CIR vs. Algue Inc.

Commissioner of Internal Revenue vs. Algue Inc.

GR No. L-28896 | Feb. 17, 1988

Facts:
Algue Inc. is a domestic corp engaged in engineering, construction and other allied activities
On Jan. 14, 1965, the corp received a letter from the CIR regarding its delinquency income
taxes from 1958-1959, amtg to P83,183.85
A letter of protest or reconsideration was filed by Algue Inc on Jan 18
On March 12, a warrant of distraint and levy was presented to Algue Inc. thru its counsel,
Atty. Guevara, who refused to receive it on the ground of the pending protest
Since the protest was not found on the records, a file copy from the corp was produced and
given to BIR Agent Reyes, who deferred service of the warrant
On April 7, Atty. Guevara was informed that the BIR was not taking any action on the
protest and it was only then that he accepted the warrant of distraint and levy earlier sought to be
served
On April 23, Algue filed a petition for review of the decision of the CIR with the Court of
Tax Appeals
CIR contentions:
- the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary
reasonable or necessary business expense
- payments are fictitious because most of the payees are members of the same family in control
of Algue and that there is not enough substantiation of such payments
CTA: 75K had been legitimately paid by Algue Inc. for actual services rendered in the form
of promotional fees. These were collected by the Payees for their work in the creation of the
Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.

Issue: W/N the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction
claimed by Algue as legitimate business expenses in its income tax returns

Ruling:
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance, made in accordance with law.
RA 1125: the appeal may be made within thirty days after receipt of the decision or ruling
challenged
During the intervening period, the warrant was premature and could therefore not be served.
Originally, CIR claimed that the 75K promotional fees to be personal holding company
income, but later on conformed to the decision of CTA
There is no dispute that the payees duly reported their respective shares of the fees in their
income tax returns and paid the corresponding taxes thereon. CTA also found, after examining
the evidence, that no distribution of dividends was involved
CIR suggests a tax dodge, an attempt to evade a legitimate assessment by involving an
imaginary deduction
 Algue Inc. was a family corporation where strict business procedures were not applied and
immediate issuance of receipts was not required. at the end of the year, when the books were to
be closed, each payee made an accounting of all of the fees received by him or her, to make up
the total of P75,000.00. This arrangement was understandable in view of the close relationship
among the persons in the family corporation
The amount of the promotional fees was not excessive. The total commission paid by the
Philippine Sugar Estate Development Co. to Algue Inc. was P125K. After deducting the said
fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. The amount of
P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that
it was the payees who did practically everything, from the formation of the Vegetable Oil
Investment Corporation to the actual purchase by it of the Sugar Estate properties.
Sec. 30 of the Tax Code: allowed deductions in the net income – Expenses - All the ordinary
and necessary expenses paid or incurred during the taxable year in carrying on any trade or
business, including a reasonable allowance for salaries or other compensation for personal
services actually rendered xxx
the burden is on the taxpayer to prove the validity of the claimed deduction
In this case, Algue Inc. has proved that the payment of the fees was necessary and reasonable
in the light of the efforts exerted by the payees in inducing investors and prominent businessmen
to venture in an experimental enterprise and involve themselves in a new business requiring
millions of pesos.
Taxes are what we pay for civilization society. Without taxes, the government would be
paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural
reluctance to surrender part of one's hard earned income to the taxing authorities, every person
who is able to must contribute his share in the running of the government. The government for its
part, is expected to respond in the form of tangible and intangible benefits intended to improve
the lives of the people and enhance their moral and material values
Taxation must be exercised reasonably and in accordance with the prescribed procedure. If it
is not, then the taxpayer has a right to complain and the courts will then come to his succor

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 2011[1] and 20 April 2011[2]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 review[9]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:
the assessment against Cosmos was based on Ordinance Nos. 7988 and 8011 (Revenue Code
(1)
of Manila);

the assessment against Cosmos included taxes imposed under Section 21, in addition to
(2)
Section 14, of the Revenue Code of Manila; and

the local taxes collected from Cosmos for the first quarter of 2007 was based on its gross
(3)
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:
On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and
(a) 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 complaint[26] 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 appeal[27] 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. Castro[30] 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 payment[32] 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 timewithin 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.

License Fees Physical Therapy Org. vs. Municipal Board G.R. No. L-10448, August
30, 1957

Facts: The petitioner-appellant, an association of registered massagists and licensed operators of

massage clinics in the City of Manila and other parts of the country, filed an action in the Court
of First Instance of Manila for declaratory judgment regarding the validity of Municipal
Ordinance No. 3659, promulgated by the Municipal Board and approved by the City Mayor. To
stop the City from enforcing said ordinance, the petitioner secured an injunction upon filing of a
bond in the sum of P1,000.00. A hearing was held, but the parties without introducing any
evidence submitted the case for decision on the pleadings, although they submitted written
memoranda. Thereafter, the trial court dismissed the petition and later dissolved the writ of
injunction previously issued. The petitioner appealed said order of dismissal directly to this
Court. In support of its appeal, petitioner-appellant contends among other things that the trial
court erred in holding that the Ordinance in question has not restricted the practice of
massotherapy in massage clinics to hygienic and aesthetic massage, that the Ordinance is valid as
it does not regulate the practice of massage, that the Municipal Board of Manila has the power to
enact the Ordinance in question by virtue of Section 18, Subsection (kk), Republic Act 409, and
that permit fee of P100.00 is moderate and not unreasonable. Inasmuch as the appellant assails
and discuss certain provisions regarding the ordinance in question, and it is necessary to pass
upon the same, for purposes of ready reference, we are reproducing said ordinance in toto.

Issue: Whether the license fee of P100.00 for operator of the Ordinance is unreasonable, nay,
unconscionable.

Held: No, The amount of the fee or charge is properly considered in determining whether it is a
tax or an exercise of the police power. The amount may be so large as to itself show that the
purpose was to raise revenue and not to regulate, but in regard to this matter there is a marked
distinction between license fees imposed upon useful and beneficial occupations which the
sovereign wishes to regulate but not restrict, and those which are inimical and dangerous to
public health, morals or safety. In the latter case the fee may be very large without necessarily
being a tax. (Cooley on Taxation, Vol. IV, pp. 3516-17; underlining supplied.) Evidently, the
Manila Municipal Board considered the practice of hygienic and aesthetic massage not as a
useful and beneficial occupation which will promote and is conducive to public morals, and
consequently, imposed the said permit fee for its regulation.

G.R. No. 196596

COMMISSIONER OF INTERNAL REVENUE, Petitioner

vs.
DE LA SALLE UNIVERSITY, INC., Respondent

DECISION

BRION, J.:

Before the Court are consolidated petitions for review on certiorari:1

1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to assail the
December 10, 2010 decision and March 29, 2011 resolution of the Court of Tax Appeals
(CTA) in En Banc Case No. 622;2

2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8, 2011
decision and October 4, 2011 resolution in CTA En Banc Case No. 671;3 and

3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and October 4,
2011 resolution in CTA En Banc Case No. 671.4

G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First Division (CTA
Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En Banc Case No. 622 filed by
the Commissioner to challenge CTA Case No. 7303. G.R. No. 198841 and 198941 both
stemmed from CTA En Banc Case No. 671 filed by DLSU to also challenge CTA Case No.
7303.

The Factual Antecedents

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of Authority
(LOA) No. 2794 authorizing its revenue officers to examine the latter's books of accounts and
other accounting records for all internal revenue taxes for the period Fiscal Year Ending 2003
and Unverified Prior Years.5
On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6

Subsequently on August 18, 2004, the BIR through a Formal Letter of Demand assessed DLSU
the following deficiency taxes: (1) income tax on rental earnings from restaurants/canteens and
bookstores operating within the campus; (2) value-added tax (VAI) on business income; and
(3) documentary stamp tax (DSI) on loans and lease contracts. The BIR demanded the payment
of ₱17,303,001.12, inclusive of surcharge, interest and penalty for taxable years 2001, 2002
and 2003.7

DLSU protested the assessment. The Commissioner failed to act on the protest; thus, DLSU filed
on August 3, 2005 a petition for review with the CTA Division.8

DLSU, a non-stock, non-profit educational institution, principally anchored its petition

on Article XIV, Section 4 (3)of the Constitution, which reads:

(3) All revenues and assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall be exempt from taxes and duties. xxx.

On January 5, 2010, the CTA Division partially granted DLSU's petition for review. The
dispositive portion of the decision reads:

WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST assessment on
the loan transactions of [DLSU] in the amount of ₱1,1681,774.00 is hereby CANCELLED.
However, [DLSU] is ORDERED TO PAY deficiency income tax, VAT and DST on its lease
contracts, plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total amount
of ₱18,421,363.53 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total amount
due computed from September 30, 2004 until full payment thereof pursuant to Section 249(C)(3)
of the [National Internal Revenue Code]. Further, the compromise penalties imposed by [the
Commissioner] were excluded, there being no compromise agreement between the parties.

SO ORDERED.9

Both the Commissioner and DLSU moved for the reconsideration of the January 5, 2010
decision.10 On April 6, 2010, the CTA Division denied the Commissioner's motion for
reconsideration while it held in abeyance the resolution on DLSU's motion for reconsideration.11

On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En Banc Case No.
622) arguing that DLSU's use of its revenues and assets for non-educational or commercial
purposes removed these items from the exemption coverage under the Constitution.12

On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of
documentary evidence to prove that its rental income was used actually, directly and exclusively
for educational purposes.13 The Commissioner did not promptly object to the formal offer of
supplemental evidence despite notice.14
On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted, reduced
the amount of DLSU's tax deficiencies. The dispositive portion of the amended decision reads:

WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY

GRANTED. [DLSU] is hereby ORDERED TO PAY for deficiency income tax, VAT and DST
plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total adjusted amount
of ₱5,506,456.71 ... xxx.

In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on the ...
basic deficiency taxes ... until full payment thereof pursuant to Section 249(B) of the [National
Internal Revenue Code] ... xxx.

Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on the
deficiency taxes, surcharge and deficiency interest which have accrued ... from September 30,
2004 until fully paid.15

Consequently, the Commissioner supplemented its petition with the CTA En Banc and argued
that the CTA Division erred in admitting DLSU's additional evidence.16

Dissatisfied with the partial reduction of its tax liabilities, DLSU filed a separate petition for
review with the CTA En Banc (CTA En Banc Case No. 671) on the following grounds: (1) the
entire assessment should have been cancelled because it was based on an invalid LOA; (2)
assuming the LOA was valid, the CTA Division should still have cancelled the entire assessment
because DLSU submitted evidence similar to those submitted by Ateneo De Manila
University (Ateneo) in a separate case where the CTA cancelled Ateneo's tax assessment;17 and
(3) the CTA Division erred in finding that a portion of DLSU's rental income was not proved to
have been used actually, directly and exclusively for educational purposes.18

The CTA En Banc Rulings

CTA En Banc Case No. 622

The CTA En Banc dismissed the Commissioner's petition for review and sustained the findings
of the CTA Division.19

Tax on rental income

Relying on the findings of the court-commissioned Independent Certified Public Accountant

(Independent CPA), the CTA En Banc found that DLSU was able to prove that a portion of the
assessed rental income was used actually, directly and exclusively for educational purposes;
hence, exempt from tax.20 The CTA En Banc was satisfied with DLSU's supporting evidence
confirming that part of its rental income had indeed been used to pay the loan it obtained to build
the university's Physical Education – Sports Complex.21
Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its income that was
not shown by supporting documents to have been actually, directly and exclusively used for
educational purposes, must be subjected to income tax and VAT.22

DST on loan and mortgage transactions

Contrary to the Commissioner's contention, DLSU froved its remittance of the DST due on its
loan and mortgage documents.23 The CTA En Banc found that DLSU's DST payments had been
remitted to the BIR, evidenced by the stamp on the documents made by a DST imprinting
machine, which is allowed under Section 200 (D) of the National Internal Revenue Code (Tax
Code)24 and Section 2 of Revenue Regulations (RR) No. 15-2001.25

Admissibility of DLSU's supplemental evidence

The CTA En Banc held that the supplemental pieces of documentary evidence were admissible
even if DLSU formally offered them only when it moved for reconsideration of the CTA
Division's original decision. Notably, the law creating the CTA provides that proceedings before
it shall not be governed strictly by the technical rules of evidence.26

The Commissioner moved but failed to obtain a reconsideration of the CTA En Banc's December
10, 2010 decision.27 Thus, she came to this court for relief through a petition for review
on certiorari (G.R. No. 196596).

CTA En Banc Case No. 671

The CTA En Banc partially granted DLSU's petition for review and further reduced its tax
liabilities to ₱2,554,825.47inclusive of surcharge.28

On the validity of the Letter of Authority

The issue of the LOA' s validity was raised during trial;29 hence, the issue was deemed properly
submitted for decision and reviewable on appeal.

Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable period
and that the practice of issuing a LOA covering audit of unverified prior years is
prohibited.30 The prohibition is consistent with Revenue Memorandum Order (RMO) No. 43-90,
which provides that if the audit includes more than one taxable period, the other periods or years
shall be specifically indicated in the LOA.31

In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified
Prior Years. Hence, the assessments for deficiency income tax, VAT and DST for taxable
years 2001 and 2002 are void, but the assessment for taxable year 2003 is valid.32

On the applicability of the Ateneo case

The CTA En Banc held that the Ateneo case is not a valid precedent because it involved different
parties, factual settings, bases of assessments, sets of evidence, and defenses.33

On the CTA Division's appreciation of the evidence

The CTA En Banc affirmed the CTA Division's appreciation of DLSU' s evidence. It held that
while DLSU successfully proved that a portion of its rental income was transmitted and used to
pay the loan obtained to fund the construction of the Sports Complex, the rental income
from other sources were not shown to have been actually, directly and exclusively used for
educational purposes.34

Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the
Commissioner (G.R. No. 198941) came to this Court for relief.

The Consolidated Petitions

G.R. No. 196596

The Commissioner submits the following arguments:

First, DLSU's rental income is taxable regardless of how such income is derived, used or
disposed of.35 DLSU's operations of canteens and bookstores within its campus even though
exclusively serving the university community do not negate income tax liability.36

The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be
harmonized with Section 30 (H) of the Tax Code, which states among others, that the income of
whatever kind and character of [a non-stock and non-profit educational institution] from any of
[its] properties, real or personal, or from any of [its] activities conducted for profit regardless of
the disposition made of such income, shall be subject to tax imposed by this Code.37

The Commissioner argues that the CTA En Banc misread and misapplied the case
of Commissioner of Internal Revenue v. YMCA38 to support its conclusion that revenues
however generated are covered by the constitutional exemption, provided that, the revenues will
be used for educational purposes or will be held in reserve for such purposes.39

On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is exempt
only from property tax but not from income tax on the rentals earned from property.40 Thus,
DLSU's income from the leases of its real properties is not exempt from taxation even if the
income would be used for educational purposes.41

Second, the Commissioner insists that DLSU did not prove the fact of DST payment42 and that it
is not qualified to use the On-Line Electronic DST Imprinting Machine, which is available only
to certain classes of taxpayers under RR No. 9-2000.43

Finally, the Commissioner objects to the admission of DLSU's supplemental offer of evidence.
The belated submission of supplemental evidence reopened the case for trial, and worse, DLSU
offered the supplemental evidence only after it received the unfavorable CTA Division's original
decision.44 In any case, DLSU's submission of supplemental documentary evidence was
unnecessary since its rental income was taxable regardless of its disposition.45

G.R. No. 198841

DLSU argues as that:

First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication of unverified
prior years. A LOA issued contrary to RMO No. 43-90 is void, thus, an assessment issued based
on such defective LOA must also be void.46

DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and Unverified
Prior Years. On the basis of this defective LOA, the Commissioner assessed DLSU for
deficiency income tax, VAT and DST for taxable years 2001, 2002 and 2003.47 DLSU objects to
the CTA En Banc's conclusion that the LOA is valid for taxable year 2003. According to DLSU,
when RMO No. 43-90 provides that:

The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby prohibited.

it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since the LOA
issued to DLSU follows this format, then any assessment arising from it must
be entirely voided.48

Second, DLSU invokes the principle of uniformity in taxation, which mandates that for similarly
situated parties, the same set of evidence should be appreciated and weighed in the same
manner.49 The CTA En Banc erred when it did not similarly appreciate DLSU' s evidence as it
did to the pieces of evidence submitted by Ateneo, also a non-stock, non-profit educational
institution.50

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
Decision[2] dated 28 August 2007, and Resolution[3] 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 P435,332,196.00,
exclusive of penalties.

On 8 February 2002, MERALCO protested[5] 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
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 PASIG 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 City[13] 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,Arabay 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
tax[19] 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.