationalized by Article 383 of the Implementing Rules and Regulations of RA
7160.

Let a copy of this decision be furnished to the President of the Republic of the
Philippines, the President of the Senate, and the Speaker of the House of
Representatives for their information and guidance.

SO ORDERED.
Carpio, (Acting C.J.) Leonardo-De Castro, Peralta, Del Castillo, Perlas-Bernabe,
Martires, Tijam, and Gesmundo, JJ., concur.
Velasco, Jr., concur. Please see separate opinion.
Leonen, Gaguioa, and Reyes J., JJ., dissent. See separate opinions.
Jardeleza, J., no part prior OSG action.

NOTICE OF JUDGMENT

Sirs/Mesdames:

Please take notice that on July 3, 2018 a Decision, copy attached herewith, was
rendered by the Supreme Court in the above-entitled case, the original of which was
received by this Office on July 23, 2018 at 3:36 p.m.

Very truly yours,

EDGAR O. ARICHETA
Clerk of Court

By:

(SGD.) ANNA-LI R. PAPA-GOMBIO

Deputy Clerk of Court En Banc

Endnotes:

1
Pimentel, Jr. v. Aguirre, G.R. No. 132988, July 19, 2000, 336 SCRA 201, 218.
2
Article 378, Administrative Order No. 270, Series of 1992.
3
Rollo (G.R. No. 208488), p. 50.
4
Id. at 310.
5
In the Matter of Save the Supreme Court Judicial Independence and Fiscal
Autonomy Movement v. Abolition of Judiciary Development Fund (JDF) and
Reduction of Fiscal Autonomy, UDK-15143, January 21, 2015, 746 SCRA 352, 371,
citing Uy Kiao Eng v. Lee,G.R. No. 176831, January 15, 2010, 610 SCRA 211, 217.
6
Ruby Shelter Builders and Realty Development Corporation v. Formaran, III, G.R.
No. 175914, February 10, 2009.
7
Evangelista v. Santiago, G.R. No. 157447, April 29, 2005, 457 SCRA 744, 762.
8
G.R. No. 209287, July 1, 2014, 728 SCRA 1.
9
Id. at 75.
10
Black's Law Dictionary, 6th ed., Nolan, J., & Nolan-Haley, J., West Group, St.
Paul, Minnesota, 1990, p. 1017.
11
25 Iowa 163 (1868).
12
Id. at 170.
13
1 J. Dillon, Municipal Corporations,§ 89 (3rd Ed. 1881). See Dean, K.D., The
Dillon Rule – a Limit on Local Government Powers, Missouri Law Review, Vol. 41,
Issue 4, Fall 1976, p. 547.
14
G.R. No. 111097, July 20, 1994, 234 SCRA 255, 272-273, citing The City of
Clinton v. The Cedar Rapids and Missouri River Railroad Company, 24 Iowa
(1868): 455 at 475.
15
G.R. No. 93252, August 5, 1991, 200 SCRA 271, 281.
16
Id. at 281.
17
Land Transportation Office v. City of Butuan, G.R. No. 131512, January 20, 2000,
322 SCRA 805, 808.
18
See Ganzon v. Court of Appeals, note 15.
19
Disomangcop v. Datumanong, G.R. No. 149848, November 25, 2004, 444 SCRA
203, 227.
20
Basco v. Philippine Amusement and Gaming Corporation, G.R. No. 91649, May
14, 1991, 197 SCRA 52, 65.
21
Limbona v. Mangelin, G.R. No. 80391, February 28, 1989, 170 SCRA 786, 795.
22
In Cordillera Board Coalition v. Commission on Audit, G.R. No. 79956, January
29, 1990, 181 SCRA 495, 506, the Court observed that: "It must be clarified that the
constitutional guarantee of local autonomy in the Constitution [Art. X, sec. 2] refers
to the administrative autonomy of local government units or, cast in more technical
language, the decentralization of government authority [Villegas v. Subido, G.R.
No. L-31004, January 8, 1971, 37 SCRA 1]. Local autonomy is not unique to the
1987 Constitution, it being guaranteed also under the 1973 Constitution [Art. II, sec.
10]. And while there was no express guarantee under the 1935 Constitution, the
Congress enacted the Local Autonomy Act (R.A. No. 2264) and the Decentralization
Act (R.A. No. 5185), which ushered the irreversible march towards further
enlargement of local autonomy in the country [Villegas v. Subido, supra.]

On the other hand, the creation of autonomous regions in Muslim Mindanao and the
Cordilleras, which is peculiar to the 1987 Constitution, contemplates the grant
of politicalautonomy and not just administrative autonomy to these regions. Thus,
the provision in the Constitution for an autonomous regional government with a
basic structure consisting of an executive department and a legislative assembly and
special courts with personal, family and property law jurisdiction in each of the
autonomous regions [Art. X, sec. 18]"
23
Pimentel v. Aguirre, supra note 1, at 217.
24
Disomangcop v. Datumanong, supra note 19, at 231.
25
Section 20, Article X of the 1987 Constitution states:

Section 20. Within its territorial jurisdiction and subject to the provisions of this
Constitution and national laws, the organic act of autonomous regions shall
provide for legislative powers over:

(1) Administrative organization;

(2) Creation of sources of revenues;
(3) Ancestral domain and natural resources;
(4) Personal, family, and property relations;
(5) Regional urban and rural planning development;
(6) Economic, social, and tourism development;
(7) Educational policies;
(8) Preservation and development of the cultural heritage; and
(9) Such other matters as may be authorized by law for the promotion of the general
welfare of the people of the region.
26
G.R. No. 177597, July 16, 2008, 558 SCRA 700, 743-744.
27
Id. at 730-732.
28
See Article X, Section 3.
29
Id., Section 5.
30
Id., Section 5 and Section 6.
31
Disomangcop v. Datumanong, supra note 19, at 233.
32
Does Decentralization Improve Perceptions of Accountability? Attitudinal
Evidence from Colombia. Escobar-Lemmon, M. & Ross, A. Midwest Political
Science Association, American Journal of Political Science, Vol, 58, No. 1 (January
2014), p. 176 accessed
at http://www.jstor.org/stable/10.1017/s0022381612000667 last October 4, 2017.
33
Comparative Federalism and Decentralization: On Meaning and Measurement.
Rodden, J. Comprative Politics, Ph.D. Programs in Political Science, City University
of New York. Comparative politics, Vol. 36, No.4 (July 2004), p. 482. Accessed
at http://www.jstor.org/stable/4150172 last October 6, 2017.
34
Disomangcop v. Datumanong, supra note 19, at 234.
35
Section 17, LGC.
36
Does Decentralization Improve Perceptions of Accountability? Attitudinal
Evidence from Colombia. Escobar-Lemmon, M. & Ross, A. Midwest Political
Science Association, American Journal of Political Science, Vol, 58, No. 1 (January
2014), p. 176 accessed
at http://www.jstor.org/stable/10.1017/s0022381612000667 last October 4, 2017.
37
Disomangcop v. Datumanong, supra note 19, at 233.
38
Section 98, LGC.
39
Section 102, LGC.
40
Section 107, LGC.
41
Pimentel, Jr. v. Aguirre, supra note 1, at 218.
42
Section 5. Each local government unit shall have the power to create its own
sources of revenues and to levy taxes, fees, and charges subject to such guidelines
and limitations as the Congress may provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue exclusively to the local
governments.
43
Section 6. Local government units shall have a just share, as determined by law,
in the national taxes which shall be automatically released to them.
44
Section 7. Local governments shall be entitled to an equitable share in the proceeds
of the utilization and development of the national wealth within their respective
areas, in the manner provided by law, including sharing the same with the inhabitants
by way of direct benefits.
45
Province of Batangas v. Romulo, G.R. No. 152774, May 27, 2004, 429 SCRA 736,
760.
46
Pimentel, Jr. v. Aguirre, supra note 1.
47
Decentralization and Intrastate Struggles: Chechnya, Punjab, and Quebec. Bakke,
K. Cambridge University Press, New York, 2015, p. 12.
48
Province of Batangas v. Romulo, supra note 45.
49
See Marcos v. Manglapus, G.R. No. 88211, September 15, 1989, 177 SCRA 668,
689.
50
Chavez v. Judicial and Bar Council, G.R. No. 202242, July 17, 2012, 676 SCRA
579, 598.
51
Republic v. COCOFED, G.R. No. 147062-64, December 14, 2001, 372 SCRA 462,
482.
52
Aban, Law of Basic Taxation in the Philippines, Revised Ed. 2001, p. 27.
53
G.R. No. 101273, July 3, 1992, 211 SCRA 219, 227.
54
Id.
55
SECTION 15. Collection and Sharing of Internal Revenue Taxes. — The share
of the central government or national government of all current year collections
of internal revenue taxes, within the area of autonomy shall, for a period of five
(5) years be allotted for the Regional Government in the Annual
Appropriations Act.

The Bureau of Internal Revenue (BIR) or the duly authorized treasurer of the city or
municipality concerned, as the case may be, shall continue to collect such taxes and
remit the share to the Regional Autonomous Government and the central
government or national government through duly accredited depository bank within
thirty (30) days from the end of each quarter of the current year;

Fifty percent (50%) of the share of the central government or national

government of the yearly incremental revenue from tax collections under
Sections 106 (value-added tax on sales of goods or properties), 108 (value-added
tax on sale of services and use or lease of properties) and 116 (tax on persons
exempt from value-added tax) of the National Internal Revenue Code (NIRC)
shall be shared by the Regional Government and the local government units
within the area of autonomy as follows:

(a) twenty percent (20%) shall accrue to the city or municipality where such taxes
are collected; and
(b) eighty percent (80%) shall accrue to the Regional Government.

In all cases, the Regional Government shall remit to the local government units their
respective shares within sixty (60) days from the end of each quarter of the current
taxable year. The provinces, cities, municipalities, and barangay within the area of
autonomy shall continue to receive their respective shares in the Internal Revenue
Allotment (IRA), as provided for in Section 284 of Republic Act No. 7160, the Local
Government Code of 1991. The five-year (5) period herein abovementioned may be
extended upon mutual agreement of the central government or national government
and the Regional Government.
56
Section 9. Sharing of Internal Revenue, Natural Resources Taxes, Fees and
Charges. - The collections of a province or city from national internal revenue taxes,
fees and charges, and taxes imposed on natural resources, shall be distributed as
follows:
(a) Thirty-five percent (35%) to the province or city;
(b) Thirty-five percent (35%) to the regional government; and
(c) Thirty percent (30%) to the central government or national government.

The share of the province shall be apportioned as follows: forty-five percent (45%)
to the province, thirty-five percent (35%) to the municipality and twenty percent
(20%) to the barangay.

The share of the city shall be distributed as follows: fifty percent (50%) to the city
and fifty percent (50%) to the barangay concerned.

The province or city concerned shall automatically retain its share and remit
the shares of the Regional Government and the central government or national
government to their respective treasurers who shall, after deducting the share
of the Regional Government as mentioned in paragraphs (b) and (c) of this
Section, remit the balance to the national government within the first five (5)
days of every month after the collections were made.

The remittance of the shares of the provinces, cities, municipalities, and barangay in
the internal revenue taxes, fees, and charges and the taxes, fees, and charges on the
use, development, and operation of natural resources within the autonomous region
shall be governed by law enacted by the Regional Assembly.

The remittances of the share of the central government or national government of

the internal revenue taxes, fees, and charges and on the taxes, fees, and charges on
the use, development, and operation of the natural resources within the autonomous
region shall be governed by the rules and regulations promulgated by the Department
of Finance of the central government or national government.

Officials who fail to remit the shares of the central government or national
government, the Regional Government and the local government units concerned in
the taxes, fees, and charges mentioned above may be suspended or removed from
office by order of the Secretary of Finance in cases involving the share of the central
government or national government or by the Regional Governor in cases involving
the share of the Regional Government and by the proper local government executive
in cases involving the share of local government. [Bold emphasis supplied]
57
SEC. 287. Shares of Local Government Units in the Proceeds from the
Development and Utilization of the National Wealth. - Local Government units shall
have an equitable share in the proceeds derived from the utilization and development
of the national wealth, within their respective areas, including sharing the same with
the inhabitants by way of direct benefits.

(A) Amount of Share of Local Government Units. - Local government units shall,
in addition to the internal revenue allotment, have a share of forty percent
(40%) of the gross collection derived by the national government from the
preceding fiscal year from excise taxes on mineral products, royalties, and such
other taxes, fees or charges, including related surcharges, interests or fines, and
from its share in any co-production, joint venture or production sharing
agreement in the utilization and development of the national wealth within their
territorial jurisdiction.

(B) Share of the Local Governments from Any Government Agency or Government-
owned or - Controlled Corporation. - Local Government Units shall have a share,
based on the preceding fiscal year, from the proceeds derived by any government
agency or government-owned or controlled corporation engaged in the utilization
and development of the national wealth based on the following formula, whichever
will produce a higher share for the local government unit:

(1) One percent (1%) of the gross sales or receipts of the preceding calendar year, or
(2) Forty percent (40%) of the excise taxes on mineral products, royalties, and such
other taxes, fees or charges, including related surcharges, interests or fines the
government agency or government-owned or -controlled corporations would have
paid if it were not otherwise exempt.

(C) Allocation of Shares. - The share in the preceding Section shall be distributed in
the following manner:

(1) Where the natural resources are located in the province:

(a) Province - twenty percent (20%)
(b) Component city/municipality - forty-five percent (45%); and
(c) Barangay - thirty-five percent (35%)

Provided, however, That where the natural resources are located in two (2) or more
provinces, or in two (2) or more component cities or municipalities or in two (2) or
more barangays, their respective shares shall be computed on the basis of: (l)
Population - seventy percent (70%); and (2) Land area - thirty percent (30%).

(2) Where the natural resources are located in a highly urbanized or independent
component city:
(a) City - sixty-five percent (65%); and
(b) Barangay - thirty-five percent (35%)

Provided, however, That where the natural resources are located in two (2) or more
Cities, the allocation of shares shall be based on the formula on population and land
area as specified in subsection (C)(1) hereof. [Bold emphasis supplied]
58
SEC. 290. Amount of Share of Local Government Units. - Local government
units shall, in addition to the internal revenue allotment, have a share of forty
percent (40%) of the gross collection derived by the national government from
the preceding fiscal year from mining taxes, royalties, forestry and fishery
charges, and such other taxes, fees, or charges, including related surcharges,
interests, or fines, and from its share in any co-production, joint venture or
production sharing agreement in the utilization and development of the national
wealth within their territorial jurisdiction. (Bold emphasis supplied)
59
Section 6 of R.A. No. 6631 (An Act granting Manila Jockey Club, Inc. a Franchise
to Construct, Operate and Maintain a Race Track for Horse Racing in the City of
Manila or in the Province of Bulacan) states:

Section 6. In consideration of the franchise and rights herein granted to the Manila
Jockey Club, Inc., the grantee shall pay into the national Treasury a franchise tax
equal to twenty-five per centum (25%) of its gross earnings from the horse races
authorized to be held under this franchise which is equivalent to the eight and one-
half per centum (8 ½%) of the total wager funds or gross receipts on the sale of
betting tickets during the racing day as mentioned in Section four hereof, allotted as
follows: a) National Government, five per centum (5%); b) the city or municipality
where the race track is located, five per centum (5%); c) Philippine Charity
Sweepstakes Office, seven per centum (7%); d) Philippine Anti-Tuberculosis
Society, six per centum (6%); and e) White Cross, two per centum (2%). The said
tax shall be paid monthly and shall be in lieu of any and all taxes, except the income
tax of any kind, nature and description levied, established or collected by any
authority whether barrio, municipality, city, provincial or national, now or in the
future, on its properties, whether real or personal, and profits, from which taxes the
grantee is hereby expressly excepted. (Bold emphasis supplied)
60
Section 8 of Republic Act 6632 (An Act granting the Philippine Racing Club, Inc.,
a franchise to operate and maintain a race track for Horse Racing in the Province
of Rizal) provides:
Section 8. In consideration of the franchise and rights herein granted to the
Philippine Racing Club, Inc., the grantee shall pay into the National Treasury a
franchise tax equal to twenty-five per centum (25%) of its gross earnings from the
horse races authorized to be held under this franchise which is equivalent to the eight
and one fourth per centum (8 1/4%) of the total wager funds or gross receipts on the
sale of betting tickets during the racing day as mentioned in Section six hereof,
allotted as follows: a) National Government, five per centum (5%); the
Municipality of Makati, five per centum (5%); b) Philippine Charity Sweepstakes
Office, seven per centum (7%); c) Philippine Anti-Tuberculosis Society, six per
centum (6%); and d) White Cross, two per centum (2%). The said tax shall be paid
monthly and shall be in lieu of any and all taxes, except the income tax, of any kind,
nature and description levied, established or collected by any authority whether
barrio, municipality, city, provincial or national, on its properties, whether real or
personal, from which taxes the grantee is hereby expressly exempted. (Bold
emphasis supplied)
61
Disposition of National Internal Revenue. - National Internal revenue collected and
not applied as herein above provided or otherwise specially disposed of by law shall
accrue to the National Treasury and shall be available for the general purposes of the
Government, with the exception of the amounts set apart by way of allotment as
provided for under Republic Act No. 7160, otherwise known as the Local
Government Code of 1991.

In addition to the internal revenue allotment as provided for in the preceding

paragraph, fifty percent (50%) of the national taxes collected under Sections 106,
108 and 116 of this Code in excess of the increase in collections for the
immediately preceding year shall be distributed as follows:

(a) Twenty percent (20%) shall accrue to the city or municipality where such
taxes are collected and shall be allocated in accordance with Section 150 of
Republic Act No. 7160, otherwise known as the Local Government Code of
1991; and
(b) Eighty percent (80%) shall accrue to the National Government. (Bold emphasis
supplied)
62
R.A. No. 7227 (Bases Conversion and Development Act of 1992) states:

Section 8. Funding Scheme. — x x x

The President is hereby authorized to sell the above lands, in whole or in part, which
are hereby declared alienable and disposable pursuant to the provisions of existing
laws and regulations governing sales of government properties: Provided, That no
sale or disposition of such lands will be undertaken until a development plan
embodying projects for conversion shall be approved by the President in accordance
with paragraph (b), Section 4, of this Act. However, six (6) months after approval of
this Act, the President shall authorize the Conversion Authority to dispose of certain
areas in Fort Bonifacio and Villamor as the latter so determines. The Conversion
Authority shall provide the President a report on any such disposition or plan for
disposition within one (2) month from such disposition or preparation of such plan.
The proceeds from any sale, after deducting all expenses related to the sale, of
portions of Metro Manila military camps as authorized under this Act, shall be used
for the following purposes with their corresponding percent shares of proceeds:

(1) Thirty-two and five-tenths percent (35.5%) — To finance the transfer of the AFP
military camps and the construction of new camps, the self-reliance and
modernization program of the AFP, the concessional and long-term housing loan
assistance and livelihood assistance to AFP officers and enlisted men and their
families, and the rehabilitation and expansion of the AFP's medical facilities;
(2) Fifty percent (50%) — To finance the conversion and the commercial uses of the
Clark and Subic military reservations and their extentions;
(3) Five Percent (5%) — To finance the concessional and long-term housing loan
assistance for the homeless of Metro Manila, Olongapo City, Angeles City and other
affected municipalities contiguous to the base areas as mandated herein; and
(4) The balance shall accrue and be remitted to the National Treasury to be
appropriated thereafter by Congress for the sole purpose of financing programs and
projects vital for the economic upliftment of the Filipino people.

Provided, That, in the case of Fort Bonifacio, two and five tenths percent (2.5%)
of the proceeds thereof in equal shares shall each go to the Municipalities of
Makati, Taguig and Pateros: Provided, further, That in no case shall farmers
affected be denied due compensation.

With respect to the military reservations and their extensions, the President upon
recommendation of the Conversion Authority or the Subic Authority when it
concerns the Subic Special Economic Zone shall likewise be authorized to sell or
dispose those portions of lands which the Conversion Authority or the Subic
Authority may find essential for the development of their projects. (Bold emphasis
supplied)

Section 12. Subic Special Economic Zone. — Subject to the concurrence by

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

The abovementioned zone shall be subject to the following policies:

xxxx

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

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

xxxx
63
The NIRC provides in Section 289 as follows:

Section 289. Special Financial Support to Beneficiary Provinces Producing

Virginia Tobacco. - The financial support given by the National Government
for the beneficiary provinces shall be constituted and collected from the
proceeds of fifteen percent (15%) of the excise taxes on locally manufactured
Virginia-type of cigarettes.

The funds allotted shall be divided among the beneficiary provinces pro-rata
according to the volume of Virginia tobacco production.

Provinces producing Virginia tobacco shall be the beneficiary provinces under

Republic Act No. 7171. Provided, however, that to qualify as beneficiary under R.A.
No. 7171, a province must have an average annual production of Virginia leaf
tobacco in an amount not less than one million kilos: Provided, further, that the
Department of Budget and Management (DBM) shall each year determine the
beneficiary provinces and their computed share of the funds under R.A. No. 7171,
referring to the National Tobacco Administration (NTA) records of tobacco
acceptances, at the tobacco trading centers for the immediate past year.

The Secretary of Budget and Management is hereby directed to retain annually

the said funds equivalent to fifteen percent (15%) of excise taxes on locally
manufactured Virginia type cigarettes to be remitted to the beneficiary
provinces qualified under R.A. No. 7171.

The provisions of existing laws to the contrary notwithstanding, the fifteen

percent (15%) share from government revenues mentioned in R.A. No. 7171
and due to the Virginia tobacco-producing provinces shall be directly remitted
to the provinces concerned.

Provided, That this Section shall be implemented in accordance with the guidelines
of Memorandum Circular No. 61-A dated November 28, 1993, which amended
Memorandum Circular No. 61, entitled 'Prescribing Guidelines for Implementing
Republic Act No. 7171', dated January 1, 1992.

Provided, further, That in addition to the local government units mentioned in the
above circular, the concerned officials in the province shall be consulted as regards
the identification of projects to be financed. [Bold emphasis supplied]
64
Section 288. Disposition of Incremental Revenues.

xxxx

(B) Incremental Revenues from Republic Act No. 8240. - Fifteen percent (15%)
of the incremental revenue collected from the excise tax on tobacco products
under R. A. No. 8240 shall be allocated and divided among the provinces
producing burley and native tobacco in accordance with the volume of tobacco
leaf production. The fund shall be exclusively utilized for programs to promote
economically viable alternatives for tobacco farmers and workers such as:

(1) Programs that will provide inputs, training, and other support for tobacco farmers
who shift to production of agricultural products other than tobacco including, but not
limited to, high-value crops, spices, rice, com, sugarcane, coconut, livestock and
fisheries;
(2) Programs that will provide financial support for tobacco farmers who are
displaced or who cease to produce tobacco;
(3) Cooperative programs to assist tobacco fanners in planting alternative crops or
implementing other livelihood projects;
(4) Livelihood programs and projects that will promote, enhance, and develop the
tourism potential of tobacco-growing provinces;
(5) Infrastructure projects such as farm to market roads, schools, hospitals, and rural
health facilities; and
(6) Agro-industrial projects that will enable tobacco farmers to be involved in the
management and subsequent ownership of projects, such as post-harvest and
secondary processing like cigarette manufacturing and by-product utilization.

The Department of Budget and Management, in consultation with the Department

of Agriculture, shall issue rules and regulations governing the allocation and
disbursement of this fund, not later than one hundred eighty ( 180) days from the
effectivity of this Act. [Bold emphasis supplied]
65
Section 24. Appropriations and funding.

xxxx

3. A maximum of one-half of one per-centum (1/2 of 1%) of the collections from

national internal revenue taxes not otherwise accruing to Special Funds or Special
Accounts in the General Fund of the National Government, upon authority from the
Minister (Secretary) of Finance, shall be deducted from such collections and shall
be remitted to the National Treasury to cover the cost of auditing services rendered
to local government units;
66
SEC. 284. Allotment for the Commission on Audit. - One-half of one percent
(1/2 of 1%) of the collections from the national internal revenue taxes not otherwise
accruing to special accounts in the general fund of the national government shall
accrue to the Commission on Audit as a fee for auditing services rendered to local
government units, excluding maintenance, equipment, and other operating expenses
as provided for in Section 21 of Presidential Decree No. 898.

The Secretary of Finance is hereby authorized to deduct from the monthly internal
revenue tax collections an amount equivalent to the percentage as herein fixed, and
to remit the same directly to the Commission on Audit under such rules and
regulations as may be promulgated by the Secretary of Finance and the Chairman of
the Commission on Audit.
67
Section 24. Appropriations and funding.

xxxx

3. A maximum of one-half of one per-centum (1/2 of 1%) of the collections from

national internal revenue taxes not otherwise accruing to Special Funds or Special
Accounts in the General Fund of the National Government, upon authority from the
Minister (Secretary) of Finance, shall be deducted from such collections and shall
be remitted to the National Treasury to cover the cost of auditing services rendered
to local government units;
68
SECTION 15. Collection and Sharing of Internal Revenue Taxes. — The share
of the central government or national government of all current year collections
of internal revenue taxes, within the area of autonomy shall, for a period of five
(5) years be allotted for the Regional Government in the Annual
Appropriations Act.

The Bureau Of Internal Revenue (BIR) or the duly authorized treasurer of the city
or municipality concerned, as the case may be, shall continue to collect such taxes
and remit the share to the Regional Autonomous Government and the central
government or national government through duly accredited depository bank within
thirty (30) days from the end of each quarter of the current year;

Fifty percent (50%) of the share of the central government or national

government of the yearly incremental revenue from tax collections under
Sections 106 (value-added tax on sales of goods or properties), 108 (value-added
tax on sale of services and use or lease of properties) and 116 (tax on persons
exempt from value-added tax) of the National Internal Revenue Code (NIRC)
shall be shared by the Regional Government and the local government units
within the area of autonomy as follows:
(a) twenty percent (20%) shall accrue to the city or municipality where such taxes
are collected; and
(b) eighty percent (80%) shall accrue to the Regional Government.

In all cases, the Regional Government shall remit to the local government units their
respective shares within sixty (60) days from the end of each quarter of the current
taxable year. The provinces, cities, municipalities, and barangay within the area of
autonomy shall continue to receive their respective shares in the Internal Revenue
Allotment (IRA), as provided for in Section 284 of Republic Act No. 7160, the Local
Government Code of 1991. The five-year (5) period herein abovementioned may be
extended upon mutual agreement of the central government or national government
and the Regional Government.
69
Section 9. Sharing of Internal Revenue, Natural Resources Taxes, Fees and
Charges. - The collections of a province or city from national internal revenue
taxes, fees and charges, and taxes imposed on natural resources, shall be distributed
as follows:

(a) Thirty-five percent (35%) to the province or city;

(b) Thirty-five percent (35%) to the regional government; and
(c) Thirty percent (30%) to the central government or national government.

The share of the province shall be apportioned as follows: forty-five percent (45%)
to the province, thirty-five percent (35%) to the municipality and twenty percent
(20%) to the barangay.

The share of the city shall be distributed as follows: fifty percent (50%) to the city
and fifty percent (50%) to the barangay concerned.

The province or city concerned shall automatically retain its share and remit
the shares of the Regional Government and the central government or national
government to their respective treasurers who shall, after deducting the share
of the Regional Government as mentioned in paragraphs (b) and (c) of this
Section, remit the balance to the national government within the first five (5)
days of every month after the collections were made.

The remittance of the shares of the provinces, cities, municipalities, and barangay in
the internal revenue taxes, fees, and charges and the taxes, fees, and charges on the
use, development, and operation of natural resources within the autonomous region
shall be governed by law enacted by the Regional Assembly.
The remittances of the share of the central government or national government of
the internal revenue taxes, fees, and charges and on the taxes, fees, and charges on
the use, development, and operation of the natural resources within the autonomous
region shall be governed by the rules and regulations promulgated by the Department
of Finance of the central government or national government.

Officials who fail to remit the shares of the central government or national
government, the Regional Government and the local government units concerned in
the taxes, fees, and charges mentioned above may be suspended or removed from
office by order of the Secretary of Finance in cases involving the share of the central
government or national government or by the Regional Governor in cases involving
the share of the Regional Government and by the proper local government executive
in cases involving the share of local government. [Emphasis Supplied]
70
Section 288 of the NIRC (formerly Section 8 of R.A. No. 8240) imposed an excise
tax on tobacco products, a percentage of which is to be allocated and divided among
the provinces producing Burley and native tobacco in accordance with the volume
of tobacco production. Such share received would then be allocated by the recipient
LGUs for the benefit of the farmers and workers, through any of the programs set
by the law.

Section 289 of the NIRC gives the concerned LGUs a share in the excise taxes
imposed on locally manufactured Virginia tobacco products. The LGUs consist of
the provinces and their subdivisions producing Virginia tobacco. This share is
considered by Congress as the National Government's financial support to the
beneficiary LGUs producing Virginia tobacco.

The share of the COA from the NIRT is an aliquot part of the NIRTs, and serves the
special purpose of defraying the cost of auditing services rendered to the LGUs.
71
Disomangcop v. Datumanong, supra note 19, at 227.
72
Id. at 230.
73
Commissioner of Internal Revenue v. San Roque Power Corporation, G.R. Nos.
187485, 196113 and 197156, October 8, 2013, 707 SCRA 66, 77.
74
Supra note 8.
75
Id., citing Yap v. Thenamaris Ship's Management, G.R. No. 179532, May 30 2011,
649 SCRA 369, 381.
76
Id., citing League of Cities Philippines v. COMELEC, G.R. No. 176951, August
24, 2010, 628 SCRA 819, 833.
77
See Province of Batangas v. Romulo, supra note 45.
78
Commission on Human Rights Employees' Association (CHREA) v. Commission
on Human Rights, G.R. No. 155336, July 21, 2006, 496 SCRA 226, 315-316.
79
Section 285. Allocation to Local Government Units. - The share of local
government units in the internal revenue allotment shall be collected in the following
manner:

(a) Provinces - Twenty-three percent (23%);

(b) Cities - Twenty-three percent (23%);
(c) Municipalities - Thirty-four percent (34%); and
(d) Barangays - Twenty percent (20%)

Provided, however, That the share of each province, city, and municipality shall be
determined on the basis of the following formula:

(a) Population - Fifty percent (50%);

(b) Land Area - Twenty-five percent (25%); and
(c) Equal sharing - Twenty-five percent (25%)

Provided, further, That the share of each barangay with a population of not less than
one hundred (100) inhabitants shall not be less than Eighty thousand (P80,000.00)
per annum chargeable against the twenty percent (20%) share of the barangay from
the internal revenue allotment, and the balance to be allocated on the basis of the
following formula:

(a) On the first year of the effectivity of this Code:

(1) Population - Forty percent (40%); and

(2) Equal sharing - Sixty percent (60%)

(b) On the second year:

(1) Population - Fifty percent (50%); and

(2) Equal sharing - Fifty percent (50%)

(c) On the third year and thereafter:

(1) Population - Sixty percent (60%); and
(2) Equal sharing - Forty percent (40%).

Provided, finally, That the financial requirements of barangays created by local

government units after the effectivity of this Code shall be the responsibility of the
local government unit concerned.

SEPARATE OPINION

VELASCO, JR., J.:

Nature of the Case

In these consolidated cases before the Court, petitioners question the manner by
which budgetary appropriations are made in favor of local government units (LGUs).
At the core, petitioners seek clarification on whether or not respondents had been
gravely abusing their discretion in excluding certain tax collections in determining
the base amount for computing the just share in the national taxes LGUs are entitled
to.

The Facts

G.R. No. 199802 for Certiorari, Prohibition, and

Mandamus, with Prayer for Preliminary Injunction
and/or Temporary Restraining Order

Section 284 of Republic Act No. (RA) 7160, otherwise known as the Local
Government Code (LGC), allocates 40% of national internal revenue tax collections
to LGUs. The provision pertinently reads:

Section 284. Allotment of Internal Revenue Taxes. - Local government units shall
have a share in the national internal revenue taxes based on the collection of the
third fiscal year preceding the current fiscal year as follows:
(a) On the first year of the effectivity of this Code, thirty percent (30%);
(b) On the second year, thirty-five percent (35%); and
(c) On the third year and thereafter, forty percent (40%).

Provided, That in the event that the national government incurs an unmanageable
public sector deficit, the President of the Philippines is hereby authorized, upon the
recommendation of Secretary of Finance, Secretary of Interior and Local
Government and Secretary of Budget and Management, and subject to consultation
with the presiding officers of both Houses of Congress and the presidents of the
"liga", to make the necessary adjustments in the internal revenue allotment of local
government units but in no case shall the allotment be less than thirty percent (30%)
of the collection of national internal revenue taxes of the third fiscal year
preceding the current fiscal year: Provided, further, That in the first year of the
effectivity of this Code, the local government units shall, in addition to the thirty
percent (30%) internal revenue allotment which shall include the cost of devolved
functions for essential public services, be entitled to receive the amount equivalent
to the cost of devolved personal services. (emphasis added)

Petitioners, local elective government officials from the province of Batangas, allege
that the mandated base under Section 284 is not being observed as some tax
collections are allegedly being unlawfully withheld by the national government and
excluded from distribution to the LGUs.

In particular, petitioners pray that respondents include the (a) Value Added Tax
(VAT), (b) Excise Tax, and (c) Documentary Stamp Tax (DST) collections of the
Bureau of Customs (BOC) in computing the base amount. Through letters addressed
to petitioner Hermilando I. Mandanas (Mandanas), then congressman of the second
district of Batangas, and dated September 12, 20111 and November 18, 2011,2 BOC
Commissioners Angelito A. Alvarez and Rozanno Rufino B. Biazon, respectively,
attested to the amount of VAT, Excise Tax, and DST collections of the BOC from
1989-2009:

Collections in Millions Collections

Year VAT Excise Tax DST

1989 10,069 174 2,176,550.03

1990 12,854 254 2,002,011.93

1991 11,675 147 2,007,871.48

1992 13,982 296 1,992,401.92

1993 21,413 299 46,880,825.83

1994 21,293 186 179,411,238.68

1995 28,901 579 210,359,504.10

1996 35,008 1,171 41,328,214.50

1997 42,484 1,896 77,856,280.28

1998 31,980 1,193 47,281,003.31

1999 36,632 1,397 81,496,945.00

2000 42,257 2,277 51,469,598.00

2001 47,247 5,691 45,393,853.25

2002 49,383 9,970 43,413,415.00

2003 52,663 11,753 89,191,480.00

2004 58,883 16,997 45,154,928.00

2005 68,813 14,599 47,440,326.00

2006 111,869 10,759 48,747,783.00

2007 129,023 13,385 48,945,260.00

2008 156,330 15,509 65,646,588.00

2009 133,907 17,917 56,068,698.00

Petitioners proffer that these monies were collected by the BOC as an agent of the
Bureau of Internal Revenue (BIR), pursuant to Section 12 of RA 8424, otherwise
known as the National Internal Revenue Code (NIRC).3 As such, these formed part
of the national internal revenue tax collections that ought to have been shared in by
all LGUs. Per petitioners' calculation, the LGUs were deprived of their just share in
the collections in the amount of P498,854,388,154.93.

Petitioner Mandanas then began writing to various government agencies, including

the Department of Finance (DOF), Department of Budget and Management (DBM),
and the BIR, to seek support for his position that the enumerated BOC collections
be included in the distribution to LGUs. He likewise implored then president
Benigno Simeon Aquino III to include the amount he arrived at as part of the 2012
budget.

Unfortunately, all of petitioner Mandanas' efforts were in vain and RA 10155 or the
2012 General Appropriations Act was signed into law. The amounts he considered
as arrears of the national government to the LGUs were not recognized as valid
obligations. Hence, Mandanas and his co-petitioners lodged the instant recourse
praying for the following relief:

PRAYER

WHEREFORE, PREMISES CONSIDERED, it is most respectfully prayed of the

Honorable Court that:

1. Upon filing of this petition, a temporary restraining order be issued enjoining the
Respondents from unlawfully releasing, disbursing and/or using the amount of
SIXTY BILLION AND SEVEN HUNDRED FIFTY MILLION (P60.75) that is
included in the capital outlays of the departments or agencies of the national
government as that sum belongs to the LGUs as a part of their internal revenue shares
based on the NIRT collections of the BOC in 2009 but, to emphasize, has been
excluded from the IRAs for the LGUs appropriated in the 2012 GAA.

2. After notice & hearing, a preliminary injunction be issued.

3. And by way of judgment-

a) To set aside as unconstitutional and illegal the misappropriation, misallocation

and misuse of P60.75 billion belonging to the LGUs but which is embodied in the
new appropriations of the 2012 GAA for the use of national government departments
and/or agencies;
b) Make the preliminary injunction permanent;

c) Compel the Respondents to cause the automatic release in of the LGUs' IRAs as
provided in the 2012 GAA, including the SIXTY BILLION SEVEN HUNDRED
FIFTY MILLION (P60,750,000,000.00) PESOS from the 2009 NIRT collections of
the BOC; and

d) Compel Respondents to recognize and release the unpaid IRAs due to the LGUs
from BOC collections of NIRT from 1992 to 2011, which is placed at FOUR
HUNDRED THIRTY EIGHT BILLION, ONE HUNDRED THREE MILLION,
NINE HUNDRED SIXTY THOUSAND, SIX HUNDRED SEVENTY FIVE
PESOS AND SEVENTY-THREE CENTAVOS (P438,103,960,675.73) which,
when added to the SIXTY BILLION SEVEN HUNDRED FIFTY MILLION
coming from 2009 collections of the BOC referred to in letter (c) above, would total
FOUR HUNDRED NINETY EIGHT BILLION EIGHT HUNDRED FIFTY FOUR
MILLION, THREE HUDNRED EIGHTY-EIGHT THOUSAND, ONE
HUNDRED FIFTY FOUR PESOS AND NINETY-THREE CENTAVOS
(P498,854,388,154.93). This latter amount, to repeat, is the total unreleased IRA due
to the LGUs from [1989]-2012.

Other reliefs just and equitable under the premises are likewise prayed for.

The case was filed against erstwhile Executive Secretary Paquito N. Ochoa,
Secretary of Finance Cesar Purisima, Budget Secretary Florencio H. Abad,
Commissioner of Internal Revenue Kim Jacinto-Henares, and National Treasurer
Roberto Tan.

G.R. No. 208488 for Mandamus

Enrique T. Garcia (Garcia), then congressional representative for the second district
of Bataan, likewise filed a petition for certiorari against the same respondents in G.R.
No. 199802, except that Customs Commissioner Rozanno Rufino B. Biazon was
impleaded as party respondent instead of National Treasurer Roberto Tan. In his
petition, Garcia assails what he perceives as the continuing failure of the national
government to allocate to the LGUs what is due them under the Constitution.

Specifically, Garcia asserts that Section 284 of RA 7160 is constitutionally infirm

since it limits the basis for the computation of the LGU allocations only to national
internal revenue taxes, contrary to the mandate of Article X, Section 6 of the
Constitution, viz:
SECTION 6. Local government units shall have a just share, as determined by law,
in the national taxes which shall be automatically released to them. (emphasis
added)

The insertion of the phrase "internal revenue" in Section 284 of RA 7160, according
to Garcia, is patently unconstitutional. As a consequence of this infirmity, the LGUs
had been receiving far less than what the Constitution mandates. Garcia thus seeks
intervention from the Court to nullify the phrase "internal revenue" in the provision.
He argues that LGUs should share in all forms of "national taxes," not just in those
enumerated under Section 21 of the NIRC.

Moreover, Garcia contends that even assuming arguendo that the phrase "internal
revenue" under Section 284 of RA 7160 passes the test of constitutionality, the
various deductions and the exclusions therefrom find no legal basis. On this point,
Garcia directs the Court's attention to the formula utilized in determining the total
internal revenue allocation for the LGUs from 2009-2011. He noted that the reduced
tax base, from "national taxes" to "national internal revenue taxes," was further
subjected to several deductions, namely:

1. Sections 9 and 15, Article IX of RA 9054 regarding the allocation of

internal revenue taxes collected by cities and provinces in the
Autonomous Region in Muslim Mindanao (ARMM);
2. Section 287 of the NIRC in relation to Section 2904 of RA 7160
regarding the share of LGUs in the excise tax collections on mineral
products;

3. Section 6 of RA 6631 and Section 8 of RA 6632 on the franchise taxes

from the operation of the Manila Jockey Club and Philippine Racing
Club race tracks;
4. Remittances of VAT collections under RA 7643;

5. Sections 8 and 12 of RA 7227, as amended by RA 9400, regarding the

share of affected LGUs on the sale and conversion of former military
bases;

6. RA 7171 and Section 289 of the NIRC on the share of LGUs to the
Excise Tax collections from the manufacture of Virginia tobacco
products
 7. Section 8 of RA 8240, as now provided in Section 288 of the NIRC, on
the allocation of incremental revenues from excise taxes;

8. The share of the Commission on Audit (COA) on the NIRT as provided

for in Section 24(3) of Presidential Decree No. 1445 in relation to
Section 284 of the NIRC

He additionally insists that all tax collections of the BOC were unlawfully excluded
in determining the tax base. Since Section 21 of the NIRC expressly includes VAT
and excise taxes in the enumeration of national internal revenue taxes, all collections
for these accounts, regardless of whether it was collected by the BOC or directly by
the BIR, should have been included in the computation.

Garcia therefore prays that respondents be directed to perform the following:

a) Compute the IRA of the LGUs on the basis of the national

tax collections, including all the tax collections of the BIR
and the BOC;

b) Desist from deduction from the national tax collections any

tax, item, or amount that is not authorized by law to be
deducted for the purpose of computing the IRA;

c) Submit a details computation of the IRA from 1995-2014

and determine therefrom the IRA shortfall; and

d) Distribute the IRA shortfall to the LGUs.

Respondents' Comments

Speaking through the Office of the Solicitor General (OSG), respondents reasoned
out that Congress has the full and broad discretion to determine the base and the rate
the LGUs are entitled to in the national taxes. This is based on the language of Article
X, Section 6 of the Constitution itself, which states that the just share of the LGUs
in the national taxes shall be determined by law. And in the exercise of its
prerogative, Congress limited the base for the allocation to LGUs to "national
internal revenue taxes," to the exclusion of customs duties and taxes from foreign
sources.

According to respondents, the determination of what constitutes "just share" for the
LGUs is a decision reached by the legislative in the collective wisdom of its
members. The Court should then observe judicial deference and employ an attitude
of non-interference in this case involving policy directions in the exercise of the
power of the purse. Otherwise, the Court would be engaging in judicial legislation,
forbidden under the principle of separation of powers.

Garcia's enumeration of so-called deductions from the national internal revenue

taxes is justified, so respondents claim. They cite the basic tenet in statutory
construction that when statutes are in pari materia, or cover the same specific or
particular subject matter, or have the same purpose or object, they should be
construed together. Here, the executive branch merely interpreted the special laws
in consonance with the NIRC and the LGC.

Under Section 283 of the NIRC, which is a later law than the LGC and a special law
specifically on the disposition of national internal revenue taxes, collections that are
already earmarked or otherwise specially disposed of by law will not accrue to the
National Treasury. The provision reads:

SEC. 283. Disposition of National Internal Revenue. - National internal revenue

collected and not applied as herein above provided or otherwise specially disposed
of by law shall accrue to the National Treasury and shall be available for the general
purposes of the Government, with the exception of the amounts set apart by way of
allotment as provided for under Republic Act No. 7160, otherwise known as the
Local Government Code of 1991.

Respondents posit that the amounts pertaining to the enumeration that Garcia coined
as unlawful deductions are examples of those accounts that do not accrue to the
National Treasury from where the shares of the LGUs will be carved out. The
balance of the National Treasury, after deducting the shares of the LGUs, shall be
available for the general purposes of the government.

Respondents also add that correlative to the BOC's duty to assess and collect taxes
on imported items is its duty to turn over its collections of the National Treasury.
For instance, out of every P265.00 collected by the BOC as DST, only P15.00 is
reported as BIR collection, while the remaining P250.00 is credited to the collections
of the BOC. Thus, when the BIR determines the allocations to the LGUs on the basis
of certified data on its own collections, pursuant to Article 378 of the Implementing
Rules and Regulations of RA 7160,5 only P15.00 of every P265.00 DST collection
of the BOC would be subject to distribution to the LGUs. There is then a distinction
between the VAT, DST, and Excise Tax collections of the BOC and the BIR, and
that not all BOC collections are reflected on the data of the BIR.

Lastly, it is argued that Mandamus does not lie to compel the exercise of the power
of the purse. A judicial writ cannot order the appropriation of public funds since such
power is an exclusive legislative prerogative that cannot be interfered with.
Likewise, to award backpay for the allegedly withheld IRA from prior years, from
1989-2012, in the amount of P498,854,388,154.93 as prayed for by Mandanas, will
effectively dislocate the budgets then intended for salaries, operational expenses,
and development programs in the year of 2012.

The Issues

The issues in this case can be restated in the following wise:

I. Whether or not the VAT, DST, and Excise Tax collections of the BOC
should form part of the base amount for computing the just share of the
LGUs in the national taxes.

II. Whether or not the LGUs are entitled to a just share in the tariff and
customs duties collected by the BOC.
III. Whether or not the respondents had illegally been withholding amounts
from the LGUs through the special laws enumerated in the Garcia
petition.

IV. Whether or not the LGUs may still collect from the national
government the arrears from the alleged errors in computing the
national tax allocations.

Discussion

I vote to partially grant the petitions.

 The tax collections of the BOC should be included in
determining the basis for allocation to the LGUs

a. The VAT, DST, and Excise Tax collections of the BOC are
National Internal Revenue Taxes

To recall, Mandanas and his cohorts have no qualm over the constitutionality of
Section 284 of RA 7160. They merely seek to include the VAT, DST, and Excise
Tax collections of the BOC in determining the base for the LGUs' rightful share in
the national taxes.

I find the contention tenable.

Pertinently, Section 21 of the NIRC reads:

Section 21. Sources of Revenue. - The following taxes, fees and charges are deemed
to be national internal revenue taxes:

(a) Income tax;

(b) Estate and donor's taxes;
(c) Value-added tax;
(d) Other percentage taxes;
(e) Excise taxes;
(f) Documentary stamp taxes; and
(g) Such other taxes as are or hereafter may be imposed and collected by the Bureau
of Internal Revenue. (emphasis added)

Clear as crystal is that VAT, DSTs, and Excise Taxes are within the enumeration of
national internal revenue taxes under Section 21 of the NIRC. When Section 284 of
the LGC then declared that all LGUs shall be entitled to 40% of the "national internal
revenue taxes," collections for these forms of taxes are necessarily included in the
computation.

VAT, DSTs, and Excise Taxes do not lose their character as national internal revenue
taxes simply because they are not reported as collections of the BIR, and neither on
the ground that they are collected by the BOC. This is so since Section 12(A) of the
NIRC is categorical that the BOC merely acts as an agent of the BIR in collecting
these taxes:
Section 12. Agents and Deputies for Collection of National Internal Revenue
Taxes. - The following are hereby constituted agents of the Commissioner:

(a) The Commissioner of Customs and his subordinates with respect to the collection
of national internal revenue taxes on imported goods;

xxxx

The details of the agency relation between the BIR, as principal, and the BOC, as
agent, are explicated in the succeeding sections of the NIRC. In concrete, Sections
1076 and 1297are general provisions on the imposition of VAT and Excise Taxes on
imported goods. On the other hand, Section 131 of the NIRC specifically directs the
taxpayer to pay his excise tax liabilities on imported goods to the BOC, and Section
4.107-1(B) of Revenue Regulation 16-2005 provides that VAT on the imported
goods should be settled before they can be removed from customs custody, viz:

Section 131. Payment of Excise Taxes on Importer Articles. -

(A) Persons Liable. -Excise taxes on imported articles shall be paid by the owner or
importer to the Customs Officers, conformably with the regulations of the
Department of Finance and before the release of such articles from the customs
house, or by the person who is found in possession of articles which are exempt from
excise taxes other than those legally entitled to exemption.

xxxx

Sec. 4.107-1. VAT on Importation of Goods

xxxx

(b) Applicability and payment - The rates prescribed under Sec. 107 (A) of the
[NIRC] shall be applicable to all importations withdrawn from customs custody.

The VAT on the importation shall be paid by the importer prior to the release
of such goods from customs custody. (emphasis and words on brackets added)

As far as the authority of the BOC to collect DSTs is concerned, this finds legal basis
under Section 188 of the NIRC:

Section 188. Stamp Tax on Certificates. - On each certificate of damages or

otherwise, and on every certificate or document issued by any customs officer,
marine surveyor, or other person acting as such, and on each certificate issued by a
notary public, and on each certificate of any description required by law or by rules
or regulations of a public office, or which is issued for the purpose of giving
information, or establishing proof of a fact, and not otherwise specified herein, there
shall be collected a documentary stamp tax of Fifteen pesos (P15.00).

All these provisions strengthen Mandanas' position that the VAT, DSTs, and Excise
Taxes collected by the BOC partake the nature of national internal revenue taxes
under Section 21 of the NIRC. Though collected by the BOC, these taxes are
nevertheless impositions under the NIRC that should be included in the base amount
of the revenue allocation to the LGUs. It matters not who collects the items of
national income. Neither Article X, Section 6 of the Constitution nor Section 284 of
RA 7160 requires that the national collections be credited to the BIR. For what is
controlling is that they accrue to the account of the National Treasury.

b. Section 284 of RA 7160 is unconstitutional insofar as it limits

the allotment base to national internal revenue taxes; Tariff
and Customs duties are national taxes

Anent G.R. No. 208488, I concur with the argument of petitioner Garcia that
abidance with the constitutional mandate constrains the Court to declare the
recurring phrase "internal revenue" in Section 284 of RA 7160 as unconstitutional.

A cardinal rule in statutory construction is that where the words of a statute are clear,
plain, and free from ambiguity, it must be given its literal meaning and applied
without attempted interpretation.8 This is what is known as the plain-meaning rule.
It is expressed in the maxim, index animi sermo, or speech is the index of intention.
Furthermore, there is the maxim verba legis non est recedendum, or from the words
of a statute there should be no departure.9

Here, Article X, Section 6 of the 1987 Constitution is clear and categorical that Local
Government Units (LGUs) shall have a share in the country's national taxes. For
Congress to grant them anything less would then trench on the provision.
Unfortunately, this is what Section 284 of RA 7160, as currently worded,
accomplishes.

The contested phrase is unduly restrictive, nay unconstitutional, for it limits the share
of the LGUs to national internal revenue taxes. It effectively excludes other forms
of national taxes than those specified in Section 21 of the NIRC. Conspicuously
absent in the enumeration is the duties imposed on internationally sourced goods
under Presidential Decree No. (PD) 1464, otherwise known as the Tariff and
Customs Code of 1978, which consolidated and codified the tariff and customs law
in the Philippines.10 There is no cogent reason to segregate the tax collections of the
BOC pursuant to the NIRC from those in implementation of other legal edicts.
Customs duties form part of the country's national taxes and should, therefore, be
included in the basis for determining the LGU's aliquot share in the pie.

The concept of customs duties has been explicated in the case of Garcia v. Executive
Secretary,11 viz:

"[C]ustoms duties" is "the name given to taxes on the importation and

exportation of commodities, the tariff or tax assessed upon merchandise
imported from, or exported to, a foreign country." The levying of customs duties
on imported goods may have in some measure the effect of protecting local
industries — where such local industries actually exist and are producingcomparable
goods. Simultaneously, however, the very same customs duties inevitably have
the effect of producing governmental revenues. Customs duties like internal
revenue taxes are rarely, if ever, designed to achieve one policy objective only. Most
commonly, customs duties, which constitute taxes in the sense of exactions the
proceeds of which become public funds — have either or both the generation of
revenue and the regulation of economic or social activity as their moving purposes
and frequently, it is very difficult to say which, in a particular instance, is the
dominant or principal objective. In the instant case, since the Philippines in fact
produces ten (10) to fifteen percent (15%) of the crude oil consumed here, the
imposition of increased tariff rates and a special duty on imported crude oil and
imported oil products may be seen to have some "protective" impact upon
indigenous oil production. For the effective, price of imported crude oil and oil
products is increased. At the same time, it cannot be gainsaid that substantial
revenues for the government are raised by the imposition of such increased tariff
rates or special duty. (emphasis added)

"Tariff" refers to the system or principle of imposing duties on the importation of

foreign merchandise.12 Thus, embodied in the Tariff and Customs Code is the list or
schedule of articles on which a duty is imposed upon their importation, with the rates
at which they are taxed. Meanwhile, clear from the above excerpt is that these
customs duties are taxeslevied on imports. It is collected by the customs authorities
of a country not only to protect domestic industries from more efficient or predatory
competitors abroad, but also to raise state revenues.
All taxes are classifiable as either national or local. A tax imposition is considered
local if it is levied by an LGU pursuant to its revenue-generating power under Article
X, Section 5 of the Constitution and Section 18 of RA 7160. 13 On the other hand,
national taxes, by definition, are imposed by the national government through
congressional enactment. Among these tax measures signed into law is RA No.
10863, otherwise known as the Customs Modernization and Tariff Act (CMTA),
which was signed into law on May 30, 2016, amending PD 1464.

Significantly, while local governments were granted by the Constitution the power
to tax, such grant is circumscribed by "guidelines and limitations as the Congress
may provide." Article X, Section 5 of the 1987 Constitution reads:

SECTION 5. Each local government unit shall have the power to create its own
sources of revenues and to levy taxes, fees, and charges subject to such guidelines
and limitations as the Congress may provide, consistent with the basic policy of
local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local
governments

In line with this, the LGC expressly excludes from the ambit of local taxation the
imposition of tariff and customs duties. Section 133 of the LGC pertinently provides:

Sec. 133. Common Limitations on the Taxing Powers of Local Government

Units. - Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and Barangays shall not extend to the levy of
the following:

xxxx

(d) Customs duties, registration fees of vessels, wharfage on wharves, tonnage dues
and all other kinds of customs fees, charges and dues except wharfage on wharves
constructed and maintained by the local government unit concerned;

(e) Taxes, fees, charges and other impositions upon goods carried into or out of,
or passing through, the territorial jurisdictions of local governments in the guise
of charges for wharfage, tolls for bridges or otherwise, or other taxes in any form
whatever upon such goods or merchandise.

The limits on local taxation and thus the exclusion therefrom of customs duties and
tariff was recognized by the Supreme Court when it ruled in Petron Corp. v.
Tiangco14 that:
Congress has the constitutional authority to impose limitations on the power to
tax of local government units, and Section 133 of the LGC is one such
limitation. Indeed, the provision is the explicit statutory impediment to the
enjoyment of absolute taxing power by local government units, not to mention the
reality that such power is a delegated power.

In Palma Development Corp. v. Municipality of Malangas,15 the Court more

particularly said:

Section 133(e) of RA No. 7160 prohibits the imposition, in the guise of wharfage,
of fees — as well as all other taxes or charges in any form whatsoever — on goods
or merchandise. It is therefore irrelevant if the fees imposed are actually for police
surveillance on the goods, because any other form of imposition on goods passing
through the territorial jurisdiction of the municipality is clearly prohibited by Section
133(e).

In sum, by the principle of exclusion provided by Section 133 of the LGC, no

customs duties and/or tariffs can be considered local taxes; all customs duties and
tariffs can only be imposed by the Congress and, as such, they can only be national
taxes.

Ubi lex non distinguit nec nos distingui redebemus. When the law does not
distinguish, neither must we distinguish.16 To reiterate, Article X, Section 6 of the
Constitution mandates that the LGUs shall share in the national taxes, without
distinction. It can even be inferred from the deliberations of the framers that they
intended Article X, Section 6 to be mandatory, viz:17

MR. RODRIGO. I am not an expert on taxation, so I just want to know. Even a

municipality levies taxes. Does the province have a share?

MR. SUAREZ. May I state that I have the same question, so I would like to join
Commissioner Rodrigo in that inquiry.

MR. RODRIGO. I ask so because if a municipality levies taxes, it is impossible for

the province to share in those taxes.

MR. NOLLEDO. I am not aware of any rule that says so but I know that even the
province has also the power to levy taxes.
MR. RODRIGO. That is correct. But is it then the purpose of this amendment that
taxes imposed by a municipality should be exclusively for that municipality and that
the province may not share at all in the taxes? Is that the purpose of the amendment?

MR. NOLLEDO. I think the question should be directed to the proponent.

MR. DAVIDE. Even under the Committee's wording, it would clearly appear that if
a municipality levies a particular tax, the province is not entitled to a share for the
reason that the province itself, as a separate governmental unit, may collect and levy
taxes for itself

MR. NOLLEDO. Besides, the national government shall share national taxes
with the province.

MR. RODRIGO. But if we approve that amendment, the national government may
not share in the taxes levied by the province?

MR. DAVIDE. The national government may impose its own national taxes.
The concept here is that the national government must share these national
taxes with the other local government units. That is the second paragraph of
the original section 9, now section 12, beginning from lines 29-30.

MR. RODRIGO. Do I get then that if the national government imposes taxes,
local government units share in those taxes?

MR. DAVIDE. Yes, the local government shares in the national taxes.

MR. RODRIGO. But if the local government imposes local taxes, the national
government may not share?

MR. DAVIDE. That is correct because that is precisely to emphasize the local
autonomy of the unit.

MR. NOLLEDO. That has been the practice.

For Congress to have excluded, as they continue to exclude, certain items of national
tax, such as tariff and customs duties, from the amount to be distributed to the LGUs
is then a glaring contravention of our fundamental law. The alleged basis for the
exclusion, the phrase "internal revenue" under Section 284 of the LGC, should
therefore be declared as unconstitutional.
The school of thought adopted by the respondents is that the phrase "as determined
by law" appearing in Article X, Section 6 of the Constitution authorizes Congress to
determine the inclusions and exclusions from the national taxes before determining
the amount the LGUs would be entitled to. Thus, it is this authority that was
exercised by the legislative when it limited the allocation of LGUs to
national internal revenue taxes. Regrettably, I cannot join respondents in their
construction of the statute.

Article X, Section 6 of the Constitution had already been interpreted in ACORD v.

Zamora (ACORD)18 in the following manner:

Moreover, there is merit in the argument of the intervenor Province of Batangas that,
if indeed the framers intended to allow the enactment of statutes making the release
of IRA conditional instead of automatic, then Article X, Section 6 of the Constitution
would have been worded differently. Instead of reading Local government units shall
have a just share, as determined by law, in the national taxes which shall be
automatically released to them (italics supplied), it would have read as follows, so
the Province of Batangas posits:

Local government units shall have a just share, as determined by law, in the national
taxes which shall be [automatically] released to them as provided by law, or,

Local government units shall have a just share in the national taxes which shall be
[automatically] released to them as provided by law, or

Local government units shall have a just share, as determined by law, in the national
taxes which shall be automatically released to them subject to exceptions Congress
may provide.

Since, under Article X, Section 6 of the Constitution, only the just share of local
governments is qualified by the words as determined by law, and not the release
thereof, the plain implication is that Congress is not authorized by the Constitution
to hinder or impede the automatic release of the IRA. (emphasis added)

As further held in ACORD, the provision, when parsed, mandates that (1) the LGUs
shall have a just share in the national taxes; (2) the just share shall be determined by
law; and (3) the just share shall be automatically released to the LGUs. And guilty
of reiteration, "under Article X, Section 6 of the Constitution, only the just share
of local governments is qualified by the words as determined by law."19 This
ruling resulted in the nullification of appropriation items XXXVII and LIV Special
Provisions 1 and 4 of the General Appropriations Act of 2000 insofar as they set
a condition sine qua non for the release of Internal Revenue Allotment to LGUs to
the tune of P10 Billion.

Similarly, we too must be conscious here of the phraseology of Article X, Section 6

of the 1987 Constitution. As couched, the phrase "as determined by law" follows
and, therefore, qualifies ''just share"; it cannot be construed as qualifying the
succeeding phrase "in the national taxes." Hence, the ponencia is correct in ruling
that the determination of what constitutes ''just share" is within the province of
legislative powers. But what Congress is only allowed to determine is the aliquot
share that the LGUs are entitled to. They are not authorized to modify the base
amount of the budget to be distributed. To insist that the proper interpretation of the
provision is that "the just share of LGUs in the national taxes shall be determined
by law" is tantamount to a revision of the Constitution and a blatant disregard to the
specific order and wording of the provision, as crafted by its framers.

Constitutional considerations on the allocation to LGUs

The Constitution cannot be supplanted through ordinary legislative fiat. Any

limitation on the allocation of wealth to the LGUs guaranteed by the fundamental
law must likewise be embodied in the Constitution itself. Thus, instead of looking
to RA 7160 in determining the scope of the base amount for allotment, due attention
must be given to Article X, Section 7 and Article VI, Section 29(3) of the
Constitution:

SECTION 7. Local governments shall be entitled to an equitable share in the

proceeds of the utilization and development of the national wealth within their
respective areas, in the manner provided by law, including sharing the same with the
inhabitants by way of direct benefits.

xxxx

SECTION 29. x x x

(3) All money collected on any tax levied for a special purpose shall be treated as a
special fund and paid out for such purpose only. If the purpose for which a special
fund was created has been fulfilled or abandoned, the balance, if any, shall be
transferred to the general funds of the Government.
With the foregoing in mind, we are now poised to gauge whether or not the items
identified by petitioner Garcia are in fact unlawful deductions or exclusions from the
LGUs' share in the national taxes:

1. Sections 9 and 15, Article IX of RA 905420 regarding the allocation of

internal revenue taxes collected by cities and provinces in the ARMM;

Section 9 of RA 9054 provides for the sharing of government taxes collected from
LGUs in the ARMM in the following manner: 35% to the province or city, 35% to
the regional government, and 30%to the national government. The provision
likewise empowers the province and city concerned to automatically retain its share
and remit the shares of the regional government and the national government to their
respective treasurers. Meanwhile Section 15 of RA 9054 allocates 50% of the VAT
collections from the ARMM exclusively to the region and its constituencies.

The above provisions do not violate Section 6, Article X of the Constitution. Instead,
this is a clear application of the Constitutional provision that empowers Congress to
determine the just share that LGUs are entitled to receive. For while the taxes
mentioned in Sections 9 and 15 of the Constitution are in the nature of national taxes,
the LGUs are already receiving their just share thereon. Receiving their just share
does not mean receiving a share that is equal with everyone else's. This is evident
from RA 7160 which expressly provides that the share of an LGU is dependent on
its population and land area—considerations that prevent any two LGU from sharing
equally from the pie.

To clarify, the determination of what constitutes an LGU's just share in the national
taxes is not restricted to Section 284 of RA 7160. The 40% share under the provision
merely sets the general rule. And as will later be discussed, exceptions abound in
statutes such as RA 9054.

Moreover, there is justification for allocating the lion's share in the tax collections
from the ARMM to LGUs within the region themselves, rather than
allowing all LGUs to share thereon in equal footing.

The creation of autonomous regions is in compliance with the constitutional

directive under Article X, Sections 18 and 1921 to address the concerned regions'
continuous struggle for self-rule and self-determination. The grant to the
autonomous region of a larger share in the collections is simply an incident to this
grant of autonomy. To give meaning to their autonomous status, their financial and
political dependence on the national government is reduced. Allocating them a larger
share of the national taxes collected from their own territory allows not only for the
expeditious delivery of-basic services, but for them to be more self-sufficient and
selfreliant. In a way, it can also be considered as a special purpose fund.

Thus, there is no constitutional violation in allocating 50% of the VAT collections

from the ARMM to the LGUs within the region, leaving only 50% to the central
government and to the other LGUs. There is nothing illegal in the ARMM's retention
of 70% of the national taxes collected therein, limiting the amount of national tax to
be included in the base amount for distribution to the LGUs to 30%.

2. Section 28722 of the NIRC in relation to Section 29023 of RA 7160

regarding the share of LGUs in the excise tax collections on mineral
products;

The questioned provisions grant a 40% share in the tax collections from the
exploitation and development of national wealth to the LGUs under whose territorial
jurisdiction such exploitation and development occur. Such preferential allocation,
in addition to their national tax allotment, cannot be deemed violative of Article X,
Section 6 of the Constitution for it IS m pursuance of Article X, Section 7 earlier
quoted.

The exclusion of the other LGUs from sharing in the said 40% had been justified by
the Constitutional Commission in the following wise:

MR. OPLE. Madam President, the issue has to do with Section 8 on page 2 of
Committee Report No. 21:

Local taxes shall belong exclusively to local governments and they shall likewise be
entitled to share in the proceeds of the exploitation and development of the national
wealth within their respective areas.

Just to cite specific examples. In the case of timberland within the area of jurisdiction
of the Province of Quirino or the Province of Aurora, we feel that the local
governments ought to share in whatever revenues are generated from this particular
natural resource which is also considered a national resource in a proportion to be
determined by Congress. This may mean sharing not with the local government but
with the local population. The geothermal plant in the Macban, Makiling-Banahaw
area in Laguna, the Tiwi Geothermal Plant in Albay, there is a sense in which the
people in these areas, hosting the physical facility based on the resources found
under the ground in their area which are considered national wealth, should
participate in terms of reasonable rebates on the cost of power that they pay. This is
true of the Maria Cristina area in Central Mindanao, for example. May I point out
that in the previous government, this has always been a very nettlesome subject of
Cabinet debates. Are the people in the locality, where God chose to locate His
bounty, not entitled to some reasonable modest sharing of this with the national
government? Why should the national government claim all the revenues arising
from them? And the usual reply of the technocrats at that time is that there must be
uniform treatment of all citizens regardless of where God's gifts are located, whether
below the ground or above the ground. This, of course, has led to popular
disenchantment. In Albay, for example, the government then promised a 20-percent
rebate in power because of the contributions of the Tiwi plant to the Luzon grid.
Although this was ordered, I remember that the Ministry of Finance, together with
the National Power Corporation, refused to implement it. There is a bigger economic
principle behind this, the principle of equity. If God chose to locate the great rivers
and sources of hydroelectric power in Iligan, in Central Mindanao, for example, or
in the Cordillera, why should the national government impose fuel adjustment taxes
in order to cancel out the comparative advantage given to the people in these
localities through these resources? So, it is in that sense that under Section 8, the
local populations, if not the local governments, should have a share of whatever
national proceeds may be realized from this natural wealth of the nation located
within their jurisdictions.24

As can be gleaned from the discussion, the additional allocation under Article X,
Section 7 is granted by reason of equity. It is given to the host LGUs for bearing the
brunt of the exploitation of their territory, and is also a form of incentivizing the
introduction of developments in their locality. And from the language of Article X,
Section 7 itself, it is not limited to tax collections from mineral products and mining
operations, but extends to taxes, fees or charges from all forms of exploitation and
development of national wealth. This includes the cited establishment and operation
of geothermal and hydrothermal plants in Macban, Makiling-Banahaw area in
Laguna, in Tiwi, Albay, and in Iligan City, as well as the extraction of petroleum
and natural gasses.

Respondents did not then err in setting aside 40% of the gross collection of taxes on
utilization and development of the national wealth to the host LGU. Meanwhile, all
LGUs and the national government shall share in the remaining 60% of the tax
collections, satisfying the constitutional mandate that all LGUs shall receive their
just share in the national taxes, albeit at a lesser amount.

3. Section 6 of RA 663125 and Section 8 of RA 663226 on the franchise

taxes from the operation of the Manila Jockey Club and Philippine
Racing Club race tracks;
The cited provisions relate to the automatic allocation of a 5% share in the 25%
franchise tax—collected from 8.5% and 8.25% of the wager funds from the
operations of the Manila Jockey Club and Philippine Racing Club, Inc.,
respectively—to the city or municipality where the race track is located.

This is another example of an allocation by Congress to certain LGUs, on top of

their share in the 40% of national taxes under Section 284 of RA 7160. Similar to
the situation of the LGUs in the ARMM, the host cities and municipalities in RA
6631 and 6632 enjoy the 5% as part and parcel of their just share in the national
taxes. To reiterate, the just share of LGUs, as determined by law, need not be uniform
for all units. It is within the wisdom of Congress to determine the extent of the shares
in the national taxes that the LGUs will be accorded

Anent the remaining 20% of the franchise taxes, Sections 6 and 8 of RA 6631 and
6632, respectively, reveals that this had already been earmarked for special purposes.
Under the distribution, only 5% of the franchise tax shall accrue to the national
government, which will then be subject to distribution to LGUs. The rest of the
apportionments of the 25% franchise taxes collected under RA 6631 and RA 6632—
five percent (5%) to the host municipality, seven percent (7%) to the Philippine
Charity Sweepstakes Office, six percent (6%) to the Anti-Tuberculosis Society, and
two percent (2%) to the White Cross—are special purpose funds, which shall not be
distributed to all LGUs.

It must be noted that RA 6631 and 6632 had been amended by RA 8407 27 and
7953,28respectively. The Court hereby takes judicial notice of its salient provisions
including the imposition of Documentary Stamp Taxes at the rate of ten centavos
(PhP 0.10) for every peso cost of each horse racing ticket, 29 and of the ten percent
(10%) taxes on winnings and prizes.30 These are national taxes included in the
emuneration of Section 21 of the NIRC. Thus, the LGUs shall share on the
collections thereon.

4. Sharing of VAT collections under RA 7643;

RA 7643 amended Section 282 of the NIRC to read thusly:

SEC. 282. Disposition of national internal revenue.- x x x

xxxx

In addition to the internal revenue allotment as provided for in the preceding

paragraph, fifty percent (50%) of the national taxes collected under Sections 100,
102, 112, 113, and 114 of this Code in excess of the increase in collections for the
immediately preceding year shall be distributed as follows: (a) Twenty percent
(20%) shall accrue to the city or municipality where such taxes are collected and
shall be allocated in accordance with Section 150 of Republic Act No. 7160,
otherwise known as the Local Government Code of 1991; and (b) Eighty percent
(80%) shall accrue to the National Government.

Notably, the 20%-80% allocation in favor of the national government is lesser than
the 40% allocation under Section 284 of the LGC. This does not contravene Article
X, Section 6 of the Constitution, however, for it merely sets the just share that LGUs
are entitled to in the particular account. There being a special percentage allocation
for these incremental taxes, respondents can then properly exclude them in
computing the base amount for the national tax allocations to the LGUs.

5. Sections 831 and 1232 of RA 7227, as amended by RA 9400, regarding

the share of affected LGUs on the sale and conversion of former
military bases;

Section 8 of RA 7227 authorizes the President, through the Bases Conversion

Development Authority, to sell former military bases. It likewise mandates that the
LGUs of Makati, Taguig, and Pateros shall be entitled to a 2.5% share in the
disposition of converted properties in Fort Bonifacio.

Meanwhile, Section 12 of RA 7227, as amended, imposes a 5% collection on gross

income to be paid by all business enterprises within the Subic Special Economic
Zone. Of the imposition, 3% shall be remitted to the National Government. The
remaining 2% shall be remitted to the SBMA but will be distributed to the LGUs
affected by the declaration of the economic zone, namely: the City of Olongapo and
the municipalities of Subic, San Antonio, San Marcelino and Castillejos of the
Province of Zambales; and the municipalities of Morong, Hermosa and Dinalupihan
of the Province of Bataan. The distribution shall be based on population (50%), land
mass (25%), and equal sharing (25%).

Invoking Article X, Section 6 of the Constitution, petitioner Garcia questions the

provisos granting special allocations and prays that the same be included in the pool
of national taxes to be distributed to all LGUs.

The argument lacks merit.

To reiterate, Article X, Section 6 of the Constitution guarantees that LGUs shall have
a just share, as determined by law, in the national taxes. The proceeds from the sale
of converted bases and the percentage collection from income, though governmental
revenue, are not in the form of tax collections. To be sure, businesses and enterprises
in the economic zone are tax exempt and the fees being charged the enterprises are in
lieu of paying taxes. Section 12(C) categorically states: "x x x no national and local
taxes shall be imposed within the Subic Special Economic Zone." As non-tax items,
these revenues do not fall within the concept of national tax within the ambit of
Article X, Section 6 of the Constitution, and the LGUs cannot then reasonably claim
entitlement to a share thereon.

6. RA 7171 and Section 28933 of the NIRC on the share of LGUs in the
Excise Tax collections from the manufacture of Virginia tobacco
products;

Petitioner next calls for the inclusion of the 15% collections on the excise taxes from
the manufacture of Virginia tobacco products in determining the allocation base.
Under Section 289 of the NIRA, the 15% being requested currently accrues to the
Virginia tobacco-producing provinces, pro-rated based on their level of production.

This is another exercise by Congress of its authority to determine the just share in
the national taxes that LGUs are entitled to. In this case, the tobacco producing
provinces are provided incentives for their economic contribution, and financial
assistance for the tobacco farmers.

Additionally, Excise Tax collections from the manufacture of Virginia tobacco

products form part of a special fund for special purposes, within the contemplation
of Article VI, Section 29(3) of the Constitution. In the same way, the Court
in Osmeña v. Orbos34 held that the oil price stabilization fund was a special fund
segregated from the general fund and placed as it were in a trust account. And
in Gaston v. Republic Planters Bank,35 We ruled that the stabilization fees collected
from sugar millers, planters, and producers were for a special purpose: to finance the
growth and development of the sugar industry.

The special purposes, in this case, are embodied in Sections 1 and 2 of RA 7171 in
the following wise:

SECTION 1. Declaration of Policy - It is hereby declared to be the policy of the

government to extend special support to the farmers of the Virginia tobacco-
producing provinces inasmuch as these farmers are the nucleus of the Virginia
tobacco industry which generates a sizeable income, in terms of excise taxes from
locally manufactured Virginia-type cigarettes and customs duties on imported
blending tobacco, for the National Government. For the reason stated, it is hereby
further declared that the special support for these provinces shall be in terms of
financial assistance for developmental projects to be implemented by the local
governments of the provinces concerned.

SECTION 2. Objective - The special support to the Virginia tobacco-producing

provinces shall be utilized to advance the self-reliance of the tobacco farmers
through:

a. Cooperative projects that will enhance better quality

of products, increase productivity, guarantee the
market and as a whole increase farmer's income;

b. Livelihood projects particularly the development of

alternative farming systems to enhance farmers
income;

c. Agro-industrial projects that will enable tobacco

farmers in the Virginia tobacco producing provinces
to be involved in the management and subsequent
ownership of these projects such as post-harvest and
secondary processing like cigarette manufacturing
and by-product utilization; and

d. Infrastructure projects such as farm-to-market

roads.(emphasis added)

The Excise Tax collections from the manufacture of Virginia tobacco earmarked for
these programs were then validly placed in an account separate from the collections
for other national tax items. The balance shall not be transferrable to the general
funds of the government, from where the shares of the LGUs are sourced, unless the
purposes for which the special fund was created have been fulfilled or abandoned.
Absent any showing that said special purpose no longer exists, respondents
committed no error in excluding 15% of Excise Tax collections on Virginia tobacco
products from the distribution of national wealth to the LGUs.

To be sure, RA 1035136 introduced an amendment to Section 288 of the NIRC on

the allocation of excise taxes from tobacco products, to wit:
(C) Incremental Revenues from the Excise Tax on Alcohol and Tobacco Products.
–

After deducting the allocations under Republic Act Nos. 7171 and 8240, eighty
percent (80%) of the remaining balance of the incremental revenue derived from this
Act shall be allocated for the universal health care under the National Health
Insurance Program, the attainment of the millennium development goals and health
awareness programs; and twenty percent (20%) shall be allocated nationwide,
based on political and district subdivisions, for medical assistance and health
enhancement facilities program, the annual requirements of which shall be
determined by the Department of Health (DOH).

Thus, only 20% of the balance, after deducting the 15% of incremental excise tax
allocation to the Virginia tobacco growers, shall form part of the base amount for
determining the LGUs' share under Section 284 of the LGC, the 80% having been
specially allocated for a special purpose.

7. Section 8 of RA 8240,37 as now provided in Section 288 of the NIRC;

Section 288 of the NIRC, on the allocation of the incremental revenue from excise
tax collections on tobacco products, deserves the same treatment as the earlier-
discussed Excise Tax collections from the manufacture of Virginia tobacco. The
pertinent provision reads:

Section 288. Disposition of Incremental Revenues. -

xxxx

(B) Incremental Revenues from Republic Act No. 8240. - Fifteen percent (15%) of
the incremental revenue collected from the excise tax on tobacco products under RA.
No. 8240 shall be allocated and divided among the provinces producing burley and
native tobacco in accordance with the volume of tobacco leaf production. The fund
shall be exclusively utilizedfor programs in pursuit of the following objectives:

(1) Cooperative projects that will enhance better quality of agricultural

products and increase income and productivity of farmers;

(2) Livelihood projects, particularly the development of alternative farming

system to enhance farmer's income; and
(3) Agro-industrial projects that will enable tobacco farmers to be involved in
the management and subsequent ownership of projects, such as post-harvest
and secondary processing like cigarette manufacturing and by-product
utilization.

The directive that the funds be exclusively utilized for the enumerated programs
places the provision on par with Section 289 of the NIRC, in relation to RA 7171,
as discussed in the preceding section. Both partake of special purpose funds that
cannot be disbursed for any obligation other than those for which they are intended.
Respondents then likewise correctly excluded from the computation base this 15%
incremental excise tax collections for a special purpose account. But just like the
case of the Excise Taxes on Virginia tobacco products, 80% of the remainder will
accrue to a special purpose fund, leaving only 20% of the remainder for distribution
to the LGUs. This is in view of the amendment introduced by RA 10351.

8. The share of the Commission on Audit (COA) on the NIRT as provided

for in Section 24(3) of Presidential Decree No. 1445 in relation to
Section 284 of the NIRC;

Section 284 of the NIRC reads:

Section 284. Allotment for the Commission on Audit. - One-half of one percent (1/2
of 1%) of the collections from the national internal revenue taxes not otherwise
accruing to special accounts in the general fund of the national government shall
accrue to the Commission on Audit as a fee for auditing services rendered to
local government units, excluding maintenance, equipment, and other operating
expenses as provided for in Section 21 of Presidential Decree No. 898. (emphasis
added)

Evidently, the provision does not diminish the base amount of national taxes that
LGUs are to share from. It merely apportions half of 1% of national tax collections
to the COA as compensation for its auditing services. This is not an illegal exclusion,
but a recognition of the COA's right to fiscal autonomy under Article IX-A, Section
5 of the Constitution.38Thus, there is no clash nor conflict between the 40%
allocation to LGUs under RA 7160 and the ½ of 1% allocation to COA under Section
285.

In sum, only (a) 50% of the VAT collections from the ARMM, (b) 30% of all other
national tax collections from the ARMM, (c) 60% of the national tax collections
from the exploitation and development of national wealth, (d) 5% of the 25%
franchise taxes from the 8.5% and 8.25% of the total wager funds of the Manila
Jockey Club and Philippine Racing Club, Inc., and (e) 20% of the 85% of the
incremental revenue from excise taxes on Virginia, burley and native tobacco
products shall be included in the computation of the base amount of the 40%
allotment. The remainders are allocated to beneficiary LGUs determined by law as
part of their just share in the national taxes. Other special purpose funds shall
likewise be excluded.

Further, incremental taxes shall be disposed of in consonance with Section 282 of

the NIRC, as amended. The sales proceeds from the disposition of former military
bases pursuant to RA 7227, on the other hand, are excluded since these are non-tax
items to which LGUs are not constitutionally entitled to a share. There is also no
impropriety in allocating ½ of 1% of tax collections to the COA as compensation for
auditing fees.

The 40% share of the LGUs in the national taxes must be

released upon proper appropriation; the allocation
cannot be reduced without first amending Section 284 of
the LGC

Pursuant to Article VI, Section 29 of the Constitution, "No money shall be paid out
of the Treasury except in pursuance of an appropriation made by law." This
highlights the requirement of an appropriation law, the annual General
Appropriations Act (GAA), despite the "automatic release" clause under Article X,
Section 6, and places LGUs on par with Constitutional Commissions and agencies
that are granted fiscal autonomy.

Guilty of reiteration, Article X, Section 6 of the Constitution declared that the LGUs
are entitled to their just share in the national taxes, without distinction as to the type
of national tax being collected. Thus, while Congress has the exclusive power of the
purse, it cannot validly exclude from its appropriation to the LGUs the national tax
collections of the BOC that are remitted to the national coffers. Otherwise stated, the
base for national tax allotments is not limited to national internal revenue taxes under
Section 21 of the NIRC, as amended, collected by the BIR, but also includes the
Tariff and Customs Duties collected by the BOC, including the VAT, Excise Taxes
and DST collected thereon.

The national government could have misconstrued the application of Section 6,

Article X of the Constitution in not giving to the LGUs what is due the latter. True,
Congress may enact statutes to set what constitutes the just share of the LGUs, so
long as the LGUs remain to share in all national taxes. But lest it be forgotten, the
percentage allocation to the LGUs need not be uniform across all forms of national
taxes. Thus, while Section 284 of RA 7160 establishes a 40% share of the LGUs in
the national taxes, this is only the general rule that is subject to exceptions, as
explicated in the preceding discussion.

Absent any law amending Section 284 of the LGC, the 40% general allotment to the
LGUs can only be reduced under the following circumstance:

x x x That in the event that the national government incurs an unmanageable public
sector deficit, the President of the Philippines is hereby authorized, upon the
recommendation of Secretary of Finance, Secretary of Interior and Local
Government and Secretary of Budget and Management, and subject to consultation
with the presiding officers of both Houses of Congress and the presidents of the
"liga", to make the necessary adjustments in the internal revenue allotment of local
government units but in no case shall the allotment be less than thirty percent (30%)
xxx

The yearly enactment of a general appropriations law cannot be deemed as the

amendatory statutes that would permit Congress to lower, disregard, and circumvent
the 40% threshold. For though an appropriation act is a piece of legislature, it cannot
modify Section 284 of the LGC, which is a substantive law, by simply appropriating
to the LGUs an amount lower than 40%. The appropriation of a lower amount should
not be understood as the creation of an exception to Section 284 of the LGC, but
should be considered as an inappropriate provision.

Article VI, Section 25(2) of the Constitution39 deems a provision inappropriate if it

does not relate specifically to some particular item of appropriation. The concept,
however, was expanded in PHILCONSA v. Enriquez,40 wherein the Court taught that
"included in the category of 'inappropriate provisions' are unconstitutional
provisions and provisions which are intended to amend other laws, because clearly
these kind of laws have no place in an appropriations bill. " Thus Congress cannot
introduce arbitrary figures as the budgetary allocation to the LGUs in the guise of
amending the 40% threshold in Section 284 of the LGC.

To hold otherwise would bestow Congress unbridled license to enact in the GAA
any manner of allocation to the LGUs that it wants, rendering illusory the 40%
statutory percentage under Section 284. It would allow for no fixed expectation on
the part of the LGUs as to the share they will receive, for it could range from .01-
100%, depending on either the whim or wisdom of Congress. Under this setup,
Congress might dangle the modification of the percentage share as a stick or carrot
before the LGUs for the latter to toe the line. In turn, this would provide basis to fear
that LGUs would be beholden to Congress by increasing or decreasing allocations
as a form of discipline.

This would run contrary to the constitutional provision on local autonomy, and the
spirit of the LGC. Perhaps the reason there is clamor for federalism is precisely
because the allocations to LGUs had not been sufficient to finance basic services to
local communities, which predicament might be addressed by broadening the
allocation base up to what the Constitution provides. Therefore, the Court should
uphold the lofty idea behind the LGC—that of empowering the LGUs and making
them self-reliant by ensuring that they receive what is due them, amounting to 40%
of national tax collections.

The computation of the 40% allocation base shall be based on the collections from
the third fiscal year preceding the current fiscal year, as certified by the BIR and the
BOC to the DBM as remittances to the National Treasury. The DBM shall then use
said amount certified by the BIR and the BOC in determining the base amount which
shall be incorporated in the budget proposal for submission to Congress. Upon
enactment of the appropriations act, the national tax allotment the LGUs are entitled
to shall be automatically released to them by the DBM within 5 days after the end
of each quarter, in accordance with Section 286 of RA 7160.41

The Operative Fact Doctrine prevents the LGUs from

collecting the arrears sought after; the Court's ruling
herein can only be prospectively applied

Notwithstanding the postulation that the phrase ''internal revenue" in Section 284 of
the LGC and, consequently, its embodiment in the appropriation laws are
unconstitutional, it is respectfully submitted that the prayer for the award of arrears
should nevertheless be denied.

Article 7 of the Civil Code states that "When the courts declared a law to be
inconsistent with the Constitution, the former shall be void and the latter shall
govern. " The provision sets the general rule that an unconstitutional law is void and
therefore produces no rights, imposes no duties and affords no protection.42

However, the doctrine of operative fact is a recognized exception. Under the

doctrine, the law is declared as unconstitutional but the effects of the
unconstitutional law, prior to its declaration of nullity, may be left undisturbed as a
matter of equity and fair play.43 The Court acknowledges that an unconstitutional
law may have consequences which cannot always be ignored and that the past cannot
always be erased by a new judicial declaration.44 The doctrine is applicable when a
declaration of unconstitutionality will impose an undue burden on those who have
relied on the invalid law.45

In this case, the proposed nullification of the phrase "internal revenue" in Section
284 of RA 7160 would have served as the basis for the recovery of the LGUs' just
share in the tariff and customs duties collected by the BOC that were illegally
withheld from 1991-2012. However, this entitlement to a share in the tariff
collections would have been further compounded by the LGU's alleged P500-billion
share, more or less, in the VAT, Excise Tax, and DST collections of the BOC. These
arrears would be too cumbersome for the government to shoulder, which only had a
budget of P1.8 Trillion in 2012.46 Thus, while petitioners request that the LGU's can
still recover the arrears of the national, it is submitted that this is no longer feasible.
This would prove too much for the government's strained budget to meet, unless paid
out on installment or in a staggered basis.

The operative fact doctrine allows for the prospective application of the outcome of
this case and justifies the denial of petitioners' claim for arrears. As held
in Commissioner of Internal Revenue v. San Roque Power Corporation47 that:

x x x for the operative fact doctrine to apply, there must be a "legislative or executive
measure," meaning a law or executive issuance, that is invalidated by the court. From
the passage of such law or promulgation of such executive issuance until its
invalidation by the court, the effects of the law or executive issuance, when relied
upon by the public in good faith, may have to be recognized as valid. (emphasis
added)

This was echoed in Araullo v. Aquino (Araullo)48 wherein the Court held that the
operative fact doctrine can be applied to government programs, activities, and
projects that can no longer be undone, and whose beneficiaries relied in good faith
on the validity of the disbursement acceleration program (DAP). In that case, the
Court also agreed to extend to the proponents and implementors of the DAP the
benefit of the doctrine of operative fact because they had nothing to do at all with
the adoption of the invalid acts and practices. To quote:

As a general rule, the nullification of an unconstitutional law or act carries with it

the illegality of its effects. However, in cases where nullification of the effects will
result in inequity and injustice, the operative fact doctrine may apply. In so ruling,
the Court has essentially recognized the impact on the beneficiaries and the country
as a whole if its ruling would pave the way for the nullification of the P144.378
Billions worth of infrastructure projects, social and economic services funded
through the DAP. Bearing in mind the disastrous impact of nullifying these projects
by virtue alone of the invalidation of certain acts and practices under the DAP, the
Court has upheld the efficacy of such DAP-funded projects by applying the operative
fact doctrine. For this reason, we cannot sustain the Motion for Partial
Reconsideration of the petitioners in G.R. No. 209442.

Taking our cue from Araullo, it is then beyond quibbling that no amount of bad faith
can be attributed to the respondents herein. They merely followed established
practice in government, which in turn was based on the plain reading of how Section
284 of the LGC. As couched, the provision seemingly allowed limiting the share of
the LGUs to the national internal revenue taxes under Section 21 of the NIRC.

Moreover, it is imprecise to state that respondents illegally withheld monies from

the LGUs. For the monies that should have been shared with the LGUs were
nevertheless disbursed via the pertinent appropriation laws. Applying the
presumption of regularity accorded to government officials, it may be presumed that
the amount of P498,854,388,154.93 being claimed was utilized to finance
government projects just the same, and ended up redounding not to the benefit of a
particular LGU, but to the public-at-large. No badge of bad faith therefore obtained
in the actuations of respondents. Consequently, the operative fact doctrine can
properly be applied.

Increased national tax allotments may cure economic

imbalance

As a final word, it cannot be gainsaid that this ruling of the Court granting a bigger
piece of the national taxes to the LGUs will undoubtedly be an effective strategy and
positive approach in addressing the sad plight of poor or underdeveloped LGUs that
yearn to loosen the ostensible grip of imperial Manila over its supposed co-
equals, imperium in imperio.

This ruling is timely since we are now in the midst of amending or revising the 1987
Constitution, with the avowed goal to "address the economic imbalance" through
"transfer or sharing of the powers and resources of the government."49 Encapsulated
in the proposed Constitution is the "bayanihan federalism" anchored on the
principles of "working together" and "cooperative competition or
coopetition."50 Our own brand of federalism may just work given its presidential-
federal form of government that is "uniquely Filipino" that is tailor-fit to the Filipino
nation. The well-crafted proposal will undergo exhaustive scrutiny and intense
debate both in and out of the halls of Congress. Whatever may be the outcome of the
debates and the decision of Congress and the Filipino people will hopefully be for
the betterment of the country.

In the meantime, we must continue to explore readily available means to address the
imbalance suffered by the LGUs. Indeed, there is sufficient room in our Constitution
to expand the authority of the LGUs, there being no constitutional proscription
against further devolving powers and decentralizing governance in their favor. On
the contrary, this is what our laws prescribe. Article X, Section 3 of the Constitution
state:

Section 3. The Congress shall enact a local government code which shall provide
for a more responsive and accountable local government structure instituted through
a system of decentralization with effective mechanisms of recall, initiative, and
referendum, allocate among the different local government units
their powers, responsibilities, and resources, and provide for the qualifications,
election, appointment and removal, term, salaries, powers and functions and duties
of local officials, and all other matters relating to the organization and
operation of the local units.

By constitutional fiat, Congress has within its arsenal ample mandate to enact laws
to grant and allocate among the different LGUs more powers, responsibilities and
resources through the amendment of RA 7160 or the Local Government Code of
1991. And increasing the wealth and resources of the component LGUs is but one
of the veritable measures to concretize the concept of local autonomy under Article
X of the 1987 Constitution possibly without resorting to radical changes in our
political frameworks.

If it is the sincere goal of the national government to provide ample financial

resources to the LGUs, then it can consider amending Section 284 of RA 7160 and
even increase the national tax allotment (formerly IRA) to more than 40% of national
taxes. Scrutiny should be made, however, of the percentage by which the national
tax allotment is being distributed to among the different LGUs. For instance,
Congress may consider balancing Section 285 of RA 7160 by adjusting the 23%
share of the 145 cities vis-a-vis the percentage allocation of 1,478 municipalities
now pegged at 34%. There are currently too few cities taking up too much share.
This notwithstanding that cities, unlike many of the underperforming municipalities,
are more progressive and financially viable because of the higher taxes they collect
from people and business activities in their respective territories.

Congress may also decentralize and devolve more powers and duties to the LGUs or
deregulate some activities or processes to entitle said LGUs more elbow room to
successfully attain their programs and projects in harmony with national
development programs. It has the supremacy in the enactment of laws that will
define any aspect of organization and operation of the LGUs to make it more
efficient and financially stable with special focus on the amplification of the taxing
powers of said government units. Ergo, if Congress is so minded to reinforce the
powers of the LGUs, it can, within the confines of the present Constitution, transfer
or share any power of the national government to said local governments.

Moreover, Article VII, Section 17 of the Constitution makes the President the Chief
of the Executive branch of Government, thus:

Section 17. The President shall have control of all the executive departments,
bureaus and offices. He shall ensure that laws be faithfully executed.

In the same token, Section 1, Chapter III of the Administrative Code of 1987
provides that the executive power shall be vested in the President of the Philippines.
The President is the head of the executive branch of government having full control
of all executive departments, bureaus and offices.51 Part and parcel of the President's
ordinance power is the issuance of executive or administrative that tend to
decentralize or devolve certain powers and functions belonging to the executive
departments, bureaus, and offices to the LGUs, unless otherwise provided by law.

The President may also order the DBM to review and evaluate the current formula
for computation of the national tax allotment. At present, DBM relies mainly on two
(2) factors in determining the allotments of provinces, municipalities and cities—
50% percent based on population, 25% for land area and 25o/o for equal sharing.
For barangays, it is 60% based on population and 40% for equal sharing. A view has
been advanced that the shares of a province, city or municipality should be based on
the classification of LGUs under Executive Order No. 249 dated July 25, 1987
determined from the average annual income of the LGU and not mainly on
population and land area which are not accurate factors. It was put forward that the
shares of LGUs in the NTA shall be in inverse proportion to their classification. A
bigger share shall be granted to the 6th class municipality and a lower share to a 1st
class municipality. At present, Senate Bill No. 2664 is pending which intends to
rationalize the income classification of LGUs. We leave it to Congress or the
President to resolve this issue, hopefully for a fairer sharing scheme that fully benefit
the poor and disadvantaged provinces and municipalities.

Lastly, the President has the power of general supervision over local governments
under Article X, Section 4 of the Constitution, viz:

Section 4. The President of the Philippines shall exercise general supervision

over local governments. Provinces with respect to component cities and
municipalities, and cities and municipalities with respect to component barangays,
shall ensure that the acts of their component units are within the scope of their
prescribed powers and functions. (emphasis added)

He can, therefore, support, guide, or even hand-hold the LGUs that are financially
distressed or politically ineffective via the regional and provincial officials of the
executive departments or bureaus. In short, the President can transfer or share
executive powers through decentralization or devolution without need of a fresh
mandate under a new constitution.

From the foregoing, the perceived ills brought about by a unitary system of
government may after all be readily remediable through congressional and executive
interventions through the concepts of decentralization and devolution of powers to
the LGUs. In the meantime that the leaders of the public and private sectors are busy
dissecting and analyzing the proposed Bayanihan Federalism or, more importantly,
resolving the issue of whether a charter amendment is indeed necessary, it may be
prudent to consider whether the government can make do of its present powers and
mandate to attain the goal of bringing progress to our poor and depressed local
government units. After all, the present constitution may be ample enough to
straighten out the "economic imbalance" and does not require fixing.

I, therefore, vote to PARTIALLY GRANT the instant petitions. In particular, I

concur with the following dispositions:

1. The phrase "internal revenue" appearing in Section 284 of RA 7160 is

declared UNCONSTITUTIONAL and is hereby DELETED.

a. The Section 284, as modified, shall read as follows:

 Section 284. Allotment of Internal Revenue Taxes. - Local
government units shall have a share in the national internal
revenue taxes based on the collection of the third fiscal year
preceding the current fiscal year as follows:

(a) On the first year of the effectivity of this Code, thirty

percent (30%);

(b) On the second year, thirty-five percent (35%); and

(c) On the third year and thereafter, forty percent (40%).

Provided, That in the event that the national government

incurs an unmanageable public sector deficit, the President
of the Philippines is hereby authorized, upon the
recommendation of Secretary of Finance, Secretary of
Interior and Local Government and Secretary of Budget and
Management, and subject to consultation with the presiding
officers of both Houses of Congress and the presidents of
the "liga", to make the necessary adjustments in
the internal revenue allotment of local government units
but in no case shall the allotment be less than thirty percent
(30%) of the collection of national internal revenue taxes of
the third fiscal year preceding the current fiscal year:
Provided, further, That in the first year of the effectivity of
this Code, the local government units shall, in addition to
the thirty percent (30%) internal revenue allotment which
shall include the cost of devolved functions for essential
public services, be entitled to receive the amount equivalent
to the cost of devolved personal services.

b. The phrase "internal revenue" shall likewise

be DELETED from the related sections of RA 7160,
particularly Sections 285, 287, and 290, which shall now
read:

Section 285. Allocation to Local Government Units. - The

share of local government units in the internal
revenue allotment shall be collected in the following
manner:

(a) Provinces- Twenty-three percent (23%);

(b) Cities- Twenty-three percent (23%);
(c) Municipalities- Thirty-four percent (34%); and
(d) Barangays- Twenty percent (20%)

Provided, however, That the share of each province, city,

and municipality shall be determined on the basis of the
following formula:

(a) Population- Fifty percent (50%);

(b) Land Area- Twenty-five percent (25%); and
(c) Equal sharing- Twenty-five percent (25%)

Provided, further, That the share of each barangay with a

population of not less than one hundred (100) inhabitants
shall not be less than Eighty thousand (P80,000.00) per
annum chargeable against the twenty percent (20%) share
of the barangay from the internal revenue allotment, and
the balance to be allocated on the basis of the following
formula:

(a) On the first year of the effectivity of this Code:

(1) Population- Forty percent (40%); and

(2) Equal sharing- Sixty percent (60%)

(b) On the second year:

(1) Population- Fifty percent (50%); and

(2) Equal sharing- Fifty percent (50%)

(c) On the third year and thereafter:

(1) Population- Sixty percent (60%); and

(2) Equal sharing- Forty percent (40%).
 Provided, finally, That the financial requirements of
barangays created by local government units after the
effectivity of this Code shall be the responsibility of the local
government unit concerned.

xxxx

Section 287. Local Development Projects. - Each local

government unit shall appropriate in its annual budget no
less than twenty percent (20%) of its annual internal
revenue allotment for development projects. Copies of the
development plans of local government units shall be
furnished the Department of Interior and Local Government.

xxxx

Section 290. Amount of Share of Local Government Units.

- Local government units shall, in addition to the internal
revenue allotment, have a share of forty percent (40%) of
the gross collection derived by the national government
from the preceding fiscal year from mining taxes, royalties,
forestry and fishery charges, and such other taxes, fees, or
charges, including related surcharges, interests, or fines,
and from its share in any co-production, joint venture or
production sharing agreement in the utilization and
development of the national wealth within their territorial
jurisdiction.

c. Articles 378, 379, 380, 382, 409, 461, and other related
provisions in the Implementing Rules and Regulations of RA
7160 are hereby likewise MODIFIED to reflect deletion of
the phrase "internal revenue."
d. Henceforth, any mention of "IRA" in RA 7160 and its
Implementing Rules and Regulations shall hereinafter be
understood as pertaining to the national tax allotment of a
local government unit;

2. Respondents are hereby DIRECTED to include all forms of national

tax collections, other than those accruing to special purpose funds and
special allotments for the utilization and development of national
wealth, in the subsequent computations for the base amount of just
share the Local Government Units are entitled to. The base for national
tax allotments shall include, but shall not be limited to:

a. National Internal Revenue Taxes under Section 21 of the

National Internal Revenue Code, as amended, collected by
the Bureau of Internal Revenue and its deputized agents,
including Value-Added Taxes, Excise Taxes, and
Documentary Stamp Taxes collected by the Bureau of
Customs;

b. Tariff and Customs Duties collected by the Bureau of

Customs;

c. Fifty percent (50%) of the Value-Added Tax collections from

the Autonomous Region in Muslim Mindanao (ARMM), and
thirty percent (30%) of all other national tax collections
from the ARMM.

The remaining fifty percent (50%) of the Value-Added Taxes

and seventy (70%) of the other national taxes collected in
the ARMM shall be the exclusive share of the region
pursuant to Sections 9 and 15 of RA 9054;
d. Sixty percent (60%) of the national tax collections from the
exploitation and development of national wealth.

The remaining forty (40%) will validly exclusively accrue to

the host Local Government Unit pursuant to Section 290 of
RA 7160;

e. Five percent (5%) of the twenty-five percent (25%)

franchise taxes collected from eight and a half percent
(8.5%) and eight and one fourth percent (8.25%) of the
total wager funds of the Manila Jockey Club and Philippine
Racing Club, Inc. pursuant to Sections 6 and 8 of RA 6631
and 6632, respectively.

The remaining twenty percent (20%) shall be divided as

follows (5%) to the host municipality, seven percent (7%)
to the Philippine Charity Sweepstakes Office, six percent
(6%) to the Anti-Tuberculosis Society, and two percent
(2%) to the White Cross;

f. Twenty percent (20%) of the eighty-five (85%) of the

Excise Tax collections from Virginia, burley, and native
tobacco products.

The fist fifteen percent (15%) shall accrue to the tobacco

producing units pursuant to RA No. 7171 and 8240. Eighty
 percent (80%) of the remainder shall be segregated as
special purpose funds under RA 10351;

3. In addition, the Court further DECLARES that:

a. The apportionment of incremental taxes - twenty percent

(20%) to the city or municipality where the tax is collected
and eighty percent (80%) to the national government of
fifty percent (50%) of incremental tax collections - under
Section 282 of the National Internal Revenue Code, as
amended by Republic Act No. 7643, is VALID and shall be
observed;

b. Sections 8 and 12 of RA 7227 are hereby declared VALID.

The proceeds from the sale of military bases converted to
alienable lands thereunder are EXCLUDED from the
computation of the national tax allocations of the Local
Government Units since these are sales proceeds, not tax
collections;

c. The one-half of one percent (1/2%) of national tax

collections as the auditing fee of the Commission on Audit
under Section 24(3) of Presidential Decree No. 1445 shall
not be deducted prior to the computation of the forty
percent (40%) share of the Local Government Units in the
national taxes; and

d. Other special purpose funds are likewise EXCLUDED from

the computation of the national tax allotment base.
 4. The Bureau of Internal Revenue and Bureau of Customs are
hereby ORDERED to certify to the Department of Budget and
Management all their collections and remittances of National Taxes;

5. The Court's formula in this case for determining the base amount for
computing the share of the Local Government Units shall
have PROSPECTIVE APPLICATIONfrom finality of this decision
in view of the operative fact doctrine. Thus, petitioners' claims of
arrears from the national government for the unlawful exclusions from
the base amount are hereby DENIED.

6. Finally, once the General Appropriations Act for the succeeding year is
enacted, the national tax allotments of the Local Government Units
shall AUTOMATICALLY and DIRECTLY be released, without
need of any further action, to the provincial, city, municipal,
or barangay treasurer, as the case may be, on a quarterly basis but not
beyond five (5) days after the end of each quarter. The Department of
Budget and Management is hereby ORDERED to strictly comply with
Article X, Section 6 of the Constitution and Section 286 of the Local
Government Code, operationalized by Article 383 of the Implementing
Rules and Regulations of RA 7160.

Endnotes:

1
Rollo, p. 46.
2
Id. at 48.
3
Now amended by Republic Act No. 10963 or the Tax Reform for Acceleration and
Inclusion Law.
4
Section 290. Amount of Share of Local Government Units. - Local government
units shall, in addition to the internal revenue allotment, have a share of forty percent
(40%) of the gross collection derived by the national government from the preceding
fiscal year from mining taxes, royalties, forestry and fishery charges, and such other
taxes, fees, or charges, including related surcharges, interests, or fines, and from its
share in any co-production, joint venture or production sharing agreement in the
utilization and development of the national wealth within their territorial
jurisdiction.
5
Article 378. Allotment of Internal Revenue Taxes. The total annual internal
revenue allotments (IRAs) due the LGUs shall be determined on the basis of
collections from national internal revenue taxes actually realized as certified by the
BIR during the third fiscal year preceding the current fiscal year:x x x
6
Section 107. Value-Added Tax on Importation of Goods. -

(A) In General. - There shall be levied, assessed and collected on every importation
of goods a value-added tax equivalent to ten percent (10%) based on the total value
used by the Bureau of Customs in determining tariff and customs duties plus customs
duties, excise taxes, if any, and other charges, such tax to be paid by the importer
prior to the release of such goods from customs custody: Provided, That where the
customs duties are determined on the basis of the quantity or volume of the goods,
the value-added tax shall be based on the landed cost plus excise taxes, if any.

xxxx
7
Section 129. Goods subject to Excise Taxes. - Excise taxes apply to goods
manufactured or produced in the Philippines for domestic sales or consumption or
for any other disposition and to things imported. The excise tax imposed herein shall
be in addition to the value-added tax imposed under Title IV.

xxxx
8
Bolos v. Bolos, G.R. No. 186400, October 20, 2010.
9
Id.
10
See also RA 8752 or the Anti-Dumping Act of 1999, which provides the rules for
"AntiDumping Duties"; RA 8800, or the "Safeguard Measures Act," which provides
the rules on Safeguard Duties; RA 8751 on Countervailing Duty.
11
G.R. No. 101273 July 3, 1992.
12
< https://thelawdictionary.org/tariff/ > last accessed May 16, 2018.
13
Sec. 18. Power to Generate and Apply Resources. Local government units shall
have the power and authority to establish an organization that shall be responsible
for the efficient and effective implementation of their development plans, program
objectives and priorities; to create their own sources of revenue and to levy taxes,
fees, and charges which shall accrue exclusively for their use and disposition and
which shall be retained by them; to have a just share in national taxes which shall be
automatically and directly released to them without need of further action;
14
574 Phil. 620, 639 (2008); See also Palma Development Corp. v. Municipality of
Malangas, 459 Phil. 1042 (2003); Batangas City v. Pilipinas Shell Petroleum Corp.,
G.R No. 187631, July 8, 2015; First Philippine Industrial Corp. v. Court of Appeals,
360 Phil. 852 (1998); City of Davao v. Regional Trial Court, 504 Phil. 543
(2005); Manila International Airport Authority v. Court of Appeals, 528 Phil. 181
(2006); Philippine Fisheries Development Authority v. Central Board of Assessment
Appeals, 653 Phil. 328 (2010).
15
459 Phil. 1042 (2003).
16
Amores v. HRET, G.R. No. 189600, June 29, 2010.
17
Record of the Constitutional Commission, Vol. III, pp. 478-479.
18
G.R. No. 144256, June 8, 2005.
19
Id.
20
Section 9. Sharing of Internal Revenue, Natural Resources Taxes, Fees and
Charges. - The collections of a province or city from national internal revenue taxes,
fees and charges, and taxes imposed on natural resources, shall be distributed as
follows:

(a)Thirty-five percent (35%) to the province or city;

(b)Thirty-five percent (35%) to the regional government; and
(c)Thirty percent (30%) to the central government or national government.
xxxx

SECTION 15. Collection and Sharing of Internal Revenue Taxes.

xxxx

Fifty percent (50%) of the share of the central government or national government
of the yearly incremental revenue from tax collections under sections 106 (value-
added tax on sales of goods or properties), 108 (value-added tax on sale of services
and use or lease of properties) and 116 (tax on persons exempt from value-added
tax) of the National Internal Revenue Code (NIRC) shall be shared by the Regional
Government and the local government units within the area of autonomy as follows:

xxxx
21
Section 18. The Congress shall enact an organic act for each autonomous region
with the assistance and participation of the regional consultative commission
composed of representatives appointed by the President from a list of nominees from
multisectoral bodies. The organic act shall define the basic structure of government
for the region consisting of the executive department and legislative assembly, both
of which shall be elective and representative of the constituent political units. The
organic acts shall likewise provide for special courts with personal, family, and
property law jurisdiction consistent with the provisions of this Constitution and
national laws.

The creation of the autonomous region shall be effective when approved by majority
of the votes cast by the constituent units in a plebiscite called for the purpose,
provided that only provinces, cities, and geographic areas voting favorably in such
plebiscite shall be included in the autonomous region.

Section 19. The first Congress elected under this Constitution shall, within eighteen
months from the time of organization of both Houses, pass the organic acts for the
autonomous regions in Muslim Mindanao and the Cordilleras.
22
SEC. 287. Shares of Local Government Units in the Proceeds from the
Development and Utilization of the National Wealth. - Local Government units
shall have an equitable share in the proceeds derived from the utilization and
development of the national wealth, within their respective areas, including sharing
the same with the inhabitants by way of direct benefits.

(A) Amount of Share of Local Government Units. - Local government units shall,
in addition to the internal revenue allotment, have a share of forty percent (40%) of
the gross collection derived by the national government from the preceding fiscal
year from excise taxes on mineral products, royalties, and such other taxes, fees or
charges, including related surcharges, interests or fines, and from its share in any co-
production, joint venture or production sharing agreement in the utilization and
development of the national wealth within their territorial jurisdiction.

(B) Share of the Local Governments from Any Government Agency or Government-
owned or - Controlled Corporation.- Local Government Units shall have a share,
based on the preceding fiscal year, from the proceeds derived by any government
agency or government-owned or controlled corporation engaged in the utilization
and development of the national wealth based on the following formula, whichever
will produce a higher share for the local government unit:

(1) One percent (1%) of the gross sales or receipts of the preceding calendar year, or
(2) Forty percent (40%) of the excise taxes on mineral products, royalties, and such
other taxes, fees or charges, including related surcharges, interests or fines the
government agency or government owned or -controlled corporations would have
paid if it were not otherwise exempt.
23
Section 290. Amount of Share qf Local Government Units. - Local government
units shall, in addition to the internal revenue allotment, have a share of forty percent
(40%) of the gross collection derived by the national government from the preceding
fiscal year from mining taxes, royalties, forestry and fishery charges, and such other
taxes, fees, or charges, including related surcharges, interests, or fines, and from its
share in any co-production, joint venture or production sharing agreement in the
utilization and development of the national wealth within their territorial
jurisdiction.
24
Record of the Constitutional Committee, Vol. 3, p. 178.
25
SECTION 6. In consideration of the franchise and rights herein granted to the
Manila Jockey Club, Inc., the grantee shall pay into the national Treasury a franchise
tax equal to twenty-five per centum (25%) of its gross earnings from the horse races
authorized to be held under this franchise which is equivalent to the eight and one-
half per centum (8 ½%) of the total wager funds or gross receipts on the sale of
betting tickets during the racing day as mentioned in Section four hereof, allotted as
follows: a) National Government, five per centum (5%); b) the city or municipality
where the race track is located, five per centum (5%); c) Philippine Charity
Sweepstakes Office, seven per centum (7%); d) Philippine AntiTuberculosis
Society, six per centum (6%); and e) White Cross, two per centum (2%). The said
tax shall be paid monthly and shall be in lieu of any and all taxes, except the income
tax of any kind, nature and description levied, established or collected by any
authority whether barrio, municipality, city, provincial or national, now or in the
future, on its properties, whether real or personal, and profits, from which taxes the
grantee is hereby expressly excepted.
26
SECTION 8. In consideration of the franchise and rights herein granted to the
Philippine Racing Club, Inc., the grantee shall pay into the National Treasury a
franchise tax equal to twenty-five per centum (25%) of its gross earnings from the
horse races authorized to be held under this franchise which is equivalent to the eight
and one fourth per centum (8 ¼%) of the total wager funds or gross receipts on the
sale of betting tickets during the racing day as mentioned in Section six hereof,
allotted as follows: a) National Government, five per centum (5%); the Municipality
of Makati, five per centum (5%); b) Philippine Charity Sweepstakes Office, seven
per centum (7%); c) Philippine Anti-Tuberculosis Society, six per centum (6%); and
d) White Cross, two per centum (2%). The said tax shall be paid monthly and shall
be in lieu of any and all taxes, except the income tax, of any kind, nature and
description levied, established or collected by any authority whether barrio,
municipality, city, provincial or national, on its properties, whether real or personal,
from which taxes the grantee is hereby expressly exempted.
27
AN ACT AMENDING REPUBLIC ACT NUMBERED SIXTY-SIX HUNDRED
THIRTYONE ENTITLED "AN ACT GRANTING MANILA JOCKEY CLUB,
INC., A FRANCHISE TO CONSTRUCT, OPERATE AND MAINTAIN A
RACETRACK FOR HORSE RACING IN THE CITY OF MANILA OR ANY
PLACE WITIDN THE PROVINCES OF BULACAN, CAVITE OR RIZAL" AND
EXTENDING THE SAID FRANCHISE BY TWENTY-FIVE YEARS (25) FROM
THE EXPIRATION OF THE TERM THEREOF.
28
AN ACT AMENDING REPUBLIC ACT NUMBERED SIXTY-SIX HUNDRED
THIRTYTWO ENTITLED 'AN ACT GRANTING THE PHILIPPINE RACING
CLUB, INC., A FRANCHISE TO OPERATE AND MAINTAIN A RACE TRACK
FOR HORSE RACING IN THE PROVINCE OF RIZAL', AND EXTENDING
THE SAID FRANCHISE BY TWENTY-FIVE YEARS FROM THE
EXPIRATION OF THE TERM THEREOF.
29
Section 8 of RA 7953, and Section 11 of RA 8407.
30
Section 10 of RA 7953, and Section 13 of RA 8407.
31
Section 8. Funding Scheme:

The President is hereby authorized to sell the above lands, in whole or in part, which
are hereby declared alienable and disposable pursuant to the provisions of existing
laws and regulations governing sales of government properties x x x The proceeds
from any sale, after deducting all expenses related to the sale, of portions of Metro
Manila military camps as authorized under this Act, shall be used for the following
purposes with their corresponding percent shares of proceeds:
(1) Thirty-two and five-tenths percent (32.5%) To finance the transfer of the AFP
military camps and the construction of new camps, the self-reliance and
modernization program of the AFP, the concessional and long-term housing loan
assistance and livelihood assistance to AFP officers and enlisted men and their
families, and the rehabilitation and expansion of the AFP'S medical facilities;
(2) Fifty percent (50%) To finance the conversion and the commercial uses of the
Clark and Subic military reservations and their extensions;
(3) Five Percent (5%) To finance the concessional and long-term housing loan
assistance for the homeless of Metro Manila, Olongapo City, Angeles City and other
affected municipalities contiguous to the base areas as mandated herein; and
(4) The balance shall accrue and be remitted to the National Treasury to be
appropriated thereafter by Congress for the sole purpose of financing programs and
projects vital for the economic upliftment of the Filipino people.

Provided That in the case of Fort Bonifacio, two and five tenths percent (2.5%) of
the proceeds thereof in equal shares shall each go to the Municipalities of Makati,
Taguig, and Pateros: Provided further That in no case shall farmers affected be
denied due compensation.

xxxx
32
Section 12. Subic Special Economic Zone. x x x

xxxx

"(c) The provision of existing laws, rules and regulations to the contrary
notwithstanding, no national and local taxes shall be imposed within the Subic
Special Economic Zone. In lieu of said taxes, a five percent (5%) tax on gross income
earned shall be paid by all business enterprises within the Subic Special Economic
Zone and shall be remitted as follows: three percent (3%) to the National
Government, and two percent (2%) to the Subic Bay Metropolitan Authority
(SBMA) for distribution to the local government units affected by the declaration of
and contiguous to the zone, namely: the City of Olongapo and the municipalities of
Subic, San Antonio, San Marcelino and Castillejos of the Province of Zambales; and
the municipalities of Morong, Hermosa and Dinalupihan of the Province of Bataan,
on the basis of population (50%), land mass (25%), and equal sharing (25%).
33
Section 289. Special Financial Support to Beneficiary Provinces Producing
Virginia Tobacco. The financial support given by the National Government for the
beneficiary provinces shall be constituted and collected from the proceeds of fifteen
percent (15%) of the excise taxes on locally manufactured Virginia-type of
cigarettes.

The funds allotted shall be divided among the beneficiary provinces pro-rata
according to the volume of Virginia tobacco production.

xxxx

The Secretary of Budget and Management is hereby directed to retain annually the
said funds equivalent to fifteen percent (15%) of excise taxes on locally
manufactured Virginia type cigarettes to be remitted to the beneficiary provinces
qualified under R.A. No. 7171.

The provision of existing laws to the contrary notwithstanding, the fifteen percent
(15%) share from government revenues mentioned in R.A. No. 7171 and due to the
Virginia tobacco-producing provinces shall be directly remitted to the provinces
concerned. xxxx
34
G.R. No. 99886, March 31, 1993.
35
G.R. No. L-77194, March 15, 1988.
36
AN ACT RESTRUCTURING THE EXCISE TAX ON ALCOHOL AND
TOBACCO PRODUCTS BY AMENDING SECTIONS 141, 142, 143, 144, 145, 8,
131 AND 288 OF REPUBLIC ACT NO. 8424. OTHERWISE KNOWN AS THE
NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED BY
REPUBLIC ACT NO. 9334, AND FOR OTHER PURPOSES.
37
SEC. 8. Fifteen percent (15%) of the incremental revenue collected from the
excise tax on tobacco products under this Act shall be allocated and divided among
the provinces producing burley and native tobacco in accordance with the volume
of tobacco leaf production. The fund shall be exclusively utilized for programs in
pursuit of the following objectives:

(a) Cooperative projects that will enhance better quality of agricultural products and
increase income and productivity of farmers;
(b) Livelihood projects particularly the development of alternative farming system
to enhance farmer's income;
(c) Agro-industrial projects that will enable tobacco farmers to be involved in the
management and subsequent ownership of projects such as post-harvest and
secondary processing like cigarette manufacturing and by-product utilization.
The Department of Budget and Management in consultation with the Oversight
Committee created hereunder shall issue the corresponding rules and regulations
governing the allocation and disbursement of this fund.
38
SECTION 5. The Commission shall enjoy fiscal autonomy. Their approved
annual appropriations shall be automatically and regularly released.
39
Section 25.

xxxx

(2) No provision or enactment shall be embraced in the general appropriations bill

unless it relates specifically to some particular appropriation therein. Any such
provision or enactment shall be limited in its operation to the appropriation to which
it relates.
40
G.R. No. 113105, August 19, 1994.
41
Section 286. Automatic Release of Shares.-

(a) The share of each local government unit shall be released, without need of any
further action, directly to the provincial, city, municipal or barangay treasurer, as the
case may be, on a quarterly basis within five (5) days after the end of each quarter,
and which shall not be subject to any lien or holdback that may be imposed by the
national government for whatever purpose.
(b) Nothing in this Chapter shall be understood to diminish the share of local
government units under existing laws.
42
G.R. No. 79732, November 8, 1993.
43
League of Cities of the Philippines v. Commission on Elections, G.R. No. 176951,
August 24, 2010.
44
Planters Products, Inc. v. Fertiphil Corporation, G.R. No. 166006, 14 March
2008.
45
League of Cities of the Philippines v. Commission on Elections, G.R. No. 176951,
August 24, 2010.
46
See Republic Act No. 10155.
47
G.R. No. 187485, October 8, 2013.
48
G.R. No. 209287, February 3, 2015.
49
Ding Generoso, April 19, 2018, PTV news – AB.
50
Id.
51
Section 17 of Article VII of the 1987 Constitution and section 1, Chapter 1, Title
1, Book III of the Administrative Code.

DISSENTING OPINION

LEONEN, J.:

I dissent.

The Constitution only requires that the local government units should have a "just
share" in the national taxes. "Just share, as determined by law"1 does not refer only
to a percentage, but likewise a determination by Congress and the President as to
which national taxes, as well as the percentage of such classes of national taxes, will
be shared with local governments. The phrase "national taxes" is broad to give
Congress a lot of leeway in determining what portion or what sources within the
national taxes should be "just share."

We should be aware that Congress consists of both the Senate and the House of
Representatives. The House of Representatives meantime also includes district
representatives. We should assume that in the passage of the Local Government
Code and the General Appropriations Act, both Senate and the House are fully aware
of the needs of the local government units and the limitations of the budget.

On the other hand, the President, who is sensitive to the political needs of local
governments, likewise, would seek the balance between expenditures and revenues.
What petitioners seek is to short-circuit the process. They will to empower us,
unelected magistrates, to substitute our political judgment disguised as a decision of
this Court.

The provisions of the Constitution may be reasonably read to defer to the actions of
the political branches. Their interpretation is neither absurd nor odious.

We should stay our hand.

Mandamus will not lie to achieve the reliefs sought by the parties.

G.R. No. 199802 (Mandanas' Petition) is a petition for certiorari, prohibition, and
mandamus to set aside the allocation or appropriation of some P60,750,000,000.00
under Republic Act No. 10155 or the General Appropriations Act of 2012, which
supposedly should form part of the 40% internal revenue allotment of the local
government units. Petitioners contend that the General Appropriations Act of 2012
is unconstitutional, in so far as it misallocates some P60,750,000,000.00 that
represents a part of the local government units' internal revenue allotment coming
from the national internal revenue taxes specifically the value-added taxes, excise
taxes, and documentary stamp taxes collected by the Bureau of Customs.2

Thus, petitioners seek to enjoin respondents from releasing the P60,750,000,000.00

of the P1,816,000,000,000.00 appropriations provided under the General
Appropriations Act of 2012. They submit that the P60,750,000,000.00 should be
deducted from the capital outlay of each national department or agency to the extent
of their respective pro-rated share.3

Petitioners further seek to compel respondents to cause the automatic release of the
local government units' internal revenue allotments for 2012, including the amount
of P60,750,000,000.00; and to pay the local government units their past unpaid
internal revenue allotments from Bureau of Customs' collections of national internal
revenue taxes from 1989 to 2009.4

On the other hand, G.R. No. 208488 (Garcia's Petition) seeks to declare as
unconstitutional Section 284 of Republic Act No. 7160 or the Local Government
Code of 1991, in limiting the basis for the computation of the local government units'
internal revenue allotment to national internal revenue taxes instead of national
taxes as ordained in the Constitution.5
This Petition also seeks a writ of mandamus to command respondents to fully and
faithfully perform their duties to give the local government units their just share in
the national taxes. Petitioner contends that the exclusion of the following special
taxes and special accounts from the basis of the internal revenue allotment is
unlawful:

a. Autonomous Region of Muslim Mindanao, RA No. 9054;

b. Share of LGUs in mining taxes, RA No. 7160;
c. Share of LGUs in franchise taxes, RA No. 6631, RA No. 6632;
d. VAT of various municipalities, RA No. 7643;
e. ECOZONE, RA No. 7227;
f. Excise tax on Locally Manufactured Virginia Tobacco, RA No.
7171;
g. Incremental Revenue from Burley and Native Tobacco, RA No.
8240;
h. COA share, PD 1445.6

Similar to Mandanas' Petition, Garcia argues that the value-added tax and excise
taxes collected by the Bureau of Customs should be included in the scope of national
internal revenue taxes.

Specifically, petitioner asks that respondents be commanded to:

(a) Compute the internal revenue allotment of the local

government units on the basis of the national tax
collections including tax collections of the Bureau of
Customs, without any deductions;

(b) Submit a detailed computation of the local government

units' internal revenue allotments from 1995 to 2014; and

(c) Distribute the internal revenue allotment shortfall to the

local government units.7
In sum, both Petitions ultimately seek a writ of mandamus from this Court to compel
the Executive Department to disburse amounts, which allegedly were illegally
excluded from the local government units' Internal Revenue Allotments for 2012
and previous years, specifically from 1992 to 2011.

Under Rule 65, Section 3 of the Rules of Civil Procedure, a petition

for mandamus may be filed "[w]hen any tribunal, corporation, board, officer or
person unlawfully neglects the performance of an act which the law specifically
enjoins as a duty resulting from an office, trust, or station." It may also be filed
"[w]hen any tribunal, corporation, board, officer or person . . . unlawfully excludes
another from the use and enjoyment of a right or office to which such other is
entitled."

"Through a writ of mandamus, the courts 'compel the performance of a clear legal
duty or a ministerial duty imposed by law upon the defendant or respondent' by
operation of his or her office, trust, or station."8 It is necessary for petitioner to show
both the legal basis for the duty, and the defendant's or respondent's failure to
perform the duty.9 "It is equally necessary that the respondent have the power to
perform the act concerning which the application for mandamus is made."10

There was no unlawful neglect on the part of public respondents, particularly the
Commissioner of Internal Revenue, in the computation of the internal revenue
allotment. Moreover, the act being requested of them is not their ministerial duty;
hence, mandamus does not lie and the Petitions must be dismissed.

Respondents' computation of the internal revenue allotment was not without legal
justification.

Republic Act No. 7160, Section 284 provides that the local government units shall
have a forty percent (40%) share in the national internal revenue taxes based on the
collections of the third fiscal year preceding the current fiscal year. Article 378 of
Administrative Order No. 270 or the Rules and Regulations Implementing the Local
Government Code of 1991 (Local Government Code Implementing Rules) mandates
that "[t]he total annual internal revenue allotments ... due the [local government
units] shall be determined on the basis of collections from national internal revenue
taxes actually realized as certified by the [Bureau of Internal Revenue]." Consistent
with this Rule, it was reiterated in Development Budget Coordination Committee
Resolution No. 2003-02 dated September 4, 2003 that the national internal revenue
collections as defined in Republic Act No. 7160 shall refer to "cash collections based
on the [Bureau of Internal Revenue] data as reconciled with the [Bureau of
Treasury]."

Pursuant to the foregoing Article 378 of the Local Government Code Implementing
Rules and Development Budget Coordination Committee Resolution, the Bureau of
Internal Revenue computed the internal revenue allotment on the bases of its actual
collections of national internal revenue taxes. The value-added tax, excise taxes, and
a portion of the documentary stamp taxes collected by the Bureau of Customs on
imported goods were not included in the computation because "these collections of
the [Bureau of Customs] are remitted directly to the [Bureau of Treasury]" 11 and, as
explained by then Commissioner Jacinto-Henares, "are recognized by the Bureau of
Treasury as the collection performance of the Bureau of Customs."12

Furthermore, the exclusions of certain special taxes from the revenue base for the
internal revenue allotment were made pursuant to special laws—Presidential Decree
No. 1445 and Republic Act Nos. 6631, 6632, 7160, 7171, 7227, 7643, and 8240—
all of which enjoy the presumption of constitutionality and validity.

It is basic that laws and implementing rules are presumed to be valid unless and until
the courts declare the contrary in clear and unequivocal terms.13Thus, respondents
must be deemed to have conducted themselves in good faith and with regularity
when they acted pursuant to the Local Government Code and its Implementing
Rules, the Development Budget Coordination Committee Resolution, and special
laws.

At any rate, the issue on the alleged "unlawful neglect" of respondents was settled
when Congress adopted and approved their internal revenue allotment computation
in the General Appropriations Act of 2012.

Mandamus will also not lie to enjoin respondents to withhold the

P60,750,000,000.00 appropriations in the General Appropriations Act of 2012 for
capital outlays of national agencies and release the same to the local government
units as internal revenue allotment.

Congress alone, as the "appropriating and funding department of the

Government,"14 can authorize the expenditure of public funds through its power to
appropriate. Article VI, Section 29(1) of the Constitution is clear that the expenditure
of public funds must be pursuant to an appropriation made by law. Inherent in
Congress' power of appropriation is the power to specify not just the amount that
may be spent but also the purpose for which it may be spent.15
While the disbursement of public funds lies within the mandate of the Executive, it
is subject to the limitations on the amount and purpose determined by Congress.
Book VI, Chapter 5, Section 32 of Executive Order No. 292 directs that "[a]ll
moneys appropriated for functions, activities, projects and programs shall be
available solely for the specific purposes for which these are appropriated." It is the
ministerial duty of the Department of Budget and Management to desist from
disbursing public funds without the corresponding appropriation from Congress.
Thus, the Department of Budget and Management has no power to set aside fund for
purposes outside of those mentioned in the appropriations law. The proper remedy
of the petitioners is to apply to Congress for the enactment of a special appropriation
law; but it is still discretionary on the part of Congress to appropriate or not.

Thus, on procedural standpoint alone, the Petitions must be dismissed.

II

On the substantive issue, I hold the view that:

1) Section 28416 of the Local Government Code, limiting the

base for the computation of internal revenue allotment to
national internal revenue taxes is a proper exercise of the
legislative discretion accorded by the Constitution17 to
determine the "just share" of the local government units;

2) The exclusion of certain revenues—value-added tax, excise

tax, and documentary stamp taxes collected by the Bureau
of Customs—from the base for the computation for the
internal revenue allotment, which was approved in the
General Appropriations Act of 2012, is not unconstitutional;
and

3) The deductions to the Bureau of Internal Revenue's

collections made pursuant to special laws were proper.

III
We assess the validity of the internal revenue allotment of the local government units
in light of Article X, Section 6 of the 1987 Constitution, which provides:

Section 6. Local government units shall have a just share, as determined by law, in
the national taxes which shall be automatically released to them.

"Just share" does not refer only to a percentage, but it can also refer to a
determination as to which national taxes, as well as the percentage of such classes
of national taxes, will be shared with local governments. There are no constitutional
restrictions on how the share of the local governments should be determined other
than the requirement that it be "just." The "just share" is to be determined "by law,"
a term which covers both the Constitution and statutes. Thus, the Congress and the
President are expressly authorized to determine the "just share" of the local
government units.

According to the ponencia, mandamus will not lie because "the determination of
what constitutes the just share of the local government units in the national taxes
under the 1987 Constitution is an entirely discretionary power"18 and the discretion
of Congress is not subject to external direction. Yet the disposition on the substantive
issues, in essence, supplants legislative discretion and relegates it to one that is
merely ministerial.

The percentages 30% in the first year, 35% in the second year, and 40% in the third
year, and onwards were fixed in Section 284 of the Local Government Code on the
basis of what Congress determined as the revenue base, i.e., national internal revenue
taxes. Thus, we cannot simply declare the phrase "internal revenue" as
unconstitutional and strike it from Section 284 of the Local Government Code,
because this would effectively change Congress' determination of the just share of
the local government units. By broadening the base for the computation of the 40%
share to national taxes instead of to national internal revenue taxes, we would, in
effect, increase the local government units' share to an amount more than what
Congress has determined and intended.

The limitation provided in Article X, Section 6 of the 1987 Constitution should be

reasonably construed so as not to unduly hamper the full exercise by the Legislative
Department of its powers. Under the Constitution, it is Congress' exclusive power
and duty to authorize the budget for the coming fiscal year. "Implicit in the power to
authorize a budget for government is the necessary function of evaluating the past
year's spending performance as well as the determination of future goals for the
economy."19 For sure, this Court has, in the past, acknowledged the awesome power
of Congress to control appropriations.

In Guingona, Jr. v. Carague,20 petitioners therein urged that Congress could not give
debt service the highest priority in the General Appropriations Act of 1990 because
under Article XIV, Section 5(5) of the Constitution, it should be education that is
entitled to the highest funding. Rejecting therein petitioners' argument, this Court
held:

While it is true that under Section 5(5), Article XIV of the Constitution
Congress is mandated to "assign the highest budgetary priority to
education" in order to "insure that teaching will attract and retain its rightful share
of the best available talents through adequate remuneration and other means of job
satisfaction and fulfillment," it does not thereby follow that the hands of Congress
are so hamstrung as to deprive it the power to respond to the imperatives of the
national interest and for the attainment of other state policies or objectives.

As aptly observed by respondents, since 1985, the budget for education has tripled
to upgrade and improve the facility of the public school system. The compensation
of teachers has been doubled. The amount of P29,740,611,000.00 set aside for the
Department of Education, Culture and Sports under the General Appropriations Act
(R.A. No. 6831), is the highest budgetary allocation among all department budgets.
This is a clear compliance with the aforesaid constitutional mandate according
highest priority to education.

Having faithfully complied therewith, Congress is certainly not without any

power, guided only by its good judgment, to provide an appropriation, that can
reasonably service our enormous debt, the greater portion of which was
inherited from the previous administration. It is not only a matter of honor and
to protect the credit standing of the country. More especially, the very survival of
our economy is at stake. Thus, if in the process Congress appropriated an
amount for debt service bigger than the share allocated to education, the Court
finds and so holds that said appropriation cannot be thereby assailed as
unconstitutional.21(Emphasis supplied)

Appropriation is not a judicial function. We do not have the power of the purse and
rightly so. The power to appropriate public funds for the maintenance of the
government and other public needs distinctively belongs to Congress. Behind the
Constitutional mandate that "[n]o money shall be paid out of the Treasury except in
pursuance of an appropriation made by law"22 lies the principle that the people's
money may be spent only with their consent. That consent is to be expressed either
in the Constitution itself or in valid acts of the legislature as the direct representative
of the people.

Every appropriation is a political act. Allocation of funds for programs, projects, and
activities are very closely related to political decisions. The budget translates the
programs of the government into monetary terms. It is intended as a guide for
Congress to follow not only in fixing the amounts of appropriation but also in
determining the specific governmental activities for which public funds should be
spent.

The Constitution requires that all appropriation bills should originate from the House
of Representatives.23 Since the House of Representatives, through the district
Representatives, is closer to the people and has more interaction with the local
government that is within their districts than the Senate, it is expected to be more
sensitive to and aware of the local needs and problems,24 and thus, have the privilege
of taking the initiative in the disposal of the people's money. The Senate, on the other
hand, may propose amendments to the House bill.25

The appropriation bill passed by Congress is submitted to the President for his or her
approval.26 The Constitution grants the President the power to veto any particular
item or items in the appropriation bill, without affecting the other items to which he
or she does not object.27 This function enables the President to remove any item of
appropriation, which in his or her opinion, is wasteful28 or unnecessary.

Considering the entire process, from budget preparation to legislation, we can

presume that the Executive and Congress have prudently determined the level of
expenditures that would be covered by the anticipated revenues for the government
on the basis of historical performance and projections of economic conditions for
the incoming year. The determination of just share contemplated under Article X,
Section 6 of the 1987 Constitution is part of this process. Their interpretation or
determination is not absurd and well within the text of the Constitution. We should
exercise deference to the interpretation of Congress and of the President of what
constitutes the "just share" of the local government units.

IV

The general appropriations law, like any other law, is a product of deliberations in
the legislative body. Congress' role in the budgetary process29 and the procedure for
the enactment of the appropriations law has been described in detail as follows:
The Budget Legislation Phase covers the period commencing from the time
Congress receives the President's Budget, which is inclusive of the [National
Expenditure Program] and the [Budget of Expenditures and Sources of Financing],
up to the President's approval of the GAA. This phase is also known as the Budget
Authorization Phase, and involves the significant participation of the Legislative
through its deliberations.

Initially, the President's Budget is assigned to the House of Representatives'

Appropriations Committee on First Reading. The Appropriations Committee and its
various Sub-Committees schedule and conduct budget hearings to examine the PAPs
of the departments and agencies. Thereafter, the House of Representatives drafts the
General Appropriations Bill (GAB).

The GAB is sponsored, presented and defended by the House of Representatives'

Appropriations Committee and Sub-Committees in plenary session. As with other
laws, the GAB is approved on Third Reading before the House of Representatives’
version is transmitted to the Senate.

After transmission, the Senate conducts its own committee hearings on the GAB. To
expedite proceedings, the Senate may conduct its committee hearings
simultaneously with the House of Representatives' deliberations. The Senate's
Finance Committee and its Sub-Committees may submit the proposed amendments
to the GAB to the plenary of the Senate only after the House of Representatives has
formally transmitted its version to the Senate. The Senate version of the GAB is
likewise approved on Third Reading.

The House of Representatives and the Senate then constitute a panel each to sit in
the Bicameral Conference Committee for the purpose of discussing and harmonizing
the conflicting provisions of their versions of the GAB. The "harmonized" version
of the GAB is next presented to the President for approval. The President reviews
the GAB, and prepares the Veto Message where budget items are subjected to direct
veto, or are identified for conditional implementation.

If, by the end of any fiscal year, the Congress shall have failed to pass the GAB for
the ensuing fiscal year, the GAA for the preceding fiscal year shall be deemed re-
enacted and shall remain in force and effect until the GAB is passed by the
Congress.30 (Emphasis in the original, citations omitted)

The general appropriations law is a special law pertaining specifically to

appropriations of money from the public treasury. The "just share" of the local
government units is incorporated as the internal revenue allotment in the general
appropriations law. By the very essence of how the general appropriations law is
enacted, particularly for this case the General Appropriations Act of 2012, it can be
presumed that Congress has purposefully, deliberately, and precisely approved the
revenue base, including the exclusions, for the internal revenue allotment.

A basic rule in statutory construction is that as between a specific and general law,
the former must prevail since it reveals the legislative intent more clearly than a
general law does.31 The specific law should be deemed an exception to the general
law.32

The appropriations law is a special law, which specifically outlines the share in the
national fund of all branches of the government, including the local government
units. On the other hand, the National Internal Revenue Code is a general law on
taxation, generally applicable to all persons. Being a specific law on appropriations,
the General Appropriations Act should be considered an exception to the National
Internal Revenue Code definition of national internal revenue taxes insofar as the
internal revenue allotments of the local government units are concerned. The
General Appropriations Act of 2012 is the clear and specific expression of the
legislative will—that the local government units' internal revenue allotment is 40%
of national internal revenue taxes excluding tax collections of the Bureau of
Customs—and must be given effect. That this was the obvious intent can also be
gleaned from Congress' adoption and approval of internal revenue allotments using
the same revenue base in the General Appropriations Act from 1992 to 2011.

The ruling in Province of Batangas v. Romulo33 that a General Appropriations Act

cannot amend substantive law must be read in its context.

In that case, the General Appropriations Acts of 1999, 2000, and 2001 contained
provisos earmarking for each corresponding year the amount of P5,000,000,000.00
of the local government units' internal revenue allotment for the Local Government
Service Equalization Fund and imposing the condition that "such amount shall be
released to the local government units subject to the implementing rules and
regulations, including such mechanisms and guidelines for the equitable allocations
and distribution of said fund among the local government units subject to the
guidelines that may be prescribed by the Oversight Committee on Devolution." This
Court struck down the provisos in the General Appropriations Acts of 1999, 2000,
and 2001 as unconstitutional, and the Oversight Committee on Devolution
resolutions promulgated pursuant to these provisos. This Court held that to subject
the distribution and release of the Local Government Service Equalization Fund, a
portion of the internal revenue allotment, to the rules and guidelines prescribed by
the Oversight Committee on Devolution makes the release not automatic, a flagrant
violation of the constitutional and statutory mandate that the "just share" of the local
government units "shall be automatically released to them."

This Court further found that the allocation of the shares of the different local
government units in the internal revenue allotment as provided in Section 285 34 of
the Local Government Code was not followed, as the resolutions of the Oversight
Committee on Devolution prescribed different sharing schemes of the Local
Government Service Equalization Fund. This Court held that the percentage sharing
of the local government units fixed in the Local Government Code are matters of
substantive law, which could not be modified through appropriations laws or
General Appropriations Acts. This Court explained that Congress cannot include in
a general appropriation bill matters that should be more properly enacted in a
separate legislation.

Province of Batangas cited in turn this Court's ruling in Philippine Constitution

Association (PHILCONSA) v. Enriquez,35 which defined what were considered
inappropriate provisions in appropriation laws:

As the Constitution is explicit that the provision which Congress can include in an
appropriations bill must "relate specifically to some particular appropriation therein"
and "be limited in its operation to the appropriation to which it relates," it follows
that any provision which does not relate to any particular item, or which extends in
its operation beyond an item of appropriation, is considered "an inappropriate
provision" which can be vetoed separately from an item. Also to be included in the
category of "inappropriate provisions" are unconstitutional provisions and
provisions which are intended to amend other laws, because clearly these kind[s] of
laws have no place in an appropriations bill. These are matters of general legislation
more appropriately dealt with in separate enactments.

The doctrine of "inappropriate provision" was well elucidated in Henry v. Edwards,

... , thus:

Just as the President may not use his item-veto to usurp constitutional powers
conferred on the legislature, neither can the legislature deprive the Governor of the
constitutional powers conferred on him as chief executive officer of the state by
including in a general appropriation bill matters more properly enacted in separate
legislation. The Governor's constitutional power to veto bills of general legislation .
. . cannot be abridged by the careful placement of such measures in a general
appropriation bill, thereby forcing the Governor to choose between approving
unacceptable substantive legislation or vetoing 'items' of expenditures essential to
the operation of government. The legislature cannot by location of a bill give it
immunity from executive veto. Nor can it circumvent the Governor's veto power over
substantive legislation by artfully drafting general law measures so that they appear
to be true conditions or limitations on an item of appropriation. ... We are no more
willing to allow the legislature to use its appropriation power to infringe on the
Governor's constitutional right to veto matters of substantive legislation than we are
to allow the Governor to encroach on the constitutional powers of the legislature. In
order to avoid this result, we hold that, when the legislature inserts inappropriate
provisions in a general appropriation bill, such provisions must be treated as 'items'
for purposes of the Governor's item veto power over general appropriation
bills.36 (Emphasis in the original)

In PHILCONSA, this Court upheld the President's veto of the proviso in the Special
Provision of the item on debt service requiring that "any payment in excess of the
amount herein appropriated shall be subject to the approval of the President of the
Philippines with the concurrence of the Congress of the Philippines." 37 This Court
held that the proviso was an inappropriate provision because it referred to funds
other than the P86,323,438,000.00 appropriated for debt service m the General
Appropriations Act of 1991.

Province of Batangas referred to a provision m the General Appropriations Act,

which was clearly shown to contravene the Constitution,
while PHILCONSA referred to an inappropriate provision, i.e., a provision that was
clearly extraneous to any definite item of appropriation in the General
Appropriations Act, which incidentally constituted an implied amendment of
another law.

What is involved here is the internal revenue allotment of the local government units
in the Government Appropriations Act of 2012, the determination of which was,
under the Constitution, left to the sole prerogative of the legislature. Congress has
full discretion to determine the "just share" of the local government units, in which
authority necessarily includes the power to fix the revenue base, or to define what
are included in this base, and the rate for the computation of the internal revenue
allotment. Absent any clear and unequivocal breach of the Constitution, this Court
should proceed with restraint when a legislative act is challenged in deference to a
co-equal branch of the Government.38 "If a particular statute is within the
constitutional powers of the Legislature to enact, it should be sustained whether the
courts agree or not in the wisdom of its enactment."39
V

The ponencia further elaborates "automatic release" in Section 286 of the Local
Government Code as "without need for a yearly appropriation." This is contrary to
the Constitution. A statute cannot amend the Constitutional requirement.

Section 286 of the Local Government Code states:

Section 286. Automatic Release of Shares. — (a) The share of each local government
unit shall be released, without need of any further action, directly to the provincial,
city, municipal or barangay treasurer, as the case may be, on a quarterly basis within
five (5) days after the end of each quarter, and which shall not be subject to any lien
or holdback that may be imposed by the National Government for whatever purpose.

Appropriation and release refer to two (2) different actions. "An appropriation is the
setting apart by law of a certain sum from the public revenue for a specified
purpose."40 It is the Congressional authorization required by the Constitution for
spending.41 Release, on the other hand, has to do with the actual disbursement or
spending of funds. "Appropriations have been considered 'released' if there has
already been an allotment or authorization to incur obligations and disbursement
authority."42 This is a function pertaining to the Executive Department, particularly
the Department of Budget and Management, in the execution phase of the budgetary
process.43

Article VI, Section 29(1) of the Constitution is explicit that:

Section 29. (1) No money shall be paid out of the Treasury except in pursuance of
an appropriation made by law.

In other words, before money can be taken out of the Government Treasury for any
purpose, there must first be an appropriation made by law for that specific purpose.
Neither of the fiscal officers or any other official of the Government is authorized to
order the expenditure of unappropriated funds. Any other course would give to these
officials a dangerous discretion.

This Court has pronounced that to be valid, an appropriation must be specific, both
in amount and purpose.44 In Nazareth v. Villar,45 this Court held that even if there is
a law authorizing the grant of Magna Carta benefits for science and technology
personnel, the funding for these benefits must be "purposefully, deliberately, and
precisely" appropriated for by Congress in a general appropriation law:
Article VI Section 29 (1) of the 1987 Constitution firmly declares that: "No money
shall be paid out of the Treasury except in pursuance of an appropriation made by
law." This constitutional edict requires that the GAA be purposeful, deliberate, and
precise in its provisions and stipulations. As such, the requirement under Section 20
of R.A. No. 8439 that the amounts needed to fund the Magna Carta benefits were to
be appropriated by the GAA only meant that such funding must be purposefully,
deliberately, and precisely included in the GAA. The funding for the Magna
Carta benefits would not materialize as a matter of course simply by fiat of R.A. No.
8439, but must initially be proposed by the officials of the DOST as the concerned
agency for submission to and consideration by Congress. That process is what
complies with the constitutional edict. R.A. No. 8439 alone could not fund the
payment of the benefits because the GAA did not mirror every provision of law that
referred to it as the source of funding. It is worthy to note that the DOST itself
acknowledged the absolute need for the appropriation in the GAA. Otherwise,
Secretary Uriarte, Jr. would not have needed to request the OP for the express
authority to use the savings to pay the Magna Carta benefits.46 (Citation omitted)

All government expenditures must be integrated in the general appropriations law.

This is revealed by a closer look into the entire government budgetary and
appropriation process.

The first phase in the process is the budget preparation. The Executive prepares a
National Budget that is reflective of national objectives, strategies, and plans for the
following fiscal year. Under Executive Order No. 292 of the Administrative Code
of 1987, the national budget is to be "formulated within the context of a regionalized
government structure and of the totality of revenues and other receipts, expenditures
and borrowings of all levels of government and of government-owned or controlled
corporations."47

The budget may include the following:

(1) A budget message setting forth in brief the government's

budgetary thrusts for the budget year, including their
impact on development goals, monetary and fiscal
objectives, and generally on the implications of the
revenue, expenditure and debt proposals; and
(2) Summary financial statements setting forth:

(a) Estimated expenditures and proposed appropriations

necessary for the support of the Government for the
ensuing fiscal year, including those financed from
operating revenues and from domestic and foreign
borrowings;

(b) Estimated receipts during the ensuing fiscal year

under laws existing at the time the budget is
transmitted and under the revenue proposals, if any,
forming part of the year's financing program;

(c) Actual appropriations, expenditures, and receipts

during the last completed fiscal year;

(d) Estimated expenditures and receipts and actual or

proposed appropriations during the fiscal year in
progress;

(e) Statements of the condition of the National Treasury

at the end of the last completed fiscal year, the
estimated condition of the Treasury at the end of the
fiscal year in progress and the estimated condition of
the Treasury at the end of the ensuing fiscal year,
taking into account the adoption of financial proposals
contained in the budget and showing, at the same
 time, the unencumbered and unobligated cash
resources

(f) Essential facts regarding the bonded and other long-

term obligations and indebtedness of the
Government, both domestic and foreign, including
identification of recipients of loan proceeds; and

(g) Such other financial statements and data as are

deemed necessary or desirable in order to make
known in reasonable detail the financial condition of
the government.48

The President, in accordance with Article VII, Section 22 of the Constitution,

submits the budget of expenditures and sources of financing, which is also called the
National Expenditure Plan, to Congress as the basis of the general appropriation
bill,49 which will be discussed, debated on, and voted upon by Congress. Also
included in the budget submission are the proposed expenditure levels of the
Legislative and Judicial Branches, and of Constitutional bodies.50

All appropriation proposals must be included in the budget preparation

process.51 Congress then "deliberates or acts on the budget proposals . . . in the
exercise of its own judgment and wisdom [and] formulates an appropriation
act."52 The Constitution states that "Congress may not increase the appropriations
recommended by the President for the operation of the Government as specified in
the budget."53 Furthermore, "all expenditures for (1) personnel retirement premiums,
government service insurance, and other similar fixed expenditures, (2) principal
and interest on public debt, (3) national government guarantees of obligations which
are drawn upon, are automatically appropriated."54

Parenthetically, the General Appropriations Act of 2012 includes the budgets for
entities enjoying fiscal autonomy,55 and for debt service that is automatically
appropriated, under the following titles:

1. Title XXIX, the Judiciary;

 2. Title XXX, Civil Service Commission;
3. Title XXXI, Commission on Audit;
4. Title XXXII, Commission on Elections;
5. Title XXXIII, Office of the Ombudsman;
6. Annex A, Automatic Appropriations, which include the interest
payments for debt service and the internal revenue allotment of
the local government units; and
7. Annex B, Debt Service — Principal Amortizations.56

"Automatic appropriation" is not the same as "automatic release" of appropriations.

As stated earlier, the power to appropriate belongs to Congress, while the
responsibility of releasing appropriations belongs to the Department of Budget and
Management.57

Items of expenditure that are automatically appropriated, like debt service, are
approved at its annual levels or on a lump sum by Congress upon due deliberations,
without necessarily going into the details for implementation by the
Executive.58 However, just because an expenditure is automatically appropriated
does not mean that it is no longer included in the general appropriations law.

On the other hand, the "automatic release" of approved annual appropriations

requires the full release59 of appropriations without any condition.60 Thus, "no
report, no release" policies cannot be enforced against institutions with fiscal
autonomy. Neither can a "shortfall in revenues" be considered as valid justification
to withhold the release of approved appropriations.61

With regard to the local government units, the automatic release of internal revenue
allotments under Article X, Section 6 of the Constitution binds both the Legislative
and Executive departments.62 In ACORD, Inc. v. Zamora,63the [General
Appropriations Act 2000] of placed P10,000,000,000.00 of the [internal revenue
allotment] under "unprogrammed funds." This Court, citing Province of
Batangas and Pimentel v. Aguirre,64 ruled that such withholding of the internal
revenue allotment contingent upon whether revenue collections could meet the
revenue targets originally submitted by the President contravened the constitutional
mandate on automatic release.

The automatic release of the local government units' shares is a basic feature of local
fiscal autonomy. Nonetheless, as clarified in Pimentel:

Under the Philippine concept of local autonomy, the national government has not
completely relinquished all its powers over local governments, including
autonomous regions. Only administrative powers over local affairs are delegated to
political subdivisions. The purpose of the delegation is to make governance more
directly responsive and effective at the local levels. In turn, economic, political and
social development at the smaller political units are expected to propel social and
economic growth and development. But to enable the country to develop as a whole,
the programs and policies effected locally must be integrated and coordinated
towards a common national goal. Thus, policy-setting for the entire country still lies
in the President and Congress. As we stated in Magtajas v. Pryce Properties Corp.,
Inc., municipal governments are still agents of the national government. 65(Citation
omitted)

The release of the local government units' share without an appropriation, as what
the ponencia proposes, substantially amends the Constitution. It also gives local
governments a level of fiscal autonomy not enjoyed even by constitutional bodies
like the Supreme Court, the Constitutional Commissions, and the Ombudsman. It
bypasses Congress as mandated by the Constitution.

"Without appropriation" also substantially alters the relationship of the President to

local governments, effectively diminishing, if not removing, supervision as
mandated by the Constitution.

ACCORDINGLY, I vote to DISMISS the Petitions.

Endnotes:

1
CONST., art. X, sec. 6
2
Rollo (G.R. No. 199802), pp. 4-5.
3
Id. at 24.
4
Id. at 24-25.
5
Rollo (G.R. No. 208488), p. 15.
6
Id. at 11.
7
Id. at 15-16.
8
Bagumbayan-VNP Movement, Inc. v. Commission on Elections, G.R. No. 222731
(Resolution), March 8, 2016 <
http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2016/march201
6/222731.pdf > 10 [Per J. Leonen, En Banc].
9
Id.
10
Alzate v. Aldana, 118 Phil. 220, 225 (1963) [Per J. Barrera, En Banc].
11
Rollo (G.R. No. 199802), p. 198, Memorandum of Respondents.
12
Id. at 217-218, Memorandum of Petitioner.
13
See Abakada Guro Party List v. Purisima, 584 Phil. 246 (2008) [J. Corona, En
Banc].
14
Dissenting Opinion of J. Padilla in Gonzales v. Macaraig, Jr., 269 Phil. 472, 516
(1990) [Per J. Melencio-Herrera, En Banc].
15
See Verceles, Jr. v. Commission on Audit, G.R. No. 211553, September 13, 2016
<
http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudenee/2016/september
2016/211553.pdf > [Per J. Brion, En Banc]; Atitiw v. Zamora, 508 Phil. 321 (2005)
[Per J. Tinga, En Banc].
16
LOCAL GOVT. CODE, sec. 284 provides:

Section 284. Allotment of Internal Revenue Taxes.- Local government units shall
have a share in the national internal revenue taxes based on the collection of the third
fiscal year preceding the current fiscal year as follows:

(a) on the first year of the effectivity of this Code, thirty percent (30%);
(b) on the second year, thirty-five percent (35%); and
(c) on the third year and thereafter, forty percent (40%).

Provided, That in the event that the national government incurs an unmanageable
public sector deficit, the President of the Philippines is hereby authorized, upon the
recommendation of Secretary of Finance, Secretary of Interior and Local
Government, and Secretary of Budget and Management, and subject to consultation
with the presiding officers of both Houses of Congress and the presidents of the
"liga", to make the necessary adjustments in the internal revenue allotment of local
government units but in no case shall the allotment be less than thirty percent (30%)
of the collection of national internal revenue taxes of the third fiscal year preceding
the current fiscal year: Provided, further, That in the first year of the effectivity of
this Code, the local government units shall, in addition to the thirty percent (30%)
internal revenue allotment which shall include the cost of devolved functions for
essential public services, be entitled to receive the amount equivalent to the cost of
devolved personal services.
17
CONST., art. X, sec. 6 states:

Section 6. Local government units shall have a just share, as determined by law, in
the national taxes which shall be automatically released to them.
18
Ponencia, p. 6.
19
Separate Concurring Opinion of J. Leonen in Belgica v. Ochoa, 721 Phil. 41 6,
686 (2013) [Per J. Perlas-Bernabe, En Banc].
20
273 Phil. 443 (1991) [Per J. Gancayco, En Banc].
21
Id. at 451.
22
CONST., art. VI, sec. 29(1).
23
CONST., art. VI, sec. 24.
24
See Tolentino v. Secretary of Finance, 305 Phil. 686 (1994) [Per J. Mendoza, En
Banc].
25
CONST., art. VI, sec. 24.
26
CONST., art. VI, sec. 27(1).
27
CONST., art. VI, sec. 27(2).
28
Concurring Opinion of J. Carpio, Belgica v. Ochoa, 721 Phi1. 416, 613-654
(2013) [Per J. Perlas Bernabe, En Banc].
29
The budgetary process was described as consisting of four phases: (1) Budget
Preparation; (2) Budget Legislation; (3) Budget Execution; and (4) Acountability.
Congress enters the picture in the second phase.
30
Araullo v. Aquino III, 737 Phil. 457, 547-549 (2014) [Per J. Bersamin, En Banc].
31
See Vinzons-Chato v. Fortune Tobacco Corp., 552 Phil. 101 (2007) [Per J. Ynares
Santiago, Third Division]; De Jesus v. People, 205 Phil. 663 (1983) [Per J. Escolin,
En Banc].
32
See Lopez, Jr. v. Civil Service Commission, 273 Phil. 147 (1991) [Per J. Sarmiento,
En Banc].
33
473 Phil. 806 (2004) [Per J. Callejo, Sr., En Banc].
34
LOCAL GOVT. CODE, sec. 285 states:

Section 285. Allocation to Local Government Units. — The share of local

government units in the internal revenue allotment shall be allocated in the following
manner:
(a) Provinces - Twenty-three percent (23%);
(b) Cities - Twenty-three percent (23%);
(c) Municipalities - Thirty-four percent (34%); and
(d) Barangays - Twenty percent (20%).
35
305 Phil. 546 (1994) [Per J. Quiason, En Banc].
36
Id. at 577-578.
37
Id. at 573.
38
See Lawyers Against Monopoly and Poverty v. Secretary of Budget and
Management, 686 Phil. 357 (2012) [Per J. Mendoza, En Banc]; Estrada v.
Sandiganbayan, 421 Phil. 290 (2001) [Per J. Bellosillo, En Banc].
39
Tajanlañgit, et al. v. Peñaranda, et al., 37 Phil. 155, 160 (1917) (Per J. Johnson,
First Division].
40
Bengzon v. Secretary of Justice, 62 Phil. 912, 916 (1936) [Per J. Malcolm, En
Banc].
41
Araullo v. Aquino III, 737 Phil. 457, 571 (2014) (Per J. Bersamin, En Banc] citing
Gonzales v. Raquiza, 259 Phil. 736 (1989) [Per C.J. Fernan, Third Division].
42
Id.
43
Id.
44
Dela Cruz v. Ochoa, Jr., G.R. No. 219683, January 23, 2018 <
http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2018/january20
18/219683.pdf > [Per J. Bersamin, En Banc] citing Goh v. Bayron, 748 Phil. 282
(2014) [Per J. Carpio, En Banc].
45
702 Phil. 319 (2013) [Per J. Bersamin, En Banc].
46
Id. at 338-339.
47
ADM. CODE, Book VI, chap. 2, sec. 3.
48
ADM. CODE, Book VI, chap. 3, sec. 12.
49
CONST., art. VII, sec. 22.
50
ADM. CODE, Book VI, chap. 3, sec. 12.
51
ADM. CODE, Book VI, chap. 4, sec. 27.
52
Lawyers Against Monopoly and Poverty v. Secretary of Budget and Management,
686 Phil. 357, 375 (2012) [Per J. Mendoza, En Banc].
53
CONST., art. VI, sec. 25(1).
54
ADM. CODE, Book VI, chap. 4, sec. 26.
55
See Commission on Human Rights Employees' Association v. Commission on
Human Rights, 528 Phil. 658, 678 (2006) [Per J. Chico-Nazario, Special Second
Division]. "Fiscal Autonomy shall mean independence or freedom regarding
financial matters from outside control and is characterized by self direction or self
determination.... [it] means more than just the automatic and regular release of
approved appropriation, and also encompasses, among other things: (1) budget
preparation and implementation; (2) flexibility in fund utilization of approved
appropriations; and (3) use of savings and disposition of receipts."
56
For 2012 GAA, please look at SUM2012 (Summary of FY 2012 New
Appropriations) folder. The Annexes to the 2012 New Appropriations consist of (1)
Automatic Appropriations, which included the interest payments for debt service;
and (2) Debt Service Principal Amortization. Please refer to the AA and DSPA
folders for the details of the automatic appropriations and debt service
appropriations, respectively. The yearly GAAs can be accessed from the Department
of Budget and Management website under DBM Publications.
57
See Civil Service Commission v. Department of Budget and Management 517 Phil.
440 (2006) [Per J. Carpio Morales, En Banc].
58
See Guingona, Jr. v. Carague, 273 Phil. 443 (1991) [Per J. Gancayco, En Banc].
59
Civil Service Commission v. Department of Budget and Management, 517 Phil.
440 (2006) [Per J. Carpio Morales, En Banc].
60
Civil Service Commission v. Department of Budget and Management, 502 Phil.
372 (2005) [Per J. Carpio Morales, En Banc].
61
Id.
62
ACORD Inc. v. Zamora, 498 Phil. 615 (2005) [Per J. Carpio Morales, En Banc].
63
498 Phil. 615 (2005) [Per J. Carpio Morales, En Banc].
64
391 Phil. 84 (2000) [Per J. Panganiban, En Banc].
65
Id. at 102.

SEPARATE OPINION

CAGUIOA, J.:

Every statute has in its favor the presumption of constitutionality. This presumption rests on the doctrine
of separation of powers, which enjoins the three branches of government to encroach upon the duties
and powers of another.1 It is based on the respect that the judicial branch accords to the legislature,
which is presumed to have passed every law with careful scrutiny to ensure that it is in accord with the
Constitution.2 Thus, before a law is declared unconstitutional, there must be a clear and unequivocal
showing that what the Constitution prohibits, the statute permits. 3 In other words, laws shall not be
declared invalid unless the conflict with the Constitution is clear beyond reasonable doubt. 4 To doubt is
to sustain the constitutionality of the assailed statute.5
In the present case, doubt exists as to whether Section 284 of the Local Government Code (LGC) directly
contravenes Section 6, Article X of the 1987 Constitution because the latter is susceptible of two
interpretations.

Section 6, Article X of the 1987 Constitution states:

SECTION 6. Local government units shall have a just share, as determined by law, in the national taxes
which shall be automatically released to them.

In Province of Batangas v. Romulo,6 the Court explained that the foregoing provision mandates that (1)
the local government units (LGUs) shall have a "just share" in the national taxes; (2) the "just share"
shall be determined by law; and (3) the "just share" shall be automatically released to the LGUs.

The issue now before this Court is what constitutes a "just share".

The ponencia offers a restrictive interpretation of the term "just share" as referring only to a percentage
or fractional value of the entire pie of national taxes. This necessarily results in finding Section 284 of
the LGC too restrictive as it limits the pie to internal revenue taxes only. Thus, the ponencia finds the
words "internal revenue" in Section 284 of the LGC constitutionally infirm and deems the same as not
written.

Justice Leonen, on the other hand, provides a liberal interpretation. According to him the term "just
share" may refer to the classes of national taxes as well as to the percentages of such classes, since
other than the term "just", no other restrictions on how the share of the LGUs should be determined are
provided by the Constitution. He posits that the Constitution left the sole discretion to Congress in
determining the "just share" of the LGUs, which authority necessarily includes the power to fix the
revenue base (i.e., only a portion of "national taxes") and the rate for the computation of the allotment
to the LGUs.

It is a settled rule in the construction of laws, that "[i]f there is doubt or uncertainty as to the meaning
of the legislature, if the words or provisions of the statute are obscure, or if the enactment is fairly
susceptible of two or more constructions, that interpretation will be adopted which will avoid the effect
of unconstitutionality, even though it may be necessary, for this purpose, to disregard the more usual
or apparent import of the language employed."7

I find the foregoing rule applicable even to the construction of the Constitution. Thus, as between
the ponencia's restrictive approach and Justice Leonen's liberal approach, I submit that the latter should
be upheld. The Court's ruling in Remman Enterprises, Inc. v. Professional Regulatory Board of Real
Estate Service,8 lends credence:

Indeed, "all presumptions are indulged in favor of constitutionality; one who attacks a statute, alleging
unconstitutionality must prove its invalidity beyond a reasonable doubt; that a law may work hardship
does not render it unconstitutional; that if any reasonable basis may be conceived which supports
the statute, it will be upheld, and the challenger must negate all possible bases; that the courts
are not concerned with the wisdom, justice, policy, or expediency of a statute; and that a liberal
interpretation of the constitution in favor of the constitutionality of legislation should be
adopted."9

Moreover, I join the position of Justice Leonen that the Constitution gave Congress the absolute authority
and discretion to determine the LGUs' "just share" — which include both the classes of national taxes
and the percentages thereof. The exercise of this plenary power vested upon Congress, through the
latter's enactment of laws, including the LGC, the National Internal Revenue Code and the general
appropriations act, is beyond the Court's judicial review as this pertains to policy and wisdom of the
legislature.
I echo Justice Leonen's statement that appropriation is not a judicial function. Congress, which holds
the power of the purse, is in the best position to determine the "just share" of the LGUs based on their
needs and circumstances. Courts cannot provide a new formula for the Internal Revenue Allotments
(IRA) or substitute its own determination of what "just share" should be, absent a clear showing that
the assailed act of Congress (i.e., Section 284 of the LGC) is prohibited by the fundamental law. To do
so would be to tread the dangerous grounds of judicial legislation and violate the deeply rooted doctrine
of separation of powers.

Finally, even assuming that Section 284 of the LGC is constitutionally infirm, I agree with
the ponencia's position that the operative fact doctrine should apply to this case. The doctrine nullifies
the effects of an unconstitutional law or an executive act by recognizing that the existence of a statute
prior to a determination of unconstitutionality is an operative fact and may have consequences that
cannot always be ignored. It applies when a declaration of unconstitutionality will impose an undue
burden on those who have relied on the invalid law.10 In Araullo v. Aquino III,11 the doctrine was held
to apply to recognize the positive results of the implementation of the unconstitutional law or executive
issuance to the economic welfare of the country. Not to apply the doctrine of operative fact would result
in most undesirable wastefulness and would be enormously burdensome for the Government. 12

In the same vein, petitioners cannot claim deficiency IRA from previous fiscal years as these funds may
have already been used for government projects, the undoing of which would not only be physically
impossible but also impractical and burdensome for the Government.

Verily, considering that the decisions of this Court can only be applied prospectively, I find the Court's
computation of "just share" of no practical value to petitioners and other LGUs; because while LGUs, in
accordance with the Court's ruling, are now entitled to share directly from national taxes, Congress, as
they may see fit, can simply enact a law lowering the percentage shares of LGUs equivalent to the
amount initially granted to them. In fine, and in all practicality, this case is much ado over nothing.

For the foregoing reasons, I vote to DISMISS the Petitions.

G.R. No. 196681, June 27, 2018

CITY OF MANILA AND OFFICE OF THE CITY TREASURER OF MANILA, Petitioners, v. COSMOS
BOTTLING CORPORATION, Respondent.

DECISION

MARTIRES, J.:

The filing of a motion for reconsideration or new trial to question the decision of a division of the Court
of Tax Appeals (CTA) is mandatory. An appeal brought directly to the CTA En Banc is dismissible for lack
of jurisdiction.

In local taxation, an assessment for deficiency taxes made by the local government unit may be
protested before the local treasurer without necessity of payment under protest. But if payment is made
simultaneous with or following a protest against an assessment, the taxpayer may subsequently
maintain an action in court, whether as an appeal from assessment or a claim for refund, so long as it
is initiated within thirty (30) days from either decision or inaction of the local treasurer on the protest.
THE CASE

This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the 16 February
20111 and 20 April 20112 Resolutions of the CTA En Banc. The 16 February 2011 Resolution dismissed
the petition for review of the petitioners for failure to file a motion for reconsideration or new trial before
the CTA Third Division (CTA Division); while the 20 April 2011 Resolution denied the motion for
reconsideration of the first assailed resolution. The CTA Division's 9 November 2010 Decision 3 ruled in
favor of respondent Cosmos Bottling Corporation (Cosmos) by partially granting its appeal from the
decision of the Regional Trial Court, Branch 49, Manila (RTC), in Civil Case No. 01-116881
entitled Cosmos Bottling Corporation v. City of Manila and Liberty Toledo (City Treasurer of Manila).

THE FACTS

Antecedents

The CTA Division, narrates the antecedents as follows:

For the first quarter of 2007, the City of Manila assessed [Cosmos] local business taxes and regulatory
fees in the total amount of P1,226,781.05, as contained in the Statement of Account dated January 15,
2007. [Cosmos] protested the assessment through a letter dated January 18, 2007, arguing that Tax
Ordinance Nos. 7988 and 8011, amending the Revenue Code of Manila (RCM), have been declared null
and void. [Cosmos] also argued that the collection of local business tax under Section 21 of the RCM in
addition to Section 14 of the same code constitutes double taxation.

[Cosmos] also tendered payment of only P131,994.23 which they posit is the correct computation of
their local business tax for the first quarter of 2007. This payment was refused by the City Treasurer.
[Cosmos] also received a letter from the City Treasurer denying their protest, stating as follows:

In view thereof, this Office, much to our regret, has to deny your protest and that any action taken
thereon will be sub-judice. Rest assured, however, that once we receive a final ruling on the matter, we
will act in accordance therewith. [Cosmos] was thus constrained to pay the assessment of
P1,226,78,1.05 as evidenced by Official Receipt No. BAJ-005340 dated February 13, 2007. On March 1,
2007, [Cosmos] filed a claim for refund of P1,094,786.82 with the Office of the City Treasurer raising
the same grounds as discussed in their protest.

On March 8, 2007, [Cosmos] filed its complaint with the RTC of Manila praying for the refund or issuance
of a tax credit certificate in the amount of P1,094,786.82. The RTC in its decision ruled in favor of
[Cosmos] but denied the claim for refund. The dispositive portion of the assailed Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered enjoining the respondent Treasurer of
the City of Manila to refrain henceforth from imposing tax under Section 21 of the Revenue Code of
Manila if it had already imposed tax on .manufacturers under Section 14 of the same Code. As to the
prayer in the petition for refund, the same is denied.

[Cosmos'] motion for partial reconsideration was also denied, hence, [the] Petition for Review [before
the CTA].4

The petition for review was raffled to the CTA Division and docketed as CTA A.C. No. 60.

The Ruling of the CTA Division

The CTA Division essentially ruled that the collection by the City Treasurer of Manila of local business
tax under both Section 21 and Section 14 of the Revenue Code of Manila constituted double taxation. 5 It
also ruled that the City Treasurer cannot validly assess local business tax based on the increased rates
under Tax Ordinance Nos. 7988 and 8011 after the same have been declared null and void. 6 Finally, the
court held that Cosmos Bottling Corporation's (Cosmos) local business tax liability for the calendar year
2007 shall be computed based on the gross sales or receipts for the year 2006.7

The dispositive portion of the decision of the CTA Division reads:

WHEREFORE, finding merit in the instant Petition for Review, the same is hereby granted. The assailed
Decision dated April 14, 2009 of the Regional Trial Court of Manila, Branch 49 in Civil Case No. 07-
116881 is hereby PARTIALLY REVERSED. Accordingly, respondent is ENJOINED from imposing the
business tax under Section 21 of the Revenue Code of Manila if it had already imposed tax on
manufacturers under Section 14 of the same Code. Respondent, furthermore, is ORDERED to REFUND
or to issue a TAX CREDIT CERTIFICATE to petitioner the amount of P1,094,786.82, representing excess
business taxes collected for the first quarter of year 2007.8

Instead of filing a motion for reconsideration or new trial, the petitioners directly filed with the CTA En
Banc a petition for review9 praying that the decision of the CTA Division be reversed or set aside.

The Ruling of the CTA En Banc

In its Resolution of 16 February 2011, the CTA En Banc ruled that the direct resort to it without a prior
motion for reconsideration or new trial before the CTA Division violated Section 18 of Republic Act (R.A.)
No. 1125,10 as amended by R.A. No. 9282 and R.A. No. 9503, and Section 1, Rule 8 of the Revised Rules
of the CTA (CTA Rules).11

The petitioners sought reconsideration, but their motion was denied by the CTA En Banc. Hence, the
appeal before this Court.

The Present Petition for Review

The petitioners assigned the following errors allegedly committed by the CTA En Banc:

1. The Honorable CTA En Banc erred in not reconsidering its Order dismissing the case on
procedural grounds.

2. The 3rd Division of the CTA committed reversible error when it ruled in favor of respondent
Cosmos despite its failure to appeal the assessment within 30 days from receipt of the denial
by the City Treasurer.

3. The 3rd Division of the CTA committed grave error when it failed to consider that the assessment
subject of this case has already become final and executory and no longer appealable.

4. The 3rd Division of the CTA gravely erred in granting Cosmos' claim despite erroneously filing
the instant case under the provision of Section 196 of the LGC.12

On the first ground, the petitioners essentially invoke excusable mistake on the part of their handling
lawyer in asking the Court to resolve the case on the merits. They argue that the Court had on many
occasions set aside the rules of procedure in order to afford substantial justice.

On the second, third, and fourth grounds, the petitioners claim that Cosmos' remedy was one of protest
against assessment as demonstrated by its letter dated 18 January 2007. Being so, Cosmos' adopted
remedy should be governed by Section 195 of the Local Government Code (LGC). Pursuant to such
provision, Cosmos had only thirty (30) days from receipt of denial of the protest within which to file an
appeal before a court of competent jurisdiction. However, Cosmos failed to comply with the period of
appeal, conveniently shifting its theory from tax protest to tax refund under Section 196 of the LGC
when it later on filed a "claim for refund/tax credit of illegally/erroneously paid taxes" on 1 March 2007.
The petitioners, thus, argue that Cosmos had already lost its right to appeal and is already precluded
from questioning the denial of its protest.

In its comment,13 Cosmos counters that the rules should not be lightly disregarded by harping on
substantial justice and the policy of liberal construction. It also insists that it is not Section 195 of the
LGC that is applicable to it but Section 196 of the same code.

ISSUES

Whether the CTA En Banc correctly dismissed the petition for review before it for failure of the petitioners
to file a motion for reconsideration or new trial with the CTA Division.

Whether a taxpayer who had initially protested and paid the assessment may shift its remedy to one of
refund.

OUR RULING

We rule for Cosmos.

I.

The filing of a motion for reconsideration or new trial

before the CTA Division is an indispensable requirement
for filing an appeal before the CTA En Banc.

The CTA En Banc was correct in interpreting Section 18 of R.A. No. 1125, as amended by R.A. 9282 and
R.A. No. 9503, which states –

Section 18. Appeal to the Court of Tax Appeals En Banc. – No civil proceeding involving matter arising
under the National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code
shall be maintained, except as herein provided, until and unless an appeal has been previously filed with
the CTA and disposed of this Act.

A party adversely affected by a resolution of a Division of the CTA on motion for reconsideration or new
trial, may file a petition for review with the CTA en banc. (underlining supplied)

as requiring a prior motion for reconsideration or new trial before the same division of the CTA that
rendered the assailed decision before filing a petition for review with the CTA En Banc. Failure to file
such motion for reconsideration or new trial is cause for dismissal of the appeal before the CTA En Banc.

Corollarily, Section 1, Rule 8 of the CTA Rules provides:

Section 1. Review of cases in the Court en banc. — In cases falling under the exclusive appellate
jurisdiction of the Court en banc, the petition for review of a decision or resolution of the Court in
Division must be preceded by the filing of a timely motion for reconsideration or new trial with the
Division. (emphasis supplied)
Clear it is from the cited rule that the filing of a motion for reconsideration or new trial is mandatory –
not merely directory – as indicated by the word "must."

Thus, in Asiatrust Development Bank, Inc. v. Commissioner of Internal Revenue (Asiatrust),14 we

declared that a timely motion for reconsideration or new trial must first be filed with the CTA Division
that issued the assailed decision or resolution in order for the CTA En Banc to take cognizance of an
appeal via a petition for review. Failure to do so is a ground for the dismissal of the appeal as the word
"must" indicates that the filing of a prior motion is mandatory, and not merely
directory.15 In Commissioner of Customs v. Marina Sales, Inc. (Marina Sales),16 which was cited in
Asiatrust, we held:

The rules are clear. Before the CTA En Banc could take cognizance of the petition for review concerning
a case falling under its exclusive appellate jurisdiction, the litigant must sufficiently show that it sought
prior reconsideration or moved for a new trial with the concerned CTA division. Procedural rules are not
to be trifled with or be excused simply because their noncompliance may have resulted in prejudicing a
party's substantive rights. Rules are meant to be followed. They may be relaxed only for very exigent
and persuasive reasons to relieve a litigant of an injustice not commensurate to his careless non-
observance of the prescribed rules.17 (citations omitted)

The rules are to be relaxed only in the interest of justice

and to benefit the deserving.18

We cannot lend to the petitioners the benefit of liberal application of the rules.. As in Marina Sales, the
rules may be relaxed when to do so would afford a litigant substantial justice. After a cursory
examination of the records of the case, we find that the petitioners, as determined by the CTA Division,
erroneously assessed and collected from Cosmos local business taxes for the first quarter of 2007; thus,
a refund is warranted.

The ruling of the CTA Division is anchored on the following findings:

(1) the assessment against Cosmos was based on Ordinance

Nos. 7988 and 8011 (Revenue Code of Manila);

(2) the assessment against Cosmos included taxes imposed

under Section 21, in addition to Section 14, of the Revenue
Code of Manila; and

(3) the local taxes collected from Cosmos for the first quarter
of 2007 was based on its gross receipts in 2005.

We cannot help but sustain the ruling of the CTA Division that the City of Manila cannot validly assess
local business taxes under Ordinance Nos. 7988 and 8011 because they are void and of no legal effect;
the collection of local business taxes under Section 21 in addition to Section 14 of the Revenue Code of
Manila constitutes double taxation; and the 2007 local business tax assessed against Cosmos should be
computed based on the latter's gross receipts in 2006.

1. Ordinance Nos. 7988 and 8011 have been declared null

and void, hence, invalid bases for the imposition of
business taxes.

At .the time the CTA Division rendered the assailed decision, the cases of Coca-Cola Bottlers Philippines,
Inc. v. City of Manila (2006),19 The City of Manila v. Coca-Cola Bottlers, Inc. (2009)20 and City of Manila
v. Coca-Cola Bottlers, Inc. (2010)21 had already settled the matter concerning the validity of Ordinance
Nos. 7988 and 8011. The said cases clarified that Ordinance Nos. 7988 and 8011, which amended
Ordinance No. 7794, were null and void for failure to comply with the required publication for three (3)
consecutive days and thus cannot be the basis for the collection of business taxes.

It is not disputed that Cosmos was assessed with the tax on manufacturers under Section 14 and the
tax on other businesses under Section 21 of Ordinance No. 7988, as amended by Ordinance No. 8011.
Consistent with the settled jurisprudence above, the taxes assessed in this case, insofar as they are
based on such void ordinances, must perforce be nullified. Thus, what remains enforceable is the old
Ordinance No. 7794. Accordingly, the business tax assessable against Cosmos should be based on the
rates provided by this Ordinance.

2. The collection of taxes under both Sections 14 and 21

of the Revenue Code of Manila constitutes double
taxation.

While the City of Manila could impose against Cosmos a manufacturer's tax under Section 14 of
Ordinance No. 7794, or the Revenue Code of Manila, it cannot at the same time impose the tax under
Section 21 of the same code; otherwise, an obnoxious double taxation would set in. The petitioners
erroneously argue that double taxation is wanting for the reason that the tax imposed under Section 21
is imposed on a different object and of a different nature as that in Section 14. The argument is not
novel. In The City of Manila v. Coca-Cola Bottlers, Inc. (2009),22 the Court explained –

[T]here is indeed double taxation if respondent is subjected to the taxes under both Sections 14 and 21
of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter — the
privilege of doing business in the City of Manila; (2) for the same purpose — to make persons conducting
business within the City of Manila contribute to city revenues; '(3) by the same taxing authority —
petitioner City of Manila; (4) within the same taxing jurisdiction — within the territorial jurisdiction of
the City of Manila; (5) for the same taxing periods per calendar year; and (6) of the same kind or
character — a local business tax imposed on gross sales or receipts of the business.

The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax
Ordinance No. 7794 is specious. The Court revisits Section 143 of the LGC, the very source of the power
of municipalities and cities to impose a local business tax, and to which any local business tax imposed
by petitioner City of Manila must conform. It is apparent from a perusal thereof that when a
municipality or city has already imposed a business tax on manufacturers, etc. of liquors,
distilled spirits, wines, and any other article of commerce, pursuant to Section 143(a) of the LGC,
said municipality or city may no longer subject the same manufacturers, etc. to a business
tax under Section 143(h) of the same Code. Section 143(h) may be imposed only on businesses
that are subject to excise tax, VAT, or percentage tax under the NIRC, and that are "not otherwise
specified in preceding paragraphs." In the same way, businesses such as respondent's, already
subject to a local business tax under Section 14 of Tax Ordinance No. 7794 [which is based on
Section 143(a) of the LGC], can no longer be made liable for local business tax under Section
21 of the same Tax Ordinance [which is based on Section 143(h) of the LGC].23 (emphases supplied)

In reality, Cosmos, being a manufacturer of beverages,24 is similarly situated with Coca-Cola Bottlers,
Inc. in the cited cases, with the difference only in the taxable periods of assessment. Thus, given that
Cosmos is already paying taxes under Section 14 (just like Coca-Cola), it is not totally misplaced to
consider the additional imposition of a tax under Section 21 as constituting double taxation, therefore
excessive, warranting its refund to Cosmos as the CTA Division has correctly ordered.

Computation of Business Tax Under Section 14

We consider next the proper basis for the computation of the business tax under Section 14 that is
imposable against Cosmos.

3. The computation of local business tax is based on gross

sales or receipts of the preceding calendar year.

It is undisputed that Section 14 of the Revenue Code of Manila is derived from Section 143(a) of the
LGC which provides:

Section 143. Tax on Business. – The municipality may impose taxes on the following businesses:

(a) On manufacturers, assemblers, repackers, processors,

brewers, distillers, rectifiers, and compounders x x x in
accordance with the following schedule: With gross sales
or receipts for the preceding calendar year in the
amount of:

x x x x (emphasis supplied)

Consistent with the above provision, an assessment for business tax under Section 14 of Ordinance No.
7794 for the taxable year 2007 should be computed based on the taxpayer's gross sales or receipts of
the preceding calendar year 2006. In this case, however, the petitioners based the computation of
manufacturer's tax on Cosmos' gross sales for the calendar year 2005. The CTA Division was therefore
correct in adjusting the computation of the business tax on the basis of Cosmos' gross sales in 2006
which amount, incidentally, was lower than Cosmos' gross sales in 2005. The business tax paid
corresponding to the difference is consequently refundable to Cosmos.

II.

A taxpayer who had protested and paid an assessment

may later on institute an action for refund.
The petitioners submit that the assessment against Cosmos became final and executory when the latter
effectively abandoned its protest and instead sued in court for the refund of the assessed taxes and
charges.

We cannot agree mainly for two reasons.

First, even a cursory glance at the complaint filed by Cosmos would readily reveal that the action is not
just for the refund of its paid taxes but also one assailing the assessment in question. Cosmos captioned
its petition before the RTC as "For: The Revision of Statement of Account (Preliminary Assessment)
and For Refund or Credit of Local Business Tax Erroneously/Illegally Collected."25 The allegations in said
complaint26 likewise confirm that Cosmos did not agree with the assessment prepared by Liberty M.
Toledo (Toledo) who was the City Treasurer of the City of Manila at the time. In asking the court to
refund the assessed taxes it had paid, Cosmos essentially alleged that the basis of the payment, which
is the assessment issued by Toledo, is erroneous or illegal.

It is, thus, totally misplaced to consider Cosmos as having abandoned its protest against the
assessment. By seasonably instituting the petition before the RTC, the assessment had not attained
finality.

Second, a taxpayer who had protested and paid an assessment is not precluded from later on instituting
an action for refund or credit.

The taxpayers' remedies of protesting an assessment and refund of taxes are stated in Sections 195
and 196 of the LGC, to wit:

Section 195. Protest of Assessment. – When the local treasurer or his duly authorized representative
finds that correct taxes, fees, or charges have not been paid, he shall issue a notice of assessment
stating the nature of the tax, fee, or charge, the amount of deficiency, the surcharges, interests and
penalties. Within sixty (60) days from the receipt of the notice of assessment, the taxpayer may file a
written protest with the local treasurer contesting the assessment; otherwise, the assessment shall
become final and executory. The local treasurer shall decide the protest within sixty (60) days from the
time of its filing. If the local treasurer finds the protest to be wholly or partly meritorious, he shall issue
a notice cancelling wholly or partially the assessment. However, if the local treasurer finds the
assessment to be wholly or partly correct, he shall deny the protest wholly or partly with notice to the
taxpayer. The taxpayer shall have thirty (30) days from the receipt of the denial of the protest or from
the lapse of the sixty (60)-day period prescribed herein within which to appeal with the court of
competent jurisdiction otherwise the assessment becomes conclusive and unappealable.

Section 196. Claim for Refund of Tax Credit. – No case or proceeding shall be maintained in any court
for the recovery of any tax, fee, or charge erroneously or illegally collected until a written claim for
refund or credit has been filed with the local treasurer. No case or proceeding shall be entertained in
any court after the expiration of two (2) years from the date of the payment of such tax, fee, or charge,
or from the date the taxpayer is entitled to a refund or credit.

The first provides the procedure for contesting an assessment issued by the local treasurer; whereas,
the second provides the procedure for the recovery of an erroneously paid or illegally collected tax, fee
or charge. Both Sections 195 and 196 mention an administrative remedy that the taxpayer should first
exhaust before bringing the appropriate action in court. In Section 195, it is the written protest with the
local treasurer that constitutes the administrative remedy; while in Section 196, it is the written claim
for refund or credit with the same office. As to form, the law does not particularly provide any for a
protest or refund claim to be considered valid. It suffices that the written protest or refund is addressed
to the local treasurer expressing in substance its desired relief. The title or denomination used in
describing the letter would not ordinarily put control over the content of the letter.

Obviously, the application of Section 195 is triggered by an assessment made by the local treasurer or
his duly authorized representative for nonpayment of the correct taxes, fees or charges. Should the
taxpayer find the assessment to be erroneous or excessive, he may contest it by filing a written protest
before the local treasurer within the reglementary period of sixty (60) days from receipt of the notice;
otherwise, the assessment shall become conclusive. The local treasurer has sixty (60) days to decide
said protest. In case of denial of the protest or inaction by the local treasurer, the taxpayer
may appeal27 with the court of competent jurisdiction; otherwise, the assessment becomes conclusive
and unappealable.

On the other hand, Section 196 may be invoked by a taxpayer who claims to have erroneously paid a
tax, fee or charge, or that such tax, fee or charge had been illegally collected from him. The provision
requires the taxpayer to first file a written claim for refund before bringing a suit in court which must
be initiated within two years from the date of payment. By necessary implication, the administrative
remedy of claim for refund with the local treasurer must be initiated also within such two-year
prescriptive period but before the judicial action.

Unlike Section 195, however, Section 196 does not expressly provide a specific period within which the
local treasurer must decide the written claim for refund or credit. It is, therefore, possible for a taxpayer
to submit an administrative claim for refund very early in the two-year period and initiate the judicial
claim already near the end of such two-year period due to an extended inaction by the local treasurer.
In this instance, the taxpayer cannot be required to await the decision of the local treasurer any longer,
otherwise, his judicial action shall be barred by prescription.

Additionally, Section 196 does not expressly mention an assessment made by the local treasurer. This
simply means that its applicability does not depend upon the existence of an assessment notice. By
consequence, a taxpayer may proceed to the remedy of refund of taxes even without a prior protest
against an assessment that was not issued in the first place. This is not to say that an application for
refund can never be precipitated by a previously issued assessment, for it is entirely possible that the
taxpayer, who had received a notice of assessment, paid the assessed tax, fee or charge believing it to
be erroneous or illegal. Thus, under such circumstance, the taxpayer may subsequently direct
his claim pursuant to Section 196 of the LGC.

Clearly, when a taxpayer is assessed a deficiency local tax, fee or charge, he may protest it under
Section 195 even without making payment of such assessed tax, fee or charge. This is because the law
on local government taxation, save in the case of real property tax, 28 does not expressly require
"payment under protest" as a procedure prior to instituting the appropriate proceeding in court. This
implies that the success of a judicial action questioning the validity or correctness of the assessment is
not necessarily hinged on the previous payment of the tax under protest.

Needless to say, there is nothing to prevent the taxpayer from paying the tax under protest or
simultaneous to a protest. There are compelling reasons why a taxpayer would prefer to pay while
maintaining a protest against the assessment For instance, a taxpayer who is engaged in business would
be hard-pressed to secure a business permit unless he pays an assessment for business tax and/or
regulatory fees. Also, a taxpayer may pay the assessment in order to avoid further penalties, or save
his properties from levy and distraint proceedings.

The foregoing clearly shows that a taxpayer facing an assessment may protest it and alternatively: (1)
appeal the assessment in court, or (2) pay the tax and thereafter seek a refund.29 Such procedure may
find jurisprudential mooring in San Juan v. Castro30 wherein the Court described for the first and only
time the alternative remedies for a taxpayer protesting an assessment – either appeal the assessment
before the court of competent jurisdiction, or pay the tax and then seek a refund.31 The Court, however,
did not elucidate on the relation of the second mentioned alternative option, i.e., pay the tax and then
seek a refund, to the remedy stated in Section 196.

As this has a direct bearing on the arguments raised in the petition, we thus clarify.

Where an assessment is to be protested or disputed, the taxpayer may proceed (a) without payment,
or (b) with payment32 of the assessed tax, fee or charge. Whether there is payment of the assessed tax
or not, it is clear that the protest in writing must be made within sixty (60) days from receipt of the
notice of assessment; otherwise, the assessment shall become final and conclusive. Additionally, the
subsequent court action must be initiated within thirty (30) days from denial or inaction by the local
treasurer; otherwise, the assessment becomes conclusive and unappealable.

(a) Where no payment is made, the taxpayer's procedural remedy is governed strictly by Section 195.
That is, in case of whole or partial denial of the protest, or inaction by the local treasurer, the taxpayer's
only recourse is to appeal the assessment with the court of competent jurisdiction. The appeal before
the court does not seek a refund but only questions the validity or correctness of the assessment.

(b) Where payment was made, the taxpayer may thereafter maintain an action in court questioning the
validity and correctness of the assessment (Section 195, LGC) and at the same time seeking a refund
of the taxes. In truth, it would be illogical for the taxpayer to only seek a reversal of the assessment
without praying for the refund of taxes. Once the assessment is set aside by the court, it follows as a
matter of course that all taxes paid under the erroneous or invalid assessment are refunded to the
taxpayer.

The same implication should ensue even if the taxpayer were to style his suit in court as an action for
refund or recovery of erroneously paid or illegally collected tax as pursued under Section 196 of the
LGC. In such a suit for refund, the taxpayer cannot successfully prosecute his theory of erroneous
payment or illegal collection of taxes without necessarily assailing the validity or correctness of the
assessment he had administratively protested.

It must be understood, however, that in such latter case, the suit for refund is conditioned on the prior
filing of a written claim for refund or credit with the local treasurer. In this instance, what may be
considered as the administrative claim for refund is the letter-protest submitted to the treasurer. Where
the taxpayer had paid the assessment, it can be expected that in the same letter-protest, he would also
pray that the taxes paid should be refunded to him.33 As previously mentioned, there is really no
particular form or style necessary for the protest of an assessment or claim of refund of taxes. What is
material is the substance of the letter submitted to the local treasurer.

Equally important is the institution of the judicial action for refund within thirty (30) days from the
denial of or inaction on the letter-protest or claim, not any time later, even if within two (2) years
from the date of payment (as expressly stated in Section 196). Notice that the filing of such judicial
claim for refund after questioning the assessment is within the two-year prescriptive period specified in
Section 196. Note too that the filing date of such judicial action necessarily falls on the beginning portion
of the two-year period from the date of payment. Even though the suit is seemingly grounded on Section
196, the taxpayer could not avail of the full extent of the two-year period within which to
initiate the action in court.

The reason is obvious. This is because an assessment was made, and if not appealed in court within
thirty (30) days from decision or inaction on the protest, it becomes conclusive and unappealable. Even
if the action in court is one of claim for refund, the taxpayer cannot escape assailing the assessment,
invalidity or incorrectness, the very foundation of his theory that the taxes were paid erroneously or
otherwise collected from him illegally. Perforce, the subsequent judicial action, after the local treasurer's
decision or inaction, must be initiated within thirty (30) days later. It cannot be anytime thereafter
because the lapse of 30 days from decision or inaction results in the assessment becoming conclusive
and unappealable. In short, the scenario wherein the administrative claim for refund falls on the early
stage of the two-year period but the judicial claim on the last day or late stage of such two-year period
does not apply in this specific instance where an assessment is issued.

To stress, where an assessment is issued, the taxpayer cannot choose to pay the assessment and
thereafter seek a refund at any time within the full period of two years from the date of payment as
Section 196 may suggest. If refund is pursued, the taxpayer must administratively question the validity
or correctness of the assessment in the 'letter-claim for refund' within 60 days from receipt of the notice
of assessment, and thereafter bring suit in court within 30 days from either decision or inaction by the
local treasurer.
Simply put, there are two conditions that must be satisfied in order to successfully prosecute an action
for refund in case the taxpayer had received an assessment. One, pay the tax and administratively
assail within 60 days the assessment before the local treasurer, whether in a letter-protest or in a claim
for refund. Two, bring an action in court within thirty (30) days from decision or inaction by the local
treasurer, whether such action 1s denominated as an appeal from assessment and/or claim for refund
of erroneously or illegally collected tax.

In this case, after Cosmos received the assessment of Toledo on 15 January 2007, it forthwith protested
such assessment through a letter dated 18 January 2007.34 Constrained to pay the assessed taxes and
charges, Cosmos subsequently wrote the Office of the City Treasurer another letter asking for the refund
and reiterating the grounds raised in the previous submitted protest letter.35 In the meantime, Cosmos
received on 6 February 2007 the letter of Toledo denying its protest.36 Thus, on 8 March 2007, or exactly
thirty (30) days from its receipt of the denial, Cosmos brought the action before the RTC of Manila.

Under the circumstances, it is evident that Cosmos was fully justified in asking for the refund of the
assailed taxes after protesting the same before the local treasurer. Consistent with the discussion in the
premises, Cosmos may resort to, as it actually did, the alternative procedure of seeking a refund after
timely protesting and paying the assessment. Considering that Cosmos initiated the judicial claim for
refund within 30 days from receipt of the denial of its protest, it stands to reason that the assessment
which was validly protested had not yet attained finality.

To reiterate, Cosmos, after it had protested and paid the assessed tax, is permitted by law to seek a
refund having fully satisfied the twin conditions for prosecuting an action for refund before the court.

Consequently, the CTA did not commit a reversible error when it allowed the refund in favor of Cosmos.

WHEREFORE, the petition is DENIED for lack of merit. The 16 February 2011 and 20 April 2011
Resolutions of the Court of Tax Appeals En Banc in C.T.A. E.B. No. 702 are hereby AFFIRMED.

The 9 November 2010 Decision of the Court of Tax Appeals Third Division in C.T.A. AC No. 60 is
likewise AFFIRMED.

SO ORDERED.

Velasco, Jr., (Chairperson), Bersamin, Leonen, and Gesmundo, JJ., concur.

July 19, 2018

NOTICE OF JUDGMENT

Sirs/Mesdames:

Please take notice that on June 27, 2018 a Decision, copy attached hereto, was rendered by the
Supreme Court in the above-entitled case, the original of which was received by this Office on July 19,
2018 at 11:15 a.m.
 Very truly yours,

(SGD.) WILFREDO V. LAPITAN

Division Clerk of Court

Endnotes:

1Rollo,pp. 29-36; penned by Associate Justice Erlinda P. Uy and concurred in by Presiding Justice
Ernesto D. Acosta and Associate Justices Juanito C. Castañeda, Jr., Lovell R. Bautista, Caesar A.
Casanova, Olga Palanca-Enriquez, Esperanza R. Fabon-Victorino, Cielito N. Mindaro-Grulla and Amelia
R. Cotangco-Manalastas.

2 Id. at 38-41.

3Id. at 43-51; penned by Associate Justice Amelia R. Cotangco-Manalastas and concurred in by

Associate Justice Lovell R. Bautista.

4 Id. at 44-45.

5 Id. at 46-47.

6 Id. at 47.

7 Id. at 47-48.

8 Id. at 50.

9 The petitioners previously filed a Motion for Extension of Time to File a Petition for Review, id. at 29.

10Section 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising
under the National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code
shall be maintained, except as herein provided, until and unless an appeal has been previously filed with
the CTA and disposed of this Act.

A party adversely affected by a resolution of a Division of the CTA on motion for reconsideration or new
trial, may file a petition for review with the CTA en banc. (underlining supplied)

11 Section 1. Review of cases in the Court en banc. - In cases falling under the exclusive appellate
jurisdiction of the Court en banc, the petition for review of a decision or resolution of the Court in
Division must be preceded by the filing of a timely motion for reconsideration or new trial with the
Division. (underscoring supplied)

12 Id. at 13-14.

13 Id. at 55-59.
14
G.R. Nos. 201530 & 201680-81, 19 April 2017.

15 Id.

16 650 Phil. 143 (2010).

17 Id. at 152.

18Magsino v. De Ocampo, 741 Phil. 394, 410 (2014).

19 526 Phil. 249 (2006).

20 612 Phil. 609 (2009).

21 G.R. No. 167283, 10 February 2010.

22The City of Manila v. Coca-Cola Bottlers, Inc., supra note 17.

23 Id. at 632-633.

24Rollo, pp. 86-87, 90 and 126-127.

25 Id. at 89.

26 Id. at 90-93; paragraphs 5 to 10 of the complaint.

27 In Yamane v. BA Lepanto Condominium Corporation, 510 Phil. 750, 763-764 (2005), the Court
explained that even though Section 195 utilized the term 'appeal', the law did not vest appellate
jurisdiction on the regional trial courts over the denial by the local treasurer of a tax protest. The Court
described the court's jurisdiction in this instance as original in character, viz:

"[S]ignificantly, the Local Government Code, or any other statute for that matter, does not expressly
confer appellate jurisdiction on the part of regional trial courts from the denial of a tax protest by a local
treasurer. On the other hand, Section 22 of B.P. 129 expressly delineates the appellate jurisdiction of
the Regional Trial Courts, confining as it does said appellate jurisdiction to cases decided by Metropolitan,
Municipal, and Municipal Circuit Trial Courts. Unlike in the case of the Court of Appeals, B.P. 129 does
not confer appellate jurisdiction on Regional Trial Courts over rulings made by non-judicial entities."

28Section 252 of the LGC requires payment under protest of an assessment for real property tax, to
wit:

Section 252. Payment Under Protest. - (a) No protest shall be entertained unless the taxpayer first pays
the tax. There shall be annotated on the tax receipts the words "paid under protest." The protest in
writing must be filed within thirty (30) days from payment of the tax to the provincial, city treasurer or
municipal treasurer, in the case of a municipality within Metropolitan Manila Area, who shall decide the
protest within sixty (60) days from receipt.

29See San Juan v. Castro, 565 Phil. 810, 816-817 (2007) citing Ernesto D. Acosta and Jose C. Vitug,
TAX LAW AND JURISPRUDENCE, 2nd edition. Rex Book Store: Manila, Philippines, 2000, pp. 463-464.

30 Id. at 817.

31 Id.; the pertinent text of the decision in San Juan v. Castro reads:
"That petitioner protested in writing against the assessment of tax due and the basis thereof is on record
as in fact it was on that account that respondent sent him the abovequoted July 15, 2005 letter which
operated as a denial of petitioner's written protest.

Petitioner should thus have, following the earlier above-quoted Section 195 of the Local Government
Code, either appealed the assessment before the court of competent jurisdiction or paid the tax and
then sought a refund." (citations omitted)

32 Whether payment was made before, on, or after the date of filing the formal protest.

33Where protest against assessment was first made, then later payment of the assessed tax, substantial
justice or procedural economy, at the very least, demands that the prior letter-protest be treated as
having the same effect and import as a written claim for refund for purposes of satisfying the
requirement of exhaustion of administrative remedies.

34Rollo, p. 44.

35
Id. at 44-45.

36The Complaint alleged 6 February 2007 as the date Cosmos received Toledo's letter denying the
protest. The petitioners failed to controvert this allegation. Thus, the RTC proceeded to render its
decision operating under the premise that Cosmos seasonably filed the action on 8 March 2007, or within
the 30-day period to appeal. The CTA Division likewise affirmed such finding of the lower court in its
decision in C.T.A AC No. 60.

SECOND DIVISION

G.R. No. 205925, June 20, 2018

BASES CONVERSION AND DEVELOPMENT AUTHORITY, Petitioner, v. COMMISSIONER OF

INTERNAL REVENUE, Respondent.

DECISION

REYES, JR., J.:

This petition for review on certiorari1 under Rule 45 of the Rules of Court seeks to reverse and set aside
the Decision2 dated August 29, 2012 and Resolution3 dated February 12, 2013 of the Court of Tax
Appeals (CTA) En Banc in CTA EB Case No. 797, which affirmed the CTA First Division's dismissal of the
case filed by herein petitioner Bases Conversion and Development Authority (BCDA) on the ground that
the latter failed to pay docket fees as required under Rule 141 of the Rules of Court.

The Facts

The facts, as summarized by the CTA En Banc, read as follows:

On October 8, 2010, BCDA filed a petition for review with the CTA in order to preserve its right to pursue
its claim for refund of the Creditable Withholding Tax (CWT) in the amount of Php122,079,442.53, which
was paid under protest from March 19, 2008 to October 8, 2008. The CWT which BCDA paid under
protest was in connection with its sale of the BCDA-allocated units as its share in the Serendra Project
pursuant to the Joint Development Agreement with Ayala Land, Inc.4

The petition for review was filed with a Request for Exemption from the Payment of Filing Fees in the
amount of Php1,209,457.90.5

On October 20, 2010, the CTA First Division denied BCDA's Request for Exemption and ordered it to pay
the filing fees within five days from notice.6

BCDA moved for reconsideration which was denied by the CTA First Division on February 8, 2011. BCDA
was once again ordered to pay the filing fees within five days from notice, otherwise, the petition for
review will be dismissed.7

BCDA filed a petition for review with the CTA En Banc on February 25, 2011, which petition was returned
and not deemed filed without the payment of the correct legal fees. BCDA once again emphasized its
position that it is exempt from the payment of such fees.8

On March 28, 2011, the petition before the CTA First Division was dismissed. BCDA attempted to tile its
Motion for Reconsideration, however, the Officer-In-Charge of the First Division refused to receive the
checks for the payment of the filing fees, and the Motion for Reconsideration. BCDA then filed its Motion
for Reconsideration by registered mail.9

Subsequently, BCDA filed a manifestation stating the incidents relating to the tiling of its Motion for
Reconsideration. The CTA First Division, on April 26, 2011, issued its Resolution,10 the dispositive portion
of which states:

WHEREFORE, finding no reason to deny receipt of the supposed Motion for Reconsideration of the
[BCDA] on the dismissal of its Petition for Review, the Executive Clerk of Court III of this Division, Atty.
Margarette Y. Guzman, is hereby DIRECTED to allow petitioner BCDA to file the same, or to accept said
pleading which was allegedly mailed through registered mail, upon receipt thereof, and to commence
the procedure in paying the prescribed docket fees, subject to the caveat herein stated, should petitioner
BCDA decide to pursue its case.

SO ORDERED.11

On May 17, 2011, BCDA moved for reconsideration of the Resolution dated April 26, 2011 and prayed
that it be allowed to pay the prescribed docket fees of Php1,209,457.90 without qualification. On June
9, 2011, the CTA First Division denied both motions for reconsideration.12

On June 28, 2011, BCDA filed a petition for review with the CTA En Banc but the same was dismissed.
In its assailed Decision13 dated August 29, 2012, it adopted and affirmed the findings of the First
Division, to wit:

BCDA fails to raise any new and substantial arguments, and no cogent reason exists to warrant a
consideration of the Court's Resolution dated March 28, 2011 dismissing its Petition for Review.

It must be emphasized that payment in full of docket fees within the prescribed period is mandatory. It
is an essential requirement without which the decision appealed from would become final and executory
as if no appeal had been filed. To repeat, in both original and appellate cases, the court acquires
jurisdiction over the case only upon the payment of the prescribed docket fees.

In this case, due to BCDA's non-payment of the prescribed legal fees within the prescribed period, this
Court has not acquired jurisdiction over the case. Consequently, it is as if no appeal was ever filed with
this Court.14
Undeterred, BCDA filed a Motion15 for Reconsideration but was likewise denied by the CTA En Banc in
the assailed Resolution16 dated February 12, 2013.

Hence, this petition.

The Issues

I.

THE CTA EN BANC ERRED IN AFFIRMING THE CTA FIRST DIVISION'S RULING THAT BCDA IS NOT A
GOVERNMENT INSTRUMENTALITY, HENCE, NOT EXEMPT FROM PAYMENT OF LEGAL FEES.

II.

THE CTA EN BANC ERRED IN AFFIRMING CTA FIRST DIVISION'S RESOLUTION DISMISSING BCDA'S
PETITION FOR REVIEW FOR NON-PAYMENT OF THE PRESCRIBED LEGAL FEES WITHIN THE
REGLEMENTARY PERIOD.

Ruling of the Court

The petition is impressed with merit.

BCDA is a government instrumentality vested with

corporate powers. As such, it is exempt from the payment
of docket fees.

At the crux of the present pet1t1on is the issue of whether or not BCDA is a government instrumentality
or a government-owned and – controlled corporation (GOCC). [fit is an instrumentality, it is exempt
from the payment of docket fees. lf it is a GOCC, it is not exempt and as such non-payment thereof
would mean that the tax court did not acquire jurisdiction over the case and properly dismissed it for
BCDA's failure to settle the fees on time.

BCDA is a government instrumentality vested with corporate powers. As such, it is exempt from the
payment of docket fees required under Section 21, Rule 141 of the Rules or Court, to wit:

RULE 141
LEGAL FEES

SEC. 1. Payment of fees. – Upon the filing of the pleading or other application which initiates an action
or proceeding, the fees prescribed therefor shall be paid in full.

xxxx

SEC. 21. Government exempt. – The Republic of the Philippines, its agencies and
instrumentalities, are exempt from paying the legal fees provided in this rule. Local
governments and government-owned or controlled corporations with or without independent charters
are not exempt from paying such fees. (Emphasis Ours)

Section 2(10) and (13) of the Introductory Provisions of the Administrative Code of 1987 provides for
the definition of a government "instrumentality" and a "GOCC", to wit:
SEC. 2. General Terms Defined. x x x x

(10) Instrumentality refers to any agency of the National Government. not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if
not all corporate powers, administering special funds, and enjoying operational autonomy, usually
through a charter. x x x.

xxxx

(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-
stock corporation, vested with functions relating to public needs whether governmental or proprietary
in nature, and owned by the Government directly or through its instrumentalities either wholly, or,
where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of
its capital stock: x x x. (Emphasis Ours)

The grant of these corporate powers is likewise stated in Section 3 of Republic Act (R.A.) No. 7227; also
known as The Bases Conversion and Development Act of 1992 which provides for BCDA's manner of
creation, to wit:

Sec. 3. Creation of the Bases Conversion and Development Authority. - There is hereby created a body
corporate to be known as the Bases Conversion and Development Authority, which shall have the
attribute of perpetual succession and shall be vested with the powers of a corporation. (Emphasis
Ours)

From the foregoing, it is clear that a government instrumentality may be endowed with corporate powers
and at the same time retain its classification as a government "instrumentality" for all other purposes.

In the 2006 case of Manila International Airport Authority v. CA,17 the Court, speaking through Associate
Justice Antonio T. Carpio, explained in this wise:

Many government instrumentalities are vested with corporate powers but they do not become stock or
non-stock corporations, which is a necessary condition before an agency or instrumentality is deemed
a [GOCC]. Examples are the Mactan International Airport Authority, the Philippine Ports Authority, the
University of the Philippines and Bangko Sentral ng Pilipinas. All these government instrumentalities
exercise corporate powers but they are not organized as stock or non-stock corporations as required by
Section 2 (13) of the Introductory Provisions of the Administrative Code. These government
instrumentalities arc sometimes loosely called government corporate entities. However, they are not
[GOCCs] in the strict sense as understood under the Administrative Code, which is the governing law
defining the legal relationship or status of government entities.18

Moreover, in the 2007 case of Philippine Fisheries Development Authority v. CA,19 the Court reiterated
that a government instrumentality retains its classification as such albeit having been endowed with
some if not all corporate powers. The relevant portion of said decision reads as follows:

Indeed, the Authority is not a GOCC but an instrumentality of the government. The Authority has a
capital stock but it is not divided into shares of stocks. Also, it has no stockholders or voting shares.
Hence, it is not a stock corporation. Neither is it a non-stock corporation because it has no members.

The Authority is actually a national government instrumentality which is define as an agency of the
national government, not integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers, administering special funds and
enjoying operational autonomy, usually through a charter. When the law vests in a government
instrumentality corporate powers, the instrumentality does not become a corporation. Unless the
government instrumentality is organized as a stock or non-stock corporation, it remains a government
instrumentality exercising not only governmental but also corporate powers.20
As previously mentioned, in order to qualify as a GOCC, one must be organized either as a stock or non-
stock corporation. Section 321 of the Corporation Code defines a stock corporation as one whose "capital
stock is divided into shares and x x x authorized to distribute to the holders of such shares dividends x
x x.''

Section 6 of R.A. No. 7227 provides for BCDA's capitalization, to wit:

Sec. 6. Capitalization. – The Conversion Authority shall have an authorized capital of One hundred billion
pesos (P100,000,000,000.00) which may be fully subscribed by the Republic of the Philippines and shall
either be paid up from the proceeds of the sales of its land assets as provided for in Section 8 of this
Act or by transferring to the Conversion Authority properties valued in such amount.

An initial operating capital in the amount of seventy million pesos (P70,000,000.00) is hereby authorized
to be appropriated out of any funds in the National Treasury not otherwise appropriated which shall be
covered by preferred shares of the Conversion Authority retireable within two (2) years.

Based on the foregoing, it is clear that BCDA has an authorized capital of Php100 Billion, however, it is
not divided into shares of stock. BCDA has no voting shares. There is likewise no provision which
authorizes the distribution of dividends and allotments of surplus and profits to BCDA's stockholders.
Hence, BCDA is not a stock corporation.

Section 8 of R.A. No. 7227 provides an enumeration of BCDA's purposes and their corresponding
percentage shares in the sales proceeds of BCDA. Section 8 likewise states that after distribution of the
proceeds acquired from BCDA's activities, the balance, if any, shall accrue and be remitted to the
National Treasury, to wit:

Sec. 8. Funding Scheme.—The capital of the Conversion Authority shall come from the sales proceeds
and/or transfers of certain Metro Manila military camps, including all lands covered by Proclamation No.
423, series of 1957, commonly known as Fort Bonifacio and Villamor (Nicholas) Air Base x x x.

xxxx

The President is hereby authorized to sell the above lands, in whole or in part, which are hereby declared
alienable and disposable pursuant to the provisions of existing laws and regulations governing sales of
government properties: provided, that no sale or disposition of such lands will be undertaken until a
development plan embodying projects for conversion shall be approved by the President in accordance
with paragraph (b), Sec. 4, of this Act. However, six (6) months after approval of this Act, the President
shall authorize the Conversion Authority to dispose of certain areas in Fort Bonifacio and Villamor as the
latter so determines. The Conversion Authority shall provide the President a report on any such
disposition or plan for disposition within one (1) month from such disposition or preparation of such
plan. The proceeds from any sale, after deducting all expenses related to the sale, of portions of
Metro Manila military camps as authorized under this Act, shall be used for the following purposes
with their corresponding percent shares of proceeds:

(1) Thirty-two and five-tenths percent (35.5%) — To finance the transfer of the AFP military camps and
the construction of new camps, the self-reliance and modernization program of the AFP, the concessional
and long-term housing loan assistance and livelihood assistance to AFP officers and enlisted men and
their families, and the rehabilitation and expansion of the AFP's medical facilities;

(2) Fifty percent (50%) — To finance the conversion and the commercial uses of the Clark and subic
military reservations and their extentions;

(3) Five Percent (5%) — To finance the concessional and long-term housing loan assistance for the
homeless of Metro Manila, Olongapo City, Angeles City and other affected municipalities contiguous to
the base areas as mandated herein: and
(4) The balance shall accrue and be remitted to the National Treasury to be appropriated
thereafter by Congress for the sole purpose of financing programs and projects vital for the economic
upliftment of the Filipino people. (Emphasis Ours)

The remaining balance, if any, from the proceeds of BCDA's activities shall be remitted to the National
Treasury. The National Treasury is not a stockholder of BCDA Hence, none of the proceeds from BCDA's
activities will be allotted to its stockholders.

BCDA also does not qualify as a non-stock corporation because it is not organized for any of the purposes
mentioned under Section 88 of the Corporation Code, to wit:

Sec. 88. Purposes. – Non-stock corporations may be formed or organized tor charitable, religious,
educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes,
like trade industry, agricultural and like chambers, or any combination thereof: subject to the special
provisions of this Title governing particular classes of non-stock corporations.

A cursory reading of Section 4 of R.A. No. 7227 shows that BCDA is organized for a specific purpose -
to own, hold and/or administer the military reservations in the country and implement its conversion to
other productive uses, to wit:

Sec. 4. Purposes of the Conversion Authority. — The Conversion Authority shall have the following
purposes:

(a) To own, hold and/or administer the military reservations of John Hay Air Station, Wallace Air
Station, O'Donnell Transmitter Station, San Miguel Naval Communications Station. Mt. Sta. Rita Station
(Hermosa, Bataan) and those portions of Metro Manila military camps which may be transferred to it by
the President:

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

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

(d) To serve as the holding company of subsidiary companies created pursuant to Section 16 of
this Act and to invest in Special Economic Zones declared under Sections 12 and 15 of this Act;

(e) To manage and operate through private sector companies developmental projects outside the
jurisdiction of subsidiary companies and Special Economic Zones declared by presidential proclamations
and established under this Act;

(f) To establish a mechanism in coordination with the appropriate local government units to
effect meaningful consultation regarding the plans, programs and projects within the
regions where such plans, programs and/or project development are part of the conversion of the Clark
and Subic military reservations and their extensions and the surrounding communities as envisioned in
this Act; and

(g) To plan, program and undertake the readjustment, relocation, or resettlement of

population within the Clark and Subic military reservations and their extensions as may be
deemed necessary and beneficial by the Conversion Authority, in coordination with the appropriate
government agencies and local government units. (Emphases Ours)
From the foregoing, it is clear that BCDA is neither a stock nor a non-stock corporation. BCDA is a
government instrumentality vested with corporate powers. Under Section 21,22 Rule 141 of the Rules of
Court, agencies and instrumentalities of the Republic of the Philippines are exempt from paying legal or
docket fees. Hence, BCDA is exempt from the payment of docket fees.

WHEREFORE, premises considered, the present petition is GRANTED. The Decision dated August 29,
2012 and Resolution dated February 12, 2013 of the CTA En Banc are hereby REVERSED and SET
ASIDE.

Let this case be remanded to the Court of Tax Appeals for further proceedings regarding Bases
conversion and Development Authority's claim for refund of the Creditable Withholding Tax (CWT) in
the amount of P122,079,442.53 which the latter paid under protest from March 19, 2008 to October 8,
2008.

SO ORDERED.

Carpio* (Chairperson), Peralta, Perlas-Bernabe, and Caguioa, JJ., concur.

Endnotes:

* Senior Associate Justice (Per Section 12, R.A. No. 296 The Judiciary Act of 1948, as amended)

1Rollo, pp. 3-28.

2 Penned by Associate Justice Amelia R. Cotangco-Manalastas; id. at 33-41.

3 Id. at 43-45.

4 Id. at 34.

5 Id.

6 Id.

7 Id. at 35.

8 Id.

9 Id.

10 Id.

11 Id.

12 Id.

13 Id. at 33-41.

14 Id. at 39-40.

15 Id. at 138-162.
16
Id. at 43-45.

17 528 Phil. 181 (2006).

18 Id. at 213.

19 555 Phil 661 (2007).

20 Id. at 669-670.

21Sec. 3. Classes of corporations. - Corporations formed or organized under this Code may be stock or
non-stock corporations. Corporations which have capital stock divided into shares and are authorized to
distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the
shares held are stock corporations. All other corporations are non-stock corporations.

22SEC. 21. Government exempt. - The Republic of the Philippines, its agencies and instrumentalities,
are exempt from paying legal fees provided in this rule. Local governments and government-owned or
controlled corporations with or without independent charters are not exempt from paying such fees.

SECOND DIVISION

G.R. No. 189792, June 20, 2018

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. CEBU HOLDINGS, INC., Respondent.

DECISION

CARPIO, J.:

The Case

This petition for review1 assails the 29 July 2009 Decision and the 9 October 2009 Resolution of the
Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 478. The CTA En Banc affirmed the 10 November
2008 Decision and the 12 March 2009 Resolution of the CTA First Division which ordered the issuance
of a tax credit certificate in the reduced amount of P2,083,878.07 2 representing the excess creditable
taxes for taxable year 2002 in favor of respondent Cebu Holdings, Inc. (respondent).

The Facts

Respondent is a registered real estate developer. On 15 April 2003, respondent filed with the Bureau of
Internal Revenue (BIR) its Income Tax Return (ITR) for the year ending 31 December 2002, which
states:

Sales/Revenues/Receipts/Fees 395,529,877
Less: Cost of Sales/Services 213,551,009
 Gross Income from Operation 181,978,868
Add: Non-Operation and Other Income 9,170,916
Total Gross Income 191,149,784
Less: Deductions 147,535.224
Taxable Income 43,614,560
Tax Rate 32.00%
Income Tax 13,956,659
MCIT 4,377,937
Tax Due 13,956,659
Less:

Prior Year's Excess Credits 33,468,076

Creditable Tax Withheld for the First 12,130,450
Three Quarters 6,861,605
Creditable Tax Withheld for Fourth 52,460,131
Quarter (19,511,417)
Total Tax Credits/Payments
Tax Payable/(Overpayment)-prior year's
tax credit

Tax Payable/(Overpayment)-current (18,992.055)3

year's tax credit ===========

Respondent indicated in its ITR that it is opting to be issued a tax credit certificate for the alleged
overpayment of P18,992,055.00.

Subsequently, respondent filed an amended ITR for taxable year 2002, which states:

Sales/Revenues/Receipts/Fees
395,529,877
Less: Cost of Sales/Services
213,551,009
Gross Income from Operation
181,978,868
Add: Non-Operation and Other Income
9,170,916
Total Gross Income
191,149,784
Less: Deductions
147,535,224
Taxable Income
 43,614,560
=========

Tax Due (32%) 13,956,659

Less: Tax Credits/Payments

Prior Years' Excess Credits 30,150,767

Creditable Tax Withheld for the First Three 12,130,450

Quarters 6,861,605
Creditable Tax Withheld for the Fourth 18,992,055
Quarter
Total Creditable Tax Withheld - 2002

49,142,822
Total Tax Credits/Payments
========

Tax Payable (Overpayment) (35,186,163)4

Respondent likewise indicated in its amended ITR that it is opting to be issued a tax credit certificate for
the alleged overpayment of P18,992,055.00.

On 4 March 2005, respondent filed with the BIR a written claim for a tax credit certificate in the amount
of P18,992,055.00. When petitioner failed to act upon respondent's claim, respondent filed a Petition
for Review with the CTA First Division on 15 April 2005.

On 6 June 2006, the CTA First Division granted respondent's request for the appointment of an
Independent Certified Public Accountant (CPA) under Rule 13 of the Revised Rules of the Court of Tax
Appeals. The Court commissioned Independent CPA filed his Final and Consolidated Report on 3 August
2006.

The report of the Independent CPA states:

Summary of Findings

In summary, based on the procedures performed to verify the accuracy of the amount of overpaid
income tax/excess Creditable Withholding Taxes (CWTs) as of the year ended December 31, 2002
amounting to PhP18,992,054.91 and the propriety of the documents supporting the claim for refund or
tax credit of the Company on the present case at hand, we present below our findings and observations
according to the particular source of creditable taxes, as follows:

Real Estate Sales- PhP 6,067,093.08

CWTs supported by original

Withholding Tax Remittance
Return duly stamped
"Received" by the (Annex
A. P5,764,623.06
Authorized Agent Bank and 1)
were machine validated
with its supporting Contract
to Sell or Deed of Sale

B. CWT supported by
Certificate Authorizing
Registration; no related
income declared during the (Annex
taxable year 2002 2) 18,856.25

C. CWT[s] supported by
original Withholding Tax
Remittance Return not
stamped "Received"; but
were Machine Validated by (Annex
the Authorized Agent Bank 3) 141,087.59

D. CWT[s] supported by
original Withholding Tax
Remittance Return duly (Annex
stamped "Received" by 4) 142,526.18
 Authorized Agent Bank but
were not Machine Validated
by the Authorized Agent
Bank; but supported by
BIR-Collections and
Reconciliation System

TOTAL - CWTs per reviewed

certificates P6,067,093.08

Unaccounted Difference –
passed due to immateriality (0.00)

TOTAL- CWTs claimed per

December 31, 1998 [sic] P6,067,093.08
Amended ITR ===========

Real Estate Leasing- Php

12,800,461.83

E. CWTs supported by original

Certificates of Creditable (Annex
Tax Withheld at Source 5) P9,707,369.69

F. CWTs not supported by

Certificates of Creditable
Tax Withheld at Source (Annex
Withholding Tax 6) 67,710.10
G. CWTs filed out of period (Annex
7) 2,818,260.83

H. Double Claim (Annex

8) 213,124.04

TOTAL - CWTs per reviewed

certificates 12,806,464.66

Unaccounted difference passed

due to immateriality (6,002.83)

TOTAL CWTs claimed per

December 31, 1998 [sic] P 12,800,461.83
Amended ITR ============

Other Income- Management

Fees - Php 124,500.00

I. CWTs supported by original

Certificates of Creditable (Annex
Tax Withheld at Source 9) P 124,500.00

TOTAL- CWTs per reviewed

certificates P 124,500.00
 Unaccounted Difference (00.00)

TOTAL - CWTs claimed per

December 31, 1998 [sic] P 124,500.005]
Amended ITR ===========

The Ruling of the CTA First Division

The CTA First Division agreed with the findings of the Independent CPA, except for the amount of
P3,857.33 which the Independent CPA erroneously included as part of the Creditable Withholding Taxes
(CWTs) filed out of period in the amount of P2,818,260.83. The CTA First Division found that the
certificate supporting the creditable tax of P3,857.33 shows that the same was withheld in taxable year
2002. Thus, the CTA First Division held that only the amount of P2,814,403.50 pertains to "CWTs filed
out of period," after deducting the amount of P3,857.33 from P2,818,260.83.

The CTA First Division further held that out of the total creditable tax withheld of P18,992,055.00, only
the amount of P15,877,961.02 represents respondent's valid claim for taxable year 2002. The CTA First
Division disallowed CWTs totaling P3,114,093.89:

CWT supported by Certificate Authorizing

P 18,856.25
Registration

CWTs not supported by Certificate of

Creditable Tax

Withheld at Source Withholding Tax 67,710.10

CWTs filed out of period 2,814,403.50

Double Claim 213,124.04

Disallowed Creditable Withholding

Taxes P3,114,093.89 6

The CTA First Division also found a discrepancy in respondent's revenue from sales of real properties in
the amount of P120,964,737.00 as indicated in its ITR, which is lower by P19,999.70 compared to the
amount of P120,984,736.70 gross sales stated in its withholding tax remittance returns. For failure of
respondent to account for the discrepancy in sales of real properties amounting to P19,999.70, the CTA
First Division disallowed CWTs in the amount of P999.99, computed as follows:

Sales of Goods/Properties per income tax P

return 120,964,737.00

Less: Sales of Real properties per P

withholding tax remittance returns 120,984,736.70

Discrepancy in sales of real properties P 19,999.70

Multiply by : 5% withholding tax rate 0.05

Disallowed Creditable Withholding

Taxes P 999.99 7

The CTA First Division also disallowed the P124,500.00 CWTs pertaining to management fees amounting
to P2,490,000.00 for failure of respondent to indicate such amount under "Sales of Services" in its ITR.
Although respondent reported a "Miscellaneous" income of P4,205,134.00, it failed to submit documents
to prove that the P2,490,000.00 management fees formed part of its Miscellaneous income of
P4,205,134.00. The CTA First Division stated:

Hence, [respondent] complied with the third requisite but only to the extent of P15,752,461.03, out of
the total claimed creditable withholding taxes of P15,877,961.02 with valid proofs of withholding, to
wit:.

Claimed creditable withholding taxes w/

P 15,877,961.02
valid proofs of withholding

Creditable taxes withheld

pertaining to the discrepancy
in sales of real properties per
Less: a.
income tax return and per
withholding tax remittance
return 999.99
 b. Creditable taxes withheld
pertaining to the management
fees of P2,490,000.00 124,500.00

Claimed creditable taxes withheld

pertaining to [respondent's] declared P 8

income in its 2002 income tax return 15,752,461.03

The CTA First Division further ruled that respondent failed to substantiate the P30,150,757.00 9 prior
year's excess credits, except for the amount of P288,076.04.

In its Decision dated 10 November 2008, the CTA First Division held:

In sum, out of the reported prior year's excess credits of P30,150,757.00, only the amount of
P288,076.04 shall be applied against the income tax liability for taxable year 2002 in the amount of
P13,956,659.00. The remaining income tax liability of P13,668,582.96 shall be offset against the
substantiated creditable taxes withheld in taxable year 2002 in the amount of P15,752,461.03, leaving
a refundable excess tax credits of only P2,083,878.07, computed as follows:

Sales/Revenues/Receipts/Fees P395,529,877.00
Less: Cost of Sales/Services 213,551,009.00
Gross Income from Operation P181,978,868.00
Add: Non-operation & Other Income 9,170,916.00
Total Gross Income P191,149,784.00

147,535,224.00
Less: Deductions
P 43,614,560.00
Taxable Income
============

Tax Due (32%) P13,956,659.00

Less: Prior year's excess credits 288,076.04
Tax Still Due P13,668,582.96
Less: Substantiated Creditable Taxes 15,752,461.03
 Withheld P 2,083,878.07
Refundable Excess Tax Credits ===========

WHEREFORE, the instant Petition for Review is hereby GRANTED. Accordingly, [the Commissioner of
Internal Revenue] is hereby ORDERED TO ISSUE TAX CREDIT CERTIFICATE in favor of [Cebu Holdings,
Inc.] in the reduced amount [of] P2,083,8[7]8.07, representing excess creditable taxes for taxable year
2002.10

Petitioner and respondent filed separate Motions for Partial Reconsideration which were both denied by
the CTA First Division in a Resolution dated 12 March 2009.11

On 26 March 2009, respondent filed an Urgent Motion to Withdraw the Petition for Review in C.T.A. Case
No. 7218 on the ground that it shall no longer pursue its claim for a tax credit certificate. Instead,
respondent is opting to carry forward the excess creditable income taxes to the succeeding taxable
quarters of the succeeding taxable years until the same have been fully utilized. In a Resolution dated
5 May 2009,12 the CTA First Division denied respondent's motion.

On 16 April 2009, petitioner filed a petition for review before the CTA En Banc, assailing the 10
November 2008 Decision and the 12 March 2009 Resolution of the CTA First Division.

The Ruling of the CTA En Banc

The CTA En Banc affirmed the 10 November 2008 Decision and the 12 March 2009 Resolution of the
CTA First Division. The CTA En Banc agreed with the finding of the CTA First Division that respondent is
entitled only to P2,083,878.07 of tax credit certificate representing excess creditable taxes for taxable
year 2002. The CTA En Banc further ruled that respondent's claim for refund filed with the BIR on 4
March 2005 and the Petition for Review filed on 15 April 2005 were within the reglementary period.

As regards the unsubstantiated P16,194,108.00 prior year's tax credit which was carried over by
respondent for taxable year 2003, the CTA En Banc held that since the refund claim pertains only to the
taxable year 2002, the alleged tax deficiency for taxable year 2003 cannot be offset against the excess
creditable taxes covered by the refund claim.

Petitioner filed a Motion for Reconsideration which the CTA En Banc denied for lack of merit. Hence, this
petition for review.

Petitioner asserts that respondent is not entitled to the P2,083,878.07 refund of excess creditable
withholding tax for taxable year 2002. Furthermore, petitioner reiterates that respondent is liable for
deficiency income tax for taxable year 2003 because respondent erroneously carried over the amount
of P16,194,108.00 as prior year's excess credits, to which it is not entitled, to the succeeding taxable
year 2003.

The Issues

Petitioner raises the following issues:

1. Whether respondent is entitled to a tax credit certificate in the amount of P2,083,878.07,

representing respondent's excess creditable taxes for taxable year 2002; and

2. Whether respondent is liable for deficiency income tax for taxable year 2003.

The Court's Ruling

The petition is partly meritorious.

The requisites for claiming a refund of excess creditable withholding taxes are: (l) the claim for refund
was filed within the two-year prescriptive period; (2) the fact of withholding is established by a copy of
a statement duly issued by the payor (withholding agent) to the payee, showing the amount of tax
withheld therefrom; and (3) the income upon which the taxes were withheld was included in the income
tax return of the recipient as part of the gross income.13

Respondent complied with all the requisites, albeit the CTA First Division found some discrepancies with
the claimed refund and the amount to which respondent is entitled for refund.

First, respondent filed the claim for refund within the two-year prescriptive period. As found by the CTA
First Division and CTA En Banc, respondent filed its claim for refund with the BIR on 4 March 2005 and
the Petition for Review before the CTA on 15 April 2005, which both fell within the two-year prescriptive
period counting from the date respondent filed its ITR on 15 April 2003.

Second, as proof of taxes withheld, respondent submitted the Certificate Authorizing Registration,
Withholding Tax Remittance Returns, and Certificates of Creditable Tax Withheld at Source, upon which
the Independent CPA based his report.

Third, respondent submitted its amended 2002 ITR to show that the income upon which the taxes were
withheld was included in its ITR. However, upon comparison with the Certificates of Creditable Tax
Withheld at Source and Withholding Tax Remittance Returns, the CTA First Division and the CTA En
Bancfound certain discrepancies and held that out of the total claimed CWT of P15,877,961.02,
respondent was only able to provide valid proofs of withholding for the amount of P15,752,461.03.

Thus, the CTA First Division correctly held that respondent is entitled to a refundable excess tax credits
of P2,083,878.07 after deducting the substantiated prior year's excess credits (P288,076.04) and the
substantiated CWT (P15,752,461.03) from the total tax due (P13,956,659.00).

However, as pointed out by petitioner, respondent erroneously carried over the amount of
P16,194,108.00 as prior year's excess credits, to which it is not entitled, to the succeeding taxable year
2003 as shown in respondent's Annual ITR for the year 2003. 14 The fact that respondent carried over
the amount of P16,194,108.00 as prior year's excess credits to the succeeding taxable year 2003 was
even mentioned in the Decision dated 10 November 2008 of the CTA First Division. 15 It should be
stressed that the amount of P16,194,108.00 is the remaining portion of the claimed prior year's excess
credits in the amount of P30,150,767.00 after deducting the P13,956,659.00 tax due in respondent's
amended ITR for taxable year 2002. But the CTA First Division categorically ruled that
respondent (petitioner therein) failed to substantiate its prior year's excess credits of
P30,150,767.00 except for the amount of P288,076.04, which can be applied against
respondent's income tax liability for taxable year 2002. The CTA First Division stated:

Petitioner [Cebu Holdings, Inc.] alleges that no amount of the creditable taxes withheld in taxable year
2002 was utilized since its prior year's excess credits of P30,150,7[6]7.00 were more than enough to
offset its income tax liability for taxable year 2002 in the amount of P13,956,659.00.

However, petitioner failed to substantiate its prior year's excess credits of P30,150,7[6]7.00,
save for the amount of P288,076.04, computed as follows:

xxxx

In sum, out of the reported prior year's excess credits of P30,150,7[6]7.00, only the amount
of P288,076.04 shall be applied against the income tax liability for taxable year 2002 in the
amount of P13,956,659.00. The remaining income tax liability of P13,668,582.96 shall be offset
against the substantiated creditable taxes withheld in taxable year 2002 in the amount of
P15,752,461.03, leaving a refundable excess tax credits of only P2,083,878.07 x x x. 16 (Emphasis
supplied)

Such categorical pronouncement of the CTA First Division affects respondent's claim for excess
creditable income taxes which can be carried over to succeeding taxable years. Thus, when the CTA
First Division denied respondent's Motion for Partial Reconsideration of the Decision dated 10 November
2008, respondent filed an "Urgent Motion to Withdraw Petition for Review." In its motion, respondent
stated that "it shall no longer pursue its claim for tax credit certificate and, instead carry forward the
said excess creditable income taxes to the succeeding taxable quarters of the succeeding taxable years
until the same will have been fully utilized."17 Clearly, respondent filed the motion in order to avoid the
adverse effect of the ruling of the CTA First Division that respondent (petitioner therein) failed to
substantiate almost all of its claimed prior year's excess credits, especially since respondent already
carried over and applied the amount of P16,194,108.00 as prior year's excess creditable tax against the
income tax due for the succeeding taxable year 2003. The CTA First Division denied for lack of merit
respondent's Urgent Motion to Withdraw Petition for Review.

It should be emphasized that respondent no longer appealed the 10 November 2008 Decision and the
12 March 2009 Resolution of the CTA First Division to the CTA En Banc. Neither did respondent appeal
the CTA En Banc Decision dated 29 July 2009, which affirmed the 10 November 2008 Decision and the
12 March 2009 Resolution of the CTA First Division.

In the Decision dated 10 November 2008 of the CTA First Division, the substantiated prior year's excess
credits have already been fully applied against respondent's income tax liability for taxable year 2002.
Thus, respondent no longer has any remaining prior year's excess creditable tax which can be carried
over and applied against its income tax due for the succeeding taxable year 2003.

Clearly, respondent erred when it carried over the amount of P16,194,108.00 as prior year's excess
credits to the succeeding taxable year 2003, resulting in a tax overpayment of P7,653,926.00 as shown
in its 2003 Amended ITR:

Aggregate Income Tax Due

Tax Credits/Payments P 25,567,685

Less:
Prior Year's Excess Credits 16,194,108

Creditable Tax Withheld for the First

6,472,176
Three Quarters

Creditable Tax Withheld Per BIR Form

10,555,327
No. 2307 for the Fourth Quarter

Total Tax Credits/Payments 33,221,611

 Total Tax Payable/(Overpayment) (P
7,653,926)18

Considering that respondent's prior year's excess credits have already been fully applied against its
2002 income tax liability, the P16,194,108.00 unsubstantiated tax credits in taxable year 2002 could no
longer be carried over and applied against its income tax liability for taxable year 2003. Thus, the
amount of P16,194,108.00 as prior year's excess credits should be deleted, making respondent liable
for income tax in the amount of P8,540,182.00 for taxable year 2003 as computed below:

Aggregate Income Tax Due P 25,567,685

Tax Credits/Payments
Less:
Prior Year's Excess Credits 0

Creditable Tax Withheld for the First

6,472,176
Three Quarters

Creditable Tax Withheld Per BIR Form

10,555,327
No. 2307 for the Fourth Quarter

Total Tax Credits/Payments 17,027,503

Total Tax Payable/(Overpayment) (P

8,540,182)

Respondent argues that the alleged deficiency income tax for taxable year 2003 has no bearing on the
case which merely involves a claim for a tax credit certificate for taxable year 2002.

We cannot subscribe to respondent's reasoning. The ruling of the CTA First Division and the CTA En
Bancclearly affects respondent's income tax liability for taxable year 2003 precisely because respondent
carried over the amount of P16,194,108.00 as prior year's excess credits, to which it is not entitled.
Respondent is once again trying to evade the adverse effect of the ruling of the CTA First Division that
respondent (petitioner therein) failed to substantiate almost all of its claimed prior year's excess credits,
especially since respondent already carried over and applied the amount of P16,194,108.00 as prior
year's excess creditable tax against the income tax due for the succeeding taxable year 2003. To
reiterate, the CTA First Division already ruled that respondent (petitioner therein) failed to substantiate
its prior year's excess credits of P30,150,767.00 except for the amount of P288,076.04, which can be
applied against respondent's income tax liability for taxable year 2002. Thus, since respondent's prior
year's excess credits have already been fully applied against its 2002 income tax liability, the
P16,194,108.00 unsubstantiated tax credits in taxable year 2002 could no longer be carried over and
applied against its income tax liability for taxable year 2003.

Nevertheless, it is incumbent upon petitioner to issue a final assessment notice and demand letter for
the payment of respondent's deficiency tax liability for taxable year 2003. Section 228 of the National
Internal Revenue Code provides that:

Section 228. Protesting Assessment. – When the Commissioner or his duly authorized representative
finds that proper taxes should be assessed, he shall first notify the taxpayers of his findings: Provided,
however, That a pre-assessment notice shall not be required in the following cases:

(a) When the finding for any deficiency tax is the result of mathematical error in the computation of the
tax as appearing on the face of the return; or

(b) When a discrepancy has been determined between the tax withheld and the amount actually remitted
by the withholding agent; or

(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding
tax for a taxable period was determined to have carried over and automatically applied the
same amount claimed against the estimated tax liabilities for the taxable quarter or quarters
of the succeeding taxable year; or

(d) When the excise tax due on excisable articles has not been paid; or

(e) When an article locally purchased or imported by an exempt person, such as, but not limited to,
vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non
exempt persons.

The taxpayers shall be informed in writing of the law and the facts on which the assessment is made;
otherwise, the assessment shall be void.

Within a period to be prescribed by implementing rules and regulations, the taxpayer shall be required
to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized
representative shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or

reinvestigation within thirty (30) days from receipt of the assessment in such form and manner as may
be prescribed by implementing rules and regulations. Within sixty (60) days from filing of the protest,
all relevant supporting documents shall have been submitted; otherwise, the assessment shall become
final.

If the protest is denied in whole or in part, or is not acted upon within one hundred eighty (180) days
from submission of documents, the taxpayer adversely affected by the decision or inaction may appeal
to the Court of Tax Appeals within thirty (30) days from receipt of the said decision, or from the lapse
of the one hundred eighty (180)-day period; otherwise, the decision shall become final, executory and
demandable. (Emphasis supplied)

In this case, no pre-assessment notice is required since respondent taxpayer carried over to taxable
year 2003 the prior year's excess credits which have already been fully applied against its income tax
liability for taxable year 2002.

WHEREFORE, the petition is PARTIALLY GRANTED. We AFFIRM with MODIFICATION the 29 July
2009 Decision and the 9 October 2009 Resolution of the Court of Tax Appeals En Banc in C.T.A. EB No.
478. Petitioner Commissioner of Internal Revenue is ordered to: (a) issue a tax credit certificate to
respondent Cebu Holdings, Inc. in the amount of P2,083,878.07, representing excess creditable taxes
for taxable year 2002; and (b) issue a final assessment notice and demand letter for the payment of
respondent's deficiency tax liability in the amount of P8,540,182.00 for taxable year 2003.

SO ORDERED.

Peralta, Perlas-Bernabe, Caguioa, and Reyes, Jr., JJ., concur.

Endnotes:

1 Under Rule 45 of the 1997 Rules of Civil Procedure.

2 The dispositive portion of the Decision dated 10 November 2008 of the CTA First Division erroneously
ordered petitioner to issue a tax credit certificate in favor of respondent in the amount
of P2,083,868.07 instead of P2,083,878.07, which is the correct amount of "Refundable Excess Tax
Credits" as computed by the CTA First Division. The amount stated in the dispositive portion is clearly a
typographical error.

3Rollo, p. 49. Emphasis supplied.

4 Records (CTA First Division), p. 224.

5Rollo, pp. 215-216. Emphasis in the original.

6 Id. at 115. Emphasis in the original.

7 Id. at 117. Emphasis in the original.

8 Id. at 117-118. Emphasis in the original.

9 The amount stated in the amended ITR representing Prior Year's Excess Credits is P30,150,767.00.

10Rollo, p. 119. Emphasis in the original.

11 Id. at 135-136.

12 Id. at 137-138.

13Winebrenner & Iñigo Insurance Brokers, Inc. v. Commissioner of Internal Revenue, 752 Phil. 375
(2015); Rep. of the Philippines v. Team (Phils.) Energy Corp., 750 Phil. 700 (2015); Commissioner of
Internal Revenue v. Team (Phils.) Operations Corp., 731 Phil. 141 (2014).

14Rollo, p. 181. Annex P.

15Id. at 110-111. On pages 5 and 6 of its Decision, the CTA First Division stated that: "Out of the total
tax credits of P49,142,822.00, petitioner [Cebu Holdings, Inc.] utilized the amount of P13,956,659.00
to answer for its income tax liability for taxable year 2002; leaving an excess tax credits of
P35,186,163.00, consisting of the creditable taxes withheld for taxable year 2002 in the amount of
P18,992,055.00 and the remainder of the prior year's excess credits of P16,194,108.00 x x x. Out of
the income tax overpayment of P35,186,163.00, only the amount of P16,194,108.00 was carried over
as prior year's excess credits to the succeeding taxable year 2003 as shown in petitioner's [Cebu
Holdings, Inc.] amended Annual Income Tax Return for taxable year 2003."
16
Id. at 118-119.

17 Records (CTA First Division), pp. 377-378.

18Rollo, p. 181, Annex P. Emphasis supplied.

SECOND DIVISION

G.R. No. 224327, June 11, 2018

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. BANK OF THE PHILIPPINE

ISLANDS, Respondent.

DECISION

PERALTA, J.:

For this Court’s resolution is the Petition for Review on Certiorari1 under Rule 45 of the Revised Rules of
Civil Procedure assailing the Decision2 dated September 16, 2015 and Resolution3 dated April 21, 2016
of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 1173 (CTA CASE No. 8350) on petitioner
Commissioner of Internal Revenue's (CIR) tax assessment against respondent Bank of the Philippine
Islands (BPI).

The facts follow.

Citytrust Banking Corporation (CBC) filed its Annual Income Tax Returns for its Regular Banking Unit,
and Foreign Currency Deposit Unit for taxable year 1986 on April 15, 1987.

Thereafter, on August 11, 1989, July 12, 1990 and November 8, 1990, CBC executed Waivers of the
Statute of Limitations under the National Internal Revenue Code (NIRC).

On March 7, 1991, petitioner CIR issued a Pre-Assessment Notice (PAN) against CBC for deficiency
taxes, among which is for deficiency Income Tax for taxable year 1986 in the total amount of
P19,202,589.97. The counsel for CBC filed its protest against the PAN on April 22, 1991.

Petitioner, on May 6, 1991, issued a Letter, with attached Assessment Notices, demanding for the
payment of the deficiency taxes within thirty (30) days from receipt thereof. The counsel for CBC filed
its Protest against the assessments on May 27, 1991 and another Protest on February 17, 1992.

A Letter was again issued by petitioner on February 5, 1992 requesting for the payment of CBC's tax
liabilities, within ten (10) days from receipt thereof.

The counsel for CBC, on March 29, 1994, issued a Letter addressed to petitioner offering a compromise
settlement on its deficiency Income Tax assessment for Taxable year 1986, with an attached Application
for Compromise Settlement/Abatement of Penalties under Revenue Memorandum Order (RMO) No. 45-
93, in the amount of P1,721,503.40, or twenty percent (20%) of the subject assessment, which was
received on March 30, 1994. On May 2, 1994, the counsel for CBC issued a Letter addressed to
petitioner, reiterating its Letter of offer of compromise settlement dated March 29, 1994 and Application
for Compromise Settlement/Abatement under RMO No. 45-93.
Petitioner, on October 12, 1994, approved the earlier mentioned Application for Compromise Settlement
of CBC, provided that one hundred percent (100%) of its deficiency Income Tax assessment for the year
1986, or in the amount of P8,607,517.00, be paid within fifteen (15) days from receipt thereof.

The counsel for CBC, on November 28, 1994, issued a Letter addressed to petitioner, requesting for a
reconsideration of the approved amount as compromise settlement, and offering to pay the amount of
P1,600,000.00 as full and final settlement of the subject assessment. The same counsel for CBC issued
a Letter on March 8, 1995 reiterating its request for reconsideration and offering to increase its full and
final settlement in the amount P3,200,000.00.

On March 28, 1995, petitioner approved the Application for Compromise Settlement of CBC dated March
30, 1994, provided that CBC pay the amount of P8,607,517.00 within fifteen (15) days from receipt
thereof.

Later, on May 4, 1995, the counsel for CBC issued another Letter addressed to petitioner, requesting
for a final reconsideration, and reiterating its offer of compromise in the amount of P3,200,000.00.

Petitioner, however, disapproved the Application for Compromise Settlement of CBC dated March 30,
1994. The counsel of CBC, on July 27, 1995, issued a Letter addressed to petitioner requesting for
reconsideration and offering to pay the increased amount of P4,303,758.50.

Meanwhile, on October 4, 1996, the Securities and Exchange Commission approved the Articles of
Merger between respondent BPI and CBC, with BPI as the surviving corporation.

Afterwards, on May 26, 2011, petitioner issued a Notice of Denial addressed to respondent, requesting
for the payment of CBC's deficiency Income Tax for taxable year 1986, within fifteen (15) days from
receipt thereof, and on July 28, 2011, petitioner issued another Letter addressed to respondent, denying
the offer of compromise penalty, and requesting for the payment of the amount of P19,202,589.97, plus
all increments incident to delinquency, pursuant to Sections 248 (A) (3) and 249 (C) (3) of the 1997
NIRC, as amended.

Consequently, on September 21, 2011, petitioner issued a Warrant of Distraint and/or Levy against
respondent BPI which prompted the latter to file a Petition for Review with the CTA on October 7, 2011.

In a Decision4 dated February 12, 2014, the CTA Special Third Division granted the petition for review,
thus:

WHEREFORE, the Petition for Review is hereby GRANTED. Accordingly, the Warrant of Distraint and/or
Levy dated September 21, 2011 is hereby CANCELLED and SET ASIDE.

SO ORDERED.5

According to the CTA Special Third Division, BPI can validly assail the Warrant of Distraint and/or Levy,
as its appellate jurisdiction is not limited to cases which involve decisions of the Commissioner of Internal
Revenue on matters relating to assessments or refunds. The Court further ruled that the Assessment
Notices, being issued only on May 6, 1991, were already issued beyond the three-year period to assess,
counting from April 15, 1987, when CBC filed its Annual Income Tax Returns for the taxable year 1986.
The same Court also held that the Waivers of Statute of Limitations executed on July 12, 1990 and
November 8, 1990 were not in accordance with the proper form of a valid waiver pursuant to RMO No.
20-90, thus, the waivers failed to extend the period given to petitioner to assess.

After the denial of petitioner's motion for reconsideration, a petition for review was filed with the CTA En
Banc, in which the latter Court denied the said petition, thus:
WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED. Accordingly, the
Decision and the Resolution, dated February 12, 2014 and April 25, 2014, respectively, are hereby
AFFIRMED.

SO ORDERED.6

Hence, the present petition after the CTA En Banc denied petitioner's motion for reconsideration.

Petitioner raises the following grounds for the allowance of the present petition:

THE CTA EN BANC ERRED IN AFFIRMING THE CTA SPECIAL THIRD DIVISION'S EXERCISE OF
JURISDICTION OVER THE INSTANT CONTROVERSY.

THE CTA EN BANC ERRED IN AFFIRMING THE ANNULMENT OF THE WARRANT OF DISTRAINT AND/OR
LEVY AGAINST RESPONDENT GIVEN PETITIONER'S CLEAR RIGHT TO THE SAME.7

Petitioner argues that the CTA did not acquire jurisdiction over the case for respondent's failure to
contest the assessments made against it by the Bureau of Internal Revenue (BIR) within the period
prescribed by law. Petitioner also contends that by the principle of estoppel, respondent is not allowed
to raise the defense of prescription against the efforts of the government to collect the tax assessed
against it.

In its Comment8 dated August 22, 2016, respondent claims that the assessment notice issued against
it, is not yet final and executory and that the CTA has jurisdiction over the case. It further asserts that
the right of petitioner to assess deficiency income tax for the taxable year 1986 had already prescribed
pursuant to the Tax Code of 1977 and that the right of petitioner to collect the alleged deficiency income
tax for the taxable year 1986 had already prescribed. Respondent also insists that it is not liable for the
alleged deficiency income tax and increments for the taxable year 1986.

The petition lacks merit.

First of all, the CTA did not err in its ruling that it has jurisdiction over cases asking for the cancellation
and withdrawal of a warrant of distraint and/or levy as provided under Section 7 of Republic Act (R.A.)
No. 9282, thus:

Sec. 7 Jurisdiction. – The CTA shall exercise:

a. Exclusive appellate jurisdiction to review by appeal, as herein provided:

1. x x x

2. Inaction by the Commissioner of the Internal Revenue in cases involving disputed

assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matter arising under the National Internal Revenue
Code or other laws administered by the Bureau of Internal Revenue, where the
National Internal Revenue Code provides a specific period of action, in which case the
inaction shall be deemed a denial;

xxxx

Anent the other grounds relied upon by petitioner, such are factual in nature. It is doctrinal that the
Court will not lightly set aside the conclusions reached by the CTA which, by the very nature of its
function of being dedicated exclusively to the resolution of tax problems, has developed an expertise on
the subject, unless there has been an abuse or improvident exercise of authority.9 We thus accord the
findings of fact by the CTA with the highest respect. These findings of facts can only be disturbed on
appeal if they are not supported by substantial evidence or there is a showing of gross error or abuse
on the part of the CTA. In the absence of any clear and convincing proof to the contrary, this Court must
presume that the CTA rendered a decision which is valid in every respect. 10 Nevertheless, the factual
findings of the CTA are supported by substantial evidence.

An assessment becomes final and unappealable if within thirty (30) days from receipt of the assessment,
the taxpayer fails to file his or her protest requesting for reconsideration or reinvestigation as provided
in Section 229 of the NIRC, thus:

SECTION 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 thirty (30) days from receipt of the assessment; otherwise, the assessment shall
become final and unappealable.

If the protest is denied in whole and 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 the said decision; otherwise, the decision shall become
final, executory and demandable.11

Petitioner insists that respondent failed to elevate the tax assessment against it to the CTA within the
required period. Respondent, on the other hand, claims that it never received any final decision on the
disputed assessment from petitioner granting or denying the same, whether in whole or in part.

The CTA was correct in ruling that petitioner failed to prove that it sent a notice of assessment and that
it was received by respondent, thus:

The February 5, 1992 Decision of the CIR which she insists to be the reckoning point to protest, was not
proven to have been received by BPI when the latter denied its receipt. Thus, the assessment notice
dated May 6, 1991 should be deemed as the final decision of the CIR on the matter, in which BPI timely
protested on May 27, 1991. While a mailed letter is deemed received by the addressee in the ordinary
course of mail, this is still merely a disputable presumption subject to controversion, and a direct denial
of the receipt thereof shifts the burden upon the party favored by the presumption to prove that the
mailed letter was indeed received by the addressee. (Republic v. Court of Appeals, G.R. No. L-38540,
April 30, 1987, 149 SCRA 351, 355.) In the instant case, BPI denies receiving the assessment notice,
and the CIR was unable to present substantial evidence that such notice was, indeed, mailed or sent
before the BIR's right to assess had prescribed and that said notice was received by BPI. As a matter of
fact, there was an express admission on the part of the CIR that there was no proof that indeed the
alleged Final Assessment Notice was ever sent to or received by BPI. As stated in the Transcript of
stenographic Notes on the court hearing dated October 29, 2012:

Q: And you anchor your argument based on this document (Letter dated February 5, 1992) that this is
the final decision of the BIR, is that correct?
A: Yes.

Q: When was this received by the petitioner City Trust Banking Corporation?
A: I think it was only mailed.

Q: What is your proof that it was mailed?

A: Because the BIR...(interrupted by Atty. Nidea)
Q: Do you have any proof that it was mailed?
A: No, I don't have any proof.

Q: So, you don't have any proof. So you don't have any proof that it was received by the petitioner?
A: I don't have any idea.

Q: You don't have any proof.

Moreover, as correctly pointed out in the assailed Resolution, whether or not the Letter dated February
5, 1992 constitutes as the Final Decision on the Disputed Assessment appealable under Section 229 of
the 1977 Tax Code, or whether the same was validly served and duly received by BPI, are immaterial
matters which will not cure the nullity of the said Preliminary Assessment Notice and Assessment
Notices, as they were clearly made beyond the prescriptive period.12

In the case of Nava v. Commissioner of Internal Revenue,13 this Court stressed on the importance of
proving the release, mailing or sending of the notice.

While we have held that an assessment is made when sent within the prescribed period, even if received
by the taxpayer after its expiration (Coll. Of Int. Rev. vs. Bautista, L-12250 and L-12259, May 27, 1959),
this ruling makes it the more imperative that the release, mailing, or sending of the notice be clearly
and satisfactorily proved. Mere notations made without the taxpayer's intervention, notice, or control,
without adequate supporting evidence, cannot suffice; otherwise, the taxpayer would be at the mercy
of the revenue offices, without adequate protection or defense.

Thus, the failure of petitioner to prove the receipt of the assessment by respondent would necessarily
lead to the conclusion that no assessment was issued.

As to the contention of petitioner that through the principle of estoppel, respondent is not allowed to
raise the defense of prescription against the efforts of the government to collect the tax assessed against
it, such is misplaced. Its argument that respondent's belated assertions relative to the alleged defects
and flaws in the waivers it signed in favor of the government should not be given merit, is also amiss.

Petitioner cannot implore the doctrine of estoppel just to compensate its failure to follow the proper
procedure. As aptly ruled by the CTA:

It is well established that issues raised for the first time on appeal are barred by estoppel. However, in
the leading case of Commissioner of Internal Revenue v. Kudos Metal Corporation, the Supreme Court
held that:

The doctrine of estoppel cannot be applied in this case as an exception to the statute of limitations on
the assessment of taxes considering that there is a detailed procedure for the proper execution of the
waiver, which the BIR must strictly follow. xxx As such, the doctrine of estoppel cannot give validity to
an act that is prohibited by law or one that is against public policy. xxx

Moreover, the BIR cannot hide behind the doctrine of estoppel to cover its failure to comply with RMO
20-90 and RDAO 05-01, which the BIR itself issued. xxx Having caused the defects in the waivers, the
BIR must bear the consequence. It cannot shift the blame to the taxpayer. To stress, a waiver of the
statute of limitations, being a derogation of the taxpayer's right to security against prolonged and
unscrupulous investigations, must be carefully and strictly construed.

Applying the said ruling in the case at bench, BPI is not estopped from raising the invalidity of the
subject Waivers as the BIR in this case caused the defects thereof. As such, the invalid Waivers did not
operate to toll or extend the period of prescription. 14
From the above disquisitions, it is clear that the right of petitioner to assess respondent has already
prescribed and respondent is not liable to pay the deficiency tax assessment. The period of collection
has also prescribed. As held by the CTA:

As to the period of collection, We uphold the ruling of the Division that such has already prescribed.
Regardless if We will reckon the period to collect from May 6, 1991, or the alleged Final Demand Letter
on February 5, 1992, counting the three-year period therein to collect in accordance with Section 223
(c) of the 1977 Tax Code, obviously, the mode of collection through the issuance of Warrant of Distraint
and/or Levy on October 05, 2011 was made beyond the prescriptive period.15

It must be remembered that [T]he law imposes a substantive, not merely a formal, requirement. To
proceed heedlessly with tax collection without first establishing a valid assessment is evidently violative
of the cardinal principle in administrative investigations: that taxpayers should be able to present their
case and adduce supporting evidence.16 Although taxes are the lifeblood of the government, their
assessment and collection "should be made in accordance with law as any arbitrariness will negate the
very reason for government itself."17

WHEREFORE, the Petition for Review on Certiorari dated June 16, 2016 of petitioner Commissioner of
Internal Revenue is DENIED for lack of merit. Consequently, the Decision dated September 16, 2015
and the Resolution dated April 21, 2016 of the Court of Tax Appeals En Banc in CTA EB No. 1173 (CTA
CASE No. 8350), are AFFIRMED.

SO ORDERED.

THIRD DIVISION

G.R. No. 190324, June 06, 2018

PHILIPPINE PORTS AUTHORITY, Petitioner, v. THE CITY OF DAVAO, SANGGUNIANG

PANGLUNGSOD NG DAVAO CITY, CITY MAYOR OF DAVAO CITY, CITY TREASURER OF DAVAO
CITY, CITY ASSESSOR OF DAVAO CITY, AND CENTRAL BOARD OF ASSESSMENT APPEALS
(CBAA), Respondents.

DECISION

LEONEN, J.:

When a tax case is pending on appeal with the Court of Tax Appeals, the Court of Tax Appeals has the
exclusive jurisdiction to enjoin the levy of taxes and the auction of a taxpayer's properties in relation to
that case.

This is a Petition for Review on Certiorari,1 assailing the Court of Appeals December 15, 2008
Decision2and September 11, 2009 Resolution3 in CA-G.R. SP No. 00735-MIN, dismissing the Philippine
Ports Authority's Petition for Prohibition.

The Philippine Ports Authority was created under Presidential Decree No. 857, as amended. It was
mandated "to implement an integral program for the planning, development, financing, and operation
of ports in the Philippines" and was "empowered to administer properties of any kind under its
jurisdiction."4
On June 17, 2004, the Philippine Ports Authority received a letter from the City Assessor of Davao for
the assessment and collection of real property taxes against its administered properties located at Sasa
Port. It appealed the assessment via registered mail to the Local Board of Assessment Appeals through
the Office of the City Treasurer of Davao on August 2, 2004. The Office of the City Treasurer of Davao
received the appeal on August 11, 2004, and forwarded it to the Chairman of the Local Board of
Assessment Appeals, who received it on September 6, 2004. While the case was pending, the City of
Davao posted a notice of sale of delinquent real properties, 5 including the three (3) properties subject
of this case, namely, 1) the quay covered by Tax Declaration No. E-04-09-063842; 2) the parcel of land
with Tax Declaration No. E-04-09-092572; and 3) the administrative building under Tax Declaration No.
E-04-09-090803.6

The Local Board of Assessment Appeals dismissed the Philippine Ports Authority's appeal for having been
filed out of time, and for its lack of jurisdiction on the latter's tax exemption in its January 25, 2005
Order.7 The Philippine Ports Authority appealed8 before the Central Board of Assessment Appeals, but
this appeal was denied in the Central Board of Assessment Appeals April 7, 2005 Decision.9 Thus, it filed
an appeal with the Court of Tax Appeals.10

The Philippine Ports Authority claimed that it did not receive any warrant of levy for the three (3)
properties which were sold to respondent City of Davao, or any notice that they were going to be
auctioned. It was informed that it had one (1) year from the date of registration of the sale within which
to redeem the properties by paying the taxes, penalties, and incidental expenses, plus interest at the
rate of 2% per month on the purchase price.11

Thus, it filed a petition for certiorari with the Court of Appeals, arguing that the City of Davao's taxation
of its properties and their subsequent auction and sale to satisfy the alleged tax liabilities were without
or in excess of its jurisdiction and contrary to law. It argued that it had no other speedy and adequate
remedy except to file a petition for certiorari with the Court of Appeals.12

While the petition was pending with the Court of Appeals, the Court of Tax Appeals promulgated a
Decision13 dated July 30, 2007, granting the Philippine Ports Authority's appeal, resolving in its favor
the issue of its liability for the real estate tax of Sasa Port and its buildings. The dispositive portion of
this Decision read:

WHEREFORE, premises considered, the present Petition for Review is hereby GRANTED. Accordingly,
the Decision dated April 7, 2005 of the Central Board of Assessment Appeals in CBAA Case No. M-20
and the Order dated January 25, 2005 of the LBAA in LBAA Case No. 01-04 dismissing the appeal are
hereby SET ASIDE. We declare the Sasa Port, Davao City and its buildings EXEMPT from the real estate
tax imposed by Davao City. We declare VOID all the real estate tax assessments issued by Davao City
on the Sasa Port and its buildings.

SO ORDERED.14 (Emphasis in the original)

Additionally, while the petition was pending with the Court of Appeals, the Court of Tax Appeals issued
an Entry of Judgment stating that its July 30, 2007 Decision became final and executory on February
13, 2008, considering that no appeal to the Supreme Court had been taken.15

Thereafter, the Court of Appeals dismissed the petition in its December 15, 2008 Decision. 16 It held that
the Court of Tax Appeals had exclusive jurisdiction to determine the matter 17 and said that the Philippine
Ports Authority "should have applied for the issuance of writ of injunction or prohibition before the Court
of Tax Appeals."18 It further found the petition dismissible on the ground that the Philippine Ports
Authority committed forum shopping, as the petition raised the same facts and issues as in its appeal
before the Court of Tax Appeals.19

Petitioner filed a motion for reconsideration, which the Court of Appeals denied in its September 11,
2009 Resolution,20 which read, in part:
This Court GRANTS the Motion For Extension Of Time To tile Comment and NOTES the Comment
subsequently tiled within the extended period prayed for, and DENIESpetitioner's Motion for
Reconsideration from the Decision dated December 15, 2008, dismissing the petition for prohibition and
upholding the authority of the City Government of Davao in taxing, auctioning and selling petitioner's
properties to satisfy the latter's real property tax liabilities.

....

WHEREFORE, the instant Motion for Reconsideration is hereby DENIED.

SO ORDERED.21 (Emphasis in the original)

Thus, the Philippine Ports Authority filed its Petition for Review 22 under Rule 45 of the Rules of Court
before this Court against the City of Davao, Sangguniang Panglungsod ng Davao City, City Mayor of
Davao City, City Treasurer of Davao City, City Assessor of Davao City, and Central Board of Assessment
Appeals (collectively, respondents), assailing the Court of Appeals December 15, 2008 Decision and
September 11, 2009 Resolution. Respondents filed their Comment 23 to which petitioner filed its Reply.24

Petitioner argues that it did not commit forum shopping, asserting that the only element of forum
shopping present as between the appeals filed before the Court of Tax Appeals and the Court of Appeals
is identity of parties.25 Its arguments regarding the jurisdiction of the Court of Appeals are inscrutable
but appear to maintain that the Court of Appeals has jurisdiction on the basis of urgency. It also avers
that the Court of Appeals erred when it "ruled, declared and upheld the authority" of respondent City of
Davao to tax, auction, and sell its properties.26 It points out that the Supreme Court has held that as a
government instrumentality, its properties cannot be taxed by local government.27

Respondents insist that forum shopping exists, considering that the elements of litis pendentia were
present when the case was filed with the Court of Appeals. 28 On the question of the propriety of the
imposition of tax on petitioner's properties, respondents claim that there was an error in the Court of
Tax Appeals July 30, 2007 Decision. Thus, while they maintain that this case is not the proper case to
rectify the error of the Court of Tax Appeals, they ask that this Court lay down a jurisprudential
pronouncement on the real property tax treatment of petitioner's properties.29

The issues for resolution by this Court are:

First, whether or not the Court of Appeals had jurisdiction to issue the injunctive relief prayed for by
petitioner Philippine Ports Authority; and

Second, whether or not the petition before the Court of Appeals was properly dismissed for forum
shopping.

This Court denies the Petition.

In real property tax cases such as this, the remedy of a taxpayer depends on the stage in which the
local government unit is enforcing its authority to impose real property taxes.30 Moreover, as jurisdiction
is conferred by law,31 reference must be made to the law when determining which court has jurisdiction
over a case, in relation to its factual and procedural antecedents.

Petitioner has failed to cite any law supporting its contention that the Court of Appeals has jurisdiction
over this case. On the other hand, Section 7, paragraph (a)(5) of Republic Act No. 1125, 32 as amended
by Republic Act No. 9282,33 provides that the Court of Tax Appeals has exclusive appellate jurisdiction
over:
Section 7. Jurisdiction. - The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

. . . .
(5) Decisions of the Central Board of Assessment Appeals in the exercise of its appellate jurisdiction
over cases involving the assessment and taxation of real property originally decided by the provincial or
city board of assessment appeals[.]

The Central Board of Assessment Appeals April 7, 2005 Decision assailed by petitioner before the Court
of Appeals was rendered in the exercise of its appellate jurisdiction over the real property tax assessment
of its properties. Clearly, this falls within the above-cited provision. Indeed, there is no dispute that this
Central Board of Assessment Appeals decision constitutes one of the cases covered by the Court of Tax
Appeals' exclusive jurisdiction.

Despite the clear wording of the law placing this case within the exclusive appellate jurisdiction of the
Court of Tax Appeals, petitioner insists that the Court of Appeals could have issued the relief prayed for
despite the provisions of Republic Act No. 9282, considering its urgent need for injunctive relief. 34

Petitioner's contention has no legal basis whatsoever and must be rejected. Urgency does not remove
the Central Board of Assessment Appeals decision from the exclusive appellate jurisdiction of the Court
of Tax Appeals. This is particularly true since, as properly recognized by the Court of Appeals, petitioner
could have, and should have, applied for injunctive relief with the Court of Tax Appeals, which has the
power to issue the preliminary injunction prayed for.35

In City of Manila v. Grecia-Cuerdo,36 this Court expressly recognized the Court of Tax Appeals' power to
determine whether or not there has been grave abuse of discretion in cases falling within its exclusive
appellate jurisdiction and its power to issue writs of certiorari:

On the strength of the above constitutional provisions, it can be fairly interpreted that the power of the
CTA includes that of determining whether or not there has been grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of the RTC in issuing an interlocutory order in cases falling
within the exclusive appellate jurisdiction of the tax court. It, thus, follows that the CTA, by constitutional
mandate, is vested with jurisdiction to issue writs of certiorari in these cases.

Indeed, in order for any appellate court, to effectively exercise its appellate jurisdiction, it must have
the authority to issue, among others, a writ of certiorari. In transferring exclusive jurisdiction over
appealed tax cases to the CTA, it can reasonably be assumed that the law intended to transfer also such
power as is deemed necessary, if not indispensable, in aid of such appellate jurisdiction. There is no
perceivable reason why the transfer should only be considered as partial, not total.

Consistent with the above pronouncement, this Court has held as early as the case of J.M. Tuason &
Co., Inc. v. Jaramillo, et al. that "if a case may be appealed to a particular court or judicial tribunal or
body, then said court or judicial tribunal or body has jurisdiction to issue the extraordinary writ of
certiorari, in aid of its appellate jurisdiction." This principle was affirmed in De Jesus v. Court of Appeals,
where the Court stated that "a court may issue a writ of certiorari in aid of its appellate jurisdiction if
said court has jurisdiction to review, by appeal or writ of error, the final orders or decisions of the lower
court." The rulings in J.M. Tuason and De Jesus were reiterated in the more recent cases of Galang, Jr.
v. Geronimo and Bulilis v. Nuez.

Furthermore, Section 6, Rule 135 of the present Rules of Com1 provides that when by law, jurisdiction
is conferred on a court or judicial officer, all auxiliary writs, processes and other means necessary to
carry it into effect may be employed by such court or officer.

If this Court were to sustain petitioners' contention that jurisdiction over their certioraripetition lies with
the CA, this Court would be confirming the exercise by two judicial bodies, the CA and the CTA, of
jurisdiction over basically the same subject matter — precisely the split-jurisdiction situation which is
anathema to the orderly administration of justice. The Court cannot accept that such was the legislative
motive, especially considering that the law expressly confers on the CTA, the tribunal with the specialized
competence over tax and tariff matters, the role of judicial review over local tax cases without mention
of any other court that may exercise such power. Thus, the Court agrees with the ruling of the CA that
since appellate jurisdiction over private respondents' complaint for tax refund is vested in the CTA, it
follows that a petition for certiorari seeking nullification of an interlocutory order issued in the said case
should, likewise, be filed with the same court. To rule otherwise would lead to an absurd situation where
one court decides an appeal in the main case while another court rules on an incident in the very same
case.

Stated differently, it would be somewhat incongruent with the pronounced judicial abhorrence to split
jurisdiction to conclude that the intention of the law is to divide the authority over a local tax case filed
with the RTC by giving to the CA or this Court jurisdiction to issue a writ of certiorari against interlocutory
orders of the RTC but giving to the CTA the jurisdiction over the appeal from the decision of the trial
court in the same case. It is more in consonance with logic and legal soundness to conclude that the
grant of appellate jurisdiction to the CTA over tax cases filed in and decided by the RTC carries with it
the power to issue a writ of certiorari when necessary in aid of such appellate jurisdiction. The
supervisory power or jurisdiction of the CTA to issue a writ of certiorari in aid of its appellate jurisdiction
should co-exist with, and be a complement to, its appellate jurisdiction to review, by appeal, the final
orders and decisions of the RTC, in order to have complete supervision over the acts of the latter.

A grant of appellate jurisdiction implies that there is included in it the power necessary to exercise it
effectively, to make all orders that will preserve the subject of the action, and to give effect to the final
determination of the appeal. It carries with it the power to protect that jurisdiction and to make the
decisions of the court thereunder effective. The court, in aid of its appellate jurisdiction, has authority
to control all auxiliary and incidental matters necessary to the efficient and proper exercise of that
jurisdiction. For this purpose, it may, when necessary, prohibit or restrain the performance of any act
which might interfere with the proper exercise of its rightful jurisdiction in cases pending before it.

Lastly, it would not be amiss to point out that a court which is endowed with a particular jurisdiction
should have powers which are necessary to enable it to act effectively within such jurisdiction. These
should be regarded as powers which are inherent in its jurisdiction and the court must possess them in
order to enforce its rules of practice and to suppress any abuses of its process and to defeat any
attempted thwarting of such process.37(Citations omitted)

In this case, the Court of Tax Appeals had jurisdiction over petitioner's appeal to resolve the question
of whether or not it was liable for real property tax. To recall, the real property tax liability was the very
reason for the acts which petitioner wanted to have enjoined. It was, thus, the Court of Tax Appeals,
and not the Court of Appeals, that had the power to preserve the subject of the appeal, to give effect
to its final determination, and, when necessary, to control auxiliary and incidental matters and to prohibit
or restrain acts which might interfere with its exercise of jurisdiction over petitioner's appeal. Thus,
respondents' acts carried out pursuant to the imposition of the real property tax were also within the
jurisdiction of the Court of Tax Appeals.

Even if the law had vested the Court of Appeals with jurisdiction to issue injunctive relief in real property
tax cases such as this, the Court of Appeals was still correct in dismissing the petition before it. Once a
court acquires jurisdiction over a case, it also has the power to issue all auxiliary writs necessary to
maintain and exercise its jurisdiction, to the exclusion of all other courts.38 Thus, once the Court of Tax
Appeals acquired jurisdiction over petitioner's appeal, the Court of Appeals would have been precluded
from taking cognizance of the case.

II

The rule against forum shopping is violated when a party institutes more than one action based on the
same cause to increase its chances of obtaining a favorable outcome. Thus, when a party institutes a
case while another case is pending, where there is an identity of parties and an identity of rights asserted
and relief prayed for such that judgment in one case amounts to res judicata in the other, it is guilty of
forum shopping.39

To reverse a court determination that a party has violated the rule against forum shopping, this party
must show that one or more of the requirements for forum shopping does not exist. To this end,
petitioner attempts to differentiate the petition filed with the Court of Appeals from the appeal filed with
the Court of Tax Appeals. It argues that the right asserted before the Court of Appeals is its right to
peacefully possess its ports, free from the threat of losing the properties due to tax liabilities, whereas
the right asserted before the Court of Tax Appeals is its right to be exempt from real property tax, as a
government instrumentality. Petitioner further argues that the reliefs sought from the two (2) tribunals
were not the same—it sought a final relief from payment of real property taxes on its ports from the
Court of Tax Appeals; on the other hand, it sought a temporary and immediate relief from respondents'
acts from the Court of Appeals, while the issue of taxability was still pending with the Court of Tax
Appeals.40

However, even assuming without conceding that the arguments laid down by petitioner could support
its claim that it did not forum shop, this Court cannot accept that it was what was argued before the
Court of Tax Appeals and Court of Appeals, respectively, without reading the text itself. Whether or not
the rights asserted and reliefs prayed for in the two (2) petitions were different would best determined
from a reading of the appeal and petition themselves.

Unfortunately for petitioner, it submitted only its own arguments. Neither its petition before the Court
of Appeals nor its appeal before the Court of Tax Appeals was attached to the petition filed with this
Court. Without any of these texts, this Court is in no position to determine that the elements of forum
shopping are absent here.

Thus, this Court affirms the Court of Appeals' finding that the rule against forum shopping was violated
when petitioner filed its Petition for Certiorari despite its pending appeal before the Court of Tax
Appeals.41

WHEREFORE, the Petition for Review on Certiorari is DENIED. The Court of Appeals December 15,
2008 Decision and September 11, 2009 Resolution in CA-G.R. SP No. 00735-MIN are
hereby AFFIRMED.

SO ORDERED.

Velasco, Jr., (Chairperson), Bersamin, Martires, and Gesmundo, JJ., concur.

July 6, 2018

NOTICE OF JUDGMENT

Sirs/Mesdames:

Please take notice that on June 6, 2018 a Decision, copy attached hereto, was rendered by the
Supreme Court in the above-entitled case, the original of which was received by this Office on July 6,
2018 at 2:47 p.m.
 Very truly yours,

(SGD.) WILFREDO V. LAPITAN

Division Clerk of Court

SECOND DIVISION

G.R. Nos. 201225-26 (From CTA-EB Nos. 649 & 651), April 18, 2018

TEAM SUAL CORPORATION (FORMERLY MIRANT SUAL

CORPORATION), Petitioner, v.COMMISSIONER OF INTERNAL
REVENUE, Respondent.

G.R. No. 201132 (From CTA-EB No. 651), April 18, 2018

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. TEAM SUAL

CORPORATION (FORMERLY MIRANT SUAL
CORPORATION), Respondent.

G.R. No. 201133 (From CTA-EB No. 649), April 18, 2018

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. TEAM SUAL

CORPORATION (FORMERLY MIRANT SUAL
CORPORATION), Respondent.

DECISION

REYES, JR., J.:

Nature of the Petitions

Challenged before the Court via Petitions for Review on Certiorari1 under Rule 45
of the Rules of Court is the Consolidated Decision2 of the Court of Tax Appeals
(CTA) En Banc dated September 15, 2011 and its subsequent Resolution 3 dated
March 21,2012 in CTA-EB Nos. 649 and 651. The assailed Decision and Resolution
modified the Amended Decision4 of the CTA Special First Division dated June 7,
2010 and partially granted Team Sual Corporation's (TSC) claim for refund in the
amount of P123,110,001.68 representing unutilized input Value Added Tax (VAT)
for the second, third, and fourth quarters of taxable year 2001.

The Antecedent Facts

TSC is a domestic corporation duly organized and existing under and by virtue of
the laws of the Philippines with principal office at Barangay Pangascasan, Sual,
Pangasinan. It is principally engaged in the business of power generation and
subsequent sale thereof to the National Power Corporation (NPC) under a Build,
Operate, and Transfer scheme. TSC was originally registered with the Securities
and Exchange Commission under the name "Pangasinan Electric Corporation." On
August 17, 1999, it changed its name to "Southern Energy Pangasinan, Inc.," which
was then changed to "Mirant Sual Corporation" on June 28, 2001, and finally to
"Team Sual" on July 23, 2007.5

As a seller of services, TSC is registered with the Bureau of Internal Revenue (BIR)
as a VAT taxpayer with Certificate of Registration bearing RDO Control No. 05-
0181 and Taxpayer's Identification No. 003-841-103.6

On December 6, 2000, TSC filed with the BIR Revenue District Office No. 5-
Alaminos, Pangasinan an application for zero-rating arising from its sale of power
generation services to NPC for the taxable year 2001. The same was subsequently
approved. As a result, TSC filed its VAT returns covering the four quarters of taxable
year 2001.7

For the first, second, third, and fourth quarters of 2001, TSC reported excess input
VAT amounting to P37,985,009.25, P29,298,556.12, P32,869,835.40, and
P66,566,967.02, respectively. The total excess input VAT claimed by TSC for the
taxable year amounted to P166,720,367.79.8

On March 20, 2003, TSC filed with the BIR an administrative claim for refund in
the aggregate amount of P166,720,367.79 for its unutilized input VAT for taxable
year 2001.9

On March 31, 2003, without waiting for the resolution of its administrative claim for
refund or tax credit, TSC filed with the CTA Division a petition for review docketed
as CTA Case No. 6630. It prayed for the refund or issuance of a tax credit certificate
for its alleged unutilized input VAT for the first quarter of taxable year 2001 in the
amount of P37,985,009.25.10
On July 23, 2003, TSC filed another petition for review docketed as CTA Case No.
6733, seeking the refund or issuance of a tax credit certificate for its alleged
unutilized input VAT for the second, third, and fourth quarters of taxable year 2001
in the amount of P128,735,358.54. Both cases were consolidated on August 7,
2003.11

Trial of the case ensued.

In its Decision dated June 9, 2006, the CTA Division partially granted TSC's claim.
It allowed the refund of unutilized input VAT for the first, third, and fourth quarters
of taxable year 2001, but disallowed the refund for the second quarter. The CTA
Division ruled that the claim for the second quarter did not fall within the two-year
prescriptive period. The dispositive portion of the CTA Division's decision reads:

WHEREFORE, the instant Petition for Review is hereby PARTIALLY

GRANTED. ACCORDINGLY, respondent Commissioner of Internal Revenue is
hereby ORDERED to REFUND or to ISSUE A TAX CREDIT
CERTIFICATE in the amount of ONE HUNDRED SEVENTEEN MILLION
THREE HUNDRED THIRTY THOUSAND FIVE HUNDRED FIFTY PESOS
AND 62/100 (P117,330,550.62) to petitioner Mirant Sual Corporation, representing
unutilized input VAT from its domestic purchases of goods and services and
importation of goods attributable to its effectively zero-rated sales to the National
Power Corporation for the first, third, and fourth quarters of taxable year 2001.12

The Commissioner of Internal Revenue (CIR) filed a Motion for Partial

Reconsideration on July 3, 2009, praying that the entire claim for refund be denied.
The CIR argued that TSC has not sufficiently proven its entitlement to refund and
that the CTA had no jurisdiction to act on the judicial claim for refund because the
same was prematurely filed.13

Likewise, in its Motion for Partial Reconsideration dated July 7, 2009 and
Supplemental Motion for Partial Reconsideration dated July 31, 2009, TSC prayed
that the CTA, in addition to the amount already granted, refund the amounts of: (1)
P29,298,556.12 representing input VAT for the second quarter of taxable year 2001,
and (2) P12,761,224.50 for input VAT on local purchases of goods and services for
the same year.14

On June 7, 2010, the CTA Division promulgated an Amended Decision which

partially granted TSC's additional claim for refund. In said decision, the CTA denied
the claim for input VAT on local purchases of goods and services, but allowed the
refund for input VAT for the second quarter of taxable year 2001. However, the
grant was reduced from P29,298,556.12 to P27,233,561.57 for failure to substantiate
the difference.15 The dispositive portion of the amended decision states:

WHEREFORE, respondent's Motion for Partial Reconsideration filed on July 3,

2009 and petitioner's Supplemental Motion for Partial Reconsideration filed on July
31, 2009 are hereby DENIED for lack of merit. Petitioner's Motion for Partial
Reconsideration filed on July 7, 2009 is hereby PARTIALLY GRANTED and this
Court's Decision dated June 9, 2009 denying petitioner's claim for refund of
unutilized input VAT for the second quarter of 2001 is hereby MODIFIED.
Accordingly, respondent Commissioner of Internal Revenue is
hereby ORDERED to REFUND or to ISSUE A TAX CREDIT
CERTIFICATE in the amount of ONE HUNDRED FORTY FOUR MILLION
FIVE HUNDRED SIXTY FOUR THOUSAND ONE HUNDRED TWELVE
PESOS AND 19/100 (P144,564,112.19) to petitioner Team Sual Corporation
(formerly: Mirant Sual Corporation), representing unutilized input VAT from its
domestic purchases of goods and services and importation of goods attributable to
its effectively zerorated sales to the National Power Corporation for the first, second,
third, and fourth quarters of taxable year 2001.

SO ORDERED.16

Dissatisfied, TSC filed a Petition for Review docketed as CTA EB No. 649 before
the CTA En Banc. It posits that the CTA Division erred in disallowing the amount
of P12,761,224.50 for input VAT on local purchases of goods and services on the
mere fact that the pertinent supporting documents were issued under TSC's former
name. TSC argues that a corporation's change of name does not affect its identity or
rights. Thus, it should still be entitled to claim the said input VAT.17

The CIR also filed a petition for review praying that the Decision dated June 9, 2009
and the Amended Decision dated June 7, 2010 be reversed and set aside and another
one be rendered denying the entire claim for refund. The CIR reiterated the
arguments she raised in her Motion for Partial Reconsideration. The case was
docketed as CTA EB No. 651.18

On September 15, 2010, the CTA En Banc resolved19 to consolidate CTA EB No.
649 with CTA EB No. 651.

On September 15, 2011, the CTA En Banc rendered a Consolidated

Decision20 granting petitioner's claim for refund of input VAT for the second, third,
and fourth quarters of taxable year 2001 amounting to P123,110,001.68. Insofar as
the refund of the input VAT for the first quarter of taxable year 2001 is concerned,
the CTA En Banc ruled that the CTA did not acquire jurisdiction over it as it had
been filed prematurely. The dispositive portion of said decision reads as follows:

WHEREFORE, all the foregoing considered, the Commissioner's Petition for

Review in CTA EB No. 651 is hereby DENIED.

On the other hand, Team Sual's Petition for Review in CTA EB No. 649 is
hereby PARTIALLY GRANTED, but only insofar as the consideration of the
portion of the refund claim disallowed by the court a quo upon the reason that the
supporting documents were in Team Sual's former names.

The Decision promulgated on June 9, 2009 and Amended Decision dated June 7,
2010 by the Court in Division, are therefore MODIFIED. Accordingly, the
Commissioner is hereby ORDERED to REFUND to Team Sual the amount of, or
to ISSUE A TAX CREDIT CERTIFICATE in its favor amounting to, ONE
HUNDRED TWENTY THREE MILLION ONE HUNDRED TEN
THOUSAND ONE PESOS and SIXTY EIGHT CENTAVOS
(P123,110,001.68), representing Team Sual's unutilized input VAT attributable to
its effectively zero-rated sales to NPC for the second, third and fourth quarters of
taxable year 2001.

SO ORDERED.21

TSC filed a Motion for Partial Reconsideration of the CTA En Banc's decision. It
insists that the judicial claim for refund over the first quarter of 2001 was not
prematurely filed and that the CTA Division did in fact have jurisdiction to act on it.
Similarly, the CIR filed a motion for reconsideration, praying that TSC's claim be
denied altogether.22

In its Resolution dated March 21, 2012, the CT A En Banc denied the motions of
both TSC and the CIR, affirming its September 15, 2011 Decision as follows:

WHEREFORE, premises considered, the Motion for Reconsideration of the

Commissioner and the Motion for Partial Reconsideration of Team Sual are
hereby DENIED for lack of merit.

SO ORDERED.23

Aggrieved, the CIR and TSC filed their respective Petitions for Review
on Certiorari under Rule 45 before the Court. TSC's petition was docketed as G.R.
No. 201225-26,24 while the CIR's petitions were docketed as G.R. Nos. 20113225 and
201133.26

In the Resolutions dated June 25, 201227 and July 18, 2012,28 the Court resolved to
consolidate G.R. Nos. 201132, 201133, and 201225-26.

The Issues

On one hand, the CIR argues the following for the total disallowance of TSC's claim:

I. The Honorable Court of Tax Appeals En Banc erred, when it affirmed, with
modification, the former First Division's decision promulgated on June 9,
2009 and Amended Decision dated June 7, 2012, granting respondent's claim
for refund in the amount of P123,110,001.68 allegedly representing unutilized
input VAT attributable to its effectively zero-rated sales to the National Power
Corporation for the second, third, and fourth quarters of taxable year 2001,
because the Honorable Court of Tax Appeals had no jurisdiction to act on
respondent's petitions for review; and
II. Assuming that the former First Division had jurisdiction, petitioner avers that
its denial by inaction was proper and that respondent has not sufficiently
proven its entitlement to a refund.29

On the other hand, TSC raises the following grounds for the allowance of its judicial
claim for refund covering the first quarter of taxable year 2001:

I. The CTA acquired jurisdiction over the case filed with and tried by the First
Division of the CTA due to the failure of respondent CIR to invoke the rule
of non-exhaustion of administrative remedies; and

II. The CTA En Banc's application of the doctrine laid down in the case
of Commissioner Of Internal Revenue vs. Aichi Forging Company of Asia30 to
petitioner's claim for refund is erroneous as:

A.) It will violate established rules on non-retroactivity of judicial decisions;

B.) It will cause injustice to petitioner who relied in good faith on the existing
jurisprudence at the time of the filing of the claim for refund; and

C.) It will unjustly enrich the government at the expense of the petitioner.31
In sum, the rise or fall of the instant petitions rest upon whether the CTA has
jurisdiction to act on TSC's two judicial claims for refund.

The Court's Ruling

The petitions are bereft of merit.

In order for the CTA to acquire jurisdiction over a judicial claim for refund or tax
credit arising from unutilized input VAT, the said claim must first comply with the
mandatory 120+30-day waiting period. Any judicial claim for refund or tax credit
filed in contravention of said period is rendered premature, depriving the CTA of
jurisdiction to act on it.32

Pursuant to Section 112, Subsections (A) and (C) of the National Internal Revenue
Code (NIRC) of 1997,33 the procedure to be followed in claiming a refund or tax
credit of unutilized input VAT are as follows:

Sec. 112. Refunds or Tax Credits of Input Tax.—

(A) Zero-rated or Effectively Zero-rated Sales. - Any VAT-registered person, whose

sales are zero-rated or effectively zero-rated may, within two (2) years after the
close of the taxable quarter when the sales were made, apply for the issuance of
a tax credit certificate or refund of creditable input tax due or paid attributable
to such sales, except transitional input tax, to the extent that such input tax has not
been applied against output tax: Provided, however, That in the case of zero-rated
sales under Section 106(A)(2)(a)(1), (2) and (b) and Section 108 (B)(1) and (2), the
acceptable foreign currency exchange proceeds thereof had been duly accounted for
in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas
(BSP): Provided, further, That where the taxpayer is engaged in zero-rated or
effectively zero-rated sale and also in taxable or exempt sale of goods of properties
or services, and the amount of creditable input tax due or paid cannot be directly and
entirely attributed to any one of the transactions, it shall be allocated proportionately
on the basis of the volume of sales. Provided, finally, that for a person making sales
that are zero-rated under Section 108(B) (6), the input taxes shall be allocated ratably
between his zero-rated and non-zero-rated sales.

xxxx

(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In
proper cases, the Commissioner shall grant a refund or issue the tax credit certificate
for creditable input taxes within one hundred twenty (120) days from the date of
submission of complete documents in support of the application filed in accordance
with Subsections (A) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or
the failure on the part of the Commissioner to act on the application within the
period prescribed above, the taxpayer affected may, within thirty (30) days from
the receipt of the decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the unacted claim with the
Court of Tax Appeals. (Emphasis supplied)

It is clear from the above-quoted provisions that any taxpayer seeking a refund or
tax credit arising from unutilized input VAT from zero-rated or effectively zero-
rated sales should first file an initial administrative claim with the BIR. This claim
for refund or tax credit must be filed within two years after the close of the taxable
quarter when the sales were made.

The CIR is then given a period of 120-days from the submission of complete
documents in support of the application to either grant or deny the claim. If the claim
is denied by the CIR or the latter has not acted on it within the 120-day period, the
taxpayer-claimant is then given a period of 30 days to file a judicial
claim via petition for review with the CTA.

As such, the law provides for two scenarios before a judicial claim for refund may
be filed with the CTA: (1) the full or partial denial of the claim within the 120-day
period, or (2) the lapse of the 120-day period without the CIR having acted on the
claim. It is only from the happening of either one may a taxpayer-claimant file its
judicial claim for refund or tax credit for unutilized input VAT. Consequently,
failure to observe the said period renders the judicial claim premature, divesting the
CTA of jurisdiction to act on it.

This mandatory and jurisdictional nature of the 120-day waiting period has been
reiterated time and again by the Court.34 In the case of Commissioner of Internal
Revenue vs. San Roque Power Corporation,35 the Court En Banc categorically
stated:

Failure to comply with the 120-day waiting period violates a mandatory provision
of law. It violates the doctrine of exhaustion of administrative remedies and renders
the petition premature and thus without a cause of action, with the effect that the
CTA does not acquire jurisdiction over the taxpayer's petition. Philippine
jurisprudence is replete with cases upholding and reiterating these doctrinal
principles.36
Likewise, in Harte-Hanks Philippines, Inc. vs. Commissioner of Internal
Revenue,37 the Court illustrated the fatal effect of non-observance of the 120-day
period. In said case, the Court dismissed the judicial claim for refund because it was
filed a mere seven days after taxpayer-claimant HHPI filed its administrative claim,
without waiting for it to be first reso1ved. The Court explained that the CTA must
wait for the Commissioner's decision on the administrative claim or the lapse of the
120-day waiting period otherwise there would be nothing to review. It is the denial
or inaction "deemed a denial" which the taxpayer-claimant takes to the CTA for
review. Without any 'decision,' the CTA as a court of special jurisdiction acquires
no jurisdiction over a taxpayer-claimant's judicial claim for refund.38

In the instant case, TSC filed its administrative claim for refund for taxable year
2001 on March 20, 2003, well within the two-year period provided for by law. TSC
then filed two separate judicial claims for refund: one on March 31, 2003 for the first
quarter of 2001, and the other on July 23, 2003 for the second, third, and fourth
quarters of the same year.39

Given the fact that TSC's administrative claim was filed on March 20, 2003, the CIR
had 120 days or until July 18, 2003 to act on it. Thus, the first judicial claim was
premature because TSC filed it a mere 11 days after filing its administrative claim.

On the other hand, the second judicial claim filed by TSC was filed on time because
it was filed on July 23, 2003 or five days after the lapse of the 120-day
period.40 Accordingly, it is clear that the second judicial claim complied with the
mandatory waiting period of 120 days and was filed within the prescriptive period
of 30 days from the CIR's action or inaction. Therefore, the CTA division only
acquired jurisdiction over TSC's second judicial claim for refund covering its
second, third, and fourth quarters of taxable year 2001.

TSC submits that at the time of the filing of its claims for refund, prevailing
jurisprudence espoused that the 120-day waiting period was merely permissive
instead of mandatory.41 Otherwise stated, TSC argues that as long as a taxpayer-
claimant filed both its administrative and judicial claim within the two year
prescriptive period under Section 112(A) of the NIRC then there would be no need
to comply with the 120-day waiting period. This assertion has no basis.

In support of its position, TSC cites42 the cases of Intel Technology Philippines, Inc.
vs. Commissioner of Internal Revenue,43San Roque Power Corporation vs.
Commissioner of Internal Revenue,44AT&T Communications Services Philippines,
Inc. vs. Commissioner of Internal Revenue,45 and Southern Philippines Power
Corporation vs. Commissioner of Internal Revenue.46 TSC insists that in said cases,
because the Court allowed the filing of the judicial claim even before the CIR could
act on the administrative claim, then the Court implicitly ruled that the 120-day
period is not mandatory. However, a more thorough study of the cases reveals that
they are inapplicable to this controversy as they involve different issues.

In Intel Technology Philippines,47 the Court resolved the issue of whether entities
engaged in business are required to indicate in their receipts or invoices the authority
from the BIR to print the same. Nowhere in the case did the Court rule that the 120-
day period may be dispensed with as long as the administrative and judicial claims
are filed within the two-year prescriptive period.

In San Roque Power Corporation,48 the main issue revolved around the coverage of
the terms, "zero-rated or effectively zero-rated sales." The Court discussed that the
NIRC does not limit the definition of "sale" to commercial transactions in the normal
course of business, but extends the term to transactions which are also "deemed" sale
under Section 106(B) of the NIRC. Again, nowhere in said case was the 120-day
period even remotely mentioned or ruled upon.

Finally, in AT&T Communications Services Philippines, Inc.49 and Southern

Philippines Power Corporation,50 the issues resolved by the Court dealt with the
substantiation requirements in relation to a claim for tax refund or credit Likewise,
the Court never even touched upon the nature of the 120-day waiting period in said
case.

Given the foregoing, it is apparent that none of these cases constitute binding
precedent as to the nature of the 120-day period. As such, TSC cannot now claim
that at the time they filed their judicial claims, they relied in good faith on the then-
prevailing interpretation as to the nature of the 120-day period.

Nevertheless, TSC insists that assuming arguendo that the 120-day period was
indeed mandatory and jurisdictional, the issue of its non-compliance with said
period, as a ground to deny its claim, was already waived since the CIR did not raise
it in the proceedings before the CTA Division. It claims that non-compliance with
the 120-day period prior to the filing of a judicial claim with the CTA merely results
in a lack of cause of action, a ground which may be waived for failure to timely
invoke the same.51

However, it is apparent from the records that the issue of TSC's non-compliance with
the 120-day waiting period has been raised by the CIR throughout the pendency of
the entire case. In fact, the records reveal that the CIR raised it at the earliest possible
opportunity, when it filed its motion for partial reconsideration with the CTA
Division dated July 3, 2009.52

In any case, even if the CIR failed to raise the issue of TSC's non-compliance with
the 120-day waiting period at the first instance, such failure would not operate to
vest the CTA with jurisdiction over TSC's judicial claims for refund. The Court has
already settled that a judicial claim for refund which does not comply with the 120-
day mandatory waiting period renders the same void.53 As such, no right can be
claimed or acquired from it, notwithstanding the failure of a party to raise it as a
ground for dismissal. In San Roque,54 the Court expounded on such point, to wit:

San Roque's failure to comply with the 120-day mandatory period renders its petition
for review with the CTA void. Article 5 of the Civil Code provides, "Acts executed
against provisions of mandatory or prohibitory laws shall be void, except when the
law itself authorizes their validity.'' San Roque's void petition for review cannot be
legitimized by the CTA or this Court because Article 5 of the Civil Code states that
such void petition cannot be legitimized "except when the law itself authorizes [its]
validity." There is no law authorizing the petition's validity.

It is hornbook doctrine that a person committing a void act contrary to a

mandatory provision of law cannot claim or acquire any right from his void
act. A right cannot spring in favor of a person from his own void or illegal act. This
doctrine is repeated in Article 2254 of the Civil Code, which states, "No vested or
acquired right can arise from acts or omissions which are against the law or which
infringe upon the rights of others." For violating a mandatory provision of law in
filing its petition with the CTA, San Roque cannot claim any right arising from such
void petition. Thus, San Roque's petition with the CTA is a mere scrap of
paper.55 (Emphasis supplied)

Being a mere scrap of paper, TSC's judicial claim for refund filed on March 31, 2003
covering the first quarter of taxable year 2001 cannot be the source of any rights.

Thus, considering the foregoing, the Court agrees with the ruling of the CTA En
Banc which held that between the March 31 and the July 23 petitions for review filed
by TSC, the CTA Division only acquired jurisdiction over the latter.

Seeing as the CTA validly acquired jurisdiction over the July 23 petition for review
covering the second, third, and fourth quarters of taxable year 2001, we give full
accord to its factual findings with respect to the amount of duly substantiated excess
input VAT for said periods.
The CTA En Banc, based on their appreciation of the evidence presented to them,
unequivocally ruled that TSC has sufficiently proven its entitlement to the refund or
the issuance of a tax credit certificate in its favor for unutilized input VAT in the
amount of P123,110,001.68.56

It is well settled that factual findings of the CTA when supported by substantial
evidence, will not be disturbed on appeal. Due to the nature of its functions, the tax
court dedicates itself to the study and consideration of tax problems and necessarily
develops expertise thereon. Unless there has been an abuse of discretion on its part,
the Court accords the highest respect to the factual findings of the CTA.57

It must be emphasized that generally, it is not the province of an appeal by petition

for review on certiorari to determine factual matters. Although there are
exceptions58 to this general rule, none of these exist in the instant case. With that
being said, the issue of whether a claimant has actually presented the necessary
documents that would prove its entitlement to a tax refund or tax credit, is
indubitably a question of fact.59

As a final note, tax refunds or tax credits, just like tax exemptions, are strictly
construed against the taxpayer-claimant. A claim for tax refund is a statutory
privilege and the mere existence of unutilized input VAT does not entitle the
taxpayer, as a matter of right, to it. As such, the rules and procedure in claiming a
tax refund should be faithfully complied with. Non-compliance with the pertinent
laws should render any judicial claim fatally defective.60

WHEREFORE, premises considered, the instant petitions are DENIED. The

Consolidated Decision dated September 15, 2011 and the Resolution dated March
21, 2012 of the Court of Tax Appeals En Banc in CTA EB No. 649 and CTA EB
No. 651 are hereby AFFIRMED in toto.

SO ORDERED.

Carpio,*(Chairperson), Peralta, Perlas-Bernabe, and Caguioa, JJ., concur.

Endnotes:

*
Acting Chief Justice per Special Order No. 2539, dated February 28, 2018.

1Rollo (G.R. No. 201225-26), Vol. I, pp. 104-129 & Rollo, (G.R. No. 201132), Vol. I, pp. 12-50.

2Rollo (G.R. No. 201225-26), Vol. I, pp. 136-163.

3
Rollo (G.R. No. 201132), Vol. I. pp. 186-204.

4Rollo (G.R. No. 201225-26), Vol. I. pp. 12-25.

5 Id. at 137-138.

6 Id. at 137.

7The VAT returns for the first, second, third, and fourth quarters of taxable year 2001 were filed on
April 18, 2001, July 24, 2001, October 24, 2001, and January 24, 2002, respectively; id. at 35.

8 Id. at 139.

9 Id.

10 Id.

11 Id.

12 Id. at 37.

13 Id.

14 Id. at 37-38.

15 Id. at 23.

16
Id. at 24.

17 Id. at 39.

18 Id. at 39-40.

19 Id. at 41.

20Rollo (G.R. No. 201225-26), Vol. I, pp. 136-163.

21 Id. at 59.

22 Id. at 110.

23 Id. at 100.

24 Team Sual Corporation challenging the Decisions of the CTA En Banc in CTA-EB Nos. 649 & 651.

25 Commissioner of Internal Revenue challenging the Decision of the CTA En Banc in CTA-EB No. 651.

26 Commissioner of Internal Revenue challenging the Decision of the CTA En Banc in CTA-EB No. 649.

27Rollo (G.R. No. 201132), Vol. I. p. 183-A.

28Rollo (G.R. No. 201225-26), Vol. I, p. 224.

29
Rollo (G.R. No. 201132), Vol. I, pp. 22-23.

30 646 Phil. 710 (2010).

31Rollo, (G.R. No. 201225-26). Vol. I, p. 111.

32 Supra note 27.

33 As amended by R.A. No. 9337.

34See Commissioner of Internal Revenue v. Deutsche Knowledge Services, Pte. Ltd., G.R. No. 211072,
November 7, 2016, 807 SCRA 90, 98; Commissioner of Internal Revenue v. Toledo Power Company,
766 Phil. 20, 26 (2015); Taganito Mining Corporation v. Commissioner of Internal Revenue, 747 Phil.
469, 475-476 (2014).

35 703 Phil. 311 (2013).

36 Id. at 354.

37 G.R. No. 205721 September 14, 2016.

38 Id.

39Rollo (G.R. No. 201225-26), Vol. I, p. 139.

40 Id.

41Rollo (G.R. No. 201225-26), Vol. I, pp. 116-127.

42 Id. at 117-118.

43 550 Phil. 751 (2007).

44 620 Phil. 554 (2009).

45
640 Phil. 613 (2010).

46 675 Phil. 732 (2011).

47 Supra note 43, at 788.

48 Supra note 44, at 578.

49 Supra note 45, at 615.

50 Supra note 46, at 739.

51Rollo, (G.R. No. 201225-26), Vol. I, pp. 112-115.

52Rollo (G.R. No. 201132), Vol. I, p. 60.

53
Commissioner of Internal Revenue v. Team Sual Corporation (formerly Mirant Sual Corporation), 726
Phil. 266, 282 (2014).

54 Supra note 35.

55 Id. at 356

56Rollo (G.R. No. 201225-26). Vol. I, pp.49-58.

57Commissioner of Internal Revenue v. San Miguel Corporation, G.R. No. 205045 and G.R. No. 205723
January 25, 2017, 815 SCRA 563, 617.

58See Pascual v. Burgos, G.R. No. 171722, January 11, 2016, 778 SCRA 189, 207. Where the Court held
that the following are known exceptions, to wit:

(1) When the conclusion is a finding grounded entirely on speculation, surmises or conjectures;
(2) When the inference made is manifestly mistaken, absurd or impossible;
(3) Where there is a grave abuse of discretion;
(4) When the judgment is based on a misapprehension of facts;
(5) When the findings of fact are conflicting;
(6) When the Court of Appeals, in making its findings, went beyond the issues of the case and the same
is contrary to the admissions of both appellant and appellee;
(7) The findings of the Court of Appeals are contrary to those of the trial court;
(8) When the findings of fact are conclusions without citation of specific evidence on which they are
based;
(9) When the facts set forth in the petition as well as in the petitioner's main and reply briefs are not
disputed by the respondents; and
(10) The finding of fact of the Court of Appeals is premised on the supposed absence of evidence and is
contradicted by the evidence on record.

59Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue, 655
Phil. 499, 508 (2011).

THIRD DIVISION

G.R. No. 197663, March 14, 2018

TEAM ENERGY CORPORATION (FORMERLY: MIRANT PAGBILAO CORPORATION AND

SOUTHERN ENERGY QUEZON, INC.), Petitioner, v. COMMISSIONER OF INTERNAL
REVENUE, Respondent.

G.R. No. 197770, March 14, 2018

REPUBLIC OF THE PHILIPPINES REP. BY THE BUREAU OF INTERNAL

REVENUE, Petitioner, v.TEAM ENERGY CORPORATION, Respondent.

DECISION

LEONEN, J.:
For a judicial claim for Value Added Tax (VAT) refund to prosper, the claim must not only be filed within
the mandatory 120+30-day periods. The taxpayer must also prove the factual basis of its claim and
comply with the 1997 National Internal Revenue Code (NIRC) invoicing requirements and other
appropriate revenue regulations. Input VAT payments on local purchases of goods or services must be
substantiated with VAT invoices or official receipts, respectively.

The Petitions for Review in G.R. Nos. 197663 and 197770 seek to reverse and set aside the April 8,
2011 Decision1 and July 7, 2011 Resolution2 of the Court of Tax Appeals En Banc in CTA EB No. 603.
The assailed Decision affirmed with modification the October 5, 2009 Decision 3 and February 23, 2010
Resolution4 of the Court of Tax Appeals in Division, granting Team Energy Corporation (Team Energy)
a tax refund/credit in the reduced amount of P11,161,392.67, representing unutilized input VAT
attributable to zero-rated sales for the taxable year 2003. The assailed Resolution denied the respective
motions for reconsideration filed by Team Energy and the Commissioner of Internal Revenue
(Commissioner).

Team Energy is a VAT-registered entity with Certificate of Registration No. 96-600-002498. It is engaged
in power generation and electricity sale to National Power Corporation (NPC) under a Build, Operate,
and Transfer scheme.5

On November 13, 2002, Team Energy filed with the Bureau of Internal Revenue (BIR) "an Application
for Effective Zero-Rate of its supply of electricity to the NPC, which was subsequently approved."6

For the year 2003, Team Energy filed its Original and Amended Quarterly VAT Returns on the following
dates and with the following details:

Origin
Amend
Quart al
ed Zero-rated Sales Input VAT
er Retur
Return
n

April
July 25, P3,170,914,604.2 P15,085,320.
1 st
25,
2003 4 31
2003

July October
15,898,643.5
2 nd
25, 27, 3,034,739,252.93
6
2003 2003

Octob
21,151,308.5
3 rd
er 27, - 2,983,478,607.66
7
2003

Januar
July 26, 31,330,081.0
4 th
y 24, 3,019,672,908.84
20047 6
2004
 P12,208,805,37 P83,465,353
Total
3.678 .509

On December 17, 2004, Team Energy filed with the Revenue District Office No. 60 in Lucena City a claim
for refund of unutilized input VAT in the amount of P83,465,353.50, for the first to fourth quarters of
taxable year 2003.10

On April 22, 2005, Team Energy appealed before the Court of Tax Appeals its 2003 first quarter VAT
claim of PI 5,085,320.31. The appeal was docketed as CTA Case No. 7229.11

Opposing the appeal, the Commissioner averred that the amount claimed by Team Energy was not
properly documented and that NPC's exemption from taxes did not extend to its electricity supplier such
as Team Energy.12

On July 22, 2005, Team Energy appealed its VAT refund claims for the second to fourth quarters of 2003
in the amount of P68,380,033.19, docketed as CTA Case No. 7298.13

As special and affirmative defenses, the Commissioner alleged that it was imperative upon Team Energy
to prove its compliance with the registration requirements of a VAT taxpayer; the invoicing and
accounting requirements for VAT-registered persons; and the checklist of requirements for a VAT refund
under Revenue Memorandum Order No. 53-98. Furthermore, the Commissioner contended that Team
Energy must prove that the claims were filed within the prescriptive periods and that the input taxes
being claimed had not been applied against any output tax liability or were not carried over in the
succeeding quarters.14

On October 12, 2005, the two (2) cases were consolidated.15

The Court of Tax Appeals First Division partially granted Team Energy's petition. 16 It held that NPC's
exemption from direct and indirect taxes had long been resolved by this Court. 17 Consequently, NPC's
electricity purchases from independent power producers, such as Team Energy, were subject to 0% VAT
pursuant to Section 108(B)(3) of the 1997 NIRC.18

The Court of Tax Appeals First Division further ruled that P20,986,302.67 out of the reported zero-rated
sales of P12,208,805,373.67 must be excluded for Team Energy's failure to submit the corresponding
official receipts, leaving a balance of P12,187,819,071.00 as substantiated zero-rated
sales.19Consequently, only 99.83%20 of the validly supported input VAT payments being claimed could
be considered.

The Court of Tax Appeals First Division likewise disallowed P12,642,304.32 of Team Energy's claimed
input VAT for its failure to meet the substantiation requirements under Sections 110(A) and 113(A) of
the 1997 NIRC and Sections 4.104-1, 4.104-5, and 4.108-1 of Revenue Regulations No. 7-95 or the
Consolidated Value Added Tax Regulations.21 Team Energy's reported output VAT liability of P776.36 in
its Quarterly VAT Return for the third quarter of 2003 was further deducted from the substantiated input
VAT.22 The Court of Tax Appeals used the following computation in determining Team Energy's total
allowable input VAT:

Substantiated Input VAT P70,823,049.18

Less: Output VAT 776.36

 Excess: Input VAT 70,822,272.82

Multiply by rate of substantiated zero- 99.83%

rated sales

Excess input VAT attributable to P70,700,533.0123

substantiated zero-rated sales

Finally, on the issue of prescription, the Court of Tax Appeals First Division held that "[t]he reckoning of
the two-year prescriptive period for the filing of a claim for input VAT refund starts from the date of
filing of the corresponding quarterly VAT return."24 It explained that this Court's ruling in Commissioner
of Internal Revenue v. Mirant Pagbilao Corporation,25 to the effect that "the two-year prescriptive period
for the filing of a claim for input VAT refund starts from the close of the taxable quarter when the
relevant sales were made,"26 must be applied to cases filed after the promulgation of Mirant.
Accordingly, Team Energy's administrative claim filed on December 17, 2004, and judicial claims filed
on April 22, 2005 and July 22, 2005 were well within the two (2)-year prescriptive period.27

The dispositive portion of the October 5, 2009 Decision provided:

WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby PARTIALLY
GRANTED. [The Commissioner of Internal Revenue] is hereby ORDERED to REFUND or ISSUE a tax
credit certificate to [Team Energy] in the amount of P70,700,533.01.

SO ORDERED.28 (Emphasis in the original)

Upon the denial of her Motion for Reconsideration, the Commissioner filed on March 31, 2010 a Petition
for Review with the Court of Tax Appeals En Banc.29 She argued that the Court of Tax Appeals First
Division erred in allowing the tax refund/credit as Team Energy's administrative and judicial claims for
the first and second quarters were filed beyond the two (2)-year period prescribed in Section 112(A) of
the 1997 NIRC.30 Additionally, she averred that Team Energy's judicial claims for the second, third, and
fourth quarters of 2003 were filed beyond the 30-day period to appeal under Section 112 of the 1997
NIRC.31 Team Energy filed its Comment/Opposition to the Petition.32

On April 8, 2011, the Court of Tax Appeals En Banc promulgated its Decision, partially granting Team
Energy's petition. It held that Team Energy's judicial claim for refund for the second, third, and fourth
quarters of 2003 was filed only on July 22, 2005 or beyond the 30-day period prescribed under Section
112(D)33 of the 1997 NIRC. Consequently, the claim for these quarters must be denied for lack of
jurisdiction. Furthermore, the Court of Tax Appeals En Banc found Team Energy entitled to a refund in
the reduced amount of P11,161,392.67, representing unutilized input VAT attributable to its zero-rated
sales for the first quarter of 2003.

The dispositive portion of the Court of Tax Appeals En Banc April 8, 2011 Decision read:

WHEREFORE, on the basis of the foregoing considerations, the Petition for Review ... is PARTIALLY
GRANTED. The assailed Decision and Resolution of the First Division dated October 5, 2009 and
February 23, 2010, respectively, are hereby MODIFIED. Accordingly, [the Commissioner] is ORDERED
to refund in favor of [Team Energy] the reduced amount of Eleven Million One Hundred Sixty[-]One
Thousand Three Hundred Ninety[-]Two [Pesos] and Sixty[-]Seven Centavos (P11,161,392.67)
representing unutilized input value-added tax (VAT) paid on its domestic purchases of goods and
services and importation of goods attributable to its zero-rated sales for the first quarter of taxable year
2003.
SO ORDERED.34 (Emphasis in the original)

The separate partial motions for reconsideration of Team Energy and the Commissioner were denied in
the Court of Tax Appeals En Banc July 7, 2011 Resolution.35

Team Energy and the Commissioner filed their separate Petitions for Review before this Court, docketed
as G.R. Nos. 19766336 and 197770,37 respectively.

After the parties have filed their respective comments to the petitions and replies to these comments,
this Court directed them to submit their respective memoranda in its July 1, 2013 Resolution. 38

Team Energy filed its Consolidated Memorandum39 while the Commissioner filed a
Manifestation, stating that she was adopting her Comment dated February 21, 2012 41 as her
40

Memorandum.

The issues for this Court's resolution are as follows:

First, whether or not the Court of Tax Appeals erred in disallowing Team Energy Corporation's claim for
tax refund of its unutilized input VAT for the second to fourth quarters of 2003 on the ground of lack of
jurisdiction;

Second, whether or not the Court of Tax Appeals erred in failing to recognize the interchangeability of
VAT invoices and VAT official receipts to comply with the substantiation requirements for refunds of
excess or unutilized input tax under Sections 110 and 113 of the 1997 National Internal Revenue Code,
resulting in the disallowance of P258,874.55; and

Finally, whether or not Team Energy Corporation's failure to submit the Registration and Certificate of
Compliance issued by the Energy Regulatory Commission (ERC) disqualifies it from claiming a tax
refund/credit.

The prescriptive periods regarding judicial claims for refunds or tax credits of input VAT are explicitly
set forth in Section 112(D)42 of the 1997 NIRC:

Section 112. Refunds or Tax Credits of Input Tax. —

….

(D) Period within which Refund or Tax Credit, of Input Taxes shall be Made. — In proper cases, the
Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one
hundred twenty (120) days from the date of submission of complete documents in support of the
application filed in accordance with Subsections (A) and (B) hereof.

In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected
may, within thirty (30) days from the receipt of the decision denying the claim or after the
expiration of the one hundred twenty day-period, appeal the decision or the unacted claim
with the Court of Tax Appeals. (Emphasis supplied)

The text of the law is clear that resort to an appeal with the Court of Tax Appeals should be made within
30 days either from receipt of the decision denying the claim or the expiration of the 120-day period
given to the Commissioner to decide the claim.
It was in Commissioner of Internal Revenue v. Aichi Forging Company of Asia, Inc.43 where this Court
first pronounced that observance of the 120+30-day periods in Section 112(D)44 is crucial in filing an
appeal with the Court of Tax Appeals. This was further emphasized in Commissioner of Internal Revenue
v. San Roque Power Corporation45 where this Court categorically held that compliance with the 120+30-
day periods under Section 112 of the 1997 NIRC is mandatory and jurisdictional. Exempted from this
are VAT refund cases that are prematurely filed before the Court of Tax Appeals or before the lapse of
the 120-day period between December 10, 2003, when the BIR issued Ruling No. DA-489-03, and
October 6, 2010, when this Court promulgated Aichi.46

Section 112(D)47 is consistent with Section 11 of Republic Act No. 1125, as amended by Section 9 of
Republic Act No. 9282 (2004), which provides a 30-day period of appeal either from receipt of the
adverse decision of the Commissioner or from the lapse of the period fixed by law for action:

Section 11. Who May Appeal; Mode of Appeal; Effect of Appeal. -Any party adversely affected by a
decision, ruling or inaction of the Commissioner of Internal Revenue, . . . may file an appeal with the
CTA within thirty (30) days after the receipt of such decision or ruling or after the expiration
of the period fixed by law for action as referred to in Section 7(a)(2)48 herein.

Appeal shall be made by filing a petition for review under a procedure analogous to that provided for
under Rule 42 of the 1997 Rules of Civil Procedure with the CTA within thirty (30) days from the
receipt of the decision or ruling or in the case of inaction as herein provided, from the
expiration of the period fixed by law to act thereon. (Emphasis supplied)

In this case, Team Energy's judicial claim was filed beyond the 30-day period required in Section 112(D).
The administrative claim for refund was filed on December 17, 2004. 49 Thus, BIR had 120 days to act
on the claim, or until April 16, 2005. Team Energy, in turn, had until May 16, 2005 to file a petition with
the Court of Tax Appeals but filed its appeal only on July 22, 2005, or 67 days late. Thus, the Court of
Tax Appeals En Banc correctly denied its claim for refund due to prescription.

Team Energy argues, however, that the application of the Aichi doctrine to its claim would violate the
rule on non-retroactivity of judicial decisions.50 Team Energy adds that when it filed its claims for refund
with the BIR and the Court of Tax Appeals, both the administrative and judicial claims for refund must
be filed within the two (2)-year prescriptive period.51 Moreover, Revenue Regulations No. 7-95 did not
require a specific number of days after the 60-day, now 120-day, period given to the Commissioner to
decide on the claim within which to appeal to the Court of Tax Appeals.52 Team Energy contends that to
deny its claim of P70,700,533.01 duly proven before the Court of Tax Appeals First Division "would
result to unjust enrichment on the part of the government."53

This Court is not persuaded.

When Team Energy filed its refund claim in 2004, the 1997 NIRC was already in effect, which clearly
provided for: (a) 120 days for the Commissioner to act on a taxpayer's claim; and (b) 30 days for the
taxpayer to appeal either from the Commissioner's decision or from the expiration of the 120-day period,
in case of the Commissioner's inaction.

"Rules and regulations [including Revenue Regulations No. 7-95] or parts [of them] which are contrary
to or inconsistent with [the NIRC] are . . . amended or modified accordingly."54

This Court, in construing the law, merely declares what a particular provision has always meant. It does
not create new legal obligations. This Court does not have the power to legislate. Interpretations of law
made by courts necessarily always have a "retroactive" effect.55

In Aichi, where the issue on prematurity of a judicial claim was first raised and passed upon, this Court
applied outright its interpretation of the 1997 NIRC's language on the mandatory character of the
120+30-day periods. Consequently, it ordered the dismissal of Aichi's appeal due to premature filing of
its claim for refund/credit of input VAT. The administrative and judicial claims in Aichi were filed on
September 30, 2004, even prior to the filing of Team Energy's claims.

San Roque dealt with judicial claims which were either prematurely filed or had already prescribed. That
case, specifically in G.R. No. 197156, Philex Mining Corporation v. Commissioner of Internal Revenue,
involved the filing of a judicial claim beyond the 30-day period to appeal as in this case. Then and there,
this Court rejected Philex Mining Corporation's (Philex) judicial claim because of late filing:

Unlike San Roque and Taganito, Philex's case is not one of premature filing but of late filing. Philex did
not file any petition with the CTA within the 120-day period. Philex did not also file any petition with the
CTA within 30 days after the expiration of the 120-day period. Philex filed its judicial claim long after
the expiration of the 120-day period, in fact 426 days after the lapse of the 120-day period. In any
event, whether governed by jurisprudence before, during, or after the Atlas case, Philex's
judicial claim will have to be rejected because of late filing. Whether the two-year prescriptive
period is counted from the date of payment of the output VAT following the Atlas doctrine, or from the
close of the taxable quarter when the sales attributable to the input VAT were made following
the Mirant and Aichi doctrines, Philex's judicial claim was indisputably filed late.

The Atlas doctrine cannot save Philex from the late filing of its judicial claim. The inaction of the
Commissioner on Philex's claim during the 120-day period is, by express provision of law,
"deemed a denial" of Philex's claim. Philex had 30 days from the expiration of the 120-day
period to file its judicial claim with the CTA. Philex's failure to do so rendered the "deemed a
denial" decision of the Commissioner final and inappealable. The right to appeal to the CTA from
a decision or "deemed a denial" decision of the Commissioner is merely a statutory privilege, not a
constitutional right. The exercise of such statutory privilege requires strict compliance with the
conditions attached by the statute for its exercise. Philex failed to comply with the statutory conditions
and must thus bear the consequences.56 (Emphasis supplied, citation omitted)

Philex filed its judicial claim on October 17, 2007, before Aichi was promulgated.

The proper application of the mandatory and jurisdictional nature of the 120+30-day periods, whether
prospective or retroactive, was, in fact, at the heart of this Court en banc's debates in San Roque.

Some justices were of the view that the mandatory and jurisdictional nature of the 120+30-day periods
must be applied prospectively, or at the earliest upon the effectivity of Revenue Regulations No. 16-
2005,57 or upon the finality of Aichi.58 Still others59 argued for retroactive application to all undecided
VAT refund cases regardless of the period when the claim for refund was made.

The majority held that the 120+30-day mandatory periods were already in the 1997 NIRC when the
taxpayers filed their judicial claims. The law is clear, plain, and unequivocal and must be applied exactly
as worded. However, the majority considered as an exception, for equitable reasons, BIR Ruling No.
DA-489-03, which expressly stated that taxpayers need not wait for the lapse of the 120-day period
before seeking judicial relief. Thus, judicial claims filed from December 10, 2003, when BIR Ruling No.
DA-489-03 was issued, to October 6, 2010, when the Aichi doctrine was adopted, were excepted from
the strict application of the 120+30-day mandatory and jurisdictional periods.

San Roque Power Corporation (San Roque) filed a motion for reconsideration and supplemental motion
for reconsideration in G.R. No. 187485, arguing for the prospective application of the 120+30-day
mandatory and jurisdictional periods. This Court denied San Roque with finality on October 8, 2013.60

In Commissioner of Internal Revenue v. Mindanao II Geothermal Partnership,61 Mindanao II Geothermal

Partnership (Mindanao II) filed its administrative and judicial claims on October 6, 2005 and July 21,
2006, respectively, prior to the promulgation of Aichi and San Roque. While its administrative claim was
found to have been timely filed, this Court nevertheless denied its refund claim because the judicial
claim was filed late or only 138 days after the lapse of the 120+30-day periods. This Court held that
the 30-day period to appeal was mandatory and jurisdictional, applying the ruling in San Roque. It
further emphasized that late filing was absolutely prohibited.

Since then, the 120+30-day periods have been applied to pending cases,62 resulting in denial of
taxpayers' claims due to late filing. This Court finds no reason to except this case.

Further, the Commissioner's inaction on Team Energy's claim during the 120-day period is "deemed a
denial," pursuant to Section 7(a)(2)63 of Republic Act No. 1125, as amended by Section 7 of Republic
Act No. 9282. Team Energy had 30 days from the expiration of the 120-day period to file its judicial
claim with the Court of Tax Appeals. Its failure to do so rendered the Commissioner's "deemed a denial"
decision as final and inappealable.

Team Energy's contention that denial of its duly proven refund claim would constitute unjust enrichment
on the part of the government is misplaced.

"Excess input tax is not an excessively, erroneously, or illegally collected tax." 64 A claim for refund of
this tax is in the nature of a tax exemption, which is based on Sections 110(B) and 112(A) of 1997
NIRC, allowing VAT-registered persons to recover the excess input taxes they have paid in relation to
their zero-rated sales. "The term 'excess' input VAT simply means that the input VAT available as
[refund] credit exceeds the output VAT, not that the input VAT is excessively collected because it is
more than what is legally due."65 Accordingly, claims for tax refund/credit of excess input tax are
governed not by Section 229 but only by Section 112 of the NIRC.

A claim for input VAT refund or credit is construed strictly against the taxpayer. 66 Accordingly, there
must be strict compliance with the prescriptive periods and substantive requirements set by law before
a claim for tax refund or credit may prosper.67 The mere fact that Team Energy has proved its excess
input VAT does not entitle it as a matter of right to a tax refund or credit. The 120+30-day periods in
Section 112 is not a mere procedural technicality that can be set aside if the claim is otherwise
meritorious. It is a mandatory and jurisdictional condition imposed by law. Team Energy's failure to
comply with the prescriptive periods is, thus, fatal to its claim.

II

On the disallowance of some of its input VAT claims, Team Energy submits that "at the time when the
unutilized input VAT [was] incurred in 2003, the applicable NIRC provisions did not create a distinction
between an official receipt and an invoice in substantiating a claim for refund."68 Section 113 of the
1997 NIRC, prior to its amendment by Republic Act No. 9337 in 2005, provides:

Section 113. Invoicing and Accounting Requirements for VAT-Registered Persons. —

(A) Invoicing Requirements. - A VAT-registered person shall,

for every sale, issue an invoice or receipt. In addition to
the information required under Section 237, the following
information shall be indicated in the invoice or receipt:
 (1) A statement that the seller is a VAT-registered
person, followed by his taxpayer's identification
number (TIN); and

(2) The total amount which the purchaser pays or is

obligated to pay to the seller with the indication that
such amount includes the value-added tax.

Team Energy posits that Section 113, prior to its amendment by Republic Act No. 9337, must be applied
to its input VAT incurred in 2003, and that the disallowed amount of P258,874.55 supported by VAT
invoice or official receipts should be allowed.

Team Energy's contention is untenable.

Claimants of tax refunds have the burden to prove their entitlement to the claim under substantive law
and the factual basis of their claim.69 Moreover, in claims for VAT refund/credit, applicants must satisfy
the substantiation and invoicing requirements under the NIRC and other implementing rules and
regulations.70

Under Section 110(A)(1) of the 1997 NIRC, creditable input tax must be evidenced by a VAT invoice or
official receipt, which must in turn reflect the information required in Sections 113 and 237 of the
Code, viz:

Section 113. Invoicing and Accounting Requirements for VAT-Registered Persons. —

(A) Invoicing Requirements. — A VAT-registered person shall, for every sale, issue an invoice or
receipt. In addition to the information required under Section 237, the following information
shall be indicated in the invoice or receipt:

(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's identification
number (TIN); and

(2) The total amount which the purchaser pays or is obligated to pay to the seller with the indication
that such amount includes the value- added tax.

....

Section 237. Issuance of Receipts or Sales or Commercial Invoices. — All persons subject to an
internal revenue tax shall, for each sale or transfer of merchandise or for services rendered valued at
Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales or commercial
invoices, prepared at least in duplicate, showing the date of transaction, quantity, unit cost and
description of merchandise or nature of service: Provided, however, That in the case of sales,
receipts or transfers in the amount of One hundred pesos (P100.00) or more, or regardless of
amount, where the sale or transfer is made by a person liable to value-added tax to another
person also liable to value-added tax; or where the receipt is issued to cover payment made as
rentals, commissions, compensations or fees, receipts or invoices shall be issued which shall show
the name, business style, if any, and address of the purchaser, customer or client: Provided,
further, That where the purchaser is a VAT-registered person, in addition to the information
herein required, the invoice or receipt shall further show the Taxpayer Identification Number
(TIN) of the purchaser. (Emphasis supplied)

Section 4.108-1 of Revenue Regulations No. 7-95 summarizes the information that must be contained
in a VAT invoice and a VAT official receipt:

Section 4.108-1. Invoicing Requirements — All VAT-registered persons shall, for every sale or
lease of goods or properties or services, issue duly registered receipts or sales or commercial
invoices which must show:

1. the name, TIN and address of seller;

2. date of transaction;
3. quantity, unit cost and description of merchandise or nature of service;
4. the name, TIN, business style, if any, and address of the VAT- registered purchaser,
customer or client;
5. the word "zero rated" imprinted on the invoice covering zero- rated sales; and
6. the invoice value or consideration.

In the case of sale of real property subject to VAT and where the zonal or market value is higher than
the actual consideration, the VAT shall be separately indicated in the invoice or receipt.

Only VAT-registered persons are required to print their TIN followed by the word "VAT" in
their invoice or receipts and this shall be considered as a "VAT Invoice".All purchases covered
by invoices other than "VAT Invoice" shall not give rise to any input tax.

If the taxable person is also engaged in exempt operations, he should issue separate invoices or receipts
for the taxable and exempt operations. A "VAT Invoice" shall be issued only for sales of goods,
properties or services subject to VAT imposed in Sections 100 and 102 [now Sections 106
and 108] of the Code.

The invoice or receipt shall be prepared at least in duplicate, the original to be given to the buyer and
the duplicate to be retained by the seller as part of his accounting records. (Emphasis supplied)

In this case, the Court of Tax Appeals disallowed Team Energy's input VAT of P258,874.55, which
consisted of:

1. Input taxes of P78,134.65 claimed on local purchase of goods supported by documents other
than VAT invoices;71 and

2. Input taxes of P180,739.90 claimed on local purchase of services supported by documents other
than VAT official receipts.72

Team Energy submits that the disallowances "essentially result from the non-recognition [by] the [Court
of Tax Appeals] En Banc of the interchangeability of VAT invoices and VAT [official receipts] in a claim
for refund of excess or unutilized input tax."73

In AT&T Communications Services Philippines, Inc. v. Commissioner of Internal Revenue,74 this Court
was confronted with the same issue on the substantiation of the taxpayer-applicant's zero-rated sales
of services. In that case, AT&T Communications Services Philippines, Inc. (AT&T) applied for tax refund
and/or tax credit of its excess/unutilized input VAT from zero-rated sales of services for calendar year
2002. The Court of Tax Appeals First Division, as affirmed by the En Banc, denied AT&T's claim "for lack
of substantiation" on the ground that:

[Considering that the subject revenues pertain to gross receipts from services rendered by
petitioner, valid VAT official receipts and not mere sales invoices should have been submitted in
support thereof. Without proper VAT official receipts, the foreign currency payments received by
petitioner from services rendered for the four (4) quarters of taxable year 2002 in the sum of
US$1,102,315.48 with the peso equivalent of P56,898,744.05 cannot qualify for zero-rating for VAT
purposes.75 (Emphasis in the original)

Reversing the Court of Tax Appeals, this Court held that since Section 113 did not distinguish between
a sales invoice and an official receipt, the sales invoices presented by AT&T would suffice provided that
the requirements under Sections 113 and 237 of the Tax Code were met. It further explained:

Sales invoices are recognized commercial documents to facilitate trade or credit transactions. They are
proofs that a business transaction has been concluded, hence, should not be considered bereft of
probative value. Only the preponderance of evidence threshold as applied in ordinary civil cases is
needed to substantiate a claim for tax refund proper.76 (Citations omitted)

However, in a subsequent claim for tax refund or credit of input VAT filed by AT&T for the calendar year
2003, the same issue on the interchangeability of invoice and official receipt was raised. This time
in AT&T Communications Services Phils., Inc. v. Commissioner of Internal Revenue,77 this Court held
that there was a clear delineation between official receipts and invoices and that these two (2)
documents could not be used interchangeably. According to this Court, Section 113 on invoicing
requirements must be read in conjunction with Sections 106 and 108, which specifically delineates sales
invoices for sales of goods and official receipts for sales of services.

Although it appears under [Section 113 of the 1997 NIRC] that there is no clear distinction on the
evidentiary value of an invoice or official receipt, it is worthy to note that the said provision is a general
provision which covers all sales of a VAT[-]registered person, whether sale of goods or services. It does
not necessarily follow that the legislature intended to use the same interchangeably. The Court therefore
cannot conclude that the general provision of Section 113 of the NIRC of 1997, as amended, intended
that the invoice and official receipt can be used for either sale of goods or services, because there are
specific provisions of the Tax Code which clearly delineates the difference between the two transactions.

In this instance, Section 108 of the NIRC of 1997, as amended, provides:

SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. —

....

(C) Determination of the Tax — The tax shall be computed by multiplying the total amount indicated in
the official receipt by one-eleventh (1/11).

Comparatively, Section 106 of the same Code covers sale of goods, thus:

SEC. 106. Value-added Tax on Sale of Goods or Properties. —

....

(D) Determination of the Tax. — The tax shall be computed by multiplying the total amount indicated
in the invoice by one-eleventh (1/11).

Apparently, the construction of the statute shows that the legislature intended to distinguish the use of
an invoice from an official receipt. It is more logical therefore to conclude that subsections of a statute
under the same heading should be construed as having relevance to its heading. The legislature
separately categorized VAT on sale of goods from VAT on sale of services, not only by its treatment with
regard to tax but also with respect to substantiation requirements. Having been grouped under Section
108, its subparagraphs, (A) to (C), and Section 106, its subparagraphs (A) to (D), have significant
relations with each other.
Legislative intent must be ascertained from a consideration of the statute as a whole and not of an
isolated part or a particular provision alone. This is a cardinal rule in statutory construction. For taken
in the abstract, a word or phrase might easily convey a meaning quite different from the one actually
intended and evident when the word or phrase is considered with those with which it is associated. Thus,
an apparently general provision may have a limited application if viewed together with the other
provisions.78 (Emphasis supplied, citation omitted)

This Court reiterates that to claim a refund of unutilized or excess input VAT, purchase of goods or
properties must be supported by VAT invoices, while purchase of services must be supported by VAT
official receipts.

For context, VAT is a tax imposed on each sale of goods or services in the course of trade or business,
or importation of goods "as they pass along the production and distribution chain." 79 It is an indirect
tax, which "may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or
services."80 The output tax81 due from VAT-registered sellers becomes the input tax82 paid by VAT-
registered purchasers on local purchase of goods or services, which the latter in turn may credit against
their output tax liabilities. On the other hand, for a non-VAT purchaser, the VAT shifted forms part of
the cost of goods, properties, and services purchased, which may be deductible as an expense for
income tax purposes.83

Panasonic Communications Imaging Corp. v. Commissioner of Internal Revenue 84 explained the concept
of VAT and its collection through the tax credit method:

The VAT is a tax on consumption, an indirect tax that the provider of goods or services may pass on to
his customers. Under the VAT method of taxation, which is invoice-based, an entity can subtract from
the VAT charged on its sales or outputs the VAT it paid on its purchases, inputs and imports. For
example, when a seller charges VAT on its sale, it issues an invoice to the buyer, indicating the amount
of VAT he charged. For his part, if the buyer is also a seller subjected to the payment of VAT on his
sales, he can use the invoice issued to him by his supplier to get a reduction of his own VAT liability.
The difference in tax shown on invoices passed and invoices received is the tax paid to the government.
In case the tax on invoices received exceeds that on invoices passed, a tax refund may be claimed.

Under the 1997 NIRC, if at the end of a taxable quarter the seller charges output taxes equal to the
input taxes that his suppliers passed on to him, no payment is required of him. It is when his output
taxes exceed his input taxes that he has to pay the excess to the BIR. If the input taxes exceed the
output taxes, however, the excess payment shall be earned over to the succeeding quarter or quarters.
Should the input taxes result from zero-rated or effectively zero-rated transactions or from the
acquisition of capital goods, any excess over the output taxes shall instead be refunded to the
taxpayer.85 (Citations omitted)

Our VAT system is invoice-based, i.e. taxation relies on sales invoices or official receipts. A VAT-
registered entity is liable to VAT, or the output tax at the rate of 0% or 10% (now 12%) on the gross
selling price86 of goods or gross receipts87 realized from the sale of services. Sections 106(D) and 108(C)
of the Tax Code expressly provide that VAT is computed at 1/11 of the total amount indicated in
the invoice for sale of goods or official receipt for sale of services.88 This tax shall also be recognized as
input tax credit to the purchaser of the goods or services.

Under Section 11089 of the 1997 NIRC, the input tax on purchase of goods or properties, or services is
creditable:

(a) To the purchaser upon consummation of sale and on importation of goods or properties;

(b) To the importer upon payment of the VAT prior to the release of the goods from the custody of the
Bureau of Customs; and
[(c)] [T]o the purchaser [of services], lessee [of property] or licensee upon payment of the
compensation, rental, royalty or fee.

A VAT-registered person may opt, however, to apply for tax refund or credit certificate of VAT paid
corresponding to the zero-rated sales of goods, properties, or services to the extent that this input tax
has not been applied against the output tax.

Strict compliance with substantiation and invoicing requirements is necessary considering VAT's nature
and VAT system's tax credit method, where tax payments are based on output and input taxes and
where the seller's output tax becomes the buyer's input tax that is available as tax credit or refund in
the same transaction. It ensures the proper collection of taxes at all stages of distribution, facilitates
computation of tax credits, and provides accurate audit trail or evidence for BIR monitoring purposes.

The Court of Tax Appeals further pointed out that the noninterchangeability between VAT official receipts
and VAT invoices avoids having the government refund a tax that was not even paid.

It should be noted that the seller will only become liable to pay the output VAT upon receipt of payment
from the purchaser. If we are to use sales invoice in the sale of services, an absurd situation will arise
when the purchaser of the service can claim tax credit representing input VAT even before there is
payment of the output VAT by the seller on the sale pertaining to the same transaction. As a matter of
fact[,] if the seller is not paid on the transaction, the seller of service would legally not have to pay
output tax while the purchaser may legally claim input tax credit thereon. The government ends up
refunding a tax which has not been paid at all. Hence, to avoid this, VAT official receipt for the sale of
services is an absolute requirement.90

In conjunction with this rule, Revenue Memorandum Circular No. 42-0391 expressly provides that an
"invoice is the supporting document for the claim of input tax on purchase of goods whereas official
receipt is the supporting document for the claim of input tax on purchase of services." It further states
that a taxpayer's failure to comply with the invoicing requirements will result to the disallowance of the
claim for input tax. Pertinent portions of this circular provide:

A-13: Failure by the supplier to comply with the invoicing requirements on the documents supporting
the sale of goods and services will result to the disallowance of the claim for input tax by the purchaser-
claimant.

If the claim for refund/[tax credit certificate] is based on the existence of zero-rated sales by the
taxpayer but it fails to comply with the invoicing requirements in the issuance of sales invoices (e.g.
failure to indicate the TIN), its claim for tax credit/refund of VAT on its purchases shall be denied
considering that the invoice it is issuing to its customers does not depict its being a VAT-registered
taxpayer whose sales are classified as zero-rated sales. Nonetheless, this treatment is without prejudice
to the right of the taxpayer to charge the input taxes to the appropriate expense account or asset
account subject to depreciation, whichever is applicable. Moreover, the case shall be referred by the
processing office to the concerned BIR office for verification of other tax liabilities of the taxpayer.

Pursuant to Sections 106(D) and 108(C) in relation to Section 110 of the 1997 NIRC, the output or input
tax on the sale or purchase of goods is determined by the total amount indicated in the VAT invoice,
while the output or input tax on the sale or purchase of services is determined by the total amount
indicated in the VAT official receipt.

Thus, the Court of Tax Appeals properly disallowed the input VAT of P258,874.55 for Team Energy's
failure to comply with the invoicing requirements.

III

The Commissioner submits that the Court of Tax Appeals En Banc erred in granting Team Energy a tax
refund/credit of P11,161,392.67, representing unutilized input VAT attributable to zero-rated sales of
electricity to NPC.92 She maintains that Team Energy is not entitled to any tax refund or credit because
it cannot qualify for VAT zero-rating under Republic Act No. 913693 or the Electrical Power Industry
Reform Act (EPIRA) Law for failure to submit its ERC Registration and Certificate of Compliance. 94 She
avers that to operate a generation facility, Team Energy must have a duly issued ERC Certificate of
Compliance, without which an entity cannot be considered a power generation company and its sales of
generated power will not qualify for VAT zero-rating.95

The Court of Tax Appeals rejected this argument on the ground that the issue was raised for the first
time in a motion for partial reconsideration, viz:

[The Commissioner] raised the issue of [Team Energy's] failure to submit the Registration and Certificate
of Compliance (COC) issued by ERC for the first time in the instant Motion for Partial Reconsideration.
The said issue was neither raised in the Court a quo nor in the Petition for Review with the Court En
Banc. The rule is well settled that no question will be considered by the appellate court which has not
been raised in the court below. When a party deliberately adopts a certain theory, and the case is tried
and decided upon the theory in the court below, he will not be permitted to change his theory on appeal,
because to permit him to do so would be unfair to the adverse party. Thus, a judgment that goes beyond
the issues and purports to adjudicate something on which the court did not hear the parties, is not only
irregular but also extrajudicial and invalid. In the case of Rizal Commercial Banking Corporation vs.
Commissioner of Internal Revenue,96 the Supreme Court said:

The rule is well-settled that points of law, theories, issues and arguments not adequately brought to the
attention of the lower court need not be considered by the reviewing court as they cannot be raised for
the first time on appeal, much more in a motion for reconsideration as in this case, because this would
be offensive to the basic rules of fair play, justice and due process. This last ditch effort to shift to a new
theory and raise a new matter in the hope of a favorable result is a pernicious practice that has
consistently been rejected.

Also, both parties stipulated and recognized in the Joint Stipulation of Facts and Issues that [Team
Energy] is principally engaged in the business of power generation. Moreover, [the Commissioner]
acknowledged [Team Energy's] sale of electricity to the NPC as zero-rated evidence[d] by the approved
Application for VAT zero-rating.97

The Commissioner now asserts that her counsel's mistake in belatedly raising the issue should not
prejudice the State, as it is not bound by the errors of its officers or agents.98 She adds that despite the
Stipulation of Facts, the Court of Tax Appeals should have determined Team Energy's compliance with
Republic Act No. 9136 or the EPIRA Law because the burden lies on the taxpayer to prove its entitlement
to a refund.99

The Commissioner's argument is misplaced.

Team Energy's claim for unutilized or excess input VAT was anchored not on the EPIRA Law but on
Section 108(B)(3)100 of the 1997 NIRC, in relation to Section 13 of Republic Act No. 6395101 or the NPC's
charter,102 before its repeal by Republic Act No. 9337. One of the issues presented before the Court of
Tax Appeals First Division was "[w]hether or not the power generation services rendered by [Team
Energy] to NPC are subject to zero percent (0%) VAT pursuant to Section 108(B)(3)." 103Otherwise
stated, the Court of Tax Appeals First Division was confronted with the legal issue of whether NPC's tax
exemption privilege includes the indirect tax of VAT to entitle Team Energy to 0% VAT rate. The Court
of Tax Appeals aptly resolved the issue in the affirmative, consistent with this Court's
pronouncements104 that NPC is exempt from all taxes, both direct and indirect, and services rendered
by any VAT-registered person or entity to NPC are effectively subject to 0% rate.

Indeed, the requirements of the EPIRA law would apply to claims for refund filed under the EPIRA. In
such case, the taxpayer must prove that it has been duly authorized by the ERC to operate a generation
facility and that it derives its sales from power generation. This was the thrust of this Court's ruling
in Commissioner of Internal Revenue v. Toledo Power Company (TPC).105
In Toledo, the Court of Tax Appeals granted Toledo Power Company's (TPC) claim for refund of unutilized
input VAT attributable to sales of electricity to NPC, but denied refund of input VAT related to sales of
electricity to other entities106 for failure of TPC to prove that it was a generation company under the
EPIRA. This Court held that TPC's failure to submit its ERC Certificate of Compliance renders its sales of
generated power not qualified for VAT zero-rating. This Court, in affirming the Court of Tax Appeals,
held:

Section 6 of the EPIRA provides that the sale of generated power by generation companies shall be
zero-rated. Section 4 (x) of the same law states that a generation company "refers to any person or
entity authorized by the ERC to operate facilities used in the generation of electricity." Corollarily, to be
entitled to a refund or credit of unutilized input VAT attributable to the sale of electricity
under the EPIRA, a taxpayer must establish: (1) that it is a generation company, and (2) that
it derived sales from power generation.

....

In this case, when the EPIRA took effect in 2001, TPC was an existing generation facility. And at the
time the sales of electricity to CEBECO, ACMDC, and AFC were made in 2002, TPC was not yet a
generation company under EPIRA. Although it filed an application for a COC on June 20, 2002, it did not
automatically become a generation company. It was only on June 23, 2005, when the ERC issued a COC
in favor of TPC, that it became a generation company under EPIRA. Consequently, TPC's sales of
electricity to CEBECO, ACMDC, and AFC cannot qualify for VAT zero-rating under the
EPIRA.107 (Emphasis supplied)

Here, considering that Team Energy's refund claim is premised on Section 108(B)(3) of the 1997 NIRC,
in relation to NPC's charter, the requirements under the EPIRA are inapplicable. To qualify its electricity
sale to NPC as zero-rated, Team Energy needs only to show that it is a VAT-registered entity and that
it has complied with the invoicing requirements under Section 108(B)(3) of the 1997 NIRC, in
conjunction with Section 4.108-1 of Revenue Regulations No. 7-95.108

Finally, the Commissioner is bound by her admission in the Joint Stipulation of Facts and
Issues,109concerning the prior approval of Team Energy's 2002 Application for Effective Zero-Rate of its
supply of electricity to the NPC.110 Thus, she is estopped from asserting that Team Energy's transactions
cannot be effectively considered zero-rated.

In sum, the Court of Tax Appeals En Banc found proper the refund of P11,161,392.67, representing
unutilized input VAT attributable to Team Energy's zero-rated sales for the first quarter of 2003.111 This
Court accords the highest respect to the factual findings of the Court of Tax Appeals 112 considering its
developed expertise on the subject, unless there is showing of abuse in the exercise of its
authority.113This Court finds no reason to overturn the factual findings of the Court of Tax Appeals on
the amounts allowed for refund.

WHEREFORE, the Petitions are DENIED. The April 8, 2011 Decision and July 7, 2011 Resolution of the
Court of Tax Appeals En Banc in CTA EB No. 603 are AFFIRMED.

SO ORDERED.

Velasco, Jr., (Chairperson), Bersamin, Martires, and Gesmundo, JJ., concur.

May 10, 2018

NOTICE OF JUDGMENT

Sirs/Mesdames:

Please take notice that on March 14, 2018 a Decision, copy attached hereto, was rendered by the
Supreme Court in the above-entitled case, the original of which was received by this Office on May 10,
2018 at 2:40 p.m.

Very truly yours,

(SGD.) WILFREDO V. LAPITAN

Division Clerk of Court

Endnotes:

1Rollo(G.R. No. 197663), pp. 54-80, inclusive of Annex A. The Decision was penned by Associate Justice
Juanito C. Castañeda, Jr.; concurred in by Associate Justices Erlinda P. Uy, Caesar A. Casanova, Olga
Palanca-Enriquez, Esperanza R. Fabon-Victorino, Cielito N. Mindaro-Grulla, Amelia R. Cotangco-
Manalastas; concurred and dissented by Presiding Justice Ernesto D. Acosta (pp. 81-84); and dissented
by Associate Justice Lovell R. Bautista (pp. 85-90) of the Court of Tax Appeals, En Banc.

2 Id. at 91-101. The Resolution was penned by Associate Justice Juanito C. Castañeda, Jr.; concurred in
by Associate Justices Erlinda P. Uy, Caesar A. Casanova, Olga Palanca-Enriquez, and Esperanza R.
Fabon-Victorino; concurred and dissented by Presiding Justice Ernesto D. Acosta (pp. 102-105); and
dissented by Associate Justice Lovell R. Bautista of the Court of Tax Appeals, En Banc. Associate Justices
Cielito N. Mindaro-Grulla and Amelia R. Cotangco-Manalastas were on wellness leave.

3Id. at 13-36 (inclusive of Annex A). The Decision, docketed as CTA Case Nos. 7229 and 7298, was
penned by Associate Justice Caesar A. Casanova, concurred in by Associate Justice Lovell R. Bautista,
and concurred and dissented by Presiding Justice Ernesto D. Acosta (pp. 37-39) of the First Division,
Court of Tax Appeals, Quezon City.

4Id. at 41-46. The Resolution was penned by Associate Justice Caesar A. Casanova, concurred in by
Associate Justice Lovell R. Bautista, and concurred and dissented by Chairperson Ernesto D. Acosta (pp.
47-52) of the Special First Division, Court of Tax Appeals, Quezon City.

5 Id. at 13-14.

6 Id. at 14.

7 Id. al 14-15.

8 Id. at 23.

9 Id. at 25.

10 Id. at 56.
11
Id.

12 Id. at 56-57.

13Id. at 56. The CA Decision states P63,380,033.19 on this page but the correct amount is
P68,380,033.19. See rollo (G.R. 197663), p. 58.

14 Id. at 57-58.

15 Id. at 59.

16 Id. at 30.

17 Id. at 21.

18 Id. at 20.

19 Id. at 24.

20 Id.; Computed as follows:

Substantiated zero-rated sales P12,187,819,071.00

Divided bv total declared zero-rated sales P12,208,805,373.67

Rate of substantiated zero-rated 99.83%

sales

21 Id. at 25.

22 Id. at 28.

23 Id. at 29.

24 Id.

25 586 Phil. 712(2008) [Per J . Velasco, Jr., Second Division

26Rollo (G.R. No. 197663), p. 30.

27 Id.

28 Id.

29Rollo (G.R. No. 197770), p. 18.

30Rollo (G.R. No. 197663), p. 62.

31
Id. at 61-62.

32 Id. at 62.

33 Now Section 112 (C), pursuant to RA 9337.

34Rollo (G.R. No. 197663), pp. 74-75.

35 Id. at 100.

36 Id. at 112-141.

37Rollo (G.R. No. 197770), pp. 8-37.

38Rollo (G.R. No. 197663), pp. 368-370.

39 Id. at 376-414.

40 Id. at 371.

41 Id. at 275-305.

42 Now Section 112(C), per amendments introduced by Republic Act No. 9337 (2005).

43 646 Phil. 710 (2010) [Per J. Del Castillo, First Division].

44 Now Section 112(C), per amendments introduced by Republic Act No. 9337 (2005).

45 703 Phil. 310 (2013) [Per J. Carpio, En Banc].

46 Id. at 398-399.

47 Now Section 112(C), per amendments introduced by Republic Act No. 9337 (2005).

48 Section 7. Jurisdiction. — The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

. . . .
(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in relations
thereto, or other matters arising under the National Internal Revenue Code or other laws administered
by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific
period of action, in which case the inaction shall be deemed a denial[.]

49Rollo (G.R. No. 197663), p. 56.

50 Id. at 387.

51 Id. at 388.

52 Id. at 393-394.
53
Id. at 396.

54 TAX CODE, sec. 291.

55SeeDissenting Opinion of J. Leonen in Commissioner of Internal Revenue v. San Roque Power Corp.,
719 Phil. 137 (2013) [Per J. Carpio, En Banc].

56Commissioner of Internal Revenue v. San Roque Power Corporation, 703 Phil. 310, 362-363 (2013)
[Per J. Carpio, En Banc].

57 RR 16-2005, otherwise known as the Consolidated Value-Added Tax Regulations of 2005, became
effective on November 1, 2005. The prefatory statement of RR 16-2005 provides:

Pursuant to the provisions of Secs. 244 and 245 of the National Internal Revenue Code of 1997, as last
amended by Republic Act No. 9337 (Tax Code), in relation to Sec. 23 of the said Republic Act, these
Regulations are hereby promulgated to implement Title IV of the Tax Code, as well as other provisions
pertaining to Value-Added Tax (VAT). These Regulations supersedes Revenue Regulations No. 14-2005
dated June 22, 2005.

In the Dissenting Opinion of J. Velasco in Commissioner of Internal Revenue v. San Roque Power Corp.,
719 Phil. 137, 400-434(2013) [Per J. Carpio, En Banc], J. Velasco, joined by Justices Mendoza and
Perlas-Bernabe, opined that the permissive treatment of the 120+30-day periods should be reckoned
not from December 10, 2003 when BIR Ruling No. DA-489-03 was issued, but from January 1, 1996
(the effective date of Revenue Regulation (RR) No. 7-95, which still applied the two (2)-year prescriptive
period to judicial claims) to October 31, 2005 (prior to the effective date of RR No. 16-2005). He
explained that it was only in RR No. 16-2005 (effective November 1, 2005), particularly Section 4.112-
1, where the reference to the two (2)-year prescriptive period in conjunction with the filing of a judicial
claim for refund/credit of input VAT was deleted.

58Separate Dissenting Opinion of C.J. Sereno in Commissioner of Internal Revenue v. San Roque Power
Corp., 719 Phil. 137, 395-400 (2013) [Per J. Carpio, En Banc].

59 In the Separate Opinion of J. Leonen in Commissioner of Internal Revenue v. San Roque Power Corp.,
719 Phil. 137, 388-395 (2013) [Per J. Carpio, En Banc], J. Leonen, joined by Justice Del Castillo, argued
that the plain text of Section 112 of the 1997 NIRC would already put the private parties within a
reasonable range of interpretation that would serve them notice as to the remedies that were available
to them. An erroneous construction placed upon the law by the Commissioner, even if it has been
followed for years, must be abandoned. When the text of the law is clear, unbridled administrative
discretion to read it otherwise cannot be condoned.

60See Commissioner of Internal Revenue v. San Roque Power Corporation, 719 Phil. 137 (2013) [Per J.
Carpio, En Banc].

61
724 Phil. 534 (2014) [Per C.J. Sereno, First Division].

62Commissioner of Internal Revenue v. Toledo Power Co., 766 Phil. 20 (2015) [Per CJ Sereno, First
Division]; CE Casecnan Water and Energy Company, Inc. v. Commissioner of Internal Revenue, 764
Phil. 595 (2015) [Per J. Leonen, Second Division]; Northern Mindanao Power Corp. v. Commissioner of
Internal Revenue, 754 Phil. 146 (2015) [Per CJ Sereno, First Division]; Rohm Apollo Semiconductor
Phils. v. Commissioner of Internal Revenue, 750 Phil. 624 (2015) [Per CJ Sereno, First Division]; CBK
Power Co. Ltd. v. Commissioner of Internal Revenue, 724 Phil. 686 (2014) [Per CJ Sereno, First
Division]; Commissioner of Internal Revenue v. Dash Engineering Philippines, Inc., 723 Phil. 433 (2013)
[Per J. Mendoza, Third Division].

63 Section 7. Jurisdiction. —The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:
. . . .
(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in relations
thereto, or other matters arising under the National Internal Revenue Code or other laws administered
by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific
period of action, in which case the inaction shall be deemed a denial[.] (Emphasis supplied)

64Dissenting Opinion of J. Leonen in Commissioner of Internal Revenue v. San Roque Power Corp., 703
Phil. 310, 389 (2013) [Per J. Carpio, En Banc].

65Commissioner of Internal Revenue v. San Roque Power Corp., 703 Phil. 310, 366 (2013) [Per J. Carpio,
En Banc].

66See Microsoft Philipines, Inc. v. Commissioner of Internal Revenue, 662 Phil. 762 (2011) [Per J. Carpio,
Second Division]; CIR v. Manila Mining Corporation, 505 Phil. 650, 671 (2005) [Per J. Carpio Morales,
Third Division].

67SeeCommissioner of Internal Revenue v. San Roque Power Corp., 703 Phil. 310 (2013) [Per J. Carpio,
En Banc]; Commissioner of Internal Revenue v. Manila Mining Corp., 505 Phil. 650 (2005) [Per J. Carpio
Morales, Third Division].

68Rollo (G.R. No. 197663), p. 397.

69See Luzon Hydro Corp. v. Commissioner of Internal Revenue, 721 Phil. 202 (2013) [Per J. Bersamin,
First Division]; Commissioner of Internal Revenue v. Seagate Technology (Philippines), 491 Phil. 3 17
(2005) [Per J. Panganiban, Third Division]; Atlas Consolidated Mining and Development Corp. v.
Commissioner of Internal Revenue, 547 Phil. 332 (2007) [Per J. Corona, First Division].

70Bonifacio Water Corp. v. Commissioner of Internal Revenue, 714 Phil. 413 (2013) [Per J. Peralta, Third
Division]; Microsoft Philipines, Inc. v. Commissioner of Internal Revenue, 662 Phil. 762 (2011) [Per J.
Carpio, Second Division].

71Rollo (G.R. No. 197663), p. 71.

72 Id. at 72.

73 Id. at 134.

74 640 Phil. 613 (2010) [Per J. Carpio Morales, Third Division].

75 Id. at 615.

76 Id. at 618-619.

77747 Phil. 337 (2014) [Per J. Perez, First Division]. See also KEPCO Philippines Corporation v. CIR,
G.R. No. 181858, 24 November 2010, 636 SCRA 166 [Per J. Mendoza, Second Division] cited in Northern
Mindanao Power Corp. v. Commissioner of Internal Revenue, G.R. No. 185115, February 18, 2015 [Per
C.J. Sereno, First Division].

78AT&T Communications Services Phils., Inc. v. Commissioner of Internal Revenue, 747 Phil. 337, 356-
357 (2014) [Per J. Perez, First Division].
79
Commissioner of Internal Revenue v. Seagate Technology (Philippines), 491 Phil. 317, 332 (2005)
[Per J. Panganiban, Third Division].

80 TAX CODE, sec. 105.

81"Output tax" means the VAT due on the sale or lease of taxable goods, properties or services by a
VAT-registered or VAT-registrable person. Sec last paragraph of Sec. 110(A)(3) of the Tax Code.

82"'[I]nputtax" means the [VAT] due from or paid by a VAT-registered person in the course of his for
her] trade or business on importation of goods or local purchase of goods or services, including lease or
use of property, from a VAT-registered person. It shall also include the transitional input tax determined
in accordance with Section 111 of this Code." See Sec. 110(A)(3) of the Tax Code.

83SeeCommissioner of Internal Revenue v. Benguet Corporation, 501 Phil. 343 (2005) [Per J. Tinga,
Second Division].

84 625 Phil. 631 (2010) [Per J. Abad, Second Division].

85 Id. at 638-639.

86 "The term 'gross selling price' means the total amount of money or its equivalent which the
purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange
of the goods or properties, excluding the value-added tax. The excise tax, if any, on such goods or
properties shall form part of the gross selling price." (Emphasis supplied) See last paragraph of Section
106(A)(1) of the Tax Code.

87 "The term 'gross receipts' means the total amount of money or its equivalent representing the contract
price, compensation, service fee, rental or royalty, including the amount charged for materials supplied
with the services and deposits and advanced payments actually or constructively received during
the taxable quarter for the services performed or to be performed for another person, excluding value-
added tax." (Emphasis supplied) See last paragraph of Section 108(A) of the Tax Code.

88 TAX CODE, secs. 106 and 108 provide:

Section 106. Value-added Tax on Sale of Goods or Properties. —

(A) Rate and Base of Tax. — These shall be levied, assessed and collected on every sale, barter or
exchange of goods or properties, value-added tax equivalent to ten percent (10%) of the gross selling
price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be
paid by the seller or transferor.
. . . .
(D) Determination of the Tax. —

(1) The tax shall be computed by multiplying the total amount indicated in the invoice by one-
eleventh (1/11).
(2) Sales Returns, Allowances and Sales Discounts. — The value of goods or properties sold and
subsequently returned or for which allowances were granted by a VAT-registered person may be
deducted from the gross sales or receipts for the quarter in which a refund is made or a credit
memorandum or refund is issued. Sales discount granted and indicated in the invoice at the time of sale
and the grant of which does not depend upon the happening of a future event may be excluded from
the gross sales within the same quarter it was given.

Section 108. Value-added Tax on Sale of Services and Use or Lease of Properties. —
(A) Rate and Base of Tax. — There shall be levied, assessed and collected, a value-added tax equivalent
to ten percent (10%) of gross receipts derived from the sale or exchange of services, including
the use or lease of properties. . . .
....

(C) Determination of the Tax. — The tax shall be computed by multiplying the total amount
indicated in the official receipt by one-eleventh (1/11). (Emphasis supplied)

89 TAX CODE, sec. 110 provides:

Section 110. Tax Credits. —

(A) Creditable Input Tax. —

(1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with Section 113
hereof on the following transactions shall be creditable against the output tax:

(a) Purchase or importation of goods:

(i) For sale; or

(ii) For conversion into or intended to form part of a finished product for sale including packaging
materials; or
(iii) For use as supplies in the course of business; or
(iv) For use as materials supplied in the sale of service; or
(v) For use in trade or business for which deduction for depreciation or amortization is allowed under
this Code, except automobiles, aircraft and yachts.

(b) Purchase of services on which a value-added tax has been actually paid.

(2) The input tax on domestic purchase of goods or properties shall be creditable.

(a) To the purchaser upon consummation of sale and on importation of goods or properties; and
(b) To the importer upon payment of the value-added tax prior to the release of the goods from the
custody of the Bureau of Customs.

However, in the case of purchase of services, lease or use of properties, the input tax shall be creditable
to the purchaser, lessee or licensee upon payment of the compensation, rental, royalty or fee.

(3) A VAT-registered person who is also engaged in transactions not subject to the value-added tax
shall be allowed tax credit as follows:

(a) Total input tax which can be directly attributed to transactions subject to value-added tax; and
(b) A ratable portion of any input tax which cannot be directly attributed to either activity.

(B) Excess Output or Input Tax. — If at the end of any taxable quarter the output tax exceeds the input
tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the
excess shall be carried over to the succeeding quarter or quarters. Any input tax attributable to the
purchase of capital goods or to zero-rated sales by a VAT-registered person may at his option be
refunded or credited against other internal revenue taxes, subject to the provisions of Section 112.

(C) Determination of Creditable Input Tax. — The sum of the excess input tax carried over from the
preceding month or quarter and the input tax creditable to a VAT-registered person during the taxable
month or quarter shall be reduced by the amount of claim for refund or tax credit for value-added tax
and other adjustments, such as purchase returns or allowances and input tax attributable to exempt
sale.
The claim for tax credit referred to in the foregoing paragraph shall include not only those filed with the
Bureau of Internal Revenue but also those filed with other government agencies, such as the Board of
Investments and the Bureau of Customs.

90Rollo (G.R. No. 197663), p. 98.

91Clarifying Certain Issues Raised Relative to the Processing of Claims for Value-Added Tax (VAT)
Credit/Refund. Including Those Filed with the Tax and Revenue Group, One-Stop Shop Inter-Agency
Tax Credit and Duty Drawback Center, Department of Finance (OSS) by Direct Exporters (2003).

92Rollo (G.R. No. 197770), p. 28.

93 Rep. Act No. 9136, sec. 6 provides:

Section 6. Generation Sector. — Generation of electric power, a business affected with public interest,
shall be competitive and open.

Upon the effectivity of this Act, any new generation company shall, before it operates, secure from the
Energy Regulatory Commission (ERC) a certificate of compliance pursuant to the standards set forth in
this Act, as well as health, safety and environmental clearances from the appropriate government
agencies under existing laws.

Any law to the contrary notwithstanding, power generation shall not be considered a public utility
operation. For this purpose, any person or entity engaged or which shall engage in power generation
and supply of electricity shall not be required to secure a national franchise.

Upon implementation of retail competition and open access, the prices charged by a generation company
for the supply of electricity shall not be subject to regulation by the ERC except as otherwise provided
in this Act.

Pursuant to the objective of lowering electricity rates to end-users, sales of generated power by
generation companies shall be value added tax zero-rated.

The ERC shall, in determining the existence of market power abuse or anti-competitive behavior, require
from generation companies the submission of their financial statements.

94Rollo (G.R. No. 197770), pp. 21-22.

95 Id. at 24.

96 G.R. No. 168498 (Resolution), [April 24, 2007], 550 Phil. 316-326.

97
Rollo (G.R. No. 197770), pp. 83-84.

98Id. at 30.

99 Id. at 31.

100 Sec. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. -

....
(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:

....

(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 percent (0%) rate[.] (Emphasis supplied)

101 Rep. Act No. 6395, sec. 13 provides:

Section 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts
and other Charges by Government and Governmental Instrumentalities. — The Corporation shall be
non-profit and shall devote all its returns from its capital investment, as well as excess revenues from
its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in
furtherance and effective implementation of the policy enunciated in Section one of this Act, the
Corporation is hereby declared exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges, costs and service fees in any court or
administrative proceedings in which it may be a party, restrictions and duties to the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities;
(b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other government agencies and instrumentalities;
(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of
foreign goods required for its operations and projects; and
(d) From all taxes, duties, fees, imposts, and all other charges imposed by the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on
all petroleum products used by the Corporation in the generation, transmission, utilization, and sale of
electric power. (Repealed by Section 24 of Republic Act No. 9337 [July 1, 2005]).

102Rollo (G.R. No. 197663), p. 402.

103Rollo (G.R. No. 197770), p. 105.

104See CBK Power Co. Ltd. v. Commissioner of Internal Revenue, 724 Phil. 686 (2014) [Per CJ Sereno,
First Division]; Kepco Philippines Corp. v. Commissioner of Internal Revenue, 656 Phil. 68 (2011) [Per
J. Mendoza, Second Division]; San Roque Power Corp. v. Commissioner of Internal Revenue, 620 Phil.
554 (2009) [Per J. Chico-Nazario, Third Division]; Philippine Geothermal Inc. v. Commissioner of
Internal Revenue, 503 Phil. 278 (2005) [Per J. Quisumbing, First Division].

105 774 Phil. 92 (2015) [Per J. Del Castillo, Second Division].

106Id. at 08. Cebu Electric Cooperative III (CEBECO), Atlas Consolidated Mining and Development
Corporation (ACMDC), and Atlas Fertilizer Corporation (AFC);

107Commissioner of Internal Revenue v. Toledo Power Company, 114 Phil. 92, 111-114 (2015) [Per J.
Del Castillo, Second Division].

108See Kepco Philippines Corp. v. Commissioner of Internal Revenue, 656 Phil. 68 (2011) [Per J.
Mendoza, Second Division]. See also Panasonic Communications Imaging Corp. v. Commissioner of
Internal Revenue, 625 Phil. 63 I (2010) [Per J. Abad, Second Division].

109Rollo (G.R. No. 197770), pp. 103-106.

110 Id. at 104.

111
Id. at 63.

112Commissioner of Internal Revenue v. Toledo Power, Inc., 725 Phil. 66 (2014) [Per J. Peralta, Third
Division] citing Barcelon, Roxas Securities, Inc. v. Commissioner of Internal Revenue, 529 Phil. 785
(2006) [Per J. Chico-Nazario, First Division].

113Commissioner of Internal Revenue v. Team Sual Corp., 739 Phil. 215 (2014) [Per J. Carpio, Second
Division]; Kepco Philippines Corp. v. Commissioner of Internal Revenue, 650 Phil. 525 (2011) [Per J.
Mendoza, Second Division].

THIRD DIVISION

March 7, 2018

G.R. No. 205955

UNIVERSITY PHYSICIANS SERVICES INC. - MANAGEMENT, INC., Petitioner

vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent

DECISION

MARTIRES, J.:

When a corporation overpays its income tax liability as adjusted at the close of the taxable year,
it has two options: (1) to be refunded or issued a tax credit certificate, or (2) to carry over such
overpayment to the succeeding taxable quarters to be applied as tax credit against income tax
due.1 Once the carry-over option is taken, it becomes irrevocable such that the taxpayer cannot
later on change its mind in order to claim a cash refund or the issuance of a tax credit certificate
of the very same amount of overpayment or excess m. come tax credit.2

Does the irrevocability rule apply exclusively to the carry-over option? Such is the novel issue
presented in this case.

THE FACTS

Before the Court is a petition for review under Rule 45 of the Rules of Court filed by petitioner
University Physicians Services Inc.-Management, Inc. (UPSI-MI) which seeks the reversal and
setting aside of the 8 February 2013 Decision3 of the Court of Tax Appeals (CTA) En Banc in
CTA-EB Case No. 828. ·Said decision of the CTA En Banc affirmed the 5 July 2011 Decision and
8 September 2011 Resolution of the CTA Second Division (CTA Division) in CTA Case No. 7908.
The CTA Division denied the application of UPSI-MI for tax refund or issuance of Tax Credit
Certificate (TCC) of its excess unutilized creditable income tax for the taxable year 2006.

The Antecedents
 As narrated by the CTA, the facts are uncomplicated, viz:

UPSI-MI is a corporation incorporated and existing under and by virtue of laws of the Republic of
the Philippines, with business address at 1122 General Luna Street, Paco. Manila. Respondent
on the other hand, is the duly appointed Commissioner of Internal Revenue, with power, among
others, 10 act upon claims for refund or tax credit of overpaid internal revenue taxes, with office
address at the Fifth Floor, BIR National Office Building, BIR Road, Diliman , Quezon City.

On April 16, 2007. petitioner filed its Annual Income Tax Return (ITR) for the year ended
December 31, 2006 with the Revenue District No. 34 of the Revenue Region No. 6 of the Bureau
of Internal Revenue (BIR), reflecting an income tax overpayment of 5,159,341.00. computed as
follows:4

Sales/Revenues/Receipts/Fees ₱ 28,808,960.00

Less: Cost of Sales/Services 23,834,605.00

Gross Income from Operation ₱ 4,974,355.00

Add: Non-Operating & Other Income 5,375.00

Total Gross Income ₱ 4,979,730.00

Less: Deductions ₱ 4,979,730.00

Taxable Income -

Tax Rate (except MCIT Rate) 35%

Income Tax -

Minimum Corporate Income Tax (MCIT) ₱ 99,595.00

Aggregate Income Tax Due ₱ 99,595.00

Less: Tax Credits/Payments

Prior Year's Excess Credits ₱ 2,331,102.00

Creditable Tax Withheld for the First

Three Quarters

Creditable Tax Withheld for the Fourth

Three Quarters 2,972,834.00

Total Tax Credits/Payments ₱ 5,258,936.00)

Tax Payable/(Overpayment) ₱ (5,159,341.00)

Subsequently, on November 14, 2007, petitioner filed an Annual ITR for the short period fiscal
year ended March 31, '.W07, reflecting the income tax overpayment of 5. 159.341 from the
previous period as "Prior Year’s Excess Credit", as follows:5

Sales/Revenues/Receipts/Fees 7,489,259

Less: Cost of Sales/Services 6,461,650

Gross Income from Operation 1,027,609

Add: Non-Operating & Other Income 479

Total Gross Income 1,028,088

Less: Deductions 1,206,543

Taxable Income (178,455)

Tax Rate (except MCIT Rate) 35%

Income Tax -

Minimum Corporate Income Tax (MCIT) 20,562

Aggregate Income Tax Due 20,562

Less: Tax Credits/Payments

Prior Year's Excess Credits 5,159,341

Creditable Tax Withheld for the First

1,107,228
Three Quarters

Creditable Tax Withheld for the Fourth

Quarter 6,266,569

Total Tax Credits/Payments 6,266,569

Tax Payable/(Overpayment) (6,246,007)

On the same date, petitioner filed an amended Annual ITR for the short period fiscal year ended
March 31, 2007, reflecting the removal of the amount of the instant claim in the ''Prior Year's
Excess Credit".Thus, the amount thereof was changed from ₱5, 159,341 to ₱2,231,507.

On October 10, 2008, petitioner filed with the respondent's office, a claim for refund and/or
issuance of a Tax Credit Certificate (TCC) in the amount of ₱2,927.834.00, representing the
alleged excess and unutilized creditable withholding taxes for 2006.

In view of the fact that respondent has not acted upon the foregoing claim for refund/tax credit,
petitioner filed with a Petition for Review on April l4, 2009 before the Court in Division.

The Ruling of the CTA Division

After trial, the CT A Division denied the petition for review for lack of merit. It reasoned that UPSI-
MI effectively exercised the carry-over option under Section 76 of the National Internal Revenue
Code (NIRC) of 1997. On motion for reconsideration, UPSI-MI argued that the irrevocability rule
under Section 76 of the NIRC is not applicable for the reason that it did not carry over to the
succeeding taxable period the 2006 excess income tax credit. UPSI-MI added that the subject
excess tax credits were inadvertently included in its original 2007 ITR, and such mistake was
rectified in the amended 2007 ITR. Thus, UPSI-MI insisted that what should control is its election
of the option "To be issued a Tax Credit Certificate" in its 2006 ITR.

The CTA Division ruled that UPSI-MI's alleged inadvertent inclusion of the 2006 excess tax credit
in the 2007 original ITR belies its own allegation that it did not carry over the said amount to the
succeeding taxable period. The amendment of the 2007 ITR cannot undo UPSI-MI's actual
exercise of the carry-over option in the original 2007 ITR, for to do so would be against the
irrevocability rule. The dispositive portion of the CTA Division's decision reads:

WHEREFORE, the instant Petition for Review is hereby DENIED for lack of merit.6

Aggrieved, UPSI-MI appealed before the CTA En Banc.

The Ruling of the CTA En Banc

The CTA En Banc ruled that UPSI-MI is barred by Section 76 of the NIRC from claiming a refund
of its excess tax credits for the taxable year 2006. The barring effect applies after UPSI-MI carried
over its excess tax credits to the succeeding quarters of 2007, even if such carry-over was
allegedly done inadvertently. The court emphasized that the prevailing law and jurisprudence
admit of no exception or qualification to the irrevocability rule. Thus, the CTA En Banc affirmed
the assailed decision and resolution of the CTA Division, disposing as follows:

WHEREFORE, all the foregoing considered, the instant Petition for Review is hereby DENIED.
The assailed Decision dated July 5. 2011and Resolution dated September 8, 2011 both rendered
by the Court in Division in CTA Case No. 7908 are hereby AFFIRMED.

SO ORDERED.7
Notably, the said decision was met by a dissent from Justice Esperanza R. Pabon-Victorino.
Invoking Phi/am Asset Management, Inc. v. Commissioner (Philam), 8 Justice Pabon-Victorino
took the view that the irrevocability rule applies as much to the option of refund or tax credit
certificate. She wrote:

A contextual appreciation of the ruling [Philam] would tell us that any of the two alternatives once
chosen is irrevocable - be it for refund or carry over. The controlling factor for the operation of
the irrevocability rule is that the taxpayer chose an option; and once it had already done
so, it could no longer make another one.

Unsatisfied with the decision of the CTA En Banc, UPSI-MI appealed before this Court.

The Present Petition for Review

UPSI-MI interposed the following reasons for its petition:

THE HONORABLE COURT OF TAX APPEALS (En Banc) SERIOUSLY ERRED AND
DECIDED IN A MANNER NOT IN ACCORDANCE WITH THE LAW, PREVAILING
JURISPRUDENCE, AND FACTUAL MILIEU SURROUNDING THE CASE, WHEN IT ADOPTED
THE DECISION OF THE COURT OF TAX APPEALS IN DIVISION AND RULED THAT:

a. Petitioner is not entitled to the refund or issuance of a Tax Credit Certificate in the amount of
₱2,927,834.00 representing its 2006 excess tax credits because of the application of the
"irrevocability rule" under Section 76 of the NIRC of 1997.

b. The amendment of the original ITR for fiscal year ended 31 March 2007 does not take back,
cancel or rescind the original option to refund through tax credit certificate based on the argument
that the Petitioner allegedly made an option to carry-over the excess credits.

THE HONORABLE COURT OF TAX APPEALS (En Banc) SERIOUSLY ERRED WHEN IT
IGNORED THAT ON JOINT STIPULATIONS, THE RESPONDENT ADMITTED THE FACT
THAT PETITIONER INDICATED IN THE CORRESPONDING BOX ITS

INTENTION TO BE ISSUED A TAX CREDIT CERTIFICATE REPRESENTING ITS UNUTILIZED

CREDITABLE WITHHOLDING TAX WITHHELD FOR THE TAXABLE YEAR 2006 BY
MARKING THE APPROPRIATE BOX.

THE HONORABLE COURT OF TAX APPEALS (En Banc) SERIOUSLY ERRED WHEN IT
DECIDED ON THE ISSUE OF WHETHER OR NOT PEITIONER CARRIED OVER ITS 2006
EXCESS TAX CREDITS TO THE SUCCEEDING SHORT TAXABLE PERIOD OF 2007 WHEN
THE SAME WAS NEVER RAISED IN THE JOINT STIPULATION OF FACTS.

UPSI-MI faults the CTA En Banc for banking too much on the irrevocability of the option to carry
over. It contends that even the option to be refunded through the issuance of a TCC is likewise
irrevocable. Taking cue from the dissent of Justice Pabon-Victorino, UPSI-MI cites Philam in
restating this Court's pronouncement that "the options of a corporate taxpayer, whose total
quarterly income tax payments exceed its tax liability, are alternative in nature and the choice of
one precludes the other." It also cites Commissioner v. PL Management International Philippines,
Inc. (PL Management)9 that reiterated the rule that the choice of one precludes the other. Thus,
 when it indicated in its 2006 Annual ITR the option "To be issued a Tax Credit Certificate," such
choice precluded the other option to carry over.10

In other words, UPSI-MI proposes that the options of refund on one hand and carry-over on the
other hand are both irrevocable by nature. Relying again on the dissent of Justice Pabon-
Victorino, UPSI-MI also points to BIR Form 1702 (Annual Income Tax Return) itself which
expressly states under line 31 thereof:

"If overpayment, mark one box only:

(once the choice is made, the same is irrevocable)"

Resume of relevant facts

To recapitulate, UPSI-MI had, as of 31 December 2005, an outstanding amount of ₱2,331, 102.00

in excess and unutilized creditable withholding taxes.

For the subsequent taxable year ending 31 December 2006, the total sum of creditable taxes
withheld on the management fees of UPSI-MI was ₱2,927,834.00. Per its 2006 Annual Income
Tax Return (ITR), UPSI-MI's income tax due amounted to ₱99,105.00. UPSI-MI applied its "Prior
Year's Excess Credits" of ₱2,331, 102.00 as tax credit against such 2006 Income Tax due, leaving
a balance of ₱2,231,507.00 of still unutilized excess creditable tax. Meanwhile, the creditable
taxes withheld for the year 2006 (₱2,927,834.00) remained intact and unutilized. In said 2006
Annual ITR, UPSI-MI chose the option "To be issued a tax credit certificate" with respect to the
amount ₱2,927,834.00, representing unutilized excess creditable taxes for the taxable year
ending 31 December 2006. The figures are summarized in the table below:

xable Excess Creditable Income Tax Due Less Tax Balance of Exce
ar Withholding Tax (CWT) Tax Credit Payable CWT

05 P 2,331, 102.00 --- --- --- P 2,231,507.00

06 P 2,927,834.00 P 99, 105.00 P 99,105.00 (A portion of P 0.00 P 2,927,834.00

(MCIT) the excess credit of
Php2,33l,102.00 in 2015)

In the following year, UPSI-MI changed its taxable period from calendar year to fiscal year ending
on the last day of March. Thus, it filed on 14 November 2007 an Annual ITR covering the short
period from January 1 to March 31 of 2007. In the original 2007 Annual ITR, UPSI-MI opted to
carry over as "Prior Year's Excess Credits" the total amount of ₱5,159,341.00 which included the
2006 unutilized creditable withholding tax of ₱2,927,834.00. UPSI-MI amended the return by
excluding the sum of ₱2,927,834.00 under the line "Prior Year's Excess Credits" which amount is
the subject of the refund claim.

In sum, the question to be resolved is whether UPSI-MI may still be entitled to the refund of its
2006 excess tax credits in the amount of ₱2,927,834.00 when it thereafter filed its income tax
return (for the short period ending 31 March 2007) indicating the option of carry-over.

OUR RULING
We affirm the CTA.

We cannot subscribe to the suggestion that the irrevocability rule enshrined in Section 76 of the
National Internal Revenue Code (NIRC) applies to either of the options of refund or carry-over.
Our reading of the law assumes the interpretation that the irrevocability is limited only to the option
of carry-over such that a taxpayer is still free to change its choice after electing a refund of its
excess tax credit. But once it opts to carry over such excess creditable tax, after electing refund
or issuance of tax credit certificate, the carry-over option becomes irrevocable. Accordingly, the
previous choice of a claim for refund, even if subsequently pursued, may no longer be granted.

The aforementioned Section 76 of the NIRC provides:

SECTION 76. Final Adjustment Return. - Every corporation liable to tax under Section 27 shall
file a final adjustment return covering the total taxable income for the preceding calendar or fiscal
year. If the sum of the quarterly tax payments made during the said taxable year is not equal to
the total tax due on the entire taxable income of that year, the corporation shall either:

(A) Pay the balance of tax still due; or

(B) Carry over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income
taxes paid, the excess amount shown on its final adjustment return may be carried over and
credited against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to carry-over and apply the excess quarterly income
tax against income tax due for the taxable quarters of the succeeding taxable years has been
made, such option shall be considered irrevocable for that taxable period and no application
for cash refund or issuance of a tax credit certificate shall be allowed therefor. (emphasis supplied)

Under the cited law, there are two options available to the corporation whenever it overpays its
income tax for the taxable year: (1) to carry over and apply the overpayment as tax credit against
the estimated quarterly income tax liabilities of the succeeding taxable years (also known as
automatic tax credit) until fully utilized (meaning, there is no prescriptive period); and (2) to apply
for a cash refund or issuance of a tax credit certificate within the prescribed period.11 Such
overpayment of income tax is usually occasioned by the over-withholding of taxes on the income
payments to the corporate taxpayer.

The irrevocability rule is provided in the last sentence of Section 76. A perfunctory reading of the
law unmistakably discloses that the irrevocable option referred to is the carry-over option only.
There appears nothing therein from which to infer that the other choice, i.e., cash refund or tax
credit certificate, is also irrevocable. If the intention of the lawmakers was to make such option of
cash refund or tax credit certificate also irrevocable, then they would have clearly provided so.

In other words, the law does not prevent a taxpayer who originally opted for a refund or tax credit
certificate from shifting to the carry-over of the excess creditable taxes to the taxable quarters of
the succeeding taxable years. However, in case the taxpayer decides to shift its option to
carryover, it may no longer revert to its original choice due to the irrevocability rule. As Section 76
unequivocally provides, once the option to carry over has been made, it shall be irrevocable.
Furthermore, the provision seems to suggest that there are no qualifications or conditions
attached to the rule on irrevocability.

Law and jurisprudence unequivocally support the view that only the option of carry-over is
irrevocable.

Aside from the uncompromising last sentence of Section 76, Section 228 of the NIRC recognizes
such freedom of a taxpayer to change its option from refund to carry-over. This law affords the
government a remedy in case a taxpayer, who had previously claimed a refund or tax credit
certificate (TCC) of excess creditable withholding tax, subsequently applies such amount as
automatic tax credit. The pertinent text of Section 228 reads:

SEC. 228. Protesting of Assessment. - When the Commissioner or his duly authorized
representative finds that proper taxes should be assessed, he shall first notify the taxpayer of his
findings: Provided, however, That a pre-assessment notice shall not be required in the following
cases:

(a) When the finding for any deficiency tax is the result of mathematical error in the
computation of the tax as appearing on the face of the return; or

(b) When a discrepancy has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or

(c) When a taxpayer who opted to claim a refund or tax credit of excess
creditable withholding tax for a taxable period was determined to have carried
over and automatically applied the same amount claimed against the
estimated tax liabilities for the taxable quarter or quarters of the succeeding
taxable year; or

(d) When the excise tax due on exciseable articles has not been paid; or

(e) When the article locally purchased or imported by an exempt person, such as,
but not limited to, vehicles, capital equipment, machineries and spare parts, has
been sold, traded or transferred to non-exempt persons.

The taxpayers shall be informed in writing of the law and the facts on which the assessment is
made; otherwise, the assessment shall be void. x x x (emphasis supplied)

The provision contemplates three scenarios:

(1) Deficiency in the payment or remittance of tax to the government (paragraphs [a], [b]
and [d]);

(2) Overclaim of refund or tax credit (paragraph [ c ]); and

(3) Unwarranted claim of tax exemption (paragraph [e]).

In each case, the government is deprived of the rightful amount of tax due it. The law assures
recovery of the amount through the issuance of an assessment against the erring taxpayer.
However, the usual two-stage process in making an assessment is not strictly followed.
Accordingly, the government may immediately proceed to the issuance of a final assessment
notice (FAN), thus dispensing with the preliminary assessment (PAN), for the reason that the
discrepancy or deficiency is so glaring or reasonably within the taxpayer's knowledge such that a
preliminary notice to the taxpayer, through the issuance of a PAN, would be a superfluity.

Pertinently, paragraph (c) contemplates a double recovery by the taxpayer of an overpaid income
tax that arose from an over-withholding of creditable taxes. The refundable amount is the excess
and unutilized creditable withholding tax.

This paragraph envisages that the taxpayer had previously asked for and successfully
recovered from the BIR its excess creditable withholding tax through refund or tax credit
certificate; it could not be viewed any other way. If the government had already granted the
refund, but the taxpayer is determined to have automatically applied the excess creditable
withholding tax against its estimated quarterly tax liabilities in the succeeding taxable year(s), the
taxpayer would undeservedly recover twice the same amount of excess creditable withholding
tax. There appears, therefore, no other viable remedial recourse on the part of the government
except to assess the taxpayer for the double recovery. In this instance, and in accordance with
the above rule, the government can right away issue a FAN.

If, on the other hand, an administrative claim for refund or issuance of TCC is still pending but
the taxpayer had in the meantime automatically carried over the excess creditable tax, it would
appear not only wholly unjustified but also tantamount to adopting an unsound policy if the
government should resort to the remedy of assessment.

First, on the premise that the carry-over is to be sustained, there should be no more reason for
the government to make an assessment for the sum (equivalent to the excess creditable
withholding tax) that has been justifiably returned already to the taxpayer (through automatic tax
credit) and for which the government has no right to retain in the first place. In this instance, all
that the government needs to do is to deny the refund claim.

Second, on the premise that the carry-over is to be disallowed due to the pending application for
refund, it would be more complicated and circuitous if the government were to grant first the refund
claim and then later assess the taxpayer for the claim of automatic tax credit that was previously
disallowed. Such procedure is highly inefficient and expensive on the part of the government due
to the costs entailed by an assessment. It unduly hampers, instead of eases, tax administration
and unnecessarily exhausts the government's time and resources. It defeats, rather than
promotes, administrative feasibility.12 Such could not have been intended by our lawmakers.
Congress is deemed to have enacted a valid, sensible, and just law.13

Thus, in order to place a sensible meaning to paragraph (c) of Section 228, it should be interpreted
as contemplating only that situation when an application for refund or tax credit certificate had
already been previously granted. Issuing an assessment against the taxpayer who benefited twice
because of the application of automatic tax credit is a wholly acceptable remedy for the
government.

Going back to the case wherein the application for refund or tax credit is still pending before the
BIR, but the taxpayer had in the meantime automatically carried over its excess creditable tax in
the taxable quarters of the succeeding taxable year(s), the only judicious course of action that the
BIR may take is to deny the pending claim for refund. To insist on giving due course to the refund
claim only because it was the first option taken, and consequently disallowing the automatic tax
credit, is to encourage inefficiency or to suppress administrative feasibility, as previously
explained. Otherwise put, imbuing upon the choice of refund or tax credit certificate the character
of irrevocability would bring about an irrational situation that Congress did not intend to remedy
by means of an assessment through the issuance of a FAN without a prior PAN, as provided in
paragraph (c) of Section 228. It should be remembered that Congress' declared national policy in
passing the NIRC of 1997 is to rationalize the internal revenue tax system of the Philippines,
including tax administration.14

The foregoing simply shows that the lawmakers never intended to make the choice of refund or
tax credit certificate irrevocable. Sections 76 and 228, paragraph (c), unmistakably evince such
intention.

Philam and PL Management cases

did not categorically declare the
option of refund or TCC irrevocable.

The petitioner hinges its claim of irrevocability of the option of refund on the statement of this
Court in Philam and PL Management that "the options xxx are alternative and the choice of one
precludes the other." This also appears as the basis of Justice Fabon-Victorino’s stance in her
dissent to the majority opinion in the assailed decision.

We do not agree.

The cases cited in the petition did not make an express declaration that the option of cash refund
or TCC, once made, is irrevocable. Neither should this be inferred from the statement of the Court
that the options are alternative and that the choice of one precludes the other. Such statement
must be understood in the light of the factual milieu obtaining in the cases.

Philam involved two cases wherein the taxpayer failed to signify its option in the Final Adjustment
Return (FAR).

In the first case (G.R. No. 156637), the Court ruled that such failure did not mean the outright
barring of the request for a refund should one still choose this option later on. Thy taxpayer did in
fact file on 11 September 1998 an administrative claim for refund of its 1997 excess creditable
taxes. We sustained the refund claim in1 this case.

It was different in the second case (G.R. No. 162004) because the taxpayer filled out the portion
"Prior Year's Excess Credits" in its subsequent FAR. The court considered the taxpayer to have
constructively chosen the carry-over option. It was in this context that the court determined the
taxpayer to be bound by its initial choice (of automatic tax credit), so that it is precluded from
asking for a refund of the excess CWT. It must be so because the carry-over option is irrevocable,
and it cannot be allowed to recover twice for its overpayment of tax.

Unlike the second case, there was no flip-flopping of choices in the first one. The taxpayer did not
indicate in its 1997 FAR the choice of carryover. Neither did it apply automatic tax credit in
subsequent income tax returns so as to be considered as having constructively chosen the carry-
over option. When it later on asked for a refund of its 1997 excess CWT, the taxpayer was
expressing its option for the first time. It must be emphasized that the Court sustained the
application for refund but without expressly declaring that such choice was irrevocable.
In either case, it is clear that the taxpayer cannot avail of both refund and automatic tax credit at
the same time. Thus, as Philam declared: "One cannot get a tax refund and a tax credit at the
same time for the same excess income taxes paid." This is the import of the Court's
pronouncement that the options under Section 76 are alternative in nature.

In declaring that "the choice of one (option) precludes the other," the Court
in Philam cited Philippine Bank of Communications v. Commissioner of Internal Revenue
(PBCom), 15 a case decided under the aegis of the old NIRC of 1977 under which the irrevocability
rule had not yet been established. It was in PBCom that the Court stated for the first time that "the
choice of one precludes the other."16 However, a closer perusal of PBCom reveals that the
taxpayer had opted for an automatic tax credit. Thus, it was precluded from availing of the other
remedy of refund; otherwise, it would recover twice the same excess creditable tax. Again,
nowhere is it even suggested that the choice of refund is irrevocable. For one thing, it was not the
choice taken by the taxpayer. For another, the irrevocability rule had not yet been provided.

As in PBCom, the Court also said in PL Management that the choice of one (option) precludes
the other. Similarly, the taxpayer in PL Management initially signified in the FAR its choice of
1âwphi1

automatic tax credit. But unlike in PBCom, PL Management was decided under the NIRC of 1997
when the irrevocability rule was already applicable. Thus, although PL Management was unable
to actually apply its excess creditable tax in the next succeeding taxable quarters due to lack of
income tax liability, its subsequent application for TCC was rightfully denied by the Court. The
reason is the irrevocability of its choice of carry-over.

In other words, previous incarnations of the words "the options are alternative... the choice of one
precludes the other" did not lay down a doctrinal rule that the option of refund or tax credit
certificate is irrevocable.

Again, we need not belabor the point that insisting upon the irrevocability of the option for refund,
even though the taxpayer subsequently changed its mind by resorting to automatic tax credit, is
not only contrary to the apparent intention of the lawmakers but is also clearly violative of the
principle of administrative feasibility.

Prior to the NIRC of 1997, the alternative options of refund and carryover of excess creditable tax
had already been firmly established. However, the irrevocability rule was not yet in place.17 As we
explained in PL Management,Congress added the last sentence of Section 76 in order to lay
down the irrevocability rule. More recently, in Republic v. Team (Phils.) Energy Corp., 18 we said
that the rationale of the rule is to avoid confusion and complication that could be brought about
by the flip-flopping on the options, viz:

The evident intent of the legislature, in adding the last sentence to Section 76 of the NIRC of
1997, is to keep the taxpayer from flip-flopping on its options, and avoid confusion and
complication as regards said taxpayer's excess tax credit.19

The current rule specifically addresses the problematic situation when a taxpayer, after claiming
cash refund or applying for the issuance of tax credit, and during the pendency of such claim or
application, automatically carries over the same excess creditable tax and applies it against the
estimated quarterly income tax liabilities of the succeeding year. Thus, the rule not only eases tax
administration but also obviates double recovery of the excess creditable tax.
Further, nothing in the contents of BIR 1702 expressly declares that the option of refund or TCC
is irrevocable. Even on the assumption that the irrevocability also applies to the option of refund,
such would be an interpretation of the BIR that, as already demonstrated in the foregoing
discussion, is contrary to the intent of the law. It must be stressed that such erroneous
interpretation is not binding on the court. Philippine Bank of Communications v. CIR20is apropos:

It is widely accepted that the interpretation placed upon a statute by the executive officers, whose
duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such interpretation is
not conclusive and will be ignored if judicially found to be erroneous. Thus, courts will not
countenance administrative issuances that override, instead of remaining consistent and in
harmony with, the law they seek to apply and implement.21

Applying the foregoing precepts to the given case, UPSI-MI is barred from recovering its excess
creditable tax through refund or TCC. It is undisputed that despite its initial option to refund its
2006 excess creditable tax, UPSI-MI subsequently indicated in its 2007 short-period FAR that it
carried over the 2006 excess creditable tax and applied the same against its 2007 income tax
due. The CTA was correct in considering UPSI-MI to have constructively chosen the option of
carry-over, for which reason, the irrevocability rule forbade it to revert to its initial choice. It does
not matter that UPSI-Ml had not actually benefited from the carry-over on the ground that it did
not have a tax due in its 2007 short period. Neither may it insist that the insertion of the carry-over
in the 2007 FAR was by mere mistake or inadvertence. As we previously laid down, the
irrevocability rule admits of no qualifications or conditions.

In sum, the petitioner is clearly mistaken in its view that the irrevocability rule also applies to the
option of refund or tax credit certificate. In view of the court's finding that it constructively chose
the option of can-y-over, it is already barred from recovering its 2006 excess creditable tax through
refund or TCC even if it was its initial choice.

However, the petitioner remains entitled to the benefit of carry-over and thus may apply the 2006
overpaid income tax as tax credit in succeeding taxable years until fully exhausted. This is
because, unlike the remedy of refund or tax credit certificate, the option of carry-over under
Section 76 is not subject to any prescriptive period.

WHEREFORE, the petition is DENIED for lack of merit. The 8 February 2013 Decision of the
Court of Tax Appeals in CTA-EB Case No. 828 is hereby AFFIRMED.

SO ORDERED.

SAMUEL R. MARTIRES
Associate Justice

WE CONCUR:

PRESBITERO J. VELASCO, JR.

Associate Justice

LUCAS P. BERSAMIN MARVIC M.V.F. LEONEN

Associate Justice Associate Justice
ALEXANDER G. GESMUNDO
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decisionhad been reached in consultation before the
case was assigned to the writer of the opinion of the Court’s Division.

PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to the Section 13, Article VIII of the Constitution and the Division Chairperson’s
Attestation, I certify that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Court’s Division.

ANTONIO T. CARPIO
Acting Chief Justice

Footnotes

1 See Section 76, National Internal Revenue Code.

2 Id.

3
Rollo, pp. 9-24; penned by Associate Justice Erlinda P. Uy with Associate Justices
Juanito C. Castaneda, Jr., Lovell R. Bautista, Caesar A. Casanova and Amelia R.
Cotangco-Manalastas, concurring. Associate Justice Esperanza R. Fabon-Victorino,
joined in by Associate Justice Cielito N. Mindaro-Grulla, wrote a dissenting opinion.

4 Id. at 10-11.

5 Id. at 11.

6
Id. at 9-10.

7 Id. at 23-24.

8 514 Phil. 147 (2005).

9 662 Phil. 431 (2011), per J. Bersamin.

10 Id. at 436.
11The prescriptive period for the application for refund or issuance of tax credit certificate
is two (2) years from the date of payment. The rule is provided in Section 229 of the NIRC,
to wit:

SECTION 229. 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 excessively 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 filed after the expiration of two (2)
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.

12Administrative feasibility is one of the canons of a sound. tax system. It simply means
that the tax system should be capable of being effectively administered and enforced with
the least inconvenience to the taxpayer. (Diaz v. Secretary of Finance, 669 Phil. 371, 393
(2011)).

Lawyers Against Monopoly and Poverty (LAMP), et al. v. The Secretary of Budget and
13

Management, et al., 686 Phil. 357, 372-373 (2012), citing Farinas v. The Executive
Secretary, 463 Phil. 179, 197 (2003).

14 Section 2 of R.A. No. 8424 provides:

SECTION 2. State Policy. - It is hereby declared the policy of the State to promote
sustainable economic growth through the rationalization of the Philippine internal
revenue tax system, including tax administration; to provide, as much as possible,
an equitable relief to a greater number of taxpayers in order to improve levels of
disposable income and increase economic activity; and to create a robust
environment for business to enable firms to compete better in the regional as well
as the global market, at the same time that the State ensures that Government is
able to provide for the needs of those under its jurisdiction and care.

15
361Phil.916(1999).

16
Id. at 932.

The predecessor provision of Section 76 of the 1997 NIRC was Section 79 of the 1985
17

NIRC which then provided:

Section 76. Final Adjustment Return. - Every corporation liable to tax under Section
24 shall file a final adjustment return covering the total net income for the preceding
calendar or fiscal year. If the sum of the quarterly tax payments made during the
 said taxable year is not equal to the total tax due on the entire taxable net income
of that year the corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly

income taxes-paid, the refundable amount shown on its final adjustment return
may be credited against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding taxable year.

18 750 Phil. 700 (2015).

19Id. at 715, citing Commissioner of Internal Revenue v. Bank of the Philippine

Islands, 609 Phil. 678, 690.

20 Supra note 15.

21 Id. at 929.

THIRD DIVISION

March 7, 2018

G.R. No. 181710

CITY OF PASIG and CRISPINA V. SALUMBRE, in her capacity as OIC-City Treasurer of

Pasig City, Petitioners
vs.
MANILA ELECTRIC COMPANY, Respondent

DECISION

MARTIRES, J.:

Under the Local Government Code (LGC) of 1991, a municipality is bereft of authority to levy and
impose franchise tax on franchise holders within its territorial jurisdiction. That authority belongs
to provinces and cities only.1 A franchise tax levied by a municipality is, thus, null and void. The
nullity is not cured by the subsequent conversion of the municipality into a city.

At bar is a petition for review under Rule 45 of the Rules of Court which seeks a reversal of the
Decision2 dated 28 August 2007, and Resolution3 dated 8 February 2008 of the Court of
Appeals (CA) in CA-G.R. CV No. 81255 entitled "The Manila Electric Company v. The City of
Pasig, et al."
THE FACTS

On 26 December 1992, the Sangguniang Bayan of the Municipality of Pasig enacted Ordinance
No. 25 which, under its Article 3, Section 32, imposed a franchise tax on all business venture
operations carried out through a franchise within the municipality, as follows:

ARTICLE 3 -FRANCHISE TAX

Section 32. Imposition of Tax. - Any provision of laws or grant of exemption to the contrary
notwithstanding, any person, corporation, partnership or association enjoying a franchise and
doing business in the Municipality of Pasig, shall pay a franchise tax at the rate of fifty percent
(50%) of one percent (1%) of its gross receipts derived from the operation of the business in Pasig
during the preceding calendar year.

By virtue of Republic Act (R.A.) No. 7829, which took effect on 25 January 1995, the Municipality
of Pasig was converted into a highly urbanized city to be known as the City of Pasig.

On 24 August 2001, the Treasurer’s Office of the City Government of Pasig informed the Manila
Electric Company (MERALCO), a grantee of a legislative franchise,4 that it is liable to pay taxes
for the period 1996 to 1999, pursuant to Municipal Ordinance No. 25. The city, thereafter, on two
separate occasions, demanded payment of the said tax in the amount of ₱435,332, 196.00,
exclusive of penalties.

On 8 February 2002, MERALCO protested5 the validity of the demand "claiming that the same be
withdrawn and cancelled for the following reasons: (1) Ordinance No. 25 was declared void ab
initio by the Department of Justice (DOJ) for being in contravention of law, which resolution was
reiterated in another case that questioned the validity of the franchise tax, etc.; (2) The Regional
Trial Court of Pasig City (RTC) ordered the Municipality of Pasig, now City of Pasig, to refund
MERALCO the amount the latter paid as franchise tax because the former lacked legal foundation
in collecting the same, as municipalities are not empowered by law to impose and collect franchise
tax pursuant to Section 142 of the LGC; (3) The CA affirmed the RTC decision; and (4) The
petition for certiorari filed by the then Municipality of Pasig before the Supreme Court, assailing
the decision of the CA that sustained the RTC, was likewise dismissed and the motion for
reconsideration of the Municipality of Pasig was denied with finality.

In view of the inaction by the Treasurer's Office, MERALCO instituted an action before the RTC
for the annulment of the said demand with prayer for a temporary restraining order and a writ of
preliminary injunction.6 The RTC ruled in favor of the City of Pasig, disposing as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the defendant City
of Pasig, declaring as valid its demand for payment of franchise tax upon [MERALCO] for the
years 1996 to 1999, inclusive, subject to revision of the computation of the amount of such tax
pursuant to the guidelines above-mentioned.7

MERALCO appealed before the CA.

The Ruling of the CA

On whether the City of Pasig can legally assess and collect franchise tax from MERALCO for the
period 1996 to 1999, the court ruled in the negative.
The CA ratiocinated that the LGC authorizes cities to levy a franchise tax. However, the basis of
the City of Pasig’s demand for payment of franchise tax was Section 32, Article 3 of Ordinance
No. 25 which was enacted at a time when Pasig was still a municipality and had no authority to
levy a franchise tax. From the time of its conversion into a city, Pasig has not enacted a new
ordinance for the imposition of a franchise tax. The conversion of Pasig into a city, the CA
explained, did not rectify the defect of the said ordinance. Citing San Miguel Corporation v.
Municipal Council (SMC)8 and Arabay, Inc. v. Court of First Instance of Zamboanga del Norte
(Arabay), 9 the CA ruled that the conversion of a municipality into a city does not remove the
original infirmity of the ordinance. The dispositive portion of the decision reads:

WHEREFORE, the foregoing premises considered, we resolve to REVERSE and SET ASIDE the
decision appealed from. In its stead, a new judgment is hereby entered declaring the demand
1âwphi1

for payment of franchise tax from [MERALCO] as invalid for being devoid of legal basis.10

The City of Pasig moved, but failed to obtain a reconsideration of the said decision. Thus, the
instant appeal.

The Present Petition for Review

The City of Pasig relied on the following reasons to support its petition:

I.

THE COURT OF APPEALS COMMITTED GRAVE REVERSIBLE ERROR IN SETTING ASIDE

THE DECISION OF THE TRIAL COURT AND IN DECLARING THAT THE CONVERSION OF
THE MUNICIPALITY OF P ASIG INTO A CITY DID NOT VEST THE LATTER WITH AUTHORITY
TO LEVY FRANCHISE TAXES AS THE ORDINANCE GRANTING SUCH POWER WAS NULL
AND VOID.

II.

THE COURT OF APPEALS COMMITTED GRAVE REVERSIBLE ERROR IN SETTING ASIDE

THE DECISION OF THE TRIAL COURT AND DECLARING THAT THERE IS NOTHING IN
REPUBLIC ACT NO. 7892 WHICH INVESTS A CURATIVE EFFECT UPON ORDINANCE NO.
32.

III.

THE COURT OF APPEALS COMMITTED GRAVE REVERSIBLE ERROR IN SETTING ASIDE

THE DECISION OF THE TRIAL COURT CONTRARY TO THE RULE THAT IN CASE OF DOUBT
IN THE APPLICATION OF A STATUTE, AN APPLICATION GIVING EFFECT TO THE
LEGISLATIVE INTENT AND THE PRINCIPLE OF LOCAL AUTONOMY ENSHRINED IN THE
CONSTITUTION SHOULD BE FOLLOWED.

For the Court’s consideration is the following:

ISSUE
Whether the CA was correct in ruling that the City of Pasig had no valid basis for its imposition of
franchise tax for the period 1996 to 1999.

OUR RULING

We answer in the affirmative.

I. Unlike a city, a municipality is bereft of authority to levy franchise tax, thus, the ordinance
enacted for that purpose is void.

The conversion of the municipality into a city does not lend validity to the void ordinance.

Neither does it authorize the collection of the tax under said ordinance.

The power to impose franchise tax belongs to the province by virtue of Section 137 of the LGC
which states:

CHAPTER II

Specific Provisions on the Taxing and Other Revenue-Raising Powers of Local Government Units

ARTICLE I
Provinces

Section 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special
law, the province may impose a tax on businesses enjoying a franchise, at the rate not exceeding
fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar
year based on the incoming receipt, or realized, within its territorial jurisdiction.

xxxx

On the other hand, the municipalities are prohibited from levying the taxes specifically allocated
to provinces, viz:

ARTICLE II
Municipalities

Section 142. Scope of Taxing Powers. - Except as otherwise provided in this Code, municipalities
may levy taxes, fees, and charges not otherwise levied by provinces.

Section 151 empowers the cities to levy taxes, fees and charges allowed to both provinces and
municipalities, thus -

ARTICLE III

Cities

Section 151. Scope of Taxing Powers. - Except as otherwise provided in this Code, the city, may
levy the taxes, fees, and charges which the province or municipality may impose: Provided,
however, That the taxes, fees and charges levied and collected by highly urbanized and
independent component cities shall accrue to them and distributed in accordance with the
provisions of this Code.

xxxx

The LGC further provides that the power to impose a tax, fee, or charge or to generate revenue
shall be exercised by the Sanggunian of the local government unit concerned through an
appropriate ordinance.11 This simply means that the local government unit cannot solely rely on
the statutory provision (LGC) granting specific taxing powers, such as the authority to levy
franchise tax. The enactment of an ordinance is indispensable for it is the legal basis of the
imposition and collection of taxes upon covered taxpayers. Without the ordinance, there is nothing
to enforce by way of assessment and collection.

However, an ordinance must pass muster the test of constitutionality and the test of consistency
with the prevailing laws.12 Otherwise, it shall be void.

It is not disputed that at the time the ordinance in question was enacted in 1992, the local
government of Pasig, then a municipality, had no authority to levy franchise tax. Article 5 of the
Civil Code explicitly provides, "acts executed against the provisions of mandatory or prohibitory
laws shall be void, except when the law itself authorizes their validity." Section 32 of Municipal
Ordinance No. 25 is, thus, void for being in direct contravention with Section 142 of the LGC.
Being void, it cannot be given any legal effect. An assessment and collection pursuant to the said
ordinance is, perforce, legally infirm.

Consequently, the CA was correct when it declared that the demand of the City of Pasig upon
MERALCO for the payment of the disputed tax was devoid of legal basis. It bears emphasizing
that the DOJ and the RTC of Pasig City13 had previously declared Section 32 of Municipal
Ordinance No. 25 as void ab initio. 14 Even the City of Pasig, it seems, does not contest the
invalidity of said ordinance.15

It is submitted, however, that when Pasig was converted into a city in 1995 by virtue of R.A. No.
7829 (the cityhood law) it was authorized to collect and impose a franchise tax. Demurring from
the rulings in Arabay and SMC cited in the assailed CA decision, the City of Pasig insists that the
demand for payment of franchise tax was justified for the period 1996 up to 1999, or when Pasig
was already a city. Unlike the present case, the City of Pasig continues, Ara
bay and SMC involved taxes paid prior to the respective municipalities' conversion into cities.

We are not persuaded.

The doctrinal rule on the matter still rings true to this day - that the conversion of the municipality
into a city does not remove the original infirmity of the subject ordinance. Such doctrine, evoked
in Arabay and SMC, is squarely relevant in the case at bar. In these two separate cases, the sales
taxes were paid by the petitioners pursuant to ordinances enacted prior to the conversion of the
respondents into cities, or at which time the latter were without authority to levy the said taxes.
Finding the municipal ordinances to be void, the Court minced no words in declaring the payments
of taxes under the ordinances to be without basis even if subsequently the respondents became
cities. Fittingly, the Court ordered the refund of the said taxes to the petitioners.
We find the instant case no different from Arabay and SMC. As in those cases, the cityhood law
(R.A. No. 7829) of Pasig cannot breathe life into Section 32 of Municipal Ordinance No. 25,
ostensibly by bringing it within the ambit of Section 151 of the LGC that authorizes cities to levy
the franchise tax under Section 137 of the same law. It is beyond cavil that Section 32 of Municipal
Ordinance No. 25 is an act that is null and void ab initio. It is even of little consequence that Pasig
sought to collect only those taxes after its conversion into a city. A void ordinance, or provision
thereof, is what it is - a nullity that produces no legal effect. It cannot be enforced; and no right
could spring forth from it. The cityhood of Pasig notwithstanding, it has no right to collect franchise
tax under the assailed ordinance.

Besides, the City of Pasig had apparently misunderstood Arabay. In that case, the taxes subject
of the refund claim included those paid after the conversion of Dipolog into a city. Thus, while the
creation of the City of Dipolog was effective on 1 January 1970, the petitioner, Arabay, Inc.,
applied for the refund of taxes paid under the questioned ordinance for the period from December
1969 to July 1972.16 As previously noted, the Court granted the refund.

II. The cityhood law of

Pasig did not cure the defect of
the questioned ordinance.
The petitioner cites -

Section 45. Municipal Ordinances Existing at the Time of the Approval of this Act. - All municipal
ordinances of the municipality of Pasig existing at the time of the approval of this Act shall continue
to be in force within the City of Pasig until the Sangguniang Panlungsod shall, by ordinance,
provide otherwise.

of R.A. No. 7829 as legal basis that gave curative effect upon Section 32 of Municipal Ordinance
No. 25.

As we see it, the cited law does not lend any help to the City of Pasig's cause. It is crystal clear
from the said law that what shall continue to be in force after the conversion of Pasig into a city
are the municipal ordinances existing as of the time of the approval of R.A. No. 7829. The
provision contemplates ordinances that are valid and legal from their inception; that upon the
approval of R.A. No. 7829, their effectivity and enforcement shall continue. To 'continue' means
(1) to be steadfast or constant in a course or activity; (2) to keep going: maintain a course,
direction, or progress; or (3) to remain in a place or condition.17 It presupposes something already
existing.

A void ordinance cannot legally exist, it cannot have binding force and effect. Such is Section 32
of Municipal Ordinance No. 25 and, being so, is outside the comprehension of Section 45 of R.A.
No. 7829

We are not in full accord with the explanation given by the City of Pasig - that Section 45 of R.A.
No. 7829 intended to prevent the City of Pasig from becoming paralyzed in delivering basic
services. We can concede that Section 45 of R.A. No. 7829 assures the City of Pasig continued
collection of taxes under ordinances passed prior to its conversion. What the petitioner fails to
realize is that Section 32, Municipal Ordinance No. 25 is not the singular source of its income or
funds necessary for the performance of its essential functions. The argument of the City of Pasig
is at best flimsy and insubstantial. The records, it should be noted, bear no evidence to
demonstrate the resulting paralysis claimed by the City of Pasig. An unsupported allegation it is,
no better than a mere conjecture and speculation.

III. There is no ambiguity in

Section 45 of R.A. No. 7829.

As a last-ditch effort to persuade this Court, the City of Pasig calls out a latent ambiguity in Section
42 of R.A. No. 7829 in order to pave the way for the operation of the cardinal rule in statutory
construction requiring courts to give effect to the legislative intent. It pounces on the same
ambiguity so that it may be resolved in favor of promoting local autonomy.

We disagree. We have already established that the provision is clear enough to dislodge any
notion that it gives curative effect to the legal infirmity of Section 32 of Municipal Ordinance No.
25. The legislative intent behind Section 42 of R.A. No. 7829, as previously discussed, did not
comprehend the affirmance of void or inexistent ordinances.

Neither can the bare invocation of the principle of local autonomy provide succor to settle any
ambiguity in Section 42 of R.A. No. 7829, if doubt as to its meaning may even be supposed. While
we can agree that an ambiguity in the law concerning local taxing powers must be resolved in
favor of fiscal autonomy,18 we are hampered by the nullity of Section 32 of Municipal Ordinance
No. 25. At the risk of being repetitive, the said ordinance cannot be given legal effect. It must be
borne in mind that the constitutionally ordained policy of local fiscal autonomy was not intended
by the framers to be absolute. It does not provide unfettered authority to tax objects of any kind.
The very source of local governments' authority to tax19 also empowered Congress to provide
limitations on the exercise of such taxing powers. Precisely, Congress' act of withdrawing from
municipalities the power to levy franchise tax by virtue of Section 142 of the LGC is a valid
exercise of its constitutional authority

In this case, the validity of the municipal ordinance imposing a franchise tax cannot be made to
rest upon the ambiguity of a provision of law (Section 42, R.A. No. 7829) operating supposedly,
albeit mistakenly, under the context of promoting local autonomy. Regard, too, must be made for
the equally important doctrine that a doubt or ambiguity arising out of the term used in granting
the power of taxation must be resolved against the local government unit.20

In fine, the City of Pasig cannot legally make a demand for the payment of taxes under the
challenged ordinance, which is void, even after its conversion into a city. The CA, thus, committed
no reversible error.

WHEREFORE, the petition is DENIED for lack of merit. The 28 August 2007 Decision and the 8
February 2008 Resolution of the Court of Appeals in CA-G.R. CV No. 81255 are
hereby AFFIRMED.

SO ORDERED.

SAMUEL R. MARTIRES
Associate Justice

WE CONCUR:
PRESBITERO J. VELASCO, JR.
Associate Justice

LUCAS P. BERSAMIN MARVIC M.V.F. LEONEN

Associate Justice Associate Justice

ALEXANDER G. GESMUNDO
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decisionhad been reached in consultation before the
case was assigned to the writer of the opinion of the Court’s Division.

PRESBITERO J. VELASCO, JR.

Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to the Section 13, Article VIII of the Constitution and the Division Chairperson’s
Attestation, I certify that the conclusions in the above Decision had been reached in consultation
before the case was assigned to the writer of the opinion of the Court’s Division.

ANTONIO T. CARPIO
Acting Chief Justice

Footnotes

1 Local Government Code of 1991, Sections 13 7 and 151.

2 Rollo, pp. 28-35; penned by Associate Justice Apolinario D. Bruselas, Jr., and concurred
in by Associate Justices Bievenido L. Reyes (former member of the Court) and Aurora
Santiago-Lagman.

3
Id. at 36-37.

4 Under Act No. 484, as implemented by Ordinance No. 44 and extended by Republic Act
Nos. 150 and 4159, MERALCO is authorized to construct, maintain and operate an electric
light, heat and power system in the City of Manila and its suburbs including the City of
Pasig.

5 Records, pp. 14-22.

 6 Filed before Branch 70, RTC-Pasig City, docketed as Civil Case No. 68944.

7 Records, p. 367.

8 152 Phil. 30 (1973 ).

9
160-A Phil. 132 (1975).

10 Rollo, p. 35.

11 See LGC, Section 132 ..

12Ferrer, Jr. v. Bautista, 762 Phil. 233, 263 (2015) citing City of Manila v. Hon. Laguio,
Jr., 495 Phil. 289, 308 (2005).

13
Filed before Branch 266, RTC-Pasig City, docketed as Civil Case No. 64881. The
decision of the RTC declaring Section 32 of Ordinance No. 25 was later affirmed by the
CA in its Decision, dated 16 March 2001, in CA-GR CV No. 55611. See Rollo, p. 11 and
records, p. 365.

14
Id.

15 Id. at 18-19.

The City of Dipolog had, however, previously refunded to plaintiff Arabay, Inc. the
16

payments from April to July 1972.

17
Webster's Third New International Dictionary, page 493.

18 See Demaala v. Commission on Audit, 754 Phil. 28, 42 (2015).

19 Constitution, Article X, Section 5 which provides:

Section 5 - Each Local Government unit shall have the power to create its own sources of
revenue and to levy taxes, fees and charges subject to such guidelines and limitations as
the Congress may provide, consistent with the basic policy of local autonomy. Such taxes,
fees and charges shall accrue exclusively to the Local Governments.

20
See Demaala v. Commission on Audit, supra note 18 at 39 citing Icard v. City Council
of Baguio, 83 Phil. 870,873 (1949)

SECOND DIVISION

G.R. No. 203160, January 24, 2018

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. COVANTA ENERGY PHILIPPINE
HOLDINGS, INC., Respondent.

DECISION

REYES, JR., J.:

This is a petition for review on certiorari1 under Rule 45 of the Rules of Court, seeking to reverse and
set aside the Decision2 dated March 30, 2012 and Resolution3 dated August 16, 2012 of the Court of
Tax Appeals (CTA) en banc in CTA EB Case No. 713.

The CTA en banc denied the appeal of the Commissioner of Internal Revenue (CIR) and affirmed the
cancellation and withdrawal of the deficiency tax assessments on respondent Covanta Energy Philippine
Holdings, Inc. (CEPHI). The CIR avers, however, that CEPHI failed to comply with the requirements of
the tax amnesty law, or Republic Act (R.A.) No. 9480.4

Factual Antecedents

On December 6, 2004, the CIR issued Formal Letters of Demand and Assessment Notices against CEPHI
for deficiency value-added tax (VAT) and expanded withholding tax (EWT). The deficiency assessments
were respectively in the amounts of P465,593.21 and P288,903.78, or an aggregate amount of
P754,496.99, representing CEPHI's VAT and EWT liabilities for the taxable year 2001.5

CEPHI protested the assessments by filing two (2) separate Letters of Protest on January 19, 2005.
However, the CIR issued another Formal Letter of Demand and Assessment Notice dated January 11,
2005, assessing CEPHI for deficiency minimum corporate income tax (MCIT) in the amount of
P467,801.99, likewise for the taxable year 2001. This assessment lead to CEPHI filing a Letter of Protest
on the MCIT assessment on February 16, 2015.6

The protests remained unacted upon. Thus, CEPHI filed separate petitions before the CTA, seeking the
cancellation and withdrawal of the deficiency assessments. The petitions were filed on October 10, 2005,
for the deficiency VAT and EWT, which was docketed as CTA Case No. 7338; and on November 9, 2005,
for the deficiency MCIT, which was docketed as CTA Case No. 7365. 7

On December 6, 2005, the CIR filed an Answer for CTA Case No. 7338, while the Answer for CTA Case
No. 7365 was filed on January 10, 2006. The cases were eventually consolidated upon the CIR's motion.8

After the parties' respective submission of their fonnal offer of evidence, CEPHI filed a Supplemental
Petition on October 7, 2008, informing the CTA that it availed of the tax amnesty under R.A. No. 9480.
CEPHI afterwards submitted a Supplemental Formal Offer of Evidence, together with the documents
relevant to its tax amnesty.9

The CTA then required the parties to submit their respective memoranda within 30 days. The case was
submitted for decision upon the parties' compliance.10

Ruling of the CTA Second Division

In a Decision dated July 27, 2010, the CTA Second Division partially granted the petitions of CEPHI with
respect to the deficiency VAT and MCIT assessments for 2001. Since tax amnesty does not extend to
withholding agents with respect to their withholding tax liabilities,11 the CTA Second Division ruled, after
computation, that CEPHI is liable to pay the amount of P131,791.02 for the deficiency EWT assessment,
plus additional deficiency and delinquency interest. The dispositive portion of this decision states:12

WHEREFORE, the instant Petitions for Review are hereby PARTIALLY GRANTED. Accordingly, the
deficiency [VAT] and deficiency [MCIT] assessments for taxable year 2001 issued against petitioner are
CANCELLED and WITHDRAWN.
However, petitioner is ORDERED TO PAY respondent the amount of ONE HUNDRED THIRTY-ONE
THOUSAND SEVEN HUNDRED NINETY-ONE PESOS AND 02/100 (P131,791.02), representing deficiency
[EWT], including the twenty-five percent (25%) surcharge imposed thereon.

Likewise, petitioner is ORDERED TO PAY:

(a) deficiency interest at the rate of twenty percent (20%) per annum on the basic deficiency EWT of
P29,415.00 computed from November 16, 2005 until full payment thereof pursuant to Section 249(B)
of the NIRC of 1997; and

(b) delinquency interest at the rate of 20% per annum of P131,791.02 which is the total amount still
due and on the 20% deficiency interest which have accrued as afore-stated in paragraph (a) computed
from January 10, 2005 until full payment thereof, pursuant to Section 249(C) of the NIRC of 1997.

SO ORDERED.13

The CIR moved for the reconsideration of this decision, which the CTA Second Division denied in its
Resolution14 dated December 13, 2010:

WHEREFORE, premises considered, respondent's "Motion for Reconsideration" is hereby DENIED for lack
of merit.

SO ORDERED.15

Unsatisfied with the ruling of the CTA Second Division, the CIR elevated the matter to the CTA en
bancthrough a Petition for Review dated January 4, 2011, pursuant to R.A. No. 1125,16 as amended by
R.A. No. 928217 and R.A. No. 9503.18 The sole issue raised in the CIR's appeal was whether the CTA
Second Division erred in upholding the validity of the tax amnesty availed by CEPHI. The CIR was of the
position that CEPHI is not entitled to the immunities and privileges under R.A. No. 9480 because its
documentary submissions failed to comply with the requirements under the tax amnesty law. 19

Ruling of the CTA En Banc

Finding the CIR's petition for review unmeritorious, the CTA en banc denied the appeal in the assailed
Decision20 dated March 30, 2012:

WHEREFORE, the Petition for Review filed by [CIR] is hereby DENIED for lack of merit. The Decision
dated July 27, 2010 and Resolution dated December 13, 2010 are hereby AFFIRMED. Deficiency [VAT]
and Deficiency [MCIT] in taxable year 2001 remain CANCELLED and WITHDRAWN. Respondent,
however, is ORDERED TO PAY the amount of ONE HUNDRED THIRTY-ONE THOUSAND SEVEN HUNDRED
NINETY-ONE PESOS AND 02/100 (P131,791.02), representing deficiency [EWT], including the twenty-
five (25%) surcharge imposed thereon. Likewise, respondent is ORDERED TO PAY:

(a) deficiency interest at the rate of twenty percent (20%) per

annum on the basic deficiency EWT of P29,415.00
computed from November 16, 2005 until full payment
thereof pursuant to Section 249(B) of the NIRC of 1997;
and
 (b) delinquency interest at the rate of 20% per annum of
P131,791.02 which is the total amount still due and on the
20% deficiency interest which have accrued as afore-
stated in paragraph (a) computed from January 10, 2005
until full payment thereof, pursuant to Section 249(c) of
the NIRC of 1997.
SO ORDERED.21

The CTA en banc upheld the ruling that, without any evidence that CEPHI's net worth was underdeclared
by at least 30%, there is a presumption of compliance with the requirements of the tax amnesty law.
For this reason, CEPHI may immediately enjoy the privileges of the tax amnesty program. 22 The CIR
disagreed with this decision, and on April 23, 2012, it moved for the reconsideration of the CTA en
banc's decision.

The CIR's motion for reconsideration was denied in the assailed CTA en banc Resolution23 dated August
16, 2012:

WHEREFORE, premises considered, the Motion for Reconsideration is hereby DENIED for lack of merit.

SO ORDERED.24

Prompted by the denial of their petition for review and motion for reconsideration, the CIR elevated the
matter to this Court, by again assailing the validity of CEPHI's tax amnesty. The CIR reiterated its
argument that CEPHI's failure to provide complete information in its Statement of Assets, Liabilities and
Net worth (SALN), particularly the columns requiring the Reference and Basis of Valuation, is sufficient
basis to disqualify CEPHI from the tax amnesty program.25 The CIR also alleged that there is no period
of limitation in challenging CEPHI's compliance with the requirements of the tax amnesty program. 26

Ruling of this Court

The Court dismisses the petition.

CEPHI is entitled to the immunities

and privileges of the tax amnesty
program upon full compliance with
the requirements of R.A. No. 9480.

R.A. No. 9480 governs the tax amnesty program for national internal revenue taxes for the taxable year
2005 and prior years.27 Subject to certain exceptions,28 a taxpayer may avail of this program by
complying with the documentary submissions to the Bureau of Internal Revenue (BIR) and thereafter,
paying the applicable amnesty tax.29

The implementing rules and regulations of R.A. No. 9480, as embodied in Department of Finance (DOF)
Department Order No. 29-07,30 laid down the procedure for availing of the tax amnesty:

SEC. 6. Method of Availment of Tax Amnesty. –

1. Forms/Documents to be filed. – To avail of the general tax amnesty, concerned

taxpayers shall file the following documents/requirements:
 a. Notice of Availment in such forms as may be prescribed by the BIR.
b. [SALN] as of December 31, 2005 in such forms, as may be prescribed by the
BIR.
c. Tax Amnesty Return in such form as may be prescribed by the BIR.

2. Place of Filing of Amnesty Tax Return. – The Tax Amnesty Return, together with
the other documents stated in Sec. 6 (1) hereof, shall be filed as follows:

a. Residents shall file with the Revenue District Officer (RDO)/Large Taxpayer
District Office of the BIR which has jurisdiction over the legal residence or
principal place of business of the taxpayer, as the case may be.
b. Non-residents shall file with the office of the Commissioner of the BIR, or with
the RDO.
c. At the option of the taxpayer, the RDO may assist the taxpayer in accomplishing
the forms and computing the taxable base and the amnesty tax payable, but
may not look into, question or examine the veracity of the entries contained in
the Tax Amnesty Return, [SALN], or such other documents submitted by the
taxpayer.

3. Payment of Amnesty Tax and Full Compliance. – Upon filing of the Tax Amnesty
Return in accordance with Sec. 6 (2) hereof, the taxpayer shall pay the amnesty tax to
the authorized agent bank or in the absence thereof, the Collection Agents or duly
authorized Treasurer of the city or municipality in which such person has his legal
residence or principal place of business.

The RDO shall issue sufficient Acceptance of Payment Forms, as may be prescribed by
the BIR for the use of-or to be accomplished by – the bank, the collection agent or the
Treasurer, showing the acceptance by the amnesty tax payment. In case of the
authorized agent bank, the branch manager or the assistant branch manager shall sign
the acceptance of payment form.

The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax
Amnesty Return shall be submitted to the RDO, which shall be received only after
complete payment. The completion of these requirements shall be deemed full
compliance with the provisions of RA 9480.

4. Time for Filing and Payment of Amnesty Tax. – The filing of the Tax Amnesty
Return, together with the SALN, and the payment of the amnesty tax shall be made
within six (6) months from the effectivity of these Rules.31 (Emphasis and underscoring
Ours)

Upon the taxpayer's full compliance with these requirements, the taxpayer is immediately entitled to
the enjoyment of the immunities and privileges of the tax amnesty program. 32 But when: (a) the
taxpayer fails to file a SALN and the Tax Amnesty Return; or (b) the net worth of the taxpayer in the
SALN as of December 31, 2005 is proven to be understated to the extent of 30% or more, the taxpayer
shall cease to enjoy these immunities and privileges.33

The underdeclaration of a taxpayer's net worth, as referred in the second instance above, is proven
through: (a) proceedings initiated by parties other than the BIR or its agents, within one (1) year from
the filing of the SALN and the Tax Amnesty Return; or (b) findings or admissions in congressional
hearings or proceedings in administrative agencies, and in courts. Otherwise, the taxpayer's SALN is
presumed true and correct.34 The tax amnesty law thus places the burden of overturning this
presumption to the parties who claim that there was an underdeclaration of the taxpayer's net worth.

In this case, it is undisputed that CEPHI submitted all the documentary requirements for the tax amnesty
program.35 The CIR argued, however, that CEPHI cannot enjoy the privileges attendant to the tax
amnesty program because its SALN failed to comply with the requirements of R.A. No. 9480. The CIR
specifically points to CEPHI's supposed omission of the information relating to the Reference and Basis
for Valuation columns in CEPHI's original and amended SALNs.36

The required information that should be reflected in the taxpayer's SALN is enumerated in Section 3 of
R.A. No. 9480.37 The essential contents of the SALN are also itemized under the implementing rules and
regulations as follows:

SEC. 8. Contents of the SALN. – The SALN shall contain a true and complete declaration of assets,
liabilities and networth of the taxpayer as of December 31, 2005, as follows:

1. Assets within or without the Philippines, whether real or personal, tangible or intangible,
whether or not used in trade or business:

a. Real properties shall be accompanied by a description of their classification,

exact location, and valued at acquisition cost, if acquired by purchase or the
zonal valuation or fair market value, whichever is higher, if acquired through
inheritance or donation;
b. Personal properties other than money, shall be accompanied by a specific
description of the kind and number of assets (i.e. automobiles, shares of stock,
etc.) or other investments, indicating the acquisition cost less depreciation or
amortization, in proper cases, if acquired by purchase, or the fair market price
or value at the time of receipt, if acquired through inheritance or donations;
c. Assets denominated in foreign currency shall be converted into the
corresponding Philippine currency equivalent, at the rate of exchange prevailing
as of December 31, 2005; and
d. Cash on hand and in bank in peso as of December 31, 2005, as well as Cash on
Hand and in Bank in foreign currency, converted to peso as of December 31,
2005.

2. All existing liabilities which are legitimate and enforceable, secured and unsecured,
whether or not incurred in trade or business, disclosing or indicating clearly the name
and address of the creditor and the amount of the corresponding liability.

3. The total networth of the taxpayer, which shall be difference between the total assets
and total liabilities.

It is evident from CEPHI's original and amended SALN that the information statutorily mandated in R.A.
No. 9480 were all reflected in its submission to the BIR. While the columns for Reference and Basis for
Valuation were indeed left blank, CEPHI attached schedules to its SALN (Schedules 1 to 7), both
original and amended, which provide the required information under R.A. No. 9480 and its
implementing rules and regulations.38 A review of the SALN form likewise reveals that the
information required in the Reference and Basis for Valuation columns are actually the specific
description of the taxpayer's declared assets. As such, these were deemed filled when CEPHI referred
to the attached schedules in its SALN. On this basis, the CIR cannot disregard or simply set aside the
SALN submitted by CEPHI.

More importantly, CEPHI's SALN is presumed true and correct, pursuant to Section 4 of R.A. No.
9480.39This presumption may be overturned if the CIR is able to establish that CEPHI understated its
net worth by the required threshold of at least 30%.

However, aside from the bare allegations of the CIR, there is no evidence on record to prove that the
amount of CEPHI's net worth was understated. Parties other than the BIR or its agents did not initiate
proceedings within one year from the filing of the SALN or Tax Amnesty Return, in order to challenge
the net worth of CEPHI. Neither was the CIR able to establish that there were findings or admissions in
a congressional, administrative, or court proceeding that CEPHI indeed understated its net worth by
30%.

As the Court previously held in CS Garment, Inc. v. CIR,40 taxpayers are eligible to the immunities of
the tax amnesty program as soon as they fulfill the suspensive conditions imposed under R.A. No. 9480:

A careful scrutiny of the 2007 Tax Amnesty Law would tell us that the law contains two types of
conditions one suspensive, the other resolutory. Borrowing from the concepts under our Civil Code, a
condition may be classified as suspensive when the fulfillment of the condition results in the acquisition
of rights. On the other hand, a condition may be considered resolutory when the fulfillment of the
condition results in the extinguishment of rights. In the context of tax amnesty, the rights referred to
are those arising out of the privileges and immunities granted under the applicable tax amnesty law.

x x x x

This clarification, however, does not mean that the amnesty taxpayers would go scot-free in
case they substantially understate the amounts of their net worth in their SALN. The 2007 Tax
Amnesty Law imposes a resolutory condition insofar as the enjoyment of immunities and privileges
under the law is concerned. Pursuant to Section 4 of the law, third parties may initiate proceedings
contesting the declared amount of net worth of the amnesty taxpayer within one year following the date
of the filing of the tax amnesty return and the SALN. Section 6 then states that "All these immunities
and privileges shall not apply x x x where the amount of networth as of December 31, 2005 is proven
to be understated to the extent of thirty percent (30%) or more, in accordance with the provisions of
Section 3 hereof." Accordingly, Section 10 provides that amnesty taxpayers who willfully understate
their net worth shall be (a) liable for perjury under the Revised Penal Code; and (b) subject to immediate
tax fraud investigation in order to collect all taxes due and to criminally prosecute those found to have
willfully evaded lawful taxes due.41 (Emphasis Ours)

Considering that CEPHI completed the requirements and paid the corresponding amnesty tax, it is
considered to have totally complied with the tax amnesty program. As a matter of course, CEPHI is
entitled to the immediate enjoyment of the immunities and privileges of the tax amnesty
program.42Nonetheless, the Court emphasizes that the immunities and privileges granted to taxpayers
under R.A. No. 9480 is not absolute. It is subject to a resolutory condition insofar as the
taxpayers' enjoyment of the immunities and privileges of the law is concerned. These
immunities cease upon proof that they underdeclared their net worth by 30%.

Unfortunately for the CIR, however, there is no such proof in CEPHI's case. The Court, thus, finds it
necessary to deny the present petition. While tax amnesty is in the nature of a tax exemption, which is
strictly construed against the taxpayer,43 the Court cannot disregard the plain text of R.A. No. 9480.

WHEREFORE, premises considered, the petition is DENIED for lack of merit. The Decision dated March
30, 2012 and Resolution dated August 16, 2012 of the CTA en banc in CTA EB Case No. 713
are AFFIRMED.

SO ORDERED.

Carpio, (Chairperson,) Peralta, Perlas-Bernabe, and Caguioa, JJ., concur.

Endnotes:
1Rollo, pp. 9-29.

2 Penned by Associate Justice Lovell R. Bautista; id. at 30-54.

3 Id. at 55-57.

4AN ACT ENHANCING REVENUE ADMINISTRATION AND COLLECTION BY GRANTING AN AMNESTY ON

ALL UNPAID INTERNAL REVENUE TAXES IMPOSED BY THE NATIONAL GOVERNMENT FOR TAXABLE YEAR
2005 AND PRIOR YEARS. Approved on May 24, 2007.

5Rollo, pp. 32-33.

6 Id. at 33.

7 Id.

8 Id. at 37.

9 Id.

10 Id.

11R.A. No. 9480, Section 8(1).

12Rollo, pp. 108-109.

13 Id.

14 Id. at 128-132.

15 Id. at 132.

16 AN ACT CREATING THE COURT OF TAX APPEALS. Approved on June 16, 1954.

17AN ACT EXPANDING THE JURISDICTION OF THE COURT OF TAX APPEALS (CTA), ELEVATING ITS
RANK TO THE LEVEL OF A COLLEGIATE COURT WITH SPECIAL JURISDICTION AND ENLARGING ITS
MEMBERSHIP, AMENDING FOR THE PURPOSE CERTAIN SECTIONS OR REPUBLIC ACT NO. 1125, AS
AMENDED, OTHERWISE KNOWN AS THE LAW CREATING THE COURT OF TAX APPEALS, AND FOR OTHER
PURPOSES. Approved on March 30, 2004.

18AN ACT ENLARGING THE ORGANIZATIONAL STRUCTURE OF THE COURT OF TAX APPEALS, AMENDING
FOR THE PURPOSE CERTAIN SECTIONS OF THE LAW CREATING THE COURT OF TAX APPEALS, AND FOR
OTHER PURPOSES. Approved on June 12, 2008.

19Rollo, pp. 40-43.

20 Id. at 30-54.

21 Id. at 52-53.

22 Id. at 51-52.

23 Id. at 55-57.

24 Id. at 56-57.

25 Id. at 16-23.
26
Id. at 23-26.

27R.A. No. 9480, Section 1.

28 Id. at Section 8.

29 Id. at Section 2.

30 Rules and Regulations to Implement Republic Act No. 9480 (August 15, 2007).

31 DOF Department Order No. 29-07, Rule III, Section 6.

32R.A.
No. 9480, Section 6; DOF Department Order No. 29-07, Rule V, Section 10; See also CIR v. Apo
Cement Corporation, G.R. No. 193381, February 8, 2017.

33 Id.

34R.A. No. 9480, Section 4; DOF Department Order No. 29-07, Rule IV, Section 9.

35Rollo, p. 100.

36 Id. at 23.

37SEC. 3. What to Declare in the SALN — The SALN shall contain a declaration of the assets, liabilities
and networth as of December 31, 2005, as follows:

1. Assets within or without the Philippines, whether real or personal, tangible or intangible, whether or
not used in trade or business: Provided, That property other than money shall be valued at the cost at
which the property was acquired: Provided, further, That foreign currency assets and/or securities shall
be valued at the rate of exchange prevailing as of the date of the SALN;

2. All existing liabilities which are legitimate and enforceable, secured or unsecured, whether or not
incurred in trade or business; and

3. The networth of the taxpayer, which shall be the difference between the total assets and total
liabilities.

THIRD DIVISION

G.R. Nos. 206079-80, January 17, 2018

PHILIPPINE AIRLINES, INC. (PAL), Petitioner, v. COMMISSIONER OF INTERNAL

REVENUE, Respondent.

G.R. No. 206309, January 17, 2018

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. PHILIPPINE AIRLINES, INC.

(PAL), Respondent.

DECISION

LEONEN, J.:
Before this Court are two (2) consolidated Petitions for Review on Certiorari under Rule 45 of the Rules
of Court assailing the August 14, 2012 Decision1 and February 25, 2013 Resolution2 of the Court of Tax
Appeals En Banc in CTA EB Nos. 749 and 757 (CTA Case No. 6877).

These consolidated cases stem from a refund claim by Philippine Airlines, Inc. (PAL) for final taxes
withheld on its interest income from its peso and dollar deposits with China Banking Corporation
(Chinabank), JP Morgan Chase Bank (JPMorgan), Philippine Bank of Communications (PBCom), and
Standard Chartered Bank (Standard Chartered) (collectively, Agent Banks).3

G.R. Nos. 206079-80 involves the Petition filed by PAL questioning the denial of its claim for refund of
P510,233.16 and US$65,877.07, representing the final income tax withheld by Chinabank, PBCom, and
Standard Chartered.4

Meanwhile, G.R. No. 206309 involves the Petition filed by the Commissioner of Internal Revenue
(Commissioner) assailing the grant to PAL of the tax refund of P1,237,646.43, representing the final
income tax withheld and remitted by JPMorgan.5

PAL asserts that it is entitled to a refund of the withheld taxes because it is exempted from paying the
tax on interest income under its franchise, Presidential Decree No. 1590. 6 However, the Commissioner
refused to grant the claim, arguing that PAL failed to prove the remittance of the withheld taxes to the
Bureau of Internal Revenue.7

Thus, the issue involves whether or not PAL is required to prove the remittance to the Bureau of Internal
Revenue of the final withholding tax on its interest from currency bank deposits to be entitled to tax
refund.

The Court of Tax Appeals Special First Division ordered the refund to PAL of P1,237,646.43 representing
the final income tax withheld and remitted by JPMorgan on PAL's interest income. However, it denied
the refund of P510,223.16 and US$65,877.07, representing the final income tax withheld by Chinabank,
PBCom, and Standard Chartered.8 The Court of Tax Appeals En Banc affirmed the Decision of the Court
of Tax Appeals Special First Division.9

The facts are as follows:

Sometime in 2002, PAL made US dollar and Philippine peso deposits and placements in the following
Philippine banks: Chinabank, JPMorgan, PBCom, and Standard Chartered.10

PAL earned interest income from these deposits and the Agent Banks deducted final withholding taxes. 11

From Chinabank, PAL claimed that it earned interest income net of withholding tax in the amount of
US$480,688.76 in its US dollar time deposit for the year 2002. 12 Substantiating this claim was
Chinabank's Certification dated October 24, 2003,13 which stated that withholding taxes were deducted
from PAL's interest income in the amount of US$38,974.75. These taxes were remitted to the Bureau
of Internal Revenue on different dates from February 11, 2002 to January 10, 2003. 14

From JPMorgan, PAL alleged that it earned interest income in its peso deposit in the amount of
P6,188,232.17, from September 2002 to December 2002. JPMorgan deducted withholding tax totalling
P1,237,646.43.15

From PBCom, PAL maintained that it earned interest income from its various dollar placements for the
year 2002, with the following corresponding final taxes withheld:16
 CERTIFICATE FOR
INTEREST INCOME TAX WITHHELD
THE PERIOD

1st Quarter US$ 102,648.40 US$ 7,698.63

2nd Quarter US$ 22,653.20 US$ 1,698.00

3rd Quarter US$ 40,123.73 US$ 3,009.28

4thQuarter US$ 107,163.73 US$ 8,037.28

TOTAL US$ 272,589.06 US$ 20,443.19

PAL's peso deposit account with PBCom also allegedly earned interest income for the year 2002, with
the following corresponding final taxes withheld:17

CERTIFICATE FOR
INTEREST INCOME TAX WITHHELD
THE PERIOD

2nd Quarter P 541,758.42 P 108,351.67

3rd Quarter P 2,009,357.41 P 401,871.46

TOTAL P 2,551,115.83 P 510,223.13

A letter dated April 10, 2003 from PBCom's Branch Manager, Carmencita L. Tan, stated that the taxes
withheld from PAL's interest income had been remitted by PBCom to the Bureau of Internal Revenue.18

From Standard Chartered, PAL stated that it earned interest income in its dollar time deposit account
from May 2002 to December 2002, amounting to US$86,107.55. The amount of US$6,458.14 was
deducted and allegedly remitted to the Bureau of Internal Revenue as final withholding tax.19

Claiming that it was exempt from final withholding taxes under its franchise, Presidential Decree No.
1590, PAL filed with the Commissioner on November 3, 2003 a written request for a tax refund20 of the
withheld amounts of P1,747,869.59 and US$65,877.07.21

The Commissioner failed to act on the request. Thus, on February 24, 2004, PAL elevated the case to
the Court of Tax Appeals in Division.22

In her Answer, the Commissioner contended that PAL's claim was subject to administrative routinary
investigation or examination by the Bureau of Internal Revenue. She also alleged that PAL's claim was
not properly documented, and that it must show that it complied with the prescriptive period for filing
refunds under Sections 204(C) and 229 of the National Internal Revenue Code. It likewise asserted that
claims for refund are of the same nature as a tax exemption, and thus, are strictly construed against
the claimant.23

PAL presented evidence to support its claim. The Commissioner then submitted the case for decision
based on the pleadings.24

In its November 9, 2010 Decision,25 the Court of Tax Appeals Special First Division partially granted
PAL's Petition and ordered the Commissioner to refund PAL P1,237,646.43, representing the final income
tax withheld and remitted by JPMorgan. It denied the remaining claim for refund of P510,223.16 and
US$65,877.07 representing the final income tax withheld by Chinabank, PBCom, and Standard
Chartered.26

The Court of Tax Appeals Special First Division found that PAL was exempted from final withholding tax
on interest on bank deposits.27 However, it ruled that PAL failed to adequately substantiate its claim
because it did not prove that the Agent Banks, with the exception of JPMorgan, remitted the withheld
amounts to the Bureau of Internal Revenue.28 PAL only presented documents29 which showed the total
amount of final taxes withheld for all branches of the banks.30 As such, the amount of tax withheld from
and to be refunded to PAL could not be ascertained with particularity. 31 It ruled that the Certificates of
Final Tax Withheld at Source are not sufficient to prove remittance.32 Thus:

WHEREFORE, premises considered, the instant Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, respondent is hereby ORDERED TO REFUND in favor of petitioner the reduced amount of
P1,237,646.43, representing the 20% final income tax withheld and remitted by JP Morgan Chase bank
on petitioner's interest income; while the remaining claim of P510,223.16 and US$65,877.07,
representing the final income tax withheld by China Banking Corporation, Philippine Bank of
Communication[s], and Standard Chartered Bank are hereby DENIED due to insufficiency of evidence.

SO ORDERED.33

The Court of Tax Appeals Special First Division denied the separate motions for reconsideration filed by
the parties. Thus, both parties filed separate appeals before the Court of Tax Appeals En Banc, which
consolidated the cases.34

In its August 14, 2012 Decision, the Court of Tax Appeals En Banc denied the petitions and affirmed the
decision of the Court of Tax Appeals Special First Division.35 The Court of Tax Appeals En Banc sustained
that PAL needed to prove the remittance of the withheld taxes because although remittance is the
responsibility of the banks as withholding agents, remittance was put in issue in this case. Thus, the
Court of Tax Appeals Special First Division correctly made a ruling on it.36

It found that PAL was able to establish the remittance of the taxes withheld by JPMorgan because the
monthly remittance returns were identified by PAL's witness and were formally offered in the Court of
Tax Appeals Special First Division without objections to their admissibility. It ruled that the monthly
remittance returns may be considered even if they were only presented in the Court of Tax Appeals
Special First Division as it is a court of record and is required to conduct a formal trial.37

It sustained that PAL failed to prove the remittance by Chinabank, PBCom, and Standard Chartered
because it did not show that the amounts remitted by these Agent Banks pertained to the taxes withheld
from PAL's interest income.38

Thus:

WHEREFORE, all the foregoing considered, the Commissioner's Petition for Review in CTA EB No. 749
and PAL's Petition for Review in CTA EB No. 757 are hereby DENIED for lack of merit. The assailed
Decision dated November 9, 2010 and Resolution dated March 17, 2011 are hereby AFFIRMED.
SO ORDERED.39 (Emphasis in the original)

The Court of Tax Appeals En Banc denied the motions for reconsideration.40

Hence, the present Petitions via Rule 45 have been filed.41

In G.R. Nos. 206079-80, PAL questions the denial of its refund claim for the taxes withheld by
Chinabank, PBCom, and Standard Chartered. PAL argues that it adequately established the withholding
and remittance of final taxes through the Certificates of Final Taxes Withheld issued to it by these Agent
Banks.42 It contends that these Certificates are prima facieevidence of actual remittance, and if they are
uncontroverted, as in this case, they are sufficient proof of remittance.43 It holds that the rule pertaining
to Creditable Taxes Withheld in CIR v. Asian Transmission Corporation44 and other Court of Tax Appeals
En Banc cases45 should apply to Final Taxes Withheld, as these are of the same nature.46

PAL also insists that it is unequivocally exempt from final withholding taxes, 47 and consequently, for as
long as it duly establishes that taxes were withheld from its income, it must be refunded.48 It maintains
that proof of actual remittance is not necessary.49

PAL further claims that it need not establish the remittance of income taxes to the Bureau of Internal
Revenue because this function is vested with the Agent Banks as the payors and withholding agents of
the Commissioner.50

In G.R. No. 206309, the Commissioner questions the grant of refund to PAL for the final income taxes
withheld by JPMorgan. She argues that PAL is not entitled to the refund as it failed to present its
documentary evidence before the Bureau of Internal Revenue when it filed its administrative claim. 51

In its June 10, 2013 Resolution, the two (2) cases were consolidated.52

The parties thereafter filed their respective Comments,53 Replies,54 and Memoranda.55

PAL argues that it is entitled to its claim for tax refund or tax credit and insists that it has adequately
established that the final taxes on interest income withheld by the banks were remitted to the Bureau
of Internal Revenue.56 It contends that the Certificates of Final Taxes Withheld issued by the Agent
Banks are prima facie evidence of actual remittance.57 As prima facie evidence, they are sufficient proof
of the fact that PAL is establishing, if they are unexplained or uncontradicted.58

As such, PAL avers that the Commissioner had the burden to prove that the Agent Banks failed to remit
the withheld taxes.59 Nonetheless, the Commissioner simply submitted the case for decision based on
the pleadings. It did not contradict or dispute the Certificates of Final Taxes Withheld.60

PAL further posits that the failure of the Agent Banks to remit the withheld taxes should not prejudice
PAL, because they are the withholding agents accountable for proving remittance. PAL has no control or
responsibility over the remittance of the taxes withheld.61

Moreover, PAL holds that there is no need for proof of actual remittance to be entitled to claim for
refund,62 and that this Court's rulings on creditable taxes withheld should also apply to final taxes
withheld at source, as they are of the same nature.63 Since PAL has shown that it is unequivocally
exempt from paying final withholding taxes, its taxes were erroneously paid and must be refunded. 64

PAL further asserts that the Court of Tax Appeals is a court of record, required to conduct a trial de
novo. Thus, it should not be barred from considering new evidence not submitted in the administrative
claim for refund.65

Assuming PAL is limited by the documents it submitted in the administrative level, the Commissioner
had the burden to prove that PAL did not submit complete supporting documents. However, it neither
showed what documents PAL presented nor established that PAL submitted incomplete supporting
documents.66

PAL further submits that assuming it failed to present the remittance returns on final income tax
withheld, the Commissioner could have retrieved these files from the records, as these are monthly
returns filed with the Bureau of Internal Revenue.67 As the Chief of the Bureau of Internal Revenue, the
Commissioner has access to all tax returns including those of final income tax withheld at source, and
thus, is in bad faith in not checking the records to determine whether or not the withheld taxes were
remitted.68 PAL maintains that the Commissioner's denial of the withholding of the taxes is not a specific
denial, and thus, should be deemed as an admission of this fact.69

Finally, PAL holds that the denial of its refund because of its failure to submit monthly remittance returns
is contrary to substantial justice, equity, and fair play.70

On the other hand, the Commissioner argues in her Memorandum 71 that PAL needed to prove, but did
not prove, that the withheld taxes were remitted to the Bureau of Internal Revenue. 72

She points out that PAL only showed the withheld amounts remitted by branches of Chinabank, PBCom,
and Standard Chartered, but there is no indication that the remitted amounts are the taxes withheld
from PAL's interest income. She argues that PAL must first prove that the money remitted to the Bureau
of Internal Revenue is attributable to it because tax refunds are strictly construed against the taxpayer. 73

She further insists that PAL's claim must fail for insufficiency of evidence because it failed to present
several of its documentary evidence before the Bureau of Internal Revenue during the administrative
level.74 She argues that even if the evidence was presented in the Court of Tax Appeals, it should not
be considered because trial de novo in the Court of Tax Appeals must be limited to the evidence shown
in the administrative claim for refund.75 The Court of Tax Appeals' judicial review is allegedly limited to
whether the Commissioner rightfully ruled on the claim on the basis of the evidence presented in the
administrative claim, and the ruling may only be set aside where there is gross abuse of discretion,
fraud, or error of law.76 Thus, she claims that the Court of Tax Appeals erred in considering the new
evidence presented to it.77In allowing the presentation of new evidence, the Court of Tax Appeals did
not conduct a judicial review. Rather, it adopted an entirely new proceeding.78

This Court resolves the following issues:

First, whether or not evidence not presented in the administrative claim for refund in the Bureau of
Internal Revenue can be presented in the Court of Tax Appeals;

Second, whether or not Philippine Airlines, Inc. was able to prove remittance of its final taxes withheld
to the Bureau of Internal Revenue; and

Finally, whether or not proof of remittance is necessary for Philippine Airlines, Inc. to claim a refund
under its charter, Presidential Decree No. 1590.

This Court sustains the factual findings of the Court of Tax Appeals that Philippine Airlines, Inc. failed to
prove remittance of the withheld taxes.

Nonetheless, this Court grants the Petition of Philippine Airlines, Inc.

The Commissioner contends that PAL failed to present several of its documentary evidence before the
Bureau of Internal Revenue during the administrative level. 79 Thus, she claims that the new evidence
that petitioner presented in the Court of Tax Appeals should not have been considered because trial de
novo in the Court of Tax Appeals must be limited to the evidence shown in the administrative claim. 80
This Court rules that the Court of Tax Appeals is not limited by the evidence presented in the
administrative claim in the Bureau of Internal Revenue. The claimant may present new and additional
evidence to the Court of Tax Appeals to support its case for tax refund.

Section 4 of the National Internal Revenue Code81 states that the Commissioner has the power to decide
on tax refunds, but his or her decision is subject to the exclusive appellate jurisdiction of the Court of
Tax Appeals:

Section 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. — The power to
interpret the provisions of this Code and other tax laws shall be under the exclusive and original
jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions
thereof administered by the Bureau of Internal Revenue is vested in the commissioner, subject to the
exclusive appellate jurisdiction of the Court of Tax Appeals.

Republic Act No. 9282,82 amending Republic Act No. 1125,83 is the governing law on the jurisdiction of
the Court of Tax Appeals. Section 7 provides that the Court of Tax Appeals has exclusive appellate
jurisdiction over tax refund claims in case the Commissioner fails to act on them:

Section 7. Jurisdiction. — The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising
under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds
of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising
under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue,
where the National Internal Revenue Code provides a specific period of action, in which case the inaction
shall be deemed a denial;

(3) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or
resolved by them in the exercise of their original or appellate jurisdiction[.] (Emphasis supplied)

This means that while the Commissioner has the right to hear a refund claim first, if he or she fails to
act on it, it will be treated as a denial of the refund, and the Court of Tax Appeals is the only entity that
may review this ruling.

The power of the Court of Tax Appeals to exercise its appellate jurisdiction does not preclude it from
considering evidence that was not presented in the administrative claim in the Bureau of Internal
Revenue. Republic Act No. 1125 states that the Court of Tax Appeals is a court of record:

Section 8. Court of record; seal; proceedings. — The Court of Tax Appeals shall be a court of record and
shall have a seal which shall be judicially noticed. It shall prescribe the form of its writs and other
processes. It shall have the power to promulgate rules and regulations for the conduct of the business
of the Court, and as may be needful for the uniformity of decisions within its jurisdiction as conferred
by law, but such proceedings shall not be governed strictly by technical rules of evidence. 84

As such, parties are expected to litigate and prove every aspect of their case anew and formally offer
all their evidence.85No value is given to documentary evidence submitted in the Bureau of Internal
Revenue unless it is formally offered in the Court of Tax Appeals.86 Thus, the review of the Court of Tax
Appeals is not limited to whether or not the Commissioner committed gross abuse of discretion, fraud,
or error of law, as contended by the Commissioner.87 As evidence is considered and evaluated again,
the scope of the Court of Tax Appeals' review covers factual findings.

In Commissioner of Internal Revenue v. Philippine National Bank:88

Finally, petitioner's allegation that the submission of the certificates of withholding taxes before the
Court of Tax Appeals was late is untenable. The samples of the withholding tax certificates attached to
respondent's comment bore the receiving stamp of the Bureau of Internal Revenue's Large Taxpayers
Document Processing and Quality Assurance Division. As observed by the Court of Tax Appeals En Banc,
"[t]he Commissioner is in no position to assail the authenticity of the CWT certificates due to PNB's
alleged failure to submit the same before the administrative level since he could have easily directed
the claimant to furnish copies of these documents, if the refund applied for casts him any doubt." Indeed,
petitioner's inaction prompted respondent to elevate its claim for refund to the tax court.

More importantly, the Court of Tax Appeals is not precluded from accepting respondent's evidence
assuming these were not presented at the administrative level. Cases filed in the Court of Tax Appeals
are litigated de novo. Thus, respondent "should prove every minute aspect of its case by presenting,
formally offering and submitting . . . to the Court of Tax Appeals [all evidence] . . . required for the
successful prosecution of [its] administrative claim."89 (Emphasis supplied, citations omitted)

In the case at bar, the Commissioner failed to act on PAL's administrative claim. 90 If she had acted on
the refund claim, she could have directed PAL to submit the necessary documents to prove its case.

Furthermore, considering that the refund claim will be litigated anew in the Court of Tax Appeals, the
latter may consider all pieces of evidence formally offered by PAL, whether or not they were submitted
in the administrative level.

Thus, the Commissioner's contention must fail.

II

Both PAL and the Commissioner are contesting whether or not PAL has proven the Agent Banks'
remittance of the withheld taxes on its interest income.91

The Court of Tax Appeals Special First Division and En Banc ruled that PAL was able to prove JPMorgan's
remittance of the withheld taxes but that it failed to prove those of Chinabank, PBCom, and Standard
Chartered.92

This Court maintains the factual findings of the Court of Tax Appeals Special First Division and En Banc.

Firstly, in bringing forth the issue of remittance, the parties are raising a question of fact which is not
within the scope of review on certiorari under a Rule 45 Petition. 93 An appeal under Rule 45 must raise
only questions of law.94

The Rules of Court states that a review of appeals filed before this Court is "not a matter of right, but
of sound judicial discretion." The Rules of Court further requires that only questions of law should be
raised in petitions filed under Rule 45 since factual questions are not the proper subject of an appeal
by certiorari. It is not this Court's function to once again analyze or weigh evidence that has already
been considered in the lower courts.95 (Citations omitted)

There is a question of law when it seeks to determine whether or not the legal conclusions of the lower
courts from a given set of facts are correct, i.e. what is the law, given a particular set of circumstances?
On the other hand, there is a question of fact when the issue involves the truth or falsity of the parties'
allegations. The test in determining if an issue is a question of law or fact is whether or not there is a
need to evaluate evidence to resolve the issue. If there is a need to review the evidence or witnesses,
it is a question of fact. If there is no need, it is a question of law.96

As stated, this Court will no longer entertain questions of fact in appeals under Rule 45. The factual
findings of the lower courts are accorded respect and are beyond this Court's review. 97 However, the
rule admits of exceptions, especially if it is shown that the factual findings are not supported by evidence,
or the judgment is based on a misapprehension of facts:

[T]he general rule for petitions filed under Rule 45 admits exceptions. Medina v. Mayor Asistio, Jr. lists
down the recognized exceptions:

(1) When the conclusion is a finding grounded entirely on speculation, surmises or conjectures; (2)
When the inference made is manifestly mistaken, absurd or impossible; (3) Where there is a grave
abuse of discretion; (4) When the judgment is based on a misapprehension of facts; (5) When the
findings of fact are conflicting; (6) When the Court of Appeals, in making its findings, went beyond the
issues of the case and the same is contrary to the admissions of both appellant and appellee; (7) The
findings of the Court of Appeals are contrary to those of the trial court; (8) When the findings of fact
are conclusions without citation of specific evidence on which they are based; (9) When the facts set
forth in the petition as well as in the petitioner's main and reply briefs are not disputed by the
respondents; and (10) The finding of fact of the Court of Appeals is premised on the supposed absence
of evidence and is contradicted by the evidence on record.

These exceptions similarly apply in petitions for review filed before this Court involving civil, labor, tax,
or criminal cases.98 (Citations omitted)

A party filing the petition, however, has the burden of showing convincing evidence that the appeal falls
under one of the exceptions. A mere assertion is not sufficient.99

Moreover, this Court has consistently held that the findings of fact of the Court of Tax Appeals, as a
highly specialized court, are accorded respect and are deemed final and conclusive.100

In Philippine Refining Company v. Court of Appeals:101

The Court of Tax Appeals is a highly specialized body specifically created for the purpose of reviewing
tax cases ...

Because of this recognized expertise, the findings of the CTA will not ordinarily be reviewed absent a
showing of gross error or abuse on its part. The findings of fact of the CTA are binding on this Court and
in the absence of strong reasons for this Court to delve into facts, only questions of law are open for
determination . . .102 (Citation omitted)

In Commissioner of Internal Revenue v. Tours Specialists, Inc., and the Court of Tax Appeals:103

The well-settled doctrine is that the findings of facts of the Court of Tax Appeals are binding on this
Court and absent strong reasons for this Court to delve into facts, only questions of law are open for
determination . . . In the recent case of Sy Po v. Court of Appeals . . . we ruled that the factual findings
of the Court of Tax Appeals are binding upon this court and can only be disturbed on appeal if not
supported by substantial evidence.104

In the case at bar, both the Court of Tax Appeals Special First Division and En Banc ruled that PAL failed
to sufficiently prove that Chinabank, PBCom, and Standard Chartered had remitted the withheld
taxes.105 It found that the presented documents106 only showed the total amount of final taxes withheld
for all branches of these Agent Banks.107 It did not show that the amounts remitted by these Agent
Banks pertained to the taxes withheld from PAL’s interest income.108
However, it found that PAL was able to prove the remittance of the taxes withheld by JPMorgan because
the monthly remittance returns were identified by PAL's witness and were formally offered in the Court
of Tax Appeals Special First Division without objections to their admissibility.109

The Court of Tax Appeals Special First Division stated:

To prove that petitioner earned interest income on its bank deposits and that they were remitted to the
BIR, petitioner offered in evidence the following certifications and Certificates of Final Tax Withheld at
Source (BIR Form No. 2306) from various banks:

AMOUNT OF TAX
WITHHELD
PERIOD
BANK
COVERED
US
PESO
DOLLAR

January
China Banking 2002 -
38,974.75
Corp. (Exhibit "C") December
2002

September
JP Morgan Chase 2002 -
1,237,646.43
Bank (Exhibit "D") December
2002

Phil. Bank of January

Communication[s] 2002 - 7,698.63
(Exhibit "E") March 2002

Phil. Bank of
April 2002 -
Communication[s] 108,351.68 1,698.99
June 2002
(Exhibit "F")

Phil. Bank of July 2002 -

Communication[s] September 401,871.48 3,009.28
(Exhibit "G") 2002

Phil. Bank of October

8,037.28
Communication[s] 2002 -
 (Exhibit[s] "H" December
and "I") 2002

Standard May 2002 -

Chartered [Bank] December 6,458.14
(Exhibit "J") 2002

TOTAL P1,747,869.59 $65,877.07

A careful scrutiny of the evidence presented reveals that only documents pertaining to the amount of
taxes withheld and actually remitted to the BIR by depositary bank JP Morgan Chase, in the amount of
P1,237,646.43, represents petitioner's valid claim . . .

....

This Court cannot give credence to the other certifications and Certificates of Final Tax Withheld at
Source issued by the various depositary banks because proof on the fact of remittance was not aptly
complied with; thus, the amount of taxes to be refunded cannot be ascertained.

The amount of final withholding taxes as reflected on the Summary of Monthly Final Income Taxes
Withheld on Philippine Savings Deposit and Foreign Currency Deposit and the Monthly Remittance
Return of Final Income Taxes (BIR Form No. 1602) provided by withholding agents China Banking
Corporation, Philippine Bank of Communication, and Standard Chartered Bank were based on the total
amount of final withholding taxes per branch of each depositary banks; while the total amount appearing
on the documents of Monthly Remittance Return of Final Income Taxes (BIR Form No. 1602) was based
on the total amount of final withholding taxes for all branches of the depositary banks.

Therefore, the amount of final income tax withheld from petitioner cannot be ascertained with
particularity from the total amount of final withholding taxes that were remitted to the BIR by China
Banking Corporation, Philippine Bank of Communication[s), and Standard Chartered Bank.110

These findings were affirmed by the Court of Tax Appeals En Banc:

Without doubt, there were amounts of withheld taxes which have been remitted by [Chinabank] to the
BIR. However, from the supposed Stage 1 up to the last Stage of the paper trail, We fail to see, in the
evidence pointed out by PAL, the inclusion of the final income taxes withheld from its interest income in
the total amounts remitted by [Chinabank] to the BIR. In other words, there is no indication that the
specific withheld amounts which have been remitted to the BIR by [Chinabank] referred to the taxes
withheld on PAL's interest income. In fact, PAL's documentary evidence are merely to the effect that
certain amounts have been remitted to the BIR by [Chinabank], and such amounts may be broken down
as to which [Chinabank] branch offices the same are attributable.

The same holds true as regards the taxes withheld by [PBCom] and [Standard Chartered]. The
documentary evidence of PAL relating to the supposed remittances of the said depositary banks are also
wanting of any sign that portion of the remitted taxes pertain to the withheld taxes from PAL's interest
income. Simply put, We cannot perceive, from such evidence, that pertinent items of the withheld taxes
are attributable to PAL.111

In questioning these findings of the Court of Tax Appeals regarding the remittance of the taxes, the
parties are raising questions of fact. To determine whether or not the taxes have been remitted to the
Bureau of Internal Revenue requires an evaluation of the documents and other evidence presented by
the parties. Thus, it is incumbent upon them to prove that the above-stated exceptions are present in
this case.

However, the parties failed to show that this case falls into any of the exceptions mentioned.112

The Court of Tax Appeals Special First Division and En Banc based their findings after an examination
of all pieces of evidence presented by PAL. Both parties failed to show that the Court of Tax Appeals
committed any gross error or abuse in making this factual determination. There is likewise no showing
that the findings are conflicting or based on speculation, conjecture, or misapprehension or mistake of
facts. There is no sign of any grave abuse of discretion.

Thus, this Court finds no reason to disturb the Court of Tax Appeals' factual findings.

III

Nonetheless, this Court rules that PAL is entitled to its claim for refund for taxes withheld by Chinabank,
PBCom, and Standard Chartered.

Remittance need not be proven. PAL needs only to prove that taxes were withheld from its interest
income.

III.A

First, PAL is uncontestedly exempt from paying the income tax on interest earned.

Under its franchise, Presidential Decree No. 1590,113 petitioner may either pay a franchise tax or the
basic corporate income tax, and is exempt from paying any other tax, including taxes on interest earned
from deposits:

Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the
Philippine Government during the life of this franchise whichever of subsections (a) and (b) hereunder
will result in a lower tax:

(a) The basic corporate income tax based on the grantee's annual net taxable income computed in
accordance with the provisions of the National Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross revenues derived by the grantee from all sources,
without distinction as to transport or nontransport operations; provided, that with respect to
international air-transport service, only the gross passenger, mail, and freight revenues from its
outgoing flights shall be subject to this tax.

The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes,
duties, royalties, registration, license, and other fees and charges of any kind, nature, or description,
imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national
authority or government agency, now or in the future, including but not limited to the following:

....

The grantee, shall, however, pay the tax on its real property in conformity with existing law. (Emphasis
supplied)

In Commissioner of Internal Revenue v. Philippine Airlines, Inc.,114 this Court ruled that Section 13 of
Presidential Decree No. 1590 is clear and unequivocal in exempting PAL from all taxes other than the
basic corporate income tax or the 2% franchise tax:
While the Court recognizes the general rule that the grant of tax exemptions is strictly construed against
the taxpayer and in favor of the taxing power, Section 13 of the franchise of respondent leaves no room
for interpretation. Its franchise exempts it from paying any tax other than the option it chooses: either
the "basic corporate income tax" or the two percent gross revenue tax. 115 (Citation omitted)

More recently, PAL's tax privileges were outlined and confirmed in Commissioner of Internal Revenue v.
Philippine Airlines, Inc.116 when Republic Act No. 9334 took effect, amending Section 131 of the National
Internal Revenue Code.117 Republic Act No. 9334 increased the rates of excise tax imposed on alcohol
and tobacco products, and removed the exemption from taxes, duties and charges, including excise
taxes, on importations of cigars, cigarettes, distilled spirits, wines and fermented liquor into the
Philippines.118 This Court ruled that PAL's tax exemptions remain:

In the fairly recent case of Commissioner of Internal Revenue and Commissioner of Customs v.
Philippine Airlines, Inc., the core issue raised was whether or not PAL's importations of alcohol and
tobacco products for its commissary supplies are subject to excise tax. This Court, ruling in favor of PAL,
held that:

....

That the Legislature chose not to amend or repeal [PD] 1590 even after PAL was privatized reveals the
intent of the Legislature to let PAL continue to enjoy, as a private corporation, the very same rights and
privileges under the terms and conditions stated in said charter. . . .

To be sure, the manner to effectively repeal or at least modify any specific provision of PAL's franchise
under PD 1590, as decreed in the aforequoted Sec. 24, has not been demonstrated. . . .

....

Any lingering doubt, however, as to the continued entitlement of PAL under Sec. 13 of its franchise to
excise tax exemption on otherwise taxable items contemplated therein, e.g., aviation gas, wine, liquor
or cigarettes, should once and for all be put to rest by the fairly recent pronouncement in Philippine
Airlines, Inc. v. Commissioner of Internal Revenue. In that case, the Court, on the premise that the
"propriety of a tax refund is hinged on the kind of exemption which forms its basis," declared in no
uncertain terms that PAL has "sufficiently prove[d]" its entitlement to a tax refund of the excise taxes
and that PAL's payment of either the franchise tax or basic corporate income tax in the amount fixed
thereat shall be in lieu of all other taxes or duties, and inclusive of all taxes on all importations of
commissary and catering supplies, subject to the condition of their availability and eventual use....

In the more recent consolidated cases of Republic of the Philippines v. Philippine Airlines, Inc.
(PAL) and Commissioner of Internal Revenue v. Philippine Airlines, Inc. (PAL), this Court, echoing the
ruling in the abovecited case of CIR v. PAL, held that:

In other words, the franchise of PAL remains the governing law on its exemption from taxes. Its payment
of either basic corporate income tax or franchise tax — whichever is lower — shall be in lieu of all other
taxes, duties, royalties, registrations, licenses, and other fees and charges, except only real property
tax. The phrase "in lieu of all other taxes" includes but is not limited to taxes, duties, charges, royalties,
or fees due on all importations by the grantee of the commissary and catering supplies, provided that
such articles or supplies or materials are imported for the use of the grantee in its transport and
nontransport operations and other activities incidental thereto and are not locally available in reasonable
quantity, quality, or price.119 (Citations omitted)

PAL's tax liability was also modified on July 1, 2005, when Republic Act No. 9337 120 further amended
the National Internal Revenue Code. Section 22 of Republic Act No. 9337 abolished the franchise tax
and subjected PAL to corporate income tax and to value-added tax. Nonetheless, it maintained PAL's
exemption from "any taxes, duties, royalties, registration, license, and other fees and charges, as may
be provided by their respective franchise agreement."121
Section 22. Franchises of Domestic Airlines. — The provisions of P.D. No. 1590 on the franchise tax of
Philippine Airlines, Inc., R.A. No. 7151 on the franchise tax of Cebu Air, Inc., R.A. No. 7583 on the
franchise tax of Aboitiz Air Transport Corporation, R.A. No. 7909 on the franchise tax of Pacific Airways
Corporation, R.A. No. 8339 on the franchise tax of Air Philippines, or any other franchise agreement or
law pertaining to a domestic airline to the contrary notwithstanding:

(A) The franchise tax is abolished;

(B) The franchisee shall be liable to the corporate income tax;

(C) The franchisee shall register for value-added tax under Section 236, and to account under Title IV
of the National Internal Revenue Code of 1997, as amended, for value-added tax on its sale of goods,
property or services and its lease of property; and

(D) The franchisee shall otherwise remain exempt from any taxes, duties, royalties, registration, license,
and other fees and charges, as may be provided by their respective franchise agreement.

Again, in Commissioner of Internal Revenue v. Philippine Airlines, Inc.,122 this Court maintained that
despite these amendments to the National Internal Revenue Code, PAL remains exempt from all other
taxes, duties, royalties, registrations, licenses, and other fees and charges, provided it pays the
corporate income tax as granted in its franchise agreement. It further emphasized that no explicit
repeals were made on Presidential Decree No. 1590.123

Thus, Presidential Decree No. 1590 and PAL's tax exemptions subsist. Necessarily, PAL remains exempt
from tax on interest income earned from bank deposits.

Moreover, Presidential Decree No. 1590 provides that any excess payment over taxes due from PAL's
shall either be refunded or credited against its tax liability for the succeeding taxable year, thus:

Section 14. The grantee shall pay either the franchise tax or the basic corporate income tax on quarterly
basis to the Commissioner of Internal Revenue. . . .

....

Any excess of the total quarterly payments over the actual annual franchise of income tax due as shown
in the final or adjustment franchise or income-tax return shall either be refunded to the grantee or
credited against the grantee's quarterly franchise or income-tax liability for the succeeding taxable year
or years at the option of the grantee.

The term "gross revenues" is herein defined as the total gross income earned by the grantee from; (a)
transport, nontransport, and other services; (b) earnings realized from investments in money-market
placements, bank deposits, investments in shares of stock and other securities, and other investments;
(c) total gains net of total losses realized from the disposition of assets and foreign-exchange
transactions; and (d) gross income from other sources.124 (Emphasis supplied)

Thus, PAL is entitled to a tax refund or tax credit if excess payments are made on top of the taxes due
from it.

Considering that PAL is not liable to pay the tax on interest income from bank deposits, any payments
made for that purpose are in excess of what is due from it. Thus, if PAL erroneously paid for this tax, it
is entitled to a refund.

III.B
PAL is likewise entitled to a refund because it is not responsible for the remittance of tax to the Bureau
of Internal Revenue. The taxes on interest income from bank deposits are in the nature of a withholding
tax. Thus, the party liable for remitting the amounts withheld is the withholding agent of the Bureau of
Internal Revenue.

Interest income from bank deposits is taxed under the National Internal Revenue Code:

Section 27. Rates of Income Tax on Domestic Corporations.

....

(D) Rates of Tax on Certain Passive Incomes. —

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from
Trust Funds and Similar Arrangements, and Royalties. — A final tax at the rate of twenty percent (20%)
is hereby imposed upon the amount of interest on currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements received by
domestic corporations, and royalties, derived from sources within the Philippines: Provided,
however, That interest income derived by a domestic corporation from a depository bank under the
expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven
and one-half percent (7 1/2%) of such interest income.125(Emphasis supplied)

The tax due on this income is a final withholding tax:

Section 57. Withholding of Tax at Source. —

(A) Withholding of Final Tax on Certain Incomes. — Subject to rules and regulations the Secretary of
Finance may promulgate, upon the recommendation of the Commissioner, requiring the filing of income
tax return by certain income payees, the tax imposed or prescribed by Sections ... 27(D)(1), ... of this
Code on specified items of income shall be withheld by payor-corporation and/or person and paid in the
same manner and subject to the same conditions as provided in Section 58 of this Code.126

Final withholding taxes imposed on interest income are likewise provided for under Revenue Regulations
No. 02-98, Section 2.57.1(G):127

(G) Income Payment to a Domestic Corporation. — The following items of income shall be subject to a
final withholding tax in the hands of a domestic corporation, based on the gross amount thereof and at
the rate of tax prescribed therefor:

(1) Interest from any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust fund and similar arrangements derived from sources within the Philippines —
Twenty Percent (20%).

....

(3) Interest income derived from a depository bank under the Expanded Foreign Currency Deposit
System, otherwise known as a Foreign Currency Deposit Unit (FCDU) — Seven and one-half percent
(7.5%).

When a particular income is subject to a final withholding tax, it means that a withholding agent will
withhold the tax due from the income earned to remit it to the Bureau of Internal Revenue. Thus, the
liability for remitting the tax is on the withholding agent:128

Under Revenue Regulations No. 02-98, Section 2.57:

Section 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. — Under the final withholding tax system the amount of income tax withheld
by the withholding agent is constituted as a full and final payment of the income tax due from the payee
on the said income. The liability for payment of the tax rests primarily on the payor as a withholding
agent. Thus, in case of his failure to withhold the tax or in case of under withholding, the deficiency tax
shall be collected from the payor/withholding agent. The payee is not required to file an income tax
return for the particular income. (Emphasis supplied)

Clearly, the withholding agent is the payor liable for the tax, and any deficiency in its amount shall be
collected from it.129Should the Bureau of Internal Revenue find that the taxes were not properly
remitted, its action is against the withholding agent, and not against the taxpayer.

The responsibility of the withholding agent is further underscored by Republic Act No. 8424, Section 58:

Section 58. Returns and Payment of Taxes Withheld at Source. —

(B) Statement of Income Payments Made and Taxes Withheld. — Every withholding agent required to
deduct and withhold taxes under Section 57 shall furnish each recipient, in respect to his or its receipts
during the calendar quarter or year, a written statement showing the income or other payments made
by the withholding agent during such quarter or year, and the amount of the tax deducted and withheld
therefrom, simultaneously upon payment at the request of the payee, but not later than the twentieth
(20th) day following the close of the quarter in the case of corporate payee, or not later than March 1 of
the following year in the case of individual payee for creditable withholding taxes. For final withholding
taxes, the statement should be given to the payee on or before January 31 of the succeeding year.

(C) Annual Information Return. — Every withholding agent required to deduct and withhold taxes under
Section 57 shall submit to the Commissioner an annual information return containing the list of payees
and income payments, amount of taxes withheld from each payee and such other pertinent information
as may be required by the Commissioner . . .130 (Emphasis supplied)

Revenue Regulations 09-28 further provides:

Section 2.57.4. Time of Withholding. — The obligation of the payor to deduct and withhold the tax under
Section 2.57 of these regulations arises at the time an income is paid or payable, whichever comes first,
the term "payable" refers to the date the obligation become due, demandable or legally enforceable. 131

....

Section 2.58. Returns and Payment of Taxes Withheld at Source. —

....

(B) Withholding tax statement for taxes withheld — Every payor required to deduct and withhold taxes
under these regulations shall furnish each payee, whether individual or corporate, with a withholding
tax statement, using the prescribed form (BIR Form 2307) showing the income payments made and the
amount of taxes withheld therefrom, for every month of the quarter within twenty (20) days following
the close of the taxable quarter employed by the payee in filing his/its quarterly income tax return.
Upon request of the payee, however, the payor must furnish such statement to the payee simultaneously
with the income payment. For final withholding taxes, the statement should be given to the payee on
or before January 31 of the succeeding year.

(C) Annual information return for income tax withheld at source. — The payor is required to file with the
Commissioner, Revenue Regional Director, Revenue District Officer, Collection Agent in the city or
municipality where the payor has his legal residence or principal place of business, where the
government office is located in the case of a government agency, on or before January 31 of the following
year in which payments were made, an Annual Information Return of Income Tax Withheld at Source
(Form No. 1604), showing among others the following information:

(1) Name, address and taxpayer's identification number (TIN); and

(2) Nature of income payments, gross amount and amount of tax withheld from each payee and such
other information as may be required by the Commissioner.132 (Emphasis supplied)

These provisions state that the withholding agent must file the annual information return and furnish
the payee written statements of the payments it made and of the amounts it deducted and withheld.
They confirm that the remittance of the tax is not the responsibility of the payee, but that of the payor,
the withholding agent.

Moreover, in Commissioner of Internal Revenue v. Philippine National Bank:133

Petitioner's posture that respondent is required to establish actual remittance to the Bureau of Internal
Revenue deserves scant consideration. Proof of actual remittance is not a condition to claim for a refund
of unutilized tax credits. Under Sections 57 and 58 of the 1997 National Internal Revenue Code, as
amended, it is the payor-withholding agent, and not the payee-refund claimant such as respondent,
who is vested with the responsibility of withholding and remitting income taxes.

This court's ruling in Commissioner of Internal Revenue v. Asian Transmission Corporation, citing the
Court of Tax Appeals' explanation, is instructive:

. . . proof of actual remittance by the respondent is not needed in order to prove withholding and
remittance of taxes to petitioner. Section 2.58.3 (B) of Revenue Regulation No. 2-98 clearly provides
that proof of remittance is the responsibility of the withholding agent and not of the taxpayer-refund
claimant. It should be borne in mind by the petitioner that payors of withholding taxes are by themselves
constituted as withholding agents of the BIR. The taxes they withhold are held in trust for the
government. In the event that the withholding agents commit fraud against the government by not
remitting the taxes so withheld, such act should not prejudice herein respondent who has been duly
withheld taxes by the withholding agents acting under government authority. Moreover, pursuant to
Sections 57 and 58 of the NIRC of 1997, as amended, the withholding of income tax and the remittance
thereof to the BIR is theresponsibility of the payor and not the payee. Therefore, respondent . . . has
no control over the remittance of the taxes withheld from its income by the withholding agent or payor
who is the agent of the petitioner. The Certificates of Creditable Tax Withheld at Source issued by the
withholding agents of the government are prima facie proof of actual payment by herein respondent-
payee to the government itself through said agents.134 (Emphasis supplied, citations omitted)

In the case at bar, PAL is the income earner and the payee of the final withholding tax, and the Agent
Banks are the withholding agents who are the payors responsible for the deduction and remittance of
the tax.

Given the above provisions, the failure of the Agent Banks to remit the amounts does not affect and
should not prejudice PAL. In case of failure of remittance of taxes, the Bureau of Internal Revenue's
cause of action is against the Agent Banks.

Thus, PAL is not obliged to remit, let alone prove the remittance of, the taxes withheld.

III.C

To claim a refund, this Court rules that PAL needs only to prove that taxes were withheld.
Taxes withheld by the withholding agent are deemed to be the full and final payment of the income tax
due from the income earner or payee.135

Section 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. — Under the final withholding tax system the amount of income tax withheld
by the withholding agent is constituted as a full and final payment of the income tax due from
the payee on the said income. The liability for payment of the tax rests primarily on the payor
as a withholding agent. Thus, in case of his failure to withhold the tax or in case of under withholding,
the deficiency tax shall be collected from the payor/withholding agent. The payee is not required to file
an income tax return for the particular income.

The finality of the withholding tax is limited only to the payee's income tax liability on the particular
income. It does not extend to the payee's other tax liability on said income, such as when the said
income is further subject to a percentage tax. For example, if a bank receives income subject to final
withholding tax, the same shall be subject to a percentage tax.136 (Emphasis supplied)

Certificates of Final Taxes Withheld issued by the Agent Banks are sufficient evidence to establish the
withholding of the taxes.137

In Commissioner of internal Revenue v. Philippine National Bank:138

The certificate of creditable tax withheld at source is the competent proof to establish the fact that taxes
are withheld. It is not necessary for the person who executed and prepared the certificate of creditable
tax withheld at source to be presented and to testify personally to prove the authenticity of the
certificates.

In Banco Filipino Savings and Mortgage Bank v. Court of Appeals, this court declared that a certificate
is complete in the relevant details that would aid the courts in the evaluation of any claim for refund of
excess creditable withholding taxes:

In fine, the document which may be accepted as evidence of the third condition, that is, the fact of
withholding, must emanate from the payor itself, and not merely from the payee, and must indicate the
name of the payor, the income payment basis of the tax withheld, the amount of the tax withheld and
the nature of the tax paid.

At the time material to this case, the requisite information regarding withholding taxes from the sale of
acquired assets can be found in BIR Form No. 1743.1. As described in Section 6 of Revenue Regulations
No. 6-85, BIR Form No. 1743.1 is a written statement issued by the payor as withholding agent showing
the income or other payments made by the said withholding agent during a quarter or year and the
amount of the tax deducted and withheld therefrom. It readily identifies the payor, the income payment
and the tax withheld. It is complete in the relevant details which would aid the courts in the evaluation
of any claim for refund of creditable withholding taxes.139 (Emphasis supplied, citations omitted)

In the case at bar, the Court of Tax Appeals Special First Division noted that PAL offered in evidence the
following Certificates of Final Tax Withheld at Source from the Agent Banks to prove the earned interest
income on its bank deposits and the taxes withheld:140

PERIOD AMOUNT OF TAX

BANK
COVERED WITHHELD
 US
PESO
DOLLAR

January
China Banking 2002 -
38,974.75
Corp. (Exhibit "C") December
2002

September
JP Morgan Chase 2002 -
1,237,646.43
Bank (Exhibit "D") December
2002

Phil. Bank of January

Communication[s] 2002 - 7,698.63
(Exhibit "E") March 2002

Phil. Bank of
April 2002 -
Communication[s] 108,351.68 1,698.99
June 2002
(Exhibit "F")

Phil. Bank of July 2002 -

Communication[s] September 401,871.48 3,009.28
(Exhibit "G") 2002

Phil. Bank of October

Communication[s] 2002 -
8,037.28
(Exhibit[s] "H" December
and "I") 2002

Standard May 2002 -

Chartered [Bank] December 6,458.14
(Exhibit "J") 2002

TOTAL P1,747,869.59 $65,877.07

PAL also presented bank-issued Certificates of Final Tax Withheld at Source showing that the amounts
it is seeking to refund were withheld.
For JPMorgan, PAL presented a Certificate of Income Tax Withheld for the Year 2002, which stated that
its interest earned was P6,188,232.17 and that JPMorgan's withheld taxes were P1,237,646.43. This
Certificate was signed by JPMorgan's Vice President and Operations Manager, Mamerto R. Natividad.141

For Chinabank, PAL presented a Bank Certification dated October 24, 2003, signed by Wilfredo A.
Quijencio, Chinabank's International Banking Group Senior Manager.142 It showed that Chinabank
withheld final taxes amounting to US$38,974.75 from PAL's interest income from its dollar time deposit
with Chinabank for the year 2002:

This is to certify the amount[s] of tax withheld from US DOLLAR Time Deposit account of PHILIPPINE
AIRLINES the year 2002 are as follows:

WITHHO DATE
PERI INTERES
LDING REMI
PRINCIPAL OD MATURITY T
TAX TTED
AMOUNT COVE VALUE INCOME
DEDUCT TO
RED (NET)
ED BIR

USD17,09 01/0 USD17,31 USD111, USD9,01 02/11

8,253.14 1/02 5,721.55 150.52 2.20 /02,
to 03/11
04/0 /02,
2/02 04/10
/02,
05/10
/02

USD17,31 04/0 USD17,61 USD301, USD24,4 05/10

5,721.55 2/02 7,709.54 987.99 85.51 /02,
to 06/10
09/3 /02,
0/02 07/10
/02,
08/10
/02,
09/10
/02,
10/10
/02
 USD17,61 9/30/ USD17,66 USD52,2 USD4,23 10/10
7,709.54 02 to 9,993.76 84.22 9.26 /02,
12/1 11/11
6/02 /02,
12/10
/02,
01/10
/03

USD10,66 12/1 USD10,80 USD11,3 USD916. 01/10

9,993.76 6/02 7,210.62 09.08 95 /03
to
12/3
1/02

USD7,000, 12/2 USD7,086, USD3,95 USD320. 01/10

000.00 3/02 558.17 6.95 83 /03
to
12/3
1/02

This is to certify further that the said withholding tax deducted was duly remitted in accordance with
existing rules and regulations of the Bureau of Internal Revenue.

This certification is being issued upon the request of the above client for whatever purpose/s it may
serve.143

For PBCom, PAL presented Certificates of Income Tax Withheld for the four (4) quarters of Year 2002,
all of which were signed by PBCom's Assistant Vice President, Carmencita L. Tan. 144

These Certificates stated the amounts of interest income PAL earned and the taxes withheld from its US
dollar time deposits:145

CERTIFICATE FOR
INTEREST INCOME TAX WITHHELD
THE PERIOD

1st Quarter146 US$102,648.40 US$7,698.63

2nd Quarter147 US$22,653.20 US$1,698.00

 3rd Quarter148 US$40,123.73 US$3,009.28

4th Quarter149 US$107,163.73 US$8,037.28

TOTAL150 US$ 272,589.06 US$ 20,443.19

These Certificates also showed the amounts of interest income PAL earned and the taxes withheld from
its peso deposit accounts:151

CERTIFICATE FOR
INTEREST INCOME TAX WITHHELD
THE PERIOD

2nd Quarter152 P 541,758.42 P 108,351.67

3rd Quarter153 P 2,009,357.41 P 401,871.46

TOTAL P 2,551,115.83 P 510,223.13

Moreover, PBCom's letter154 dated April 10, 2003 stated:

Dear Sir,

This is to certify that Philippine Airlines had various dollar & [peso savings accounts] placement[s] with
our branch for the year 2002. The taxes withheld of which had been remitted to the BIR [are] as follows:

SEPTEM
MAY JUNE JULY AUGUST
BER

PSA

Princip
al 186,000, 192,490, 244,661, 104,420, 104,842,
Amou 000.03 557.00 600.04 160.01 017.46
nt

Intere 325,500. 216,258. 1,259,24 527,321. 222,789.

st Paid 00 42 6.32 80 29
 Withh
65,100.0 43,251.6 251,849. 105,464. 44,557.8
olding
0 7 25 35 6
Tax

1ST 2ND 3RD 4TH

QRTR. QRTR. QRTR. QRTR.

Dollar
Time
Depo
sit

Intere 102,648. 22,653.2 40,123.7 107,163.

st Paid 40 0 3 73

Withh
olding 7,698.63 1,698.99 3,009.28 8,037.28
Tax

This certification is hereby issued for whatever legal purpose it may serve.

Very truly yours,

(SGD) Ms. Carmencita L. Tan, AVP
Branch Manager155

For Standard Chartered, PAL presented a letter dated September 19, 2003, signed by Standard
Chartered's Treasury Operations Officer, Bienvenido Nieto, listing PAL's interest income and withholding
tax for its US dollar time deposit account from May 2002 to December 2002. 156

This letter stated:

We confirm the above interest income and the 7.5% withholding tax for your Time Deposit Account and
remitted to the Bureau of Internal Revenue.157

These bank-issued Certificates of Income Tax Withheld and BIR Forms were neither disputed nor alleged
to be false or fraudulent. There was not even any denial from the Commissioner or the Agent Banks
that the amounts were not withheld as final taxes from PAL's interest income from its money deposits.

Moreover, these Certificates of Final Tax Withheld, complete in relevant details, were declared under
the penalty of perjury. As such, they may be taken at face value.158

Section 267 of the National Internal Revenue Code, as amended, provides:

Section 267. Declaration under Penalties of Perjury. — Any declaration, return and other statements
required under this Code, shall, in lieu of an oath, contain a written statement that they are made under
the penalties of perjury. Any person who willfully files a declaration, return or statement containing
information which is not true and correct as to every material matter shall, upon conviction, be subject
to the penalties prescribed for perjury under the Revised Penal Code.159

Considering that these Certificates were presented, the burden of proof shifts to the Commissioner, who
needs to establish that they were incomplete, false, or issued irregularly.160

However, the Commissioner did no such thing.

Thus, these Certificates are sufficient evidence to establish the withholding of the taxes.

The taxes withheld from PAL are considered its full and final payment of taxes. Necessarily, when taxes
were withheld and deducted from its income, PAL is deemed to have paid them.

Considering that PAL is exempted from paying the withholding tax, it is rightfully entitled to a refund.

III.D

This Court notes that the case of Commissioner of Internal Revenue v. Philippine National
Bank161 involves a refund of creditable withholding tax and not of final withholding tax. However, its
ruling that proof of remittance is not necessary to claim a tax refund applies to final withholding taxes.
The same principles used to rationalize the ruling apply to final withholding taxes: (i) the payor-
withholding agent is responsible for the withholding and remitting of the income taxes; (ii) the payee-
refund claimant has no control over the remittance of the taxes withheld from its income; (iii) the
Certificates of Final Tax Withheld at Source issued by the withholding agents of the government
are prima facie proof of actual payment by payee-refund claimant to the government itself and are
declared under perjury.162

Thus, this Court sees no reason why it should not rule the same way.

III.E

Lastly, while tax exemptions are strictly construed against the taxpayer, the government should not
misuse technicalities to keep money it is not entitled to.

Substantial justice, equity and fair play are on the side of petitioner. Technicalities and legalisms,
however exalted, should not be misused by the government to keep money not belonging to it, thereby
enriching itself at the expense of its law-abiding citizens. Under the principle of solutio indebiti provided
in Art. 2154, Civil Code, the BIR received something "when there [was] no right to demand it," and
thus, it has the obligation to return it. Heavily militating against respondent Commissioner is the ancient
principle that no one, not even the state, shall enrich oneself at the expense of another. Indeed, simple
justice requires the speedy refund of the wrongly held taxes.163 (Citations omitted)

Considering that PAL presented sufficient proof that: (i) it is exempted from paying withholding taxes;
(ii) amounts were withheld and deducted from its accounts; (iii) and the Commissioner did not contest
the withholding of these amounts and only raises that they were not proven to be remitted, this Court
finds that PAL sufficiently proved that it is entitled to its claim for refund.

Finally, both the Commissioner and the Court of Tax Appeals should have appreciated the unreasonable
difficulty that it would have put the taxpayer—in this case PAL—to claim a statutory exemption granted
to it. In requiring that it prove actual remittance, the court a quo and the Commissioner effectively put
the burden on the payee to prove that both government and the banks complied with their legal
obligation. It would have been near impossible for the taxpayer to demand to see the records of the
payor bank or the ledgers of the government. The legislative policy was to provide incentives to the
taxpayer by unburdening it of taxes. By administrative and judicial interpretation, such policy would
have been unreasonably reversed. This is not this Court's view of equity. Clearly, the taxpayer in this
case is entitled to relief.

WHEREFORE, premises considered, the Petition of Philippine Airlines, Inc. in G.R. Nos. 206079-
80 is GRANTED. The Petition of the Commissioner of Internal Revenue in G.R. No.
206309 is DENIED. The August 14, 2012 Decision and February 25, 2013 Resolution of the Court of
Tax Appeals En Banc in CTA CASE No. 6877 are PARTIALLY REVERSED. Philippine Airlines, Inc. is
entitled to its claim for refund of P510,223.16 and US$65,877.07, representing the final income taxes
withheld by China Banking Corporation, Philippine Bank of Communications, and Standard Chartered
Bank.

SO ORDERED.

Velasco, Jr., (Chairperson), Bersamin, Martires, and Gesmundo, JJ., concur.

March 12, 2018

NOTICE OF JUDGMENT

Sirs/Mesdames:

Please take notice that on January 17, 2018 a Decision, copy attached hereto, was rendered by the
Supreme Court in the above-entitled case, the original of which was received by this Office on March
12, 2018 at 10:20 a.m.

Very truly yours,

(SGD.) WILFREDO V. LAPITAN

Division Clerk of Court

Endnotes:

1Rollo (G.R. No. 206309), pp. 30-45, Decision of the Court of Tax Appeals En Banc. The Decision was
penned by Associate Justice Erlinda P. Uy and concurred in by Presiding Justice Ernesto D. Acosta and
Associate Justices Juanito C. Castañeda, Jr., Lovell R. Bautista, Caesar A. Casanova, Olga Palanca-
Enriquez, Esperanza R. Pabon-Victorino, Cielito N. Mindaro-Grulla, and Amelia R. Cotangco-Manalastas
of the Court of Tax Appeals, Quezon City.

2 Id. at 48-54, Resolution of the Court of Tax Appeals En Banc. The Resolution was penned by Associate
Justice Erlinda P. Uy and concurred in by Acting Presiding Justice Juanito C. Castañeda, Jr. and Associate
Justices Lovell R. Bautista, Caesar A. Casanova, Esperanza R. Pabon-Victorino, Cielito N. Mindaro-Grulla,
and Amelia R. Cotangco-Manalastas of the Court of Tax Appeals, Quezon City.
3
Id. at 103, Decision of the Court of Tax Appeals Special First Division.

4Rollo (G.R. Nos. 206079-80), pp. 35-52, Petition for Review on Certiorari.

5Rollo (G.R. No. 206309), pp. 7-27.

6 Id. at 34.

7 Id. at 14.

8 Id. at 116.

9 Id. at 44.

10 Id. at 32.

11 Id.

12 Id.

13Signed by China Banking Corporation's Senior Manager, International Banking Group, Wilfredo A.
Quijencio.

14Rollo (G.R. No. 206309), p. 32.

15 Id. at 32-33.

16
Id. at 33.

17 Id.

18 Id.

19 Id.

20 Through PAL's Assistant Vice President for Financial Planning and Analysis, Ma. Stella L. Diaz.

21Rollo (G.R. No. 206309), p. 34.

22 Id.

23 Id.

24 Id. at 34-35.

25Id. at 103-117. The Decision was penned by Associate Justice Lovell R. Bautista and concurred in by
Presiding Justice Ernesto D. Acosta and Associate Justice Caesar A. Casanova of the Special First
Division, Court of Tax Appeals, Quezon City.

26Rollo (G.R. No. 206309), p. 35; rollo (G.R. Nos. 206079-80), pp. 360-379.

27Rollo (G.R. No. 206309), p. 108.

28
Id. at 112.

29Certificates of Final Tax Withheld at Source (BIR Forms No. 2036), Summary of Monthly Final Income
Taxes Withheld, and Monthly Remittance Return of Final Income Taxes (BIR Form No. 1602).

30Rollo (G.R. No. 206309), pp. 112-113.

31 Id. at 113.

32 Id. at 113-114.

33Rollo (GR. Nos. 206079-80), p. 378.

34Rollo (G.R. No. 206309), p. 36.

35 Id. at 44.

36 Id. at 41.

37 Id. at 39-40.

38 Id. at 41-43.

39 Id. at 44.

40 Id. at 53.

41
Rollo (G.R. Nos. 206079-80), pp. 35-52; Rollo (G.R. No. 206309), pp. 7-27.

42Rollo (G.R. Nos. 206079-80), p. 42.

43 Id. at 43 and 46.

44CIR v. Asian Transmission Corporation, 655 Phil. 186 (2011) [Per J. Mendoza, Second Division].

45Rollo
(G.R. Nos. 206079-80), pp. 44-45 citing Winebrenner & Inigo Insurance Brokers v. CIR, CTA EB
Case No. 285, October 1, 2007; PAL v. CIR, CTA EB Case No. 665, January 5, 2012; Sonoma v. CIR,
CTA Case No. 7911, August 16, 2012.

46Rollo (G.R. Nos. 206079-80), pp. 44-45.

47Id. at 47, citing Commissioner of Internal Revenue v. Philippine Airlines, 535 Phil. 95 (2006) [Per C.J.
Panganiban, First Division].

48Rollo (G.R. Nos. 206079-80), p. 47.

49 Id.

50 Id, citing CIR v. PNB, CTA EB Case No. 285, October 1, 2007.

51Rollo (G.R. No. 206309), pp. 16-19.

52
Rollo (G.R. Nos. 206079-80), p. 574.

53Rollo(G.R. Nos. 206079-80), pp. 575-585, PAL's Comment with Opposition; rollo (G.R. No. 206309),
pp. 250-264, CIR's Comment.

54Rollo (G.R. Nos. 206079-80), pp. 595-302, PAL's Reply; Rollo (G.R. No. 206309), pp. 291-300, CIR's
Reply.

55Rollo(G.R. Nos. 206079-80), pp. 275-347, PAL's Memorandum; Rollo (G.R. No. 206309), pp. 309-
331, CIR's Memorandum.

56Rollo (G.R. No. 206309), p. 314.

57 Id. at 316.

58 Id. at 318.

59 Id. at 315.

60 Id. at 319.

61 Id. at 316.

62 Id. at 316 and 319.

63 Id. at 317.

64 Id. at 320.

65 Id. at 321.

66 Id. at 324-325.

67 Id. at 326.

68
ld. at 326 and 319.

69 Id. at 327.

70 Id.

71 Id. at 342-355.

72 Id. at 347.

73 Id. at 348-349.

74 Id. at 349.

75 Id. at 351.

76 Id. at 350.
77
Id.

78 Id. at 351-352.

79 Id. at 349.

80 Id. at 348 and 351.

81 TAX CODE, Title I, sec. 4, as amended by Rep. Act No. 8424 (1997), Tax Reform Act of 1997.

82 Rep. Act No. 9282 (2004).

83 Rep. Act No. 1125 (1954).

84 Rep. Act No. 1125 (1954), sec. 8.

Commissioner of Internal Revenue v. Manila Mining Corp., 505 Phil. 650, 664 (2005) [Per J. Carpio-
85

Morales, Third Division].

86 Id.

87Rollo (G.R. No. 206309), p. 350.

88 744 Phil. 299 (2014) [Per J. Leonen, Second Division].

89 Id. at 311-312.

90
Rollo (G.R. No. 206309), p. 34.

91 Id. at 314 and 347.

92 Id. at 39 and 113.

93City Government of Valenzuela v. Agustines, G.R. No. 209369 (Notice), January 28, 2015 <
http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/resolutions/2015/01/209369.pdf >
3 [Per J. Leonen, Second Division].

94 See Fangonil-Herrera v. Fangonil, 558 Phil. 235, 254 (2007) [Per J. Chico-Nazario, Third Division].

95Spouses Miano. v. Manila Electric Co., G.R. No. 205035, November 16, 2016 <
http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2016/november2016/205035.pdf
> 4 [Per J. Leonen, Second Division].

96 Id.

97 See Fangonil-Herrera v. Fangonil, 558 Phil. 235, 254 (2007) [Per J. Chico-Nazario, Third Division].

98Spouses Miano. v. Manila Electric Co., G.R. No. 205035, November 16, 2016 <
http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2016/november2016/205035.pdf
> 4-5 [Per J. Leonen, Second Division].

99 Id.
100
Philippine Refining Company v. Court of Appeals, 326 Phil. 680, 689 (1996) [Per J. Regalado, Second
Division].

101 326 Phil. 680 (1996) [Per J. Regalado, Second Division].

102 Id. at 689.

103 262 Phil. 437 (1990) [Per, J. Gutierrez, Jr., En Banc]

104Id. at 442, citing Nilsen v. Commissioner of Customs, 178 Phil. 26-32 (1979) [Per J. Fernando,
Second Division]; Balbas v. Domingo, 128 Phil. 467-473 (1967) [Per J. Fernando, En Banc]; Raymundo
v. De Joya, 189 Phil. 378-382 (1980) [Per C.J. Fernando, Second Division].

105Rollo (G.R. No. 206309), pp. 42 and 112.

106Certificates of Final Tax Withheld (BIR Form No. 2036), Summary of Monthly Final Income Taxes
Withheld, Monthly Remittance Return of Final Income Taxes (BIR Form No. 1602).

107Rollo (G.R. No. 206309), p. 113.

108 Id. at 41-43.

109 Id. at 39-40.

110 Id. at 111-113.

111 Id. at 43.

112 See Fangonil-Herrera v. Fangonil, 558 Phil. 235, 254 (2007) [Per J. Chico-Nazario, Third Division].

113 Pres. Decree No. 1590 (1978), Grant of New Franchise to Philippine Airlines, Inc. To Operate, etc.
Air Transport Services.

114 535 Phil. 95 (2006) [Per C. J. Panganiban, First Division].

115 Id. at 109.

116G.R. Nos. 215705-07, February 22, 2017 <

http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2017/february2017/215705-
07.pdf > [Per J. Peralta, Second Division].

117
Rep. Act No. 9334 (2004), amending Rep. Act No. 8424 (1997), Title II, ch. 4, sec. 131 reads in
part: Section 131. Payment of Excise Taxes on Imported Articles. —

(A) Persons Liable. — Excise taxes on imported articles shall be paid by the owner or importer to the
Customs Officers, conformably with the regulations of the Department of Finance and before the release
of such articles from the customs house, or by the person who is found in possession of articles which
are exempt from excise taxes other than those legally entitled to exemption. In the case of tax-free
articles brought or imported into the Philippines by persons, entities, or agencies exempt from tax which
are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities,
the purchasers or recipients shall be considered the importers thereof, and shall be liable for the duty
and internal revenue tax due on such importation.
The provision of any special or genera/law to the contrary notwithstanding, the importation of cigars
and cigarettes, distilled spirits, fermented liquors and wines into the Philippines, even if destined for tax
and duty-free shops, shall be subject to all applicable taxes, duties, charges, including excise taxes due
thereon. This shall apply to cigars and cigarettes, distilled spirits, fermented liquors and wines brought
directly into the duly chartered or legislated freeports of the Subic Special Economic and Freeport Zone,
created under Republic Act No. 7227; the Cagayan Special Economic Zone and Freeport, created under
Republic Act No. 7922; and the Zamboanga City Special Economic Zone, created under Republic Act No.
7903, and such other freeports as may hereafter be established or created by law: Provided, further,
That importations of cigars and cigarettes, distilled spirits, fermented liquors and wines made directly
by a government-owned and operated duty-free shop, like the Duty-Free Philippines (DFP), shall be
exempted from all applicable duties only: Provided, still further, That such articles directly imported by
a government-owned and operated duty-free shop, like the Duty-Free Philippines, shall be labeled 'duty-
free' and 'not for resale': Provided, finally, That the removal and transfer of tax and duty-free goods,
products, machinery, equipment and other similar articles other than cigars and cigarettes, distilled
spirits, fermented liquors and wines, from one freeport to another freeport, shall not be deemed an
introduction into the Philippine customs territory. (Emphasis supplied)

118Commissioner of Internal Revenue v. Philippine Airlines, Inc., G.R. Nos. 215705-07, February 22,
2017 <
http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2017/february2017/215705-
07.pdf > [Per J. Peralta, Second Division].

119 Id. at 8-10.

120 Rep. Act No. 9337 (2005), VAT Reform Act.

121 Rep. Act No. 9337, sec. 22.

122G.R. Nos. 215705-07, February 22, 2017 <

http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2017/february2017/215705-
07.pdf > [Per J. Peralta, Second Division].

123 Id.

124 Pres. Decree No. 1590 (1978), sec. 14.

125 TAX CODE, Title II, ch.4, sec. 27, as amended by Rep. Act No. 8424 (1997).

126 TAX CODE, sec. 57.

127BIR Revenue Reg. No. 02-98 (1998), Implementing Republic Act No. 8424, "An Act Amending The
National Internal Revenue Code, as Amended" Relative to the Withholding on Income Subject to the
Expanded Withholding Tax and Final Withholding Tax, Withholding of Income Tax on Compensation,
Withholding of Creditable Value-Added Tax and Other Percentage Taxes.

128 BIR Revenue Reg. No. 02-98 (1998), sec. 2.57.

129 BIR Revenue Reg. No. 02-98 (1998), sec. 2.57(A).

130 TAX CODE, Title II, ch. 4, sec. 58, as amended by Rep. Act No. 8424 (1997).

131 BIR Revenue Reg. No. 02-98 (1998), sec. 2.57.4.

132 BIR Revenue Reg. No. 02-98 (1998), sec. 2.58.

133
744 Phil. 299 (2014) [Per J. Leonen, Second Division].

134 Id. at 310-311.

135 BIR Revenue Reg. No. 02-98 (1998), sec. 2.57.

136 BIR Revenue Reg. No. 02-98 (1998), sec. 2.57(A).

137Commissioner of Internal Revenue v. Philippine National Bank, 744 Phil. 299, 309 (2014) [Per J.
Leonen, Second Division].

138 744 Phil. 299 (2014) [Per J. Leonen, Second Division].

139 Id. at 309-310.

140Rollo (G.R. No. 206309), pp. 111-113.

141 Id. at 63-64.

142 Id. at 62.

143 Id.

144 Id. at 65-72.

145 Id.

146
Id. at 65-66.

147 Id. at 67-68.

148 Id. at 69-70.

149 Id. at 71-72.

150 Id. at 73.

151 Id. at 67-70.

152Rollo (G.R. Nos. 206079-80), p. 14.

153 Id.

154Rollo (G.R. No. 206309), p. 73.

155 Id.

156 Id. at 74-76.

157 Id. at 76.

158
Commissioner of Internal Revenue. v. Philippine National Bank, 744 Phil. 299, 310 (2014) [Per J.
Leonen, Second Division].

159 TAX CODE, Title X, ch. 1, sec. 267, as amended by Rep. Act No. 8424 (1997).

160Commissioner of Internal Revenue. v. Philippine National Bank, 744 Phil. 299, 310 (2014) [Per J.
Leonen, Second Division].

161 744 Phil. 299 (2014) [Per J. Leonen, Second Division].

162 Id. at 310-311.

163State
Land Investment Corp. v. Commissioner of Internal Revenue, 566 Phil. 113, 122 (2008) [Per J.
Sandoval-Gutierez, First Division].