COMMISSIONER OF INTERNAL REVENUE, PETITIONER, V.

EURO-PHILIPPINES
AIRLINE SERVICES, INC., RESPONDENT.

G.R. No. 222436 | 2018-07-23

DECISION

REYES, JR., J:

This is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court, seeking
to set aside the Decision[2]dated July 14, 2015 and Resolution[3] dated December 22,
2015 of the Court of Tax Appeals (CTA) En Banc in case CTA EB Case No. 1106
affirming the Decision of the CTA Special First Division which cancelled and withdrew
the assessments for deficiency value-added tax, as well as interest and surcharges.

THE ANTECEDENTS

Respondent Euro-Philippines Airline Services, Inc. (Euro-Phil) is an exclusive passenger

sales agent of British Airways, PLC, an off-line international airline in the Philippines to
service the latter's passengers in the Philippines.[4]

Euro-Phil received a Formal Assessment Notice (FAN)[5] dated September 13, 2010
from petitioner Commissioner of Internal Revenue (CIR) on 14 September 2010 in the
aggregate amount of P4,271,228,20.00 consisting of assessment of Value Added Tax
(VAT), among others, for the taxable year ending March 31, 2007 with Details of
Discrepancies.[6]

On 29 September 2010, Euro-Phil filed a final protest on CIR.[7]

Following the lapse of the 180-day period within which to resolve the protest, Euro-Phil
filed a petition for review before the Court of Tax Appeals Special First Division (CTA-
First Division) praying, among others, for the cancellation of the FAN issued by CIR for
deficiency VAT. Euro-Phil argued therein that the receipts that are supposedly subject
to 12% VAT actually pertained to "services rendered to persons engaged exclusively in
international air transport" hence, zero-rated.[8]

The CTA- Special First Division rendered a Decision[9] on 25 July 2013 finding Euro-Phil
is rendering services to persons engaged in international air transport operations and,
as such, is zero-rated under Section 108 of the NIRC of 1997. The said decision
disposed thus:[10]

WHEREFORE, the instant Petition for Review is PARTIALLY GRANTED. The

assessments for deficiency value-added tax and documentary stamp tax, as well as the
interests and surcharges, for the taxable year ending March 31, 2007 are
hereby CANCELLED and WITHDRAWN for lack of legal basis.

xxxx

SO ORDERED."[11]
CIR filed a Motion for Partial Reconsideration of the said Decision covering only the
value-added tax that was denied therein. Such motion was denied for lack of merit in a
Resolution dated 18 November 2013.[12]

CIR then appealed before the CTA En Banc alleging that CTA Special First Division erred
in not holding that Euro-Phil's services is subject to 12% VAT.[13]

The CTA En Banc rendered a Decision[14] denying the petition and sustaining the CTA
Special First Division with which CTA Presiding Justice Roman G. Del Rosario (Justice
Del Rosario) concurred with Dissenting Opinion.[15] The said decision disposed thus:

WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED.
Accordingly, the Decision and the Resolution, dated July 25, 2013 and November 18,
2013, respectively, are hereby AFFIRMED.

SO ORDERED.[16]

CIR moved for reconsideration of the said decision insisting that the presentation of
VAT official receipts with the words "zero-rated" imprinted thereon is indispensable to
cancel the value-added tax (VAT) assessment against Euro-Phil.[17] However, it was
denied in a Resolution[18] dated December 22, 2015 with a dissenting opinion[19] from
CTA Presiding Justice (Justice del Rosario), to quote as follows, pertinent to the issue of
VAT:

In the case at bar, respondent is assessed for deficiency VAT for services it rendered as
passenger sales agent of British Airways PLC. Respondent invokes that services
rendered by VAT-registered persons to persons engaged in international air transport
operations is subject to zero percent (0%) rate, pursuant to Section 108 of the National
Internal Revenue Code (NIRC) of 1997, as amended.

To reiterate, it is not enough for respondent to invoke Section 108 of the NIRC of 1997,
as amended. Respondent has likewise the burden to show compliance with the invoicing
requirements laid down in Section 113 of the NIRC of 1997, as amended, to be entitled
to zero rating. Needless to say, unless appropriately refuted, tax assessments by tax
examiners are presumed correct and made in good faith.

In fine, the issue of compliance with Section 113 of the NIRC of 1997, as amended, is
vital in the disposition of the present controversy which the Court should consider, lest
an indispensable requirement for the availment of VAT zero-rating is blatantly ignored.

For all the foregoing, I VOTE to grant petitioner's Motion for Reconsideration and
UPHOLD the VAT assessment."[20]

Hence, this petition with CIR adopting Justice Del Rosario's dissent and that Euro-Phil
had to comply with the invoicing requirements to be entitled to zero rating of
VAT.[21] CIR also takes exception to the doctrine of "issues cannot be raised the first
time on appeal."

The Issues

1. Whether or not the issue of non-compliance of the invoicing requirements by Euro-

Phil must be recognized despite being raised only on appeal; and
2. Whether or not the Court of Tax Appeals En Banc erred in finding that the transaction
sale made by respondent is entitled to the benefit of zero-rated VAT despite its failure
to comply with invoicing requirements as mandated by law.

Our Ruling

The petition is denied.

The CTA En Banc did not commit any

reversible error.

Euro-Phil contends that CIR raised new matters in its Petition for Review with the
CTA En Banc and does it again in this Petition for Review which should not be allowed
by this Court.

We agree.

In the case of Aguinaldo Industries Corporation (Fishing Nets Division) vs.

Commissioner of Internal Revenue and the Court of Tax Appeals,[22] this doctrine was
explained by this Court as follows:

To allow a litigant to assume a different posture when he comes before the court and
challenge the position he had accepted at the administrative level would be to sanction
a procedure whereby the court – which is supposed to review administrative
determinations would not review, but determine and decide for the first time, a
question not raised at the administrative forum. This cannot be permitted, for the same
reason that underlies the requirement of prior exhaustion of administrative remedies to
give administrative authorities the prior opportunity to decide controversies within its
competence, and in much the same way that, on the judicial level, issues not raised in
the lower court cannot be raised for the first time on appeal.[23]
Here, it is not disputed that CIR raised the issue that the alleged failure to present VAT
official receipts with the imprinted words "zero rated" adopting the dissent of Justice
Del Rosario, only at the latter stage of the appeal on Motion for Reconsideration of the
CTA En Banc's decision. Accordingly, with the doctrine that issues may not be raised for
the first time on appeal, CIR should not be allowed by this Court to raise this matter.

Moreover, while the issue arose from the dissent of Justice Del Rosario, the law is clear
on the matter. Section 108 of the NIRC of 1997 imposes zero percent (0%) value-
added tax on services performed in the Philippines by VAT-registered persons to
persons engaged in international air transport operations, as it thus provides:

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

Properties. –

(A) x x x x

(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) x x x x

xxxx
(4) Services rendered to persons engaged in international shipping
or International air-transport operations, including leases of property for use
thereof;

xxxx

Here, there is no dispute that Euro-Phil is VAT registered. Next, it is also not disputed
that the services rendered by Euro-Phil was to a person engaged in international air-
transport operations. Thus, by application, Section 108 of the NIRC of 1997 subjects
the services of Euro-Phil to British Airways PLC, to the rate of zero percent VAT.

While CIR contends that the dissenting opinion of Justice del Rosario that Euro-Phil's
failure to present and offer any proof to show that it has complied with the invoicing
requirements, deems its sale of services to British Airways PLC subject to 12% VAT, it
does not negate the established fact that British Airways PLC is engaged in international
air-transport operations.

Moreover, as dictated by Section 113 of the NIRC of 1997, on the said provisions on the
"Consequences of Issuing Erroneous VAT Invoice of VAT Official Receipt,[24] nowhere
therein is a presumption created by law that the non-imprintment of the word "zero
rated" deems the transaction subject to 12 % VAT. In addition, Section 4. 113-4 of
Revenue Regulations 16-2005,[25] Consolidated Value-Added Tax Regulations of 2005,
also does not state that the non-imprintment of the word "zero rated" deems the
transaction subject to 12 %VAT. Thus, in this case, failure to comply with invoicing
requirements as mandated by law does not deem the transaction subject to 12% VAT.

In view of the foregoing considerations, the Court finds that the CTA En Banc did not
commit any reversible error.

WHEREFORE, the Petition for Review is DENIED. The Decision[26] dated July 14, 2015
and Resolution[27] dated December 22,2015 of the Court of Tax Appeals (CTA) En
Banc in CTA EB Case No. 1106 is AFFIRMED.

SO ORDERED.
Carpio (Chairperson),[*] Peralta, and Perlas-Bernabe, JJ., concur.
Caguioa, J., see concurring opinion.

South African Airways vs. CIR (2010)

G.R. No. 180356 | 2010-02-16

Subject: Gross Philippine Billings, place of sale is irrelevant; Off-line air carriers having
general sales agents in the Philippines are engaged in or doing business in the
Philippines and their income from sales of passage documents here is income from
within the Philippines; Statements made by individual members of Congress in the
consideration of a bill are not controlling in the interpretation of law; South African
Airways is subject to the general rule that resident foreign corporations shall be liable
for a 32% income tax on their income from within the Philippines; Taxes cannot be
subject to compensation; Refund cannot be granted pending determination of
petitioner's liability under Sec. 28(A)(1)

Facts:

South African Airways (petitioner) is a foreign corporation operating as an international

air carrier having no landing rights in the Philippines. It has a general sales agent in the
Philippines, Aerotel Limited Corporation (Aerotel). Aerotel sells passage documents for
compensation or commission for petitioner's off-line flights (carriage of passengers and
cargo between ports or points outside the Philippines). Petitioner is not registered with
the Securities and Exchange Commission as a corporation, branch office, or
partnership. It is not licensed to do business in the Philippines.

For the taxable year 2000, petitioner filed separate quarterly and annual income tax
returns for its off-line flights. On February 5, 2003, petitioner filed with the Bureau of
Internal Revenue (BIR) a claim for the refund of PhP 1,727,766.38 as erroneously paid
tax on Gross Philippine Billings (GPB) for the taxable year 2000. Such claim was
unheeded. Thus, on April 14, 2003, petitioner filed a Petition for Review with the Court
of Tax Appeals (CTA) for the refund of the said amount.

The CTA First Division denied petitioner's claim for a refund. The CTA ruled that
petitioner was not liable to pay tax on its GPB under Section 28(A)(3)(a) of the Tax
Code (NIRC). However, petitioner, as a resident foreign corporation engaged in trade or
business in the Philippines, is liable to pay a tax of 32% on its income derived from the
sales of passage documents in the Philippines. Petitioner filed a Petition for Review
before the CTA En Banc, which was denied. The motion for reconsideration was likewise
denied. Hence, this petition.

The issue is whether or not the income derived by petitioner from the sale of passage
documents covering petitioner's off-line flights is Philippine-source income subject to
Philippine income tax.

Held:

Gross Philippine Billings, place of sale is irrelevant

1. It is petitioner's contention that, with the new definition of GPB, it is no longer liable
under Sec. 28(A)(3)(a). Further, petitioner argues that because the 2 and 1/2% tax on
GPB is inapplicable to it, it is thereby excluded from the imposition of any income tax.

2. Essentially, prior to the 1997 NIRC, GPB referred to revenues from uplifts anywhere
in the world, provided that the passage documents were sold in the Philippines.
Legislature departed from such concept in the 1997 NIRC where GPB is now defined
under Sec. 28(A)(3)(a):

"Gross Philippine Billings" refers to the amount of gross revenue derived from carriage
of persons, excess baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or issue and the
place of payment of the ticket or passage document.

3. Now, it is the place of sale that is irrelevant; as long as the uplifts of passengers and
cargo occur to or from the Philippines, income is included in GPB.

Off-line air carriers having general sales agents in the Philippines are engaged
in or doing business in the Philippines and their income from sales of passage
documents here is income from within the Philippines

4. Inasmuch as petitioner does not maintain flights to or from the Philippines, it is not
taxable under Sec. 28(A)(3)(a) of the 1997 NIRC. But petitioner posits the view that
due to the non-applicability of Sec. 28(A)(3)(a) to it, it is precluded from paying any
other income tax for its sale of passage documents in the Philippines.

5. In Commissioner of Internal Revenue vs. British Overseas Airways Corporation,

which was decided under similar factual circumstances, this Court ruled that off-line air
carriers having general sales agents in the Philippines are engaged in or doing business
in the Philippines and that their income from sales of passage documents here is
income from within the Philippines. Thus, in that case, we held the off-line air carrier
liable for the 32% tax on its taxable income.

6. Petitioner argues, however, that because British Overseas Airways was decided
under the 1939 NIRC, it does not apply to the instant case, which must be decided
under the 1997 NIRC. Petitioner alleges that the 1939 NIRC taxes resident foreign
corporations, such as itself, on all income from sources within the Philippines.
Petitioner's interpretation of Sec. 28(A)(3)(a) of the 1997 NIRC is that, since it is an
international carrier that does not maintain flights to or from the Philippines, thereby
having no GPB as defined, it is exempt from paying any income tax at all. In other
words, the existence of Sec. 28(A)(3)(a) according to petitioner precludes the
application of Sec. 28(A)(1) to it.

7. We point out that Sec. 28(A)(3)(a) of the 1997 NIRC does not, in any categorical
term, exempt all international air carriers from the coverage of Sec. 28(A)(1) of the
1997 NIRC [Tax on Resident Foreign Corporations]. Certainly, had legislature's
intentions been to completely exclude all international air carriers from the application
of the general rule under Sec. 28(A)(1) , it would have used the appropriate language
to do so; but the legislature did not. Thus, the logical interpretation of such provisions
is that, if Sec. 28(A)(3)(a) is applicable to a taxpayer, then the general rule under Sec.
28(A)(1) would not apply. If, however, Sec. 28(A)(3)(a) does not apply, a resident
foreign corporation, whether an international air carrier or not, would be liable for the
tax under Sec. 28(A)(1).

Statements made by individual members of Congress in the consideration of a

bill are not controlling in the interpretation of law

8. Petitioner argues that the intention of Congress in amending the definition of GPB is
to exempt off-line air carriers from income tax. Petitioner cites the pronouncements
made by Senator Juan Ponce Enrile during the deliberations on the provisions of the
1997 NIRC. Such pronouncements, however, are not controlling on this Court.
9. A cardinal rule in the interpretation of statutes is that the meaning and intention of
the law-making body must be sought, first of all, in the words of the statute itself, read
and considered in their natural, ordinary, commonly-accepted and most obvious
significations, according to good and approved usage and without resorting to forced or
subtle construction. Courts, therefore, as a rule, cannot presume that the law-making
body does not know the meaning of words and rules of grammar. Consequently, the
grammatical reading of a statute must be presumed to yield its correct sense. x x x It is
also a well-settled doctrine in this jurisdiction that statements made by individual
members of Congress in the consideration of a bill do not necessarily reflect the sense
of that body and are, consequently, not controlling in the interpretation of law. (see
Espino v. Cleofe)

South African Airways is subject to the general rule that resident foreign
corporations shall be liable for a 32% income tax on their income from within
the Philippines

10. Sec. 28(A)(1) and (A)(3)(a) provides:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation organized,

authorized, or existing under the laws of any foreign country, engaged in trade or
business within the Philippines, shall be subject to an income tax equivalent to thirty-
five percent (35%) of the taxable income derived in the preceding taxable year from all
sources within the Philippines: provided, That effective January 1, 1998, the rate of
income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall
be thirty-three percent (33%), and effective January 1, 2000 and thereafter, the rate
shall be thirty-two percent (32%).

xxxx

(3) International Carrier. - An international carrier doing business in the Philippines

shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine Billings' as
defined hereunder.

11. Sec. 28(A)(1) of the 1997 NIRC is a general rule that resident foreign corporations
are liable for 32% tax on all income from sources within the Philippines. Sec. 28(A)(3)
is an exception to this general rule.

12. Hence, the general rule is that resident foreign corporations shall be liable for a
32% income tax on their income from within the Philippines, except for resident foreign
corporations that are international carriers that derive income "from carriage of
persons, excess baggage, cargo and mail originating from the Philippines" which shall
be taxed at 2 1/2% of their Gross Philippine Billings. To clarify, if an international air
carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2
1/2% of its Gross Philippine Billings, while international air carriers that do not have
flights to and from the Philippines but nonetheless earn income from other activities in
the country will be taxed at the rate of 32% of such income.

13. Petitioner, being an international carrier with no flights originating from the
Philippines, does not fall under the exception. As such, petitioner must fall under the
general rule. This principle is embodied in the Latin maxim, exception firmat regulam in
casibus non exceptis, which means, a thing not being excepted must be regarded as
coming within the purview of the general rule.

Taxes cannot be subject to compensation

14. Petitioner questions the offsetting of its payment of the tax under Sec. 28(A)(3)(a)
with their liability under Sec. 28(A)(1), considering that there has not yet been any
assessment of their obligation under the latter provision. Petitioner argues that such
offsetting is in the nature of legal compensation, which cannot be applied under the
circumstances present in this case. (see Article 1279 of the Civil Code)

15. Taxes cannot be subject to compensation for the simple reason that the
government and the taxpayer are not creditors and debtors of each other. There is a
material distinction between a tax and debt. Debts are due to the Government in its
corporate capacity, while taxes are due to the Government in its sovereign capacity.
(see Philex Mining Corporation v. Commissioner of Internal Revenue)

16. There can be no off-setting of taxes against the claims that the taxpayer may have
against the government. A person cannot refuse to pay a tax on the ground that the
government owes him an amount equal to or greater than the tax being collected. The
collection of a tax cannot await the results of a lawsuit against the government. (see
Francia v. Intermediate Appellate Court)

Refund cannot be granted pending determination of petitioner's liability under

Sec. 28(A)(1)

17. Petitioner's tax refund claim assumes that the tax return that it filed was correct.
Given, however, the finding of the CTA that petitioner, although not liable under Sec.
28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(1), the correctness of the
return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a
refund. (see Sec. 72, Chapter XI of the 1997 NIRC)

18. It must be remembered that the tax under Sec. 28(A)(3)(a) is based on GPB, while
Sec. 28(A)(1) is based on taxable income, that is, gross income less deductions and
exemptions, if any. It cannot be assumed that petitioner's liabilities under the two
provisions would be the same. There is a need to make a determination of petitioner's
liability under Sec. 28(A)(1) to establish whether a tax refund is forthcoming or that a
tax deficiency exists. There is a necessity to receive evidence to establish such amount
vis-a -vis the claim for refund. It is only after such amount is established that a tax
refund or deficiency may be correctly pronounced.

AIR CANADA, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION
BAUTISTA, J P:

This case seeks for the refund of alleged erroneously collected income tax covering the taxable
period from the 3rd quarter of 2000 up to the 2nd quarter of 2002 in the total amount of FIVE
MILLION ONE HUNDRED EIGHTY FIVE THOUSAND SIX HUNDRED SEVENTY SIX
PESOS AND 77/100 (P5,185,676.77).

The undisputed facts as culled from the records of the case are as follows:

Petitioner, Air Canada, a foreign corporation organized and existing under the laws of Canada,
was granted an authority to operate as an off-line carrier by the Civil Aeronautics Board (CAB)
subject to certain conditions, on April 24, 2000, with said authority to expire on April 24, 2005
(Exhibit "I").

On July 1, 1999, petitioner and Aerotel Ltd., Corporation, entered into a Passenger General Sales
Agency Agreement, whereby Aerotel Ltd., Corporation was appointed as petitioner's Passenger
General Sales Agent for the territory defined in the said Agreement (Annex "B; Petition for
Review).

On November 28, 2002, petitioner filed its administrative claim for refund with the Bureau of
Internal Revenue in the total amount of FIVE MILLION ONE HUNDRED EIGHTY FIVE
THOUSAND SIX HUNDRED SEVENTY SIX PESOS AND 77/100 (P5,185,676.77), allegedly
representing erroneously paid income taxes from the 3rd quarter of 2000 up to the 2nd quarter of
2002 (Exhibit K).

With no response received from the Bureau of Internal Revenue and before it could be barred by
prescription, petitioner deemed it proper to elevate its claim to this Court through this instant
Petition for Review filed on November 29, 2002.

On February 4, 2003, respondent filed his Answer raising the following as his Special and
Affirmative Defenses, to wit:

4. Petitioner's alleged claim for refund is subject to administrative examination/investigation

by the respondent's Bureau;
5. Petitioner's claim for refund of alleged erroneously paid income tax (Gross Philippine
Billings) has already prescribed;
6. Granting that petitioner is not subject to the tax on Gross Philippine Billings, then it is
liable to pay the tax equal to 32% of its gross income received during the period starting the 3rd
quarter of 2000 and ending on the 2nd quarter of 2002 from all sources within the Philippines
pursuant to Section 28(B)(1) of the National Internal Revenue Code of 1997 as a Non-resident
Foreign Corporation;
7. In fact Section 3 of Revenue Regulations No. 15-2002 cited in the petition has
reservations when it states that "(T)his provision is without prejudice to classifying such taxpayer
under a different category pursuant to a separate provision of the same Code.";
8. When the law is clear and unambiguous it leaves no room for interpretation and must be
applied according to its plain meaning, resort therefore to the legislative intent, much more
interpretation of the statement of a senator in the bicameral conference, is unnecessary;
9. Taxes paid and collected are presumed to have been paid in accordance with law, hence,
not refundable;
10. In an action for tax refund/credit, the taxpayer has the burden to establish its right to
refund, and failure to sustain the burden is fatal to the claim for refund;
11. Well-established is the rule that refunds/tax credits are construed strictly against the
taxpayer as they partake the nature of exemption from tax.

This case was deemed submitted for decision on October 4, 2004 sans the Memorandum of the
respondent.

The issues as stipulated by the parties are as follows:

1. Whether or not petitioner is subject to tax on its Gross Philippine Billings;

2. Whether or not petitioner is taxable as a non-resident foreign corporation doing business
in the Philippines; and
3. Whether or not petitioner is entitled to its claim for refund in the total amount of
P5,185,676.77 pertaining to income tax paid for the 3rd Quarter of 2000 to the 2nd Quarter of
2002.

Considering that the first and third issues are interrelated, this Court shall discuss them jointly.

It is petitioner's argument that pursuant to the amended definition of Gross Philippine Billings
under Section 28(A)(3)(a) of the 1997 Tax Code, for passenger revenue to form part of the Gross
Philippine Billings, such revenues must be derived from the carriage of persons and cargo
originating from the Philippines in a continuous and uninterrupted flight irrespective of the place
of sale or issue and the place of payment of the ticket or passage document. As a consequence,
there is no liability to pay the tax if the carriage of persons and cargo does not originate from the
Philippines in a continuous and uninterrupted flight. This is regardless of whether the ticket or
passage document is sold, issued or paid in the Philippines.

Petitioner further argues that under the definition of Gross Philippine Billings both in the 1993
and 1977 Tax Codes, the determinative factor in the imposition of the tax is the place where the
passage documents are sold, and not where the carriage of the passengers or cargoes originate.
Hence, in contrast to the amended definition of the term Gross Philippine Billings under the 1997
Tax Code, under the old definition, so long as the passage documents were sold in the
Philippines, the gross revenue derived from the carriage of persons and cargoes regardless of
where the carriage originates is subject to income tax. Petitioner maintains that it is a foreign
corporation licensed to operate as an off-line carrier in the Philippines, without flight operations
originating from and coming to the Philippines.

Thus, petitioner asserts that it is not subject to income tax on its Gross Philippine Billings nor to
any income tax. It erroneously paid income tax in the amount of P5,185,676.77 representing the
1.5% of its total gross revenue for the 3rd quarter of taxable year 2000 up to the 2nd quarter of
taxable year 2002 should therefore be refunded.

Section 28(A)(3)(a) of the 1997 Tax Code defines "Gross Philippine Billings" in this manner, to
wit:

"Gross Philippine Billings" refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the
ticket or passage document; Provided, That tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross Philippine Billing if the passenger boards a
plane in a port or point in the Philippines; Provided, further, That for a flight which originates
from the Philippines, but transshipment of passengers takes place at any port outside the
Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to
the leg flown from the Philippines to the point of transshipment shall form part of Gross
Philippine Billing." (Emphasis and Italics Ours)

The Tax Code prior to the 1997 amendment, however, defined "Gross Philippine Billing" in this
wise:
"Gross Philippine Billings" means gross revenue realized from uplifts of passengers anywhere in
the world and excess baggage, cargo and mail originating from the Philippines, covered by
passage documents sold in the Philippines: Provided, That documents sold outside the
Philippines under a "prepaid ticket advice" scheme for passengers originating from the
Philippines shall be considered as documents sold in the Philippines. Gross revenue from
chartered flights originating in the Philippines shall likewise form part of the "Gross Philippine
Billings" regardless of the place of sale or payment of the passage documents. For purposes of
determining the taxability of revenue from chartered flights, the term "originating from the
Philippines" shall include flights of passengers who stay in the Philippines for more than forty
eight (48) hours prior to embarkation." (Emphasis and italics supplied)

Based on the above provisions then, it is evident that the definition of "Gross Philippine Billings"
under Section 28(A)(3)(a) of the 1997 Tax Code covers the gross revenue derived from the
carriage of persons, excess baggage, cargo and mail "originating from the Philippines in a
continuous and uninterrupted flight" irrespective of the place or sale or issue and the place of
payment of the ticket or passage document. "To originate" would mean "to cause the beginning
of; to start (a person or thing) on a course or journey; to begin, start" (Webster's Third New
International Dictionary). In other words, the flights carrying the passengers must have
originated or started from the Philippines. Verily, petitioner, being an off-line international
carrier, as authorized to operate by the Civil Aeronautics Board (Exhibit "I") and having no
flights originating from the Philippines in a continuous and uninterrupted flight, cannot be taxed
pursuant to Section 28(A)(3)(a) of the 1997 Tax Code, that is, based on their Gross Philippine
Billings.

However, another question needs to be answered: Whether or not petitioner is liable to pay
income tax based on its gross revenue from sales of its passenger tickets. Otherwise put, the
parties jointly stipulated the issue of whether or not petitioner is taxable as a non-resident foreign
corporation doing business in the Philippines.

It is petitioner's allegation that it does not maintain a branch, office, employee or personnel in the
Philippines but is merely represented by an independent General Sales Agent. Petitioner further
argues that under the RP-Canada Tax Treaty, petitioner may only be subjected to income tax if it
maintains a "permanent establishment", pursuant to Article V of the said treaty, here in the
Philippines.

We do not agree with petitioner.

Under Section 22 of the 1997 Tax Code, the term "resident foreign corporation" applies to a
foreign corporation engaged in trade or business within the Philippines, while the term "non-
resident foreign corporation" applies to a foreign corporation not engaged in trade or business
within the Philippines. However, with regard to the term "doing" or "engaged in" business, there
is no fixed or specific criterion as what constitutes "doing" or "'engaging" in business. In the case
of The Mentholatum Co., Inc., et al. vs. Mangiliman, et al., 72 PHIL 524, the Honorable
Supreme Court had thoroughly and clearly explained the term in this way:

". . . There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting"
business. Each case must be judged in the light of its peculiar environmental circumstances. The
term implies continuity of commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of the functions normally
incident to, and in progressive prosecution of commercial gain or for the purpose and object of
the business organization." (Emphasis supplied)
In order that a foreign corporation may be regarded as doing business, there must be continuity
of conduct and intention to establish a continuous business, such as the appointment of a local
agent, and not one of a temporary character. In other words, a foreign airline company selling
tickets in the Philippines through their local agents, whether liaison offices, agencies or branches,
as in the case at bar, shall be considered as resident foreign corporation engaged in trade or
business in that country for such activities show continuity of commercial dealings or
arrangements and performance of acts or works or the exercise of some functions normally
incident to and in progressive prosecution of commercial gain or for the purpose and object of
the business organization.

Evidently then, petitioner during the periods claimed, maintained a General Sales Agent in the
Philippines under a Passenger General Sales Agency Agreement. That sales agent's functions
include, among others, solicitation, promotion and sale of petitioner's air passenger services, as
well as, filing of all necessary tax returns and paying the tax thereon on its behalf (Annex "B",
Petition for Review). These activities are clearly in exercise of the functions which are normally
incident to, and are in progressive pursuit of, the purpose and object of its organization as an
international carrier. In fact, it can be said that the regular sale of tickets is an airline's main
activity and is the very lifeblood of the airline business, the generation of ticket sales being its
principal objective. There is no indicium of doubt then that petitioner is "engaged in" business in
the Philippines through a local agent during the period covered by the claims. Accordingly, it is a
resident foreign corporation subject to income tax.
Moreover, Revenue Regulations No. 6-78 had elaborated that the phrase "doing business in the
Philippines" includes the "regular sale of tickets in the Philippines by off-line international
airlines either by themselves or through their agents. In the case of off-line airlines, their general
sales agents in the Philippines are constituted as withholding agents pursuant to section 50 of the
NIRC." Consequently, it is even admitted by petitioner that it is its General Sales Agent which
files and pays the necessary tax returns in its behalf.

It is noteworthy to stress that Section 28(A)(1) of the 1997 Tax Code provides that resident
foreign corporations shall be subject to an income tax equivalent to thirty-two (32) percent (32%)
of their taxable income derived from sources within the Philippines, As defined by Section 32(A)
of the 1997 Tax Code, gross income is "except when otherwise provided in this title, gross
income means all income derived from whatever source, including (but not limited to) the
following items: (1) compensation for services in whatever form paid, including, but not limited
to, fees, salaries, wages, commissions, and similar items; (2) gross income derived from the
conduct of trade or business or in the exercise of a profession . . .". By the very definition of the
term "gross income" it is broad and comprehensive as to include proceeds from the sales of
transport documents. The word "income from whatever source" discloses a legislative policy to
include all income not expressly exempted within the class of taxable income under our laws.
Income means "cash received or its equivalent"; it means something distinct from principal or
capital. For, while capital is a fund, income is a flow. As used in our income tax law, "income"
refers to the flow of wealth (Commissioner of Internal Revenue vs. British Overseas Airways
Corporation, 149 SCRA 395).

Likewise, for a source of income to be considered as coming from the Philippines, it is sufficient
that the income is derived from the activities within the Philippines. In the case of petitioner, the
absence of flight operations within the Philippine territory cannot alter the fact that the income
received was derived from the activities within the Philippines. "The test of taxability is the
"source"; and the source of an income is that activity . . . which produced the income" (Howden
& Co., Ltd. vs. Commissioner of Internal Revenue, 13 SCRA 601). The sale of tickets in the
Philippines is the activity that produces the income. The tickets exchanged hands here and
payments for fares were also made here in Philippine currency. The situs of the source of
payments is the Philippines. The flow of wealth preceded from, and occurred within, Philippine
territory, enjoying the protection accorded by the Philippine government. In consideration of
such protection, the flow of wealth should share the burden of supporting the government."
(Commissioner of Internal Revenue vs. British Overseas Airways Corporation, supra)

Unquestionably, the ticket sales were sold here in the Philippines. Thus, the revenue received
there from were also generated in the Philippines, as the business activities were regularly
pursued in the Philippines.

In addition, under the RP-Canada Tax Treaty, more particularly Article V and Article VII, it is
clear that petitioner's gross revenues are taxable in the Philippines. To quote the pertinent
provisions of the tax treaty:

Article VII
Business Profits

1. The profits of an enterprise of a Contracting State shall be taxable only in that State
unless the enterprise carries on business in the other Contracting State through a permanent
establishment situated therein. If the enterprise carries on or has carried on business as aforesaid,
the profits of the enterprise may be taxed in the other State but only so much of them as are
attributable to:
a. That permanent establishment;
b. Sales of goods or merchandise of the same or similar business activities of the same or
similar kind as those affected, through that permanent establishment.

ARTICLE V

PERMANENT ESTABLISHMENT

1. For the purpose of this Convention, the term "permanent establishment" means a fixed
place of business in which the business of the enterprise is wholly or partly carried on.
2. The term "permanent establishment" shall include especially:
a. a place of management
b. a branch
c. an office
d. a factory
e. a workshop
f. a mine, quarry, or other place of extraction of natural resources
g. a building or construction site or supervisory activities in connection therewith, where
such activities continue for a period more than six months
h. an assembly or installation project which exists for more than three months
i. premises used as a sales outlet
j. a warehouse, in relation to a person providing storage facilities for others. (Emphasis
supplied)

By the very provisions of the said Tax Treaty, it is evident that petitioner is taxable on its gross
revenues sourced within the Philippines. It bears emphasis that by the provisions itself, "an
enterprise carrying on a business or enterprise in the Philippines through a permanent
establishment" is subject to tax in the Philippines. Petitioner, by the appointment of the local
General Sales Agent, in which petitioner uses its premises as an outlet where sales of tickets are
made, petitioner is deemed to have had established a permanent establishment covered under the
RP-Canada Tax Treaty. Petitioner cannot argue the fact that it maintains an agent responsible for
the sales of tickets for its various flights.

Verily, petitioner is a resident foreign corporation subject to income tax here in the Philippines.

WHEREFORE, premises considered, the Petition for Review is hereby DENIED.

SO ORDERED.
PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR),
PETITIONER, VS. THE BUREAU OF INTERNAL REVENUE, REPRESENTED BY
JOSE MARIO BUÑAG, IN HIS CAPACITY AS COMMISSIONER OF THE BUREAU
OF INTERNAL REVENUE, AND JOHN DOE AND JANE DOE, WHO ARE PERSONS
ACTING FOR, IN BEHALF OR UNDER THE AUTHORITY OF RESPONDENT,
RESPONDENT.

G.R. No. 215427 | 2014-12-10

A discussion citing this case or law is available.

PAGCOR , taxability and tax treatment

EN BANC

DECISION

PERALTA, J.:

The present petition stems from the Motion for Clarification filed by petitioner Philippine
Amusement and Gaming Corporation (PAGCOR) on September 13, 2013 in the case
entitled Philippine Amusement and Gaming Corporation (PAGCOR) v. The Bureau of
Internal Revenue, et al.,[1] which was promulgated on March 15, 2011. The Motion for
Clarification essentially prays for the clarification of our Decision in the aforesaid case,
as well the issuance of a Temporary Restraining Order and/or Writ of Preliminary
Injunction against the Bureau of Internal Revenue (BIR), their employees, agents and
any other persons or entities acting or claiming any right on BIR’s behalf, in the
implementation of BIR Revenue Memorandum Circular (RMC) No. 33-2013 dated April
17, 2013.

At the onset, it bears stressing that while the instant motion was denominated as a
“Motion for Clarification,” in the session of the Court En Banc held on November 25,
2014, the members thereof ruled to treat the same as a new petition for certiorari
under Rule 65 of the Rules of Court, given that petitioner essentially alleges grave
abuse of discretion on the part of the BIR amounting to lack or excess of jurisdiction in
issuing RMC No. 33-2013. Consequently, a new docket number has been assigned
thereto, while petitioner has been ordered to pay the appropriate docket fees pursuant
to the Resolution dated November 25, 2014, the pertinent portion of which reads:

G.R. No. 172087 (Philippine Amusement and Gaming Corporation vs. Bureau of
Internal Revenue, et al.). – The Court Resolved to
(a) TREAT as a new petition the Motion for Clarification with Temporary Restraining
Order and/or Preliminary Injunction Application dated September 6, 2013 filed by
PAGCOR;

(b) DIRECT the Judicial Records Office to RE-DOCKET the aforesaid Motion for
Clarification, subject to payment of the appropriate docket fees; and

(c) REQUIRE petitioner PAGCOR to PAY the filing fees for the subject Motion for
Clarification within five (5) days from notice hereof. Brion, J., no part and on leave.
Perlas-Bernabe, J., on official leave.

Considering that the parties have filed their respective pleadings relative to the instant
petition, and the appropriate docket fees have been duly paid by petitioner, this Court
considers the instant petition submitted for resolution.

The facts are briefly summarized as follows:

On April 17, 2006, petitioner filed before this Court a Petition for Review on Certiorari
and Prohibition (With Prayer for the Issuance of a Temporary Restraining Order and/or
Preliminary Injunction) seeking the declaration of nullity of Section 1[2] of Republic Act
(R.A.) No. 9337[3] insofar as it amends Section 27(C)[4] of R.A. No. 8424,[5] otherwise
known as the National Internal Revenue Code (NIRC) by excluding petitioner from the
enumeration of government-owned or controlled corporations (GOCCs) exempted from
liability for corporate income tax.

On March 15, 2011, this Court rendered a Decision[6] granting in part the petition filed
by petitioner. Its fallo reads:

WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337,
amending Section 27(c) of the National Internal Revenue Code of 1997, by excluding
petitioner Philippine Amusement and Gaming Corporation from the enumeration of
government-owned and controlled corporations exempted from corporate income tax is
valid and constitutional, while BIR Revenue Regulations No. 16-2005 insofar as it
subjects PAGCOR to 10% VAT is null and void for being contrary to the National
Internal Revenue Code of 1997, as amended by Republic Act No. 9337.

No costs.
SO ORDERED.[7]

Both petitioner and respondent filed their respective motions for partial reconsideration,
but the same were denied by this Court in a Resolution[8] dated May 31, 2011.

Resultantly, respondent issued RMC No. 33-2013 on April 17, 2013 pursuant to the
Decision dated March 15, 2011 and the Resolution dated May 31, 2011, which clarifies
the “Income Tax and Franchise Tax Due from the Philippine Amusement and Gaming
Corporation (PAGCOR), its Contractees and Licensees.” Relevant portions thereof state:

II. INCOME TAX

Pursuant to Section 1 of R.A. 9337, amending Section 27(C) of the NIRC, as amended,
PAGCOR is no longer exempt from corporate income tax as it has been effectively
omitted from the list of government-owned or controlled corporations (GOCCs) that are
exempt from income tax. Accordingly, PAGCOR’s income from its operations and
licensing of gambling casinos, gaming clubs and other similar recreation or amusement
places, gaming pools, and other related operations, are subject to corporate income tax
under the NIRC, as amended. This includes, among others:

a) Income from its casino operations;

b) Income from dollar pit operations;

c) Income from regular bingo operations; and

d) Income from mobile bingo operations operated by it, with agents on commission
basis. Provided, however, that the agents’ commission income shall be subject to
regular income tax, and consequently, to withholding tax under existing regulations.

Income from “other related operations” includes, but is not limited to:

a) Income from licensed private casinos covered by authorities to operate issued to

private operators;
b) Income from traditional bingo, electronic bingo and other bingo variations covered
by authorities to operate issued to private operators;

c) Income from private internet casino gaming, internet sports betting and private
mobile gaming operations;

d) Income from private poker operations;

e) Income from junket operations;

f) Income from SM demo units; and

g) Income from other necessary and related services, shows and entertainment.

PAGCOR’s other income that is not connected with the foregoing operations are likewise
subject to corporate income tax under the NIRC, as amended.

PAGCOR’s contractees and licensees are entities duly authorized and licensed by
PAGCOR to perform gambling casinos, gaming clubs and other similar recreation or
amusement places, and gaming pools. These contractees and licensees are subject to
income tax under the NIRC, as amended.

III. FRANCHISE TAX

Pursuant to Section 13(2) (a) of P.D. No. 1869,[9] PAGCOR is subject to a franchise tax
of five percent (5%) of the gross revenue or earnings it derives from its operations and
licensing of gambling casinos, gaming clubs and other similar recreation or amusement
places, gaming pools, and other related operations as described above.

On May 20, 2011, petitioner wrote the BIR Commissioner requesting for reconsideration
of the tax treatment of its income from gaming operations and other related operations
under RMC No. 33-2013. The request was, however, denied by the BIR Commissioner.

On August 4, 2011, the Decision dated March 15, 2011 became final and executory and
was, accordingly, recorded in the Book of Entries of Judgment.[10]
Consequently, petitioner filed a Motion for Clarification alleging that RMC No. 33-2013 is
an erroneous interpretation and application of the aforesaid Decision, and seeking
clarification with respect to the following:

Whether PAGCOR’s tax privilege of paying 5% franchise tax in lieu of all other taxes
with respect to its gaming income, pursuant to its Charter – P.D. 1869, as amended by
R.A. 9487, is deemed repealed or amended by Section 1 (c) of R.A. 9337.

If it is deemed repealed or amended, whether PAGCOR’s gaming income is subject to

both 5% franchise tax and income tax.

Whether PAGCOR’s income from operation of related services is subject to both income
tax and 5% franchise tax.

Whether PAGCOR’s tax privilege of paying 5% franchise tax inures to the benefit of
third parties with contractual relationship with PAGCOR in connection with the operation
of casinos.[11]

In our Decision dated March 15, 2011, we have already declared petitioner’s income tax
liability in view of the withdrawal of its tax privilege under R.A. No. 9337. However, we
made no distinction as to which income is subject to corporate income tax, considering
that the issue raised therein was only the constitutionality of Section 1 of R.A. No.
9337, which excluded petitioner from the enumeration of GOCCs exempted from
corporate income tax.

For clarity, it is worthy to note that under P.D. 1869, as amended, PAGCOR’s income is
classified into two: (1) income from its operations conducted under its Franchise,
pursuant to Section 13(2) (b) thereof (income from gaming operations); and (2)
income from its operation of necessary and related services under Section 14(5) thereof
(income from other related services). In RMC No. 33-2013, respondent further
classified the aforesaid income as follows:

1. PAGCOR’s income from its operations and licensing of gambling casinos,

gaming clubs and other similar recreation or amusement places, gaming pools,
includes, among others:
a) Income from its casino operations;

b) Income from dollar pit operations;

c) Income from regular bingo operations; and

d) Income from mobile bingo operations operated by it, with agents on commission
basis. Provided, however, that the agents’ commission income shall be subject to
regular income tax, and consequently, to withholding tax under existing regulations.

2. Income from “other related operations” includes, but is not limited to:

a) Income from licensed private casinos covered by authorities to operate issued to

private operators;

b) Income from traditional bingo, electronic bingo and other bingo variations covered
by authorities to operate issued to private operators;

c) Income from private internet casino gaming, internet sports betting and private
mobile gaming operations;

d) Income from private poker operations;

e) Income from junket operations;

f) Income from SM demo units; and

g)Income from other necessary and related services, shows and entertainment.[12]

After a thorough study of the arguments and points raised by the parties, and in
accordance with our Decision dated March 15, 2011, we sustain petitioner’s contention
that its income from gaming operations is subject only to five percent (5%) franchise
tax under P.D. 1869, as amended, while its income from other related services is
subject to corporate income tax pursuant to P.D. 1869, as amended, as well as R.A. No.
9337. This is demonstrable.
First. Under P.D. 1869, as amended, petitioner is subject to income tax only with
respect to its operation of related services. Accordingly, the income tax exemption
ordained under Section 27(c) of R.A. No. 8424 clearly pertains only to petitioner’s
income from operation of related services. Such income tax exemption could not have
been applicable to petitioner’s income from gaming operations as it is already exempt
therefrom under P.D. 1869, as amended, to wit:

SECTION 13. Exemptions. –

xxxx

(2) Income and other taxes. — (a) Franchise Holder: No tax of any kind or form,
income or otherwise, as well as fees, charges or levies of whatever nature,
whether National or Local, shall be assessed and collected under this
Franchise from the Corporation; nor shall any form of tax or charge attach in
any way to the earnings of the Corporation, except a Franchise Tax of five
(5%) percent of the gross revenue or earnings derived by the Corporation
from its operation under this Franchise. Such tax shall be due and payable
quarterly to the National Government and shall be in lieu of all kinds of taxes, levies,
fees or assessments of any kind, nature or description, levied, established or collected
by any municipal, provincial, or national government authority.[13]

Indeed, the grant of tax exemption or the withdrawal thereof assumes that the person
or entity involved is subject to tax. This is the most sound and logical interpretation
because petitioner could not have been exempted from paying taxes which it was not
liable to pay in the first place. This is clear from the wordings of P.D. 1869, as
amended, imposing a franchise tax of five percent (5%) on its gross revenue or
earnings derived by petitioner from its operation under the Franchise in lieu of all taxes
of any kind or form, as well as fees, charges or levies of whatever nature, which
necessarily include corporate income tax.

In other words, there was no need for Congress to grant tax exemption to petitioner
with respect to its income from gaming operations as the same is already exempted
from all taxes of any kind or form, income or otherwise, whether national or local,
under its Charter, save only for the five percent (5%) franchise tax. The exemption
attached to the income from gaming operations exists independently from the
enactment of R.A. No. 8424. To adopt an assumption otherwise would be downright
ridiculous, if not deleterious, since petitioner would be in a worse position if the
exemption was granted (then withdrawn) than when it was not granted at all in the first
place.
Moreover, as may be gathered from the legislative records of the Bicameral Conference
Meeting of the Committee on Ways and Means dated October 27, 1997, the exemption
of petitioner from the payment of corporate income tax was due to the acquiescence of
the Committee on Ways and Means to the request of petitioner that it be exempt from
such tax. Based on the foregoing, it would be absurd for petitioner to seek exemption
from income tax on its gaming operations when under its Charter, it is already
exempted from paying the same.

Second. Every effort must be exerted to avoid a conflict between statutes; so that if
reasonable construction is possible, the laws must be reconciled in that manner.[14]

As we see it, there is no conflict between P.D. 1869, as amended, and R.A. No. 9337.
The former lays down the taxes imposable upon petitioner, as follows: (1) a five
percent (5%) franchise tax of the gross revenues or earnings derived from its
operations conducted under the Franchise, which shall be due and payable in lieu of all
kinds of taxes, levies, fees or assessments of any kind, nature or description, levied,
established or collected by any municipal, provincial or national government
authority;[15] (2) income tax for income realized from other necessary and related
services, shows and entertainment of petitioner.[16] With the enactment of R.A. No.
9337, which withdrew the income tax exemption under R.A. No. 8424, petitioner’s tax
liability on income from other related services was merely reinstated.

It cannot be gainsaid, therefore, that the nature of taxes imposable is well defined for
each kind of activity or operation. There is no inconsistency between the statutes; and
in fact, they complement each other.

Third. Even assuming that an inconsistency exists, P.D. 1869, as amended, which
expressly provides the tax treatment of petitioner’s income prevails over R.A. No. 9337,
which is a general law. It is a canon of statutory construction that a special law
prevails over a general law — regardless of their dates of passage — and the special is
to be considered as remaining an exception to the general.[17] The rationale is:

Why a special law prevails over a general law has been put by the Court as follows:

xxxx
x x x The Legislature consider and make provision for all the circumstances of the
particular case. The Legislature having specially considered all of the facts and
circumstances in the particular case in granting a special charter, it will not be
considered that the Legislature, by adopting a general law containing
provisions repugnant to the provisions of the charter, and without making any
mention of its intention to amend or modify the charter, intended to amend,
repeal, or modify the special act. (Lewis vs. Cook County, 74 I11. App., 151;
Philippine Railway Co. vs. Nolting 34 Phil., 401.)[18]

Where a general law is enacted to regulate an industry, it is common for individual

franchises subsequently granted to restate the rights and privileges already mentioned
in the general law, or to amend the later law, as may be needed, to conform to the
general law.[19] However, if no provision or amendment is stated in the franchise to
effect the provisions of the general law, it cannot be said that the same is the intent of
the lawmakers, for repeal of laws by implication is not favored.[20]

In this regard, we agree with petitioner that if the lawmakers had intended to withdraw
petitioner’s tax exemption of its gaming income, then Section 13(2)(a) of P.D. 1869
should have been amended expressly in R.A. No. 9487, or the same, at the very least,
should have been mentioned in the repealing clause of R.A. No. 9337.[21] However, the
repealing clause never mentioned petitioner’s Charter as one of the laws being
repealed. On the other hand, the repeal of other special laws, namely, Section 13 of
R.A. No. 6395 as well as Section 6, fifth paragraph of R.A. No. 9136, is categorically
provided under Section 24(a) (b) of R.A. No. 9337, to wit:

SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby
repealed and the persons and/or transactions affected herein are made subject to the
value-added tax subject to the provisions of Title IV of the National Internal Revenue
Code of 1997, as amended:

(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of the
National Power Corporation (NPC);

(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on
the sales of generated power by generation companies; and

(C) All other laws, acts, decrees, executive orders, issuances and rules and regulations
or parts thereof which are contrary to and inconsistent with any provisions of this Act
are hereby repealed, amended or modified accordingly.[22]
When petitioner’s franchise was extended on June 20, 2007 without revoking or
withdrawing its tax exemption, it effectively reinstated and reiterated all of petitioner’s
rights, privileges and authority granted under its Charter. Otherwise, Congress would
have painstakingly enumerated the rights and privileges that it wants to withdraw,
given that a franchise is a legislative grant of a special privilege to a person. Thus, the
extension of petitioner’s franchise under the same terms and conditions means a
continuation of its tax exempt status with respect to its income from gaming
operations. Moreover, all laws, rules and regulations, or parts thereof, which are
inconsistent with the provisions of P.D. 1869, as amended, a special law, are
considered repealed, amended and modified, consistent with Section 2 of R.A. No.
9487, thus:

SECTION 2. Repealing Clause. – All laws, decrees, executive orders, proclamations,

rules and regulations and other issuances, or parts thereof, which are inconsistent with
the provisions of this Act, are hereby repealed, amended and modified.

It is settled that where a statute is susceptible of more than one interpretation, the
court should adopt such reasonable and beneficial construction which will render the
provision thereof operative and effective, as well as harmonious with each other.[23]

Given that petitioner’s Charter is not deemed repealed or amended by R.A. No. 9337,
petitioner’s income derived from gaming operations is subject only to the five percent
(5%) franchise tax, in accordance with P.D. 1869, as amended. With respect to
petitioner’s income from operation of other related services, the same is subject to
income tax only. The five percent (5%) franchise tax finds no application with respect
to petitioner’s income from other related services, in view of the express provision of
Section 14(5) of P.D. 1869, as amended, to wit:

Section 14. Other Conditions.

xxxx

(5) Operation of related services. — The Corporation is authorized to operate such

necessary and related services, shows and entertainment. Any income that may be
realized from these related services shall not be included as part of the income
of the Corporation for the purpose of applying the franchise tax, but the same
shall be considered as a separate income of the Corporation and shall be subject to
income tax.[24]
Thus, it would be the height of injustice to impose franchise tax upon petitioner for its
income from other related services without basis therefor.

For proper guidance, the first classification of PAGCOR’s income under RMC No. 33-
2013 (i.e., income from its operations and licensing of gambling casinos, gaming clubs
and other similar recreation or amusement places, gambling pools) should be
interpreted in relation to Section 13(2) of P.D. 1869, which pertains to the income
derived from issuing and/or granting the license to operate casinos to PAGCOR’s
contractees and licensees, as well as earnings derived by PAGCOR from its own
operations under the Franchise. On the other hand, the second classification of
PAGCOR’s income under RMC No. 33-2013 (i.e., income from other related operations)
should be interpreted in relation to Section 14(5) of P.D. 1869, which pertains to
income received by PAGCOR from its contractees and licensees in the latter’s operation
of casinos, as well as PAGCOR’s own income from operating necessary and related
services, shows and entertainment.

As to whether petitioner’s tax privilege of paying five percent (5%) franchise tax inures
to the benefit of third parties with contractual relationship with petitioner in connection
with the operation of casinos, we find no reason to rule upon the same. The resolution
of the instant petition is limited to clarifying the tax treatment of petitioner’s income
vis-à-vis our Decision dated March 15, 2011. This Decision is not meant to expand our
original Decision by delving into new issues involving petitioner’s contractees and
licensees. For one, the latter are not parties to the instant case, and may not therefore
stand to benefit or bear the consequences of this resolution. For another, to answer the
fourth issue raised by petitioner relative to its contractees and licensees would be
downright premature and iniquitous as the same would effectively countenance
sidesteps to judicial process.

In view of the foregoing disquisition, respondent, therefore, committed grave abuse of

discretion amounting to lack of jurisdiction when it issued RMC No. 33-2013 subjecting
both income from gaming operations and other related services to corporate income tax
and five percent (5%) franchise tax. This unduly expands our Decision dated March 15,
2011 without due process since the imposition creates additional burden upon
petitioner. Such act constitutes an overreach on the part of the respondent, which
should be immediately struck down, lest grave injustice results. More, it is settled that
in case of discrepancy between the basic law and a rule or regulation issued to
implement said law, the basic law prevails, because the said rule or regulation cannot
go beyond the terms and provisions of the basic law.

In fine, we uphold our earlier ruling that Section 1 of R.A. No. 9337, amending Section
27(c) of R.A. No. 8424, by excluding petitioner from the enumeration of GOCCs
exempted from corporate income tax, is valid and constitutional. In addition, we hold
that:

Petitioner’s tax privilege of paying five percent (5%) franchise tax in lieu of all other
taxes with respect to its income from gaming operations, pursuant to P.D. 1869, as
amended, is not repealed or amended by Section 1(c) of R.A. No. 9337;

Petitioner’s income from gaming operations is subject to the five percent (5%)
franchise tax only; and

Petitioner’s income from other related services is subject to corporate income tax only.

In view of the above-discussed findings, this Court ORDERS the respondent to cease
and desist the implementation of RMC No. 33-2013 insofar as it imposes: (1) corporate
income tax on petitioner’s income derived from its gaming operations; and (2) franchise
tax on petitioner’s income from other related services.

WHEREFORE, the Petition is hereby GRANTED. Accordingly, respondent is ORDERED

to cease and desist the implementation of RMC No. 33-2013 insofar as it imposes: (1)
corporate income tax on petitioner’s income derived from its gaming operations; and
(2) franchise tax on petitioner’s income from other related services.

SO ORDERED.

CIR vs. Court of Appeals and YMCA (1998)

G.R. No. 124043 | 1998-10-14

Subject: Factual findings of the CTA, when supported by substantial evidence, will not
be disturbed on appeal; Rental income of the YMCA from its real estate is subject to
tax, regardless of how such income is used; Tax exemption of charitable institutions
under Art VI, Sec 28 of the 1987 covers property taxes only; YMCA is not an
educational institution entitled to tax exemption Article XIV, Section 4, par.3 of the
Constitution; Constitutional construction; Cases cited by YMCA inapplicable

Facts:
The Young Men's Christian Association of the Philippines, Inc. (YMCA) is established as
"a welfare, educational and charitable non-profit corporation." In 1980, YMCA earned an
income of P676,829.80 from leasing out a portion of its premises to small shop owners,
like restaurants and canteen operators, and P44,259.00 from parking fees collected
from non-members.

In 1984, the Commissioner of Internal Revenue (CIR) issued an assessment to YMCA

for P415,615.01 including surcharge and interest, for deficiency income tax, deficiency
expanded withholding taxes on rentals and professional fees and deficiency withholding
tax on wages.

The YMCA protested the assessment but the CIR denied the protest. The YMCA filed a
petition for review with the Court of Tax Appeals (CTA) which issued a ruling in favor of
the YMCA.

The CTA found that the leasing of YMCA's facilities and the operation of the parking lot
are reasonably incidental to and reasonably necessary for the accomplishment of the
objectives of YMCA. The facilities were leased to members and to service the needs of
its members and their guests. The parking was primarily for members with stickers and
they charged P.50 for non-members. The rentals and parking fees were just enough to
cover the costs of operation and maintenance only. These earnings are channeled to
support YMCA's many activities and attainment of its objectives since the membership
dues are very insufficient to support its program.

The Court of Appeals (CA) initially decided in favor of the CIR. However it later
reconsidered its decision and upheld the CTA decision in favor of YMCA.

Hence, this petition for review under Rule 45 of the Rules of Court filed by the CIR.

Held:

Factual findings of the CTA, when supported by substantial evidence, will not
be disturbed on appeal

1. It is a basic rule in taxation that the factual findings of the CTA, when supported by
substantial evidence, will not be disturbed on appeal unless it is shown that the said
court committed gross error in the appreciation of facts.

2. In the present case, the Court of Appeals (in its initial decision reversing the CTA)
did not alter any fact or evidence. It merely resolved the issue but the fact that it did so
in a manner different from that of the CTA did not necessarily imply a reversal of
factual findings. What the appellate court reversed was the legal conclusion, not the
factual finding, of the CTA.

3. The distinction between a question of law and a question of fact is clear-cut. It has
been held that "[t]here is a question of law in a given case when the doubt or difference
arises as to what the law is on a certain state of facts; there is a question of fact when
the doubt or difference arises as to the truth or falsehood of alleged facts. In the
present case, the CA did not doubt, much less change, the facts narrated by the CTA. It
merely applied the law to the facts. That its interpretation or conclusion is different
from that of the CTA is not irregular or abnormal.

Rental income of the YMCA from its real estate is subject to tax, regardless of
how such income is used

4. The NIRC provides that:

"SEC. 27. Exemptions from tax on corporations. -- The following organizations shall not
be taxed under this Title in respect to income received by them as such --

xxx
(g) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;

(h) Club organized and operated exclusively for pleasure, recreation, and other non-
profitable purposes, no part of the net income of which inures to the benefit of any
private stockholder or member;

xxx

5. Notwithstanding the provision in the preceding paragraphs, the income of whatever

kind and character of the foregoing organization from any of their properties, real or
personal, or from any of their activities conducted for profit, regardless of the
disposition made of such income, shall be subject to the tax imposed under this Code.
(as amended by Pres. Decree No. 1457)"

6. Because taxes are the lifeblood of the nation, the Court has always applied the
doctrine of strict interpretation in construing tax exemptions. Thus, the claimed
exemption "must expressly be granted in a statute stated in a language too clear to be
mistaken.

7. In the instant case, the exemption claimed by the YMCA is expressly disallowed by
the very wording of the last paragraph of then Section 27 of the NIRC which mandates
that the income of exempt organizations (such as the YMCA) from any of their
properties, real or personal, be subject to the imposed by the same Code. Because the
last paragraph of said section unequivocally subjects to tax the rent income of the
YMCA from its rental property, the Court is duty-bound to abide strictly by its literal
meaning and to refrain from resorting to any convoluted attempt at construction.

8. The last paragraph of Section 27, the YMCA argues, should be "subject to the
qualification that the income from the properties must arise from activities 'conducted
for profit' before it may be considered taxable." This argument is erroneous. A reading
of said paragraph shows that the phrase "any of their activities conducted for profit"
does not qualify the word "properties." This makes income from the property of the
organization taxable, regardless of how that income is used -- whether for profit or for
lofty non-profit purposes.

9. Hence, the Court of Appeals committed reversible error when it allowed the tax
exemption claimed by YMCA on income it derived from renting out its real property, on
the ground that the said income is not collected for profit but is merely incidental to its
operation. The law does not make a distinction. The rental income is taxable regardless
of whence such income is derived and how it used or disposed of. Where the law does
not distinguish, neither should we. Verba legis non est recedendum.

Tax exemption of charitable institutions under Art VI, Sec 28 of the 1987
covers property taxes only

10. The YMCA submits that Article VI, Section 28 of par. 3 of the 1987 Constitution,
exempts "charitable institutions" from the payment not only of property taxes but also
of income tax from any source.

11. What is exempted is not the institution itself...those exempted from real estate
taxes are lands, buildings and improvements actually, directly and exclusively used for
religious, charitable or educational purposes. The tax exemption covers property taxes
only." Indeed, the income tax exemption claimed by YMCA finds no basis in Article VI,
Section 28, par. 3 of the Constitution. In short, YMCA is exempt from the payment
of property tax, but not income tax on the rentals from its property.

YMCA is not an educational institution entitled to tax exemption Article XIV,

Section 4, par.3 of the Constitution

12. YMCA also invokes Article XIV, Section 4, par. 3 of the 1987 Constitution claiming
that the YMCA "is a non-stock, non-profit educational institution whose revenues and
assets are used actually, directly and exclusively for educational purposes so it is
exempt from taxes on its properties and income."

13. Laws allowing tax exemption are construed strictissimi juris. Hence, for the YMCA
to be granted the exemption it claims under the aforecited provision, it must prove with
substantial evidence that (1) it falls under the classification non-stock, non-profit
educational institution; and (2) the income it seeks to be exempted from taxation is
used actually, directly, and exclusively for educational purposes.

14. The term "educational institution" or "institution of learning" has acquired a well-
known technical meaning, of which the members of the Constitutional Commission are
deemed cognizant. Under the Education Act of 1982, such term refers to schools which
"refers to the hierarchically structured and chronological graded learnings organized
and provided by the formal school system and for which certification is required in order
for the learner to progress through the grades or move to the higher levels." The Court
has examined the "Amended Articles of Incorporation"and "By-Laws" of the YMCA, but
found nothing in them that even hints that it is a school or an educational institution.

15. Under the Education Act of 1982, even non-formal education is understood to be
school-based and "private auspices such as foundations and civic-spirited organizations"
are ruled out.

16. It is settled that the term "educational institution," when used in laws granting tax
exemptions, refers to a " school seminary, college or educational establishment.”
Therefore, the YMCA cannot be deemed one of the educational institutions covered by
the constitutional provision under consideration.
17. Moreover, YMCA did not submit proof of the proportionate amount of the subject
income that was actually, directly and exclusively used for educational purposes. Article
XIII, Section 5 of the YMCA by-laws is patently insufficient, since the same merely
signified that "[t]he net income derived from the rentals of the commercial buildings
shall be apportioned to the Federation and Member Associations as the National Board
may decide.”

Constitutional construction

18. Words used in the Constitution are to be taken in their ordinary acceptation. While
in its broadest and best sense education embraces all forms and phrases of instruction,
improvement and development of mind and body, and as well of religious and moral
sentiments, yet in the common understanding and application it means a place where
systematic instruction in any or all of the useful branches of learning is given by
methods common to schools and institutions of learning. That we conceive to be the
true intent and scope of the term 'educational institutions' as used in the Constitution.

Cases cited by YMCA inapplicable

19. YMCA of Manila v. Collector of Internal Revenue and Abra Valley College, Inc. v.
Aquino are not applicable, because the controversy in both cases involved exemption
from the payment of property tax, not income tax. Hospital de San Juan de Dios, Inc. v.
Pasay City is not in point either, because it involves a claim for exemption from the
payment of regulatory fees, specifically electrical inspection fees, imposed by an
ordinance of Pasay City -- an issue not at all related to that involved in a claimed
exemption from the payment if income taxes imposed on property leases. In Jesus
Sacred Heart College v. Com. Of Internal Revenue, the party therein, which claimed an
exemption from the payment of income tax, was an educational institution which
submitted substantial evidence that the income subject of the controversy had been
devoted or used solely for educational purposes.

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, VS. ST. LUKE'S

MEDICAL CENTER, INC., RESPONDENT.

G.R. No. 203514 | 2017-02-13

DECISION

DEL CASTILLO, J.:

The doctrine of stare decisis dictates that "absent any powerful countervailing
considerations, like cases ought to be decided alike."[1]

This Petition for Review on Certiorari[2] under Rule 45 of the Rules of Court assails the
May 9, 2012 Decision[3] and the September 17, 2012 Resolution[4] of the Court of Tax
Appeals (CTA) in CTA EB Case No. 716.

Factual Antecedents
On December 14, 2007, respondent St. Luke's Medical Center, Inc. (SLIVIC) received
from the Large Taxpayers Service-Documents Processing and Quality Assurance Division
of the Bureau of Internal Revenue (BIR) Audit Results/Assessment Notice Nos. QA-07-
000096[5] and QA-07-000097,[6] assessing respondent SLMC deficiency income tax under
Section 27(B)[7] of the 1997 National Internal Revenue Code (NIRC), as amended, for
taxable year 2005 in the amount of P78,617,434.54 and for taxable year 2006 in the
amount of P57,119,867.33.

On January 14, 2008, SLMC filed with petitioner Commissioner of Internal Revenue (CIR)
an administrative protest[8] assailing the assessments. SLMC claimed that as a non-stock,
non-profit charitable and social welfare organization under Section 30(E) and (G)[9] of the
1997 NIRC, as amended, it is exempt from paying income tax.

On April 25, 2008, SLMC received petitioner CIR's Final Decision on the Disputed
Assessment[10] dated April 9, 2008 increasing the deficiency income for the taxable year
2005 tax to P82,419,522.21 and for the taxable year 2006 to P60,259,885.94, computed
as follows:

For Taxable Year 2005:

ASSESSMENT NO. QA-07-000096

PARTICULARS AMOUNT

Sales/Revenues/Receipts/Fees P3,623,511,616.00

Less: Cost of Sales/Services 2,643,049,769.00

Gross Income From Operation 980,461,847.00

Add: Non-Operating & Other Income -

Total Gross Income 980,461,847.00

Less: Deductions 481,266,883.00

Net Income Subject to Tax 499,194,964.00

X Tax Rate 10%

Tax Due 49,919,496.40

Less: Tax Credits -

Deficiency Income Tax 49,919,496.40

Add: Increments

25% Surcharge 12,479,874.10

20% Interest Per Annum (4/15/06-4/15/08) 19,995,151.71

Compromise Penalty for Late Payment 25,000.00

Total increments 32,500,025.81

Total Amount Due P82,419,522.21

For Taxable Year 2006:

ASSESSMENT NO. QA-07-000097

PARTICULARS [AMOUNT]

Sales/Revenues/Receipts/Fees P3,815,922,240.00

Less: Cost of Sales/Service 2,760,518,437.00

Gross Income From Operation 1,055,403,803.00

Add: Non-Operating & Other Income -

Total Gross Income 1,055,403,803.00

Less: Deductions 640,147,719.00

Net Income Subject to Tax 415,256,084.00

X Tax Rate 10%

Tax Due 41,525,608.40

Less: Tax Credits -

Deficiency Income Tax 41,525,608.40

Add: Increments -

25% Surcharge 10,381,402.10

20% Interest Per Annum (4/15/07-4/15/08) 8,327,875.44

Compromise Penalty for Late Payment 25,000.00

Total increments 18,734,277.54

Total Amount Due P60,259,885.94[11]

Aggrieved, SLMC elevated the matter to the CTA via a Petition for Review,[12] docketed
as CTA Case No. 7789.

Ruling of the Court of Tax Appeals Division

On August 26, 2010, the CTA Division rendered a Decision[13] finding SLMC not liable for
deficiency income tax under Section 27(B) of the 1997 NIRC, as amended, since it is
exempt from paying income tax under Section 30(E) and (G) of the same Code. Thus:

WHEREFORE, premises considered, the Petition for Review is hereby GRANTED.

Accordingly, Audit Results/Assessment Notice Nos. QA-07-000096 and QA-07-000097,
assessing petitioner for alleged deficiency income taxes for the taxable years 2005 and
2006, respectively, are hereby CANCELLED and SET ASIDE.

SO ORDERED.[14]

CIR moved for reconsideration but the CTA Division denied the same in its December 28,
2010 Resolution.[15]

This prompted CIR to file a Petition for Review[16] before the CTA En Banc.

Ruling of the Court of Tax Appeals En Banc

On May 9, 2012, the CTA En Banc affirmed the cancellation and setting aside of the Audit
Results/Assessment Notices issued against SLMC. It sustained the findings of the CTA
Division that SLMC complies with all the requisites under Section 30(E) and (G) of the
1997 NIRC and thus, entitled to the tax exemption provided therein. [17]

On September 17, 2012, the CTA En Banc denied CIR's Motion for Reconsideration.

Issue

Hence, CIR filed the instant Petition under Rule 45 of the Rules of Court contending that
the CTA erred in exempting SLMC from the payment of income tax.

Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos. 195909
and 195960, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center,
Inc.,[18] finding SLMC not entitled to the tax exemption under Section 30(E) and (G) of
the NIRC of 1997 as it does not operate exclusively for charitable or social welfare
purposes insofar as its revenues from paying patients are concerned. Thus, the Court
disposed of the case in this manner:

WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No. 195909
is PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc dated 19
November 2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746 are
MODIFIED. St Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency income tax
in 1998 based on the 10% preferential income tax rate under Section 27(B) of the
National h1ternal Revenue Code. However, it is not liable for surcharges and interest on
such deficiency income tax under Sections 248 and 249 of the National Internal Revenue
Code. All other parts of the Decision and Resolution of the Court of Tax Appeals are
AFFIRMED.

The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating
Section I, Rule 45 of the Rules of Court.

SO ORDERED.[19]
Considering the foregoing, SLMC then filed a Manifestation and Motion [20] informing the
Court that on April 30, 2013, it paid the BIR the amount of basic taxes due for taxable
years 1998, 2000-2002, and 2004-2007, as evidenced by the payment
confirmation[21] from the BIR, and that it did not pay any surcharge,

interest, and compromise penalty in accordance with the above-mentioned Decision of

the Court. In view of the payment it made, SLMC moved for the dismissal of the instant
case on the ground of mootness.

CIR opposed the motion claiming that the payment confirmation submitted by SLMC is
not a competent proof of payment as it is a mere photocopy and does not even indicate
the quarter/s and/or year/s said payment covers.[22]

In reply,[23] SLMC submitted a copy of the Certification[24] issued by the Large Taxpayers
Service of the BIR dated May 27, 2013, certifying that, "[a]s far as the basic deficiency
income tax for taxable years 2000, 2001, 2002, 2004, 2005, 2006, 2007 are concerned,
this Office considers the cases closed due to the payment made on April 30, 2013." SLMC
likewise submitted a letter[25] from the BIR dated November 26, 2013 with attached
Certification of Payment[26] and application for abatement,[27] which it earlier submitted
to the Court in a related case, G.R. No. 200688, entitled Commissioner of Internal
Revenue v. St. Luke's Medical Center, Inc.[28]

Thereafter, the parties submitted their respective memorandum.

CIR's Arguments

CIR argues that under the doctrine of stare decisis SLMC is subject to 10% income tax
under Section 27(B) of the 1997 NIRC.[29] It likewise asserts that SLMC is liable to pay
compromise penalty pursuant to Section 248(A)[30] of the 1997 NIRC for failing to file its
quarterly income tax returns.[31]

As to the alleged payment of the basic tax, CIR contends that this does not render the
instant case moot as the payment confirmation submitted by SLMC is not a competent
proof of payment of its tax liabilities.[32]

SLMC's Arguments

SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling in G.R.
Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical
Center, Inc.)[33] positing that earning a profit by a charitable, benevolent hospital or
educational institution does not result in the withdrawal of its tax exempt
privilege.[34] SLMC further claims that the income it derives from operating a hospital is
not income from "activities conducted for profit."[35] Also, it maintains that in accordance
with the ruling of the Court in G.R. Nos. 195909 and 195960 (Commissioner of Internal
Revenue v. St. Luke's Medical Center, Inc.),[36] it is not liable for compromise
penalties.[37]

In any case, SLMC insists that the instant case should be dismissed in view of its payment
of the basic taxes due for taxable years 1998, 2000-2002, and 2004-2007 to the BIR on
April 30, 2013.[38]

Our Ruling

SLMC is liable for income tax under Section 27(B) of the 1997 NIRC insofar as
its revenues from paying patients are concerned.

The issue of whether SLMC is liable for income tax under Section 27(B) of the 1997 NIRC
insofar as its revenues from paying patients are concerned has been settled in G.R. Nos.
195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center,
Inc.),[39] where the Court ruled that:

xxx We hold that Section 27(B) of the NIRC does not remove the income tax exemption
of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one
hand, and Section 30(E) and (G) on the other hand, can be construed together without
the removal of such tax exemption. The effect of the introduction of Section 27(B) is to
subject the taxable income of two specific institutions, namely, proprietary non-profit
educational institutions and proprietary non-profit hospitals, among the institutions
covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the
ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section
27(A)(1).

Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit hospitals.
The only qualifications for hospitals are that they must be proprietary and non-profit.
'Proprietary' means private, following the definition of a 'proprietary educational
institution' as 'any private school maintained and administered by private individuals or
groups' with a government permit. 'Non-profit' means no net income or asset accrues to
or benefits any member or specific person, with all the net income or asset devoted to
the institution's purposes and all its activities conducted not for profit.

'Non-profit' does not necessarily mean 'charitable.' In Collector of Internal Revenue v.

Club Filipino, Inc. de Cebu, this Court considered as non-profit a sports club organized
for recreation and entertainment of its stockholders and members. The club was primarily
funded by membership fees and dues. If it had profits, they were used for overhead
expenses and improving its golf course. The club was non-profit because of its purpose
and there was no evidence that it was engaged in a profit-making enterprise.

The sports club in Club Filipino, Inc. de Cebu may be non-profit, but it was not charitable.
The Court defined 'charity' in Lung Center of the Philippines v. Quezon City as 'a gift, to
be applied consistently with existing laws, for the benefit of an indefinite number of
persons, either by bringing their minds and hearts under the influence of education or
religion, by assisting them to establish themselves in life or [by] otherwise lessening the
burden of government.' A non-profit club for the benefit of its members fails this test. An
organization may be considered as non-profit if it does not distribute any part of its
income to stockholders or members. However, despite its being a tax exempt institution,
any income such institution earns from activities conducted for profit is taxable, ad
expressly provided in the last paragraph of Section 30.

To be a charitable institution, however, an organization must meet the substantive test

of charity in Lung Center. The issue in Lung Center concerns exemption from real
property tax and not income tax. However, it provides for the test of charity in our
jurisdiction. Charity is essentially a gift to an indefinite number of persons which lessens
the burden of government. In other words, charitable institutions provide for free goods
and services to the public which would otherwise fall on the shoulders of government.
Thus, as a matter of efficiency, the government forgoes taxes which should have been
spent to address public needs, because certain private entities already assume a part of
the burden. This is the rationale for the tax exemption of charitable institutions. The loss
of taxes by the government is compensated by its relief from doing public works which
would have been funded by appropriations from the Treasury.

Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The power of
Congress to tax implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that '[n]o law granting any tax
exemption shall be passed without the concurrence of a majority of all the Members of
Congress.' The requirements for a tax exemption are strictly construed against tl1e
taxpayer because an exemption restricts the collection of taxes necessary for the
existence of the government.

The Court in Lung Center declared that the Lung Center of the Philippines is a charitable
institution for the purpose of exemption from real property taxes. This ruling uses the
same premise as Hospital de San Juan and Jesus Sacred Heart College which says that
receiving income from paying patients does not destroy the charitable nature of a
hospital.

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether
outpatient, or confined in the hospital, or receives subsidies from the government, so
long as the money received is devoted or used altogether to the charitable object which
it is intended to achieve; and no money inures to the private benefit of the persons
managing or operating the institution.

For real property taxes, the incidental generation of income is permissible because the
test of exemption is the use of the property. The Constitution provides that '[c]haritable
institutions, churches and personages or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation.' The test of exemption is not strictly a requirement on the intrinsic nature or
character of the institution. The test requires that the institution use property in a certain
way, i.e., for a charitable purpose. Thus, the Court held that the Lung Center of the
Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to
remove from the tax exemption that portion of the property not devoted to charity.

The Constitution exempts charitable institutions only from real property taxes. In the
NIRC, Congress decided to extend the exemption to income taxes. However, the way
Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3),
Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or
association that is exempt from income tax. On the other hand, Section 28(3), Article VI
of the Constitution does not define a charitable institution, but requires that the institution
'actually, directly and exclusively' use the property for a charitable purpose.

Section 30(E) of the NIRC provides that a charitable institution must be:

(1) A non-stock corporation or association;

(2) Organized exclusively for charitable purposes;

(3) Operated exclusively for charitable purposes; and

(4) No part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.

Thus, both the organization and operations of the charitable institution must be devoted
'exclusively' for charitable purposes. The organization of the institution refers to its
corporate form, as shown by its articles of incorporation, by-laws and other constitutive
documents. Section 30(E) of the NIRC specifically requires that the corporation or
association be non-stock, which is defined by the Corporation Code as 'one where no part
of its income is distributable as dividends to its members, trustees, or officers' and that
any profit 'obtain[ed] as an incident to its operations shall, whenever necessary or proper,
be used tor the furtherance of the purpose or purposes for which the corporation was
organized.' However, under Lung Center, any profit by a charitable institution must not
only be plowed back 'whenever necessary or proper,' but must be 'devoted or used
altogether to the charitable object which it is intended to achieve.'

The operations of the charitable institution generally refer to its regular activities. Section
30(E) of the NIRC requires that these operations be exclusive to charity. There is also a
specific requirement that 'no part of [the] net income or asset shall belong to or inure to
the benefit of any member, organizer, officer or any specific person.' The use of lands,
buildings and improvements of the institution is but a part of its operations.

There is no dispute that St. Luke's is organized as a non-stock and non profit charitable
institution. However, this does not automatically exempt St Luke's from paying taxes.
This only refers to the organization of St. Luke's. Even if St. Luke's meets the test of
charity, a charitable institution is not ipso facto tax exempt To be exempt from real
property taxes, Section 28(3), Article VI of the Constitution requires that a charitable
institution use the property 'actually, directly and exclusively' for charitable purposes. To
be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable
institution must be 'organized and operated exclusively' for charitable purposes. Likewise,
to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution
be 'operated exclusively' for social welfare.

However, the last paragraph of Section 30 of the NIRC qualifies the words 'organized and
operated exclusively' by providing that:

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any of their properties, real or personal,
or from any of their activities conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed under this Code.
In short, the last paragraph of Section 30 provides that if a tax exempt charitable
institution conducts 'any' activity for profit, such activity is not tax exempt even as its
not-for-profit activities remain tax exempt. This paragraph qualifies the requirements in
Section 30(E) that the [n]on-stock corporation or association [must be] organized and
operated exclusively for . . . charitable . . . purposes . . . It likewise qualifies the
requirement in Section 30(G) that the civic organization must be 'operated exclusively'
for the promotion of social welfare.

Thus, even if the charitable institution must be 'organized and operated exclusively' for
charitable purposes, it is nevertheless allowed to engage in 'activities conducted for profit'
without losing its tax exempt status for its not for profit activities. The only consequence
is that the 'income of whatever kind and character' of a charitable institution 'from any
of its activities conducted for profit, regardless of the disposition made of such income,
shall be subject to tax.' Prior to the introduction of Section 27(B), the tax rate on such
income from for profit activities was the ordinary corporate rate under Section 27(A).
With the introduction of Section 27(B), the tax rate is now 10%.

In 1998, St. Luke's had total revenues of P1,730,367,965 from services to paying
patients. It cannot be disputed that a hospital which receives approximately P1.73 billion
from paying patients is not an institution 'operated exclusively' for charitable purposes.
Clearly, revenues from paying patients are income received from 'activities conducted for
profit.' Indeed, St. Luke's admits that it derived profits from its paying patients. St. Luke's
declared P1,730,367,965 as 'Revenues from Services to Patients' in contrast to its 'Free
Services' expenditure of P218,187,498. In its Comment in G.R. No. 195909, St. Luke's
showed the following 'calculation' to support its claim that 65.20% of its 'income after
expenses was allocated to free or charitable services' in 1998.

xxxx

In Lung Center, this Court declared:

'[e]xclusive' is defined as possessed and enjoyed to the exclusion of others; debarred

from participation or enjoyment; and 'exclusively' is defined, 'in a manner to exclude; as
enjoying a privilege exclusively.' ... The words 'dominant use' or 'principal use' cannot be
substituted for the words 'used exclusively' without doing violence to the Constitution
and the law. Solely is synonymous with exclusively.

The Court cannot expand the meaning of the words 'operated exclusively' without
violating the NIRC. Services to paying patients are activities conducted for profit. They
cannot be considered any other way. There is a 'purpose to make profit over and above
the cost' of services. The P1.73 billion total revenues :from paying patients is not even
incidental to St. Luke's charity expenditure of P218,187,498 for non-paying patients.

St Luke's claims that its charity expenditure of P218,187,498 is 65.20% of its operating
income in 1998. However, if a part of the remaining 34.80% of the operating income is
reinvested in property, equipment or facilities used for services to paying and non-paying
patients, then it cannot be said that the income is 'devoted or used altogether to the
charitable object which it is intended to achieve.' The income is plowed back to the
corporation not entirely for charitable purposes, but for profit as well. In any case, the
last paragraph of Section 30 of the NIRC expressly qualifies that income from activities
for profit is taxable 'regardless of the disposition made of such income.'
Jesus Sacred Heart College declared that there is no official legislative record explaining
the phrase 'any activity conducted for profit.' However, it quoted a deposition of Senator
Mariano Jesus Cuenco, who was a member of the Committee of Conference for the
Senate, which introduced the phrase 'or from any activity conducted for profit.'

P. Cuando ha hablado de la Universidad de Santo Tomas que tiene un hospital, no cree

Vd. que es una actividad esencial dicho hospital para el funcionamiento del colegio de
medicina de medicina de dicha universidad?

xxx xxx xxx

R. Si el hospital se limita a recibir enformos pobres, mi contestacion seria afirmativa;

pero considerando que el hospital tiene cuartos de pago, y a los mismos generalmente
van enformos de buena posicion social economica, lo que se paga por estos enformos
debe estar sujeto a 'income tax', y es una de las razones que hemos tenido para insertar
las palabras o frase 'or from any activity conducted for profit.'
The question was whether having a hospital is essential to an educational institution like
the College of Medicine of the University of Santo Tomas. Senator Cuenco answered that
if the hospital has paid rooms generally occupied by people of good economic standing,
then it should be subject to income tax. He said that this was one of the reasons Congress
inserted the phrase 'or any activity conducted for profit.'

The question in Jesus Sacred Heart College involves an educational institution. However,
it is applicable to charitable institutions because Senator Cuenco's response shows an
intent to focus on the activities of charitable institutions. Activities for profit should not
escape the reach of taxation. Being a non-stock and non-profit corporation does not, by
this reason alone, completely exempt an institution from tax. An institution cannot use
its corporate form to prevent its profitable activities from being taxed.

The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for
charitable or social welfare purposes insofar as its revenues from paying patients are
C.Qncemed. This ruling is bacred not only on a strict interpretation of a provision granting
tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section
30(E) and (G) of the NIRC requires that an institution be 'operated exclusively' for
charitable or social welfare purposes to be completely exempt from income tax. An
institution tmder Section 30(E) or (G) does not lose its tax exemption if it earns income
from its for-profit activities. Such income from for-profit activities, tmder the last
paragraph of Section 30, is merely subject to income tax, previously at the ordinary
corporate rate but now at the preferential tO% rate pursuant to Section 27(B).

A tax exemption is effectively a social subsidy granted by the State because an exempt
institution is spared from sharing in the expenses of government and yet benefits from
them. Tax exemptions for charitable institutions should therefore be limited to institutions
beneficial to the public and those which improve social welfare. A profit-making entity
should not be allowed to exploit this subsidy to the detriment of the government and
other taxpayers.

St. Luke's fails to meet the requirements tmder Section 30(E) and (G) of the NlRC to be
completely tax exempt from all its income. However, it remains a proprietary non-profit
hospital tmder Section 27(B) of the NIRC as long as it does not distribute any of its profits
to its members and such profits are reinvested pursuant to its corporate purposes. St.
Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10%
on its net income from its for-profit activities.

St. Luke's is therefore liable for deficiency income tax in 1998 tmder Section 27(B) of the
NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by
the BIR, which opined that St. Luke's is 'a corporation for purely charitable and social
welfare purposes' and thus exempt from income tax. In Michael J. Lhuillier, Inc. v.
Commissioner of Internal Revenue, the Court said that 'good faith and honest belief that
one is not subject to tax on the basis of previous interpretation of government agencies
tasked to implement the tax law, are sufficient justification to delete the imposition of
surcharges and interest.'[40]

A careful review of the pleadings reveals that there is no countervailing consideration for
the Court to revisit its aforequoted ruling in G.R. Nos. 195909 and 195960 (Commissioner
of Internal Revenue v. St. Luke's Medical Center, Inc.). Thus, under the doctrine of stare
decisis, which states that "[o]nce a case has been decided in one way, any other case
involving exactly the same point at issue xxx should be decided in the same
manner,"[41] the Court finds that SLMC is subject to 10% income tax insofar as its
revenues from paying patients are concerned.

To be clear, for an institution to be completely exempt from income tax, Section 30(E)
and (G) of the 1997 NIRC requires said institution to operate exclusively for charitable or
social welfare purpose. But in case an exempt institution under Section 30(E) or (G) of
the said Code earns income from its for-profit activities, it will not lose its tax exemption.
However, its income from for profit activities will be subject to income tax at the
preferential 10% rate pursuant to Section 27(B) thereof.

SLMC is not liable for Compromise Penalty.

As to whether SLMC is liable for compromise penalty under Section 248(A) of the 1997
NIRC for its alleged failure to file its quarterly income tax returns, this has also been
resolved in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St.
Luke's Medical Center, Inc.),[42] where the imposition of surcharges and interest under
Sections 248[43] and 249[44] of the 1997 NIRC were deleted on the basis of good faith and
honest belief on the part SLMC that it is not subject to tax. Thus, following the ruling of
the Court in the said case, SLMC is not liable to pay compromise penalty under Section
248(A) of the 1997 NIRC.

The Petition is rendered moot by the payment made by SLMC on April 30, 2013.

However, in view of the payment of the basic taxes made by SLMC on April 30, 2013, the
instant Petition has become moot.

While the Court agrees with the CIR that the payment confirmation from the BIR
presented by SLMC is not a competent proof of payment as it does not indicate the specific
taxable period the said payment covers, the Court fmds that the Certification issued by
the Large Taxpayers Service of the BIR dated May 27, 2013, and the letter from the BIR
dated November 26, 2013 with attached Certification of Payment and application for
abatement are sufficient to prove payment especially since CIR never questioned the
authenticity of these documents. In fact, in a related case, G.R. No. 200688,
entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, Inc.,[45] the
Court dismissed the petition based on a letter issued by CIR confirming SLMC's payment
of taxes, which is the same letter submitted by SLMC in the instant case.

In fine, the Court resolves to dismiss the instant Petition as the same has been rendered
moot by the payment made by SLMC of the basic taxes for the taxable years 2005 and
2006, in the amounts of P49,919,496.40 and P41,525,608.40, respectively.[46]

WHEREFORE, the Petition is hereby DISMISSED.

SO ORDERED.

CIR vs. De La Salle University (2016)

G.R. No. 196596 and G.R. No. 198841 and G.R. No. 198941 | 2016-11-09

Subject: The revenues and assets of non-stock, non-profit educational institutions

proved to have been used actually, directly, and exclusively for educational purposes are
exempt from duties and taxes; Last paragraph of Section 30 of the Tax Code is declared
INVALID — the tax-exemption constitutionally granted to non-stock, non profit
educational institutions is not subject to limitations imposed by law; Article XIV, Section
4 (3) does not require that the revenues must have been sourced from educational
activities; so long as the revenues are used actually, directly and exclusively for
educational purposes, then the same shall be tax- e;xempt; Taxation of Revenues vs.
Taxation of Assets; Non-stock, non-profit educational institution vs. Proprietary
educational institution; LOA issued to DLSU is not entirely void; assessment for taxable
year 2003 is valid; The CTA correctly admitted the supplemental evidence formally
offered by DLSU; The CTA's appreciation of evidence is generally binding on the Court
unless compelling reasons justify otherwise; DLSU used actually, directly, and exclusively
for educational purposes a portion of its assessed income; Ateneo case not a basis to
dismiss the assessment against DLSU; No violation on the rule on uniformity of taxation;
DLSU proved its payment of the DST

Facts:

Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to De La Salle University,
Inc. (DLSU) a Letter of Authority (LOA) authorizing its revenue officers to examine the
latter's books of accounts for the period Fiscal Year Ending 2003 and Unverified Prior
Years.

On August 18, 2004, the BIR through a Formal Letter of Demand assessed the following
deficiency taxes: (a) income tax on rental earnings from restaurants/canteens and
bookstores operating within the campus; (b) value-added tax (VAT) on business income;
and (c) documentary stamp tax (DST) on loans and lease contracts. The BIR demanded
the payment of P17,303,001.12, inclusive of surcharge, interest and penalty for taxable
years 2001, 2002 and 2003.
DLSU protested the assessment. The Commissioner failed to act on the protest. Thus,
DLSU filed a petition for review with the CTA Division.

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

Article XIV, Section 4 (3) of the Constitution which provided that “xx 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”

The CTA Division partially granted DLSU's petition for review.

The BIR Commissioner (CIR) appealed to the 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.

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.The Commissioner did not promptly object to the formal offer of supplemental
evidence despite notice.

The CTA Division, in view of the supplemental evidence submitted, reduced the amount
of DLSU's tax deficiencies to P5,506,456.71.

Meanwhile, DLSU also filed a separate petition for review with the CTA En Banc (Case No.
671).

CTA En Banc Rulings

Case No. 622

(a) 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. DLSU's supporting evidence confirmed 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.

(b) DLSU has sufficiently proved its remittance of the DST due on its loan and mortgage
documents

(c) 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

Case No. 671

(a) 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.

(b) DLSU argued that the assessment should be dismissed since it submitted evidence
similar to those submitted by Ateneo De Manila University in a separate case where the
CTA cancelled Ateneo's tax assessment. 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.

(c) 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, however, the
rental income from other sources were not shown to have been actually, directly and
exclusively used for educational purposes.

Both DLSU and the Commissioner came to the Supreme Court to question the CTA En
Banc's rulings.

Held:

The revenues and assets of non-stock, non-profit educational institutions

proved to have been used actually, directly, and exclusively for educational
purposes are exempt from duties and taxes

1. Article XIV, Section 4 (3) of the 1987 Constitution refers to two kinds of educational
institutions: (1) non-stock, non-profit educational institutions and (2) proprietary
educational institutions. DLSU falls under the first category.

2. The term educational institution, when used in laws granting tax exemptions, refers
to the school system (synonymous with formal education); it includes a college or an
educational establishment; it refers to the hierarchically structured and chronologically
graded learnings organized and provided by the formal school system.

3. There is a marked distinction between the tax treatment of the two types of
educational institutions. The tax exemption granted to non-stock, non-profit educational
institutions is conditioned only on the actual, direct and exclusive use of their revenues
and assets for educational purposes. While tax exemptions may also be granted to
proprietary educational institutions, these exemptions may be subject to limitations
imposed by Congress.

Last paragraph of Section 30 of the Tax Code is declared INVALID — The tax-
exemption constitutionally granted to non-stock, non profit educational
institutions is not subject to limitations imposed by law

4. Section 30 (H) of the Tax Code reads:

“ the income of whatever kind and character of the foregoing organizations [non-stock
and non-profit educational institution] from any of their properties, real or personal, or
from any of their activities conducted for profit regardless of the disposition made of such
income shall be subject to tax imposed under this Code.”

5. The Commissioner posits that the Tax Code qualified the tax exemption granted to
non-stock, non-profit educational institutions such that the revenues and income they
derived from their assets, or from any of their activities conducted for profit, are taxable
even if these revenues and income are used for educational purposes. The Court
disagrees.

6. In Commissioner of Internal Revenue v. YMCA, the court has already laid out that:

(a) The last paragraph of Section 30 of the Tax Code is without force and effect with
respect to non-stock, non-profit educational institutions, provided, that the non-stock,
non-profit educational institutions prove that its assets and revenues are used actually,
directly and exclusively for educational purposes.

(b) The tax-exemption constitutionally-granted to non-stock, non profit educational

institutions, is not subject to limitations imposed by law.

7. We declare the last paragraph of Section 30 of the Tax Code without force and effect
for being contrary to the Constitution insofar as it subjects to tax the income and
revenues of non-stock, non-profit educational institutions used actually, directly and
exclusively for educational purpose.

Article XIV, Section 4 (3) does not require that the revenues must have been
sourced from educational activities; so long as the revenues are used actually,
directly and exclusively for educational purposes, then the same shall be tax-
exempt

8. Unlike Article VI, Section 28 (3) of the Constitution (pertaining to charitable

institutions, churches, parsonages or convents, mosques, and non-profit cemeteries),
which exempts from tax only the assets, i.e., "all lands, buildings, and
improvements, actually, directly, and exclusively used for religious, charitable, or
educational purposes...," Article XIV, Section 4 (3) categorically states that "all
revenues and assets... used actually, directly, and exclusively for educational purposes
shall be exempt from taxes and duties.

9. Further, a plain reading of the Constitution would show that Article XIV, Section 4 (3)
does not require that the revenues and income must have also been sourced from
educational activities or activities related to the purposes of an educational institution.
The phrase all revenues is unqualified by any reference to the source of revenues. Thus,
so long as the revenues and income are used actually, directly and exclusively for
educational purposes, then said revenues and income shall be exempt from taxes and
duties.

Taxation of Revenues vs. Taxation of Assets

10. Revenues consist of the amounts earned by a person or entity from the conduct of
business operations. It may refer to the sale of goods, rendition of services, or the return
of an investment. Revenue is a component of the tax base in income tax, VAT, and local
business tax (LBT).

11. Assets, on the other hand, are the tangible and intangible properties owned by a
person or entity. It may refer to real estate, cash deposit in a bank, investment in the
stocks of a corporation, inventory of goods, or any property from which the person or
entity may derive income or use to generate the same. In Philippine taxation, the fair
market value of real property is a component of the tax base in real property tax (RPT).
Also, the landed cost of imported goods is a component of the tax base in VAT on
importation and tariff duties.

12. Thus, when a non-stock, non-profit educational institution proves that it uses its
revenues actually, directly, and exclusively for educational purposes, it shall be exempted
from income tax, VAT, and LBT. On the other hand, when it also shows that it uses its
assets in the form of real property for educational purposes, it shall be exempted from
RPT.

13. To be clear, proving the actual use of the taxable item will result in an exemption,
but the specific tax from which the entity shall be exempted from shall depend on whether
the item is an item of revenue or asset. To illustrate, if a university leases a portion of its
school building to a bookstore or cafeteria, the leased portion is not actually, directly and
exclusively used for educational purposes, even if the bookstore or canteen caters only
to university students, faculty and staff.

14. The leased portion of the building may be subject to real property tax, as held in
Abra Valley College, Inc. v. Aquino. We ruled in that case that the test of exemption from
taxation is the use of the property for purposes mentioned in the Constitution. We also
held that the exemption extends to facilities which are incidental to and reasonably
necessary for the accomplishment of the main purposes.

15. The lease of a portion of a school building for commercial purposes, removes such
asset from the property tax exemption granted under the Constitution. There is no
exemption because the asset is not used actually, directly and exclusively for educational
purposes. The commercial use of the property is also not incidental to and reasonably
necessary for the accomplishment of the main purpose of a university, which is to educate
its students.

16. However, if the university actually, directly and exclusively uses for educational
purposes the revenues earned from the lease of its school building, such revenues
shall be exempt from taxes and duties. The tax exemption no longer hinges on the use
of the asset from which the revenues were earned, but on the actual, direct and exclusive
use of the revenues for educational purposes. To avail of the exemption, the taxpayer
must factually prove that it used actually, directly and exclusively for educational
purposes the revenues or income sought to be exempted.

17. The crucial point of inquiry then is on the use of the assets or on the use of the
revenues. These are two things that must be viewed and treated separately.

Non-stock, non-profit educational institution vs. Proprietary educational

institution

18. While a non-stock, non-profit educational institution is classified as a tax-exempt

entity under Section 30 (Exemptions from Tax on Corporations) of the Tax Code, a
proprietary educational institution is covered by Section 27 (Rates of Income Tax on
Domestic Corporations).

19. Section 30 provides that exempt organizations like non-stock, non-profit educational
institutions shall not be taxed on income received by them as such.
20. Section 27 (B), on the other hand, states that proprietary educational
institutions...which are nonprofit shall pay a tax of ten percent (10%) on their taxable
income...Provided, that if the gross income from unrelated trade, business or other
activity exceeds fifty percent (50%) of the total gross income derived by such educational
institutions...[the regular corporate income tax of 30%] shall be imposed on the entire
taxable income.

21. A proprietary educational institution is entitled only to the reduced rate of 10%
corporate income tax. The reduced rate is applicable only if: (1) the proprietary
educational institution is non profit and (2) its gross income from unrelated trade,
business or activity does not exceed 50% of its total gross income. Consistent with Article
XIV, Section 4 (3) of the Constitution, these limitations do not apply to non-stock, non-
profit educational institutions.

LOA issued to DLSU is not entirely void; assessment for taxable year 2003 is
valid

22. The relevant provision is Section C of RMO No. 43-90, the pertinent portion of which
reads:

3. A Letter of Authority [LOA] should cover a taxable period not exceeding one taxable
year. The practice of issuing [LOAs] covering audit of unverified prior years is hereby
prohibited. If the audit of a taxpayer shall include more than one taxable period, the
other periods or years shall be specifically indicated in the [LOA].

23. What this provision clearly prohibits is the practice of issuing LOAs covering audit of
unverified prior years. RMO 43-90 does not say that a LOA which contains unverified prior
years is void. It merely prescribes that if the audit includes more than one taxable period,
the other periods or years must be specified. The provision read as a whole requires that
if a taxpayer is audited for more than one taxable year, the BIR must specify each taxable
year or taxable period on separate LOAs. Without this rule, a revenue officer can unduly
burden the taxpayer by demanding random accounting records from random unverified
years, which may include documents from as far back as ten years in cases of fraud audit

24. The LOA issued to DLSU is for Fiscal Year Ending 2003 and Unverified Prior Years.
The LOA does not strictly comply with RMO 43-90 because it includes unverified prior
years. This does not mean, however, that the entire LOA is void. As the CTA correctly
held, the assessment for taxable year 2003 is valid because this taxable period is
specified in the LOA. Corollarily, the assessments for taxable years 2001 and 2002 are
void for having been unspecified on separate LOAs as required under RMO No. 43-90.

The CTA correctly admitted the supplemental evidence formally offered by DLSU

25. DLSU formally offered its supplemental evidence upon filing its motion for
reconsideration with the CTA Division. The CTA Division admitted the supplemental
evidence, which proved that a portion of DLSU's rental income was used actually, directly
and exclusively for educational purposes. Consequently, the CTA Division reduced DLSU's
tax liabilities.
26. First, the failure to timely object to the offered evidence renders it admissible, and
the court cannot, on its own, disregard such evidence. The Court has held that if a party
desires the court to reject the evidence offered, it must so state in the form of a timely
objection and it cannot raise the objection to the evidence for the first time on appeal.
Because of a party's failure to timely object, the evidence offered becomes part of the
evidence in the case. As a consequence, all the parties are considered bound by any
outcome arising from the offer of evidence properly presented.

27. The Commissioner objected to the admission of the supplemental evidence only
when the case was on appeal to the CTA En Banc. By the time the Commissioner raised
her objection, it was too late; the formal offer, admission and evaluation of the
supplemental evidence were all fait accompli.

28. Second, the CTA is not governed strictly by the technical rules of evidence. The CTA
Division's admission of the formal offer of supplemental evidence, without prompt
objection from the Commissioner, was thus justified.

29. While it is true that strict procedural rules generally frown upon the submission of
documents after the trial, the law creating the CTA specifically provides that proceedings
before it shall not be governed strictly by the technical rules of evidence and that the
paramount consideration remains the ascertainment of truth. We ruled that procedural
rules should not bar courts from considering undisputed facts to arrive at a just
determination of a controversy.

The CTA's appreciation of evidence is generally binding on the Court unless

compelling reasons justify otherwise

30. It is doctrinal that the [Supreme] 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. 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.

(a) DLSU used actually, directly, and exclusively for educational purposes a
portion of its assessed income

31. Documents showed that DLSU borrowed P93.86 Million, which was used to build the
university's Sports Complex.

32. DLSU earned a rental income of P10,610,379.00 in taxable year 2003. DLSU
identified the transactions where the rental income was expended, viz.: 1)
P4,007,724.00127 used to pay the loan obtained by DLSU to build the Sports Complex;
and 2) P6,602,655.00 transferred to the CF-CPA Account.

33. The CTA concluded that the ratio of substantiated disbursements to the total
disbursements from the CF-CPA Account for taxable year 2003 is only 26.68%. The
26.68% ratio was the result of dividing the substantiated disbursements from the CF-
CPA Account as found by the Independent CPA (P6,259,078.30) by the total
disbursements (P23,463,543.02) from the CF-CPA Account. The CTA then concluded that
only the portion (26.68%) of the rental income pertaining to the substantiated
disbursements from the CF-CPA Account was considered as used actually, directly and
exclusively for educational purposes. Consequently, the unaccounted and
unsubstantiated disbursements must be subjected to income tax and VAT.

34. We find that this system of calculation is incorrect and does not truly give effect to
the constitutional grant of tax exemption to non-stock, nonprofit educational institutions.
The CTA's reasoning is flawed because it required DLSU to substantiate an amount that
is greater than the rental income deposited in the CF-CPA Account in 2003.

35. DLSU never claimed that the total CF-CPA disbursements of P23.46 million had been
for educational purposes and should thus be tax-exempt; DLSU only claimed P10.61
million (rental income) for tax exemption. Of this amount, P4.01 had been proven to have
been used for educational purposes, as confirmed by the Independent CPA. The amount
in issue is therefore the balance of P6.60 million which was transferred to the CF-CPA
which in turn made disbursements of P23.46 million for various general purposes.
Significantly, the Independent CPA confirmed that the CF-CPA made disbursements for
educational purposes in year 2003 in the amount P6.26 million.

36. That the CF-CPA might have had other sources of funding is irrelevant because the
assessment in the present case pertains only to the rental income which DLSU
indisputably earned as revenue in 2003. That the proven CF-CPA funds used for
educational purposes should not be prorated as part of its total CF-CPA disbursements
for purposes of crediting to DLSU is also logical because no claim whatsoever had been
made that the totality of the CF-CPA disbursements had been for educational purposes.
No prorating is necessary; to state the obvious, exemption is based on actual and direct
use and this DLSU has indisputably proven.

37. In short, while the total disbursements from the CF-CPA Account amounted to
P23,463,543.02, DLSU only had to substantiate its P10.6 million rental income, part of
which was the P6,602,655.00 transferred to the CF-CPA account. Of this latter amount,
P6.259 million was substantiated to have been used for educational purposes.

(b) Ateneo case not a basis to dismiss the assessment against DLSU

38. Even granting that Ateneo and DLSU submitted similar evidence, the sufficiency and
materiality of the evidence supporting their respective claims for tax exemption would
necessarily differ because their attendant issues and facts differ.

39. Although both Ateneo and DLSU claimed that they used their rental income actually,
directly and exclusively for educational purposes by submitting similar evidence, e.g., the
testimony of their employees on the use of university revenues, the report of the
Independent CPA, their income summaries, financial statements, vouchers, etc., the fact
remains that DLSU failed to prove that a portion of its income and revenues had indeed
been used for educational purposes.

No violation on the rule on uniformity of taxation

40. DLSU misunderstands the concept of uniformity of taxation. Equality and uniformity
of taxation means that all taxable articles or kinds of property of the same class shall be
taxed at the same rate. A tax is uniform when it operates with the same force and effect
in every place where the subject of it is found.148The concept requires that all subjects
of taxation similarly situated should be treated alike and placed in equal footing.

41. In our view, the CTA placed Ateneo and DLSU in equal footing. The CTA treated them
alike because their income proved to have been used actually, directly and exclusively
for educational purposes were exempted from taxes. The CTA equally applied the
requirements in the YMCA case to test if they indeed used their revenues for educational
purposes.

(c) DLSU proved its payment of the DST

42. The CTA affirmed DLSU's claim that the DST due on its mortgage and loan
transactions were paid and remitted through its bank's On-Line Electronic DST Imprinting
Machine. The Commissioner argues that DLSU is not allowed to use this method of
payment because an educational institution is excluded from the class of taxpayers who
can use the On-Line Electronic DST Imprinting Machine.

43. DLSU entered into mortgage and loan agreements with banks. These agreements
are subject to DST.151 For the purpose of showing that the DST on the loan agreement
has been paid, DLSU presented its agreements bearing the imprint showing that DST on
the document has been paid by the bank, its counterparty. The imprint should be
sufficient proof that DST has been paid. Thus, DLSU cannot be further assessed for
deficiency DST on the said documents.

44. Finally, it is true that educational institutions are not included in the class of
taxpayers who can pay and remit DST through the On-Line Electronic DST Imprinting
Machine under RR No. 9-2000. As correctly held by the CTA, this is irrelevant because it
was not DLSU who used the On-Line Electronic DST Imprinting Machine but the bank that
handled its mortgage and loan transactions. RR No. 9-2000 expressly includes banks in
the class of taxpayers that can use the On-Line Electronic DST Imprinting Machine.

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., Petitioner,

versus THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON.
ACTING SECRETARY OF FINANCE JUANITA D. AMATONG, and THE HON.
COMMISSIONER OF INTERNAL REVENUE GUILLERMO PARAYNO, JR.,
Respondents.

G.R. No. 160756 | 2010-03-09

Tagged under keywords

A discussion citing this case or law is available.
Due Process; Procedural and substantive

DECISION

CORONA, J.:

In this original petition for certiorari and mandamus,[1] petitioner Chamber of Real Estate and Builders'
Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic Act (RA) 8424[2] and
the revenue regulations (RRs) issued by the Bureau of Internal Revenue (BIR) to implement said
provision and those involving creditable withholding taxes.[3]

Petitioner is an association of real estate developers and builders in the Philippines. It impleaded former
Executive Secretary Alberto Romulo, then acting Secretary of Finance Juanita D. Amatong and then
Commissioner of Internal Revenue Guillermo Parayno, Jr. as respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on
corporations and creditable withholding tax (CWT) on sales of real properties classified as ordinary
assets.

Section 27(E) of RA 8424 provides for MCIT on domestic corporations and is implemented by RR 9-98.
Petitioner argues that the MCIT violates the due process clause because it levies income tax even if
there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2(J) (as amended by RR 6-2001) and 2.58.2 of RR 2-98, and
Section 4(a)(ii) and (c)(ii) of RR 7-2003, all of which prescribe the rules and procedures for the collection
of CWT on the sale of real properties categorized as ordinary assets. Petitioner contends that these
revenue regulations are contrary to law for two reasons: first, they ignore the different treatment by RA
8424 of ordinary assets and capital assets and second, respondent Secretary of Finance has no authority
to collect CWT, much less, to base the CWT on the gross selling price or fair market value of the real
properties classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations violate the
due process clause because, like the MCIT, the government collects income tax even when the net
income has not yet been determined. They contravene the equal protection clause as well because the
CWT is being levied upon real estate enterprises but not on other business enterprises, more particularly
those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;

(2) whether or not the imposition of the MCIT on domestic corporations is unconstitutional and
(3) whether or not the imposition of CWT on income from sales of real properties classified as ordinary
assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

Overview of the Assailed Provisions

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is assessed an MCIT of
2% of its gross income when such MCIT is greater than the normal corporate income tax imposed under
Section 27(A).[4] If the regular income tax is higher than the MCIT, the corporation does not pay the
MCIT. Any excess of the MCIT over the normal tax shall be carried forward and credited against the
normal income tax for the three immediately succeeding taxable years. Section 27(E) of RA 8424
provides:

Section 27 (E). [MCIT] on Domestic Corporations. -

(1) Imposition of Tax. - A [MCIT] of two percent (2%) of the gross income as of the end of the taxable
year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the
fourth taxable year immediately following the year in which such corporation commenced its business
operations, when the minimum income tax is greater than the tax computed under Subsection (A) of
this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. - Any excess of the [MCIT] over the normal income tax as
computed under Subsection (A) of this Section shall be carried forward and credited against the normal
income tax for the three (3) immediately succeeding taxable years.

(3) Relief from the [MCIT] under certain conditions. - The Secretary of Finance is hereby authorized to
suspend the imposition of the [MCIT] on any corporation which suffers losses on account of prolonged
labor dispute, or because of force majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the

Commissioner, the necessary rules and regulations that shall define the terms and conditions under
which he may suspend the imposition of the [MCIT] in a meritorious case.

(4) Gross Income Defined. - For purposes of applying the [MCIT] provided under Subsection (E) hereof,
the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of
goods sold. "Cost of goods sold" shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.

For trading or merchandising concern, "cost of goods sold" shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing overhead,
freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or
warehouse.

In the case of taxpayers engaged in the sale of service, "gross income" means gross receipts less sales
returns, allowances, discounts and cost of services. "Cost of services" shall mean all direct costs and
expenses necessarily incurred to provide the services required by the customers and clients including (A)
salaries and employee benefits of personnel, consultants and specialists directly rendering the service
and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of
equipment used and cost of supplies: Provided, however, that in the case of banks, "cost of services"
shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of the
Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27(E).[5] The
pertinent portions thereof read:

Sec. 2.27(E) [MCIT] on Domestic Corporations. -

(1) Imposition of the Tax. - A [MCIT] of two percent (2%) of the gross income as of the end of the taxable
year (whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed
upon any domestic corporation beginning the fourth (4th) taxable year immediately following the
taxable year in which such corporation commenced its business operations. The MCIT shall be imposed
whenever such corporation has zero or negative taxable income or whenever the amount of minimum
corporate income tax is greater than the normal income tax due from such corporation.

For purposes of these Regulations, the term, "normal income tax" means the income tax rates
prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code xxx at 32% effective January 1, 2000 and
thereafter.

xxx xxx xxx

(2) Carry forward of excess [MCIT]. - Any excess of the [MCIT] over the normal income tax as computed
under Sec. 27(A) of the Code shall be carried forward on an annual basis and credited against the normal
income tax for the three (3) immediately succeeding taxable years.

xxx xxx xxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent CIR,
promulgated RR 2-98 implementing certain provisions of RA 8424 involving the withholding of taxes.[6]
Under Section 2.57.2(J) of RR No. 2-98, income payments from the sale, exchange or transfer of real
property, other than capital assets, by persons residing in the Philippines and habitually engaged in the
real estate business were subjected to CWT:
Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the
sale, exchange or transfer of. - Real property, other than capital assets, sold by an individual,
corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in
the real estate business in accordance with the following schedule -

Those which are exempt from a withholding tax at source as prescribed in Sec. 2.57.5 of these
regulations.

Exempt

With a selling price of five hundred thousand pesos (P500,000.00) or less. Gross selling price shall mean
the consideration stated in the sales document or the fair market value determined in accordance with
Section 6 (E) of the Code, as amended, whichever is higher. In an exchange, the fair market value of the
property received in exchange, as determined in the Income Tax Regulations shall be used.

1.5%

With a selling price of more than five hundred thousand pesos (P500,000.00) but not more than two
million pesos (P2,000,000.00).

3.0%

With selling price of more than two million pesos (P2,000,000.00)

5.0%

xxx xxx xxx

Where the consideration or part thereof is payable on installment, no withholding tax is required to be
made on the periodic installment payments where the buyer is an individual not engaged in trade or
business. In such a case, the applicable rate of tax based on the entire consideration shall be withheld on
the last installment or installments to be paid to the seller.

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall
be deducted and withheld by the buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxx xxx xxx

(J)Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the
sale, exchange or transfer of real property classified as ordinary asset. - A [CWT] based on the gross
selling price/total amount of consideration or the fair market value determined in accordance with
Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange
of real property, other than capital asset, shall be imposed upon the withholding agent,/buyer, in
accordance with the following schedule:

Where the seller/transferor is exempt from [CWT] in accordance with Sec. 2.57.5 of these regulations.

Exempt

Upon the following values of real property, where the

seller/transferor is habitually engaged in the real
estate business.

With a selling price of Five Hundred Thousand Pesos

(P500,000.00) or less. 1.5%

With a selling price of more than Five Hundred Thousand

Pesos (P500,000.00) but not more than Two Million
Pesos (P2,000,000.00). 3.0%

With a selling price of more than two Million

Pesos (P2,000,000.00). 5.0%

xxx xxx xxx

Gross selling price shall remain the consideration stated in the sales document or the fair market value
determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. In an
exchange, the fair market value of the property received in exchange shall be considered as the
consideration.

xxx xxx xxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules
shall apply:
(i) If the sale is a sale of property on the installment plan (that is, payments in the year of sale do not
exceed 25% of the selling price), the tax shall be deducted and withheld by the buyer on every
installment.

(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not on the
installment plan" (that is, payments in the year of sale exceed 25% of the selling price), the buyer shall
withhold the tax based on the gross selling price or fair market value of the property, whichever is
higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer unless the [CWT]
due on the sale, transfer or exchange of real property other than capital asset has been fully paid.
(Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58(E) of RA 8424 provides that any sale, barter or
exchange subject to the CWT will not be recorded by the Registry of Deeds until the CIR has certified
that such transfers and conveyances have been reported and the taxes thereof have been duly paid:[7]

Sec. 2.58.2. Registration with the Register of Deeds. - Deeds of conveyances of land or land and
building/improvement thereon arising from sales, barters, or exchanges subject to the creditable
expanded withholding tax shall not be recorded by the Register of Deeds unless the [CIR] or his duly
authorized representative has certified that such transfers and conveyances have been reported and the
expanded withholding tax, inclusive of the documentary stamp tax, due thereon have been fully paid
xxxx.

On February 11, 2003, RR No. 7-2003[8] was promulgated, providing for the guidelines in determining
whether a particular real property is a capital or an ordinary asset for purposes of imposing the MCIT,
among others. The pertinent portions thereof state:

Section 4. Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of real properties shall, unless otherwise exempt, be
subject to applicable taxes imposed under the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;

a. In the case of individual citizen (including estates and trusts), resident aliens, and non-resident aliens
engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to
the [CWT] (expanded) under Sec. 2.57..2(J) of [RR 2-98], as amended, based on the gross selling price or
current fair market value as determined in accordance with Section 6(E) of the Code, whichever is
higher, and consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the
Code, as the case may be, based on net taxable income.
xxx xxx xxx

c. In the case of domestic corporations. -

xxx xxx xxx

(ii) The sale of land and/or building classified as ordinary asset and other real property (other than land
and/or building treated as capital asset), regardless of the classification thereof, all of which are located
in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as
amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the
ordinary income tax, however, domestic corporations may become subject to the [MCIT] under Sec.
27(E) of the Code, whichever is applicable.

xxx xxx xxx

We shall now tackle the issues raised.

Existence of a Justiciable Controversy

Courts will not assume jurisdiction over a constitutional question unless the following requisites are
satisfied: (1) there must be an actual case calling for the exercise of judicial review; (2) the question
before the court must be ripe for adjudication; (3) the person challenging the validity of the act must
have standing to do so; (4) the question of constitutionality must have been raised at the earliest
opportunity and (5) the issue of constitutionality must be the very lis mota of the case.[9]

Respondents aver that the first three requisites are absent in this case. According to them, there is no
actual case calling for the exercise of judicial power and it is not yet ripe for adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has been assessed
by the BIR for the payment of [MCIT] or [CWT] on sales of real property. Neither did petitioner allege
that its members have shut down their businesses as a result of the payment of the MCIT or CWT.
Petitioner has raised concerns in mere abstract and hypothetical form without any actual, specific and
concrete instances cited that the assailed law and revenue regulations have actually and adversely
affected it. Lacking empirical data on which to base any conclusion, any discussion on the
constitutionality of the MCIT or CWT on sales of real property is essentially an academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for adjudicating
abstract issues. Otherwise, adjudication would be no different from the giving of advisory opinion that
does not really settle legal issues.[10]

An actual case or controversy involves a conflict of legal rights or an assertion of opposite legal claims
which is susceptible of judicial resolution as distinguished from a hypothetical or abstract difference or
dispute.[11] On the other hand, a question is considered ripe for adjudication when the act being
challenged has a direct adverse effect on the individual challenging it.[12]
Contrary to respondents' assertion, we do not have to wait until petitioner's members have shut down
their operations as a result of the MCIT or CWT. The assailed provisions are already being implemented.
As we stated in Didipio Earth-Savers' Multi-Purpose Association, Incorporated (DESAMA) v. Gozun:[13]

By the mere enactment of the questioned law or the approval of the challenged act, the dispute is said
to have ripened into a judicial controversy even without any other overt act. Indeed, even a singular
violation of the Constitution and/or the law is enough to awaken judicial duty.[14]

If the assailed provisions are indeed unconstitutional, there is no better time than the present to settle
such question once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the Philippines.
Petitioners did not allege that [it] itself is in the real estate business. It did not allege any material
interest or any wrong that it may suffer from the enforcement of [the assailed provisions].[15]

Legal standing or locus standi is a party's personal and substantial interest in a case such that it has
sustained or will sustain direct injury as a result of the governmental act being challenged.[16] In Holy
Spirit Homeowners Association, Inc. v. Defensor,[17] we held that the association had legal standing
because its members stood to be injured by the enforcement of the assailed provisions:

Petitioner association has the legal standing to institute the instant petition xxx. There is no dispute that
the individual members of petitioner association are residents of the NGC. As such they are covered and
stand to be either benefited or injured by the enforcement of the IRR, particularly as regards the
selection process of beneficiaries and lot allocation to qualified beneficiaries. Thus, petitioner
association may assail those provisions in the IRR which it believes to be unfavorable to the rights of its
members. xxx Certainly, petitioner and its members have sustained direct injury arising from the
enforcement of the IRR in that they have been disqualified and eliminated from the selection
process.[18]

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy the
requirements of an actual case, ripeness or legal standing when paramount public interest is
involved.[19] The questioned MCIT and CWT affect not only petitioners but practically all domestic
corporate taxpayers in our country. The transcendental importance of the issues raised and their
overreaching significance to society make it proper for us to take cognizance of this petition.[20]

Concept and Rationale of the MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the Philippine taxation
system. It came about as a result of the perceived inadequacy of the self-assessment system in capturing
the true income of corporations.[21] It was devised as a relatively simple and effective revenue-raising
instrument compared to the normal income tax which is more difficult to control and enforce. It is a
means to ensure that everyone will make some minimum contribution to the support of the public
sector. The congressional deliberations on this are illuminating:

Senator Enrile. Mr. President, we are not unmindful of the practice of certain corporations of reporting
constantly a loss in their operations to avoid the payment of taxes, and thus avoid sharing in the cost of
government. In this regard, the Tax Reform Act introduces for the first time a new concept called the
[MCIT] so as to minimize tax evasion, tax avoidance, tax manipulation in the country and for
administrative convenience. ... This will go a long way in ensuring that corporations will pay their just
share in supporting our public life and our economic advancement.[22]

Domestic corporations owe their corporate existence and their privilege to do business to the
government. They also benefit from the efforts of the government to improve the financial market and
to ensure a favorable business climate. It is therefore fair for the government to require them to make a
reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having large turn-overs,
report minimal or negative net income resulting in minimal or zero income taxes year in and year out,
through under-declaration of income or over-deduction of expenses otherwise called tax shelters.[23]

Mr. Javier (E.) ... [This] is what the Finance Dept. is trying to remedy, that is why they have proposed the
[MCIT]. Because from experience too, you have corporations which have been losing year in and year
out and paid no tax. So, if the corporation has been losing for the past five years to ten years, then that
corporation has no business to be in business. It is dead. Why continue if you are losing year in and year
out? So, we have this provision to avoid this type of tax shelters, Your Honor.[24]

The primary purpose of any legitimate business is to earn a profit. Continued and repeated losses after
operations of a corporation or consistent reports of minimal net income render its financial statements
and its tax payments suspect. For sure, certain tax avoidance schemes resorted to by corporations are
allowed in our jurisdiction. The MCIT serves to put a cap on such tax shelters. As a tax on gross income,
it prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated and artful
manipulations of deductions and other stratagems. Since the tax base was broader, the tax rate was
lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated
into the law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital
expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately
following the year in which the corporation commenced its operations.[25] This grace period allows a
new business to stabilize first and make its ventures viable before it is subjected to the MCIT.[26]

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax
which shall be credited against the normal income tax for the three immediately succeeding years.[27]
Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the
Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged
labor dispute, force majeure and legitimate business reverses.[28]

Even before the legislature introduced the MCIT to the Philippine taxation system, several other
countries already had their own system of minimum corporate income taxation. Our lawmakers noted
that most developing countries, particularly Latin American and Asian countries, have the same form of
safeguards as we do. As pointed out during the committee hearings:

[Mr. Medalla:] Note that most developing countries where you have of course quite a bit of room for
underdeclaration of gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), there's a minimum of income tax of half a percent (0.5%)
of gross assessable income. In Korea a 25% of taxable income before deductions and exemptions. Of
course the different countries have different basis for that minimum income tax.

The other thing you'll notice is the preponderance of Latin American countries that employed this
method. Okay, those are additional Latin American countries.[29]

At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary have their
own versions of the MCIT.[30]

MCIT Is Not Violative of Due Process

Petitioner claims that the MCIT under Section 27(E) of RA 8424 is unconstitutional because it is highly
oppressive, arbitrary and confiscatory which amounts to deprivation of property without due process of
law. It explains that gross income as defined under said provision only considers the cost of goods sold
and other direct expenses; other major expenditures, such as administrative and interest expenses
which are equally necessary to produce gross income, were not taken into account.[31] Thus, pegging
the tax base of the MCIT to a corporation's gross income is tantamount to a confiscation of capital
because gross income, unlike net income, is not "realized gain."[32]

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist nor endure.
The exercise of taxing power derives its source from the very existence of the State whose social
contract with its citizens obliges it to promote public interest and the common good.[33]

Taxation is an inherent attribute of sovereignty.[34] It is a power that is purely legislative.[35]

Essentially, this means that in the legislature primarily lies the discretion to determine the nature (kind),
object (purpose), extent (rate), coverage (subjects) and situs (place) of taxation.[36] It has the authority
to prescribe a certain tax at a specific rate for a particular public purpose on persons or things within its
jurisdiction. In other words, the legislature wields the power to define what tax shall be imposed, why it
should be imposed, how much tax shall be imposed, against whom (or what) it shall be imposed and
where it shall be imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in its very nature
no limits, so that the principal check against its abuse is to be found only in the responsibility of the
legislature (which imposes the tax) to its constituency who are to pay it.[37] Nevertheless, it is
circumscribed by constitutional limitations. At the same time, like any other statute, tax legislation
carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be deprived of life,
liberty or property without due process of law." In Sison, Jr. v. Ancheta, et al.,[38] we held that the due
process clause may properly be invoked to invalidate, in appropriate cases, a revenue measure[39]
when it amounts to a confiscation of property.[40] But in the same case, we also explained that we will
not strike down a revenue measure as unconstitutional (for being violative of the due process clause) on
the mere allegation of arbitrariness by the taxpayer.[41] There must be a factual foundation to such an
unconstitutional taint.[42] This merely adheres to the authoritative doctrine that, where the due
process clause is invoked, considering that it is not a fixed rule but rather a broad standard, there is a
need for proof of such persuasive character.[43]

Petitioner is correct in saying that income is distinct from capital.[44] Income means all the wealth
which flows into the taxpayer other than a mere return on capital. Capital is a fund or property existing
at one distinct point in time while income denotes a flow of wealth during a definite period of time.[45]
Income is gain derived and severed from capital.[46] For income to be taxable, the following requisites
must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation.[47]

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is not income. In
other words, it is income, not capital, which is subject to income tax. However, the MCIT is not a tax on
capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation
in the sale of its goods, i.e., the cost of goods[48] and other direct expenses from gross sales. Clearly, the
capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the normal net income
tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of
net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the
base the corporation's gross income.
Besides, there is no legal objection to a broader tax base or taxable income by eliminating all deductible
items and at the same time reducing the applicable tax rate.[49]

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are found in
many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or
constitutional, unless it interferes with interstate commerce or violates the requirement as to uniformity
of taxation.[50]

The United States has a similar alternative minimum tax (AMT) system which is generally characterized
by a lower tax rate but a broader tax base.[51] Since our income tax laws are of American origin,
interpretations by American courts of our parallel tax laws have persuasive effect on the interpretation
of these laws.[52] Although our MCIT is not exactly the same as the AMT, the policy behind them and
the procedure of their implementation are comparable. On the question of the AMT's constitutionality,
the United States Court of Appeals for the Ninth Circuit stated in Okin v. Commissioner:[53]

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the system
growing from large numbers of taxpayers with large incomes who were yet paying no taxes.

xxx xxx xxx

We thus join a number of other courts in upholding the constitutionality of the [AMT]. xxx [It] is a
rational means of obtaining a broad-based tax, and therefore is constitutional.[54]

The U.S. Court declared that the congressional intent to ensure that corporate taxpayers would
contribute a minimum amount of taxes was a legitimate governmental end to which the AMT bore a
reasonable relation.[55]

American courts have also emphasized that Congress has the power to condition, limit or deny
deductions from gross income in order to arrive at the net that it chooses to tax.[56] This is because
deductions are a matter of legislative grace.[57]

Absent any other valid objection, the assignment of gross income, instead of net income, as the tax base
of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not constitutionally
objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of its
members nor does it present empirical data to show that the implementation of the MCIT resulted in
the confiscation of their property.

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the MCIT is arbitrary
and confiscatory. The Court cannot strike down a law as unconstitutional simply because of its
yokes.[58] Taxation is necessarily burdensome because, by its nature, it adversely affects property
rights.[59] The party alleging the law's unconstitutionality has the burden to demonstrate the supposed
violations in understandable terms.[60]

RR 9-98 Merely Clarifies

Section 27(E) of RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law because the MCIT
is being imposed and collected even when there is actually a loss, or a zero or negative taxable income:

Sec. 2.27(E) [MCIT] on Domestic Corporations. -

(1) Imposition of the Tax. - xxx The MCIT shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of [MCIT] is greater than the normal income tax due
from such corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or negative
taxable income, merely defines the coverage of Section 27(E). This means that even if a corporation
incurs a net loss in its business operations or reports zero income after deducting its expenses, it is still
subject to an MCIT of 2% of its gross income. This is consistent with the law which imposes the MCIT on
gross income notwithstanding the amount of the net income. But the law also states that the MCIT is to
be paid only if it is greater than the normal net income. Obviously, it may well be the case that the MCIT
would be less than the net income of the corporation which posts a zero or negative taxable income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes) are
collected.[61] Under Section 57 of RA 8424, the types of income subject to withholding tax are divided
into three categories: (a) withholding of final tax on certain incomes; (b) withholding of creditable tax at
source and (c) tax-free covenant bonds. Petitioner is concerned with the second category (CWT) and
maintains that the revenue regulations on the collection of CWT on sale of real estate categorized as
ordinary assets are unconstitutional.

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA 8424,
contends that Sections 2.57.2(J) and 2.58.2 of RR 2-98 and Sections 4(a)(ii) and (c)(ii) of RR 7-2003 were
promulgated "with grave abuse of discretion amounting to lack of jurisdiction" and "patently in
contravention of law"[62] because they ignore such distinctions. Petitioner's conclusion is based on the
following premises: (a) the revenue regulations use gross selling price (GSP) or fair market value (FMV)
of the real estate as basis for determining the income tax for the sale of real estate classified as ordinary
assets and (b) they mandate the collection of income tax on a per transaction basis, i.e., upon
consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of the net
income at the end of the taxable period.[63]
Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently, respondents
cannot disregard the distinctions set by the legislators as regards the tax base, modes of collection and
payment of taxes on income from the sale of capital and ordinary assets.

Petitioner's arguments have no merit.

Authority of the Secretary of Finance to Order the Collection of CWT on Sales of Real Property
Considered as Ordinary Assets

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to promulgate the
necessary rules and regulations for the effective enforcement of the provisions of the law. Such
authority is subject to the limitation that the rules and regulations must not override, but must remain
consistent and in harmony with, the law they seek to apply and implement.[64] It is well-settled that an
administrative agency cannot amend an act of Congress.[65]

We have long recognized that the method of withholding tax at source is a procedure of collecting
income tax which is sanctioned by our tax laws.[66] The withholding tax system was devised for three
primary reasons: first, to provide the taxpayer a convenient manner to meet his probable income tax
liability; second, to ensure the collection of income tax which can otherwise be lost or substantially
reduced through failure to file the corresponding returns and third, to improve the government's cash
flow.[67] 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.[68]

Respondent Secretary has the authority to require the withholding of a tax on items of income payable
to any person, national or juridical, residing in the Philippines. Such authority is derived from Section
57(B) of RA 8424 which provides:

SEC. 57. Withholding of Tax at Source. -

xxx xxx xxx

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less
than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited
against the income tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given by Section 57(B)
to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax
is imposed on the income payable and the tax is creditable against the income tax liability of the
taxpayer for the taxable year.

Effect of RRs on the Tax Base for the Income Tax of Individuals or Corporations Engaged in the Real
Estate Business
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real estate business'
income tax from net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to extinguish its
possible tax obligation. [69] They are installments on the annual tax which may be due at the end of the
taxable year.[70]

Under RR 2-98, the tax base of the income tax from the sale of real property classified as ordinary assets
remains to be the entity's net income imposed under Section 24 (resident individuals) or Section 27
(domestic corporations) in relation to Section 31 of RA 8424, i.e. gross income less allowable deductions.
The CWT is to be deducted from the net income tax payable by the taxpayer at the end of the taxable
year.[71] Precisely, Section 4(a)(ii) and (c)(ii) of RR 7-2003 reiterate that the tax base for the sale of real
property classified as ordinary assets remains to be the net taxable income:

Section 4. - Applicable taxes on sale, exchange or other disposition of real property. - Gains/Income
derived from sale, exchange, or other disposition of real properties shall unless otherwise exempt, be
subject to applicable taxes imposed under the Code, depending on whether the subject properties are
classified as capital assets or ordinary assets;

xxx xxx xxx

a. In the case of individual citizens (including estates and trusts), resident aliens, and non-resident aliens
engaged in trade or business in the Philippines;

xxx xxx xxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets, shall be subject to
the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended, based on the [GSP] or current
[FMV] as determined in accordance with Section 6(E) of the Code, whichever is higher, and
consequently, to the ordinary income tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the
case may be, based on net taxable income.

xxx xxx xxx

c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property (other than land
and/or building treated as capital asset), regardless of the classification thereof, all of which are located
in the Philippines, shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as
amended, and consequently, to the ordinary income tax under Sec. 27(A) of the Code. In lieu of the
ordinary income tax, however, domestic corporations may become subject to the [MCIT] under Sec.
27(E) of the same Code, whichever is applicable. (Emphasis supplied)
Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and credit the
taxes withheld (by the withholding agent/buyer) against its tax due. If the tax due is greater than the tax
withheld, then the taxpayer shall pay the difference. If, on the other hand, the tax due is less than the
tax withheld, the taxpayer will be entitled to a refund or tax credit. Undoubtedly, the taxpayer is taxed
on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for purposes of
practicality and convenience. Obviously, the withholding agent/buyer who is obligated to withhold the
tax does not know, nor is he privy to, how much the taxpayer/seller will have as its net income at the
end of the taxable year. Instead, said withholding agent's knowledge and privity are limited only to the
particular transaction in which he is a party. In such a case, his basis can only be the GSP or FMV as these
are the only factors reasonably known or knowable by him in connection with the performance of his
duties as a withholding agent.

No Blurring of Distinctions Between Ordinary Assets and Capital Assets

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real property categorized
as ordinary assets. On the other hand, Section 27(D)(5) of RA 8424 imposes a final tax and flat rate of 6%
on the gain presumed to be realized from the sale of a capital asset based on its GSP or FMV. This final
tax is also withheld at source.[72]

The differences between the two forms of withholding tax, i.e., creditable and final, show that ordinary
assets are not treated in the same manner as capital assets. Final withholding tax (FWT) and CWT are
distinguished as follows:

FWT CWT

a) The amount of income tax withheld by a) Taxes withheld on certain income payments are
intended the withholding agent is constituted to equal or at least approximate the tax due of the payee
on said income. as a full and final payment of the income tax due from the payee on the said income.

b) The liability for payment of the tax rests b) Payee of income is required to report the income and/or
pay primarily on the payor as a withholding agent. the difference between the tax withheld and the tax
due on the income. The payee also has the right to ask for a refund if the tax withheld is more than the
tax due.

c) ]The payee is not required to file an income c) The income recipient is still required to file an income
tax return, tax return for the particular income.[73] as prescribed in Sec. 51 and Sec. 52 of the NIRC, as
amended.[74]

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT is imposed
on the sale of ordinary assets. The inherent and substantial differences between FWT and CWT disprove
petitioner's contention that ordinary assets are being lumped together with, and treated similarly as,
capital assets in contravention of the pertinent provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction are contrary to
the provisions of RA 8424 on the manner and time of filing of the return, payment and assessment of
income tax involving ordinary assets.[75]

The fact that the tax is withheld at source does not automatically mean that it is treated exactly the
same way as capital gains. As aforementioned, the mechanics of the FWT are distinct from those of the
CWT. The withholding agent/buyer's act of collecting the tax at the time of the transaction by
withholding the tax due from the income payable is the essence of the withholding tax method of tax
collection.

No Rule that Only Passive Incomes Can Be Subject to CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether final or
creditable. According to petitioner, the whole of Section 57 governs the withholding of income tax on
passive income. The enumeration in Section 57(A) refers to passive income being subjected to FWT. It
follows that Section 57(B) on CWT should also be limited to passive income:

SEC. 57. Withholding of Tax at Source. -

(A) Withholding of Final Tax on Certain Incomes. - Subject to rules and regulations, the [Secretary] may
promulgate, upon the recommendation of the [CIR], requiring the filing of income tax return by certain
income payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2),
25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a),
28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and
282 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.

(B) Withholding of Creditable Tax at Source. - The [Secretary] may, upon the recommendation of the
[CIR], require the withholding of a tax on the items of income payable to natural or juridical persons,
residing in the Philippines, by payor-corporation/persons as provided for by law, at the rate of not less
than one percent (1%) but not more than thirty-two percent (32%) thereof, which shall be credited
against the income tax liability of the taxpayer for the taxable year. (Emphasis supplied)

This line of reasoning is non sequitur.

Section 57(A) expressly states that final tax can be imposed on certain kinds of income and enumerates
these as passive income. The BIR defines passive income by stating what it is not:
...if the income is generated in the active pursuit and performance of the corporation's primary
purposes, the same is not passive income...[76]

It is income generated by the taxpayer's assets. These assets can be in the form of real properties that
return rental income, shares of stock in a corporation that earn dividends or interest income received
from savings.

On the other hand, Section 57(B) provides that the Secretary can require a CWT on "income payable to
natural or juridical persons, residing in the Philippines." There is no requirement that this income be
passive income. If that were the intent of Congress, it could have easily said so.

Indeed, Section 57(A) and (B) are distinct. Section 57(A) refers to FWT while Section 57(B) pertains to
CWT. The former covers the kinds of passive income enumerated therein and the latter encompasses
any income other than those listed in 57(A). Since the law itself makes distinctions, it is wrong to regard
57(A) and 57(B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the text of
Section 57(B). RR 2-98 merely implements the law by specifying what income is subject to CWT. It has
been held that, where a statute does not require any particular procedure to be followed by an
administrative agency, the agency may adopt any reasonable method to carry out its functions.[77]
Similarly, considering that the law uses the general term "income," the Secretary and CIR may specify
the kinds of income the rules will apply to based on what is feasible. In addition, administrative rules
and regulations ordinarily deserve to be given weight and respect by the courts[78] in view of the rule-
making authority given to those who formulate them and their specific expertise in their respective
fields.

No Deprivation of Property Without Due Process

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as ordinary assets
deprives its members of their property without due process of law because, in their line of business,
gain is never assured by mere receipt of the selling price. As a result, the government is collecting tax
from net income not yet gained or earned.

Again, it is stressed that the CWT is creditable against the tax due from the seller of the property at the
end of the taxable year. The seller will be able to claim a tax refund if its net income is less than the
taxes withheld. Nothing is taken that is not due so there is no confiscation of property repugnant to the
constitutional guarantee of due process. More importantly, the due process requirement applies to the
power to tax.[79] The CWT does not impose new taxes nor does it increase taxes.[80] It relates entirely
to the method and time of payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome because taxpayers
have to wait years and may even resort to litigation before they are granted a refund.[81] This argument
is misleading. The practical problems encountered in claiming a tax refund do not affect the
constitutionality and validity of the CWT as a method of collecting the tax.
Petitioner complains that the amount withheld would have otherwise been used by the enterprise to
pay labor wages, materials, cost of money and other expenses which can then save the entity from
having to obtain loans entailing considerable interest expense. Petitioner also lists the expenses and
pitfalls of the trade which add to the burden of the realty industry: huge investments and borrowings;
long gestation period; sudden and unpredictable interest rate surges; continually spiraling
development/construction costs; heavy taxes and prohibitive "up-front" regulatory fees from at least 20
government agencies.[82]

Petitioner's lamentations will not support its attack on the constitutionality of the CWT. Petitioner's
complaints are essentially matters of policy best addressed to the executive and legislative branches of
the government. Besides, the CWT is applied only on the amounts actually received or receivable by the
real estate entity. Sales on installment are taxed on a per-installment basis.[83] Petitioner's desire to
utilize for its operational and capital expenses money earmarked for the payment of taxes may be a
practical business option but it is not a fundamental right which can be demanded from the court or
from the government.

No Violation of Equal Protection

Petitioner claims that the revenue regulations are violative of the equal protection clause because the
CWT is being levied only on real estate enterprises. Specifically, petitioner points out that manufacturing
enterprises are not similarly imposed a CWT on their sales, even if their manner of doing business is not
much different from that of a real estate enterprise. Like a manufacturing concern, a real estate
business is involved in a continuous process of production and it incurs costs and expenditures on a
regular basis. The only difference is that "goods" produced by the real estate business are house and lot
units.[84]

Again, we disagree.

The equal protection clause under the Constitution means that "no person or class of persons shall be
deprived of the same protection of laws which is enjoyed by other persons or other classes in the same
place and in like circumstances."[85] Stated differently, all persons belonging to the same class shall be
taxed alike. It follows that the guaranty of the equal protection of the laws is not violated by legislation
based on a reasonable classification. Classification, to be valid, must (1) rest on substantial distinctions;
(2) be germane to the purpose of the law; (3) not be limited to existing conditions only and (4) apply
equally to all members of the same class.[86]

The taxing power has the authority to make reasonable classifications for purposes of taxation.[87]
Inequalities which result from a singling out of one particular class for taxation, or exemption, infringe
no constitutional limitation.[88] The real estate industry is, by itself, a class and can be validly treated
differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing enterprises, fails to
realize that what distinguishes the real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production processes but the prices of their goods
sold and the number of transactions involved. The income from the sale of a real property is bigger and
its frequency of transaction limited, making it less cumbersome for the parties to comply with the
withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of transactions with
several thousand customers every month involving both minimal and substantial amounts. To require
the customers of manufacturing enterprises, at present, to withhold the taxes on each of their
transactions with their tens or hundreds of suppliers may result in an inefficient and unmanageable
system of taxation and may well defeat the purpose of the withholding tax system.

Petitioner counters that there are other businesses wherein expensive items are also sold infrequently,
e.g. heavy equipment, jewelry, furniture, appliance and other capital goods yet these are not similarly
subjected to the CWT.[89] As already discussed, the Secretary may adopt any reasonable method to
carry out its functions.[90] Under Section 57(B), it may choose what to subject to CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner's argument is not accurate. The
sales of manufacturers who have clients within the top 5,000 corporations, as specified by the BIR, are
also subject to CWT for their transactions with said 5,000 corporations.[91]

Section 2.58.2 of RR No. 2-98 Merely Implements Section 58 of RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of Deeds should not
effect the regisration of any document transferring real property unless a certification is issued by the
CIR that the withholding tax has been paid. Petitioner proffers hardly any reason to strike down this rule
except to rely on its contention that the CWT is unconstitutional. We have ruled that it is not.
Furthermore, this provision uses almost exactly the same wording as Section 58(E) of RA 8424 and is
unquestionably in accordance with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source. -

(E) Registration with Register of Deeds. - No registration of any document transferring real property shall
be effected by the Register of Deeds unless the [CIR] or his duly authorized representative has certified
that such transfer has been reported, and the capital gains or [CWT], if any, has been paid: xxxx any
violation of this provision by the Register of Deeds shall be subject to the penalties imposed under
Section 269 of this Code. (Emphasis supplied)

Conclusion

The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the world to
understand is the income tax."[92] When a party questions the constitutionality of an income tax
measure, it has to contend not only with Einstein's observation but also with the vast and well-
established jurisprudence in support of the plenary powers of Congress to impose taxes. Petitioner has
miserably failed to discharge its burden of convincing the Court that the imposition of MCIT and CWT is
unconstitutional.

WHEREFORE, the petition is hereby DISMISSED.

CYANAMID PHILIPPINES, INC., petitioner, vs. THE COURT OF APPEALS, THE

COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE,
respondents.

G.R. No. 108067 | 2000-01-20

Tagged under keywords

Discussions citing this case or law are available.

Bardahl formula
Operating cycle

DECISION

QUISUMBING, J.:

Petitioner disputes the decision1 [Rollo, pp. 25-34.] of the Court of Appeals which affirmed the decision2
[CA Rollo, pp. 19-28.] of the Court of Tax Appeals, ordering petitioner to pay respondent Commissioner of
Internal Revenue the amount of three million, seven hundred seventy-four thousand, eight hundred sixty
seven pesos and fifty centavos (P3,774,867.50) as 25% surtax on improper accumulation of profits for
1981, plus 10% surcharge and 20% annual interest from January 30, 1985 to January 30, 1987, under Sec.
25 of the National Internal Revenue Code.

The Court of Tax Appeals made the following factual findings:

Petitioner, Cyanamid Philippines, Inc., a corporation organized under Philippine laws, is a wholly owned
subsidiary of American Cyanamid Co. based in Maine, USA. It is engaged in the manufacture of
pharmaceutical products and chemicals, a wholesaler of imported finished goods, and an
importer/indentor.

On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded the payment of
deficiency income tax of one hundred nineteen thousand eight hundred seventeen (P119,817.00) pesos
for taxable year 1981, as follows:
"Net income disclosed by the return as audited 14,575,210.00

Add: Discrepancies: 17018

Professional fees/yr. 262,877.00

per investigation 110,399.37

Total Adjustment................................................ 152,477.00

Net income per Investigation ................................. 14,727,687.00

Less: Personal and additional exemptions ..................

Amount subject to tax .......................................... 14,727,687.00

Income tax due thereon .......... 2,385,231.50

25% Surtax 3,237,495.00

Less: Amount already assessed ............................... 5,161,788.00

BALANCE ....................................................... 75,709.00

monthly interest from ........ 1,389,636.00

44,108.00

Compromise penalties .......................................... 3,774,867.50

TOTAL AMOUNT DUE ....................... 119,817.00"3

[Records, CA Rollo, p. 24.

On March 4, 1985, petitioner protested the assessments particularly, (1) the 25% Surtax Assessment of
P3,774,867.50; (2) 1981 Deficiency Income Assessment of P119,817.00; and 1981 Deficiency Percentage
Assessment of P8,846.72.4 [Id. at 25.] Petitioner, through its external accountant, Sycip, Gorres, Velayo &
Co., claimed, among others, that the surtax for the undue accumulation of earnings was not proper
because the said profits were retained to increase petitioner's working capital and it would be used for
reasonable business needs of the company. Petitioner contended that it availed of the tax amnesty under
Executive Order No. 41, hence enjoyed amnesty from civil and criminal prosecution granted by the law.
On October 20, 1987, the CIR in a letter addressed to SGV & Co., refused to allow the cancellation of the
assessment notices and rendered its resolution, as follows:

"It appears that your client availed of Executive Order No. 41 under File No. 32A-F-000455-41B as certified
and confirmed by our Tax Amnesty Implementation Office on October 6, 1987.

In reply thereto, I have the honor to inform you that the availment of the tax amnesty under Executive
Order No. 41, as amended is sufficient basis, in appropriate cases, for the cancellation of the assessment
issued after August 21, 1986. (Revenue Memorandum Order No. 4-87) Said availment does not, therefore,
result in cancellation of assessments issued before August 21, 1986, as in the instant case. In other words,
the assessments in this case issued on January 30, 1985 despite your client's availment of the tax amnesty
under Executive Order No. 41, as amended still subsist.

Such being the case, you are therefore, requested to urge your client to pay this Office the
aforementioned deficiency income tax and surtax on undue accumulation of surplus in the respective
amounts of P119,817.00 and P3,774,867.50 inclusive of interest thereon for the year 1981, within thirty
(30) days from receipt hereof, otherwise this office will be constrained to enforce collection thereof thru
summary remedies prescribed by law.

This constitutes the final decision of this Office on this matter."5 [Id. at 27.]

Petitioner appealed to the Court of Tax Appeals. During the pendency of the case, however, both parties
agreed to compromise the 1981 deficiency income tax assessment of P119,817.00. Petitioner paid a
reduced amount --twenty-six thousand, five hundred seventy-seven pesos (P26,577.00) -- as compromise
settlement. However, the surtax on improperly accumulated profits remained unresolved.

Petitioner claimed that CIR's assessment representing the 25% surtax on its accumulated earnings for the
year 1981 had no legal basis for the following reasons: (a) petitioner accumulated its earnings and profits
for reasonable business requirements to meet working capital needs and retirement of indebtedness; (b)
petitioner is a wholly owned subsidiary of American Cyanamid Company, a corporation organized under
the laws of the State of Maine, in the United States of America, whose shares of stock are listed and traded
in New York Stock Exchange. This being the case, no individual shareholder of petitioner could have
evaded or prevented the imposition of individual income taxes by petitioner's accumulation of earnings
and profits, instead of distribution of the same.

In denying the petition, the Court of Tax Appeals made the following pronouncements:
"Petitioner contends that it did not declare dividends for the year 1981 in order to use the accumulated
earnings as working capital reserve to meet its "reasonable business needs". The law permits a stock
corporation to set aside a portion of its retained earnings for specified purposes (citing Section 43,
paragraph 2 of the Corporation Code of the Philippines). In the case at bar, however, petitioner's purpose
for accumulating its earnings does not fall within the ambit of any of these specified purposes.

More compelling is the finding that there was no need for petitioner to set aside a portion of its retained
earnings as working capital reserve as it claims since it had considerable liquid funds. A thorough review
of petitioner's financial statement (particularly the Balance Sheet, p. 127, BIR Records) reveals that the
corporation had considerable liquid funds consisting of cash accounts receivable, inventory and even its
sales for the period is adequate to meet the normal needs of the business. This can be determined by
computing the current asset to liability ratio of the company:

current ratio

= current assets / current liabilities

= P 47,052,535.00 / P21,275,544.00

= 2.21: 1

The significance of this ratio is to serve as a primary test of a company's solvency to meet current
obligations from current assets as a going concern or a measure of adequacy of working capital.

xxx

We further reject petitioner's argument that "the accumulated earnings tax does not apply to a publicly-
held corporation" citing American jurisprudence to support its position. The reference finds no application
in the case at bar because under Section 25 of the NIRC as amended by Section 5 of P.D. No. 1379 [1739]
(dated September 17, 1980), the exceptions to the accumulated earnings tax are expressly enumerated,
to wit: Bank, non-bank financial intermediaries, corporations organized primarily, and authorized by the
Central Bank of the Philippines to hold shares of stock of banks, insurance companies, or personal holding
companies, whether domestic or foreign. The law on the matter is clear and specific. Hence, there is no
need to resort to applicable cases decided by the American Federal Courts for guidance and
enlightenment as to whether the provision of Section 25 of the NIRC should apply to petitioner. Rtc-spped

Equally clear and specific are the provisions of E.O. 41 particularly with respect to its effectivity and
coverage...

... Said availment does not result in cancellation of assessments issued before August 21, 1986 as
petitioner seeks to do in the case at bar. Therefore, the assessments in this case, issued on January 30,
1985 despite petitioner's availment of the tax amnesty under E.O. 41 as amended, still subsist."

xxx

WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered to pay respondent Commissioner of

Internal Revenue the sum of P3,774,867.50 representing 25% surtax on improper accumulation of profits
for 1981, plus 10% surcharge and 20% annual interest from January 30, 1985 to January 30, 1987."6 [Id.
at 24-28.]

Petitioner appealed the Court of Tax Appeal's decision to the Court of Appeals. Affirming the CTA decision,
the appellate court said:

"In reviewing the instant petition and the arguments raised herein, We find no compelling reason to
reverse the findings of the respondent Court. The respondent Court's decision is supported by evidence,
such as petitioner corporation's financial statement and balance sheets (p. 127, BIR Records). On the other
hand the petitioner corporation could only come up with an alternative formula lifted from a decision
rendered by a foreign court (Bardahl Mfg. Corp. vs. Commissioner, 24 T.C.M. [CCH] 1030). Applying said
formula to its particular financial position, the petitioner corporation attempts to justify its accumulated
surplus earnings. To Our mind, the petitioner corporation's alternative formula cannot overturn the
persuasive findings and conclusion of the respondent Court based, as it is, on the applicable laws and
jurisprudence, as well as standards in the computation of taxes and penalties practiced in this jurisdiction.

WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED and the decision of the
Court of Tax Appeals dated August 6, 1992 in C.T.A. Case No. 4250 is AFFIRMED in toto."7 [Rollo, p. 33.]

Hence, petitioner now comes before us and assigns as sole issue:

WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT THE PETITIONER IS LIABLE FOR THE
ACCUMULATED EARNINGS TAX FOR THE YEAR 1981.8 [Id. at 9.]

Section 259 [The tax on improperly accumulated income tax underwent changes since the time of
assessment of herein petitioner, in 1985, until the enactment of the present tax code, the 1997 NIRC. This
provision was subsequently repealed by Executive Order No. 37 which took effect on January 1, 1986. The
reason for the repeal was explained by the Commissioner of Internal Revenue through Revenue
Memorandum Circular No. 26-86 as follows: "The tax on improper accumulation of surplus is essentially
a penalty tax designed to compel corporations to distribute corporate earnings so that the said earnings
will be taxed to the shareholders. The exemption of dividends from income tax renders the improperly
accumulated surplus tax meaningless. Accordingly, the provisions of the tax on improper accumulation or
surplus are repealed and replaced with provisions to govern the taxation of foreign corporation which are
lifted from Section 24 (b)." (Annotation, Improper Accumulation of Corporate Surplus or Profit by
Severiano S. Tabios, 173 SCRA, pp. 403-408.) However, Section 29 of the New 1997 NIRC provides for the
revival of the imposition of improperly accumulated earnings tax. The exemption from this rule now
includes publicly held corporation (par. B, 2, Section 29, 1997 NIRC)] of the old National Internal Revenue
Code of 1977 states:

"Sec. 25. Additional tax on corporation improperly accumulating profits or surplus -

"(a) Imposition of tax. -- If any corporation is formed or availed of for the purpose of preventing the
imposition of the tax upon its shareholders or members or the shareholders or members of another
corporation, through the medium of permitting its gains and profits to accumulate instead of being
divided or distributed, there is levied and assessed against such corporation, for each taxable year, a tax
equal to twenty-five per-centum of the undistributed portion of its accumulated profits or surplus which
shall be in addition to the tax imposed by section twenty-four, and shall be computed, collected and paid
in the same manner and subject to the same provisions of law, including penalties, as that tax.

"(b) Prima facie evidence. -- The fact that any corporation is mere holding company shall be prima facie
evidence of a purpose to avoid the tax upon its shareholders or members. Similar presumption will lie in
the case of an investment company where at any time during the taxable year more than fifty per centum
in value of its outstanding stock is owned, directly or indirectly, by one person.

"(c) Evidence determinative of purpose. -- The fact that the earnings or profits of a corporation are
permitted to accumulate beyond the reasonable needs of the business shall be determinative of the
purpose to avoid the tax upon its shareholders or members unless the corporation, by clear
preponderance of evidence, shall prove the contrary.
"(d) Exception -- The provisions of this sections shall not apply to banks, non-bank financial intermediaries,
corporation organized primarily, and authorized by the Central Bank of the Philippines to hold shares of
stock of banks, insurance companies, whether domestic or foreign.

The provision discouraged tax avoidance through corporate surplus accumulation. When corporations do
not declare dividends, income taxes are not paid on the undeclared dividends received by the
shareholders. The tax on improper accumulation of surplus is essentially a penalty tax designed to compel
corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed.

Relying on decisions of the American Federal Courts, petitioner stresses that the accumulated earnings
tax does not apply to Cyanamid, a wholly owned subsidiary of a publicly owned company.10 [A publicly
owned corporation was one where the outstanding stock was owned by more than 1,500 persons and not
more than 10% of either the total combined voting power, or, the total value of all classes of its
outstanding stock was owned at the close of the taxable year, by any one individual, either directly or
indirectly, under the provision for attribution of ownership.] Specifically, petitioner cites Golconda Mining
Corp. vs. Commissioner, 507 F.2d 594, whereby the U.S. Ninth Circuit Court of Appeals had taken the
position that the accumulated earnings tax could only apply to a closely held corporation.

A review of American taxation history on accumulated earnings tax will show that the application of the
accumulated earnings tax to publicly held corporations has been problematic. Initially, the Tax Court and
the Court of Claims held that the accumulated earnings tax applies to publicly held corporations. Then,
the Ninth Circuit Court of Appeals ruled in Golconda that the accumulated earnings tax could only apply
to closely held corporations. Despite Golconda, the Internal Revenue Service asserted that the tax could
be imposed on widely held corporations including those not controlled by a few shareholders or groups
of shareholders. The Service indicated it would not follow the Ninth Circuit regarding publicly held
corporations.11 [10 Mertens Law of Federal Income Taxation, Chapter 39, Accumulated Earnings Tax, Sec.
39.05.] In 1984, American legislation nullified the Ninth Circuit's Golconda ruling and made it clear that
the accumulated earnings tax is not limited to closely held corporations.12 [Ibid.] Clearly, Golconda is no
longer a reliable precedent. Sl-xm-is

The amendatory provision of Section 25 of the 1977 NIRC, which was PD 1739, enumerated the
corporations exempt from the imposition of improperly accumulated tax: (a) banks; (b) non-bank financial
intermediaries; (c) insurance companies; and (d) corporations organized primarily and authorized by the
Central Bank of the Philippines to hold shares of stocks of banks. Petitioner does not fall among those
exempt classes. Besides, the rule on enumeration is that the express mention of one person, thing, act,
or consequence is construed to exclude all others.13 [Commissioner of Customs vs. Court of Tax Appeals,
224 SCRA 665, 669-670 (1993); Centeno vs. Villalon-Pornillos, 236 SCRA 197 (1994)] Laws granting
exemption from tax are construed strictissimi juris against the taxpayer and liberally in favor of the taxing
power.14 [Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation, 181 SCRA 214, 223-224
(1990)] Taxation is the rule and exemption is the exception.15 [Ibid.] The burden of proof rests upon the
party claiming exemption to prove that it is, in fact, covered by the exemption so claimed,16 [Ibid.] a
burden which petitioner here has failed to discharge.

Another point raised by the petitioner in objecting to the assessment, is that increase of working capital
by a corporation justifies accumulating income. Petitioner asserts that respondent court erred in
concluding that Cyanamid need not infuse additional working capital reserve because it had considerable
liquid funds based on the 2.21:1 ratio of current assets to current liabilities. Petitioner relies on the so-
called "Bardahl" formula, which allowed retention, as working capital reserve, sufficient amounts of liquid
assets to carry the company through one operating cycle. The "Bardahl"17 [Bardahl Manufacturing Corp.
vs. Commissioner, 24 TCM 1030.] formula was developed to measure corporate liquidity. The formula
requires an examination of whether the taxpayer has sufficient liquid assets to pay all of its current
liabilities and any extraordinary expenses reasonably anticipated, plus enough to operate the business
during one operating cycle. Operating cycle is the period of time it takes to convert cash into raw
materials, raw materials into inventory, and inventory into sales, including the time it takes to collect
payment for the sales.18 [10 Mertens Law of Federal Income Taxation, Chapter 39, Accumulated Earnings
Tax, Sec. 39.133.]

Using this formula, petitioner contends, Cyanamid needed at least P33,763,624.00 pesos as working
capital. As of 1981, its liquid asset was only P25,776,991.00. Thus, petitioner asserts that Cyanamid had a
working capital deficit of P7,986,633.00.19 [Rollo, p. 118.] Therefore, the P9,540,926.00 accumulated
income as of 1981 may be validly accumulated to increase the petitioner's working capital for the
succeeding year.

We note, however, that the companies where the "Bardahl" formula was applied, had operating cycles
much shorter than that of petitioner. In Atlas Tool Co., Inc. vs. CIR,20 [614 F2d 860.] the company's
operating cycle was only 3.33 months or 27.75% of the year. In Cataphote Corp. of Mississippi vs. United
States,21 [535 F 2d 1225.] the corporation's operating cycle was only 56.87 days, or 15.58% of the year.
In the case of Cyanamid, the operating cycle was 288.35 days, or 78.55% of a year, reflecting that
petitioner will need sufficient liquid funds, of at least three quarters of the year, to cover the operating
costs of the business. There are variations in the application of the "Bardahl" formula, such as average
operating cycle or peak operating cycle. In times when there is no recurrence of a business cycle, the
working capital needs cannot be predicted with accuracy. As stressed by American authorities, although
the "Bardahl" formula is well-established and routinely applied by the courts, it is not a precise rule. It is
used only for administrative convenience.22 [10 Mertens Law of Federal Income Taxation, Chapter 39,
Accumulated Earnings Tax, Sec. 39.132.] Petitioner's application of the "Bardahl" formula merely creates
a false illusion of exactitude.

Other formulas are also used, e.g. the ratio of current assets to current liabilities and the adoption of the
industry standard.23 [Id. at Sec. 39.128.] The ratio of current assets to current liabilities is used to
determine the sufficiency of working capital. Ideally, the working capital should equal the current liabilities
and there must be 2 units of current assets for every unit of current liability, hence the so-called "2 to 1"
rule.24 [19 Fletcher Cyclopedia Corporations, Chapter 68, Corporation Practice, Section 9248 (1975)]

As of 1981 the working capital of Cyanamid was P25,776,991.00, or more than twice its current liabilities.
That current ratio of Cyanamid, therefore, projects adequacy in working capital. Said working capital was
expected to increase further when more funds were generated from the succeeding year's sales. Available
income covered expenses or indebtedness for that year, and there appeared no reason to expect an
impending 'working capital deficit' which could have necessitated an increase in working capital, as
rationalized by petitioner.

In Basilan Estates, Inc. vs. Commissioner of Internal Revenue,25 [21 SCRA 17 (1967)] we held that:

"...[T]here is no need to have such a large amount at the beginning of the following year because during
the year, current assets are converted into cash and with the income realized from the business as the
year goes, these expenses may well be taken care of. [citation omitted]. Thus, it is erroneous to say that
the taxpayer is entitled to retain enough liquid net assets in amounts approximately equal to current
operating needs for the year to cover 'cost of goods sold and operating expenses:' for 'it excludes proper
consideration of funds generated by the collection of notes receivable as trade accounts during the course
of the year."26 [Id. at 27.]

If the CIR determined that the corporation avoided the tax on shareholders by permitting earnings or
profits to accumulate, and the taxpayer contested such a determination, the burden of proving the
determination wrong, together with the corresponding burden of first going forward with evidence, is on
the taxpayer. This applies even if the corporation is not a mere holding or investment company and does
not have an unreasonable accumulation of earnings or profits.27 [Nolledo and Nolledo, The National
Internal Revenue Code of the Philippines, Annotated (1982)]

In order to determine whether profits are accumulated for the reasonable needs of the business to avoid
the surtax upon shareholders, it must be shown that the controlling intention of the taxpayer is
manifested at the time of accumulation, not intentions declared subsequently, which are mere
afterthoughts.28 [Basilan Estates, Inc. vs. Commissioner of Internal Revenue, 21 SCRA 17, 26 (1967), citing
Jacob Mertens, Jr., The Law of Federal Income Taxation, Vol. 7, Cumulative Supplement, p. 213.]
Furthermore, the accumulated profits must be used within a reasonable time after the close of the taxable
year. In the instant case, petitioner did not establish, by clear and convincing evidence, that such
accumulation of profit was for the immediate needs of the business.

In Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue,29 [127 SCRA 483 (1984)] we ruled:
"To determine the 'reasonable needs' of the business in order to justify an accumulation of earnings, the
Courts of the United States have invented the so-called 'Immediacy Test' which construed the words
'reasonable needs of the business' to mean the immediate needs of the business, and it was generally
held that if the corporation did not prove an immediate need for the accumulation of the earnings and
profits, the accumulation was not for the reasonable needs of the business, and the penalty tax would
apply. (Mertens, Law of Federal Income Taxation, Vol. 7, Chapter 39, p. 103).30 [Id. at 494.]

In the present case, the Tax Court opted to determine the working capital sufficiency by using the ratio
between current assets to current liabilities. The working capital needs of a business depend upon the
nature of the business, its credit policies, the amount of inventories, the rate of turnover, the amount of
accounts receivable, the collection rate, the availability of credit to the business, and similar factors.
Petitioner, by adhering to the "Bardahl" formula, failed to impress the tax court with the required
definiteness envisioned by the statute. We agree with the tax court that the burden of proof to establish
that the profits accumulated were not beyond the reasonable needs of the company, remained on the
taxpayer. This Court will not set aside lightly the conclusion reached by the Court of Tax Appeals which,
by the very nature of its function, is dedicated exclusively to the consideration of tax problems and has
necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise
of authority.31 [Commissioner of Internal Revenue vs. Court of Appeals, 271 SCRA 605, 608 (1997)] Unless
rebutted, all presumptions generally are indulged in favor of the correctness of the CIR's assessment
against the taxpayer. With petitioner's failure to prove the CIR incorrect, clearly and conclusively, this
Court is constrained to uphold the correctness of tax court's ruling as affirmed by the Court of Appeals.

WHEREFORE, the instant petition is DENIED, and the decision of the Court of Appeals, sustaining that of
the Court of Tax Appeals, is hereby AFFIRMED. Costs against petitioner.

SO ORDERED.

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. PROCTER & GAMBLE

PHILIPPINE MANUFACTURING CORPORATION & THE COURT OF TAX
APPEALS, respondents.

G.R. No. L-66838 | 1988-04-15

DECISION

PARAS, J.:

This is a petition for review on certiorari filed by the herein petitioner, Commissioner of Internal
Revenue, seeking the reversal of the decision of the Court of Tax Appeals dated January 31,
1984 in CTA Case No. 2883 entitled "Procter and Gamble Philippine Manufacturing Corporation
vs. Bureau of Internal Revenue," which declared petitioner therein, Procter and Gamble
Philippine Manufacturing Corporation to be entitled to the sought refund or tax credit in the
amount of P4,832,989.00 representing the alleged overpaid withholding tax at source and
ordering payment thereof.

The antecedent facts that precipitated the instant petition are as follows:

Private respondent, Procter and Gamble Philippine Manufacturing Corporation (hereinafter

referred to as PMC-Phil.), a corporation duly organized and existing under and by virtue of the
Philippine laws, is engaged in business in the Philippines and is a wholly owned subsidiary of
Procter and Gamble, U.S.A. (hereinafter referred to as PMC-USA), a non-resident foreign
corporation in the Philippines, not engaged in trade and business therein. As such PMC-U.S.A. is
the sole shareholder or stockholder of PMC-Phil., as PMC-U.S.A. owns wholly or by 100% the
voting stock of PMC-Phil. and is entitled to receive income from PMC-Phil. in the form of
dividends, if not rents or royalties. In addition, PMC-Phil. has a legal personality separate and
distinct from PMC-U.S.A. (Rollo, pp. 122-123).

For the taxable year ending June 30, 1974 PMC-Phil. realized a taxable net income of
P56,500,332.00 and accordingly paid the corresponding income tax thereon equivalent to P25%-
35% or P19,765,116.00 as provided for under Section 24(a) of the Philippine Tax Code, the
pertinent portion of which reads:

"SEC. 24. Rates of tax on corporation. ---- (a) Tax on domestic corporations. A tax in hereby
imposed upon the taxable net income received during each taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, and partnerships,
no matter how created or organized, but not including general professional partnerships, in
accordance with the following:

'Twenty-five per cent upon the amount by which the taxable net income does not exceed one
hundred thousand pesos; and

'Thirty-five per cent upon the amount by which the taxable net income exceeds one hundred
thousand pesos."

After taxation its net profit was P36,735,216.00. Out of said amount it declared a dividend in
favor of its sole corporate stockholder and parent corporation PMC-U.S.A. in the total sum of
P17,707,460.00 which latter amount was subjected to Philippine taxation of 35% or
P6,197,611.23 as provided for in Section 24(b) of the Philippine Tax Code which reads in full:

"SECTION 1. The first paragraph of subsection (b) of Section 24 of the National Bureau Internal
Revenue Code, as amended, is hereby further amended to read as follows:

'(b) Tax on foreign corporations. - (1) Nonresident corporation. - A foreign corporation not
engaged in trade or business in the Philippines, including a foreign life insurance company not
engaged in the life insurance business in the Philippines, shall pay a tax equal to 35% of the
gross income received during its taxable year from all sources within the Philippines, as interest
(except interest on foreign loans which shall be subject to 15% tax), dividends, rents, royalties,
salaries, wages, premiums, annuities, compensations, remunerations for technical services or
otherwise, emoluments or other fixed or determinable, annual, periodical or casual gains, profits,
and income, and capital gains: Provided, however, That premiums shall not include re-insurance
premiums: Provided, further, That cinematographic film owners, lessors, or distributors, shall
pay a tax of 15% on their gross income from sources within the Philippines: Provided, still
further That on dividends received from a domestic corporation liable to tax under this Chapter,
the tax shall be 15% of the dividends received, which shall be collected and paid as provided in
Section 53(d) of this Code, subject to the condition that the country in which the nonresident
foreign corporation is domiciled shall allow a credit against the tax due from the nonresident
foreign corporation, taxes deemed to have been paid in the Philippines equivalent to 20% which
represents the difference between the regular tax (35%) on corporations and the tax (15%) on
dividends as provided in this section: Provided, finally, That regional or area headquarters
established in the Philippines by multinational corporations and which headquarters do not earn
or derive income from the Philippines and which act as supervisory, communications and
coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region shall
not be subject to tax."

For the taxable year ending June 30, 1975 PMC-Phil. realized a taxable net income of
P8,735,125.00 which was subjected to Philippine taxation at the rate of 25%-35% or
P2,952,159.00, thereafter leaving a net profit of P5,782,966.00. As in the 2nd quarter of 1975,
PMC-Phil. again declared a dividend in favor of PMC-U.S.A. at the tax rate of 35% or
P6,457,485.00.

In July, 1977 PMC-Phil., invoking the tax-sparing credit provision in Section 24(b) as
aforequoted, as the withholding agent of the Philippine government, with respect to the dividend
taxes paid by PMC-U.S.A., filed a claim with the herein petitioner, Commissioner of Internal
Revenue, for the refund of the 20 percentage-point portion of the 35 percentage-point whole tax
paid, arising allegedly from the alleged "overpaid withholding tax at source or overpaid
withholding tax in the amount of P4,832,989.00," computed as follows:

Dividend Income Tax withheld 15% tax under Alleged

of PMC-U.S.A. at source at "tax sparing over
35% proviso" payment

P17,707,460 P6,196,611 P2,656,119 P3,541,492

6,457,485 2,260,119 968,622 1,291,497
----------------- ----------------- ----------------- ------------------
P24,164,946 P8,457,731 P3,624,941 P4,832,989
========= ======== ======== ========

There being no immediate action by the BIR on PMC-Phils' letter-claim the latter sought the
intervention of the CTA when on July 13, 1977 it filed with herein respondent court a petition for
review docketed as CTA No. 2883 entitled "Procter and Gamble Philippine Manufacturing
Corporation vs. The Commissioner of Internal Revenue," praying that it be declared entitled to
the refund or tax credit claimed and ordering respondent therein to refund to it the amount of
P4,832,989.00, or to issue tax credit in its favor in lieu of tax refund. (Rollo, p. 41)

On the other hand therein respondent, Commissioner of Internal Revenue, in his answer, prayed
for the dismissal of said petition and for the denial of the claim for refund. (Rollo, p. 48)

On January 31, 1974 the Court of Tax Appeals in its decision (Rollo, p. 63) ruled in favor of the
herein petitioner, the dispositive portion of the same reading as follows:

"Accordingly, petitioner is entitled to the sought refund or tax credit of the amount representing
the overpaid withholding tax at source and the payment therefor by the respondent hereby
ordered. No costs.

"SO ORDERED."

Hence this petition.

The Second Division of this Court without giving due course to said petition resolved to require
the respondents to comment (Rollo, p. 74). Said comment was filed on November 8, 1984
(Rollo, pp. 83-90). Thereupon this Court by resolution dated December 17, 1984 resolved to give
due course to the petition and to consider respondents' comment on the petition as Answer.
(Rollo, p. 93)

Petitioner was required to file brief on January 21, 1985 (Rollo, p. 96). Petitioner filed his brief
on May 13, 1985 (Rollo, p. 107), while private respondent PMC-Phil. filed its brief on August
22, 1985.

Petitioner raised the following assignments of errors:

I
THE COURT OF TAX APPEALS ERRED IN HOLDING WITHOUT ANY BASIS IN FACT
AND IN LAW, THAT THE HEREIN RESPONDENT PROCTER & GAMBLE PHILIPPINE
MANUFACTURING CORPORATION (PMC-PHIL. FOR SHORT) 'IS ENTITLED TO THE
SOUGHT REFUND OR TAX CREDIT' OF P4,832,989.00, REPRESENTING ALLEGEDLY
THE DIVIDED TAX OVER WITHHELD BY PMC-PHIL. UPON REMITTANCE OF
DIVIDEND INCOME IN THE TOTAL SUM OF P24,164,946.00 TO PROCTER & GAMBLE,
USA (PMC-USA, FOR SHORT).

II
THE COURT OF TAX APPEALS ERRED IN HOLDING, WITHOUT ANY BASIS IN FACT
AND IN LAW, THAT PMC-USA, A NONRESIDENT FOREIGN CORPORATION UNDER
SECTION 24(b) (1) OF THE PHILIPPINE TAX CODE AND A DOMESTIC CORPORATION
DOMICILED IN THE UNITED STATES, IS ENTITLED UNDER THE U.S. TAX CODE
AGAINST ITS U.S. FEDERAL TAXES TO A UNITED STATES FOREIGN TAX CREDIT
EQUIVALENT TO AT LEAST THE 20 PERCENTAGE-POINT PORTION (OF THE 35
PERCENT DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE CONSIDERED OR
DEEMED PAID BY THE PHILIPPINE GOVERNMENT.
The sole issue in this case is whether or not private respondent is entitled to the preferential 15%
tax rate on dividends declared and remitted to its parent corporation.

From this issue two questions are posed by the petitioner Commissioner of Internal Revenue, and
they are (1) Whether or not PMC-Phil. is the proper party to claim the refund and (2) Whether or
not the U.S. allows as tax credit the "deemed paid" 20% Philippine Tax on such dividends?

The petitioner maintains that it is the PMC-U.S.A., the tax payer and not PMC-Phil. the remitter
or payor of the dividend income, and a mere withholding agent for and in behalf of the
Philippine Government, which should be legally entitled to receive the refund if any. (Rollo, p.
129)

It will be observed at the outset that petitioner raised this issue for the first time in the Supreme
Court. He did not raise it at the administrative level, nor at the Court of Tax Appeals. As clearly
ruled by Us "To allow a litigant to assume a different posture when he comes before the court
and challenges the position he had accepted at the administrative level," would be to sanction a
procedure whereby the Court - which is supposed to review administrative determinations -
would not review, but determine and decide for the first time, a question not raised at the
administrative forum." Thus it is well settled that under the same underlying principle of prior
exhaustion of administrative remedies, on the judicial level, issues not raised in the lower court
cannot generally be raised for the first time on appeal. (Pampanga Sugar Dev. Co., Inc. v. CIR,
114 SCRA 725 [1982]; Garcia v. C.A., 102 SCRA 597 [1981]; Matialonzo v. Servidad, 107
SCRA 726 [1981]).

Nonetheless it is axiomatic that the State can never be in estoppel, and this is particularly true in
matters involving taxation. The errors of certain administrative officers should never be allowed
to jeopardize the government's financial position.

The submission of the Commissioner of Internal Revenue that PMC-Phil. is but a withholding
agent of the government and therefore cannot claim reimbursement of the alleged over paid
taxes, is completely meritorious. The real party in interest being the mother corporation in the
United States, it follows that American entity is the real party in interest, and should have been
the claimant in this case.

Closely intertwined with the first assignment of error is the issue of whether or not PMC-U.S.A.
- a non-resident foreign corporation under Section 24(b)(1) of the Tax Code (the subsidiary of an
American) a domestic corporation domiciled in the United States, is entitled under the U.S. Tax
Code to a United States Foreign Tax Credit equivalent to at least the 20 percentage paid portion
(of the 35% dividend tax) spared or waived as otherwise considered or deemed paid by the
government. The law pertinent to the issue is Section 902 of the U.S. Internal Revenue Code, as
amended by Public Law 87-834, the law governing tax credits granted to U. S. corporations on
dividends received from foreign corporations, which to the extent applicable reads:

"SEC. 902 CREDIT FOR CORPORATE STOCKHOLDERS IN FOREIGN CORPORATION.

(a) Treatment of Taxes Paid by Foreign Corporation ---- For purposes of this subject, a domestic
corporation which owns at least 10 percent of the voting stock of a foreign corporation from
which it receives dividends in any taxable year shall

(1) to the extent such dividends are paid by such foreign corporation out of accumulated profits
[as defined in subsection (c) (1) (a)] of a year for which such foreign corporation is not a less
developed country corporation, be deemed to have paid the same proportion of any income, war
profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any
foreign country or to any possession of the United States on or with respect to such accumulated
profits, which the amount of such dividends (determined without regard to Section 78) bears to
the amount of such accumulated profits in excess of such income, war profits, and excess profits
taxes (other than those deemed paid); and

(2) to the extent such dividends are paid by such foreign corporation out of accumulated profits
[as defined in subsection (c) (1) (b)] of a year for which such foreign corporation is a less
developed country corporation, be deemed to have paid the same proportion of any income, war
profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any
foreign country or to any possession of the United States on or with respect to such accumulated
profits, which the amount of such dividends bears to the amount of such accumulated profits.

Xxx xxx xxx

(c ) Applicable Rules

(1) Accumulated profits defined. - For purposes of this section, the term 'accumulated profits'
means with respect to any foreign corporation.

(A) for purposes of subsections (a) (1) and (b) (1), the amount of its gains, profits, or income
computed without reduction by the amount of the income, war profits, and excess profits taxes
imposed on or with respect to such profits or income by any foreign country. . . ; and

(B) for purposes of subsections (a) (2) and (b) (2), the amount of its gains, profits, or income in
excess of the income, was profits, and excess profits taxes imposed on or with respect to such
profits or income.

The Secretary or his delegate shall have full power to determine from the accumulated profits of
what year or years such dividends were paid, treating dividends paid in the first 20 days of any
year as having been paid from the accumulated profits of the preceding year or years (unless to
his satisfaction shows otherwise), and in other respects treating dividends as having been paid
from the most recently accumulated gains, profits, or earnings . . ." (Rollo, pp. 55-56)

To Our mind there is nothing in the aforecited provision that would justify tax return of the
disputed 15% to the private respondent, Furthermore, as ably argued by the petitioner, the private
respondent failed to meet certain conditions necessary in order that the dividends received by the
non-resident parent company in the United States may be subject to the preferential 15% tax
instead of 35%. Among other things, the private respondent failed: (1) to show the actual amount
credited by the U.S. government against the income tax due from PMC-U.S.A. on the dividends
received from private respondent; (2) to present the income tax return of its mother company for
1975 when the dividends were received; and (3) to submit any duly authenticated document
showing that the U.S. government credited the 20% tax deemed paid in the Philippines.

PREMISES CONSIDERED, the petition is GRANTED and the decision appealed from, is
REVERSED and SET ASIDE.

SO ORDERED.

PILMICO-MAURI FOODS CORP., PETITIONER, VS. COMMISSIONER OF

INTERNAL REVENUE, RESPONDENT.

G.R. No. 175651 | 2016-09-14

Republic of the Philippines

Supreme Court
Manila

THIRD DIVISION

RESOLUTION

REYES, J.:

Before the Court is a petition for review on certiorari[1] under Rule 45 of the Rules of
Court pursuant to Republic Act (R.A.) No. 1125,[2] Section 19,[3] as amended by R.A. No.
9282,[4] Section 12.[5] The petition filed by Pilmico-Mauri Foods Corp. (PMFC) against the
Commissioner of Internal Revenue (CIR) assails the Decision[6] and Resolution[7] of the
Court of Appeals (CTA) en banc, dated August 29, 2006 and December 4, 2006,
respectively, in C.T.A. EB No. 97.

Antecedents

The CTA aptly summed up the facts of the case as follows:

[PMFC] is a corporation, organized and existing under the laws of the Philippines, with
principal place of business at Aboitiz Corporate Center, Banilad, Cebu City.

The books of accounts of [PMFC] pertaining to 1996 were examined by the [CIR] thru
Revenue Officer Eugenio D. Maestrado of Revenue District No. 81 (Cebu City North
District) for deficiency income, value-added [tax] (VAT) and withholding tax liabilities.

As a result of the investigation, the following assessment notices were issued against
[PMFC]:

Assessment Notice No. 81-WT-13-96-98-11-126, dated November 26, 1998,

(a)demanding payment for deficiency withholding taxes for the year 1996 in the sum of
P384,925.05 (inclusive of interest and other penalties);
 Assessment Notice No. 81-VAT-13-96-98-11-127, dated November 26, 1998,
(b)demanding payment of deficiency value-added tax in the sum of P5,017,778.01
(inclusive of interest and other penalties); [and]

Assessment Notice No. 81-IT-13-96[-]98-11-128, dated November 26, 1998,

(c) demanding payment of. deficiency income tax for the year 1996 in the sum of
P4,359,046.96 (inclusive of interest and other penalties).

The foregoing Assessment Notices were all received by [PMFC] on December 1, 1998. On
December 29, 1998, [PMFC] filed a protest letter against the aforementioned deficiency
tax assessments through the Regional Director, Revenue Region No. 13, Cebu City.

In a final decision of the [CIR] on the disputed assessments dated July 3, 2000, the
deficiency tax liabilities of [PMFC] were reduced from P9,761,750.02 to P3,020,259.30,
broken down as follows:

a) Deficiency withholding tax from P384,925.05 to P197,780.67;

b) Deficiency value-added tax from P5,017,778.01 to P1,642,145.79; and
c) Deficiency Income Tax from P4,359,046.96 to P1,180,332.84.

xxxx

On the basis of the foregoing facts[, PMFC] filed its Petition for Review on August 9, 2000.
In the "Joint Stipulation of Facts" filed on March 7, 2001, the parties have agreed that
the following are the issues to be resolved:

I. Whether or not [PMFC] is liable for the payment of deficiency income, value-added,
expanded withholding, final withholding and withholding tax (on compensation).

II. On the P1,180,382.84 deficiency income tax

A. Whether or not the P5,895,694.66 purchases of raw materials are unsupported[;]

B. Whether or not the cancelled invoices and expenses for taxes, repairs and freight are
unsupported[;]

C. Whether or not commission, storage and trucking charges claimed are deductible[;
and]

D. Whether or not the alleged deficiency income tax for the year 1996 was correctly
computed.

xxxx

V. Whether or not [CIR's] decision on the 1996 internal revenue tax liabilities of [PMFC]
is contrary to law and the facts.

After trial on the merits, the [CTA] in Division rendered the assailed Decision affirming
the assessments but in the reduced amount of P2,804,920.36 (inclusive of surcharge and
deficiency interest) representing [PMFC's] Income, VAT and Withholding Tax deficiencies
for the taxable year 1996 plus 20% delinquency interest per annum until fully paid. The
[CTA] in Division ruled as follows:
"However, [PMFC's] contention that the NIRC of 1977 did not impose substantiation
requirements on deductions from gross income is bereft of merit. Section 238 of the 1977
Tax Code [now Section 237 of the National Internal Revenue Code of 1997] provides:

SEC. 238. 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 P25.00 or more, issue 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, That in the case of
sales, receipts or transfers in the amount of P100.00 or more, or, regardless of amount,
where the sale or transfer is made by persons subject to value-added tax to other
persons, also subject 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. 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.
xxx

From the foregoing provision of law, a person who is subject to an internal revenue tax
shall issue receipts, sales or commercial invoices, prepared at least in duplicate. The
provision likewise imposed a responsibility upon the purchaser to keep and preserve the
original copy of the invoice or receipt for a period of three years from the close of the
taxable year in which such invoice or receipt was issued. The rationale behind the latter
requirement is the duty of the taxpayer to keep adequate records of each and every
transaction entered into in the conduct of its business. So that when their books of
accounts are subjected to a tax audit examination, all entries therein, could be shown as
adequately supported and proven as legitimate business transactions. Hence, [PMFC's]
claim that the NIRC of 1977 did not require substantiation requirements is erroneous.

In fact, in its effort to prove the above-mentioned purchases of raw materials, [PMFC]
presented the following sales invoices:

Exhibit Number Invoice No. Date Gross Amount 10% VAT Net Amount

B-3 2072 04/18/96 P2,312,670.00 P210,242.73 P2,102,427.27

B-7,

B-11 2026 Undated 2,762,099.10 251,099.92 2,510,999.18

P5,074,769.10 P461,342.65 P4,613,426.45

The mere fact that [PMFC] submitted the foregoing sales invoices belies [its] claim that
the NIRC of 1977 did not require that deductions must be substantiated by adequate
records.
From the total purchases of P5,893,694.64 which have been disallowed, it seems that a
portion thereof amounting to P1,280,268.19 (729,663.64 + 550,604.55) has no
supporting sales invoices because of [PMFC's] failure to present said invoices.

A scrutiny of the invoices supporting the remaining balance of P4,613,426.45

(P5,893,694.64 less P1,280,268.19) revealed the following:

In Sales Invoice No. 2072 marked as Exhibit B-3, the name Pilmico Foods Corporation
a)was erased and on top of it the name [PMFC] was inserted but with a counter signature
therein;

For undated Sales Invoice No. 2026, [PMFC] presented two exhibits marked as Exhibits
B-7 and B-11. Exhibit B-11 is the original sales invoice whereas Exhibit B-7 is a
photocopy thereof. Both exhibits contained the word Mauri which was inserted on top
and between the words Pilmico and Foods. The only difference is that in the original
b)copy (Exhibit B-11), there was a counter signature although the ink used was different
from that used in the rest of the writings in the said invoice; while in the photocopied
invoice (Exhibit B-7), no such counter signature appeared. [PMFC] did not explain why
the said countersignature did not appear in the photocopied invoice considering it was
just a mere reproduction of the original copy.

The sales invoices contain alterations particularly in the name of the purchaser giving rise
to serious doubts regarding their authenticity and if they were really issued to [PMFC].
Exhibit B-11 does not even have any date indicated therein, which is a clear violation of
Section 238 of the NIRC of 1977 which required that the official receipts must show the
date of the transaction.

Furthermore, [PMFC] should have presented documentary evidence establishing that

Pilmico Foods Corporation did not claim the subject purchases as deduction from its gross
income. After all, the records revealed that both [PMFC] and its parent company, Pilmico
Foods Corporation, have the same AVP Comptroller in the person of Mr. Eugenio Gozon,
who is in-charge of the financial records of both entities x x x.

Similarly, the official receipts presented by [PMFC] x x x, cannot be considered as valid

proof of [PMFC's] claimed deduction for raw materials purchases. The said receipts did
not conform to the requirements provided for under Section 238 of the NIRC of 1977, as
amended. First the official receipts were not in the name of [PMFC] but in the name of
Golden Restaurant. And second, these receipts were issued by PFC and not the alleged
seller, JTE.

Likewise, [PMFC's] allegations regarding the offsetting of accounts between [PMFC], PFC
and JTE is untenable. The following circumstances contradict [PMFC's] proposition:

1) the Credit Agreement itself does not provide for the offsetting arrangement;
2) [PMFC] was not even a party to the credit agreement; and
3) the official receipts in question pertained to the year 1996 whereas the Credit
Agreement (Exhibit M) and the Real Estate Mortgage Agreement (Exhibit N) submitted
by [PMFC] to prove the fact of the offsetting of accounts, were both executed only in
1997.
Besides, in order to support its claim, [PMFC] should have presented the following vital
documents, namely, 1) Written Offsetting Agreement; 2) proof of payment by [PMFC] to
Pilmico Foods Corporation; and 3) Financial Statements for the year 1996 of Pilmico Foods
Corporation to establish the fact that Pilmico Foods Corporation did not deduct the
amount of raw materials being claimed by [PMFC].

Considering that the official receipts and sales invoices presented by [PMFC] failed to
comply with the requirements of Section 238 of the NIRC of 1977, the disallowance by
the [CIR] of the claimed deduction for raw materials is proper.

[PMFC] filed a Motion for Partial Consideration on January 21, 2005 x x x but x x x
[PMFC's] Motion for Reconsideration was denied in a Resolution dated May 19, 2005 for
lack of merit, x x x.[8] (Citation omitted, italics ours and emphasis in the original)

Unperturbed, PMFC then filed a petition for review before the CTA en banc, which adopted
the CTA First Division's ruling and ratiocinations. Additionally, the CTA en banc declared
that:

The language of [Section 238] of the 1977 NIRC, as amended, is clear. It requires that
for each sale valued at P100.00 or more, the name, business style and address of the
purchaser, customer or client shall be indicated and that the purchaser is required to
keep and preserve the same in his place of business. The purpose of the law in requiring
the preservation by the purchaser of the official receipts or sales invoices for a period of
three years is two-fold: 1) to enable said purchaser to substantiate his claimed
deductions from the gross income, and 2) to enable the Bureau of Internal Revenue
to verify the accuracy of the gross income of the seller from external sources such as the
customers of said seller. Hence, [PMFC's] argument that there was no substantiation
requirement under the 1977 NIRC is without basis.

Moreover, the Supreme Court had ruled that in claiming deductions for business expenses
[,] it is not enough to prove the business test but a claimant must substantially prove by
evidence or records the deductions claimed under the law, thus:

The principle is recognized that when a taxpayer claims a deduction, he must point to
some specific provision of the statute in which that deduction is authorized and must be
able to prove that he is entitled to the deduction which the law allows. As previously
adverted to, the law allowing expenses as deduction from gross income for purposes of
the income tax is Section 30 (a) (l) of the National Internal Revenue which allows a
deduction of "all the ordinary and necessary expenses paid or incurred during the taxable
year in carrying on any trade or business.["] An item of expenditure, in order to be
deductible under this section of the statute must fall squarely within its language.

We come, then, to the statutory test of deductibility where it is axiomatic that to be

deductible as a business expense, three conditions are imposed, namely:

(1) the expense must be ordinary and necessary;

(2) it must be paid or incurred within the taxable year, and
(3) it must be paid or incurred in carrying on a trade or business. In addition, not only
must the taxpayer meet the business test, he must substantially prove by
evidence or records the deductions claimed under the law, otherwise, the same
will be disallowed. The mere allegation of the taxpayer that an item of expense is
ordinary and necessary does not justify its deduction. x x x

And in proving claimed deductions from gross income, the Supreme Court held
that invoices and official receipts are the best evidence to substantiate deductible
business expenses. x x x

x x x x

The irregularities found on the official receipts and sales invoices submitted in evidence
by [PMFC], i.e. not having been issued in the name of [PMFC] as the purchaser and the
fact that the same were not issued by the alleged seller himself directly to the purchaser,
rendered the same of no probative value.

Parenthetically, the "Cohan Rule" which according to [PMFC] was adopted by the
Supreme Court in the case of Visayan Cebu Terminal v. Collector, x x x, is not applicable
because in both of these cases[,] there were natural calamities that prevented the
taxpayers therein to fully substantiate their claimed deductions. In the Visayan Cebu
Terminal case, there was a fire that destroyed some of the supporting documents for the
claimed expenses. There is no such circumstance in [PMFC's] case, hence, the ruling
therein is not applicable. It is noteworthy that notwithstanding the destruction of some
of the supporting documents in the aforementioned Visayan Cebu Terminal case, the
Supreme Court[,] in denying the appeal[,] issued the following caveat noting the violation
of the provision of the Tax Code committed by [PMFC] therein:

"It may not be amiss to note that the explanation to the effect that the supporting paper
of some of those expenses had been destroyed when the house of the treasurer was
burned, can hardly be regarded as satisfactory, for appellant's records are
supposed to be kept in its offices, not in the residence of one of its officers." x x x

From the above-quoted portion of the Supreme Court's Decision, it is clear that
compliance with the mandatory record-keeping requirements of the National Internal
Revenue Code should not be taken lightly. Raw materials are indeed deductible provided
they are duly supported by official receipts or sales invoices prepared and issued in
accordance with the invoicing requirements of the National Internal Revenue Code. x x x
[PMFC] failed to show compliance with the requirements of Section 238 of the 1977 NIRC
as shown by the fact that the sales invoices presented by [it] were not in its name but in
the name of Pilmico Foods Corporation.

x x x x

In the Joint Stipulation of Facts filed on March 7, 2001, the parties have agreed that with
respect to the deficiency income tax assessment, the following are the issues to be
resolved:

a. Whether or not the P5,895,694.66 purchases of raw materials are

unsupported;

x x x x

Clearly, the issue of proper substantiation of the deduction from gross income pertaining
to the purchases of raw materials was properly raised even before [PMFC] began
presenting its evidence. [PMFC] was aware that the [CIR] issued the assessment from
the standpoint of lack of supporting documents for the claimed deduction and the fact
that the assessments were not based on the deductibility of the cost of raw materials.
There is no difference in the basis of the assessment and the issue presented to the [CTA]
in Division for resolution since both pertain to the issue of proper supporting documents
for ordinary and necessary business expenses.[9] (Citation omitted, italics ours and
emphasis in the original)

PMFC moved for reconsideration. Pending its resolution, the CIR issued Revenue
Regulation (RR) No. 15-2006,[10]the abatement program of which was availed by PMFC
on October 27, 2006. Out of the total amount of P2,804,920.36 assessed as income,
value-added tax (VAT) and withholding tax deficiencies, plus surcharges and deficiency
interests, PMFC paid the CIR P1,101,539.63 as basic deficiency tax. The PMFC, thus,
awaits the CIR's approval of the abatement, which can render moot the resolution of the
instant petition.[11]

Meanwhile, the CTA en banc denied the motion for reconsideration[12] of PMFC, in its
Resolution[13] dated December 4, 2006.

Issues

In the instant petition, what is essentially being assailed is the CTA en banc's concurrence
with the CTA First Division's ruling, which affirmed but reduced the CIR's income
deficiency tax assessment against PMFC. More specifically, the following errors are
ascribed to the CTA:

The Honorable CTA First Division deprived PMFC of due process of law and the CTA
assumed an executive function when it substituted a legal basis other than that stated in
the assessment and pleading of the CIR, contrary to law.

II

The decision of the Honorable CTA First Division must conform to the pleadings and the
theory of the action under which the case was tried. A judgment going outside the issues
and purporting to adjudicate something on which the parties were not heard is invalid.
Since the legal basis cited by the CTA supporting the validity of the assessment was never
raised by the CIR, PMFC was deprived of its constitutional right to be apprised of the legal
basis of the assessment.

III

The nature of evidence required to prove an ordinary expense like raw materials is
governed by Section 29[14] of the 1977 National Internal Revenue Code (NIRC) and not
by Section 238 as found by the CTA.[15]

In support of the instant petition, PMFC claims that the deficiency income tax assessment
issued against it was anchored on Sect on 34(A)(l)(b)[16] of the 1997 NIRC. In disallowing
the deduction of the purchase of raw materials from PMFC's gross income, the CIR never
m any reference to Section 238 of the 1977 NIRC relative to the mandatory requirement
of keeping records of official receipts, upon which the CTA had misplaced reliance. Had
substantiation requirements under Section 23 the 1977 NIRC been made an issue during
the trial, PMFC could have presented official receipts or invoices, or could have compelled
its suppliers to issue the same.[17]

PMFC further argues that in determining the deductibility of the purchase of raw materials
from gross income, Section 29 of the 1977 NIRC is the applicable provision. According to
the said section, for the deduction to be allowed, the expenses must be (a) both ordinary
and necessary; (b) incurred in carrying on a trade or business; and (c) paid or incurred
within the taxable year. PMFC, thus, claims that prior to the promulgation of the 1997
NIRC, the law does not require the production of official receipts to prove an expense.[18]

In its Comment,[19] the Office of the Solicitor General (OSG) counters that the arguments
advanced by PMFC are mere reiterations of those raised in the proceedings below.
Further, PMFC was fully apprised of the assailed tax assessments and had all the
opportunities to prove its claims.[20]

The OSG also avers that in the Joint Stipulation of Facts filed before the CTA First Division
on March 7, 2001, it was stated that one of the issues for resolution was "whether or not
the Php5,895,694.66 purchases of raw materials are unsupported." Hence, PMFC was
aware that the CIR issued the assessments due to lack of supporting documents for the
deductions claimed. Essentially then, even in the proceedings before the CIR, the primary
issue has always been the lack or inadequacy of supporting documents for ordinary and
necessary business expenses.[21]

The OSG likewise points out that PMFC failed to satisfactorily discharge the burden of
proving the propriety of the tax deductions claimed. Further, there were discrepancies in
the names of the sellers and purchasers i indicated in the receipts casting doubts on their
authenticity.[22]

Ruling of the Court

The Court affirms but modifies the herein assailed decision and resolution.

Preliminary matters

On December 19, 2006, PMFC filed before the Court a motion for extension of time to file
a petition for review.[23] In the said motion, PMFC informed the Court that it had availed
of the CIR's tax abatement program, the details of which were provided for in RR No. 15-
2006. PMFC paid the CIR the amount of P1,101,539.63 as basic deficiency tax. PMFC
manifested that if the abatement application would be approved by the CIR, the instant
petition filed before the Court may be rendered superfluous.

According to Section 4 of RR No. 15-2006, after the taxpayer's payment of the assessed
basic deficiency tax, the docket of the case shall forwarded to the CIR, thru the Deputy
Commissioner for Operations Group, for issuance of a termination letter. However, as of
this Resolution's writing, none of the parties have presented the said termination letter.
Hence, the Court cannot outrightly dismiss the instant petition on the ground of
mootness.

On the procedural issues raised by PMFC

The first and second issues presented by PMFC are procedural in nature. They both
pertain to the alleged omission of due process of law by the CTA since in its rulings, it
invoked Section 238 of the 1977 NIRC, while in the proceedings below, the CIR's tax
deficiency assessments issued against PMFC were instead anchored on Section 34 of the
1997 NIRC.

Due process was not violated.

In CIR v. Puregold Duty Free, Inc.,[24] the Court is emphatic that:

It is well settled that matters that were neither alleged in the pleadings nor raised during
the proceedings below cannot be ventilated for the first time on appeal and are barred
by estoppel. To allow the contrary would constitute a violation of the other party's right
to due process, and is contrary to the principle of fair play. x x x

x x x Points of law, theories, issues, and arguments not brought to the attention of the
trial court ought not to be considered by a reviewing court, as these cannot be raised for
the first time on appeal. To consider the alleged facts and arguments belatedly raised
would amount to trampling on the basic principles of fair play, justice, and due
process.[25] (Citations omitted)

In the case at bar, the CIR issued assessment notices against PMFC for deficiency income,
VAT and withholding tax for the year 1996. PMFC assailed the assessments before the
Bureau of Internal Revenue and late before the CTA.

In the Joint Stipulation of Facts, dated March 7, 2001, filed before CTA First Division, the
CIR and PMFC both agreed that among the issues for resolution was "whether or not the
P5,895,694.66 purchases of raw materials are unsupported."[26] Estoppel, thus, operates
against PMFC anent its argument that the issue of lack or inadequacy of documents to
justify the costs of purchase of raw materials as deductions from the gross income had
not been presented in the proceedings below, hence, barred for being belatedly raised
only on appeal.

Further, in issuing the assessments, the CIR had stated the material facts and the law
upon which they were based. In the petition for review filed by PMFC before the CTA, it
was the former's burden to properly invoke the applicable legal provisions in pursuit of
its goal to reduce its tax liabilities. The CTA, on the other hand, is not bound to rule solely
on the basis of the laws cited by the CIR. Were it otherwise, the tax court's appellate
power of review shall be rendered useless. An absurd situation would arise leaving the
CTA with only two options, to wit:

(a) affirming the CIR's legal findings; or

(b) altogether absolving the taxpayer from liability if the CIR relied on misplaced legal
provisions. The foregoing is not what the law intends.

To reiterate, PMFC was at the outset aware that the lack or inadequacy of supporting
documents to justify the deductions claimed from the gross income was among the issues
raised for resolution before the CTA. With PMFC's acquiescence to the Joint Stipulation of
Facts filed before the CTA and thenceforth, the former's participation in the proceedings
with all opportunities it was afforded to ventilate its claims, the alleged deprivation of due
process is bereft of basis.

On the applicability of Section 29 of the 1977 NIRC

The third issue raised by PMFC is substantive in nature. At its core is the alleged
application of Section 29 of the 1977 NIRC as regards the deductibility from the gross
income of the cost of raw materials purchased by PMFC.

It bears noting that while the CIR issued the assessments on the basis of Section 34 of
the 1997 NIRC, the CTA and PMFC are in agreement that the 1977 NIRC finds application.

However, while the CTA ruled on the basis of Section 238 of the 1977 NIRC, PMFC now
insists that Section 29 of the same code should be applied instead. Citing Atlas
Consolidated Mining and Development Corporation v. CIR,[27]PMFC argues that Section
29 imposes less stringent requirements and the presentation of official receipts as
evidence of the claimed deductions dispensable. PMFC further posits that the mandatory
nature of the submission of official receipts as proof is a mere innovation in the 19 NIRC,
which cannot be applied retroactively.[28]

PMFC's argument fails.

The Court finds that the alleged differences between the requirements of Section 29 of
the 1977 NIRC invoked by PMFC, on one hand, and Section 238 relied upon by the CTA,
on the other, are more imagined than real.

In CIR v. Pilipinas Shell Petroleum Corporation,[29] the Count enunciated that:

It is a rule in statutory construction that every part of the statute must be interpreted
with reference to the context, i.e., that every part of the statute must be considered
together with the other parts, and kept subservient to the general intent of the whole
enactment. The law must not be read in truncated parts, its provisions must be read in
relation to the whole law. The particular words, clauses and phrases should not be studied
as detached and isolated expression, but the whole and every part of the statute must
be considered in fixing the meaning of any of its parts and in order to produce a
harmonious whole.[30] (Citations omitted)

The law, thus, intends for Sections 29 and 238 of the 1977 NIRC to be read together,
and not for one provision to be accorded preference over the other.

It is undisputed that among the evidence adduced by PMFC on it behalf are the official
receipts of alleged purchases of raw materials. Thus, the CTA cannot be faulted for
making references to the same, and for applying Section 238 of the 1977 NIRC in
rendering its judgment. Required or not, the official receipts were submitted by PMFC as
evidence. Inevitably, the said receipts were subjected to scrutiny, and the CTA
exhaustively explained why it had found them wanting.

PMFC cites Atlas[31] to contend that the statutory test, as provided in Section 29 of the
1977 NIRC, is sufficient to allow the deductibility of a business expense from the gross
income. As long as the expense is:

(a) both ordinary and necessary;

(b) incurred in carrying a business or trade; and
(c) paid or incurred within the taxable year, then, it shall be allowed as a deduction from
the gross income.[32]

Let it, however, be noted that in Atlas, the Court likewise declared that:

In addition, not only must the taxpayer meet the business test, he must substantially
prove by evidence or records the deductions claimed under the law, otherwise, the same
will be disallowed. The mere allegation of the taxpayer that an item of expense is ordinary
and necessary does not justify its deduction.[33] (Citation omitted and italics ours)

It is, thus, clear that Section 29 of the 1977 NIRC does not exempt the taxpayer from
substantiating claims for deductions. While official receipts are not the only pieces of
evidence which can prove deductible expenses, if presented, they shall be subjected to
examination. PMFC submitted official receipts as among its evidence, and the CTA
doubted their veracity. PMFC was, however, unable to persuasively explain and prove
through other documents the discrepancies in the said receipts. Consequently, the CTA
disallowed the deductions claimed, and in its ruling, invoked Section 238 of the 1977
NIRC considering that official receipts are matters provided for in the said section.

Conclusion

The Court recognizes that the CTA, which by the very nature of its function is dedicated
exclusively to the consideration of tax problems, has necessarily developed an expertise
on the subject, and its conclusions will not be overturned unless there has been an abuse
or improvident exercise of authority. Such findings 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 tax court. In the absence of any clear and convincing proof to
the contrary, the Court must presume that the CTA rendered a decision which is valid in
every respect.[34]

Further, revenue laws are not intended to be liberally construed. Taxes are the lifeblood
of the government and in Holmes' memorable metaphor, the price we pay for civilization;
hence, laws relative thereto must be faithfully and strictly implemented. [35] While the
1977 NIRC required substantiation requirements for claimed deductions to be allowed,
PMFC insists on leniency, which is not warranted under the circumstances.

Lastly, the Court notes too that PMFC's tax liabilities have been me than substantially
reduced to P2,804,920.36 from the CIR's initial assessment of P9,761,750.02.[36]

In precis, the affirmation of the herein assailed decision and resolution is in order.

However, the Court finds it proper to modify the herein assail decision and resolution to
conform to the interest rates prescribed in Nacar v. Gallery Frames, et al.[37] The total
amount of P2,804,920.36 to be paid PMFC to the CIR shall be subject to an interest of
six percent (6%) per annum to be computed from the finality of this Resolution until full
payment.

WHEREFORE, the instant petition is DENIED. The Decision dated August 29, 2006 and
Resolution dated December 4, 2006 of the Court of Tax Appeals en banc in C.T.A. EB No.
97 are AFFIRMED. However, MODIFICATION thereof, the legal interest of six percent
(6%) per annum reckoned from the finality of this Resolution until full satisfaction, is here
imposed upon the amount of P2,804,920.36 to be paid by Pilmico-Mauri Foods
Corporation to the Commissioner of Internal Revenue.

SO ORDERED.

SUPREME TRANSLINER, INC., MOISES C. ALVAREZ and PAULITA S. ALVAREZ,

Petitioners, vs. BPI FAMILY SAVINGS BANK, INC., Respondent.

-------------------------------------------------------------------------------------

BPI FAMILY SAVINGS BANK, INC., Petitioner, vs. SUPREME TRANSLINER, INC.,
MOISES C. ALVAREZ and PAULITA S. ALVAREZ, Respondents.

G.R. No. 165617 / G.R. No. 165837 | 2011-02-25

A discussion citing this case or law is available.

Foreclosure sale, tax consequences

THIRD DIVISION

DECISION

VILLARAMA, JR., J.:

This case involves the question of the correct redemption price payable to a mortgagee bank
as purchaser of the property in a foreclosure sale.

On April 24, 1995, Supreme Transliner, Inc. represented by its Managing Director, Moises C.
Alvarez, and Paulita S. Alvarez, obtained a loan in the amount of P9,853,000.00 from BPI
Family Savings Bank with a 714-square meter lot covered by Transfer Certificate of Title No.
T-79193 in the name of Moises C. Alvarez and Paulita S. Alvarez, as collateral.1

For non-payment of the loan, the mortgage was extrajudicially foreclosed and the property
was sold to the bank as the highest bidder in the public auction conducted by the Office of
the Provincial Sheriff of Lucena City. On August 7, 1996, a Certificate of Sale2 was issued in
favor of the bank and the same was registered on October 1, 1996.
Before the expiration of the one-year redemption period, the mortgagors notified the bank of
their intention to redeem the property. Accordingly, the following Statement of Account3 was
prepared by the bank indicating the total amount due under the mortgage loan agreement:

xxxx

Balance of Principal P 9,551,827.64

Add: Interest Due 1,417,761.24

Late Payment Charges 155,546.25

MRI 0.00

Fire Insurance 0.00

Foreclosure Expenses 155,817.23

Sub-total P 11,280,952.36

Less: Unapplied Payment 908,241.01

Total Amount Due As 10,372,711.35

Of 08/07/96 (Auction Date)

Add: Attorney’s Fees (15%) 1,555,906.70

Liquidated Damages (15%) 1,555,906.70

Interest on P 10,372,711.35
from 08/07/96 to 04/07/97 (243
days) at 17.25% p.a.
1,207,772.58

xxxx

Asset Acquired Expenses:

Documentary Stamps 155,595.00

Capital Gains Tax 518,635.57

Foreclosure Fee 207,534.23

Registration and Filing Fee 23,718.00

Add’l. Registration & Filing Fee 660.00 906,142.79

 Interest on P 906,142.79
from 08/07/96 to 04/07/97 (243
days)
105,509.00
at 17.25% p.a.

Cancellation Fee 300.00

Total Amount Due As

Of 04/07/97 (Subject to Audit)
P 15,704,249.12

xxxx

The mortgagors requested for the elimination of liquidated damages and reduction of
attorney’s fees and interest (1% per month) but the bank refused. On May 21, 1997, the
mortgagors redeemed the property by paying the sum of P15,704,249.12. A Certificate of
Redemption4 was issued by the bank on May 27, 1997.

On June 11, 1997, the mortgagors filed a complaint against the bank to recover the allegedly
unlawful and excessive charges totaling P5,331,237.77, with prayer for damages and
attorney’s fees, docketed as Civil Case No. 97-72 of the Regional Trial Court of Lucena City,
Branch 57.

In its Answer with Special and Affirmative Defenses and Counterclaim, the bank asserted that
the redemption price reflecting the stipulated interest, charges and/or expenses, is valid, legal
and in accordance with documents duly signed by the mortgagors. The bank further
contended that the claims are deemed waived and the mortgagors are already estopped from
questioning the terms and conditions of their contract.

On September 30, 1997, the bank filed a motion to set the case for hearing on the special
and affirmative defenses by way of motion to dismiss. The trial court denied the motion on
January 8, 1998 and also denied the bank’s motion for reconsideration. The bank elevated
the matter to the Court of Appeals (CA-G.R. SP No. 47588) which dismissed the petition for
certiorari on February 26, 1999.

On February 14, 2002, the trial court rendered its decision5 dismissing the complaint and the
bank’s counterclaims. The trial court held that plaintiffs-mortgagors are bound by the terms
of the mortgage loan documents which clearly provided for the payment of the following
interest, charges and expenses: 18% p.a. on the loan, 3% post-default penalty, 15%
liquidated damages, 15% attorney’s fees and collection and legal costs. Plaintiffs-mortgagors’
claim that they paid the redemption price demanded by the defendant bank under extreme
pressure was rejected by the trial court since there was active negotiation for the final
redemption price between the bank’s representatives and plaintiffs-mortgagors who at the
time had legal advice from their counsel, together with Orient Development Banking
Corporation which committed to finance the redemption.

According to the trial court, plaintiffs-mortgagors are estopped from questioning the
correctness of the redemption price as they had freely and voluntarily signed the letter-
agreement prepared by the defendant bank, and along with Orient Bank expressed their
conformity to the terms and conditions therein, thus:

May 14, 1997

ORIENT DEVELOPMENT BANKING CORPORATION

7th Floor Ever Gotesco Corporate Center

C.M. Recto Avenue corner Matapang Street

Manila

Attention: MS. AIDA C. DELA ROSA

Senior Vice-President

Gentlemen:

This refers to your undertaking to settle the account of SUPREME

TRANS LINER, INC. and spouses MOISES C. ALVAREZ and PAULITA S.
ALVAREZ, covering the real estate property located in the Poblacion, City
of Lucena under TCT No. T-79193 which was foreclosed by BPI FAMILY
SAVINGS BANK, INC.

With regard to the proposed refinancing of the account, we interpose

no objection to the annotation of your mortgage lien thereon subject to the
following conditions:

1. That all expenses for the registration of the annotation of mortgage

and other incidental registration and cancellation expenses shall be
borne by the borrower.

2. That you will recognize our mortgage liens as first and superior until
the loan with us is fully paid.
 3. That you will annotate your mortgage lien and pay us the full
amount to close the loan within five (5) working days from the
receipt of the titles. If within this period, you have not registered
the same and paid us in full, you will immediately and
unconditionally return the titles to us without need of demand, free
from liens/encumbrances other than our lien.

4. That in case of loss of titles, you will undertake and shoulder the
cost of re-issuance of a new owner’s titles.

5. That we will issue the Certificate of Redemption after full payment

of P15,704,249.12. representing the outstanding balance of
the loan as of May 15, 1997 including interest and other
charges thereof within a period of five (5) working days after
clearance of the check payment.

6. That we will release the title and the Certificate of Redemption and
other pertinent papers only to your authorized representative with
complete authorization and identification.

7. That all expenses related to the cancellation of your annotated

mortgage lien should the Bank be not fully paid on the period above
indicated shall be charged to you.

If you find the foregoing conditions acceptable, please indicate your

conformity on the space provided below and return to us the duplicate copy.

Very truly yours,

BPI FAMILY BANK

BY:

(SGD.) LOLITA C. CARRIDO

Manager

CONFORME:

ORIENT DEVELOPMENT BANKING CORPORATION

(SGD.) AIDA C. DELA ROSA

Senior Vice President

 CONFORME:

SUPREME TRANS LINER, INC.

(SGD.) MOISES C. ALVAREZ/PAULITA S. ALVAREZ

Mortgagors[6]

(Underscoring in the original; emphasis supplied.)

As to plaintiffs-mortgagors’ contention that the amounts representing attorney’s fees and

liquidated damages were already included in the P10,372,711.35 bid price, the trial court said
this was belied by their own evidence, the Statement of Account showing the breakdown of
the redemption price as computed by the defendant bank.

The mortgagors appealed to the CA (CA-G.R. CV No. 74761) which, by Decision7 dated April
6, 2004 reversed the trial court and decreed as follows:

WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET
ASIDE. A new one is hereby entered as follows:

1. Plaintiffs-appellants’ complaint for damages against defendant-appellee is hereby

REINSTATED;

2. Defendant-appellee is hereby ORDERED to return to plaintiffs-appellees (sic) the invalidly

collected amount of P3,111,813.40 plus six (6) percent legal interest from May 21, 1997 until
fully returned;

3. Defendant-appellee is hereby ORDERED to pay plaintiffs-appellees (sic) the amount of

P100,000.00 as moral damages, P100,000.00 as exemplary damages and P100,000.00 as
attorney’s fees;

4. Costs against defendant-appellee.

SO ORDERED.8

The CA ruled that attorney’s fees and liquidated damages were already included in the bid
price of P10,372,711.35 as per the recitals in the Certificate of Sale that said amount was
paid to the foreclosing mortgagee to satisfy not only the principal loan but also "interest and
penalty charges, cost of publication and expenses of the foreclosure proceedings." These
"penalty charges" consist of 15% attorney’s fees and 15% liquidated damages which the bank
imposes as penalty in cases of violation of the terms of the mortgage deed. The total
redemption price thus should only be P12,592,435.72 and the bank should return the amount
of P3,111,813.40 representing attorney’s fees and liquidated damages. The appellate court
further stated that the mortgagors cannot be deemed estopped to question the propriety of
the charges because from the very start they had repeatedly questioned the imposition of
attorney’s fees and liquidated damages and were merely constrained to pay the demanded
redemption price for fear that the redemption period will expire without them redeeming their
property.9

By Resolution10 dated October 12, 2004, the CA denied the parties’ respective motions for
reconsideration.

Hence, these petitions separately filed by the mortgagors and the bank.

In G.R. No. 165617, the petitioners-mortgagors raise the single issue of whether the
foreclosing mortgagee should pay capital gains tax upon execution of the certificate of sale,
and if paid by the mortgagee, whether the same should be shouldered by the redemptioner.
They specifically prayed for the return of all asset-acquired expenses consisting of
documentary stamps tax, capital gains tax, foreclosure fee, registration and filing fee, and
additional registration and filing fee totaling P906,142.79, with 6% interest thereon from May
21, 1997.11

On the other hand, the petitioner bank in G.R. No. 165837 assails the CA in holding that –

1. … the Certificate of Sale, the bid price of P10,372,711.35 includes penalty charges and as
such for purposes of computing the redemption price petitioner can no longer impose upon
the private respondents the penalty charges in the form of 15% attorney’s fees and the 15%
liquidated damages in the aggregate amount of P3,111,813.40, although the evidence
presented by the parties show otherwise.

2. … private respondents cannot be considered to be under estoppel to question the propriety

of the aforestated penalty charges despite the fact that, as found by the Honorable Trial Court,
"there was very active negotiation between the parties in the computation of the redemption
price" culminating into the signing freely and voluntarily by the petitioner, the private
respondents and Orient Bank, which financed the redemption of the foreclosed property, of
Exhibit "3", wherein they mutually agreed that the redemption price is in the sum of
P15,704,249.12.

3. … petitioner [to] pay private respondents damages in the aggregate amount of

P300,000.00 on the ground that the former acted in bad faith in the imposition upon them of
the aforestated penalty charges, when in truth it is entitled thereto as the law and the contract
expressly provide and that private respondents agreed to pay the same.12

On the correct computation of the redemption price, Section 78 of Republic Act No. 337,
otherwise known as the General Banking Act, governs in cases where the mortgagee is a
bank.13 Said provision reads:

SEC. 78. x x x In the event of foreclosure, whether judicially or extrajudicially, of any

mortgage on real estate which is security for any loan granted before the passage of this Act
or under the provisions of this Act, the mortgagor or debtor whose real property has been
sold at public auction, judicially or extrajudicially, for the full or partial payment of an
obligation to any bank, banking or credit institution, within the purview of this Act shall have
the right, within one year after the sale of the real estate as a result of the foreclosure of the
respective mortgage, to redeem the property by paying the amount fixed by the court in the
order of execution, or the amount due under the mortgage deed, as the case may be, with
interest thereon at the rate specified in the mortgage, and all the costs, and judicial and other
expenses incurred by the bank or institution concerned by reason of the execution and sale
and as a result of the custody of said property less the income received from the property. x
x x x (Emphasis supplied.)

Under the Mortgage Loan Agreement,14 petitioners-mortgagors undertook to pay the

attorney’s fees and the costs of registration and foreclosure. The following contract terms
would show that the said items are separate and distinct from the bid price which represents
only the outstanding loan balance with stipulated interest thereon.

23. Application of Proceeds of Foreclosure Sale. The proceeds of sale of the mortgaged
property/ies shall be applied as follows:

a) To the payment of the expenses and cost of foreclosure and sale, including the attorney’s
fees as herein provided;

b) To the satisfaction of all interest and charges accruing upon the obligations herein and
hereby secured.
c) To the satisfaction of the principal amount of the obligations herein and hereby secured.

d) To the satisfaction of all other obligations then owed by the Borrower/Mortgagor to the
Bank or any of its subsidiaries/affiliates such as, but not limited to BPI Credit Corporation; or
to Bank of the Philippine Islands or any of its subsidiaries/affiliates such as, but not limited to
BPI Leasing Corporation, BPI Express Card Corporation, BPI Securities Corporation and BPI
Agricultural Development Bank; and

e) The balance, if any, to be due to the Borrower/Mortgagor.

xxxx

31. Attorney’s Fees: In case the Bank should engage the services of counsel to enforce its
rights under this Agreement, the Borrower/Mortgagor shall pay an amount equivalent to
fifteen (15%) percent of the total amount claimed by the Bank, which in no case shall be less
than P2,000.00, Philippine currency, plus costs, collection expenses and disbursements
allowed by law, all of which shall be secured by this mortgage.15

Additionally, the Disclosure Statement on Loan/Credit Transaction16 also duly signed by the
petitioners-mortgagors provides:

10. ADDITIONAL CHARGES IN CASE CERTAIN STIPULATIONS ARE NOT MET BY THE
BORROWER

a. Post Default Penalty 3.00% per month

b. Attorney’s Services 15% of sum due but not less than P2,000.00

c. Liquidated Damages 15% of sum due but not less than P10,000.00

d. Collection & Legal Cost As provided by the Rules of Court

e. Others (Specify)
As correctly found by the trial court, that attorney’s fees and liquidated damages were not
yet included in the bid price of P10,372,711.35 is clearly shown by the Statement of Account
as of April 4, 1997 prepared by the petitioner bank and given to petitioners-mortgagors. On
the other hand, par. 23 of the Mortgage Loan Agreement indicated that asset acquired
expenses were to be added to the redemption price as part of "costs and other expenses
incurred" by the mortgagee bank in connection with the foreclosure sale.

Coming now to the issue of capital gains tax, we find merit in petitioners-mortgagors’
argument that there is no legal basis for the inclusion of this charge in the redemption price.
Under Revenue Regulations (RR) No. 13-85 (December 12, 1985), every sale or exchange or
other disposition of real property classified as capital asset under Section 34(a)17 of the Tax
Code shall be subject to the final capital gains tax. The term sale includes pacto de retro and
other forms of conditional sale. Section 2.2 of Revenue Memorandum Order (RMO) No. 29-86
(as amended by RMO No. 16-88 and as further amended by RMO Nos. 27-89 and 6-92) states
that these conditional sales "necessarily include mortgage foreclosure sales (judicial and
extrajudicial foreclosure sales)." Further, for real property foreclosed by a bank on or after
September 3, 1986, the capital gains tax and documentary stamp tax must be paid before
title to the property can be consolidated in favor of the bank.18

Under Section 63 of Presidential Decree No. 1529 otherwise known as the Property
Registration Decree, if no right of redemption exists, the certificate of title of the mortgagor
shall be cancelled, and a new certificate issued in the name of the purchaser. But where the
right of redemption exists, the certificate of title of the mortgagor shall not be cancelled, but
the certificate of sale and the order confirming the sale shall be registered by brief
memorandum thereof made by the Register of Deeds upon the certificate of title. In the event
the property is redeemed, the certificate or deed of redemption shall be filed with the Register
of Deeds, and a brief memorandum thereof shall be made by the Register of Deeds on the
certificate of title.

It is therefore clear that in foreclosure sale, there is no actual transfer of the mortgaged real
property until after the expiration of the one-year redemption period as provided in Act No.
3135 and title thereto is consolidated in the name of the mortgagee in case of non-
redemption. In the interim, the mortgagor is given the option whether or not to redeem the
real property. The issuance of the Certificate of Sale does not by itself transfer ownership.19

RR No. 4-99 issued on March 16, 1999, further amends RMO No. 6-92 relative to the payment
of Capital Gains Tax and Documentary Stamp Tax on extrajudicial foreclosure sale of capital
assets initiated by banks, finance and insurance companies.

SEC. 3. CAPITAL GAINS TAX. –

(1) In case the mortgagor exercises his right of redemption within one year from the issuance
of the certificate of sale, no capital gains tax shall be imposed because no capital gains has
been derived by the mortgagor and no sale or transfer of real property was realized. x x x

(2) In case of non-redemption, the capital gains [tax] on the foreclosure sale imposed under
Secs. 24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall become due based on the bid
price of the highest bidder but only upon the expiration of the one-year period of redemption
provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118, and shall be paid
within thirty (30) days from the expiration of the said one-year redemption period.

SEC. 4. DOCUMENTARY STAMP TAX. –

(1) In case the mortgagor exercises his right of redemption, the transaction shall only be
subject to the P15.00 documentary stamp tax imposed under Sec. 188 of the Tax Code of
1997 because no land or realty was sold or transferred for a consideration.

(2) In case of non-redemption, the corresponding documentary stamp tax shall be levied,
collected and paid by the person making, signing, issuing, accepting, or transferring the real
property wherever the document is made, signed, issued, accepted or transferred where the
property is situated in the Philippines. x x x (Emphasis supplied.)

Although the subject foreclosure sale and redemption took place before the effectivity of RR
No. 4-99, its provisions may be given retroactive effect in this case.

Section 246 of the NIRC of 1997 states:

SEC. 246. Non-Retroactivity of Rulings. – Any revocation, modification, or reversal of any of

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 in any
document required of him by the Bureau of Internal Revenue;
(b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based; or

(c) where the taxpayer acted in bad faith.

In this case, the retroactive application of RR No. 4-99 is more consistent with the policy of
aiding the exercise of the right of redemption. As the Court of Tax Appeals concluded in one
case, RR No. 4-99 "has curbed the inequity of imposing a capital gains tax even before the
expiration of the redemption period [since] there is yet no transfer of title and no profit or
gain is realized by the mortgagor at the time of foreclosure sale but only upon expiration of
the redemption period."20 In his commentaries, De Leon expressed the view that while
revenue regulations as a general rule have no retroactive effect, if the revocation is due to
the fact that the regulation is erroneous or contrary to law, such revocation shall have
retroactive operation as to affect past transactions, because a wrong construction of the law
cannot give rise to a vested right that can be invoked by a taxpayer.21

Considering that herein petitioners-mortgagors exercised their right of redemption before the
expiration of the statutory one-year period, petitioner bank is not liable to pay the capital
gains tax due on the extrajudicial foreclosure sale. There was no actual transfer of title from
the owners-mortgagors to the foreclosing bank. Hence, the inclusion of the said charge in the
total redemption price was unwarranted and the corresponding amount paid by the
petitioners-mortgagors should be returned to them.

WHEREFORE, premises considered, both petitions are PARTLY GRANTED.

In G.R. No. 165617, BPI Family Savings Bank, Inc. is hereby ordered to RETURN the amounts
representing capital gains and documentary stamp taxes as reflected in the Statement of
Account To Redeem as of April 7, 1997, to petitioners Supreme Transliner, Inc., Moises C.
Alvarez and Paulita Alvarez, and to retain only the sum provided in RR No. 4-99 as
documentary stamps tax due on the foreclosure sale.

In G.R. No. 165837, petitioner BPI Family Savings Bank, Inc. is hereby declared entitled to
the attorney’s fees and liquidated damages included in the total redemption price paid by
Supreme Transliner, Inc., Moises C. Alvarez and Paulita Alvarez. The sums awarded as moral
and exemplary damages, attorney’s fees and costs in favor of Supreme Transliner, Inc.,
Moises C. Alvarez and Paulita Alvarez are DELETED.

The Decision dated April 6, 2004 of the Court of Appeals in CA-G.R. CV No. 74761 is
accordingly MODIFIED.
SO ORDERED.

SMI-ED PHILIPPINES TECHNOLOGY, INC., petitioner, vs. COMMISSIONER OF

INTERNAL REVENUE, respondent.

C.T.A. Case No. 6532 | 2004-12-29

Tagged under keywords

SECOND DIVISION
DECISION

CASTANEDA, JR., J p:

This case involves a claim for refund in the amount of P44,677,500.00

allegedly representing the erroneously paid five (5%) final tax upon the sale
of the petitioner's factory and other buildings including the machinery and
equipment installed therein pursuant to Republic Act No. 7916.

The antecedent facts of the case are as follows:

Petitioner is a corporation duly organized and existing under Philippines

laws, with principal office address at First Philippine Industrial Park,
Barangay Sta. Anastacia, Sto. Tomas Batangas, and is registered with the
Securities and Exchange Commission (Paragraph 1, Joint Stipulation of Facts
and Issues).

On June 29, 1998, petitioner was registered with the Philippine Economic
Zone Authority ("PEZA") as an Ecozone Export 7916 (Exhibit B; Paragraph 3,
Joint Stipulation of Facts and Issues) to engage in the business of
manufacturing ultra high-density microprocessor unit package (page 200,
CTA Records).

Petitioner constructed a factory and other buildings within the aforesaid

office address, and purchased/imported machineries and equipment to be
installed therein at a total cost of P3,150,925,917.00 as of December 31,
1999 (Paragraph 4, Petition for Review, Exhibit C). However, it failed to
operate said business since petitioner's Board of Directors initially approved
the temporary closure of its factory effective October 15, 1999, even before
it began its operation due to the last Asian financial crisis, and subsequently,
its dissolution was finally approved by its directors and stockholders effective
November 30, 2000 (Exhibit H; Paragraph 2, Supplemental Joint Stipulation
of Facts).

Consequently, in preparation for its closure and dissolution, a Deed of

Absolute Sale dated August 1, 2000 (Exhibit J) was executed and entered
into by and between the petitioner and Ibiden Philippines, Inc., an unrelated
but also registered company with the PEZA, involving the subject factory and
other buildings including certain machinery and equipment installed therein,
for the total consideration of ¥2,100,000,000.00 (equivalent to
P893,550,000.00) (Exhibit D; Paragraph 3, Supplemental Joint Stipulation of
Facts).

On September 13, 2000, petitioner filed its quarterly income tax return for
the third quarter of calendar year 2000 and subjected the entire gross sales
of the aforesaid transaction to the 5% final tax and paid the tax of
P44,677,500.00 (Exhibits E to E-2; Paragraph 4, Supplemental Joint
Stipulation of Facts).

Subsequently, petitioner requested for the cancellation of its registration as

an Ecozone Export Enterprise from PEZA, which was eventually granted
effective September 20, 2000 (Exhibit I).

On January 18, 2001, petitioner filed with the Securities and Exchange
Commission an application to amend its Articles of Incorporation to shorten
its corporate term (Paragraph 5, Supplemental Joint Stipulation of Facts).

On February 2, 2001, petitioner filed with the Large Taxpayers Division or

LTD (now Large Taxpayers District Office or LTDO) of the Bureau of Internal
Revenue (BIR) its administrative claim for refund in the amount of
P44,677,500.00 representing the alleged erroneously paid 5% final tax
(Exhibit G; Paragraph 8, Joint Stipulation of Facts and Issues).

Furthermore, on March 1, 2001, petitioner filed its final income tax return for
the short 11-month period ending November 30, 2000 (Paragraph 5,
Stipulation of Facts), indicating an alleged net loss of P2,233,464,538.00
and an alleged refundable amount of P44,677,500.00 for the erroneously
paid 5% tax (Exhibit F).

Alleging inaction on the part of the respondent and in order to stop the
running of the two-year prescriptive period, petitioner elevated the case
through a Petition for Review with this Court on September 9, 2002.

By way of an Answer filed on October 10, 2002, respondent asserted the

following Special and Affirmative Defenses:
4. Petitioner's alleged claim for refund/tax credit is subject to administrative
routinary examination/investigation by the respondent's Bureau;
5. Petitioner failed miserably to show that the total amount of
P44,677,500.00 claimed as erroneously pad tax was erroneously or illegally
collected or that the same was properly documented;
6. Taxes paid and collected are presumed to have been paid in accordance
with law; hence, not refundable;
7. In an action for tax refund/credit, the taxpayer has the burden to
establish its right to refund, and failure to sustain the burden is fatal to the
claim for refund; and
8. It is incumbent upon petitioner to show that it has complied with the
provisions of Section 204(C) in relation to Section 229 of the Tax Code.
After trial on the merits, the Court issued a resolution on August 10, 2004
submitting the case for decision after failure of respondent to file his
memorandum within the given period.

The parties filed their Joint Stipulation of Facts and Issues on January 24,
2003 manifesting their mutual agreement on the issues involved in this
case, to wit:

1. What was the book value of the structures, equipment and machinery
sold by the petitioner at the point of sale?
2. Whether Petitioner sold the structures, equipment and machinery at a
loss (selling price is less than the book value of the structures, equipment
and machinery)?
3. Whether Petitioner erroneously paid the 5% final tax in the amount Forty
Four Million Six Hundred Seventy Seven Thousand Five Hundred Pesos
(Php44,677,500.00) Philippine Currency considering that it was under the
ITH regime at the time of sale?
4. Whether the sale of the structures, equipment and machinery is part of
the registered activity of the Petitioner?
5. In the alternative that Petitioner is not entitled to ITH since the sale is
not part of the registered activity of the Petitioner, whether Petitioner is
liable for income tax on the sale of the structures, equipment and
machinery?
6. Whether or not Petitioner is legally and factually entitled to claim refund
of its erroneously paid taxes in the amount of Forty Four Million Six Hundred
Seventy Seven Thousand Five Hundred Pesos (Php44,677,500.00) Philippine
Currency.
After a cursory reading of the Joint Stipulation of Facts and Issues of the
parties, this Court finds that the main issue in this case, despite the
numerous matters raised, basically boils down to "whether or not petitioner
is legally and factually entitled to claim for a refund of erroneously paid final
tax in the amount of Forty Four Million Six Hundred Seventy Seven
Thousand Five Hundred Pesos (Php44,677,500.00) Philippine Currency".

To begin with, it bears stressing that tax refunds are in the nature of tax
exemptions. As such, they are regarded as in derogation of sovereign
authority and to be construed in strictissimi juris against the person or entity
claiming the exemption (Commissioner of Internal Revenue vs. Procter and
Gamble Phil. Mfg. Corp., 204 SCRA 377; Commissioner of internal Revenue
vs. S.C. Johnson & Son, Inc., 309 SCRA 87). Thus, the claimant must be
able to establish clearly and convincingly that it is entitled to such
exemption.

Petitioner anchored its claim for refund on Section 204 in relation to Section
229 of the Tax Code, to wit:

"SEC. 204. Authority of the Commissioner to Compromise, Abate and

Refund or Credit Taxes. ” The Commissioner may
xxx xxx xxx

(C) Credit or refund taxes erroneously or illegally received or penalties

imposed without authority, refund the value of internal revenue stamps
when they are returned in good condition by the purchaser, and, in his
discretion, redeem or change unused stamps that have been rendered unfit
for use and refund their value upon proof of destruction. No credit or refund
of taxes or penalties shall be allowed unless the taxpayer files in writing with
the Commissioner a claim for credit or refund within two (2) years after the
payment of the tax or penalty: . . ."

"SEC. 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: . . ." (Emphasis
supplied)
Applying the aforequoted provisions, this Court finds that petitioner has
indeed established the facts that it was able to file both its administrative
and judicial claims for refund within the aforesaid period. The two-year
prescriptive period for the filing of a claim for refund commences from the
date of filing of the final adjustment return (ACCRA Investments Corporation
vs. Court of Appeals, 204 SCRA 957). Based on the records, petitioner filed
its third quarterly income tax return for the taxable year 2000 on September
13, 2000 (Exhibit E-1). And its final adjustment return of petitioner for its
2000 taxable year was filed on March 1, 2001 (Exhibit F). Counting from the
latter date, petitioner had in fact until March 3, 2003 (March 1, 2003 being a
Saturday) within which to file a claim for refund of its alleged erroneously
paid 5% preferential tax. Hence, petitioner's administrative claim for refund
filed on February 2, 2001 (Exhibit G) and the present Petition for Review
filed on September 9, 2002 were filed well within the two-year prescriptive
period.

Now, in determining the basis of such claim, this Court deems it apropos to
first resolve the other issues raised by the parties, and for this purpose, it is
important to discuss the focal provisions of R.A. No. 7916, also known as
"The Special Economic Zone Act of 1995", granting benefits and incentives
to pioneer and non-pioneer firms duly registered with the PEZA as an
"Economic Export Enterprise", considering that petitioner is a PEZA
registered company, pertinent portions of which read:

"Sec. 23. Fiscal Incentives. Business establishments operating within the

ECOZONES shall be entitled to the fiscal incentives as provided for under
Presidential Decree No. 66, the law creating the Export Processing Zone
Authority, or those provided for under Book VI of Executive Order No. 226,
otherwise known as the Omnibus Investment Code of 1987. . .

Sec. 24. Exemption from Taxes Under the National Internal Revenue Code.
— Any provision of existing laws, rules and regulations to the contrary
notwithstanding, no taxes, local and national, shall be imposed on business
establishments operating within the ECOZONE. In lieu of paying taxes, five
percent (5%) of the gross income earned by all businesses and enterprises
within the ECOZONE shall be remitted to the national government. . . "
(Emphasis supplied)
In interpreting exhaustively said provisions of law, We reiterate our
dissertation in the recent case of ROHM Apollo Semiconductor Philippines,
Inc. vs. Honorable Commissioner of Internal Revenue, CTA Case No. 6534,
May 27, 2004, wherein We ruled:

Although it is provided under Section 24 of RA No. 7916 that PEZA

registered enterprises are subject to 5% tax on gross income in lieu of
national and local taxes including VAT, it is incorrect for the respondent to
automatically assume that petitioner is subject to the 5% tax on gross
income. This court had already ruled on several occasions that there are two
sets of fiscal incentives available to a PEZA registered enterprise, namely: 1)
incentives under Presidential Decree No. 66, as amended, and Section 24 of
RA No. 7916, which include the 5% preferential tax rate on gross income
earned in lieu of national and local taxes; and 2) incentives under Book VI of
Executive Order (EO) No. 226, as amended, which include income tax
holiday for 4 to 6 years, depending on whether the enterprise is registered
as pioneer or non-pioneer. These two sets of incentives are in the alternative
and cannot be availed of at the same time by a PEZA registered enterprise
(Hitachi Computer Products Asia [Asia] Corporation vs. Commissioner of
Internal Revenue, CTA Case No. 5943, August 6, 2001 as affirmed by the
Court of Appeals in Commissioner of Internal Revenue vs. Hitachi Computer
Products [Asia] Corporation, CA-G.R. SP No. 66342, April 25, 2003).

From the above-quoted provisions, it is likewise clear that in order for the
PEZA registered company, business establishment or firm to avail of such
benefits and incentives granted therein, the PEZA registered company,
business establishment or firm should have already commenced its
"operation". By the term "operation", it refers to the operation of the
business, the nature of which is clearly defined in its certificate (Exhibit B)
issued by the PEZA. With this premise, the Court will now look into the
status of petitioner in resolving the third stipulated issue.

A careful review of the evidence on record discloses that petitioner was able
to prove that it has not commenced its operation since it became a PEZA
registered enterprise on June 29, 1998 (Exhibit B). Hence, it shall not be
entitled to the benefits and incentives granted under the law, including the
Income Tax Holiday (ITH) and the 5% preferential tax, among others. In
effect, petitioner shall be subject to taxes, both local and national.

A further scrutiny of the records reveals that the only income reported by
petitioner consists of the proceeds from the sales transaction it entered into
with Ibiden Philippines, Inc., involving the factory and buildings including
certain machineries and equipment to be used in its business, amounting to
P893,550,000.00, as evidenced by its third quarter income tax return for the
taxable year 2000 (Exhibit E). Said return clearly shows that petitioner has
mistakenly subjected the same amount of P893,550,000.00 to the 5%
preferential tax which is available only to PEZA registered companies doing
business within the Zone. The entire amount of P44,677,500.00 was
therefore erroneously paid to and duly received by respondent as evidenced
by Revenue Official Receipt 1999 No. 01247570 dated September 13, 2000
(Exhibit E-2).

The fourth and fifth issues will be discussed jointly for being interrelated.
This Court, however, finds it essential to first determine the nature of the
properties involved in the case at bar, more particularly, as regards the
question of whether the same may be considered as ordinary or capital
assets, before resolving the aforesaid issues.

Section 39(A)(1) of the 1997 National Internal Revenue Code provides:

"Sec. 39. Capital Gains and Losses.

(A) Definitions. As used in this Title

(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." (Emphasis and italics
supplied)
The statutory definition of capital assets is negative in nature (Nolledo,
Commentaries and Jurisprudence on the NIRC, 1973 Ed., p. 314). The law
defines the term by exclusion. If the taxpayer sells or exchanges any of the
properties enumerated, any gain or loss relative thereto is an ordinary gain
or loss; the gain or loss from the sale or exchange of all other properties of
the taxpayer is a capital gain or a capital loss (Tuason, Jr. vs. Lingad, 58
SCRA 170).

It is worthy to note that the subject properties in the case at bar constitute
real properties intended to be used by petitioner in its business operation,
particularly the factory, other buildings, certain machineries and equipment
attached therein, as specifically identified by the parties in Annex "A" of the
subject Deed of Absolute Sale (Exhibit D). However, the same were not
actually used considering that petitioner failed to commence its business
operation due to its closure even before it started operation. These facts
were uncontested by the respondent. (Paragraph 5, Joint Stipulation of Facts
and Issues).
The Court is guided by the principles laid down by the Honorable Supreme
Court that in the determination of whether a piece of property is a capital
asset or an ordinary asset, a careful examination and weighing of all
circumstances revealed in each case must be made. In Calasanz vs.
Commissioner of Internal Revenue, 144 SCRA 664, the Supreme Court ruled
that there is no rigid rule or fixed formula by which it can be determined
with finality whether property sold by a taxpayer was held primarily for sale
to customers in the ordinary course of his trade or business or whether it
was sold as a capital asset (Victory Housing No. 2 vs. Commissioner, 205 F.
2d 371).

One may, of course, liquidate a capital asset. To do so, it is necessary to

sell. The sale may be conducted in the most advantageous manner to the
seller and he will not lose the benefits of the capital gain provision unless he
enters the real estate business and carries on the sale in the manner in
which such a business is ordinarily conducted. In that event, the liquidation
constitutes a business and a sale in the ordinary course of such a business
and the preferred tax status is lost (Calasanz vs. Commissioner of Internal
Revenue, supra; citing Home Co., Inc. vs. Comm., 212 F 2d 637; De Leon
on NIRC, 2000 Ed., p. 307).

In determining the correct boundary between the two types of assets, the
following may be considered as helpful guides, although these factors are
not conclusive:

(a) the purpose for which the property was initially acquired;
(b) the purpose for which the property was subsequently held;
(c) the extent to which improvements, if any, were made;
(d) the frequency, number, and continuity of sales;
(e) the extent and nature of the transactions involved;
(f) the ordinary business of the taxpayer;
(g) the extent of advertising, promotion, or other activities used in
soliciting buyers for the sale of the property;
(h) the listing of the property with brokers; and
(i) the purpose for which the property was held at the time of sale.
Nevertheless, each case must in the last analysis rests upon its own peculiar
facts and circumstances (Calasanz vs. Commissioner of Internal Revenue,
supra; Tuazon vs. Lingad, supra; citing Klarkowski, TCM 1965-328, Aff'd.
385 F[2d] 398 [CA], 1967).

Prescinding from the above, it can be undeniably established that the

subject properties sold by petitioner to Ibiden Philippines, Inc. are
considered capital assets for the following reasons:

1) The factory, buildings, machineries and equipment attached thereto are

properties which do not include stock in trade of the taxpayer or other
properties of a kind which would properly be included in the inventory of the
taxpayer if on hand at the close of the taxable year;
2) The factory, buildings, machineries and equipment attached thereto are
properties held by the taxpayer not primarily for sale to customers in the
ordinary course of his trade or business;
3) The factory, buildings, machineries and equipment attached thereto are
properties not yet used in the trade or business, of a character which is
subject to the allowance for depreciation provided in Subsection (F) of
Section 34; and
4) The factory, buildings, machineries and equipment attached thereto are
real properties not yet used in trade or business of the taxpayer.
By force of logic, the subject properties sold by petitioner to Widen
Philippines, Inc. are classified as real properties not excluded by the
definition of "capital assets" provided for under Section 39(A)(1) of the 1997
NIRC. (Emphasis supplied)

To reiterate, "the option to buy or sell property is regarded a capital asset if

the optioned property constitutes, or if acquired would constitute, a capital
asset in the hands of the taxpayer. . . . Property held for the production of
income but not used in the trade or business of the taxpayer, is included in
the term `capital assets' All those properties specifically excluded are
considered ordinary assets and the profits realized therefrom must
necessarily have to be treated as ordinary gains". (Gonzales and Robledo-
Gonzales on NIRC, 2001 Ed., p. 239)

The subject properties having been indubitably established as capital assets,

as such, the same are not subject to corporate income tax but to capital
gains tax.

Section 27(D)(5) of the 1997 NIRC explicitly provides:

SEC. 27. Rates of Income Tax on Domestic Corporations.

xxx xxx xxx

(D) Rates of Tax on Certain Passive Incomes.

xxx xxx xxx

(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands
and/or Buildings. A final tax of six percent (6%) is hereby imposed on the
gain presumed to have been realized on the sale, exchange, or disposition of
lands and/or buildings which are not actually used in the business of a
corporation and are treated as capital assets, based on the gross selling
price or fair market value as determined in accordance with Section 6(E) of
this Code, whichever is higher, of such lands and/or buildings. (Emphasis
and italics supplied)
In addition, Section 2 of Revenue Regulations No. 8-98 provides, that:
SECTION 2. Final Tax on Sales, Exchanges or Transfers of Real Properties
Classified as Capital Assets. The rate of six percent (6%) shall be imposed
on capital gains presumed to have been realized by the seller from the sale,
exchange or other disposition of real properties located in the Philippines,
classified as capital assets, including pacto de retro sales and other forms of
conditional sales based on the gross selling price or fair market value as
determined in accordance with Section 6(E) of the Code (i.e. the authority of
the Commissioner to prescribe the real property values), whichever is
higher. . . (Emphasis and italics supplied)
From the foregoing and considering the above provisions, this Court hereby
concludes that the properties sold by petitioner consisting of the factory,
other buildings, machineries and equipment attached therein, which We
have already classified as capital assets as defined under Section 39(A)(1) of
the 1997 National Internal Revenue Code, are not subject to the corporate
income tax. It is however subject to capital gains tax as provided for under
Section 27(D)(5) of the same Code.

But no capital gains tax was ever paid on the sale of the subject properties
as both the vendor and the vendee were PEZA registered enterprises,
pursuant to the provision of R.A. 7916 earlier cited. However, as heretofore
discussed, petitioner is not entitled to the benefits under said law. Therefore,
it is liable to pay the 6% capital gains tax. Using gross selling price as basis,
this amounts to P53,613,000.00 (P893,550,000.00 x 6%). The petitioner
having paid already to the government the amount of P44,677,500.00, there
remains a balance of P8,935,500.00 in basic deficiency tax, which
respondent should perhaps look into.

WHEREFORE, premises considered, the instant petition is hereby DENIED.

SO ORDERED.

TOMAS CALASANZ, ET AL., petitioners, vs. THE COMMISSIONER OF INTERNAL

REVENUE and the COURT OF TAX APPEALS, respondents.

G.R. No. L-26284 | 1986-10-09

Tagged under keywords

D E C I S I O N

FERNAN, J:

Appeal taken by Spouses Tomas and Ursula Calasanz from the decision of the Court of
Tax Appeals in CTA No. 1275 dated June 7, 1966, holding them liable for the payment of
P3,561.24 as deficiency income tax and interest for the calendar year 1957 and P150.00
as real estate dealer's fixed tax.

Petitioner Ursula Calasanz inherited from her father Mariano de Torres an agricultural
land located in Cainta, Rizal, containing a total area of 1,678,000 square meters. In order
to liquidate her inheritance, Ursula Calasanz had the land surveyed and subdivided into
lots. Improvements, such as good roads, concrete gutters, drainage and lighting system,
were introduced to make the lots saleable. Soon after, the lots were sold to the public at
a profit.

In their joint income tax return for the year 1957 filed with the Bureau of Internal
Revenue on March 31, 1958, petitioners disclosed a profit of P31,060.06 realized from
the sale of the subdivided lots, and reported fifty per centum thereof or P15,530.03 as
taxable capital gains.

Upon an audit and review of the return this filed, the Revenue Examiner adjudged
petitioners engaged in business as real estate dealers, as defined in Section 194 [s] 1 of
the National Internal Revenue Code, required them to pay the real estate dealer's tax 2
and assessed a deficiency income tax on profits derived from the sale of the lots based
on the rates for ordinary income.

On September 29, 1962, petitioners received from respondent Commissioner of Internal

Revenue:

a. Demand No. 90-B-032293-57 in the amount of P160.00 representing real estate

dealer's fixed tax of P150.00 and P10.00 compromise penalty for late payment; and

b. Assessment No. 90-5-35699 in the amount of P3,561.24 as deficiency income tax on

ordinary gain of P3,018.00 plus interest of P543.24.

On October 17, 1962, petitioners filed with the Court of Tax Appeals a petition for review
contesting the aforementioned assessments.

On June 7, 1966, the Tax Court upheld the respondent Commissioner except for that
portion of the assessment regarding the compromise penalty of P10.00 for the reason
that in this jurisdiction, the same cannot be collected in the absence of a valid and binding
compromise agreement.

Hence, the present appeal.

The issues for consideration are:

a. Whether or not petitioners are real estate dealers liable for real estate dealer's fixed
tax; and

b. Whether the gains realized from the sale of the lots are taxable in full as ordinary
income or capital gains taxable at capital gain rates.

The issues are closely interrelated and will be taken jointly.

Petitioners assail their liabilities as "real estate dealers" and seek to bring the profits from
the sale of the lots under Section 34 [b] [2] 3 of the Tax Code.

The theory advanced by the petitioners is that inherited land is a capital asset within the
meaning of Section 34[a] [1] of the Tax Code and that an heir who liquidated his
inheritance cannot be said to have engaged in the real estate business and may not be
denied the preferential tax treatment given to gains from sale of capital assets, merely
because he disposed of it in the only possible and advantageous way.

Petitioners averred that the tract of land subject of the controversy was sold because of
their intention to effect a liquidation. They claimed that it was parcelled out into smaller
lots because its size proved difficult, if not impossible, of disposition in one single
transaction. They pointed out that once subdivided, certainly, the lots cannot be sold in
one isolated transaction, Petitioners, however, admitted that roads and other
improvements were introduced to facilitate its sale. 4

On the other hand, respondent Commissioner maintained that the imposition of the taxes
in question is in accordance with law since petitioners are deemed to be in the real estate
business for having been involved in a series of real estate transactions pursued for profit.
Respondent argued that property acquired by inheritance may be converted from an
investment property to a business property if, as in the present case, it was subdivided,
improved, and subsequently sold and the number, continuity and frequency of the sales
were such as to constitute "doing business." Respondent likewise contended that
inherited property is by itself neutral and the fact that the ultimate purpose is to liquidate
is of no moment for the important inquiry is what the taxpayer did with the property.
Respondent concluded that since the lots are ordinary assets, the profits realized
therefrom are ordinary gains, hence taxable in full.

We agree with the respondent.

The assets of a taxpayer are classified for income tax purposes into ordinary assets and
capital assets. Section 34]a] [1] of the National Internal Revenue Code broadly defines
capital assets as follows:

"[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 thirty; or real property
used in the trade or business of the taxpayer."

The statutory definition of capital assets is negative in nature. 5 If the asset is not among
the exceptions, it is a capital asset; conversely, assets falling within the exceptions are
ordinary assets. And necessarily, any gain resulting from the sale or exchange of an asset
is a capital gain or an ordinary gain depending on the kind of asset involved in the
transaction.
However, there is no rigid rule or fixed formula by which it can be determined with finality
whether property sold by a taxpayer was held primarily for sale to customers in the
ordinary course of his trade or business or whether it was sold as a capital asset. 6
Although several factors or indices 7 have been recognized as helpful guides in making a
determination, none of these is decisive; neither is the presence nor the absence of these
factors conclusive. Each case must in the last analysis rest upon its own peculiar facts
and circumstances. 8

Also a property initially classified as a capital asset may thereafter be treated as an

ordinary asset if a combination of the factors indubitably tend to show that the activity
was in furtherance of or in the course of the taxpayer's trade or business. Thus, a sale of
inherited real property usually gives capital gain or loss even though the property has to
be subdivided or improved or both to make it salable. However, if the inherited property
is substantially improved or very actively sold or both it may be treated as held primarily
for sale to customers in the ordinary course of the heir's business. 9

Upon an examination of the facts on record, We are convinced that the activities of
petitioners are indistinguishable from those invariably employed by one engaged in the
business of selling real estate.

One strong factor against petitioners' contention is the business element of development
which is very much in evidence. Petitioners did not sell the land in the condition in which
they acquired it. While the land was originally devoted to rice and fruit trees, 10 it was
subdivided into small lots and in the process converted into a residential subdivision and
given the name Don Mariano Subdivision. Extensive improvements like the laying out of
streets, construction of concrete gutters and installation of lighting system and drainage
facilities, among others, were undertaken to enhance the value of the lots and make
them more attractive to prospective buyers. The audited financial statements 11
submitted together with the tax return in question disclosed that a considerable amount
was expended to cover the cost of improvements. As a matter of fact, the estimated
improvements of the lots sold reached P170,028.60 whereas the cost of the land is only
P4,742.66. There is authority that a property ceases to be a capital asset if the amount
expended to improve it is double its original cost, for the extensive improvement indicates
that the seller held the property primarily for sale to customers in the ordinary course of
his business. 12

Another distinctive feature of the real estate business discernible from the records is the
existence of contracts receivables, which stood at P395,693.35 as of the year ended
December 31, 1957. The sizable amount of receivables in comparison with the sales
volume of P446,407.00 during the same period signifies that the lots were sold on
installment basis and suggests the number, continuity and frequency of the sales. Also
of significance is the circumstance that the lots were advertised 13 for sale to the public
and that sales and collection commissions were paid out during the period in question.

Petitioners, likewise, urge that the lots were sold solely for the purpose of liquidation.

In Ehrman vs. Commissioner, 14 the American court in clear and categorical terms
rejected the liquidation test in determining whether or not a taxpayer is carrying on a
trade or business. The court observed that the fact that property is sold for purposes of
liquidation does not foreclose a determination that a "trade or business" is being
conducted by the seller. The court enunciated further:

"We fail to see that the reasons behind a person's entering into a business ----whether it
is to make money or whether it is to liquidate ---- should be determinative of the question
of whether or not the gains resulting from the sales are ordinary gains or capital gains.
The sole question is ---- were the taxpayers in the business of subdividing real estate? If
they were, then it seems indisputable that the property sold falls within the exception in
the definition of capital assets . that is, that it constituted `property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business.'"

Additionally, in Home Co., Inc. vs. Commissioner, 15 the court articulated on the matter
in this wise:

"One may, of course, liquidate a capital asset. To do so, it is necessary to sell. The sale
may be conducted in the most advantageous manner to the seller and he will not lose
the benefits of the capital gain provision of the statute unless he enters the real estate
business and carries on the sale in the manner in which such a business is ordinarily
conducted. In that event, the liquidation constitutes a business and a sale in the ordinary
course of such a business and the preferred tax status is lost."

In view of the foregoing, We hold that in the course of selling the subdivided lots,
petitioners engaged in the real estate business and accordingly, the gains from the sale
of the lots are ordinary income taxable in full.

WHEREFORE, the decision of the Court of Tax Appeals is affirmed. No costs.

SO ORDERED.

ANTONIO TUASON, JR., petitioner, vs. JOSE B. LINGAD, as Commissioner of Internal

Revenue, respondent.

G.R. No. L-24248 | 1974-07-31

Tagged under keywords

DECISION

CASTRO, J:

In this petition for review of the decision of the Court of Tax Appeals in CTA Case 1398, the
petitioner Antonio Tuason, Jr. (hereinafter referred to as the petitioner) assails the Tax Court's
conclusion that the gains he realized from the sale of residential lots (inherited from his mother)
were ordinary gains and not gains from the sale of capital assets under section 34(1) of the
National Internal Revenue Code.

The essential facts are not in dispute.

In 1948 the petitioner inherited from his mother several tracts of land, among which were two
contiguous parcels situated on Pureza and Sta. Mesa streets in Manila, with an area of 318 and
67,684 square meters, respectively.

When the petitioner's mother was yet alive she had these two parcels subdivided into twenty-nine
lots. Twenty-eight were allocated to their then occupants who had lease contracts with the
petitioner's predecessor at various times from 1900 to 1903, which contracts expired on
December 31, 1953. The 29th lot (hereinafter referred to as Lot 29), with an area of 48,000
square meters, more or less, was not leased to any person. It needed filling because of its very
low elevation, and was planted to kangkong and other crops.

After the petitioner took possession of the mentioned parcels in 1950, he instructed his attorney-
in-fact, J. Antonio Araneta, to sell them.

There was no difficulty encountered in selling the 28 small lots as their respective occupants
bought them on a 10-year installment basis. Lot 29 could not however be sold immediately due
to its low elevation.

Sometime in 1952 the petitioner's attorney-in-fact had Lot 29 filled, then subdivided into small
lots and paved with macadam roads. The small lots were then sold over the years on a uniform
10-year annual amortization basis. J. Antonio Araneta, the petitioner's attorney-in-fact, did not
employ any broker nor did he put up advertisements in the matter of the sale thereof.

In 1953 and 1954 the petitioner reported his income from the sale of the small lots (P102,050.79
and P103,468.56, respectively) as long-term capital gains. On May 17, 1957 the Collector of
Internal Revenue upheld the petitioner's treatment of his gains from the said sale of small lots,
against a contrary ruling of a revenue examiner.
In his 1957 tax return the petitioner as before treated his income from the sale of the small lots
(P119,072.18) as capital gains and included only 1/2 thereof as taxable income. In this return, the
petitioner deducted the real estate dealer's tax he paid for 1957. It was explained, however, that
the payment of the dealer's tax was on account of rentals received from the mentioned 28 lots
and other properties of the petitioner. On the basis of the 1957 opinion of the Collector of
Internal Revenue, the revenue examiner approved the petitioner's treatment of his income from
the sale of the lots in question. In a memorandum dated July 16, 1962 to the Commissioner of
Internal Revenue, the chief of the BIR Assessment Department advanced the same opinion,
which was concurred in by the Commissioner of Internal Revenue.

On January 9, 1963, however, the Commissioner reversed himself and considered the petitioner's
profits from the sales of the mentioned lots as ordinary gains. On January 28, 1963 the petitioner
received a letter from the Bureau of Internal Revenue advising him to pay deficiency income tax
for 1957, as follows:
Net income per orig. investigationP211,095.36
Add:
56% of realized profit on sale
of lots which was deducted in the
income tax return and allowed in
the original report of examination 59,539.09

Net income per final investigation P270,824.70

Less:
Personal exemption 1,800.00
Amount subject to tax 269,024.70

Tax due thereon P98,551.00

Less: Amount already assessed 72,199.00

Balance P26,352.00
Add:
1/2% monthly interest from
6-20-59 to 6-29-62 4,742.36

TOTAL AMOUNT DUE AND

COLLECTIBLE P31,095.36
=======

The petitioner's motion for reconsideration of the foregoing deficiency assessment was denied,
and so he went up to the Court of Tax Appeals, which however rejected his posture in a decision
dated January 16,1965, and ordered him, in addition, to pay a 5% surcharge and 1% monthly
interest "pursuant to Sec. 51(e) of the Revenue Code."
Hence, the present petition.

The petitioner assails the correctness of the opinion below that as he was engaged in the business
of leasing the lots he inherited from his mother as well other real properties, his subsequent sales
of the mentioned lots cannot be recognized as sales of capital assets but of "real property used in
trade or business of the taxpayer." The petitioner argues that (1) he is not the one who leased the
lots in question; (2) the lots were residential, not commercial lots; and (3) the leases on the 28
small lob were to last until 1953, before which date he was powerless to eject the lessees
therefrom.
The basic issue thus raised is whether the properties in question which the petitioner had
inherited and subsequently sold in small lots to other persons should be regarded as capital
assets.

1.The National Internal Revenue Code (C.A. 466, as amended) defines the term "capital assets"
as follows:

"(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
thirty; or real property used in the trade or business of the taxpayer."
As thus defined by law, the term "capital assets" includes all the properties of a taxpayer whether
or not connected with his trade or business, except: (1) stock in trade or other property included
in the taxpayer's inventory; (2) property primarily for sale to customers in the ordinary course of
his trade or business; (3) property used in the trade or business of the taxpayer and subject to
depreciation allowance; and (4) real property used in trade or business. 1 If the taxpayer sells or
exchanges any of the properties above-enumerated, any gain or loss relative thereto is an
ordinary gain or an ordinary loss; the gain or loss from the sale or exchange of all other
properties of the taxpayer is a capital gain or a capital loss. 2

Under section 34(b) (2) of the Tax Code, if a gain is realized by a taxpayer (other than a
corporation) from the sale or exchange of capital assets held for more than twelve months, only
50% of the net capital gain shall be taken into account in computing the net income.

The Tax Code's provision on so-called long-term capital gains constitutes a statute of partial
exemption. In view of the familiar and settled rule that tax exemptions are construed in
strictissimi juris against the taxpayer and liberally in favor of the taxing authority, 3 the field of
application of the term "capital assets" is necessarily narrow, while its exclusions must be
interpreted broadly. 4 Consequently, it is the taxpayer's burden to bring himself clearly and
squarely within the terms of a tax-exempting statutory provision, otherwise, all fair doubts will
be resolved against him. 5 It bears emphasis nonetheless that in the determination of whether a
piece of property is a capital asset or an ordinary asset, a careful examination and weighing of all
circumstances revealed in each case must be made. 6

In the case at bar, after a thoroughgoing study of all the circumstances relevant to the resolution
of the issue raised, this Court is of the view, and so holds, that the petitioner's thesis is bereft of
merit.

When the petitioner obtained by inheritance the parcels in question, transferred to him was not
merely the duty to respect the terms of any contract thereon, but as well the correlative right to
receive and enjoy the fruits of the business and property which the. decedent had established and
maintained. 7 Moreover, the record discloses that the petitioner owned other real properties
which he was putting out for rent, from which he periodically derived a substantial income, and
for which he had to pay the real estate dealer's tax (which he used to deduct from his gross
income). 8 In fact, as far back as 1957 the petitioner was receiving rental payments from the
mentioned 28 small lots, even if the leases executed by his deceased mother thereon expired in
1953. Under the circumstances, the petitioner's sales of the several lots forming part of his rental
business cannot be characterized as other than sales of non-capital assets.

The sales concluded on installment basis of the subdivided lots comprising Lot 29 do not deserve
a different characterization for tax purposes. The following circumstances in combination show
unequivocally that the petitioner was, at the time material to this case, engaged in the real estate
business: (1) the parcels of land involved have in totality a substantially large area, nearly seven
(7) hectares, big enough to be transformed into a subdivision, and in the case at bar, the said
properties are located in the heart of Metropolitan Manila; (2) they were subdivided into small
lots and then sold on installment basis (this manner of selling residential lots is one of the basic
earmarks of a real estate business); (3) comparatively valuable improvements were introduced in
the subdivided lots for the unmistakable purpose of not simply liquidating the estate but of
making the lots more saleable to the general public; (4) the employment of J. Antonio Araneta,
the petitioner's attorney-in-fact, for the purpose of developing, managing, administering and
selling the lots in question indicates the existence of owner-realty broker relationship; (5) the
sales were made with frequency and continuity, and from these the petitioner consequently
received substantial income periodically; (6) the annual sales volume of the petitioner from the
said lots was considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18 in
1957; and (7) the petitioner, by his own tax returns, was not a person who can be indubitably
adjudged as a stranger to the real estate business. Under the circumstances, this Court finds no
error in the holding below that the income of the petitioner from the sales of the lots in question
should be considered as ordinary income.
2. This Court notes, however, that in ordering the petitioner to pay the deficiency income tax, the
Tax Court also required him to pay a 5% surcharge plus 1% monthly interest. In our opinion this
additional requirement should be eliminated because the petitioner relied in good faith upon
opinions rendered by no less than the highest officials of the Bureau of Internal Revenue,
including the Commissioner himself. The following ruling in Connell Bros. Co. (Phil.) vs.
Collector of Internal Revenue 9 applies with reason to the case at bar:

"We do not think Section 183(a) of the National Internal Revenue Code is applicable. The same
imposes the penalty of 25% when the percentage tax is not paid on time, and contemplates a case
where the liability for the tax is undisputed or indisputable. In the present case the taxes were
paid, the delay being with reference to the deficiency, owing to a controversy as to the proper
interpretation if Circulars Nos. 431 and 440 of the office of respondent-appellee. The
controversy was generated in good faith, since that office itself appears to have formerly taken
the view that the inclusion of the words 'tax included' on invoices issued by the taxpayer was
sufficient compliance with the requirements of said circulars." 10

ACCORDINGLY, the judgment of the Court of Tax Appeals is affirmed, except the portion
thereof that imposes 5% surcharge and 1% monthly interest, which is hereby set aside. No costs.