SECOND DIVISION (b) To provide a career of health science education and provide medical

services to the community through organized clinics in such specialties as the

G.R. No. 195909 September 26, 2012 facilities and resources of the corporation make possible;

COMMISSIONER OF INTERNAL REVENUE, PETITIONER, (c) To carry on educational activities related to the maintenance and
vs. promotion of health as well as provide facilities for scientific and medical
ST. LUKE'S MEDICAL CENTER, INC., RESPONDENT. researches which, in the opinion of the Board of Trustees, may be justified by
the facilities, personnel, funds, or other requirements that are available;
x-----------------------x
(d) To cooperate with organized medical societies, agencies of both
G.R. No. 195960 government and private sector; establish rules and regulations consistent with
the highest professional ethics;
ST. LUKE'S MEDICAL CENTER, INC., PETITIONER,
xxxx3
vs.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
On 16 December 2002, the Bureau of Internal Revenue (BIR) assessed St. Luke's
DECISION deficiency taxes amounting to ₱76,063,116.06 for 1998, comprised of deficiency
income tax, value-added tax, withholding tax on compensation and expanded
withholding tax. The BIR reduced the amount to ₱63,935,351.57 during trial in the
CARPIO, J.: First Division of the CTA. 4

The Case
These are consolidated 1 petitions for review on certiorari under Rule 45 of the Rules
of Court assailing the Decision of 19 November 2010 of the Court of Tax Appeals
(CTA) En Banc and its Resolution 2 of 1 March 2011 in CTA Case No. 6746. This
Court resolves this case on a pure question of law, which involves the interpretation of
Section 27(B) vis-à-vis Section 30(E) and (G) of the National Internal Revenue Code
of the Philippines (NIRC), on the income tax treatment of proprietary non-profit
hospitals.
The Facts
St. Luke's Medical Center, Inc. (St. Luke's) is a hospital organized as a non-stock and
non-profit corporation. Under its articles of incorporation, among its corporate
purposes are:
(a) To establish, equip, operate and maintain a non-stock, non-profit
Christian, benevolent, charitable and scientific hospital which shall give
curative, rehabilitative and spiritual care to the sick, diseased and disabled
persons; provided that purely medical and surgical services shall be
performed by duly licensed physicians and surgeons who may be freely and
individually contracted by patients;
On 14 January 2003, St. Luke's filed an administrative protest with the BIR against
the deficiency tax assessments. The BIR did not act on the protest within the 180-day
period under Section 228 of the NIRC. Thus, St. Luke's appealed to the CTA.
The BIR argued before the CTA that Section 27(B) of the NIRC, which imposes a
10% preferential tax rate on the income of proprietary non-profit hospitals, should be
applicable to St. Luke's. According to the BIR, Section 27(B), introduced in 1997, "is a
new provision intended to amend the exemption on non-profit hospitals that were
previously categorized as non-stock, non-profit corporations under Section 26 of the
1997 Tax Code x x x." 5 It is a specific provision which prevails over the general
exemption on income tax granted under Section 30(E) and (G) for non-stock, non-
profit charitable institutions and civic organizations promoting social welfare. 6
The BIR claimed that St. Luke's was actually operating for profit in 1998 because only
13% of its revenues came from charitable purposes. Moreover, the hospital's board of
trustees, officers and employees directly benefit from its profits and assets. St. Luke's
had total revenues of ₱1,730,367,965 or approximately ₱1.73 billion from patient
services in 1998. 7
St. Luke's contended that the BIR should not consider its total revenues, because its
free services to patients was ₱218,187,498 or 65.20% of its 1998 operating income
(i.e., total revenues less operating expenses) of ₱334,642,615. 8 St. Luke's also
claimed that its income does not inure to the benefit of any individual.

Page 1 of 25
St. Luke's maintained that it is a non-stock and non-profit institution for charitable and
social welfare purposes under Section 30(E) and (G) of the NIRC. It argued that the
making of profit per se does not destroy its income tax exemption.
The petition of the BIR before this Court in G.R. No. 195909 reiterates its arguments
before the CTA that Section 27(B) applies to St. Luke's. The petition raises the sole
issue of whether the enactment of Section 27(B) takes proprietary non-profit hospitals
out of the income tax exemption under Section 30 of the NIRC and instead, imposes
a preferential rate of 10% on their taxable income. The BIR prays that St. Luke's be
ordered to pay ₱57,659,981.19 as deficiency income and expanded withholding tax
for 1998 with surcharges and interest for late payment.
The petition of St. Luke's in G.R. No. 195960 raises factual matters on the treatment
and withholding of a part of its income, 9 as well as the payment of surcharge and
delinquency interest. There is no ground for this Court to undertake such a factual
review. Under the Constitution 10 and the Rules of Court, 11 this Court's review power
is generally limited to "cases in which only an error or question of law is
involved." 12 This Court cannot depart from this limitation if a party fails to invoke a
recognized exception.
The Ruling of the Court of Tax Appeals
The CTA En Banc Decision on 19 November 2010 affirmed in toto the CTA First
Division Decision dated 23 February 2009 which held:
WHEREFORE, the Amended Petition for Review [by St. Luke's] is hereby
PARTIALLY GRANTED. Accordingly, the 1998 deficiency VAT assessment issued by
respondent against petitioner in the amount of ₱110,000.00 is hereby CANCELLED
and WITHDRAWN. However, petitioner is hereby ORDERED to PAY deficiency
income tax and deficiency expanded withholding tax for the taxable year 1998 in the
respective amounts of ₱5,496,963.54 and ₱778,406.84 or in the sum of
₱6,275,370.38, x x x.
xxxx
In addition, petitioner is hereby ORDERED to PAY twenty percent (20%) delinquency
interest on the total amount of ₱6,275,370.38 counted from October 15, 2003 until full
payment thereof, pursuant to Section 249(C)(3) of the NIRC of 1997.
SO ORDERED. 13
The deficiency income tax of ₱5,496,963.54, ordered by the CTA En Banc to be paid,
arose from the failure of St. Luke's to prove that part of its income in 1998 (declared
as "Other Income-Net") 14 came from charitable activities. The CTA cancelled the
remainder of the ₱63,113,952.79 deficiency assessed by the BIR based on the 10%
Page 2 of 25
tax rate under Section 27(B) of the NIRC, which the CTA En Banc held was not
applicable to St. Luke's. 15
The CTA ruled that St. Luke's is a non-stock and non-profit charitable institution
covered by Section 30(E) and (G) of the NIRC. This ruling would exempt all income
derived by St. Luke's from services to its patients, whether paying or non-paying. The
CTA reiterated its earlier decision in St. Luke's Medical Center, Inc. v. Commissioner
of Internal Revenue, 16 which examined the primary purposes of St. Luke's under its
articles of incorporation and various documents 17 identifying St. Luke's as a
charitable institution.
The CTA adopted the test in Hospital de San Juan de Dios, Inc. v. Pasay
City, 18 which states that "a charitable institution does not lose its charitable character
and its consequent exemption from taxation merely because recipients of its benefits
who are able to pay are required to do so, where funds derived in this manner are
devoted to the charitable purposes of the institution x x x." 19 The generation of
income from paying patients does not per se destroy the charitable nature of St.
Luke's.
Hospital de San Juan cited Jesus Sacred Heart College v. Collector of Internal
Revenue, 20 which ruled that the old NIRC (Commonwealth Act No. 466, as
amended) 21 "positively exempts from taxation those corporations or associations
which, otherwise, would be subject thereto, because of the existence of x x x net
income." 22 The NIRC of 1997 substantially reproduces the provision on charitable
institutions of the old NIRC. Thus, in rejecting the argument that tax exemption is lost
whenever there is net income, the Court in Jesus Sacred Heart College declared:
"[E]very responsible organization must be run to at least insure its existence, by
operating within the limits of its own resources, especially its regular income. In other
words, it should always strive, whenever possible, to have a surplus." 23
The CTA held that Section 27(B) of the present NIRC does not apply to St.
Luke's. 24 The CTA explained that to apply the 10% preferential rate, Section 27(B)
requires a hospital to be "non-profit." On the other hand, Congress specifically used
the word "non-stock" to qualify a charitable "corporation or association" in Section
30(E) of the NIRC. According to the CTA, this is unique in the present tax code,
indicating an intent to exempt this type of charitable organization from income tax.
Section 27(B) does not require that the hospital be "non-stock." The CTA stated, "it is
clear that non-stock, non-profit hospitals operated exclusively for charitable purpose
are exempt from income tax on income received by them as such, applying the
provision of Section 30(E) of the NIRC of 1997, as amended." 25
The Issue
The sole issue is whether St. Luke's is liable for deficiency income tax in 1998 under
Section 27(B) of the NIRC, which imposes a preferential tax rate of 10% on the
income of proprietary non-profit hospitals.
The Ruling of the Court
St. Luke's Petition in G.R. No. 195960
As a preliminary matter, this Court denies the petition of St. Luke's in G.R. No.
195960 because the petition raises factual issues. Under Section 1, Rule 45 of the
Rules of Court, "[t]he petition shall raise only questions of law which must be distinctly
set forth." St. Luke's cites Martinez v. Court of Appeals 26 which permits factual review
"when the Court of Appeals [in this case, the CTA] manifestly overlooked certain
relevant facts not disputed by the parties and which, if properly considered, would
justify a different conclusion." 27
This Court does not see how the CTA overlooked relevant facts. St. Luke's itself
stated that the CTA "disregarded the testimony of [its] witness, Romeo B. Mary, being
allegedly self-serving, to show the nature of the 'Other Income-Net' x x x." 28 This is
not a case of overlooking or failing to consider relevant evidence. The CTA obviously
considered the evidence and concluded that it is self-serving. The CTA declared that
it has "gone through the records of this case and found no other evidence aside from
the self-serving affidavit executed by [the] witnesses [of St. Luke's] x x x." 29
The deficiency tax on "Other Income-Net" stands. Thus, St. Luke's is liable to pay the
25% surcharge under Section 248(A)(3) of the NIRC. There is "[f]ailure to pay the
deficiency tax within the time prescribed for its payment in the notice of
assessment[.]" 30 St. Luke's is also liable to pay 20% delinquency interest under
Section 249(C)(3) of the NIRC. 31 As explained by the CTA En Banc, the amount of
₱6,275,370.38 in the dispositive portion of the CTA First Division Decision includes
only deficiency interest under Section 249(A) and (B) of the NIRC and not
delinquency interest. 32
The Main Issue
The issue raised by the BIR is a purely legal one. It involves the effect of the
introduction of Section 27(B) in the NIRC of 1997 vis-à-vis Section 30(E) and (G) on
the income tax exemption of charitable and social welfare institutions. The 10%
income tax rate under Section 27(B) specifically pertains to proprietary educational
institutions and proprietary non-profit hospitals. The BIR argues that Congress
intended to remove the exemption that non-profit hospitals previously enjoyed under
Section 27(E) of the NIRC of 1977, which is now substantially reproduced in Section
30(E) of the NIRC of 1997. 33 Section 27(B) of the present NIRC provides:
SEC. 27. Rates of Income Tax on Domestic Corporations. -
Page 3 of 25
xxxx
(B) Proprietary Educational Institutions and Hospitals. - Proprietary educational
institutions and hospitals which are non-profit shall pay a tax of ten percent (10%) on
their taxable income except those covered by Subsection (D) hereof: 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 or hospitals
from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the
entire taxable income. For purposes of this Subsection, the term 'unrelated trade,
business or other activity' means any trade, business or other activity, the conduct of
which is not substantially related to the exercise or performance by such educational
institution or hospital of its primary purpose or function. A 'proprietary educational
institution' is any private school maintained and administered by private individuals or
groups with an issued permit to operate from the Department of Education, Culture
and Sports (DECS), or the Commission on Higher Education (CHED), or the
Technical Education and Skills Development Authority (TESDA), as the case may be,
in accordance with existing laws and regulations. (Emphasis supplied)
St. Luke's claims tax exemption under Section 30(E) and (G) of the NIRC. It contends
that it is a charitable institution and an organization promoting social welfare. The
arguments of St. Luke's focus on the wording of Section 30(E) exempting from
income tax non-stock, non-profit charitable institutions. 34 St. Luke's asserts that the
legislative intent of introducing Section 27(B) was only to remove the exemption for
"proprietary non-profit" hospitals. 35 The relevant provisions of Section 30 state:
SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall
not be taxed under this Title in respect to income received by them as such:
xxxx
(E) Nonstock corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of
veterans, 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;
xxxx
(G) Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;
xxxx
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.
(Emphasis supplied)
The Court partly grants the petition of the BIR but on a different ground. 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 36 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, 37 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. 38 The club was non-profit
because of its purpose and there was no evidence that it was engaged in a profit-
making enterprise. 39
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 40 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." 41 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, as 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
Page 4 of 25
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. 42
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." 43 The requirements for a tax exemption are strictly construed against
the taxpayer 44 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 45 and Jesus Sacred Heart
College 46 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 out-patient, or confined in the hospital, or receives subsidies from the
government, so long as the money received is devoted or used altogether to the
charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution. 47
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." 48 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
the 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" 49 and that any profit "obtain[ed] as an incident to its operations shall,
whenever necessary or proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized." 50 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." 51
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
Page 5 of 25
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.
(Emphasis supplied)
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 x x x charitable x x x purposes x x x." 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 ₱1,730,367,965 from services to paying
patients. It cannot be disputed that a hospital which receives approximately ₱1.73
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." 52 Indeed, St. Luke's admits that it derived profits from its paying
patients. St. Luke's declared ₱1,730,367,965 as "Revenues from Services to
Patients" in contrast to its "Free Services" expenditure of ₱218,187,498. 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. 53
REVENUES FROM SERVICES TO PATIENTS ₱1,730,367,965.00
 altogether to the charitable object which it is intended to achieve." 56 The income is
plowed back to the corporation not entirely for charitable purposes, but for profit as
OPERATING EXPENSES 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
Professional care of patients ₱1,016,608,394.00
income."
Administrative 287,319,334.00
Household and Property 91,797,622.00 Jesus Sacred Heart College declared that there is no official legislative record
explaining the phrase "any activity conducted for profit." However, it quoted a
₱1,395,725,350.00 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."
INCOME FROM OPERATIONS ₱334,642,615.00 100%
Free Services -218,187,498.00 - P. Cuando ha hablado de la Universidad de Santo Tomás que tiene un hospital, no
65.20% cree Vd. que es una actividad esencial dicho hospital para el funcionamiento del
colegio de medicina de dicha universidad?
INCOME FROM OPERATIONS, Net of FREE ₱116,455,117.00 34.80%
SERVICES xxxx

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

OTHER INCOME 17,482,304.00 pero considerando que el hospital tiene cuartos de pago, y a los mismos
generalmente van enfermos de buena posición social económica, lo que se paga por
estos enfermos debe estar sujeto a 'income tax', y es una de las razones que hemos
EXCESS OF REVENUES OVER EXPENSES ₱133,937,421.00 tenido para insertar las palabras o frase 'or from any activity conducted for profit.' 57

The question was whether having a hospital is essential to an educational institution

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." x x x 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. 54
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. 55 The ₱1.73 billion total revenues from paying patients is
not even incidental to St. Luke's charity expenditure of ₱218,187,498 for non-paying
patients.
St. Luke's claims that its charity expenditure of ₱218,187,498 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
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. 58 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
concerned. This ruling is based 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 under Section 30(E) or (G) does not lose its tax exemption if

Page 6 of 25
it earns income from its for-profit activities. Such income from for-profit activities, November 9, 2016
under the last paragraph of Section 30, is merely subject to income tax, previously at
the ordinary corporate rate but now at the preferential 10% rate pursuant to Section G.R. No. 196596
27(B).
COMMISSIONER OF INTERNAL REVENUE, Petitioner
A tax exemption is effectively a social subsidy granted by the State because an vs.
exempt institution is spared from sharing in the expenses of government and yet DE LA SALLE UNIVERSITY, INC., Respondent
benefits from them. Tax exemptions for charitable institutions should therefore be
limited to institutions beneficial to the public and those which improve social welfare.
x-----------------------x
A profit-making entity should not be allowed to exploit this subsidy to the detriment of
the government and other taxpayers.1âwphi1
G.R. No. 198841
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to
be completely tax exempt from all its income. However, it remains a proprietary non- DE LA SALLE UNIVERSITY INC., Petitioner,
profit hospital under Section 27(B) of the NIRC as long as it does not distribute any of vs.
its profits to its members and such profits are reinvested pursuant to its corporate COMMISSIONER OF INTERNAL REVENUE, Respondent.
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. x-----------------------x

St. Luke's is therefore liable for deficiency income tax in 1998 under 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"59 and thus exempt from income tax. 60 In Michael J.
Lhuillier, Inc. v. Commissioner of Internal Revenue, 61 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." 62
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 Internal 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 1, Rule 45 of the Rules of Court.
SO ORDERED.
SECOND DIVISION
G.R. No. 198941
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
DE LA SALLE UNIVERSITY, INC., Respondent.
DECISION
BRION, J.:
Before the Court are consolidated petitions for review on certiorari:1
1. G.R. No. 196596 filed by the Commissioner of Internal Revenue (Commissioner) to
assail the December 10, 2010 decision and March 29, 2011 resolution of the Court of
Tax Appeals (CTA) in En Banc Case No. 622;2
2. G.R. No. 198841 filed by De La Salle University, Inc. (DLSU) to assail the June 8,
2011 decision and October 4, 2011 resolution in CTA En Banc Case No. 671;3 and
3. G.R. No. 198941 filed by the Commissioner to assail the June 8, 2011 decision and
October 4, 2011 resolution in CTA En Banc Case No. 671.4
G.R. Nos. 196596, 198841 and 198941 all originated from CTA Special First
Division (CTA Division) Case No. 7303. G.R. No. 196596 stemmed from CTA En
Banc Case No. 622 filed by the Commissioner to challenge CTA Case No. 7303.

Page 7 of 25
G.R. No. 198841 and 198941 both stemmed from CTA En Banc Case No. 671 filed
by DLSU to also challenge CTA Case No. 7303.
The Factual Antecedents
Sometime in 2004, the Bureau of Internal Revenue (BIR) issued to DLSU Letter of
Authority (LOA) No. 2794 authorizing its revenue officers to examine the latter's books
of accounts and other accounting records for all internal revenue taxes for the
period Fiscal Year Ending 2003 and Unverified Prior Years.5
On May 19, 2004, BIR issued a Preliminary Assessment Notice to DLSU.6
Subsequently on August 18, 2004, the BIR through a Formal Letter of
Demand assessed DLSU the following deficiency taxes: (1) income tax on rental
earnings from restaurants/canteens and bookstores operating within the campus;
(2) value-added tax (VAI) on business income; and (3) documentary stamp tax
(DSI) on loans and lease contracts. The BIR demanded the payment
of ₱17,303,001.12, inclusive of surcharge, interest and penalty for taxable years
2001, 2002 and 2003.7
DLSU protested the assessment. The Commissioner failed to act on the protest; thus,
DLSU filed on August 3, 2005 a petition for review with the CTA Division.8
DLSU, a non-stock, non-profit educational institution, principally anchored its petition
on Article XIV, Section 4 (3) of the Constitution, which reads:
(3) All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt from taxes
and duties. xxx.
On January 5, 2010, the CTA Division partially granted DLSU's petition for review.
The dispositive portion of the decision reads:
WHEREFORE, the Petition for Review is PARTIALLY GRANTED. The DST
assessment on the loan transactions of [DLSU] in the amount of ₱1,1681,774.00 is
hereby CANCELLED. However, [DLSU] is ORDERED TO PAY deficiency income
tax, VAT and DST on its lease contracts, plus 25% surcharge for the fiscal years
2001, 2002 and 2003 in the total amount of ₱18,421,363.53 ... xxx.
In addition, [DLSU] is hereby held liable to pay 20% delinquency interest on the total
amount due computed from September 30, 2004 until full payment thereof pursuant to
Section 249(C)(3) of the [National Internal Revenue Code]. Further, the compromise
penalties imposed by [the Commissioner] were excluded, there being no compromise
agreement between the parties.
Page 8 of 25
SO ORDERED.9
Both the Commissioner and DLSU moved for the reconsideration of the January 5,
2010 decision.10 On April 6, 2010, the CTA Division denied the Commissioner's
motion for reconsideration while it held in abeyance the resolution on DLSU's motion
for reconsideration.11
On May 13, 2010, the Commissioner appealed to the CTA En Banc (CTA En
Banc Case No. 622) arguing that DLSU's use of its revenues and assets for non-
educational or commercial purposes removed these items from the exemption
coverage under the Constitution.12
On May 18, 2010, DLSU formally offered to the CTA Division supplemental pieces of
documentary evidence to prove that its rental income was used actually, directly and
exclusively for educational purposes.13 The Commissioner did not promptly object to
the formal offer of supplemental evidence despite notice.14
On July 29, 2010, the CTA Division, in view of the supplemental evidence submitted,
reduced the amount of DLSU's tax deficiencies. The dispositive portion of
the amended decision reads:
WHEREFORE, [DLSU]'s Motion for Partial Reconsideration is hereby PARTIALLY
GRANTED. [DLSU] is hereby ORDERED TO PAY for deficiency income tax, VAT
and DST plus 25% surcharge for the fiscal years 2001, 2002 and 2003 in the total
adjusted amount of ₱5,506,456.71 ... xxx.
In addition, [DLSU] is hereby held liable to pay 20% per annum deficiency interest on
the ... basic deficiency taxes ... until full payment thereof pursuant to Section 249(B)
of the [National Internal Revenue Code] ... xxx.
Further, [DLSU] is hereby held liable to pay 20% per annum delinquency interest on
the deficiency taxes, surcharge and deficiency interest which have accrued ... from
September 30, 2004 until fully paid.15
Consequently, the Commissioner supplemented its petition with the CTA En
Banc and argued that the CTA Division erred in admitting DLSU's additional
evidence.16
Dissatisfied with the partial reduction of its tax liabilities, DLSU filed
a separate petition for review with the CTA En Banc (CTA En Banc Case No. 671) on
the following grounds: (1) the entire assessment should have been cancelled because
it was based on an invalid LOA; (2) assuming the LOA was valid, the CTA Division
should still have cancelled the entire assessment because DLSU submitted evidence
similar to those submitted by Ateneo De Manila University (Ateneo) in
a separate case where the CTA cancelled Ateneo's tax assessment;17 and (3) the
CTA Division erred in finding that a portion of DLSU's rental income was not proved to
have been used actually, directly and exclusively for educational purposes. 18
The CTA En Banc Rulings
CTA En Banc Case No. 622
The CTA En Banc dismissed the Commissioner's petition for review and sustained
the findings of the CTA Division.19
Tax on rental income
Relying on the findings of the court-commissioned Independent Certified Public
Accountant (Independent CPA), the CTA En Banc found that DLSU was able to prove
that a portion of the assessed rental income was used actually, directly and
exclusively for educational purposes; hence, exempt from tax. 20 The CTA En
Banc was satisfied with DLSU's supporting evidence confirming that part of its rental
income had indeed been used to pay the loan it obtained to build the university's
Physical Education – Sports Complex.21
Parenthetically, DLSU's unsubstantiated claim for exemption, i.e., the part of its
income that was not shown by supporting documents to have been actually, directly
and exclusively used for educational purposes, must be subjected to income tax and
VAT.22
DST on loan and mortgage transactions
Contrary to the Commissioner's contention, DLSU froved its remittance of the DST
due on its loan and mortgage documents.23 The CTA En Banc found that DLSU's
DST payments had been remitted to the BIR, evidenced by the stamp on the
documents made by a DST imprinting machine, which is allowed under Section 200
(D) of the National Internal Revenue Code (Tax Code)24 and Section 2 of Revenue
Regulations (RR) No. 15-2001.25
Admissibility of DLSU's supplemental evidence
The CTA En Banc held that the supplemental pieces of documentary evidence were
admissible even if DLSU formally offered them only when it moved for reconsideration
of the CTA Division's original decision. Notably, the law creating the CTA provides
that proceedings before it shall not be governed strictly by the technical rules of
evidence.26
Page 9 of 25
The Commissioner moved but failed to obtain a reconsideration of the CTA En
Banc's December 10, 2010 decision.27 Thus, she came to this court for relief through
a petition for review on certiorari (G.R. No. 196596).
CTA En Banc Case No. 671
The CTA En Banc partially granted DLSU's petition for review and further reduced its
tax liabilities to ₱2,554,825.47 inclusive of surcharge.28
On the validity of the Letter of Authority
The issue of the LOA' s validity was raised during trial;29 hence, the issue was
deemed properly submitted for decision and reviewable on appeal.
Citing jurisprudence, the CTA En Banc held that a LOA should cover only one taxable
period and that the practice of issuing a LOA covering audit of unverified prior years is
prohibited.30 The prohibition is consistent with Revenue Memorandum Order (RMO)
No. 43-90, which provides that if the audit includes more than one taxable period, the
other periods or years shall be specifically indicated in the LOA.31
In the present case, the LOA issued to DLSU is for Fiscal Year Ending 2003 and
Unverified Prior Years. Hence, the assessments for deficiency income tax, VAT and
DST for taxable years 2001 and 2002 are void, but the assessment for taxable
year 2003 is valid.32
On the applicability of the Ateneo case
The CTA En Banc held that the Ateneo case is not a valid precedent because it
involved different parties, factual settings, bases of assessments, sets of evidence,
and defenses.33
On the CTA Division's appreciation of the evidence
The CTA En Banc affirmed the CTA Division's appreciation of DLSU' s evidence. It
held that while DLSU successfully proved that a portion of its rental income was
transmitted and used to pay the loan obtained to fund the construction of the Sports
Complex, the rental income from other sources were not shown to have been
actually, directly and exclusively used for educational purposes. 34
Not pleased with the CTA En Banc's ruling, both DLSU (G.R. No. 198841) and the
Commissioner (G.R. No. 198941) came to this Court for relief.
The Consolidated Petitions
G.R. No. 196596
The Commissioner submits the following arguments:
First, DLSU's rental income is taxable regardless of how such income is derived, used
or disposed of.35 DLSU's operations of canteens and bookstores within its campus
even though exclusively serving the university community do not negate income tax
liability.36
The Commissioner contends that Article XIV, Section 4 (3) of the Constitution must be
harmonized with Section 30 (H) of the Tax Code, which states among others, that the
income of whatever kind and character of [a non-stock and non-profit educational
institution] from any of [its] properties, real or personal, or from any of [its] activities
conducted for profit regardless of the disposition made of such income, shall be
subject to tax imposed by this Code.37
The Commissioner argues that the CTA En Banc misread and misapplied the case
of Commissioner of Internal Revenue v. YMCA38 to support its conclusion that
revenues however generated are covered by the constitutional exemption, provided
that, the revenues will be used for educational purposes or will be held in reserve for
such purposes.39
On the contrary, the Commissioner posits that a tax-exempt organization like DLSU is
exempt only from property tax but not from income tax on the rentals earned from
property.40 Thus, DLSU's income from the leases of its real properties is not exempt
from taxation even if the income would be used for educational purposes. 41
Second, the Commissioner insists that DLSU did not prove the fact of DST
payment42 and that it is not qualified to use the On-Line Electronic DST Imprinting
Machine, which is available only to certain classes of taxpayers under RR No. 9-
2000.43
Finally, the Commissioner objects to the admission of DLSU's supplemental offer of
evidence. The belated submission of supplemental evidence reopened the case for
trial, and worse, DLSU offered the supplemental evidence only after it received the
unfavorable CTA Division's original decision.44 In any case, DLSU's submission of
supplemental documentary evidence was unnecessary since its rental income was
taxable regardless of its disposition.45
G.R. No. 198841
DLSU argues as that:
Page 10 of 25
First, RMO No. 43-90 prohibits the practice of issuing a LOA with any indication
of unverified prior years. A LOA issued contrary to RMO No. 43-90 is void, thus, an
assessment issued based on such defective LOA must also be void.46
DLSU points out that the LOA issued to it covered the Fiscal Year Ending 2003 and
Unverified Prior Years. On the basis of this defective LOA, the Commissioner
assessed DLSU for deficiency income tax, VAT and DST for taxable years 2001,
2002 and 2003.47 DLSU objects to the CTA En Banc's conclusion that the LOA is
valid for taxable year 2003. According to DLSU, when RMO No. 43-90 provides that:
The practice of issuing [LOAs] covering audit of 'unverified prior years' is hereby
prohibited.
it refers to the LOA which has the format "Base Year + Unverified Prior Years." Since
the LOA issued to DLSU follows this format, then any assessment arising from it must
be entirely voided.48
Second, DLSU invokes the principle of uniformity in taxation, which mandates that for
similarly situated parties, the same set of evidence should be appreciated and
weighed in the same manner.49 The CTA En Banc erred when it did not similarly
appreciate DLSU' s evidence as it did to the pieces of evidence submitted by Ateneo,
also a non-stock, non-profit educational institution.50
G.R. No. 198941
The issues and arguments raised by the Commissioner in G.R. No. 198941 petition
are exactly the same as those she raised in her: (1) petition docketed as G.R. No.
196596 and (2) comment on DLSU's petition docketed as G.R. No. 198841.51
Counter-arguments
DLSU's Comment on G.R. No. 196596
First, DLSU questions the defective verification attached to the petition.52
Second, DLSU stresses that Article XIV, Section 4 (3) of the Constitution is clear
that all assets and revenues of non-stock, non-profit educational institutions used
actually, directly and exclusively for educational purposes are exempt from taxes and
duties.53
On this point, DLSU explains that: (1) the tax exemption of non-stock, non-profit
educational institutions is novel to the 1987 Constitution and that Section 30 (H) of
the 1997 Tax Code cannot amend the 1987 Constitution;54 (2) Section 30 of the
1997 Tax Code is almost an exact replica of Section 26 of the 1977 Tax Code -with
the addition of non-stock, non-profit educational institutions to the list of tax-exempt
entities; and (3) that the 1977 Tax Code was promulgated when the 1973
Constitution was still in place.
DLSU elaborates that the tax exemption granted to a private educational institution
under the 1973 Constitution was only for real property tax. Back then, the special tax
treatment on income of private educational institutions only emanates from
statute, i.e., the 1977 Tax Code. Only under the 1987 Constitution that exemption
from tax of all the assets and revenues of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational purposes, was
expressly and categorically enshrined.55
DLSU thus invokes the doctrine of constitutional supremacy, which renders any
subsequent law that is contrary to the Constitution void and without any force and
effect.56 Section 30 (H) of the 1997 Tax Code insofar as it subjects to tax the income
of whatever kind and character of a non-stock and non-profit educational institution
from any of its properties, real or personal, or from any of its activities conducted for
profit regardless of the disposition made of such income, should be declared without
force and effect in view of the constitutionally granted tax exemption on "all revenues
and assets of non-stock, non-profit educational institutions used actually, directly, and
exclusively for educational purposes."57
DLSU further submits that it complies with the requirements enunciated in
the YMCA case, that for an exemption to be granted under Article XIV, Section 4 (3)
of the Constitution, the taxpayer must prove 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.58 Unlike YMCA, which is not an educational institution, DLSU is
undisputedly a non-stock, non-profit educational institution. It had also submitted
evidence to prove that it actually, directly and exclusively used its income for
educational purposes.59
DLSU also cites the deliberations of the 1986 Constitutional Commission where they
recognized that the tax exemption was granted "to incentivize private educational
institutions to share with the State the responsibility of educating the youth."60
Third, DLSU highlights that both the CTA En Banc and Division found that the bank
that handled DLSU' s loan and mortgage transactions had remitted to the BIR the
DST through an imprinting machine, a method allowed under RR No. 15-2001.61 In
any case, DLSU argues that it cannot be held liable for DST owing to the exemption
granted under the Constitution.62
Finally, DLSU underscores that the Commissioner, despite notice, did not oppose the
formal offer of supplemental evidence. Because of the Commissioner's failure to
timely object, she became bound by the results of the submission of such
supplemental evidence.63
Page 11 of 25
The CIR's Comment on G.R. No. 198841
The Commissioner submits that DLSU is estopped from questioning the LOA's validity
because it failed to raise this issue in both the administrative and judicial
proceedings.64 That it was asked on cross-examination during the trial does not make
it an issue that the CTA could resolve.65 The Commissioner also maintains that
DLSU's rental income is not tax-exempt because an educational institution is only
exempt from property tax but not from tax on the income earned from the property. 66
DLSU's Comment on G.R. No. 198941
DLSU puts forward the same counter-arguments discussed above.67 In addition,
DLSU prays that the Court award attorney's fees in its favor because it was
constrained to unnecessarily retain the services of counsel in this separate petition. 68
Issues
Although the parties raised a number of issues, the Court shall decide only the pivotal
issues, which we summarize as follows:
I. Whether DLSU' s income and revenues proved to have been used actually,
directly and exclusively for educational purposes are exempt from duties and
taxes;
II. Whether the entire assessment should be voided because of the defective
LOA;
III. Whether the CTA correctly admitted DLSU's supplemental pieces of
evidence; and
IV. Whether the CTA's appreciation of the sufficiency of DLSU's evidence
may be disturbed by the Court.
Our Ruling
As we explain in full below, we rule that:
I. The income, 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.
II. The LOA issued to DLSU is not entirely void. The assessment for taxable
year 2003 is valid.
 III. The CTA correctly admitted DLSU's formal offer of supplemental evidence;
and
IV. The CTA's appreciation of evidence is conclusive unless the CTA is
shown to have manifestly overlooked certain relevant facts not disputed by
the parties and which, if properly considered, would justify a different
conclusion.
The parties failed to convince the Court that the CTA overlooked or failed to consider
relevant facts. We thus sustain the CTA En Banc's findings that:
a. DLSU proved that a portion of its rental income was used actually, directly
and exclusively for educational purposes; and
b. DLSU proved the payment of the DST through its bank's on-line imprinting
machine.
I. 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.
DLSU rests it case on Article XIV, Section 4 (3) of the 1987 Constitution, which reads:
(3) All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. Upon the dissolution or cessation
of the corporate existence of such institutions, their assets shall be disposed of in the
manner provided by law.
Proprietary educational institutions, including those cooperatively owned, may
likewise be entitled to such exemptions subject to
the limitations provided by law including restrictions on dividends and provisions for
reinvestment. [underscoring and emphasis supplied]
Before fully discussing the merits of the case, we observe that:
First, the constitutional provision refers to two kinds of educational institutions: (1)
non-stock, non-profit educational institutions and (2) proprietary educational
institutions.69
Page 12 of 25
Second, DLSU falls under the first category. Even the Commissioner admits the
status of DLSU as a non-stock, non-profit educational institution.70
Third, while DLSU's claim for tax exemption arises from and is based on the
Constitution, the Constitution, in the same provision, also imposes certain conditions
to avail of the exemption. We discuss below the import of the constitutional text vis-a-
vis the Commissioner's counter-arguments.
Fourth, there is a marked distinction between the treatment of non-stock, non-profit
educational institutions and proprietary 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.
As we explain below, the marked distinction between a non-stock, non-profit and a
proprietary educational institution is crucial in determining the nature and extent of the
tax exemption granted to non-stock, non-profit educational institutions.
The Commissioner opposes DLSU's claim for tax exemption on the basis of Section
30 (H) of the Tax Code. The relevant text reads:
The following organizations shall not be taxed under this Title [Tax on
Income] in respect to income received by them as such:
xxxx
(H) A non-stock and non-profit educational institution
xxxx
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. [underscoring and emphasis supplied]
The Commissioner posits that the 1997 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.
Did the 1997 Tax Code qualify the tax exemption constitutionally-granted to non-
stock, non-profit educational institutions?
We answer in the negative.
While the present petition appears to be a case of first impression, 71 the Court in
the YMCA case had in fact already analyzed and explained the meaning of Article
XIV, Section 4 (3) of the Constitution. The Court in that case made doctrinal
pronouncements that are relevant to the present case.
The issue in YMCA was whether the income derived from rentals of real property
owned by the YMCA, established as a "welfare, educational and charitable non-profit
corporation," was subject to income tax under the Tax Code and the Constitution.72
The Court denied YMCA's claim for exemption on the ground that as a charitable
institution falling under Article VI, Section 28 (3) of the Constitution,73 the YMCA is
not tax-exempt per se; " 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." 74
The Court held that the exemption claimed by the YMCA is expressly disallowed by
the last paragraph of then Section 27 (now Section 30) of the Tax Code, which
mandates that the income of exempt organizations from any of their properties, real or
personal, are subject to the same tax imposed by the Tax Code, regardless of how
that income is used. The Court ruled that the last paragraph of Section 27
unequivocally subjects to tax the rent income of the YMCA from its property. 75
In short, the YMCA is exempt only from property tax but not from income tax.
As a last ditch effort to avoid paying the taxes on its rental income, the YMCA invoked
the tax privilege granted under Article XIV, Section 4 (3) of the Constitution.
The Court denied YMCA's claim that it falls under Article XIV, Section 4 (3) of the
Constitution holding that 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.76
The Court then significantly laid down the requisites for availing the tax exemption
under Article XIV, Section 4 (3), namely: (1) the taxpayer 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.77
Page 13 of 25
We now adopt YMCA as precedent and hold that:
1. 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.
2. The tax-exemption constitutionally-granted to non-stock, non-profit educational
institutions, is not subject to limitations imposed by law.
The tax exemption granted by the
Constitution to non-stock, non-profit
educational institutions is conditioned only
on the actual, direct and exclusive use of
their assets, revenues and income78 for
educational purposes.
We find that 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 "[a]ll revenues and assets ... used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties."
The addition and express use of the word revenues in Article XIV, Section 4 (3) of the
Constitution is not without significance.
We find that the text demonstrates the policy of the 1987 Constitution, discernible
from the records of the 1986 Constitutional Commission79 to provide broader tax
privilege to non-stock, non-profit educational institutions as recognition of their role in
assisting the State provide a public good. The tax exemption was seen as beneficial
to students who may otherwise be charged unreasonable tuition fees if not for the tax
exemption extended to all revenues and assets of non-stock, non-profit educational
institutions.80
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.81
We find it helpful to discuss at this point the taxation of revenues versus the taxation
of assets.
Revenues consist of the amounts earned by a person or entity from the conduct of
business operations.82 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,83 VAT,84 and local business tax (LBT).85
Assets, on the other hand, are the tangible and intangible properties owned by a
person or entity.86 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).87 Also, the landed cost of imported goods is a component of the tax base
in VAT on importation88 and tariff duties.89
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.
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.
The leased portion of the building may be subject to real property tax, as held
in Abra Valley College, Inc. v. Aquino.90 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.
In concrete terms, the lease of a portion of a school building for commercial purposes,
removes such asset from the property tax exemption granted under the
Constitution.91 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.
Page 14 of 25
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.
Parenthetically, income and revenues of non-stock, non-profit educational
institution not used actually, directly and exclusively for educational purposes are not
exempt from duties and taxes. 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.
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. But so
long as the assets or revenues are used actually, directly and exclusively for
educational purposes, they are exempt from duties and taxes.
The tax exemption granted by the
Constitution to non-stock, non-profit
educational institutions, unlike the exemption
that may be availed of by proprietary
educational institutions, is not subject to
limitations imposed by law.
That the Constitution treats non-stock, non-profit educational institutions differently
from proprietary educational institutions cannot be doubted. As discussed, the
privilege granted to the former is conditioned only on the actual, direct and exclusive
use of their revenues and assets for educational purposes. In clear contrast, the tax
privilege granted to the latter may be subject to limitations imposed by law.
We spell out below the difference in treatment if only to highlight the privileged status
of non-stock, non-profit educational institutions compared with their proprietary
counterparts.
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).
To be specific, Section 30 provides that exempt organizations like non-stock, non-
profit educational institutions shall not be taxed on income received by them as such.
Section 27 (B), on the other hand, states that "[p]roprietary 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 ... "92
By the Tax Code's clear terms, 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 nonprofit 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.
Thus, 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. We make this declaration in the exercise of and
consistent with our duty93 to uphold the primacy of the Constitution. 94
Finally, we stress that our holding here pertains only to non-stock, non-profit
educational institutions and does not cover the other exempt organizations under
Section 30 of the Tax Code.
For all these reasons, we hold that the income and revenues of DLSU proven to have
been used actually, directly and exclusively for educational purposes are exempt from
duties and taxes.
II. The LOA issued to DLSU is
not entirely void. The
assessment for taxable year
2003 is valid.
DLSU objects to the CTA En Banc 's conclusion that the LOA is valid for taxable year
2003 and insists that the entire LOA should be voided for being contrary to RMO No.
43-90, which provides that if tax audit includes more than one taxable period, the
other periods or years shall be specifically indicated in the LOA.
A LOA is the authority given to the appropriate revenue officer to examine the books
of account and other accounting records of the taxpayer in order to determine the
taxpayer's correct internal revenue liabilities95 and for the purpose of collecting the
correct amount of tax,96 in accordance with Section 5 of the Tax Code, which gives
the CIR the power to obtain information, to summon/examine, and take testimony of
persons. The LOA commences the audit process97 and informs the taxpayer that it is
under audit for possible deficiency tax assessment.
Page 15 of 25
Given the purposes of a LOA, is there basis to completely nullify the LOA issued to
DLSU, and consequently, disregard the BIR and the CTA's findings of tax deficiency
for taxable year 2003?
We answer in the negative.
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 [LO As] 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]. 98
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.
Read in this light, the requirement to specify the taxable period covered by the LOA is
simply to inform the taxpayer of the extent of the audit and the scope of the revenue
officer's authority. 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.99
In the present case, 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. DLSU was fully apprised that it was being
audited for taxable year 2003. 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.
Lastly, the Commissioner's claim that DLSU failed to raise the issue of the LOA' s
validity at the CTA Division, and thus, should not have been entertained on appeal, is
not accurate.
On the contrary, the CTA En Banc found that the issue of the LOA's validity came up
during the trial.100 DLSU then raised the issue in its memorandum and motion for
partial reconsideration with the CTA Division. DLSU raised it again on appeal to the
CTA En Banc. Thus, the CTA En Banc could, as it did, pass upon the validity of the
LOA.101 Besides, the Commissioner had the opportunity to argue for the validity of the
LOA at the CTA En Banc but she chose not to file her comment and memorandum
despite notice.102
III.The CTA correctly admitted
the supplemental evidence
formally offered by DLSU.
The Commissioner objects to the CTA Division's admission of DLSU's supplemental
pieces of documentary evidence.
To recall, DLSU formally offered its supplemental evidence upon filing its motion for
reconsideration with the CTA Division.103 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.
We uphold the CTA Division's admission of the supplemental evidence on distinct but
mutually reinforcing grounds, to wit: (1) the Commissioner failed to timely object to the
formal offer of supplemental evidence; and (2) the CTA is not governed strictly by the
technical rules of evidence.
First, the failure to object to the offered evidence renders it admissible, and the court
cannot, on its own, disregard such evidence.104
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.105 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.106
As disclosed by DLSU, the Commissioner did not oppose the supplemental formal
offer of evidence despite notice.107 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.
We clarify that while the Commissioner's failure to promptly object had no bearing on
the materiality or sufficiency of the supplemental evidence admitted, she was bound
by the outcome of the CTA Division's assessment of the evidence.108
Page 16 of 25
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.
Notably, this Court had in the past admitted and considered evidence attached to the
taxpayers' motion for reconsideration.1âwphi1
In the case of BPI-Family Savings Bank v. Court of Appeals,109 the tax refund
claimant attached to its motion for reconsideration with the CT A its Final Adjustment
Return. The Commissioner, as in the present case, did not oppose the taxpayer's
motion for reconsideration and the admission of the Final Adjustment Return.110 We
thus admitted and gave weight to the Final Adjustment Return although it was only
submitted upon motion for reconsideration.
We held that 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
evidence111 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.112
We applied the same reasoning in the subsequent cases of Filinvest Development
Corporation v. Commissioner of Internal Revenue113 and Commissioner of Internal
Revenue v. PERF Realty Corporation,114 where the taxpayers also submitted the
supplemental supporting document only upon filing their motions for reconsideration.
Although the cited cases involved claims for tax refunds, we also dispense with the
strict application of the technical rules of evidence in the present tax
assessment case. If anything, the liberal application of the rules assumes greater
force and significance in the case of a taxpayer who claims a constitutionally granted
tax exemption. While the taxpayers in the cited cases claimed refund of excess tax
payments based on the Tax Code,115 DLSU is claiming tax exemption based on the
Constitution. If liberality is afforded to taxpayers who paid more than they should have
under a statute, then with more reason that we should allow a taxpayer to prove its
exemption from tax based on the Constitution.
Hence, we sustain the CTA's admission of DLSU's supplemental offer of evidence not
only because the Commissioner failed to promptly object, but more so because the
strict application of the technical rules of evidence may defeat the intent of the
Constitution.
IV. The CTA's appreciation of
evidence is generally binding on
the Court unless compelling
reasons justify otherwise.
It is doctrinal that the Court will not lightly set aside the conclusions reached by the
CTA which, by the very nature of its function of being dedicated exclusively to the
resolution of tax problems, has developed an expertise on the subject, unless there
has been an abuse or improvident exercise of authority. 116 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.117
We sustain the factual findings of the CTA.
The parties failed to raise credible basis for us to disturb the CTA's findings that DLSU
had used actually, directly and exclusively for educational purposes a portion of its
assessed income and that it had remitted the DST payments though an online
imprinting machine.
a. DLSU used actually, directly, and exclusively for educational purposes a portion of
its assessed income.
To see how the CTA arrived at its factual findings, we review the process undertaken,
from which it deduced that DLSU successfully proved that it used actually, directly
and exclusively for educational purposes a portion of its rental income.
The CTA reduced DLSU' s deficiency income tax and VAT liabilities in view of the
submission of the supplemental evidence, which consisted of statement of receipts,
statement of disbursement and fund balance and statement of fund changes.118
These documents showed that DLSU borrowed ₱93.86 Million, 119
which was used to
build the university's Sports Complex. Based on these pieces of evidence, the CTA
found that DLSU' s rental income from its concessionaires were indeed transmitted
and used for the payment of this loan. The CTA held that the degree of
preponderance of evidence was sufficiently met to prove actual, direct and exclusive
use for educational purposes.
The CTA also found that DLSU's rental income from other concessionaires, which
were allegedly deposited to a fund (CF-CPA Account),120 intended for the university's
capital projects, was not proved to have been used actually, directly and
exclusively for educational purposes. The CTA observed that "[DLSU] ... failed to
fully account for and substantiate all the disbursements from the [fund]." Thus, the
CTA "cannot ascertain whether rental income from the [other] concessionaires was
indeed used for educational purposes."121
Page 17 of 25
To stress, the CTA's factual findings were based on and supported by the report of
the Independent CPA who reviewed, audited and examined the voluminous
documents submitted by DLSU.
Under the CTA Revised Rules, an Independent CPA's functions include: (a)
examination and verification of receipts, invoices, vouchers and other long accounts;
(b) reproduction of, and comparison of such reproduction with, and certification that
the same are faithful copies of original documents, and pre-marking of documentary
exhibits consisting of voluminous documents; (c) preparation of schedules or
summaries containing a chronological listing of the numbers, dates and amounts
covered by receipts or invoices or other relevant documents and the amount(s) of
taxes paid; (d) making findings as to compliance with substantiation
requirements under pertinent tax laws, regulations and jurisprudence; (e)
submission of a formal report with certification of authenticity and veracity of findings
and conclusions in the performance of the audit; (f) testifying on such formal report;
and (g) performing such other functions as the CTA may direct. 122
Based on the Independent CPA's report and on its own appreciation of the evidence,
the CTA held that only the portion of the rental income pertaining to the substantiated
disbursements (i.e., proved by receipts, vouchers, etc.) 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.123
The CTA then further reduced DLSU's tax liabilities by cancelling the assessments for
taxable years 2001 and 2002 due to the defective LOA.124
The Court finds that the above fact-finding process undertaken by the CTA shows that
it based its ruling on the evidence on record, which we reiterate, were examined and
verified by the Independent CPA. Thus, we see no persuasive reason to deviate from
these factual findings.
However, while we generally respect the factual findings of the CTA, it does not mean
that we are bound by its conclusions. In the present case, we do not agree with
the method used by the CTA to arrive at DLSU' s unsubstantiated rental
income (i.e., income not proved to have been actually, directly and exclusively used
for educational purposes).
To recall, the CTA found that DLSU earned a rental income of ₱l0,610,379.00 in
taxable year 2003.125 DLSU earned this income from leasing a portion of its premises
to: 1) MTG-Sports Complex, 2) La Casita, 3) Alarey, Inc., 4) Zaide Food Corp., 5)
Capri International, and 6) MTO Bookstore.126
To prove that its rental income was used for educational purposes, DLSU identified
the transactions where the rental income was
expended, viz.: 1) ₱4,007,724.00127 used to pay the loan obtained by DLSU to build
the Sports Complex; and 2) ₱6,602,655.00 transferred to the CF-CPA Account.128
DLSU also submitted documents to the Independent CPA to prove that the
₱6,602,655.00 transferred to the CF-CPA Account was used actually, directly and
exclusively for educational purposes. According to the Independent CPA' findings,
DLSU was able to substantiate disbursements from the CF-CPA Account amounting
to ₱6,259,078.30.
Contradicting the findings of the Independent CPA, the CTA concluded that out of
the ₱l0,610,379.00 rental income, ₱4,841,066.65 was unsubstantiated, and thus,
subject to income tax and VAT.129
The CTA then concluded that the ratio of substantiated disbursements to the total
disbursements from the CF-CPA Account for taxable year 2003 is only
26.68%.130 The CTA held as follows:
However, as regards petitioner's rental income from Alarey, Inc., Zaide Food Corp.,
Capri International and MTO Bookstore, which were transmitted to the CF-CPA
Account, petitioner again failed to fully account for and substantiate all the
disbursements from the CF-CPA Account; thus failing to prove that the rental income
derived therein were actually, directly and exclusively used for educational purposes.
Likewise, the findings of the Court-Commissioned Independent CPA show that the
disbursements from the CF-CPA Account for fiscal year 2003 amounts to
₱6,259,078.30 only. Hence, this portion of the rental income, being the substantiated
disbursements of the CF-CPA Account, was considered by the Special First Division
as used actually, directly and exclusively for educational purposes. Since for fiscal
year 2003, the total disbursements per voucher is ₱6,259,078.3 (Exhibit "LL-25-C"),
and the total disbursements per subsidiary ledger amounts to ₱23,463,543.02 (Exhibit
"LL-29-C"), the ratio of substantiated disbursements for fiscal year 2003 is 26.68%
(₱6,259,078.30/₱23,463,543.02). Thus, the substantiated portion of CF-CPA
Disbursements for fiscal year 2003, arrived at by multiplying the ratio of 26.68% with
the total rent income added to and used in the CF-CPA Account in the amount of
₱6,602,655.00 is ₱1,761,588.35.131 (emphasis supplied)
For better understanding, we summarize the CTA's computation as follows:
1. The CTA subtracted the rent income used in the construction of the Sports
Complex (₱4,007,724.00) from the rental income (₱10,610,379.00) earned from the
abovementioned concessionaries. The difference (₱6,602,655.00) was the portion
claimed to have been deposited to the CF-CPA Account.
2. The CTA then subtracted the supposed substantiated portion of CF-CPA
disbursements (₱1,761,308.37) from the ₱6,602,655.00 to arrive at the supposed
unsubstantiated portion of the rental income (₱4,841,066.65).132
Page 18 of 25
3. The substantiated portion of CF-CPA disbursements (₱l,761,308.37)133 was
derived by multiplying the rental income claimed to have been added to the CF-CPA
Account (₱6,602,655.00) by 26.68% or the ratio of substantiated disbursements
to total disbursements (₱23,463,543.02).
4. The 26.68% ratio134 was the result of dividing the substantiated disbursements from
the CF-CPA Account as found by the Independent CPA (₱6,259,078.30) by the total
disbursements (₱23,463,543.02) from the same account.
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, non-profit 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.
To reiterate, to be exempt from tax, DLSU has the burden of proving that the
proceeds of its rental income (which amounted to a total of ₱10.61 million) 135 were
used for educational purposes. This amount was divided into two parts: (a) the ₱4.0l
million, which was used to pay the loan obtained for the construction of the Sports
Complex; and (b) the ₱6.60 million,136 which was transferred to the CF-CPA account.
For year 2003, the total disbursement from the CF-CPA account amounted to ₱23 .46
million.137 These figures, read in light of the constitutional exemption, raises the
question: does DLSU claim that the whole total CF-CPA disbursement of ₱23.46
million is tax-exempt so that it is required to prove that all these disbursements
had been made for educational purposes?
We answer in the negative.
The records show that DLSU never claimed that the total CF-CPA disbursements of
₱23.46 million had been for educational purposes and should thus be tax-exempt;
DLSU only claimed ₱10.61 million for tax-exemption and should thus be required to
prove that this amount had been used as claimed.
Of this amount, ₱4.01 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 ₱6.60 million which was transferred to the CF-CPA which in turn made
disbursements of ₱23.46 million for various general purposes, among them the ₱6.60
million transferred by DLSU.
Significantly, the Independent CPA confirmed that the CF-CPA made disbursements
for educational purposes in year 2003 in the amount ₱6.26 million. Based on these
given figures, the CT A concluded that the expenses for educational purposes that
had been coursed through the CF-CPA should be prorated so that only the portion
that ₱6.26 million bears to the total CF-CPA disbursements should be credited to
DLSU for tax exemption.
This approach, in our view, is flawed given the constitutional requirement that
revenues actually and directly used for educational purposes should be tax-exempt.
As already mentioned above, DLSU is not claiming that the whole ₱23.46 million CF-
CPA disbursement had been used for educational purposes; it only claims that ₱6.60
million transferred to CF-CPA had been used for educational purposes. This was
what DLSU needed to prove to have actually and directly used for educational
purposes.
That this fund had been first deposited into a separate fund (the CF -CPA established
to fund capital projects) lends peculiarity to the facts of this case, but does not detract
from the fact that the deposited funds were DLSU revenue funds that had been
confirmed and proven to have been actually and directly used for educational
purposes via the CF-CPA. 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.
Based on these considerations, DLSU should therefore be liable only for the
difference between what it claimed and what it has proven. In more concrete terms,
DLSU only had to prove that its rental income for taxable year 2003 (₱10,610,379.00)
was used for educational purposes. Hence, while the total disbursements from the
CF-CPA Account amounted to ₱23,463,543.02, DLSU only had to substantiate its
Pl0.6 million rental income, part of which was the ₱6,602,655.00 transferred to the
CF-CPA account. Of this latter amount, ₱6.259 million was substantiated to have
been used for educational purposes.
To summarize, we thus revise the tax base for deficiency income tax and VAT for
taxable year 2003 as follows:
CTA
Decision138 Revised
Rental income 10,610,379.00 10,610,379.00
Less: Rent income used in 4,007,724.00 4,007,724.00
construction of the Sports
Complex
Rental income deposited to the
6,602,655.00 6,602,655.00
CF-CPA Account
Page 19 of 25
1,761,588.35 6,259,078.30
Less: Substantiated portion of
CF-CPA disbursements
Tax base for deficiency
4,841,066.65 343.576.70
income tax and VAT
On DLSU' s argument that the CTA should have appreciated its evidence in the same
way as it did with the evidence submitted by Ateneo in another separate case, the
CTA explained that the issue in the Ateneo case was not the same as the issue in the
present case.
The issue in the Ateneo case was whether or not Ateneo could be held liable to pay
income taxes and VAT under certain BIR and Department of Finance
issuances139 that required the educational institution to own and operate the
canteens, or other commercial enterprises within its campus, as condition for tax
exemption. The CTA held that the Constitution does not require the educational
institution to own or operate these commercial establishments to avail of the
exemption.140
Given the lack of complete identity of the issues involved, the CTA held that it had to
evaluate the separate sets of evidence differently. The CTA likewise stressed that
DLSU and Ateneo gave distinct defenses and that its wisdom "cannot be equated on
its decision on two different cases with two different issues."141
DLSU disagrees with the CTA and argues that the entire assessment must be
cancelled because it submitted similar, if not stronger sets of evidence, as Ateneo.
We reject DLSU's argument for being non sequitur. Its reliance on the concept of
uniformity of taxation is also incorrect.
First, 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.
To state the obvious, the amount of income received by DLSU and by Ateneo during
the taxable years they were assessed varied. The amount of tax assessment
also varied. The amount of income proven to have been used for educational
purposes also varied because the amount substantiated varied.142 Thus, the amount
of tax assessment cancelled by the CTA varied.
On the one hand, the BIR assessed DLSU a total tax deficiency of ₱17,303,001.12 for
taxable years 2001, 2002 and 2003. On the other hand, the BIR assessed Ateneo a
total deficiency tax of ₱8,864,042.35 for the same period. Notably, DLSU was
assessed deficiency DST, while Ateneo was not.143
Thus, 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.
The CTA significantly found that some documents that could have fully supported
DLSU's claim were not produced in court. Indeed, the Independent CPA testified that
some disbursements had not been proven to have been used actually, directly and
exclusively for educational purposes.144
The final nail on the question of evidence is DLSU's own admission that the original of
these documents had not in fact been produced before the CTA although it claimed
that there was no bad faith on its part.145 To our mind, this admission is a good
indicator of how the Ateneo and the DLSU cases varied, resulting in DLSU's failure to
substantiate a portion of its claimed exemption.
Further, DLSU's invocation of Section 5, Rule 130 of the Revised
Rules on Evidence, that the contents of the missing supporting documents were
proven by its recital in some other authentic documents on record,146 can no longer
be entertained at this late stage of the proceeding. The CTA did not rule on this
particular claim. The CTA also made no finding on DLSU' s assertion of lack of bad
faith. Besides, it is not our duty to go over these documents to test the truthfulness of
their contents, this Court not being a trier of facts.
Second, 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.147 A tax is uniform when it operates
with the same force and effect in every place where the subject of it is found. 148 The
concept requires that all subjects of taxation similarly situated should be treated alike
and placed in equal footing.149
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.
DLSU can only assert that the CTA violated the rule on uniformity if it can show that,
despite proving that it used actually, directly and exclusively for educational purposes
its income and revenues, the CTA still affirmed the imposition of taxes. That the
Page 20 of 25
DLSU secured a different result happened because it failed to fully prove that it used
actually, directly and exclusively for educational purposes its revenues and income.
On this point, we remind DLSU that the rule on uniformity of taxation does not mean
that subjects of taxation similarly situated are treated in literally the same way in all
and every occasion. The fact that the Ateneo and DLSU are both non-stock, non-
profit educational institutions, does not mean that the CTA or this Court would
similarly decide every case for (or against) both universities. Success in tax litigation,
like in any other litigation, depends to a large extent on the sufficiency of evidence.
DLSU's evidence was wanting, thus, the CTA was correct in not fully cancelling its tax
liabilities.
b. DLSU proved its payment of the DST
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.
We sustain the findings of the CTA. The Commissioner's argument lacks basis in both
the Tax Code and the relevant revenue regulations.
DST on documents, loan agreements, and papers shall be levied, collected and paid
for by the person making, signing, issuing, accepting, or transferring the same. 150 The
Tax Code provides that whenever one party to the document enjoys exemption from
DST, the other party not exempt from DST shall be directly liable for the tax. Thus, it
is clear that DST shall be payable by any party to the document, such that the
payment and compliance by one shall mean the full settlement of the DST due on the
document.
In the present case, 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.
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.
Thus, the Court sustains the finding of the CTA that DLSU proved the
payment of the assessed DST deficiency, except for the unpaid balance of
₱13,265.48.152
WHEREFORE, premises considered, we DENY the petition of the Commissioner of
Internal Revenue in G.R. No. 196596 and AFFIRM the December 10, 2010 decision
and March 29, 2011 resolution of the Court of Tax Appeals En Banc in CTA En
Banc Case No. 622, except for the total amount of deficiency tax liabilities of De La
Salle University, Inc., which had been reduced.
We also DENY both the petition of De La Salle University, Inc. in G.R. No. 198841
and the petition of the Commissioner of Internal Revenue in G.R. No. 198941 and
thus AFFIRM the June 8, 2011 decision and October 4, 2011 resolution of the Court
of Tax Appeals En Banc in CTA En Banc Case No. 671, with
the MODIFICATION that the base for the deficiency income tax and VAT for taxable
year 2003 is ₱343,576.70.
SO ORDERED.
THIRD DIVISION
G.R. No. 212530, August 10, 2016
BLOOMBERRY RESORTS AND HOTELS, INC., Petitioner, v. BUREAU OF
INTERNAL REVENUE, REPRESENTED BY COMMISSIONER KIM S. JACINTO-
HENARES, Respondent.
DECISION
PEREZ, J.:
This is a Petition for Certiorari and Prohibition under Rule 65 of the Rules on Court
seeking: (a) to annul the issuance by the Commissioner of Internal Revenue (CIR) of
an alleged unlawful governmental regulation, specifically the provision of Revenue
Memorandum Circular (RMC) No. 33-20131 dated 17 April 2013 subjecting
contractees and licensees of the Philippine Amusement and Gaming Corporation
(PAGCOR) to income tax under the National Internal Revenue Code (NIRC) of 1997,
as amended; and (b) to enjoin respondent CIR from implementing the assailed
provision of RMC No. 33-2013.2chanrobleslaw
Page 21 of 25
The Facts
As narrated in the present petition, the factual antecedents of the case reveal that, on
8 April 2009, PAGCOR granted to petitioner a provisional license to establish and
operate an integrated resort and casino complex at the Entertainment City project site
of PAGCOR. Petitioner and its parent company, Sureste Properties, Inc., own and
operate Solaire Resort & Casino. Thus, being one of its licensees, petitioner only
pays PAGCOR license fees, in lieu of all taxes, as contained in its provisional license
and consistent with the PAGCOR Charter or Presidential Decree (PD) No.
1869,3 which provides the exemption from taxes of persons or entities contracting
with PAGCOR in casino operations.
However, when Republic Act (R.A.) No. 9337 took effect4, it amended Section 27(C)
of the NIRC of 1997, which excluded PAGCOR from the enumeration of government-
owned or controlled corporations (GOCCs) exempt from paying corporate income tax.
The enactment of the law led to the case of PAGCOR v. The Bureau of Internal
Revenue, et al.,5 where PAGCOR questioned the validity or constitutionality of R.A.
No. 9337 removing its exemption from paying corporate income tax, and therefore
alleging the same to be void for being repugnant to the equal protection and the non-
impairment clauses embodied in the 1987 Philippine Constitution. Subsequently, the
Court articulated that Section 1 of RA No. 9337, amending Section 27(C) of the NIRC
of 1997, which removed PAGCOR's exemption from corporate income tax, was
indeed valid and constitutional.
Consequently, in implementing the aforesaid amendments made by R.A. No. 9337,
respondent issued RMC No. 33-2013 dated 17 April 2013 declaring that PAGCOR, in
addition to the five percent (5%) franchise tax of its gross revenue under Section
13(2)(a) of PD No. 1869, is now subject to corporate income tax under the NIRC of
1997, as amended. In addition, a provision therein states that PAGCOR's contractees
and licensees, being entities duly authorized and licensed by it to perform gambling
casinos, gaming clubs and other similar recreation or amusement places, and gaming
pools, are likewise subject to income tax under the NIRC of 1997, as amended.
Aggrieved, as it is now being considered liable to pay corporate income tax in addition
to the 5% franchise tax, petitioner immediately elevated the matter through a petition
for certiorari and prohibition before this Court asserting the following arguments: (i)
PD No. 1869, as amended by R.A. No. 9487, is an existing valid law, and expressly
and clearly exempts the contractees and licensees of PAGCOR from the payment of
all kinds of taxes except the 5% franchise tax on its gross gaming revenue; (ii) This
clear exemption from taxes of PAGCOR's contracting parties under Section 13(2)(b)
of PD No. 1869, as amended by R.A. No. 9487, was not repealed by the deletion of
PAGCOR in the list of tax-exempt entities under the NIRC; (iii) Respondent CIR acted
without or in excess of its jurisdiction, or with grave abuse of discretion amounting to
lack or excess of jurisdiction when she issued the assailed provision in RMC No. 33-
2013 which, in effect, repealed or amended PD No. 1869; and (iv) Respondent CIR,
in issuing the assailed provision in RMC No. 33-2013, will adversely affect an industry
which seeks to create income for the government, promote tourism and generate jobs
for the Filipino people.6chanrobleslaw
To rationalize its direct recourse before this Court, petitioner submits the following
justification:
What is involved is a pure question of law, i.e. whether or not petitioner is
(a)
exempted from payment of all taxes, national or local, except the 5%
franchise tax by virtue of Section 13(2)(b) of PD No. 1869, as amended;
(b) The rule on exhaustion of administrative remedies is disregarded, among
others, when: (i) the administrative action is patently illegal amounting to
lack or excess of jurisdiction; (ii) to require exhaustion of administrative
remedies would be unreasonable; and (iii) it would amount to nullification
of a claim;
(c) The gaming business funded by private investors under license by
PAGCOR is a new industry which involves national interest. Hence, the
inclusion of the assailed provision in RMC No. 33-2013 which implements
income taxes on PAGCOR's licensees and operators when an exemption
for such is specifically provided for by PD No. 1869, as amended, being
unlawful and unwarranted legislation by the respondent, seriously affects
national interest as it effectively curtails the basis for the investments in
the industry and resulting tourist interest and jobs generated by the
industry; and
(d) The assailed provision of RMC No. 33-2013 affects not only petitioner or
other locators and PAGCOR licensees in Entertainment City, Parañaque
City, but also the rest of private casinos licensed by PAGCOR operating
in economic zones. Thus, in order to prevent multiplicity of suits and to
avoid a situation when different local courts issue differing opinions on
one question of law, direct recourse to this Court is likewise sought. 7
It is the contention of petitioner that although Section 4 of the NIRC of 1997, as
amended, gives respondent CIR the power to interpret the provisions of tax laws
through administrative issuances, she cannot, in the exercise of such power, issue
administrative rulings or circulars not consistent with the law sought to be applied
since administrative issuances must not override, supplant or modify the law, but
must remain consistent with the law they intend to carry out. Since the assailed
provision in RMC No. 33-2013 subjecting the contractees and licensees of PAGCOR
to income tax under the NIRC of 1997, as amended, contravenes the provision of the
PAGCOR Charter granting tax exemptions to corporations, associations, agencies, or
individuals with whom PAGCOR has any contractual relationship in connection with
Page 22 of 25
the operations of the casinos authorized to be conducted under the PAGCOR
Charter, it is petitioner's position that the assailed provision was issued by respondent
CIR with grave abuse of discretion amounting to lack or excess of jurisdiction.
Respondent, in her Comment filed on 18 December 2014,8 counters that there was
no grave abuse of discretion on her part when she issued the subject revenue
memorandum circular since it did not alter, modify or amend the intent and meaning
of Section 13(2)(b) of PD No. 1869, as amended, insofar as the imposition is
concerned, considering that it merely clarified the taxability of PAGCOR and
its contractees and licensees for income tax purposes as well as other franchise
grantees similarly situated under prevailing laws; that prohibition will not lie to restrain
a purely administrative act, nor enjoin acts already done, being a preventive remedy;
and that tax exemptions are strictly construed against the taxpayer.
The Issues
Hence, we are now presented with the following issues for our consideration and
resolution: (i) whether or not the assailed provision of RMC No. 33-2013 subjecting
the contractees and licensees of PAGCOR to income tax under the NIRC of 1997, as
amended, was issued by respondent CIR with grave abuse of discretion amounting to
lack or excess of jurisdiction; and (ii) whether or not said provision is valid or
constitutional considering that Section 13(2)(b) of PD No. 1869, as amended
(PAGCOR Charter), grants tax exemptions to such contractees and licensees.
Our Ruling
At the outset, although it is true that direct recourse before this Court is occasionally
allowed in exceptional cases without strict observance of the rules on hierarchy of
courts and on exhaustion of administrative remedies, we find the imperious need to
first determine whether or not this case falls within the said exceptions, before we
delve into the merits of the instant petition.
We thus find the need to look back at the dispositions rendered in Asia International
Auctioneers, Inc., et al. v. Parayno, Jr.,9 wherein we ruled that revenue memorandum
circulars10 are considered administrative rulings issued from time to time by the CIR. It
has been explained that these are actually rulings or opinions of the CIR issued
pursuant to her power under Section 411 of the NIRC of 1997, as amended, to make
rulings or opinions in connection with the implementation of the provisions of internal
revenue laws, including ruling on the classification of articles of sales and similar
purposes. Therefore, it was held that under R.A. No. 1125,12 which was thereafter
amended by RA No. 9282,13 such rulings of the CIR (including revenue memorandum
circulars) are appealable to the Court of Tax Appeals (CTA), and not to any other
courts.
In the same case, we further declared that "failure to ask the CIR for a reconsideration
of the assailed revenue regulations and RMCs is another reason why a case directly
filed before us should be dismissed. It is settled that the premature invocation of the
court's intervention is fatal to one's cause of action. If a remedy within the
administrative machinery can still be resorted to by giving the administrative officer
every opportunity to decide on a matter that comes within his jurisdiction, then such
remedy must first be exhausted before the court's power of judicial review can be
sought. The party with an administrative remedy must not only initiate the prescribed
administrative procedure to obtain relief but also to pursue it to its appropriate
conclusion before seeking judicial intervention in order to give the administrative
agency an opportunity to decide the matter itself correctly and prevent unnecessary
and premature resort to the court."14chanrobleslaw
Then, in The Philippine American Life and General Insurance Company v. Secretary
of Finance,15 we had the occasion to elucidate that the CIR's power to interpret the
provisions of the Tax Code and other tax laws is subject to the review by the
Secretary of Finance; and thereafter, the latter's ruling may be appealed to the CTA,
having the technical knowledge over the subject controversies. Also, the Court held
that "the power of the CTA includes that of determining whether or not there has been
grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the
[regional trial court] in issuing an interlocutory order in cases falling within the
exclusive appellate jurisdiction of the tax court. It, thus, follows that the CTA, by
constitutional mandate, is vested with jurisdiction to issue writs of certiorari in these
cases."16 Stated differently, the CTA "can now rule not only on the propriety of an
assessment or tax treatment of a certain transaction, but also on the validity of the
revenue regulation or revenue memorandum circular on which the said assessment is
based."17 From the foregoing jurisprudential pronouncements, it would appear that in
questioning the validity of the subject revenue memorandum circular, petitioner
should not have resorted directly before this Court considering that it appears to have
failed to comply with the doctrine of exhaustion of administrative remedies and the
rule on hierarchy of courts, a clear indication that the case was not yet ripe for judicial
remedy. Notably, however, in addition to the justifiable grounds relied upon by
petitioner for its immediate recourse (i.e. pure question of law, patently illegal act by
the BIR, national interest, and prevention of multiplicity of suits), we intend to avail of
our jurisdictional prerogative in order not to further delay the disposition of the issues
at hand, and also to promote the vital interest of substantial justice. To add, in recent
years, this Court has consistently acted on direct actions assailing the validity of
various revenue regulations, revenue memorandum circulars, and the likes, issued by
the CIR. The position we now take is more in accord with latest jurisprudence. Upon
the exercise of this prerogative, we are ushered into the merits of the case.
The determination of the submissions of petitioner will have to follow the pilot case
of PAGCOR v. The Bureau of Internal Revenue, et al., 18 where this Court clarified its
earlier ruling in G.R. No. 17208719 involving the same parties, and expressed that: (i)
Section 1 of RA No. 9337, amending Section 27(C) of the NIRC of 1997, as
amended, which excluded PAGCOR from the enumeration of GOCCs exempted from
corporate income tax, is valid and constitutional; (ii) PAGCOR's tax privilege of paying
five percent (5%) franchise tax in lieu of all other taxes with respect to its income from
gaming operations is not repealed or amended by Section l(c) of R.A. No. 9337; (iii)
PAGCOR's income from gaming operations is subject to the 5% franchise tax only;
Page 23 of 25
and (iv) PAGCOR's income from other related services is subject to corporate income
tax only.
The Court sitting En Banc expounded on the matter in this wise:
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 [PAGCOR's]
contention that its income from gaming operations is subject only to five percent
(5%) franchise tax under P.D. No. 1869, as amended, while its income from other
related services is subject to corporate income tax pursuant to P.D. No. 1869, as
amended, as well as R.A. No. 9337. This is demonstrable.
First. Under P.D. No. 1869, as amended, [PAGCOR] 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
[PAGCOR's] income from operation of related services. Such income tax exemption
could not have been applicable to [PAGCOR's] income from gaming operations
as it is already exempt therefrom under P.D. No. 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.
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 [PAGCOR] 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. No. 1869,
as amended, imposing a franchise tax of five percent (5%) on its gross revenue
or earnings derived by [PAGCOR] 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
[PAGCOR] 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
[PAGCOR] 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.20 (Emphasis supplied)
Furthermore,
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 the manner.
As we see it, there is no conflict between P.D. No. 1869, as amended, and R.A.
No. 9337. The former lays down the taxes imposable upon [PAGCOR], 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; and (2) income tax for income realized from other necessary
and related services, shows and entertainment of [PAGCOR]. With the enactment of
R.A. No. 9337, which withdrew the income tax exemption under R.A. No. 8424,
[PAGCOR'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. No. 1869, as amended,
which expressly provides the tax treatment of [PAGCOR'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. x x x
x x x x 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. 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.
In this regard, we agree with [PAGCOR] that if the lawmakers had intended to
withdraw [PAGCOR'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. However, the repealing clause never mentioned [PAGCOR'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, x x x.
Page 24 of 25
xxxx
When [PAGCOR's] franchise was extended on June 20, 2007 without revoking
or withdrawing its tax exemption, it effectively reinstated and reiterated all of
[PAGCOR'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 [PAGCOR'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.
Given that [PAGCOR's] Charter is not deemed repealed or amended by R.A. No.
9337, [PAGCOR'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 [PAGCOR'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 [PAGCOR's] income from other related services,
in view of the express provision of Section 14(5) of P.D. No. 1869, as amended, x x
x.21 (Emphasis supplied)
The Court through Justice Diosdado M. Peralta, categorically followed what was
simply provided under the PAGCOR Charter (PD No. 1869, as amended by RA No.
9487), by proclaiming that despite amendments to the NIRC of 1997, the said Charter
remains in effect. Thus, income derived by PAGCOR from its gaming operations such
as the operation and licensing of gambling casinos, gaming clubs and other similar
recreation or amusement places, gaming pools and related operations is subject only
to 5% franchise tax, in lieu of all other taxes, including corporate income tax. The
Court concluded that the CIR committed grave abuse of discretion amounting to
lack or excess of jurisdiction when it issued RMC No. 33-2013 subjecting both
income from gaming operations and other related services to corporate income
tax and 5% franchise tax considering that it unduly expands the Court's
Decision dated 15 March 2011 without due process, which creates additional
burden upon PAGCOR.
Noticeably, however, the High Court in the abovementioned case intentionally did not
rule on the issue of whether or not PAGCOR's tax privilege of paying only the 5%
franchise tax in lieu of all other taxes inures to the benefit of third parties with
contractual relationship with it in connection with the operation of casinos, such as
petitioner herein. The Court sitting En Bane simply stated that:
The resolution of the instant petition is limited to clarifying the tax treatment of
[PAGCOR's] income vis-a-vis our Decision dated March 15, 2011. This Decision
(dated 10 December 2014) is not meant to expand our original Decision (dated 15
March 2011) by delving into new issues involving [PAGCOR'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 if this resolution. For another, to answer
the fourth issue raised by [PAGCOR] relative to its contractees and licensees would
be downright premature and iniquitous as the same would effectively countenance
sidesteps to judicial process.22
Bearing in mind the parties involved and the similarities of the issues submitted in the
present case, we are now presented with the prospect of finally resolving the
confusion caused by the amendments introduced by RA No. 9337 to the NIRC of
1997, and the subsequent issuance of RMC No. 33-2013, affecting the tax regime not
only of PAGCOR but also its contractees and licensees under the existing laws and
prevailing jurisprudence.
Section 13 of PD No. 1869 evidently states that payment of the 5% franchise tax by
PAGCOR and its contractees and licensees exempts them from payment of any other
taxes, including corporate income tax, quoted hereunder for ready reference:
Sec. 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.
(b) Others: The exemptions herein granted for earnings derived from the
operations conducted under the franchise specifically from the payment of any
tax, income or otherwise, as well as any form of charges, fees or levies, shall
inure to the benefit of and extend to corporation(s), association(s), agency(ies),
or individual(s) with whom the Corporation or operator has any contractual
relationship in connection with the operations of the casino(s) authorized to be
conducted under this Franchise and to those receiving compensation or other
remuneration from the Corporation or operator as a result of essential facilities
furnished and/or technical services rendered to the Corporation or
operator. (Emphasis and underlining supplied)
Page 25 of 25
As previously recognized, the above-quoted provision providing for the said
exemption was neither amended nor repealed by any subsequent laws (i.e. Section 1
of R.A. No. 9337 which amended Section 27(C) of the NIRC of 1997); thus, it is still in
effect. Guided by the doctrinal teachings in resolving the case at bench, it is without a
doubt that, like PAGCOR, its contractees and licensees remain exempted from the
payment of corporate income tax and other taxes since the law is clear that said
exemption inures to their benefit.
We adhere to the cardinal rule in statutory construction that when the law is clear and
free from any doubt or ambiguity, there is no room for construction or interpretation.
As has been our consistent ruling, where the law speaks in clear and categorical
language, there is no occasion for interpretation; there is only room for
application.23chanrobleslaw
As the PAGCOR Charter states in unequivocal terms that exemptions granted for
earnings derived from the operations conducted under the franchise specifically from
the payment of any tax, income or otherwise, as well as any form of charges, fees or
levies, shall inure to the benefit of and extend to corporation(s), association(s),
agency(ies), or individual(s) with whom the PAGCOR or operator has any contractual
relationship in connection with the operations of the casino(s) authorized to be
conducted under this Franchise, so it must be that all contractees and licensees of
PAGCOR, upon payment of the 5% franchise tax, shall likewise be exempted from all
other taxes, including corporate income tax realized from the operation of casinos.
For the same reasons that made us conclude in the 10 December 2014 Decision of
the Court sitting En Banc in G.R. No. 215427 that PAGCOR is subject to corporate
income tax for "other related services", we find it logical that its contractees and
licensees shall likewise pay corporate income tax for income derived from such
"related services."
Simply then, in this case, we adhere to the principle that since the statute is clear and
free from ambiguity, it must be given its literal meaning and applied without attempted
interpretation. This is the plain meaning rule or verba legis, as expressed in the
maxim index animi sermo or speech is the index of intention.24chanrobleslaw
Plainly, too, upon payment of the 5% franchise tax, petitioner's income from its
gaming operations of gambling casinos, gaming clubs and other similar recreation or
amusement places, and gaming pools, defined within the purview of the aforesaid
section, is not subject to corporate income tax.
WHEREFORE, the petition is GRANTED. Accordingly, respondent Bureau of Internal
Revenue, represented by Commissioner Kim S. Jacinto-Henares is
hereby ORDERED to CEASE AND DESIST from implementing Revenue
Memorandum Circular No. 33-2013 insofar as it imposes corporate income tax on
petitioner Bloomberry Resorts and Hotels, Inc.'s income derived from its gaming
operations. SO ORDERED.