SECOND DIVISION

[G.R. No. 150154. August 9, 2005]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOSHIBA
INFORMATION EQUIPMENT (PHILS.), INC., respondent.
D E C I S I O N
CHICO-NAZARIO, J .:
In this Petition for Review under Rule 45 of the Rules of Court, petitioner Commissioner of
Internal Revenue (CIR) prays for the reversal of the decision of the Court of Appeals in CA-G.R.
SP No. 59106,
[1]
affirming the order of the Court of Tax Appeals (CTA) in CTA Case No.
5593,
[2]
which ordered said petitioner CIR to refund or, in the alternative, to issue a tax credit
certificate to respondent Toshiba Information Equipment (Phils.), Inc. (Toshiba), in the amount
of P16,188,045.44, representing unutilized input value-added tax (VAT) payments for the first
and second quarters of 1996.
There is hardly any dispute as to the facts giving rise to the present Petition.
Respondent Toshiba was organized and established as a domestic corporation, duly-
registered with the Securities and Exchange Commission on 07 July 1995,
[3]
with the primary
purpose of engaging in the business of manufacturing and exporting of electrical and mechanical
machinery, equipment, systems, accessories, parts, components, materials and goods of all kinds,
including, without limitation, to those relating to office automation and information technology,
and all types of computer hardware and software, such as HDD, CD-ROM and personal
computer printed circuit boards.
[4]

On 27 September 1995, respondent Toshiba also registered with the Philippine Economic
Zone Authority (PEZA) as an ECOZONE Export Enterprise, with principal office in Laguna
Technopark, Bian, Laguna.
[5]
Finally, on 29 December 1995, it registered with the Bureau of
Internal Revenue (BIR) as a VAT taxpayer and a withholding agent.
[6]

Respondent Toshiba filed its VAT returns for the first and second quarters of taxable year
1996, reporting input VAT in the amount
of P13,118,542.00
[7]
and P5,128,761.94,
[8]
respectively, or a total of P18,247,303.94. It alleged
that the said input VAT was from its purchases of capital goods and services which remained
unutilized since it had not yet engaged in any business activity or transaction for which it may be
liable for any output VAT.
[9]
Consequently, on 27 March 1998, respondent Toshiba filed with
the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of
Finance (DOF) applications for tax credit/refund of its unutilized input VAT for 01 January to 31
March 1996 in the amount of P14,176,601.28,
[10]
and for 01 April to 30 June 1996 in the amount
of P5,161,820.79,
[11]
for a total of P19,338,422.07. To toll the running of the two-year
prescriptive period for judicially claiming a tax credit/refund, respondent Toshiba, on 31 March
1998, filed with the CTA a Petition for Review. It would subsequently file an Amended Petition
for Review on 10 November 1998 so as to conform to the evidence presented before the CTA
during the hearings.
In his Answer to the Amended Petition for Review before the CTA, petitioner CIR raised
several Special and Affirmative Defenses, to wit
5. Assuming without admitting that petitioner filed a claim for refund/tax credit, the same
is subject to investigation by the Bureau of Internal Revenue.
6. Taxes are presumed to have been collected in accordance with law. Hence, petitioner
must prove that the taxes sought to be refunded were erroneously or illegally collected.
7. Petitioner must prove the allegations supporting its entitlement to a refund.
8. Petitioner must show that it has complied with the provisions of Sections 204(c) and
229 of the 1997 Tax Code on the filing of a written claim for refund within two (2)
years from the date of payment of the tax.
9. Claims for refund of taxes are construed strictly against claimants, the same being in
the nature of an exemption from taxation.
[12]

After evaluating the evidence submitted by respondent Toshiba,
[13]
the CTA, in its Decision
dated 10 March 2000, ordered petitioner CIR to refund, or in the alternative, to issue a tax credit
certificate to respondent Toshiba in the amount of P16,188,045.44.
[14]

In a Resolution, dated 24 May 2000, the CTA denied petitioner CIRs Motion for
Reconsideration for lack of merit.
[15]

The Court of Appeals, in its Decision dated 27 September 2001, dismissed petitioner CIRs
Petition for Review and affirmed the CTA Decision dated 10 March 2000.
Comes now petitioner CIR before this Court assailing the above-mentioned Decision of the
Court of Appeals based on the following grounds
1. The Court of Appeals erred in holding that petitioners failure to raise in the Tax Court
the arguments relied upon by him in the petition, is fatal to his cause.
2. The Court of Appeals erred in not holding that respondent being registered with the
Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise, its
business is not subject to VAT pursuant to Section 24 of Republic Act No. 7916 in
relation to Section 103 (now 109) of the Tax Code.
3. The Court of Appeals erred in not holding that since respondents business is not
subject to VAT, the capital goods and services it purchased are considered not used in
VAT taxable business, and, therefore, it is not entitled to refund of input taxes on such
capital goods pursuant to Section 4.106-1 of Revenue Regulations No. 7-95 and of
input taxes on services pursuant to Section 4.103-1 of said Regulations.
4. The Court of Appeals erred in holding that respondent is entitled to a refund or tax
credit of input taxes it paid on zero-rated transactions.
[16]

Ultimately, however, the issue still to be resolved herein shall be whether respondent
Toshiba is entitled to the tax credit/refund of its input VAT on its purchases of capital goods and
services, to which this Court answers in the affirmative.
I
An ECOZONE enterprise is a VAT-exempt entity. Sales of goods, properties, and services by
persons from the Customs Territory to ECOZONE enterprises shall be subject to VAT at zero
percent (0%).
Respondent Toshiba bases its claim for tax credit/refund on Section 106(b) of the Tax Code
of 1977, as amended, which reads:
SEC. 106. Refunds or tax credits of creditable input tax.

(b) Capital goods. A VAT-registered person may apply for the issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally purchased, to the
extent that such input taxes have not been applied against output taxes. The application may be
made only within two (2) years after the close of the taxable quarter when the importation or
purchase was made.
[17]

Petitioner CIR, on the other hand, opposes such claim on account of Section 4.106-1(b) of
Revenue Regulations (RR) No. 7-95, otherwise known as the VAT Regulations, as amended,
which provides as follows
Sec. 4.106-1. Refunds or tax credits of input tax.
. . .
(b) Capital Goods. -- Only a VAT-registered person may apply for issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally purchased. The
refund shall be allowed to the extent that such input taxes have not been applied against output
taxes. The application should be made within two (2) years after the close of the taxable quarter
when the importation or purchase was made.
Refund of input taxes on capital goods shall be allowed only to the extent that such capital goods
are used in VAT taxable business. If it is also used in exempt operations, the input tax
refundable shall only be the ratable portion corresponding to the taxable operations.
Capital goods or properties refer to goods or properties with estimated useful life greater than
one year and which are treated as depreciable assets under Section 29(f), used directly or
indirectly in the production or sale of taxable goods or services. (Underscoring ours.)
Petitioner CIR argues that although respondent Toshiba may be a VAT-registered taxpayer,
it is not engaged in a VAT-taxable business. According to petitioner CIR, respondent Toshiba is
actually VAT-exempt, invoking the following provision of the Tax Code of 1977, as amended
SEC. 103. Exempt transactions. The following shall be exempt from value-added tax.

(q) Transactions which are exempt under special laws, except those granted under Presidential
Decree No. 66, 529, 972, 1491, and 1590, and non-electric cooperatives under Republic Act No.
6938, or international agreements to which the Philippines is a signatory.
[18]

Since respondent Toshiba is a PEZA-registered enterprise, it is subject to the five percent
(5%) preferential tax rate imposed under Chapter III, Section 24 of Republic Act No. 7916,
otherwise known as The Special Economic Zone Act of 1995, as amended. According to the
said section, [e]xcept for real property taxes on land owned by developers, no taxes, local and
national, shall be imposed on business establishments operating within the ECOZONE. In lieu
thereof, five percent (5%) of the gross income earned by all business enterprises within the
ECOZONE shall be paid The five percent (5%) preferential tax rate imposed on the gross
income of a PEZA-registered enterprise shall be in lieu of all national taxes, including VAT.
Thus, petitioner CIR contends that respondent Toshiba is VAT-exempt by virtue of a special law,
Rep. Act No. 7916, as amended.
It would seem that petitioner CIR failed to differentiate between VAT-exempt transactions
from VAT-exempt entities. In the case of Commissioner of Internal Revenue v. Seagate
Technology (Philippines),
[19]
this Court already made such distinction
An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard
to the tax status VAT-exempt or not of the party to the transaction
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax
Code, a special law or an international agreement to which the Philippines is a signatory, and by
virtue of which its taxable transactions become exempt from VAT
Section 103(q) of the Tax Code of 1977, as amended, relied upon by petitioner CIR, relates
to VAT-exempt transactions. These are transactions exempted from VAT by special laws or
international agreements to which the Philippines is a signatory. Since such transactions are not
subject to VAT, the sellers cannot pass on any output VAT to the purchasers of goods,
properties, or services, and they may not claim tax credit/refund of the input VAT they had paid
thereon.
Section 103(q) of the Tax Code of 1977, as amended, cannot apply to transactions of
respondent Toshiba because although the said section recognizes that transactions covered by
special laws may be exempt from VAT, the very same section provides that those falling under
Presidential Decree No. 66 are not. Presidential Decree No. 66, creating the Export Processing
Zone Authority (EPZA), is the precursor of Rep. Act No. 7916, as amended,
[20]
under which the
EPZA evolved into the PEZA. Consequently, the exception of Presidential Decree No. 66 from
Section 103(q) of the Tax Code of 1977, as amended, extends likewise to Rep. Act No. 7916, as
amended.
This Court agrees, however, that PEZA-registered enterprises, which would necessarily be
located within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No.
7916, as amended, which imposes the five percent (5%) preferential tax rate on gross income of
PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same
statute which establishes the fiction that ECOZONES are foreign territory.
It is important to note herein that respondent Toshiba is located within an ECOZONE. An
ECOZONE or a Special Economic Zone has been described as
. . . [S]elected areas with highly developed or which have the potential to be developed into agro-
industrial, industrial, tourist, recreational, commercial, banking, investment and financial centers
whose metes and bounds are fixed or delimited by Presidential Proclamations. An ECOZONE
may contain any or all of the following: industrial estates (IEs), export processing zones (EPZs),
free trade zones and tourist/recreational centers.
[21]

The national territory of the Philippines outside of the proclaimed borders of the ECOZONE
shall be referred to as the Customs Territory.
[22]

Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and
operate the ECOZONES as a separate customs territory;
[23]
thus, creating the fiction that the
ECOZONE is a foreign territory.
[24]
As a result, sales made by a supplier in the Customs
Territory to a purchaser in the ECOZONE shall be treated as an exportation from the Customs
Territory. Conversely, sales made by a supplier from the ECOZONE to a purchaser in the
Customs Territory shall be considered as an importation into the Customs Territory.
Given the preceding discussion, what would be the VAT implication of sales made by a
supplier from the Customs Territory to an ECOZONE enterprise?
The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no
VAT shall be imposed to form part of the cost of goods destined for consumption outside of the
territorial border of the taxing authority. Hence, actual export of goods and services from the
Philippines to a foreign country must be free of VAT; while, those destined for use or
consumption within the Philippines shall be imposed with ten percent (10%) VAT.
[25]

Applying said doctrine to the sale of goods, properties, and services to and from the
ECOZONES,
[26]
the BIR issued Revenue Memorandum Circular (RMC) No. 74-99, on 15
October 1999. Of particular interest to the present Petition is Section 3 thereof, which reads
SECTION 3. Tax Treatment Of Sales Made By a VAT Registered Supplier from The
Customs Territory, To a PEZA Registered Enterprise.
(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax regime, in
lieu of all taxes, except real property tax, pursuant to R.A. No. 7916, as amended:
(a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence, considered
subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A.
No. 7916, in relation to ART. 77(2) of the Omnibus Investments Code.
(b) Sale of service. This shall be treated subject to zero percent (0%) VAT under the cross
border doctrine of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.
(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special tax regime,
hence, subject to taxes under the NIRC, e.g., Service Establishments which are subject to taxes
under the NIRC rather than the 5% special tax regime:
(a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence, considered
subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC and Sec. 23 of R.A.
No. 7916 in relation to ART. 77(2) of the Omnibus Investments Code.
(b) Sale of Service. This shall be treated subject to zero percent (0%) VAT under the cross
border doctrine of the VAT System, pursuant to VAT Ruling No. 032-98 dated Nov. 5, 1998.
(3) In the final analysis, any sale of goods, property or services made by a VAT registered
supplier from the Customs Territory to any registered enterprise operating in the ecozone,
regardless of the class or type of the latters PEZA registration, is actually qualified and thus
legally entitled to the zero percent (0%) VAT. Accordingly, all sales of goods or property to
such enterprise made by a VAT registered supplier from the Customs Territory shall be treated
subject to 0% VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the
Omnibus Investments Code, while all sales of services to the said enterprises, made by VAT
registered suppliers from the Customs Territory, shall be treated effectively subject to the 0%
VAT, pursuant to Section 108(B)(3), NIRC, in relation to the provisions of R.A. No. 7916 and
the Cross Border Doctrine of the VAT system.
This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or
services to the benefit of the zero percent (0%) VAT for sales made to the aforementioned
ECOZONE enterprises and shall serve as sufficient compliance to the requirement for prior
approval of zero-rating imposed by Revenue Regulations No. 7-95 effective as of the date of the
issuance of this Circular.
Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a
VAT-exempt entity. The VAT treatment of sales to it, however, varies depending on whether
the supplier from the Customs Territory is VAT-registered or not.
Sales of goods, properties and services by a VAT-registered supplier from the Customs
Territory to an ECOZONE enterprise shall be treated as export sales. If such sales are made by a
VAT-registered supplier, they shall be subject to VAT at zero percent (0%). In zero-rated
transactions, the VAT-registered supplier shall not pass on any output VAT to the ECOZONE
enterprise, and at the same time, shall be entitled to claim tax credit/refund of its input VAT
attributable to such sales. Zero-rating of export sales primarily intends to benefit the exporter
(i.e., the supplier from the Customs Territory), who is directly and legally liable for the VAT,
making it internationally competitive by allowing it to credit/refund the input VAT attributable
to its export sales.
Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier
would only be exempt from VAT and the supplier shall not be able to claim credit/refund of its
input VAT.
Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a
VAT-exempt entity that could not have engaged in a VAT-taxable business, this Court still
believes, given the particular circumstances of the present case, that it is entitled to a
credit/refund of its input VAT.
IIPrior to RMC No. 74-99, however, PEZA-registered enterprises availing of the income tax
holiday under Executive Order No. 226, as amended, were deemed subject to VAT.
In his Petition, petitioner CIR opposed the grant of tax credit/refund to respondent Toshiba,
reasoning thus
In the first place, respondent could not have paid input taxes on its purchases of goods and
services from VAT-registered suppliers because such purchases being zero-rated, that is, no
output tax was paid by the suppliers, no input tax was shifted or passed on to respondent. The
VAT is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee
or lessee of the goods, properties or services (Section 105, 1997 Tax Code).

Secondly, Section 4.100-2 of Revenue Regulations No. 7-95 provides:
SEC. 4.100-2. Zero-rated sales. A zero-rated sale by a VAT-registered person, which is a
taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax
on his purchases of goods, properties or services related to such zero-rated sale shall be available
as tax credit or refund in accordance with these regulations.
From the foregoing, the VAT-registered person who can avail as tax credit or refund of the input
tax on his purchases of goods, services or properties is the seller whose sale is zero-rated.
Applying the foregoing provision to the case at bench, the VAT-registered supplier, whose sale
of goods and services to respondent is zero-rated, can avail as tax credit or refund the input taxes
on its (supplier) own purchases of goods and services related to its zero-rated sale of goods and
services to respondent. On the other hand, respondent, as the buyer in such zero-rated sale of
goods and services, could not have paid input taxes for which it can claim as tax credit or
refund.
[27]

Before anything else, this Court wishes to point out that petitioner CIR is working on the
erroneous premise that respondent Toshiba is claiming tax credit or refund of input VAT based
on Section 4.100-2,
[28]
in relation to Section 4.106-1(a),
[29]
of RR No. 7-95, as amended, which
allows the tax credit/refund of input VAT on zero-rated sales of goods, properties or services.
Instead, respondent Toshiba is basing its claim for tax credit or refund on Sec. 4.106-1(b) of the
same regulations, which allows a VAT-registered person to apply for tax credit/refund of the
input VAT on its capital goods. While in the former, the seller of the goods, properties or
services is the one entitled to the tax credit/refund; in the latter, it is the purchaser of the capital
goods.
Nevertheless, regardless of his mistake as to the basis for respondent Toshibas application
for tax credit/refund, petitioner CIR validly raised the question of whether any output VAT was
actually passed on to respondent Toshiba which it could claim as input VAT subject to
credit/refund. If the VAT-registered supplier from the Customs Territory did not charge any
output VAT to respondent Toshiba believing that it is exempt from VAT or it is subject to zero-
rated VAT, then respondent Toshiba did not pay any input VAT on its purchase of capital goods
and it could not claim any tax credit/refund thereof.
The rule that any sale by a VAT-registered supplier from the Customs Territory to a PEZA-
registered enterprise shall be considered an export sale and subject to zero percent (0%) VAT
was clearly established only on 15 October 1999, upon the issuance of RMC No. 74-99. Prior to
the said date, however, whether or not a PEZA-registered enterprise was VAT-exempt depended
on the type of fiscal incentives availed of by the said enterprise. This old rule on VAT-
exemption or liability of PEZA-registered enterprises, followed by the BIR, also recognized and
affirmed by the CTA, the Court of Appeals, and even this Court,
[30]
cannot be lightly disregarded
considering the great number of PEZA-registered enterprises which did rely on it to determine its
tax liabilities, as well as, its privileges.
According to the old rule, Section 23 of Rep. Act No. 7916, as amended, gives the PEZA-
registered enterprise the option to choose between two sets of fiscal incentives: (a) The five
percent (5%) preferential tax rate on its gross income under Rep. Act No. 7916, as amended; and
(b) the income tax holiday provided under Executive Order No. 226, otherwise known as the
Omnibus Investment Code of 1987, as amended.
[31]

The five percent (5%) preferential tax rate on gross income under Rep. Act No. 7916, as
amended, is in lieu of all taxes. Except for real property taxes, no other national or local tax may
be imposed on a PEZA-registered enterprise availing of this particular fiscal incentive, not even
an indirect tax like VAT.
Alternatively, Book VI of Exec. Order No. 226, as amended, grants income tax holiday to
registered pioneer and non-pioneer enterprises for six-year and four-year periods,
respectively.
[32]
Those availing of this incentive are exempt only from income tax, but shall be
subject to all other taxes, including the ten percent (10%) VAT.
This old rule clearly did not take into consideration the Cross Border Doctrine essential to
the VAT system or the fiction of the ECOZONE as a foreign territory. It relied totally on the
choice of fiscal incentives of the PEZA-registered enterprise. Again, for emphasis, the old VAT
rule for PEZA-registered enterprises was based on their choice of fiscal incentives: (1) If the
PEZA-registered enterprise chose the five percent (5%) preferential tax on its gross income, in
lieu of all taxes, as provided by Rep. Act No. 7916, as amended, then it would be VAT-exempt;
(2) If the PEZA-registered enterprise availed of the income tax holiday under Exec. Order No.
226, as amended, it shall be subject to VAT at ten percent (10%). Such distinction was abolished
by RMC No. 74-99, which categorically declared that all sales of goods, properties, and services
made by a VAT-registered supplier from the Customs Territory to an ECOZONE enterprise shall
be subject to VAT, at zero percent (0%) rate, regardless of the latters type or class of PEZA
registration; and, thus, affirming the nature of a PEZA-registered or an ECOZONE enterprise as
a VAT-exempt entity.
The sale of capital goods by suppliers from the Customs Territory to respondent Toshiba in
the present Petition took place during the first and second quarters of 1996, way before the
issuance of RMC No. 74-99, and when the old rule was accepted and implemented by no less
than the BIR itself. Since respondent Toshiba opted to avail itself of the income tax holiday
under Exec. Order No. 226, as amended, then it was deemed subject to the ten percent (10%)
VAT. It was very likely therefore that suppliers from the Customs Territory had passed on
output VAT to respondent Toshiba, and the latter, thus, incurred input VAT. It bears emphasis
that the CTA, with the help of SGV & Co., the independent accountant it commissioned to make
a report, already thoroughly reviewed the evidence submitted by respondent Toshiba consisting
of receipts, invoices, and vouchers, from its suppliers from the Customs Territory. Accordingly,
this Court gives due respect to and adopts herein the CTAs findings that the suppliers of capital
goods from the Customs Territory did pass on output VAT to respondent Toshiba and the
amount of input VAT which respondent Toshiba could claim as credit/refund.
Moreover, in another circular, Revenue Memorandum Circular (RMC) No. 42-2003, issued
on 15 July 2003, the BIR answered the following question
Q-5: Under Revenue Memorandum Circular (RMC) No. 74-99, purchases by PEZA-
registered firms automatically qualify as zero-rated without seeking prior
approval from the BIR effective October 1999.
1) Will the OSS-DOF Center still accept applications from PEZA-registered
claimants who were allegedly billed VAT by their suppliers before and during
the effectivity of the RMC by issuing VAT invoices/receipts?

A-5(1): If the PEZA-registered enterprise is paying the 5% preferential tax in lieu of all
other taxes, the said PEZA-registered taxpayer cannot claim TCC or refund for
the VAT paid on purchases. However, if the taxpayer is availing of the income
tax holiday, it can claim VAT credit provided:
a. The taxpayer-claimant is VAT-registered;
b. Purchases are evidenced by VAT invoices or receipts, whichever is
applicable, with shifted VAT to the purchaser prior to the implementation of
RMC No. 74-99; and
c. The supplier issues a sworn statement under penalties of perjury that it shifted
the VAT and declared the sales to the PEZA-registered purchaser as taxable
sales in its VAT returns.
For invoices/receipts issued upon the effectivity of RMC No. 74-99, the claims for
input VAT by PEZA-registered companies, regardless of the type or class of
PEZA registration, should be denied.
Under RMC No. 42-2003, the DOF would still accept applications for tax credit/refund filed
by PEZA-registered enterprises, availing of the income tax holiday, for input VAT on their
purchases made prior to RMC No. 74-99. Acceptance of applications essentially implies
processing and possible approval thereof depending on whether the given conditions are met.
Respondent Toshibas claim for tax credit/refund arose from the very same circumstances
recognized by Q-5(1) and A-5(1) of RMC No. 42-2003. It therefore seems irrational and
unreasonable for petitioner CIR to oppose respondent Toshibas application for tax credit/refund
of its input VAT, when such claim had already been determined and approved by the CTA after
due hearing, and even affirmed by the Court of Appeals; while it could accept, process, and even
approve applications filed by other similarly-situated PEZA-registered enterprises at the
administrative level.
IIIFindings of fact by the CTA are respected and adopted by this Court.
Finally, petitioner CIR, in a last desperate attempt to block respondent Toshibas claim for
tax credit/refund, challenges the allegation of said respondent that it availed of the income tax
holiday under Exec. Order No. 226, as amended, rather than the five percent (5%) preferential
tax rate under Rep. Act No. 7916, as amended. Undoubtedly, this is a factual matter that should
have been raised and threshed out in the lower courts. Giving it credence would belie petitioner
CIRs assertion that it is raising only issues of law in its Petition that may be resolved without
need for reception of additional evidences. Once more, this Court respects and adopts the
finding of the CTA, affirmed by the Court of Appeals, that respondent Toshiba had indeed
availed of the income tax holiday under Exec. Order No. 226, as amended.
WHEREFORE, based on the foregoing, this Court AFFIRMS the decision of the Court of
Appeals in CA-G.R. SP. No. 59106, and the order of the CTA in CTA Case No. 5593, ordering
said petitioner CIR to refund or, in the alternative, to issue a tax credit certificate to respondent
Toshiba, in the amount of P16,188,045.44, representing unutilized input VAT for the first and
second quarters of 1996.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Tinga, JJ., concur.








Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 153866 February 11, 2005
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
SEAGATE TECHNOLOGY (PHILIPPINES), respondent.
D E C I S I O N
PANGANIBAN, J .:
Business companies registered in and operating from the Special Economic Zone in Naga, Cebu
-- like herein respondent -- are entities exempt from all internal revenue taxes and the
implementing rules relevant thereto, including the value-added taxes or VAT. Although export
sales are not deemed exempt transactions, they are nonetheless zero-rated. Hence, in the present
case, the distinction between exempt entities and exempttransactions has little significance,
because the net result is that the taxpayer is not liable for the VAT. Respondent, a VAT-
registered enterprise, has complied with all requisites for claiming a tax refund of or credit for
the input VAT it paid on capital goods it purchased. Thus, the Court of Tax Appeals and the
Court of Appeals did not err in ruling that it is entitled to such refund or credit.
The Case
Before us is a Petition for Review
1
under Rule 45 of the Rules of Court, seeking to set aside the
May 27, 2002 Decision
2
of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal
portion of the Decision reads as follows:
"WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of
merit."
3

The Facts
The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows:
"As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows:
1. [Respondent] is a resident foreign corporation duly registered with the Securities and
Exchange Commission to do business in the Philippines, with principal office address at the new
Cebu Township One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu;
2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to
perform the duties of his office, including, among others, the duty to act and approve claims for
refund or tax credit;
3. [Respondent] is registered with the Philippine Export Zone Authority (PEZA) and has been
issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to
engage in the manufacture of recording components primarily used in computers for export.
Such registration was made on 6 June 1997;
4. [Respondent] is VAT [(Value Added Tax)]-registered entity as evidenced by VAT
Registration Certification No. 97-083-000600-V issued on 2 April 1997;
5. VAT returns for the period 1 April 1998 to 30 June 1999 have been filed by [respondent];
6. An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with
supporting documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition
for Review), was filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu;
7. No final action has been received by [respondent] from [petitioner] on [respondents] claim
for VAT refund.
"The administrative claim for refund by the [respondent] on October 4, 1999 was not acted upon
by the [petitioner] prompting the [respondent] to elevate the case to [the CTA] on July 21, 2000
by way of Petition for Review in order to toll the running of the two-year prescriptive period.
"For his part, [petitioner] x x x raised the following Special and Affirmative Defenses, to wit:
1. [Respondents] alleged claim for tax refund/credit is subject to administrative routinary
investigation/examination by [petitioners] Bureau;
2. Since taxes are presumed to have been collected in accordance with laws and regulations, the
[respondent] has the burden of proof that the taxes sought to be refunded were erroneously or
illegally collected x x x;
3. In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459 (1997), the Supreme Court ruled that:
"A claimant has the burden of proof to establish the factual basis of his or her claim for tax
credit/refund."
4. Claims for tax refund/tax credit are construed in strictissimi juris against the taxpayer. This
is due to the fact that claims for refund/credit [partake of] the nature of an exemption from tax.
Thus, it is incumbent upon the [respondent] to prove that it is indeed entitled to the refund/credit
sought. Failure on the part of the [respondent] to prove the same is fatal to its claim for tax
credit. He who claims exemption must be able to justify his claim by the clearest grant of organic
or statutory law. An exemption from the common burden cannot be permitted to exist upon
vague implications;
5. Granting, without admitting, that [respondent] is a Philippine Economic Zone Authority
(PEZA) registered Ecozone Enterprise, then its business is not subject to VAT pursuant to
Section 24 of Republic Act No. ([RA]) 7916 in relation to Section 103 of the Tax Code, as
amended. As [respondents] business is not subject to VAT, the capital goods and services it
alleged to have purchased are considered not used in VAT taxable business. As such,
[respondent] is not entitled to refund of input taxes on such capital goods pursuant to Section
4.106.1 of Revenue Regulations No. ([RR])7-95, and of input taxes on services pursuant to
Section 4.103 of said regulations.
6. [Respondent] must show compliance with the provisions of Section 204 (C) and 229 of the
1997 Tax Code on filing of a written claim for refund within two (2) years from the date of
payment of tax.
"On July 19, 2001, the Tax Court rendered a decision granting the claim for refund."
4

Ruling of the Court of Appeals
The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax
credit certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This
sum represented the unutilized but substantiated input VAT paid on capital goods purchased for
the period covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the fiscal incentives under
Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not
of those under both Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916.
Respondent was, therefore, considered exempt only from the payment of income tax when it
opted for the income tax holiday in lieu of the 5 percent preferential tax on gross income earned.
As a VAT-registered entity, though, it was still subject to the payment of other national internal
revenue taxes, like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-
1 of RR 7-95 were applicable. Having paid the input VAT on the capital goods it purchased,
respondent correctly filed the administrative and judicial claims for its refund within the two-
year prescriptive period. Such payments were -- to the extent of the refundable value -- duly
supported by VAT invoices or official receipts, and were not yet offset against any output VAT
liability.
Hence this Petition.
5

Sole Issue Petitioner submits this sole issue for our consideration:
"Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the
amount ofP12,122,922.66 representing alleged unutilized input VAT paid on capital goods
purchased for the period April 1, 1998 to June 30, 1999."
6

The Courts Ruling The Petition is unmeritorious.
Sole Issue:
Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a special economic zone,
7
respondent is
entitled to the fiscal incentives and benefits
8
provided for in either PD 66
9
or EO 226.
10
It shall,
moreover, enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos.
(RA) 7227
11
and 7844.
12

Preferential Tax Treatment Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary,
respondent shall not be subject to internal revenue laws and regulations for raw materials,
supplies, articles, equipment, machineries, spare parts and wares, except those prohibited by law,
brought into the zone to be stored, broken up, repacked, assembled, installed, sorted, cleaned,
graded or otherwise processed, manipulated, manufactured, mixed or used directly or indirectly
in such activities.
13
Even so, respondent would enjoy a net-operating loss carry over; accelerated
depreciation; foreign exchange and financial assistance; and exemption from export taxes, local
taxes and licenses.
14

Comparatively, the same exemption from internal revenue laws and regulations applies if EO
226
15
is chosen. Under this law, respondent shall further be entitled to an income tax holiday;
additional deduction for labor expense; simplification of customs procedure; unrestricted use of
consigned equipment; access to a bonded manufacturing warehouse system; privileges for
foreign nationals employed; tax credits on domestic capital equipment, as well as for taxes and
duties on raw materials; and exemption from contractors taxes, wharfage dues, taxes and duties
on imported capital equipment and spare parts, export taxes, duties, imposts and fees,
16
local
taxes and licenses, and real property taxes.
17

A privilege available to respondent under the provision in RA 7227 on tax and duty-free
importation of raw materials, capital and equipment
18
-- is, ipso facto, also accorded to the
zone
19
under RA 7916. Furthermore, the latter law -- notwithstanding other existing laws, rules
and regulations to the contrary -- extends
20
to that zone the provision stating that no local or
national taxes shall be imposed therein.
21
No exchange control policy shall be applied; and free
markets for foreign exchange, gold, securities and future shall be allowed and
maintained.
22
Banking and finance shall also be liberalized under minimum Bangko Sentral
regulation with the establishment of foreign currency depository units of local commercial banks
and offshore banking units of foreign banks.
23

In the same vein, respondent benefits under RA 7844 from negotiable tax credits
24
for locally-
produced materials used as inputs. Aside from the other incentives possibly already granted to it
by the Board of Investments, it also enjoys preferential credit facilities
25
and exemption from PD
1853.
26

From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax
treatment.
27
It is not subject to internal revenue laws and regulations and is even entitled to tax
credits. The VAT on capital goods is an internal revenue tax from which petitioner as an entity is
exempt. Although the transactions involving such tax are not exempt, petitioner as a VAT-
registered person,
28
however, is entitled to their credits.
Nature of the VAT and the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent
levied on every importation of goods, whether or not in the course of trade or business, or
imposed on each sale, barter, exchange or lease of goods or properties or on each rendition of
services in the course of trade or business
29
as they pass along the production and distribution
chain, the tax being limited only to the value added
30
to such goods, properties or services by the
seller, transferor or lessor.
31
It is an indirect tax that may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services.
32
As such, it should be understood not in
the context of the person or entity that is primarily, directly and legally liable for its payment, but
in terms of its nature as a tax on consumption.
33
In either case, though, the same conclusion is
arrived at.
The law
34
that originally imposed the VAT in the country, as well as the subsequent amendments
of that law, has been drawn from the tax credit method.
35
Such method adopted the mechanics
and self-enforcement features of the VAT as first implemented and practiced in Europe and
subsequently adopted in New Zealand and Canada.
36
Under the present method that relies on
invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the
VAT paid on its purchases, inputs and imports.
37

If at the end of a taxable quarter the output taxes
38
charged by a seller
39
are equal to the input
taxes
40
passed on by the suppliers, no payment is required. It is when the output taxes exceed the
input taxes that the excess has to be paid.
41
If, however, the input taxes exceed the output taxes,
the excess shall be carried over to the succeeding quarter or quarters.
42
Should the input taxes
result from zero-rated or effectively zero-rated transactions or from the acquisition of capital
goods,
43
any excess over the output taxes shall instead be refunded
44
to the taxpayer or
credited
45
against other internal revenue taxes.
46

Zero-Rated and Effectively Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated transactions differ from effectively
zero-rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of services.
47
The
tax rate is set at zero.
48
When applied to the tax base, such rate obviously results in no tax
chargeable against the purchaser. The seller of such transactions charges no output tax,
49
but can
claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods
50
or supply of
services
51
to persons or entities whose exemption under special laws or international agreements
to which the Philippines is a signatory effectively subjects such transactions to a zero
rate.
52
Again, as applied to the tax base, such rate does not yield any tax chargeable against the
purchaser. The seller who charges zero output tax on such transactions can also claim a refund of
or a tax credit certificate for the VAT previously charged by suppliers.
Zero Rating and Exemption
In terms of the VAT computation, zero rating and exemption are the same, but the extent of
relief that results from either one of them is not.
Applying the destination principle
53
to the exportation of goods, automatic zero rating
54
is
primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT,
making such seller internationally competitive by allowing the refund or credit of input taxes that
are attributable to export sales.
55
Effective zero rating, on the contrary, is intended to benefit the
purchaser who, not being directly and legally liable for the payment of the VAT, will ultimately
bear the burden of the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the burden of the
tax.
56
But in an exemption there is only partial relief,
57
because the purchaser is not allowed any
tax refund of or credit for input taxes paid.
58

Exempt Transaction >and Exempt Party
The object of exemption from the VAT may either be the transaction itself or any of the parties
to the transaction.
59

An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard
to the tax status -- VAT-exempt or not -- of the party to the transaction.
60
Indeed, such
transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit for
any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax
Code, a special law or an international agreement to which the Philippines is a signatory, and by
virtue of which its taxable transactions become exempt from the VAT.
61
Such party is also not
subject to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending
on its registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or
passed on by the seller to the purchaser of the goods, properties or services.
62
While
the liability is imposed on one person, theburden may be passed on to another. Therefore, if a
special law merely exempts a party as a seller from its direct liability for payment of the VAT,
but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to
it by its VAT-registered suppliers, the purchase transaction is not exempt. Applying this
principle to the case at bar, the purchase transactions entered into by respondent are not VAT-
exempt.
Special laws may certainly exempt transactions from the VAT.
63
However, the Tax Code
provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special
law under which respondent was registered. The purchase transactions it entered into are,
therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10
percent,
64
depending again on the application of the destination principle.
65

If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -
- for use or consumption outside the Philippines, these shall be subject to 0 percent.
66
If entered
into with a purchaser for use or consumption in the Philippines, then these shall be subject to 10
percent,
67
unless the purchaser is exempt from the indirect burden of the VAT, in which case it
shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero.
Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero
rate,
68
because the ecozone within which it is registered is managed and operated by the PEZA as
a separate customs territory.
69
This means that in such zone is created the legal fiction of foreign
territory.
70
Under the cross-border principle
71
of the VAT system being enforced by the Bureau
of Internal Revenue (BIR),
72
no VAT shall be imposed to form part of the cost of goods destined
for consumption outside of the territorial border of the taxing authority. If exports of goods and
services from the Philippines to a foreign country are free of the VAT,
73
then the same rule holds
for such exports from the national territory -- except specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are
considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-
registered person in the customs territory are deemed imports from a foreign country.
74
An
ecozone -- indubitably a geographical territory of the Philippines -- is, however, regarded in law
as foreign soil.
75
This legal fiction is necessary to give meaningful effect to the policies of the
special law creating the zone.
76
If respondent is located in an export processing zone
77
within that
ecozone, sales to the export processing zone, even without being actually exported, shall in fact
be viewed as constructively exported under EO 226.
78
Considered as export sales,
79
such
purchase transactions by respondent would indeed be subject to a zero rate.
80

Tax Exemptions Broad and Express
Applying the special laws we have earlier discussed, respondent as an entity is exempt from
internal revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT
as a tax on consumption, for which the direct liability is imposed on one person but the
indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly
charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the
equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the
law does not distinguish, we ought not to distinguish.
Moreover, the exemption is both express and pervasive for the following reasons:
First, RA 7916 states that "no taxes, local and national, shall be imposed on business
establishments operating within the ecozone."
81
Since this law does not exclude the VAT from
the prohibition, it is deemed included.Exceptio firmat regulam in casibus non exceptis. An
exception confirms the rule in cases not excepted; that is, a thing not being excepted must be
regarded as coming within the purview of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still
be passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of
the law. That no VAT shall be imposed directly upon business establishments operating within
the ecozone under RA 7916 also means that no VAT may be passed on and imposed
indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is
prohibited directly, it is also prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for
real property taxes that presently are imposed on land owned by developers.
82
This similar and
repeated prohibition is an unambiguous ratification of the laws intent in not imposing local or
national taxes on business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be
subject to x x x internal revenue laws and regulations" under PD 66
83
-- the original charter of
PEZA (then EPZA) that was later amended by RA 7916.
84
No provisions in the latter law modify
such exemption.
Although this exemption puts the government at an initial disadvantage, the reduced tax
collection ultimately redounds to the benefit of the national economy by enticing more business
investments and creating more employment opportunities.
85

Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except
those prohibited by law -- "shall not be subject to x x x internal revenue laws and regulations x x
x"
86
if brought to the ecozones restricted area
87
for manufacturing by registered export
enterprises,
88
of which respondent is one. These rules also apply to all enterprises registered with
the EPZA prior to the effectivity of such rules.
89

Fifth, export processing zone enterprises registered
90
with the Board of Investments (BOI) under
EO 226 patently enjoy exemption from national internal revenue taxes on imported capital
equipment reasonably needed and exclusively used for the manufacture of their products;
91
on
required supplies and spare part for consigned equipment;
92
and on foreign and domestic
merchandise, raw materials, equipment and the like -- except those prohibited by law -- brought
into the zone for manufacturing.
93
In addition, they are given credits for the value of the national
internal revenue taxes imposed on domestic capital equipment also reasonably needed and
exclusively used for the manufacture of their products,
94
as well as for the value of such taxes
imposed on domestic raw materials and supplies that are used in the manufacture of their export
products and that form part thereof.
95

Sixth, the exemption from local and national taxes granted under RA 7227
96
are ipso facto
accorded to ecozones.
97
In case of doubt, conflicts with respect to such tax exemption privilege
shall be resolved in favor of the ecozone.
98

And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in
the production of export goods,
99
and for locally produced raw materials, capital equipment and
spare parts used by exporters of non-traditional products
100
-- shall also be continuously enjoyed
by similar exporters within the ecozone.
101
Indeed, the latter exporters are likewise entitled to
such tax exemptions and credits.
Tax Refund as Tax Exemption
To be sure, statutes that grant tax exemptions are construed strictissimi juris
102
against the
taxpayer
103
and liberally in favor of the taxing authority.
104

Tax refunds are in the nature of such exemptions.
105
Accordingly, the claimants of those refunds
bear the burden of proving the factual basis of their claims;
106
and of showing, by words too
plain to be mistaken, that the legislature intended to exempt them.
107
In the present case, all the
cited legal provisions are teeming with life with respect to the grant of tax exemptions too vivid
to pass unnoticed. In addition, respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions which are not exempt.
The end result, however, is that it is not subject to the VAT. The non-taxability of transactions
that are otherwise taxable is merely a necessary incident to the tax exemption conferred by law
upon it as an entity, not upon the transactions themselves.
108
Nonetheless, its exemption as an
entity and the non-exemption of its transactions lead to the same result for the following
considerations:
First, the contemporaneous construction of our tax laws by BIR authorities who are called upon
to execute or administer such laws
109
will have to be adopted. Their prior tax issuances have held
inconsistent positions brought about by their probable failure to comprehend and fully appreciate
the nature of the VAT as a tax on consumption and the application of the destination
principle.
110
Revenue Memorandum Circular No. (RMC) 74-99, however, now clearly and
correctly provides that any VAT-registered suppliers sale of goods, property or services from
the customs territory to any registered enterprise operating in the ecozone -- regardless of the
class or type of the latters PEZA registration -- is legally entitled to a zero rate.
111

Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its
very soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the
establishment of export processing zones, seeks "to encourage and promote foreign commerce as
a means of x x x strengthening our export trade and foreign exchange position, of hastening
industrialization, of reducing domestic unemployment, and of accelerating the development of
the country."
112

RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the
special economic zones, "the government shall actively encourage, promote, induce and
accelerate a sound and balanced industrial, economic and social development of the country x x
x through the establishment, among others, of special economic zones x x x that shall effectively
attract legitimate and productive foreign investments."
113

Under EO 226, the "State shall encourage x x x foreign investments in industry x x x which shall
x x x meet the tests of international competitiveness[,] accelerate development of less developed
regions of the country[,] and result in increased volume and value of exports for the
economy."
114
Fiscal incentives that are cost-efficient and simple to administer shall be devised
and extended to significant projects "to compensate for market imperfections, to reward
performance contributing to economic development,"
115
and "to stimulate the establishment and
assist initial operations of the enterprise."
116

Wisely accorded to ecozones created under RA 7916
117
was the governments policy -- spelled
out earlier in RA 7227 -- of converting into alternative productive uses
118
the former military
reservations and their extensions,
119
as well as of providing them incentives
120
to enhance the
benefits that would be derived from them
121
in promoting economic and social development.
122

Finally, under RA 7844, the State declares the need "to evolve export development into a
national effort"
123
in order to win international markets. By providing many export and tax
incentives,
124
the State is able to drive home the point that exporting is indeed "the key to
national survival and the means through which the economic goals of increased employment and
enhanced incomes can most expeditiously be achieved."
125

The Tax Code itself seeks to "promote sustainable economic growth x x x; x x x increase
economic activity; and x x x create a robust environment for business to enable firms to compete
better in the regional as well as the global market."
126
After all, international competitiveness
requires economic and tax incentives to lower the cost of goods produced for export. State
actions that affect global competition need to be specific and selective in the pricing of particular
goods or services.
127

All these statutory policies are congruent to the constitutional mandates of providing incentives
to needed investments,
128
as well as of promoting the preferential use of domestic materials and
locally produced goods and adopting measures to help make these competitive.
129
Tax credits for
domestic inputs strengthen backward linkages. Rightly so, "the rule of law and the existence of
credible and efficient public institutions are essential prerequisites for sustainable economic
development."
130

VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT law.
131
Petitioner alleges that
respondent did register for VAT purposes with the appropriate Revenue District Office.
However, it is now too late in the day for petitioner to challenge the VAT-registered status of
respondent, given the latters prior representation before the lower courts and the mode of appeal
taken by petitioner before this Court.
The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from
internal revenue laws and regulations the equipment -- including capital goods -- that registered
enterprises will use, directly or indirectly, in manufacturing.
132
EO 226 even reiterates this
privilege among the incentives it gives to such enterprises.
133
Petitioner merely asserts that by
virtue of the PEZA registration alone of respondent, the latter is not subject to the VAT.
Consequently, the capital goods and services respondent has purchased are not considered used
in the VAT business, and no VAT refund or credit is due.
134
This is a non sequitur. By the
VATs very nature as a tax on consumption, the capital goods and services respondent has
purchased are subject to the VAT, although at zero rate. Registration does not determine
taxability under the VAT law.
Moreover, the facts have already been determined by the lower courts. Having failed to present
evidence to support its contentions against the income tax holiday privilege of
respondent,
135
petitioner is deemed to have conceded. It is a cardinal rule that "issues and
arguments not adequately and seriously brought below cannot be raised for the first time on
appeal."
136
This is a "matter of procedure"
137
and a "question of fairness."
138
Failure to assert
"within a reasonable time warrants a presumption that the party entitled to assert it either has
abandoned or declined to assert it."
139

The BIR regulations additionally requiring an approved prior application for effective zero
rating
140
cannot prevail over the clear VAT nature of respondents transactions. The scope of
such regulations is not "within the statutory authority x x x granted by the legislature.
141

First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former
cannot purport to do any more than interpret the latter.
142
The courts will not countenance one
that overrides the statute it seeks to apply and implement.
143

Other than the general registration of a taxpayer the VAT status of which is aptly determined, no
provision under our VAT law requires an additional application to be made for such taxpayers
transactions to be considered effectively zero-rated. An effectively zero-rated transaction does
not and cannot become exempt simply because an application therefor was not made or, if made,
was denied. To allow the additional requirement is to give unfettered discretion to those officials
or agents who, without fluid consideration, are bent on denying a valid application. Moreover,
the State can never be estopped by the omissions, mistakes or errors of its officials or agents.
144

Second, grantia argumenti that such an application is required by law, there is still the
presumption of regularity in the performance of official duty.
145
Respondents registration carries
with it the presumption that, in the absence of contradictory evidence, an application for effective
zero rating was also filed and approval thereof given. Besides, it is also presumed that the law
has been obeyed
146
by both the administrative officials and the applicant.
Third, even though such an application was not made, all the special laws we have tackled
exempt respondent not only from internal revenue laws but also from the regulations issued
pursuant thereto. Leniency in the implementation of the VAT in ecozones is an imperative,
precisely to spur economic growth in the country and attain global competitiveness as envisioned
in those laws.
A VAT-registered status, as well as compliance with the invoicing requirements,
147
is sufficient
for the effective zero rating of the transactions of a taxpayer. The nature of its business and
transactions can easily be perused from, as already clearly indicated in, its VAT registration
papers and photocopied documents attached thereto. Hence, its transactions cannot be exempted
by its mere failure to apply for their effective zero rating. Otherwise, their VAT exemption
would be determined, not by their nature, but by the taxpayers negligence -- a result not at all
contemplated. Administrative convenience cannot thwart legislative mandate.
Tax Refund or Credit in Order
Having determined that respondents purchase transactions are subject to a zero VAT rate, the
tax refund or credit is in order.
As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives
in EO 226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime instead
of the 5 percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA
law,
148
for EO 226
149
also has provisions to contend with. These two regimes are in fact
incompatible and cannot be availed of simultaneously by the same entity. While EO 226 merely
exempts it from income taxes, the PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but only from the payment
of income tax for a certain number of years, depending on its registration as a pioneer or a non-
pioneer enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned in
lieu of local and national taxes imposable upon business establishments within the ecozone
cannot outrightly determine a VAT exemption. Being subject to VAT, payments erroneously
collected thereon may then be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA
7916, Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such
provision merely exempts respondent from taxes imposed on business. To repeat, the VAT is a
tax imposed on consumption, not on business. Although respondent as an entity is exempt, the
transactions it enters into are not necessarily so. The VAT payments made in excess of the zero
rate that is imposable may certainly be refunded or credited.
Compliance with All Requisites for VAT Refund or Credit
As further enunciated by the Tax Court, respondent complied with all the requisites for claiming
a VAT refund or credit.
150

First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from
Contex, in which this Court held that the petitioner therein was registered as a non-VAT
taxpayer.
151
Hence, for being merely VAT-exempt, the petitioner in that case cannot claim any
VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent are duly supported by VAT
invoices and have not been offset against any output taxes. Although enterprises registered with
the BOI after December 31, 1994 would no longer enjoy the tax credit incentives on domestic
capital equipment -- as provided for under Article 39(d), Title III, Book I of EO 226
152
-- starting
January 1, 1996, respondent would still have the same benefit under a general and express
exemption contained in both Article 77(1), Book VI of EO 226; and Section 12, paragraph 2 (c)
of RA 7227, extended to the ecozones by RA 7916.
There was a very clear intent on the part of our legislators, not only to exempt investors in
ecozones from national and local taxes, but also to grant them tax credits. This fact was revealed
by the sponsorship speeches in Congress during the second reading of House Bill No. 14295,
which later became RA 7916, as shown below:
"MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national
and local taxes; x x x tax credit for locally-sourced inputs x x x."
"MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an
environment conducive for investors, the bill offers incentives such as the exemption from local
and national taxes, x x x tax credits for locally sourced inputs x x x."
153

And third, no question as to either the filing of such claims within the prescriptive period or the
validity of the VAT returns has been raised. Even if such a question were raised, the tax
exemption under all the special laws cited above is broad enough to cover even the enforcement
of internal revenue laws, including prescription.
154

Summary
To summarize, special laws expressly grant preferential tax treatment to business establishments
registered and operating within an ecozone, which by law is considered as a separate customs
territory. As such, respondent is exempt from all internal revenue taxes, including the VAT, and
regulations pertaining thereto. It has opted for the income tax holiday regime, instead of the 5
percent preferential tax regime. As a matter of law and procedure, its registration status entitling
it to such tax holiday can no longer be questioned. Its sales transactions intended for export may
not be exempt, but like its purchase transactions, they are zero-rated. No prior application for the
effective zero rating of its transactions is necessary. Being VAT-registered and having
satisfactorily complied with all the requisites for claiming a tax refund of or credit for the input
VAT paid on capital goods purchased, respondent is entitled to such VAT refund or credit.
WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to
costs.
SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio-Morales and Garcia, JJ., concur.

















Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 104171 February 24, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
B.F. GOODRICH PHILS., INC. (now SIME DARBY INTERNATIONAL TIRE CO.,
INC.) and THE COURT OF APPEALS, respondents.

PANGANIBAN, J .:
Notwithstanding the expiration of the five-year prescriptive period, may the Bureau of Internal
Revenue (BIR) still assess a taxpayer even after the latter has already paid the tax due, on the
ground that the previous assessment was insufficient or based on a "false" return?
The Case
This is the main question raised before us in this Petition for Review on Certiorari assailing the
Decision
1
dated February 14, 1992, promulgated by the Court of Appeals
2
in CA-GR SP No.
25100. The assailed Decision reversed the Court of Tax Appeals (CTA)
3
which upheld the BIR
commissioner's assessments made beyond the five-year statute of limitations.
The Facts
The facts undisputed.
4
Private Respondent BF Goodrich Phils., Inc. (now Sime Darby
International Tire Co, Inc.), was an American-owned and controlled corporation previous to July
3, 1974. As a condition for approving the manufacture by private respondent of tires and other
rubber products, the Central Bank of the Philippines required that it should develop a rubber
plantation. In compliance with this requirement, private respondent purchased from the
Philippine government in 1961, under the Public Land Act and the Parity Amendment to the
1935 Constitution, certain parcels of land located in Tumajubong, Basilan, and there developed a
rubber plantation.
More than a decade later, on August 2, 1973, the justice secretary rendered an opinion stating
that, upon the expiration of the Parity Amendment on July 3, 1974, the ownership rights of
Americans over public agricultural lands, including the right to dispose or sell their real estate,
would be lost. On the basis of this Opinion, private respondent sold to Siltown Realty
Philippines, Inc. on January 21, 1974, its Basilan landholding for P500,000 payable in
installments. In accord with the terms of the sale, Siltown Realty Philippines, Inc. leased the said
parcels of land to private respondent for a period of 25 years, with an extension of another 25
years at the latter's option.
Based on the BIR's Letter of Authority No. 10115 dated April 14, 1975, the books and accounts
of private respondent were examined for the purpose of determining its tax liability for taxable
year 1974. The examination resulted in the April 23, 1975 assessment of private respondent for
deficiency income tax in the amount of P6,005.35, which it duly paid.
Subsequently, the BIR also issued Letters of Authority Nos. 074420 RR and 074421 RR and
Memorandum Authority Reference No. 749157 for the purpose of examining Siltown's business,
income and tax liabilities. On the basis of this examination, the BIR commissioner issued against
private respondent on October 10, 1980, an assessment for deficiency in donor's tax in the
amount of P1,020,850, in relation to the previously mentioned sale of its Basilan landholdings to
Siltown. Apparently, the BIR deemed the consideration for the sale insufficient, and the
difference between the fair market value and the actual purchase price a taxable donation.
In a letter dated November 24, 1980, private respondent contested this assessment. On April 9,
1981, it received another assessment dated March 16, 1981, which increased to P 1,092,949 the
amount demanded for the alleged deficiency donor's tax, surcharge, interest and compromise
penalty.
Private respondent appealed the correctness and the legality of these last two assessments to the
CTA. After trial in due course, the CTA rendered its Decision dated March 29, 1991, the
dispositive portion of which reads as follows:
WHEREFORE, the decision of the Commissioner of Internal Revenue assessing
petitioner deficiency gift tax is MODIFIED land petitioner is ordered to pay the
amount of P1,311,179.01 plus 10% surcharge and 20% annual interest from
March 16, 1981 until fully paid provided that the maximum amount that may be
collected as interest on delinquency shall in no case exceed an amount
corresponding to a period of three years pursuant to Section 130(b)(l) and (c) of
the 1977 Tax Code, as amended by P.D. No. 1705, which took effect on August 1,
1980.
SO ORDERED.
5

Undaunted, private respondent elevated the matter to the Court of Appeals, which reversed the
CTA, as follows:
What is involved here is not a first assessment; nor is it one within the 5-year
period stated in Section 331 above. Since what is involved in this case is a
multiple assessment beyond the five-year period, the assessment must be based on
the grounds provided in Section 337, and not on Section 15 of the 1974 Tax Code.
Section 337 utilizes the very specific terms "fraud, irregularity, and mistake".
"Falsity does not appear to be included in this enumeration. Falsity suffices for an
assessment, which is a firstassessment made within the five-year period. When it
is a subsequent assessment made beyond the five-year period, then, it may be
validly justified only by "fraud, irregularity and mistake" on the part of the
taxpayer.
6

Hence, this Petition for Review under Rule 45 of the Rules of Court.
7

The Issues
Before us, petitioner raises the following issues:
I
Whether or not petitioner's right to assess herein deficiency donor's tax has indeed
prescribed as ruled by public respondent Court of Appeals
II
Whether or not the herein deficiency donor's tax assessment for 1974 is valid and
in accordance with law
Prescription is the crucial issue in the resolution of this case.
The Court's Ruling
The petition has no merit.
Main Issue: Prescription
The petitioner contends that the Court of Appeals erred in reversing the CTA on the issue of
prescription, because its ruling was based on factual findings that should have been left
undisturbed on appeal, in the absence of any showing that it had been tainted with gross error or
grave abuse of
discretion.
8
The Court is not persuaded.
True, the factual findings of the CTA are generally not disturbed on appeal when supported by
substantial evidence and in the absence of gross error or grave abuse of discretion. However, the
CTA's application of the law to the facts of this controversy is an altogether different matter, for
it involves a legal question. There is a question of law when the issue is the application of the
law to a given set of facts. On the other hand, a question of fact involves the truth or falsehood of
alleged facts.
9
In the present case, the Court of Appeals ruled not on the truth or falsity of the
facts found by the CTA, but on the latter's application of the law on prescription.
Sec. 331 of the National Internal Revenue Code provides:
Sec. 331. Period of limitation upon assessment and collection. Except as
provided in the succeeding section, internal-revenue taxes shall be assessed within
five years after the return was filed, and no proceeding in court without
assessment for the collection of such taxes shall be begun after expiration of such
period. For the purposes of this section, a return filed before the last day
prescribed by law for the filing thereof shall be considered as filed on such last
day: Provided, That this limitation shall not apply to cases already investigated
prior to the approval of this Code.
Applying this provision of law to the facts at hand, it is clear that the October 16, 1980 and the
March 1981 assessments were issued by the BIR beyond the five-year statute of limitations. The
Court has thoroughly studied the records of this case and found no basis to disregard the five-
year period of prescription. As succinctly pronounced by the Court of Appeals:
The subsequent assessment made by the respondent Commissioner on October
40, 1980, modified by that of March 16, 1981, violates the law. Involved in this
petition is the income of the petitioner for the year 1974, the returns for which
were required to be filed on or before April 15 of the succeeding year. The returns
for the year 1974 were duly filed by the petitioner, and assessment of taxes due
for such year including that on the transfer of properties on June 21, 1974
was made on April 13, 1975 and acknowledged by Letter of Confirmation No.
101155 terminating the examination on this subject. The subsequent assessment
of October 10, 1980 modified, by that of March 16, 1981, was made beyond the
period expressly set in Section 331 of the National Internal Revenue Code . . . .
10

Petitioner relies on the CTA ruling, the salient portion of which reads:
Falsity is what we have here, and for that matter, we hasten to add that the second
assessment (March 16, 1981) of the Commissioner was well-advised having been
made in contemplation of his power under Section 15 of the 1974 Code (now
Section 16, of NIRC) to assess the proper tax on thebest evidence
obtainable "when there is reason to believe that a report of a taxpayer is false,
incomplete or erroneous. More, when there is falsity with intent to evade tax as in
this case, the ordinary period of limitation upon assessment and collection does
not apply so that contrary to the averment of petitioner, the right to assess
respondent has not prescribed.
What is the considered falsity? The transfer through sale of the parcels of land in
Tumajubong, Lamitan, Basilan in favor of Siltown Realty for the sum of
P500,000.00 only whereas said lands had been sworn to under Presidential Decree
No. 76 (Dec. 6, 1972) as having a value of P2,683,467 (P2,475,467 + P207,700)
(see Declaration of Real Property form, p. 28, and p. 15, no. 5, BIR Record).
11

For the purpose of safeguarding taxpayers from any unreasonable examination, investigation or
assessment, our tax law provides a statute of limitations in the collection of taxes. Thus, the law
on prescription, being a remedial measure, should be liberally construed in order to afford such
protection.
12
As a corollary, the exceptions to the law on prescription should perforce be strictly
construed.
Sec. 15 of the NIRC, on the other hand, provides that "[w]hen a report required by law as a basis
for the assessment of any national internal revenue tax shall not be forthcoming within the time
fixed by law or regulation, or when there is reason to believe that any such report is false,
incomplete, or erroneous, the Commissioner of Internal Revenue shall assess the proper tax on
the best evidence obtainable." Clearly, Section 15 does not provide an exception to the statute of
limitations on the issuance of an assessment, by allowing the initial assessment to be made on the
basis of the best evidence available. Having made its initial assessment in the manner prescribed,
the commissioner could not have been authorized to issue, beyond the five-year prescriptive
period, the second and the third assessments under consideration before us.
Nor is petitioner's claim of falsity sufficient to take the questioned assessments out of the ambit
of the statute of limitations. The relevant part of then Section 332 of the NIRC, which
enumerates the exceptions to the period of prescription, provides:
Sec. 332. Exceptions as to period of limitation of assessment and collection of
taxes. (a) In the case of a false or fraudulent return with intent to evade a tax or
of a failure to file a return, the tax may be assessed, or a proceeding in court for
the collection of such tax may be begun without assessment, at any time within
ten years after the discovery of the falsity, fraud, or omission: . . . .
Petitioner insists that private respondent committed "falsity" when it sold the property for a price
lesser than its declared fair market value. This fact alone did not constitute a false return which
contains wrong information due to mistake, carelessness or ignorance.
13
It is possible that real
property may be sold for less than adequate consideration for a bona fide business purpose; in
such event, the sale remains an "arm's length" transaction. In the present case, the private
respondent was compelled to sell the property even at a price less than its market value, because
it would have lost all ownership rights over it upon the expiration of the parity amendment. In
other words, private respondent was attempting to minimize its losses. At the same time, it was
able to lease the property for 25 years, renewable for another 25. This can be regarded as another
consideration on the price.
Furthermore, the fact that private respondent sold its real property for a price less than its
declared fair market value did not by itself justify a finding of false return. Indeed, private
respondent declared the sale in its 1974 return submitted to the BIR.
14
Within the five-year
prescriptive period, the BIR could have issued the questioned assessment, because the declared
fair market value of said property was of public record. This it did not do, however, during all
those five years. Moreover, the BIR failed to prove that respondent's 1974 return had been filed
fraudulently. Equally significant was its failure to prove respondent's intent to evade the payment
of the correct amount of tax.
Ineludibly, the BIR failed to show that private respondent's 1974 return was filed fraudulently
with intent to evade the payment of the correct amount of tax.
15
Moreover, even though a
donor's tax, which is defined as "a tax on the privilege of transmitting one's property or property
rights to another or others without adequate and full valuable consideration,"
16
is different from
capital gains tax, a tax on the gain from the sale of the taxpayer's property forming part of capital
assets,
17
the tax return filed by private respondent to report its income for the year 1974 was
sufficient compliance with the legal requirement to file a return. In other words, the fact that the
sale transaction may have partly resulted in a donation does not change the fact that private
respondent already reported its income for 1974 by filing an income tax return.
Since the BIR failed to demonstrate clearly that private respondent had filed a fraudulent return
with the intent to evade tax, or that it had failed to file a return at all, the period for assessments
has obviously prescribed. Such instances of negligence or oversight on the part of the BIR cannot
prejudice taxpayers, considering that the prescriptive period was precisely intended to give them
peace of mind.
Based on the foregoing, a discussion of the validity and legality of the assailed assessments has
become moot and unnecessary.
WHEREFORE, the Petition for Review is DENIED and the assailed Decision of the Court of
Appeals is AFFIRMED. No costs.
SO ORDERED.
Romero, Purisima and Gonzaga-Reyes, JJ., concur.


















Republic of the Philippines
SUPREME COURT
Manila
EN BANC

G.R. No. 115455 October 30, 1995
ARTURO M. TOLENTINO, petitioner,
vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 115525 October 30, 1995
JUAN T. DAVID, petitioner,
vs.
TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as Secretary of Finance; LIWAYWAY VINZONS-
CHATO, as Commissioner of Internal Revenue; and their AUTHORIZED AGENTS OR REPRESENTATIVES, respondents.
G.R. No. 115543 October 30, 1995
RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES, petitioners,
vs.
THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE BUREAU OF INTERNAL
REVENUE AND BUREAU OF CUSTOMS, respondents.
G.R. No. 115544 October 30, 1995
PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; KAMAHALAN PUBLISHING CORPORATION;
PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L. DIMALANTA, petitioners,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue; HON. TEOFISTO T. GUINGONA, JR., in his
capacity as Executive Secretary; and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of Finance, respondents.
G.R. No. 115754 October 30, 1995
CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA), petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
G.R. No. 115781 October 30, 1995
KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO,
EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G.
FERNANDO, RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF ATTORNEYS FOR
BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT COALITION, INC., and
PHILIPPINE BIBLE SOCIETY, INC. and WIGBERTO TAADA,petitioners,
vs.
THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL REVENUE and THE
COMMISSIONER OF CUSTOMS, respondents.
G.R. No. 115852 October 30, 1995
PHILIPPINE AIRLINES, INC., petitioner,
vs.
THE SECRETARY OF FINANCE and COMMISSIONER OF INTERNAL REVENUE, respondents.
G.R. No. 115873 October 30, 1995
COOPERATIVE UNION OF THE PHILIPPINES, petitioner,
vs.
HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal Revenue, HON. TEOFISTO T. GUINGONA, JR., in
his capacity as Executive Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of Finance, respondents.
G.R. No. 115931 October 30, 1995
PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC. and ASSOCIATION OF PHILIPPINE BOOK
SELLERS, petitioners,
vs.
HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V. CHATO, as the Commissioner of Internal
Revenue; and HON. GUILLERMO PARAYNO, JR., in his capacity as the Commissioner of Customs, respondents.
R E S O L U T I O N

MENDOZA, J .:
These are motions seeking reconsideration of our decision dismissing the petitions filed in these
cases for the declaration of unconstitutionality of R.A. No. 7716, otherwise known as the
Expanded Value-Added Tax Law. The motions, of which there are 10 in all, have been filed by
the several petitioners in these cases, with the exception of the Philippine Educational Publishers
Association, Inc. and the Association of Philippine Booksellers, petitioners in G.R. No. 115931.
The Solicitor General, representing the respondents, filed a consolidated comment, to which the
Philippine Airlines, Inc., petitioner in G.R. No. 115852, and the Philippine Press Institute, Inc.,
petitioner in G.R. No. 115544, and Juan T. David, petitioner in G.R. No. 115525, each filed a
reply. In turn the Solicitor General filed on June 1, 1995 a rejoinder to the PPI's reply.
On June 27, 1995 the matter was submitted for resolution.
I. Power of the Senate to propose amendments to revenue bills. Some of the petitioners
(Tolentino, Kilosbayan, Inc., Philippine Airlines (PAL), Roco, and Chamber of Real Estate and
Builders Association (CREBA)) reiterate previous claims made by them that R.A. No. 7716 did
not "originate exclusively" in the House of Representatives as required by Art. VI, 24 of the
Constitution. Although they admit that H. No. 11197 was filed in the House of Representatives
where it passed three readings and that afterward it was sent to the Senate where after first
reading it was referred to the Senate Ways and Means Committee, they complain that the Senate
did not pass it on second and third readings. Instead what the Senate did was to pass its own
version (S. No. 1630) which it approved on May 24, 1994. Petitioner Tolentino adds that what
the Senate committee should have done was to amend H. No. 11197 by striking out the text of
the bill and substituting it with the text of S. No. 1630. That way, it is said, "the bill remains a
House bill and the Senate version just becomes the text (only the text) of the House bill."
The contention has no merit.
The enactment of S. No. 1630 is not the only instance in which the Senate proposed an
amendment to a House revenue bill by enacting its own version of a revenue bill. On at least two
occasions during the Eighth Congress, the Senate passed its own version of revenue bills, which,
in consolidation with House bills earlier passed, became the enrolled bills. These were:
R.A. No. 7369 (AN ACT TO AMEND THE OMNIBUS INVESTMENTS CODE OF 1987 BY
EXTENDING FROM FIVE (5) YEARS TO TEN YEARS THE PERIOD FOR TAX AND
DUTY EXEMPTION AND TAX CREDIT ON CAPITAL EQUIPMENT) which was approved
by the President on April 10, 1992. This Act is actually a consolidation of H. No. 34254, which
was approved by the House on January 29, 1992, and S. No. 1920, which was approved by the
Senate on February 3, 1992.
R.A. No. 7549 (AN ACT GRANTING TAX EXEMPTIONS TO WHOEVER SHALL GIVE
REWARD TO ANY FILIPINO ATHLETE WINNING A MEDAL IN OLYMPIC GAMES)
which was approved by the President on May 22, 1992. This Act is a consolidation of H. No.
22232, which was approved by the House of Representatives on August 2, 1989, and S. No. 807,
which was approved by the Senate on October 21, 1991.
On the other hand, the Ninth Congress passed revenue laws which were also the result of the
consolidation of House and Senate bills. These are the following, with indications of the dates on
which the laws were approved by the President and dates the separate bills of the two chambers
of Congress were respectively passed:
1. R.A. NO. 7642
AN ACT INCREASING THE PENALTIES FOR TAX EVASION, AMENDING
FOR THIS PURPOSE THE PERTINENT SECTIONS OF THE NATIONAL
INTERNAL REVENUE CODE (December 28, 1992).
House Bill No. 2165, October 5, 1992
Senate Bill No. 32, December 7, 1992
2. R.A. NO. 7643
AN ACT TO EMPOWER THE COMMISSIONER OF INTERNAL REVENUE
TO REQUIRE THE PAYMENT OF THE VALUE-ADDED TAX EVERY
MONTH AND TO ALLOW LOCAL GOVERNMENT UNITS TO SHARE IN
VAT REVENUE, AMENDING FOR THIS PURPOSE CERTAIN SECTIONS
OF THE NATIONAL INTERNAL REVENUE CODE (December 28, 1992)
House Bill No. 1503, September 3, 1992
Senate Bill No. 968, December 7, 1992
3. R.A. NO. 7646
AN ACT AUTHORIZING THE COMMISSIONER OF INTERNAL REVENUE
TO PRESCRIBE THE PLACE FOR PAYMENT OF INTERNAL REVENUE
TAXES BY LARGE TAXPAYERS, AMENDING FOR THIS PURPOSE
CERTAIN PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE,
AS AMENDED (February 24, 1993)
House Bill No. 1470, October 20, 1992
Senate Bill No. 35, November 19, 1992
4. R.A. NO. 7649
AN ACT REQUIRING THE GOVERNMENT OR ANY OF ITS POLITICAL
SUBDIVISIONS, INSTRUMENTALITIES OR AGENCIES INCLUDING
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS (GOCCS)
TO DEDUCT AND WITHHOLD THE VALUE-ADDED TAX DUE AT THE
RATE OF THREE PERCENT (3%) ON GROSS PAYMENT FOR THE
PURCHASE OF GOODS AND SIX PERCENT (6%) ON GROSS RECEIPTS
FOR SERVICES RENDERED BY CONTRACTORS (April 6, 1993)
House Bill No. 5260, January 26, 1993
Senate Bill No. 1141, March 30, 1993
5. R.A. NO. 7656
AN ACT REQUIRING GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS TO DECLARE DIVIDENDS UNDER CERTAIN
CONDITIONS TO THE NATIONAL GOVERNMENT, AND FOR OTHER
PURPOSES (November 9, 1993)
House Bill No. 11024, November 3, 1993
Senate Bill No. 1168, November 3, 1993
6. R.A. NO. 7660
AN ACT RATIONALIZING FURTHER THE STRUCTURE AND
ADMINISTRATION OF THE DOCUMENTARY STAMP TAX, AMENDING
FOR THE PURPOSE CERTAIN PROVISIONS OF THE NATIONAL
INTERNAL REVENUE CODE, AS AMENDED, ALLOCATING FUNDS FOR
SPECIFIC PROGRAMS, AND FOR OTHER PURPOSES (December 23, 1993)
House Bill No. 7789, May 31, 1993
Senate Bill No. 1330, November 18, 1993
7. R.A. NO. 7717
AN ACT IMPOSING A TAX ON THE SALE, BARTER OR EXCHANGE OF
SHARES OF STOCK LISTED AND TRADED THROUGH THE LOCAL
STOCK EXCHANGE OR THROUGH INITIAL PUBLIC OFFERING,
AMENDING FOR THE PURPOSE THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED, BY INSERTING A NEW SECTION AND
REPEALING CERTAIN SUBSECTIONS THEREOF (May 5, 1994)
House Bill No. 9187, November 3, 1993
Senate Bill No. 1127, March 23, 1994
Thus, the enactment of S. No. 1630 is not the only instance in which the Senate, in the exercise
of its power to propose amendments to bills required to originate in the House, passed its own
version of a House revenue measure. It is noteworthy that, in the particular case of S. No. 1630,
petitioners Tolentino and Roco, as members of the Senate, voted to approve it on second and
third readings.
On the other hand, amendment by substitution, in the manner urged by petitioner Tolentino,
concerns a mere matter of form. Petitioner has not shown what substantial difference it would
make if, as the Senate actually did in this case, a separate bill like S. No. 1630 is instead enacted
as a substitute measure, "taking into Consideration . . . H.B. 11197."
Indeed, so far as pertinent, the Rules of the Senate only provide:
RULE XXIX
AMENDMENTS
xxx xxx xxx
68. Not more than one amendment to the original amendment shall be
considered.
No amendment by substitution shall be entertained unless the text thereof is
submitted in writing.
Any of said amendments may be withdrawn before a vote is taken thereon.
69. No amendment which seeks the inclusion of a legislative provision foreign to
the subject matter of a bill (rider) shall be entertained.
xxx xxx xxx
70-A. A bill or resolution shall not be amended by substituting it with another
which covers a subject distinct from that proposed in the original bill or
resolution. (emphasis added).
Nor is there merit in petitioners' contention that, with regard to revenue bills, the Philippine
Senate possesses less power than the U.S. Senate because of textual differences between
constitutional provisions giving them the power to propose or concur with amendments.
Art. I, 7, cl. 1 of the U.S. Constitution reads:
All Bills for raising Revenue shall originate in the House of Representatives; but
the Senate may propose or concur with amendments as on other Bills.
Art. VI, 24 of our Constitution reads:
All appropriation, revenue or tariff bills, bills authorizing increase of the public
debt, bills of local application, and private bills shall originate exclusively in the
House of Representatives, but the Senate may propose or concur with
amendments.
The addition of the word "exclusively" in the Philippine Constitution and the decision to drop the
phrase "as on other Bills" in the American version, according to petitioners, shows the intention
of the framers of our Constitution to restrict the Senate's power to propose amendments to
revenue bills. Petitioner Tolentino contends that the word "exclusively" was inserted to modify
"originate" and "the words 'as in any other bills' (sic) were eliminated so as to show that these
bills were not to be like other bills but must be treated as a special kind."
The history of this provision does not support this contention. The supposed indicia of
constitutional intent are nothing but the relics of an unsuccessful attempt to limit the power of the
Senate. It will be recalled that the 1935 Constitution originally provided for a unicameral
National Assembly. When it was decided in 1939 to change to a bicameral legislature, it became
necessary to provide for the procedure for lawmaking by the Senate and the House of
Representatives. The work of proposing amendments to the Constitution was done by the
National Assembly, acting as a constituent assembly, some of whose members, jealous of
preserving the Assembly's lawmaking powers, sought to curtail the powers of the proposed
Senate. Accordingly they proposed the following provision:
All bills appropriating public funds, revenue or tariff bills, bills of local
application, and private bills shall originate exclusively in the Assembly, but the
Senate may propose or concur with amendments. In case of disapproval by the
Senate of any such bills, the Assembly may repass the same by a two-thirds vote
of all its members, and thereupon, the bill so repassed shall be deemed enacted
and may be submitted to the President for corresponding action. In the event that
the Senate should fail to finally act on any such bills, the Assembly may, after
thirty days from the opening of the next regular session of the same legislative
term, reapprove the same with a vote of two-thirds of all the members of the
Assembly. And upon such reapproval, the bill shall be deemed enacted and may
be submitted to the President for corresponding action.
The special committee on the revision of laws of the Second National Assembly vetoed the
proposal. It deleted everything after the first sentence. As rewritten, the proposal was approved
by the National Assembly and embodied in Resolution No. 38, as amended by Resolution No.
73. (J. ARUEGO, KNOW YOUR CONSTITUTION 65-66 (1950)). The proposed amendment
was submitted to the people and ratified by them in the elections held on June 18, 1940.
This is the history of Art. VI, 18 (2) of the 1935 Constitution, from which Art. VI, 24 of the
present Constitution was derived. It explains why the word "exclusively" was added to the
American text from which the framers of the Philippine Constitution borrowed and why the
phrase "as on other Bills" was not copied. Considering the defeat of the proposal, the power of
the Senate to propose amendments must be understood to be full, plenary and complete "as on
other Bills." Thus, because revenue bills are required to originate exclusively in the House of
Representatives, the Senate cannot enact revenue measures of its own without such bills. After a
revenue bill is passed and sent over to it by the House, however, the Senate certainly can pass its
own version on the same subject matter. This follows from the coequality of the two chambers of
Congress.
That this is also the understanding of book authors of the scope of the Senate's power to concur
is clear from the following commentaries:
The power of the Senate to propose or concur with amendments is apparently
without restriction. It would seem that by virtue of this power, the Senate can
practically re-write a bill required to come from the House and leave only a trace
of the original bill. For example, a general revenue bill passed by the lower house
of the United States Congress contained provisions for the imposition of an
inheritance tax . This was changed by the Senate into a corporation tax. The
amending authority of the Senate was declared by the United States Supreme
Court to be sufficiently broad to enable it to make the alteration. [Flint v. Stone
Tracy Company, 220 U.S. 107, 55 L. ed. 389].
(L. TAADA AND F. CARREON, POLITICAL LAW OF THE PHILIPPINES
247 (1961))
The above-mentioned bills are supposed to be initiated by the House of
Representatives because it is more numerous in membership and therefore also
more representative of the people. Moreover, its members are presumed to be
more familiar with the needs of the country in regard to the enactment of the
legislation involved.
The Senate is, however, allowed much leeway in the exercise of its power to
propose or concur with amendments to the bills initiated by the House of
Representatives. Thus, in one case, a bill introduced in the U.S. House of
Representatives was changed by the Senate to make a proposed inheritance tax a
corporation tax. It is also accepted practice for the Senate to introduce what is
known as an amendment by substitution, which may entirely replace the bill
initiated in the House of Representatives.
(I. CRUZ, PHILIPPINE POLITICAL LAW 144-145 (1993)).
In sum, while Art. VI, 24 provides that all appropriation, revenue or tariff bills, bills authorizing
increase of the public debt, bills of local application, and private bills must "originate exclusively
in the House of Representatives," it also adds, "but the Senate may propose or concur with
amendments." In the exercise of this power, the Senate may propose an entirely new bill as a
substitute measure. As petitioner Tolentino states in a high school text, a committee to which a
bill is referred may do any of the following:
(1) to endorse the bill without changes; (2) to make changes in the bill omitting or
adding sections or altering its language; (3) to make and endorse an entirely new
bill as a substitute, in which case it will be known as a committee bill; or (4) to
make no report at all.
(A. TOLENTINO, THE GOVERNMENT OF THE PHILIPPINES 258 (1950))
To except from this procedure the amendment of bills which are required to originate in the
House by prescribing that the number of the House bill and its other parts up to the enacting
clause must be preserved although the text of the Senate amendment may be incorporated in
place of the original body of the bill is to insist on a mere technicality. At any rate there is no rule
prescribing this form. S. No. 1630, as a substitute measure, is therefore as much an amendment
of H. No. 11197 as any which the Senate could have made.
II. S. No. 1630 a mere amendment of H. No. 11197. Petitioners' basic error is that they assume
that S. No. 1630 is an independent and distinct bill. Hence their repeated references to its
certification that it was passed by the Senate "in substitution of S.B. No. 1129, taking into
consideration P.S. Res. No. 734 and H.B. No. 11197," implying that there is something
substantially different between the reference to S. No. 1129 and the reference to H. No. 11197.
From this premise, they conclude that R.A. No. 7716 originated both in the House and in the
Senate and that it is the product of two "half-baked bills because neither H. No. 11197 nor S. No.
1630 was passed by both houses of Congress."
In point of fact, in several instances the provisions of S. No. 1630, clearly appear to be mere
amendments of the corresponding provisions of H. No. 11197. The very tabular comparison of
the provisions of H. No. 11197 and S. No. 1630 attached as Supplement A to the basic petition of
petitioner Tolentino, while showing differences between the two bills, at the same time indicates
that the provisions of the Senate bill were precisely intended to be amendments to the House bill.
Without H. No. 11197, the Senate could not have enacted S. No. 1630. Because the Senate bill
was a mere amendment of the House bill, H. No. 11197 in its original form did not have to pass
the Senate on second and three readings. It was enough that after it was passed on first reading it
was referred to the Senate Committee on Ways and Means. Neither was it required that S. No.
1630 be passed by the House of Representatives before the two bills could be referred to the
Conference Committee.
There is legislative precedent for what was done in the case of H. No. 11197 and S. No. 1630.
When the House bill and Senate bill, which became R.A. No. 1405 (Act prohibiting the
disclosure of bank deposits), were referred to a conference committee, the question was raised
whether the two bills could be the subject of such conference, considering that the bill from one
house had not been passed by the other and vice versa. As Congressman Duran put the question:
MR. DURAN. Therefore, I raise this question of order as to procedure: If a House
bill is passed by the House but not passed by the Senate, and a Senate bill of a
similar nature is passed in the Senate but never passed in the House, can the two
bills be the subject of a conference, and can a law be enacted from these two
bills? I understand that the Senate bill in this particular instance does not refer to
investments in government securities, whereas the bill in the House, which was
introduced by the Speaker, covers two subject matters: not only investigation of
deposits in banks but also investigation of investments in government securities.
Now, since the two bills differ in their subject matter, I believe that no law can be
enacted.
Ruling on the point of order raised, the chair (Speaker Jose B. Laurel, Jr.) said:
THE SPEAKER. The report of the conference committee is in order. It is
precisely in cases like this where a conference should be had. If the House bill had
been approved by the Senate, there would have been no need of a conference; but
precisely because the Senate passed another bill on the same subject matter, the
conference committee had to be created, and we are now considering the report of
that committee.
(2 CONG. REC. NO. 13, July 27, 1955, pp. 3841-42 (emphasis added))
III. The President's certification. The fallacy in thinking that H. No. 11197 and S. No. 1630 are
distinct and unrelated measures also accounts for the petitioners' (Kilosbayan's and PAL's)
contention that because the President separately certified to the need for the immediate
enactment of these measures, his certification was ineffectual and void. The certification had to
be made of the version of the same revenue bill which at the momentwas being considered.
Otherwise, to follow petitioners' theory, it would be necessary for the President to certify as
many bills as are presented in a house of Congress even though the bills are merely versions of
the bill he has already certified. It is enough that he certifies the bill which, at the time he makes
the certification, is under consideration. Since on March 22, 1994 the Senate was considering S.
No. 1630, it was that bill which had to be certified. For that matter on June 1, 1993 the President
had earlier certified H. No. 9210 for immediate enactment because it was the one which at that
time was being considered by the House. This bill was later substituted, together with other bills,
by H. No. 11197.
As to what Presidential certification can accomplish, we have already explained in the main
decision that the phrase "except when the President certifies to the necessity of its immediate
enactment, etc." in Art. VI, 26 (2) qualifies not only the requirement that "printed copies [of a
bill] in its final form [must be] distributed to the members three days before its passage" but also
the requirement that before a bill can become a law it must have passed "three readings on
separate days." There is not only textual support for such construction but historical basis as
well.
Art. VI, 21 (2) of the 1935 Constitution originally provided:
(2) No bill shall be passed by either House unless it shall have been printed and
copies thereof in its final form furnished its Members at least three calendar days
prior to its passage, except when the President shall have certified to the necessity
of its immediate enactment. Upon the last reading of a bill, no amendment thereof
shall be allowed and the question upon its passage shall be taken immediately
thereafter, and the yeas and nays entered on the Journal.
When the 1973 Constitution was adopted, it was provided in Art. VIII, 19 (2):
(2) No bill shall become a law unless it has passed three readings on separate
days, and printed copies thereof in its final form have been distributed to the
Members three days before its passage, except when the Prime Minister certifies
to the necessity of its immediate enactment to meet a public calamity or
emergency. Upon the last reading of a bill, no amendment thereto shall be
allowed, and the vote thereon shall be taken immediately thereafter, and
the yeas and nays entered in the Journal.
This provision of the 1973 document, with slight modification, was adopted in Art. VI, 26 (2)
of the present Constitution, thus:
(2) No bill passed by either House shall become a law unless it has passed three
readings on separate days, and printed copies thereof in its final form have been
distributed to its Members three days before its passage, except when the
President certifies to the necessity of its immediate enactment to meet a public
calamity or emergency. Upon the last reading of a bill, no amendment thereto
shall be allowed, and the vote thereon shall be taken immediately thereafter, and
the yeasand nays entered in the Journal.
The exception is based on the prudential consideration that if in all cases three readings on
separate days are required and a bill has to be printed in final form before it can be passed, the
need for a law may be rendered academic by the occurrence of the very emergency or public
calamity which it is meant to address.
Petitioners further contend that a "growing budget deficit" is not an emergency, especially in a
country like the Philippines where budget deficit is a chronic condition. Even if this were the
case, an enormous budget deficit does not make the need for R.A. No. 7716 any less urgent or
the situation calling for its enactment any less an emergency.
Apparently, the members of the Senate (including some of the petitioners in these cases)
believed that there was an urgent need for consideration of S. No. 1630, because they responded
to the call of the President by voting on the bill on second and third readings on the same day.
While the judicial department is not bound by the Senate's acceptance of the President's
certification, the respect due coequal departments of the government in matters committed to
them by the Constitution and the absence of a clear showing of grave abuse of discretion caution
a stay of the judicial hand.
At any rate, we are satisfied that S. No. 1630 received thorough consideration in the Senate
where it was discussed for six days. Only its distribution in advance in its final printed form was
actually dispensed with by holding the voting on second and third readings on the same day
(March 24, 1994). Otherwise, sufficient time between the submission of the bill on February 8,
1994 on second reading and its approval on March 24, 1994 elapsed before it was finally voted
on by the Senate on third reading.
The purpose for which three readings on separate days is required is said to be two-fold: (1) to
inform the members of Congress of what they must vote on and (2) to give them notice that a
measure is progressing through the enacting process, thus enabling them and others interested in
the measure to prepare their positions with reference to it. (1 J. G. SUTHERLAND, STATUTES
AND STATUTORY CONSTRUCTION 10.04, p. 282 (1972)). These purposes were
substantially achieved in the case of R.A. No. 7716.
IV. Power of Conference Committee. It is contended (principally by Kilosbayan, Inc. and the
Movement of Attorneys for Brotherhood, Integrity and Nationalism, Inc. (MABINI)) that in
violation of the constitutional policy of full public disclosure and the people's right to know (Art.
II, 28 and Art. III, 7) the Conference Committee met for two days in executive session with
only the conferees present.
As pointed out in our main decision, even in the United States it was customary to hold such
sessions with only the conferees and their staffs in attendance and it was only in 1975 when a
new rule was adopted requiring open sessions. Unlike its American counterpart, the Philippine
Congress has not adopted a rule prescribing open hearings for conference committees.
It is nevertheless claimed that in the United States, before the adoption of the rule in 1975, at
least staff members were present. These were staff members of the Senators and Congressmen,
however, who may be presumed to be their confidential men, not stenographers as in this case
who on the last two days of the conference were excluded. There is no showing that the
conferees themselves did not take notes of their proceedings so as to give petitioner Kilosbayan
basis for claiming that even in secret diplomatic negotiations involving state interests, conferees
keep notes of their meetings. Above all, the public's right to know was fully served because the
Conference Committee in this case submitted a report showing the changes made on the differing
versions of the House and the Senate.
Petitioners cite the rules of both houses which provide that conference committee reports must
contain "a detailed, sufficiently explicit statement of the changes in or other amendments." These
changes are shown in the bill attached to the Conference Committee Report. The members of
both houses could thus ascertain what changes had been made in the original bills without the
need of a statement detailing the changes.
The same question now presented was raised when the bill which became R.A. No. 1400 (Land
Reform Act of 1955) was reported by the Conference Committee. Congressman Bengzon raised
a point of order. He said:
MR. BENGZON. My point of order is that it is out of order to consider the report
of the conference committee regarding House Bill No. 2557 by reason of the
provision of Section 11, Article XII, of the Rules of this House which provides
specifically that the conference report must be accompanied by a detailed
statement of the effects of the amendment on the bill of the House. This
conference committee report is not accompanied by that detailed statement, Mr.
Speaker. Therefore it is out of order to consider it.
Petitioner Tolentino, then the Majority Floor Leader, answered:
MR. TOLENTINO. Mr. Speaker, I should just like to say a few words in
connection with the point of order raised by the gentleman from Pangasinan.
There is no question about the provision of the Rule cited by the gentleman from
Pangasinan, but this provision applies to those cases where only portions of the
bill have been amended. In this case before us an entire bill is
presented; therefore, it can be easily seen from the reading of the bill what the
provisions are. Besides, this procedure has been an established practice.
After some interruption, he continued:
MR. TOLENTINO. As I was saying, Mr. Speaker, we have to look into the
reason for the provisions of the Rules, and the reason for the requirement in the
provision cited by the gentleman from Pangasinan is when there are only certain
words or phrases inserted in or deleted from the provisions of the bill included in
the conference report, and we cannot understand what those words and phrases
mean and their relation to the bill. In that case, it is necessary to make a detailed
statement on how those words and phrases will affect the bill as a whole; but
when the entire bill itself is copied verbatim in the conference report, that is not
necessary. So when the reason for the Rule does not exist, the Rule does not exist.
(2 CONG. REC. NO. 2, p. 4056. (emphasis added))
Congressman Tolentino was sustained by the chair. The record shows that when the ruling was
appealed, it was upheld by viva voce and when a division of the House was called, it was
sustained by a vote of 48 to 5. (Id.,
p. 4058)
Nor is there any doubt about the power of a conference committee to insert new provisions as
long as these are germane to the subject of the conference. As this Court held in Philippine
Judges Association v. Prado, 227 SCRA 703 (1993), in an opinion written by then Justice Cruz,
the jurisdiction of the conference committee is not limited to resolving differences between the
Senate and the House. It may propose an entirely new provision. What is important is that its
report is subsequently approved by the respective houses of Congress. This Court ruled that it
would not entertain allegations that, because new provisions had been added by the conference
committee, there was thereby a violation of the constitutional injunction that "upon the last
reading of a bill, no amendment thereto shall be allowed."
Applying these principles, we shall decline to look into the petitioners'
charges that an amendment was made upon the last reading of the bill that
eventually became R.A. No. 7354 and that copiesthereof in its final form were not
distributed among the members of each House. Both the enrolled bill and the
legislative journals certify that the measure was duly enacted i.e., in accordance
with Article VI, Sec. 26 (2) of the Constitution. We are bound by such official
assurances from a coordinate department of the government, to which we owe, at
the very least, a becoming courtesy.
(Id. at 710. (emphasis added))
It is interesting to note the following description of conference committees in the Philippines in a
1979 study:
Conference committees may be of two types: free or instructed. These committees
may be given instructions by their parent bodies or they may be left without
instructions. Normally the conference committees are without instructions, and
this is why they are often critically referred to as "the little legislatures." Once
bills have been sent to them, the conferees have almost unlimited authority to
change the clauses of the bills and in fact sometimes introduce new measures that
were not in the original legislation. No minutes are kept, and members' activities
on conference committees are difficult to determine. One congressman known for
his idealism put it this way: "I killed a bill on export incentives for my interest
group [copra] in the conference committee but I could not have done so anywhere
else." The conference committee submits a report to both houses, and usually it is
accepted. If the report is not accepted, then the committee is discharged and new
members are appointed.
(R. Jackson, Committees in the Philippine Congress, in COMMITTEES AND
LEGISLATURES: A COMPARATIVE ANALYSIS 163 (J. D. LEES AND M.
SHAW, eds.)).
In citing this study, we pass no judgment on the methods of conference committees. We cite it
only to say that conference committees here are no different from their counterparts in the United
States whose vast powers we noted in Philippine Judges Association v. Prado, supra. At all
events, under Art. VI, 16(3) each house has the power "to determine the rules of its
proceedings," including those of its committees. Any meaningful change in the method and
procedures of Congress or its committees must therefore be sought in that body itself.
V. The titles of S. No. 1630 and H. No. 11197. PAL maintains that R.A. No. 7716 violates Art.
VI, 26 (1) of the Constitution which provides that "Every bill passed by Congress shall embrace
only one subject which shall be expressed in the title thereof." PAL contends that the amendment
of its franchise by the withdrawal of its exemption from the VAT is not expressed in the title of
the law.
Pursuant to 13 of P.D. No. 1590, PAL pays a franchise tax of 2% on its gross revenue "in lieu
of all other taxes, duties, royalties, registration, license and other fees and charges of any kind,
nature, or description, imposed, levied, established, assessed or collected by any municipal, city,
provincial or national authority or government agency, now or in the future."
PAL was exempted from the payment of the VAT along with other entities by 103 of the
National Internal Revenue Code, which provides as follows:
103. Exempt transactions. The following shall be exempt from the value-
added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws or international agreements
to which the Philippines is a signatory.
R.A. No. 7716 seeks to withdraw certain exemptions, including that granted to PAL, by
amending 103, as follows:
103. Exempt transactions. The following shall be exempt from the value-
added tax:
xxx xxx xxx
(q) Transactions which are exempt under special laws, except those granted under
Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .
The amendment of 103 is expressed in the title of R.A. No. 7716 which reads:
AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM,
WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION,
AND FOR THESE PURPOSES AMENDING AND REPEALING THE
RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE
CODE, AS AMENDED, AND FOR OTHER PURPOSES.
By stating that R.A. No. 7716 seeks to "[RESTRUCTURE] THE VALUE-ADDED TAX (VAT)
SYSTEM [BY] WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION,
AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT
PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED AND
FOR OTHER PURPOSES," Congress thereby clearly expresses its intention to amend any
provision of the NIRC which stands in the way of accomplishing the purpose of the law.
PAL asserts that the amendment of its franchise must be reflected in the title of the law by
specific reference to P.D. No. 1590. It is unnecessary to do this in order to comply with the
constitutional requirement, since it is already stated in the title that the law seeks to amend the
pertinent provisions of the NIRC, among which is 103(q), in order to widen the base of the
VAT. Actually, it is the bill which becomes a law that is required to express in its title the subject
of legislation. The titles of H. No. 11197 and S. No. 1630 in fact specifically referred to 103 of
the NIRC as among the provisions sought to be amended. We are satisfied that sufficient notice
had been given of the pendency of these bills in Congress before they were enacted into what is
now R.A.
No. 7716.
In Philippine Judges Association v. Prado, supra, a similar argument as that now made by PAL
was rejected. R.A. No. 7354 is entitled AN ACT CREATING THE PHILIPPINE POSTAL
CORPORATION, DEFINING ITS POWERS, FUNCTIONS AND RESPONSIBILITIES,
PROVIDING FOR REGULATION OF THE INDUSTRY AND FOR OTHER PURPOSES
CONNECTED THEREWITH. It contained a provision repealing all franking privileges. It was
contended that the withdrawal of franking privileges was not expressed in the title of the law. In
holding that there was sufficient description of the subject of the law in its title, including the
repeal of franking privileges, this Court held:
To require every end and means necessary for the accomplishment of the general
objectives of the statute to be expressed in its title would not only be unreasonable
but would actually render legislation impossible. [Cooley, Constitutional
Limitations, 8th Ed., p. 297] As has been correctly explained:
The details of a legislative act need not be specifically stated in its
title, but matter germane to the subject as expressed in the title, and
adopted to the accomplishment of the object in view, may properly
be included in the act. Thus, it is proper to create in the same act
the machinery by which the act is to be enforced, to prescribe the
penalties for its infraction, and to remove obstacles in the way of
its execution. If such matters are properly connected with the
subject as expressed in the title, it is unnecessary that they should
also have special mention in the title. (Southern Pac. Co. v.
Bartine, 170 Fed. 725)
(227 SCRA at 707-708)
VI. Claims of press freedom and religious liberty. We have held that, as a general proposition,
the press is not exempt from the taxing power of the State and that what the constitutional
guarantee of free press prohibits are laws which single out the press or target a group belonging
to the press for special treatment or which in any way discriminate against the press on the basis
of the content of the publication, and R.A. No. 7716 is none of these.
Now it is contended by the PPI that by removing the exemption of the press from the VAT while
maintaining those granted to others, the law discriminates against the press. At any rate, it is
averred, "even nondiscriminatory taxation of constitutionally guaranteed freedom is
unconstitutional."
With respect to the first contention, it would suffice to say that since the law granted the press a
privilege, the law could take back the privilege anytime without offense to the Constitution. The
reason is simple: by granting exemptions, the State does not forever waive the exercise of its
sovereign prerogative.
Indeed, in withdrawing the exemption, the law merely subjects the press to the same tax burden
to which other businesses have long ago been subject. It is thus different from the tax involved in
the cases invoked by the PPI. The license tax in Grosjean v. American Press Co., 297 U.S. 233,
80 L. Ed. 660 (1936) was found to be discriminatory because it was laid on the gross advertising
receipts only of newspapers whose weekly circulation was over 20,000, with the result that the
tax applied only to 13 out of 124 publishers in Louisiana. These large papers were critical of
Senator Huey Long who controlled the state legislature which enacted the license tax. The
censorial motivation for the law was thus evident.
On the other hand, in Minneapolis Star & Tribune Co. v. Minnesota Comm'r of Revenue, 460
U.S. 575, 75 L. Ed. 2d 295 (1983), the tax was found to be discriminatory because although it
could have been made liable for the sales tax or, in lieu thereof, for the use tax on the privilege of
using, storing or consuming tangible goods, the press was not. Instead, the press was exempted
from both taxes. It was, however, later made to pay a special use tax on the cost of paper and ink
which made these items "the only items subject to the use tax that were component of goods to
be sold at retail." The U.S. Supreme Court held that the differential treatment of the press
"suggests that the goal of regulation is not related to suppression of expression, and such goal is
presumptively unconstitutional." It would therefore appear that even a law that favors the press is
constitutionally suspect. (See the dissent of Rehnquist, J. in that case)
Nor is it true that only two exemptions previously granted by E.O. No. 273 are withdrawn
"absolutely and unqualifiedly" by R.A. No. 7716. Other exemptions from the VAT, such as those
previously granted to PAL, petroleum concessionaires, enterprises registered with the Export
Processing Zone Authority, and many more are likewise totally withdrawn, in addition to
exemptions which are partially withdrawn, in an effort to broaden the base of the tax.
The PPI says that the discriminatory treatment of the press is highlighted by the fact that
transactions, which are profit oriented, continue to enjoy exemption under R.A. No. 7716. An
enumeration of some of these transactions will suffice to show that by and large this is not so and
that the exemptions are granted for a purpose. As the Solicitor General says, such exemptions are
granted, in some cases, to encourage agricultural production and, in other cases, for the personal
benefit of the end-user rather than for profit. The exempt transactions are:
(a) Goods for consumption or use which are in their original state (agricultural,
marine and forest products, cotton seeds in their original state, fertilizers, seeds,
seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods or
services to enhance agriculture (milling of palay, corn, sugar cane and raw sugar,
livestock, poultry feeds, fertilizer, ingredients used for the manufacture of feeds).
(b) Goods used for personal consumption or use (household and personal effects
of citizens returning to the Philippines) or for professional use, like professional
instruments and implements, by persons coming to the Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to
percentage tax.
(d) Educational services, medical, dental, hospital and veterinary services, and
services rendered under employer-employee relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not
exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for Reconsideration, pp.
58-60)
The PPI asserts that it does not really matter that the law does not discriminate against the press
because "even nondiscriminatory taxation on constitutionally guaranteed freedom is
unconstitutional." PPI cites in support of this assertion the following statement in Murdock
v. Pennsylvania, 319 U.S. 105, 87 L. Ed. 1292 (1943):
The fact that the ordinance is "nondiscriminatory" is immaterial. The protection
afforded by the First Amendment is not so restricted. A license tax certainly does
not acquire constitutional validity because it classifies the privileges protected by
the First Amendment along with the wares and merchandise of hucksters and
peddlers and treats them all alike. Such equality in treatment does not save the
ordinance. Freedom of press, freedom of speech, freedom of religion are in
preferred position.
The Court was speaking in that case of a license tax, which, unlike an ordinary tax, is mainly for
regulation. Its imposition on the press is unconstitutional because it lays a prior restraint on the
exercise of its right. Hence, although its application to others, such those selling goods, is valid,
its application to the press or to religious groups, such as the Jehovah's Witnesses, in connection
with the latter's sale of religious books and pamphlets, is unconstitutional. As the U.S. Supreme
Court put it, "it is one thing to impose a tax on income or property of a preacher. It is quite
another thing to exact a tax on him for delivering a sermon."
A similar ruling was made by this Court in American Bible Society v. City of Manila, 101 Phil.
386 (1957) which invalidated a city ordinance requiring a business license fee on those engaged
in the sale of general merchandise. It was held that the tax could not be imposed on the sale of
bibles by the American Bible Society without restraining the free exercise of its right to
propagate.
The VAT is, however, different. It is not a license tax. It is not a tax on the exercise of a
privilege, much less a constitutional right. It is imposed on the sale, barter, lease or exchange of
goods or properties or the sale or exchange of services and the lease of properties purely for
revenue purposes. To subject the press to its payment is not to burden the exercise of its right any
more than to make the press pay income tax or subject it to general regulation is not to violate its
freedom under the Constitution.
Additionally, the Philippine Bible Society, Inc. claims that although it sells bibles, the proceeds
derived from the sales are used to subsidize the cost of printing copies which are given free to
those who cannot afford to pay so that to tax the sales would be to increase the price, while
reducing the volume of sale. Granting that to be the case, the resulting burden on the exercise of
religious freedom is so incidental as to make it difficult to differentiate it from any other
economic imposition that might make the right to disseminate religious doctrines costly.
Otherwise, to follow the petitioner's argument, to increase the tax on the sale of vestments would
be to lay an impermissible burden on the right of the preacher to make a sermon.
On the other hand the registration fee of P1,000.00 imposed by 107 of the NIRC, as amended
by 7 of R.A. No. 7716, although fixed in amount, is really just to pay for the expenses of
registration and enforcement of provisions such as those relating to accounting in 108 of the
NIRC. That the PBS distributes free bibles and therefore is not liable to pay the VAT does not
excuse it from the payment of this fee because it also sells some copies. At any rate whether the
PBS is liable for the VAT must be decided in concrete cases, in the event it is assessed this tax
by the Commissioner of Internal Revenue.
VII. Alleged violations of the due process, equal protection and contract clauses and the rule on
taxation. CREBA asserts that R.A. No. 7716 (1) impairs the obligations of contracts, (2)
classifies transactions as covered or exempt without reasonable basis and (3) violates the rule
that taxes should be uniform and equitable and that Congress shall "evolve a progressive system
of taxation."
With respect to the first contention, it is claimed that the application of the tax to existing
contracts of the sale of real property by installment or on deferred payment basis would result in
substantial increases in the monthly amortizations to be paid because of the 10% VAT. The
additional amount, it is pointed out, is something that the buyer did not anticipate at the time he
entered into the contract.
The short answer to this is the one given by this Court in an early case: "Authorities from
numerous sources are cited by the plaintiffs, but none of them show that a lawful tax on a new
subject, or an increased tax on an old one, interferes with a contract or impairs its obligation,
within the meaning of the Constitution. Even though such taxation may affect particular
contracts, as it may increase the debt of one person and lessen the security of another, or may
impose additional burdens upon one class and release the burdens of another, still the tax must be
paid unless prohibited by the Constitution, nor can it be said that it impairs the obligation of any
existing contract in its true legal sense." (La Insular v. Machuca Go-Tauco and Nubla Co-Siong,
39 Phil. 567, 574 (1919)). Indeed not only existing laws but also "the reservation of the essential
attributes of sovereignty, is . . . read into contracts as a postulate of the legal order." (Philippine-
American Life Ins. Co. v. Auditor General, 22 SCRA 135, 147 (1968)) Contracts must be
understood as having been made in reference to the possible exercise of the rightful authority of
the government and no obligation of contract can extend to the defeat of that authority. (Norman
v. Baltimore and Ohio R.R., 79 L. Ed. 885 (1935)).
It is next pointed out that while 4 of R.A. No. 7716 exempts such transactions as the sale of
agricultural products, food items, petroleum, and medical and veterinary services, it grants no
exemption on the sale of real property which is equally essential. The sale of real property for
socialized and low-cost housing is exempted from the tax, but CREBA claims that real estate
transactions of "the less poor," i.e., the middle class, who are equally homeless, should likewise
be exempted.
The sale of food items, petroleum, medical and veterinary services, etc., which are essential
goods and services was already exempt under 103, pars. (b) (d) (1) of the NIRC before the
enactment of R.A. No. 7716. Petitioner is in error in claiming that R.A. No. 7716 granted
exemption to these transactions, while subjecting those of petitioner to the payment of the VAT.
Moreover, there is a difference between the "homeless poor" and the "homeless less poor" in the
example given by petitioner, because the second group or middle class can afford to rent houses
in the meantime that they cannot yet buy their own homes. The two social classes are thus
differently situated in life. "It is inherent in the power to tax that the State be free to select the
subjects of taxation, and it has been repeatedly held that 'inequalities which result from a singling
out of one particular class for taxation, or exemption infringe no constitutional limitation.'" (Lutz
v. Araneta, 98 Phil. 148, 153 (1955). Accord, City of Baguio v. De Leon, 134 Phil. 912 (1968);
Sison, Jr. v. Ancheta, 130 SCRA 654, 663 (1984); Kapatiran ng mga Naglilingkod sa
Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA 371 (1988)).
Finally, it is contended, for the reasons already noted, that R.A. No. 7716 also violates Art. VI,
28(1) which provides that "The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation."
Equality and uniformity of taxation means that all taxable articles or kinds of property of the
same class be taxed at the same rate. The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation. To satisfy this requirement it is enough that the
statute or ordinance applies equally to all persons, forms and corporations placed in similar
situation. (City of Baguio v. De Leon, supra; Sison, Jr. v. Ancheta, supra)
Indeed, the VAT was already provided in E.O. No. 273 long before R.A. No. 7716 was enacted.
R.A. No. 7716 merely expands the base of the tax. The validity of the original VAT Law was
questioned in Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan, 163 SCRA
383 (1988) on grounds similar to those made in these cases, namely, that the law was
"oppressive, discriminatory, unjust and regressive in violation of Art. VI, 28(1) of the
Constitution." (At 382) Rejecting the challenge to the law, this Court held:
As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is
uniform. . . .
The sales tax adopted in EO 273 is applied similarly on all goods and services
sold to the public, which are not exempt, at the constant rate of 0% or 10%.
The disputed sales tax is also equitable. It is imposed only on sales of goods or
services by persons engaged in business with an aggregate gross annual sales
exceeding P200,000.00. Small corner sari-sari stores are consequently exempt
from its application. Likewise exempt from the tax are sales of farm and marine
products, so that the costs of basic food and other necessities, spared as they are
from the incidence of the VAT, are expected to be relatively lower and within the
reach of the general public.
(At 382-383)
The CREBA claims that the VAT is regressive. A similar claim is made by the Cooperative
Union of the Philippines, Inc. (CUP), while petitioner Juan T. David argues that the law
contravenes the mandate of Congress to provide for a progressive system of taxation because the
law imposes a flat rate of 10% and thus places the tax burden on all taxpayers without regard to
their ability to pay.
The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT,
are regressive. What it simply provides is that Congress shall "evolve a progressive system of
taxation." The constitutional provision has been interpreted to mean simply that "direct taxes are
. . . to be preferred [and] as much as possible, indirect taxes should be minimized." (E.
FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. (1977)). Indeed,
the mandate to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise,
sales taxes, which perhaps are the oldest form of indirect taxes, would have been prohibited with
the proclamation of Art. VIII, 17(1) of the 1973 Constitution from which the present Art. VI,
28(1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not
impossible, to avoid them by imposing such taxes according to the taxpayers' ability to pay. In
the case of the VAT, the law minimizes the regressive effects of this imposition by providing
for zero rating of certain transactions (R.A. No. 7716, 3, amending 102 (b) of the NIRC),
while granting exemptions to other transactions. (R.A. No. 7716, 4, amending 103 of the
NIRC).
Thus, the following transactions involving basic and essential goods and services are exempted
from the VAT:
(a) Goods for consumption or use which are in their original state (agricultural,
marine and forest products, cotton seeds in their original state, fertilizers, seeds,
seedlings, fingerlings, fish, prawn livestock and poultry feeds) and goods or
services to enhance agriculture (milling of palay, corn sugar cane and raw sugar,
livestock, poultry feeds, fertilizer, ingredients used for the manufacture of feeds).
(b) Goods used for personal consumption or use (household and personal effects
of citizens returning to the Philippines) and or professional use, like professional
instruments and implements, by persons coming to the Philippines to settle here.
(c) Goods subject to excise tax such as petroleum products or to be used for
manufacture of petroleum products subject to excise tax and services subject to
percentage tax.
(d) Educational services, medical, dental, hospital and veterinary services, and
services rendered under employer-employee relationship.
(e) Works of art and similar creations sold by the artist himself.
(f) Transactions exempted under special laws, or international agreements.
(g) Export-sales by persons not VAT-registered.
(h) Goods or services with gross annual sale or receipt not
exceeding P500,000.00.
(Respondents' Consolidated Comment on the Motions for Reconsideration, pp.
58-60)
On the other hand, the transactions which are subject to the VAT are those which involve goods
and services which are used or availed of mainly by higher income groups. These include real
properties held primarily for sale to customers or for lease in the ordinary course of trade or
business, the right or privilege to use patent, copyright, and other similar property or right, the
right or privilege to use industrial, commercial or scientific equipment, motion picture films,
tapes and discs, radio, television, satellite transmission and cable television time, hotels,
restaurants and similar places, securities, lending investments, taxicabs, utility cars for rent,
tourist buses, and other common carriers, services of franchise grantees of telephone and
telegraph.
The problem with CREBA's petition is that it presents broad claims of constitutional violations
by tendering issues not at retail but at wholesale and in the abstract. There is no fully developed
record which can impart to adjudication the impact of actuality. There is no factual foundation to
show in the concrete the application of the law to actual contracts and exemplify its effect on
property rights. For the fact is that petitioner's members have not even been assessed the VAT.
Petitioner's case is not made concrete by a series of hypothetical questions asked which are no
different from those dealt with in advisory opinions.
The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A
mere allegation, as here, does not suffice. There must be a factual foundation of
such unconstitutional taint. Considering that petitioner here would condemn such
a provision as void on its face, he has not made out a case. This is merely to
adhere to the authoritative doctrine that where the due process and equal
protection clauses are invoked, considering that they are not fixed rules but rather
broad standards, there is a need for proof of such persuasive character as would
lead to such a conclusion. Absent such a showing, the presumption of validity
must prevail.
(Sison, Jr. v. Ancheta, 130 SCRA at 661)
Adjudication of these broad claims must await the development of a concrete case. It may be that
postponement of adjudication would result in a multiplicity of suits. This need not be the case,
however. Enforcement of the law may give rise to such a case. A test case, provided it is an
actual case and not an abstract or hypothetical one, may thus be presented.
Nor is hardship to taxpayers alone an adequate justification for adjudicating abstract issues.
Otherwise, adjudication would be no different from the giving of advisory opinion that does not
really settle legal issues.
We are told that it is our duty under Art. VIII, 1, 2 to decide whenever a claim is made that
"there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part
of any branch or instrumentality of the government." This duty can only arise if an actual case or
controversy is before us. Under Art . VIII, 5 our jurisdiction is defined in terms of "cases" and
all that Art. VIII, 1, 2 can plausibly mean is that in the exercise of that jurisdiction we have
the judicial power to determine questions of grave abuse of discretion by any branch or
instrumentality of the government.
Put in another way, what is granted in Art. VIII, 1, 2 is "judicial power," which is "the power
of a court to hear and decide cases pending between parties who have the right to sue and be
sued in the courts of law and equity" (Lamb v. Phipps, 22 Phil. 456, 559 (1912)), as
distinguished from legislative and executive power. This power cannot be directly appropriated
until it is apportioned among several courts either by the Constitution, as in the case of Art. VIII,
5, or by statute, as in the case of the Judiciary Act of 1948 (R.A. No. 296) and the Judiciary
Reorganization Act of 1980 (B.P. Blg. 129). The power thus apportioned constitutes the court's
"jurisdiction," defined as "the power conferred by law upon a court or judge to take cognizance
of a case, to the exclusion of all others." (United States v. Arceo, 6 Phil. 29 (1906)) Without an
actual case coming within its jurisdiction, this Court cannot inquire into any allegation of grave
abuse of discretion by the other departments of the government.
VIII. Alleged violation of policy towards cooperatives. On the other hand, the Cooperative Union
of the Philippines (CUP), after briefly surveying the course of legislation, argues that it was to
adopt a definite policy of granting tax exemption to cooperatives that the present Constitution
embodies provisions on cooperatives. To subject cooperatives to the VAT would therefore be to
infringe a constitutional policy. Petitioner claims that in 1973, P.D. No. 175 was promulgated
exempting cooperatives from the payment of income taxes and sales taxes but in 1984, because
of the crisis which menaced the national economy, this exemption was withdrawn by P.D. No.
1955; that in 1986, P.D. No. 2008 again granted cooperatives exemption from income and sales
taxes until December 31, 1991, but, in the same year, E.O. No. 93 revoked the exemption; and
that finally in 1987 the framers of the Constitution "repudiated the previous actions of the
government adverse to the interests of the cooperatives, that is, the repeated revocation of the tax
exemption to cooperatives and instead upheld the policy of strengthening the cooperatives by
way of the grant of tax exemptions," by providing the following in Art. XII:
1. The goals of the national economy are a more equitable distribution of
opportunities, income, and wealth; a sustained increase in the amount of goods
and services produced by the nation for the benefit of the people; and an
expanding productivity as the key to raising the quality of life for all, especially
the underprivileged.
The State shall promote industrialization and full employment based on sound
agricultural development and agrarian reform, through industries that make full
and efficient use of human and natural resources, and which are competitive in
both domestic and foreign markets. However, the State shall protect Filipino
enterprises against unfair foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all regions of the
country shall be given optimum opportunity to develop. Private enterprises,
including corporations, cooperatives, and similar collective organizations, shall be
encouraged to broaden the base of their ownership.
15. The Congress shall create an agency to promote the viability and growth of
cooperatives as instruments for social justice and economic development.
Petitioner's contention has no merit. In the first place, it is not true that P.D. No. 1955 singled out
cooperatives by withdrawing their exemption from income and sales taxes under P.D. No. 175,
5. What P.D. No. 1955, 1 did was to withdraw the exemptions and preferential treatments
theretofore granted to private business enterprises in general, in view of the economic crisis
which then beset the nation. It is true that after P.D. No. 2008, 2 had restored the tax
exemptions of cooperatives in 1986, the exemption was again repealed by E.O. No. 93, 1, but
then again cooperatives were not the only ones whose exemptions were withdrawn. The
withdrawal of tax incentives applied to all, including government and private entities. In the
second place, the Constitution does not really require that cooperatives be granted tax
exemptions in order to promote their growth and viability. Hence, there is no basis for
petitioner's assertion that the government's policy toward cooperatives had been one of
vacillation, as far as the grant of tax privileges was concerned, and that it was to put an end to
this indecision that the constitutional provisions cited were adopted. Perhaps as a matter of
policy cooperatives should be granted tax exemptions, but that is left to the discretion of
Congress. If Congress does not grant exemption and there is no discrimination to cooperatives,
no violation of any constitutional policy can be charged.
Indeed, petitioner's theory amounts to saying that under the Constitution cooperatives are
exempt from taxation. Such theory is contrary to the Constitution under which only the following
are exempt from taxation: charitable institutions, churches and parsonages, by reason of Art. VI,
28 (3), and non-stock, non-profit educational institutions by reason of Art. XIV, 4 (3).
CUP's further ground for seeking the invalidation of R.A. No. 7716 is that it denies cooperatives
the equal protection of the law because electric cooperatives are exempted from the VAT. The
classification between electric and other cooperatives (farmers cooperatives, producers
cooperatives, marketing cooperatives, etc.) apparently rests on a congressional determination that
there is greater need to provide cheaper electric power to as many people as possible, especially
those living in the rural areas, than there is to provide them with other necessities in life. We
cannot say that such classification is unreasonable.
We have carefully read the various arguments raised against the constitutional validity of R.A.
No. 7716. We have in fact taken the extraordinary step of enjoining its enforcement pending
resolution of these cases. We have now come to the conclusion that the law suffers from none of
the infirmities attributed to it by petitioners and that its enactment by the other branches of the
government does not constitute a grave abuse of discretion. Any question as to its necessity,
desirability or expediency must be addressed to Congress as the body which is electorally
responsible, remembering that, as Justice Holmes has said, "legislators are the ultimate guardians
of the liberties and welfare of the people in quite as great a degree as are the courts." (Missouri,
Kansas & Texas Ry. Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is not right, as
petitioner in G.R. No. 115543 does in arguing that we should enforce the public accountability of
legislators, that those who took part in passing the law in question by voting for it in Congress
should later thrust to the courts the burden of reviewing measures in the flush of enactment. This
Court does not sit as a third branch of the legislature, much less exercise a veto power over
legislation.
WHEREFORE, the motions for reconsideration are denied with finality and the temporary
restraining order previously issued is hereby lifted.
SO ORDERED.




Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 172231 February 12, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
ISABELA CULTURAL CORPORATION, Respondent.
D E C I S I O N
YNARES-SANTIAGO, J .:
Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005 Decision
1
of
the Court of Appeals in CA-G.R. SP No. 78426 affirming the February 26, 2003 Decision
2
of the
Court of Tax Appeals (CTA) in CTA Case No. 5211, which cancelled and set aside the
Assessment Notices for deficiency income tax and expanded withholding tax issued by the
Bureau of Internal Revenue (BIR) against respondent Isabela Cultural Corporation (ICC).
The facts show that on February 23, 1990, ICC, a domestic corporation, received from the BIR
Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the amount of
P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for deficiency expanded
withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the
taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIRs disallowance of ICCs claimed expense deductions for professional and
security services billed to and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co.,
3
for the year ending
December 31, 1985;
4

(b) Expenses for the legal services [inclusive of retainer fees] of the law firm
Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson for the years 1984
and 1985.
5

(c) Expense for security services of El Tigre Security & Investigation Agency for
the months of April and May 1986.
6

(2) The alleged understatement of ICCs interest income on the three promissory notes
due from Realty Investment, Inc.
The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge) was
allegedly due to the failure of ICC to withhold 1% expanded withholding tax on its claimed
P244,890.00 deduction for security services.
7

On March 23, 1990, ICC sought a reconsideration of the subject assessments. On February 9,
1995, however, it received a final notice before seizure demanding payment of the amounts
stated in the said notices. Hence, it brought the case to the CTA which held that the petition is
premature because the final notice of assessment cannot be considered as a final decision
appealable to the tax court. This was reversed by the Court of Appeals holding that a demand
letter of the BIR reiterating the payment of deficiency tax, amounts to a final decision on the
protested assessment and may therefore be questioned before the CTA. This conclusion was
sustained by this Court on July 1, 2001, in G.R. No. 135210.
8
The case was thus remanded to the
CTA for further proceedings.
On February 26, 2003, the CTA rendered a decision canceling and setting aside the assessment
notices issued against ICC. It held that the claimed deductions for professional and security
services were properly claimed by ICC in 1986 because it was only in the said year when the
bills demanding payment were sent to ICC. Hence, even if some of these professional services
were rendered to ICC in 1984 or 1985, it could not declare the same as deduction for the said
years as the amount thereof could not be determined at that time.
The CTA also held that ICC did not understate its interest income on the subject promissory
notes. It found that it was the BIR which made an overstatement of said income when it
compounded the interest income receivable by ICC from the promissory notes of Realty
Investment, Inc., despite the absence of a stipulation in the contract providing for a compounded
interest; nor of a circumstance, like delay in payment or breach of contract, that would justify the
application of compounded interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed
deduction for security services as shown by the various payment orders and confirmation
receipts it presented as evidence. The dispositive portion of the CTAs Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice No. FAS-1-86-90-000680 for
deficiency income tax in the amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-
000681 for deficiency expanded withholding tax in the amount of P4,897.79, inclusive of
surcharges and interest, both for the taxable year 1986, are hereby CANCELLED and SET
ASIDE.
SO ORDERED.
9

Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision,
10
holding that although the professional services (legal and auditing services) were
rendered to ICC in 1984 and 1985, the cost of the services was not yet determinable at that time,
hence, it could be considered as deductible expenses only in 1986 when ICC received the billing
statements for said services. It further ruled that ICC did not understate its interest income from
the promissory notes of Realty Investment, Inc., and that ICC properly withheld and remitted
taxes on the payments for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant petition
contending that since ICC is using the accrual method of accounting, the expenses for the
professional services that accrued in 1984 and 1985, should have been declared as deductions
from income during the said years and the failure of ICC to do so bars it from claiming said
expenses as deduction for the taxable year 1986. As to the alleged deficiency interest income and
failure to withhold expanded withholding tax assessment, petitioner invoked the presumption
that the assessment notices issued by the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the deduction of
the expenses for professional and security services from ICCs gross income; and (2) held that
ICC did not understate its interest income from the promissory notes of Realty Investment, Inc;
and that ICC withheld the required 1% withholding tax from the deductions for security services.
The requisites for the deductibility of ordinary and necessary trade, business, or professional
expenses, like expenses paid for legal and auditing services, are: (a) the expense must be
ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must
have been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be
supported by receipts, records or other pertinent papers.
11

The requisite that it must have been paid or incurred during the taxable year is further qualified
by Section 45 of the National Internal Revenue Code (NIRC) which states that: "[t]he deduction
provided for in this Title shall be taken for the taxable year in which paid or accrued or paid or
incurred, dependent upon the method of accounting upon the basis of which the net income is
computed x x x".
Accounting methods for tax purposes comprise a set of rules for determining when and how to
report income and deductions.
12
In the instant case, the accounting method used by ICC is the
accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, expenses not being claimed as deductions by a taxpayer in the current year when
they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a
taxpayer who is authorized to deduct certain expenses and other allowable deductions for the
current year but failed to do so cannot deduct the same for the next year.
13

The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay
them, in opposition to actual receipt or payment, which characterizes the cash method of
accounting. Amounts of income accrue where the right to receive them become fixed, where
there is created an enforceable liability. Similarly, liabilities are accrued when fixed and
determinable in amount, without regard to indeterminacy merely of time of payment.
14

For a taxpayer using the accrual method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize income or expense? The accrual of
income and expense is permitted when the all-events test has been met. This test requires: (1)
fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate
determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such
income or liability be determined with reasonable accuracy. However, the test does not demand
that the amount of income or liability be known absolutely, only that a taxpayer has at his
disposal the information necessary to compute the amount with reasonable accuracy. The all-
events test is satisfied where computation remains uncertain, if its basis is unchangeable; the test
is satisfied where a computation may be unknown, but is not as much as unknowable, within the
taxable year. The amount of liability does not have to be determined exactly; it must be
determined with "reasonable accuracy." Accordingly, the term "reasonable accuracy"
implies something less than an exact or completely accurate amount.[15]
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could
reasonably be expected to have known, at the closing of its books for the taxable
year.[16] Accrual method of accounting presents largely a question of fact; such that the
taxpayer bears the burden of proof of establishing the accrual of an item of income or
deduction.
17

Corollarily, it is a governing principle in taxation that tax exemptions must be construed
in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and one
who claims an exemption must be able to justify the same by the clearest grant of organic or
statute law. An exemption from the common burden cannot be permitted to exist upon vague
implications. And since a deduction for income tax purposes partakes of the nature of a tax
exemption, then it must also be strictly construed.
18

In the instant case, the expenses for professional fees consist of expenses for legal and auditing
services. The expenses for legal services pertain to the 1984 and 1985 legal and retainer fees of
the law firm Bengzon Zarraga Narciso Cudala Pecson Azcuna & Bengson, and for
reimbursement of the expenses of said firm in connection with ICCs tax problems for the year
1984. As testified by the Treasurer of ICC, the firm has been its counsel since the 1960s.
19
From
the nature of the claimed deductions and the span of time during which the firm was retained,
ICC can be expected to have reasonably known the retainer fees charged by the firm as well as
the compensation for its legal services. The failure to determine the exact amount of the expense
during the taxable year when they could have been claimed as deductions cannot thus be
attributed solely to the delayed billing of these liabilities by the firm. For one, ICC, in the
exercise of due diligence could have inquired into the amount of their obligation to the firm,
especially so that it is using the accrual method of accounting. For another, it could have
reasonably determined the amount of legal and retainer fees owing to its familiarity with the
rates charged by their long time legal consultant.
As previously stated, the accrual method presents largely a question of fact and that the taxpayer
bears the burden of establishing the accrual of an expense or income. However, ICC failed to
discharge this burden. As to when the firms performance of its services in connection with the
1984 tax problems were completed, or whether ICC exercised reasonable diligence to inquire
about the amount of its liability, or whether it does or does not possess the information necessary
to compute the amount of said liability with reasonable accuracy, are questions of fact which
ICC never established. It simply relied on the defense of delayed billing by the firm and the
company, which under the circumstances, is not sufficient to exempt it from being charged with
knowledge of the reasonable amount of the expenses for legal and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC
for the year 1985 cannot be validly claimed as expense deductions in 1986. This is so because
ICC failed to present evidence showing that even with only "reasonable accuracy," as the
standard to ascertain its liability to SGV & Co. in the year 1985, it cannot determine the
professional fees which said company would charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense deductions for the
professional services were allowable deductions for the taxable year 1986. Hence, per Revenue
Audit Memorandum Order No. 1-2000, they cannot be validly deducted from its gross income
for the said year and were therefore properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses were incurred by
ICC in 1986
20
and could therefore be properly claimed as deductions for the said year.
Anent the purported understatement of interest income from the promissory notes of Realty
Investment, Inc., we sustain the findings of the CTA and the Court of Appeals that no such
understatement exists and that only simple interest computation and not a compounded one
should have been applied by the BIR. There is indeed no stipulation between the latter and ICC
on the application of compounded interest.
21
Under Article 1959 of the Civil Code, unless there
is a stipulation to the contrary, interest due should not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the required
withholding tax from its claimed deductions for security services and remitted the same to the
BIR is supported by payment order and confirmation receipts.
22
Hence, the Assessment Notice
for deficiency expanded withholding tax was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86 for
deficiency income tax should be cancelled and set aside but only insofar as the claimed
deductions of ICC for security services. Said Assessment is valid as to the BIRs disallowance of
ICCs expenses for professional services. The Court of Appeals cancellation of Assessment
Notice No. FAS-1-86-90-000681 in the amount of P4,897.79 for deficiency expanded
withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of
the Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that
Assessment Notice No. FAS-1-86-90-000680, which disallowed the expense deduction of
Isabela Cultural Corporation for professional and security services, is declared valid only insofar
as the expenses for the professional fees of SGV & Co. and of the law firm, Bengzon Zarraga
Narciso Cudala Pecson Azcuna & Bengson, are concerned. The decision is affirmed in all other
respects.
The case is remanded to the BIR for the computation of Isabela Cultural Corporations liability
under Assessment Notice No. FAS-1-86-90-000680. SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 143672 April 24, 2003
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
GENERAL FOODS (PHILS.), INC., respondent.
CORONA, J .:
Petitioner Commissioner of Internal Revenue (Commissioner) assails the resolution
1
of the Court
of Appeals reversing the decision
2
of the Court of Tax Appeals which in turn denied the protest
filed by respondent General Foods (Phils.), Inc., regarding the assessment made against the latter
for deficiency taxes.
The records reveal that, on June 14, 1985, respondent corporation, which is engaged in the
manufacture of beverages such as "Tang," "Calumet" and "Kool-Aid," filed its income tax return
for the fiscal year ending February 28, 1985. In said tax return, respondent corporation claimed
as deduction, among other business expenses, the amount of P9,461,246 for media advertising
for "Tang."
On May 31, 1988, the Commissioner disallowed 50% or P4,730,623 of the deduction claimed by
respondent corporation. Consequently, respondent corporation was assessed deficiency income
taxes in the amount of P2,635, 141.42. The latter filed a motion for reconsideration but the same
was denied.
On September 29, 1989, respondent corporation appealed to the Court of Tax Appeals but the
appeal was dismissed:
With such a gargantuan expense for the advertisement of a singular product, which even
excludes "other advertising and promotions" expenses, we are not prepared to accept that
such amount is reasonable "to stimulate the current sale of merchandise" regardless of
Petitioners explanation that such expense "does not connote unreasonableness
considering the grave economic situation taking place after the Aquino assassination
characterized by capital fight, strong deterioration of the purchasing power of the
Philippine peso and the slacking demand for consumer products" (Petitioners
Memorandum, CTA Records, p. 273). We are not convinced with such an explanation.
The staggering expense led us to believe that such expenditure was incurred "to create or
maintain some form of good will for the taxpayers trade or business or for the industry
or profession of which the taxpayer is a member." The term "good will" can hardly be
said to have any precise signification; it is generally used to denote the benefit arising
from connection and reputation (Words and Phrases, Vol. 18, p. 556 citing Douhart vs.
Loagan, 86 III. App. 294). As held in the case of Welch vs. Helvering, efforts to establish
reputation are akin to acquisition of capital assets and, therefore, expenses related thereto
are not business expenses but capital expenditures. (Atlas Mining and Development Corp.
vs. Commissioner of Internal Revenue, supra). For sure such expenditure was meant not
only to generate present sales but more for future and prospective benefits. Hence,
"abnormally large expenditures for advertising are usually to be spread over the period of
years during which the benefits of the expenditures are received" (Mertens, supra, citing
Colonial Ice Cream Co., 7 BTA 154).
WHEREFORE, in all the foregoing, and finding no error in the case appealed from, we
hereby RESOLVE to DISMISS the instant petition for lack of merit and ORDER the
Petitioner to pay the respondent Commissioner the assessed amount of P2,635,141.42
representing its deficiency income tax liability for the fiscal year ended February 28,
1985."
3

Aggrieved, respondent corporation filed a petition for review at the Court of Appeals which
rendered a decision reversing and setting aside the decision of the Court of Tax Appeals:
Since it has not been sufficiently established that the item it claimed as a deduction is
excessive, the same should be allowed.
WHEREFORE, the petition of petitioner General Foods (Philippines), Inc. is hereby
GRANTED. Accordingly, the Decision, dated 8 February 1994 of respondent Court of
Tax Appeals is REVERSED and SET ASIDE and the letter, dated 31 May 1988 of
respondent Commissioner of Internal Revenue is CANCELLED.
SO ORDERED.
4

Thus, the instant petition, wherein the Commissioner presents for the Courts consideration a
lone issue: whether or not the subject media advertising expense for "Tang" incurred by
respondent corporation was an ordinary and necessary expense fully deductible under the
National Internal Revenue Code (NIRC).
It is a governing principle in taxation that tax exemptions must be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority;
5
and he who claims an
exemption must be able to justify his claim by the clearest grant of organic or statute law. An
exemption from the common burden cannot be permitted to exist upon vague implications.
6

Deductions for income tax purposes partake of the nature of tax exemptions; hence, if tax
exemptions are strictly construed, then deductions must also be strictly construed.
We then proceed to resolve the singular issue in the case at bar. Was the media advertising
expense for "Tang" paid or incurred by respondent corporation for the fiscal year ending
February 28, 1985 "necessary and ordinary," hence, fully deductible under the NIRC? Or was it a
capital expenditure, paid in order to create "goodwill and reputation" for respondent corporation
and/or its products, which should have been amortized over a reasonable period?
Section 34 (A) (1), formerly Section 29 (a) (1) (A), of the NIRC provides:
(A) Expenses.-
(1) Ordinary and necessary trade, business or professional expenses.-
(a) In general.- There shall be allowed as deduction from gross income all
ordinary and necessary expenses paid or incurred during the taxable year in
carrying on, or which are directly attributable to, the development, management,
operation and/or conduct of the trade, business or exercise of a profession.
Simply put, to be deductible from gross income, the subject advertising expense must comply
with the following requisites: (a) the expense must be ordinary and necessary; (b) it must have
been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying
on the trade or business of the taxpayer; and (d) it must be supported by receipts, records or other
pertinent papers.
7

The parties are in agreement that the subject advertising expense was paid or incurred within the
corresponding taxable year and was incurred in carrying on a trade or business. Hence, it was
necessary. However, their views conflict as to whether or not it was ordinary. To be deductible,
an advertising expense should not only be necessary but also ordinary. These two requirements
must be met.
The Commissioner maintains that the subject advertising expense was not ordinary on the
ground that it failed the two conditions set by U.S. jurisprudence: first, "reasonableness" of the
amount incurred and second, the amount incurred must not be a capital outlay to create
"goodwill" for the product and/or private respondents business. Otherwise, the expense must be
considered a capital expenditure to be spread out over a reasonable time.
We agree.
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an
advertising expense. There being no hard and fast rule on the matter, the right to a deduction
depends on a number of factors such as but not limited to: the type and size of business in which
the taxpayer is engaged; the volume and amount of its net earnings; the nature of the expenditure
itself; the intention of the taxpayer and the general economic conditions. It is the interplay of
these, among other factors and properly weighed, that will yield a proper evaluation.
In the case at bar, the P9,461,246 claimed as media advertising expense for "Tang" alone was
almost one-half of its total claim for "marketing expenses." Aside from that, respondent-
corporation also claimed P2,678,328 as "other advertising and promotions expense" and another
P1,548,614, for consumer promotion.
Furthermore, the subject P9,461,246 media advertising expense for "Tang" was almost double
the amount of respondent corporations P4,640,636 general and administrative expenses.
We find the subject expense for the advertisement of a single product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible under
then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of
merchandise or use of services and (2) advertising designed to stimulate the future sale of
merchandise or use of services. The second type involves expenditures incurred, in whole or in
part, to create or maintain some form of goodwill for the taxpayers trade or business or for the
industry or profession of which the taxpayer is a member. If the expenditures are for the
advertising of the first kind, then, except as to the question of the reasonableness of amount,
there is no doubt such expenditures are deductible as business expenses. If, however, the
expenditures are for advertising of the second kind, then normally they should be spread out over
a reasonable period of time.
We agree with the Court of Tax Appeals that the subject advertising expense was of the second
kind. Not only was the amount staggering; the respondent corporation itself also admitted, in its
letter protest
8
to the Commissioner of Internal Revenues assessment, that the subject media
expense was incurred in order to protect respondent corporations brand franchise, a critical point
during the period under review.
The protection of brand franchise is analogous to the maintenance of goodwill or title to ones
property. This is a capital expenditure which should be spread out over a reasonable period of
time.
9

Respondent corporations venture to protect its brand franchise was tantamount to efforts to
establish a reputation. This was akin to the acquisition of capital assets and therefore expenses
related thereto were not to be considered as business expenses but as capital expenditures.
10

True, it is the taxpayers prerogative to determine the amount of advertising expenses it will
incur and where to apply them.
11
Said prerogative, however, is subject to certain considerations.
The first relates to the extent to which the expenditures are actually capital outlays; this
necessitates an inquiry into the nature or purpose of such expenditures.
12
The second, which must
be applied in harmony with the first, relates to whether the expenditures are ordinary and
necessary. Concomitantly, for an expense to be considered ordinary, it must be reasonable in
amount. The Court of Tax Appeals ruled that respondent corporation failed to meet the two
foregoing limitations.
We find said ruling to be well founded. Respondent corporation incurred the subject advertising
expense in order to protect its brand franchise. We consider this as a capital outlay since it
created goodwill for its business and/or product. The P9,461,246 media advertising expense for
the promotion of a single product, almost one-half of petitioner corporations entire claim for
marketing expenses for that year under review, inclusive of other advertising and promotion
expenses of P2,678,328 and P1,548,614 for consumer promotion, is doubtlessly unreasonable.
It has been a long standing policy and practice of the Court to respect the conclusions of quasi-
judicial agencies such as the Court of Tax Appeals, a highly specialized body specifically created
for the purpose of reviewing tax cases. The CTA, by the nature of its functions, is dedicated
exclusively to the study and consideration of tax problems. It has necessarily developed an
expertise on the subject. We extend due consideration to its opinion unless there is an abuse or
improvident exercise of authority.
13
Since there is none in the case at bar, the Court adheres to
the findings of the CTA.
Accordingly, we find that the Court of Appeals committed reversible error when it declared the
subject media advertising expense to be deductible as an ordinary and necessary expense on the
ground that "it has not been established that the item being claimed as deduction is excessive." It
is not incumbent upon the taxing authority to prove that the amount of items being claimed is
unreasonable. The burden of proof to establish the validity of claimed deductions is on the
taxpayer.
14
In the present case, that burden was not discharged satisfactorily.
WHEREFORE, premises considered, the instant petition is GRANTED. The assailed decision
of the Court of Appeals is hereby REVERSED and SET ASIDE. Pursuant to Sections 248 and
249 of the Tax Code, respondent General Foods (Phils.), Inc. is hereby ordered to pay its
deficiency income tax in the amount of P2,635,141.42, plus 25% surcharge for late payment and
20% annual interest computed from August 25, 1989, the date of the denial of its protest, until
the same is fully paid.
SO ORDERED.











Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 124043 October 14, 1998
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S CHRISTIAN
ASSOCIATION OF THE PHILIPPINES, INC., respondents.

PANGANIBAN, J .:
Is the income derived from rentals of real property owned by the Young Men's Christian
Association of the Philippines, Inc. (YMCA) established as "a welfare, educational and
charitable non-profit corporation" subject to income tax under the National Internal Revenue
Code (NIRC) and the Constitution?
The Case
This is the main question raised before us in this petition for review on certiorari challenging
two Resolutions issued by the Court of Appeals
1
on September 28, 1995
2
and February 29,
1996
3
in CA-GR SP No. 32007. Both Resolutions affirmed the Decision of the Court of Tax
Appeals (CTA) allowing the YMCA to claim tax exemption on the latter's income from the lease
of its real property.
The Facts
The facts are undisputed.
4
Private Respondent YMCA is a non-stock, non-profit institution,
which conducts various programs and activities that are beneficial to the public, especially the
young people, pursuant to its religious, educational and charitable objectives.
In 1980, private respondent earned, among others, an income of P676,829.80 from leasing out a
portion of its premises to small shop owners, like restaurants and canteen operators, and
P44,259.00 from parking fees collected from non-members. On July 2, 1984, the commissioner
of internal revenue (CIR) issued an assessment to private respondent, in the total amount of
P415,615.01 including surcharge and interest, for deficiency income tax, deficiency expanded
withholding taxes on rentals and professional fees and deficiency withholding tax on wages.
Private respondent formally protested the assessment and, as a supplement to its basic protest,
filed a letter dated October 8, 1985. In reply, the CIR denied the claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition for review at the Court of Tax
Appeals (CTA) on March 14, 1989. In due course, the CTA issued this ruling in favor of the
YMCA:
. . . [T]he leasing of [private respondent's] facilities to small shop owners, to
restaurant and canteen operators and the operation of the parking lot are
reasonably incidental to and reasonably necessary for the accomplishment of the
objectives of the [private respondents]. It appears from the testimonies of the
witnesses for the [private respondent] particularly Mr. James C. Delote, former
accountant of YMCA, that these facilities were leased to members and that they
have to service the needs of its members and their guests. The rentals were
minimal as for example, the barbershop was only charged P300 per month. He
also testified that there was actually no lot devoted for parking space but the
parking was done at the sides of the building. The parking was primarily for
members with stickers on the windshields of their cars and they charged P.50 for
non-members. The rentals and parking fees were just enough to cover the costs of
operation and maintenance only. The earning[s] from these rentals and parking
charges including those from lodging and other charges for the use of the
recreational facilities constitute [the] bulk of its income which [is] channeled to
support its many activities and attainment of its objectives. As pointed out earlier,
the membership dues are very insufficient to support its program. We find it
reasonably necessary therefore for [private respondent] to make [the] most out
[of] its existing facilities to earn some income. It would have been different if
under the circumstances, [private respondent] will purchase a lot and convert it to
a parking lot to cater to the needs of the general public for a fee, or construct a
building and lease it out to the highest bidder or at the market rate for commercial
purposes, or should it invest its funds in the buy and sell of properties, real or
personal. Under these circumstances, we could conclude that the activities are
already profit oriented, not incidental and reasonably necessary to the pursuit of
the objectives of the association and therefore, will fall under the last paragraph of
Section 27 of the Tax Code and any income derived therefrom shall be taxable.
Considering our findings that [private respondent] was not engaged in the
business of operating or contracting [a] parking lot, we find no legal basis also for
the imposition of [a] deficiency fixed tax and [a] contractor's tax in the amount[s]
of P353.15 and P3,129.73, respectively.
xxx xxx xxx
WHEREFORE, in view of all the foregoing, the following assessments are hereby
dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractor's Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax on Wages P33,058.82
plus 10% surcharge and 20% interest per annum from July 2, 1984 until fully paid
but not to exceed three (3) years pursuant to Section 51(e)(2) & (3) of the
National Internal Revenue Code effective as of 1984.
5

Dissatisfied with the CTA ruling, the CIR elevated the case to the Court of Appeals (CA). In its
Decision of February 16, 1994, the CA
6
initially decided in favor of the CIR and disposed of the
appeal in the following manner:
Following the ruling in the afore-cited cases of Province of Abra vs.
Hernando and Abra Valley College Inc. vs. Aquino, the ruling of the respondent
Court of Tax Appeals that "the leasing of petitioner's (herein respondent's)
facilities to small shop owners, to restaurant and canteen operators and the
operation of the parking lot are reasonably incidental to and reasonably necessary
for the accomplishment of the objectives of the petitioners, and the income
derived therefrom are tax exempt, must be reversed.
WHEREFORE, the appealed decision is hereby REVERSED in so far as it
dismissed the assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractor's Tax P 3,129.23, &
1980 Deficiency Income Tax P 372,578.20
but the same is AFFIRMED in all other respect.
7

Aggrieved, the YMCA asked for reconsideration based on the following grounds:
I
The findings of facts of the Public Respondent Court of Tax Appeals being
supported by substantial evidence [are] final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent exempting [p]rivate [r]espondent
from the income on rentals of small shops and parking fees [are] in accord with
the applicable law and jurisprudence.
8

Finding merit in the Motion for Reconsideration filed by the YMCA, the CA reversed itself and
promulgated on September 28, 1995 its first assailed Resolution which, in part, reads:
The Court cannot depart from the CTA's findings of fact, as they are supported by
evidence beyond what is considered as substantial.
xxx xxx xxx
The second ground raised is that the respondent CTA did not err in saying that the
rental from small shops and parking fees do not result in the loss of the
exemption. Not even the petitioner would hazard the suggestion that YMCA is
designed for profit. Consequently, the little income from small shops and parking
fees help[s] to keep its head above the water, so to speak, and allow it to continue
with its laudable work.
The Court, therefore, finds the second ground of the motion to be meritorious and
in accord with law and jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED; the respondent
CTA's decision is AFFIRMED in toto.
9

The internal revenue commissioner's own Motion for Reconsideration was denied by Respondent
Court in its second assailed Resolution of February 29, 1996. Hence, this petition for review
under Rule 45 of the Rules of Court.
10

The Issues
Before us, petitioner imputes to the Court of Appeals the following errors:
I
In holding that it had departed from the findings of fact of Respondent Court of
Tax Appeals when it rendered its Decision dated February 16, 1994; and
II
In affirming the conclusion of Respondent Court of Tax Appeals that the income
of private respondent from rentals of small shops and parking fees [is] exempt
from taxation.
11

This Court's Ruling
The petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA Decision reversed the factual
findings of the CTA. On the other hand, petitioner argues that the CA merely reversed the
"ruling of the CTA that the leasing of private respondent's facilities to small shop owners, to
restaurant and canteen operators and the operation of parking lots are reasonably incidental to
and reasonably necessary for the accomplishment of the objectives of the private respondent and
that the income derived therefrom are tax exempt."
12
Petitioner insists that what the appellate
court reversed was the legal conclusion, not the factual finding, of the CTA.
13
The commissioner
has a point.
Indeed, it is a basic rule in taxation that the factual findings of the CTA, when supported by
substantial evidence, will be disturbed on appeal unless it is shown that the said court committed
gross error in the appreciation of facts.
14
In the present case, this Court finds that the February
16, 1994 Decision of the CA did not deviate from this rule. The latter merely applied the law to
the facts as found by the CTA and ruled on the issue raised by the CIR: "Whether or not the
collection or earnings of rental income from the lease of certain premises and income earned
from parking fees shall fall under the last paragraph of Section 27 of the National Internal
Revenue Code of 1977, as amended."
15

Clearly, the CA did not alter any fact or evidence. It merely resolved the aforementioned issue,
as indeed it was expected to. That it did so in a manner different from that of the CTA did not
necessarily imply a reversal of factual findings.
The distinction between a question of law and a question of fact is clear-cut. It has been held that
"[t]here is a question of law in a given case when the doubt or difference arises as to what the
law is on a certain state of facts; there is a question of fact when the doubt or difference arises as
to the truth or falsehood of alleged facts."
16
In the present case, the CA did not doubt, much less
change, the facts narrated by the CTA. It merely applied the law to the facts. That its
interpretation or conclusion is different from that of the CTA is not irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA from its real estate subject
to tax? At the outset, we set forth the relevant provision of the NIRC:
Sec. 27. Exemptions from tax on corporations. The following organizations
shall not be taxed under this Title in respect to income received by them as such

xxx xxx xxx
(g) Civic league or organization not organized for profit but operated exclusively
for the promotion of social welfare;
(h) Club organized and operated exclusively for pleasure, recreation, and other
non-profitable purposes, no part of the net income of which inures to the benefit
of any private stockholder or member;
xxx xxx xxx
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 the tax
imposed under this Code. (as amended by Pres. Decree No. 1457)
Petitioner argues that while the income received by the organizations enumerated in Section 27
(now Section 26) of the NIRC is, as a rule, exempted from the payment of tax "in respect to
income received by them as such," the exemption does not apply to income derived ". . . 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 . . . ."
Petitioner adds that "rental income derived by a tax-exempt organization from the lease of its
properties, real or personal, [is] not, therefore, exempt from income taxation, even if such
income [is] exclusively used for the accomplishment of its objectives."
17
We agree with the
commissioner.
Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict
in interpretation in construing tax exemptions.
18
Furthermore, a claim of statutory exemption
from taxation should be manifest. and unmistakable from the language of the law on which it is
based. Thus, the claimed exemption "must expressly be granted in a statute stated in a language
too clear to be mistaken."
19

In the instant case, the exemption claimed by the YMCA is expressly disallowed by the very
wording of the last paragraph of then Section 27 of the NIRC which mandates that the income of
exempt organizations (such as the YMCA) from any of their properties, real or personal, be
subject to the tax imposed by the same Code. Because the last paragraph of said section
unequivocally subjects to tax the rent income of the YMCA from its real property,
20
the Court is
duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted
attempt at construction.
It is axiomatic that where the language of the law is clear and unambiguous, its express terms
must be applied.
21
Parenthetically, a consideration of the question of construction must not even
begin, particularly when such question is on whether to apply a strict construction or a liberal
one on statutes that grant tax exemptions to "religious, charitable and educational propert[ies] or
institutions."
22

The last paragraph of Section 27, the YMCA argues, should be "subject to the qualification that
the income from the properties must arise from activities 'conducted for profit' before it may be
considered taxable."
23
This argument is erroneous. As previously stated, a reading of said
paragraph ineludibly shows that the income from any property of exempt organizations, as well
as that arising from any activity it conducts for profit, is taxable. The phrase "any of their
activities conducted for profit" does not qualify the word "properties." This makes from the
property of the organization taxable, regardless of how that income is used whether for profit
or for lofty non-profit purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals committed reversible
error when it allowed, on reconsideration, the tax exemption claimed by YMCA on income it
derived from renting out its real property, on the solitary but unconvincing ground that the said
income is not collected for profit but is merely incidental to its operation. The law does not make
a distinction. The rental income is taxable regardless of whence such income is derived and how
it is used or disposed of. Where the law does not distinguish, neither should we.
Constitutional Provisions
On Taxation
Invoking not only the NIRC but also the fundamental law, private respondent submits that
Article VI, Section 28 of par. 3 of the 1987 Constitution,
24
exempts "charitable institutions"
from the payment not only of property taxes but also of income tax from any source.
25
In
support of its novel theory, it compares the use of the words "charitable institutions," "actually"
and "directly" in the 1973 and the 1987 Constitutions, on the one hand; and in Article VI,
Section 22, par. 3 of the 1935 Constitution, on the other hand.
26

Private respondent enunciates three points. First, the present provision is divisible into two
categories: (1) "[c]haritable institutions, churches and parsonages or convents appurtenant
thereto, mosques and non-profit cemeteries," the incomes of which are, from whatever source, all
tax-exempt;
27
and (2) "[a]ll lands, buildings and improvements actually and directly used for
religious, charitable or educational purposes," which are exempt only from property
taxes.
28
Second, Lladoc v. Commissioner of Internal Revenue,
29
which limited the exemption
only to the payment of property taxes, referred to the provision of the 1935 Constitution and not
to its counterparts in the 1973 and the 1987 Constitutions.
30
Third, the phrase "actually, directly
and exclusively used for religious, charitable or educational purposes" refers not only to "all
lands, buildings and improvements," but also to the above-quoted first category which includes
charitable institutions like the private respondent.
31

The Court is not persuaded. The debates, interpellations and expressions of opinion of the
framers of the Constitution reveal their intent which, in turn, may have guided the people in
ratifying the Charter.
32
Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional commissioner, who is now a
member of this Court, stressed during the Concom debates that ". . . 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."
33
Father Joaquin G. Bernas, an eminent authority on the Constitution and also a
member of the Concom, adhered to the same view that the exemption created by said provision
pertained only to property taxes.
34

In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating that "[t]he tax exemption
covers property taxes only."
35
Indeed, the income tax exemption claimed by private respondent
finds no basis in Article VI, Section 26, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the Character,
36
claiming that
the YMCA "is a non-stock, non-profit educational institution whose revenues and assets are used
actually, directly and exclusively for educational purposes so it is exempt from taxes on its
properties and income."
37
We reiterate that private respondent is exempt from the payment of
property tax, but not income tax on the rentals from its property. The bare allegation alone that it
is a non-stock, non-profit educational institution is insufficient to justify its exemption from the
payment of income tax.
As previously discussed, laws allowing tax exemption are construed strictissimi juris. Hence, for
the YMCA to be granted the exemption it claims under the aforecited provision, it must prove
with substantial evidence that (1) it falls under the classification non-stock, non-profit
educational institution; and (2) the income it seeks to be exempted from taxation is
used actually, directly, and exclusively for educational purposes. However, the Court notes that
not a scintilla of evidence was submitted by private respondent to prove that it met the said
requisites.
Is the YMCA an educational institution within the purview of Article XIV, Section 4, par. 3 of
the Constitution? We rule that it is not. The term "educational institution" or "institution of
learning" has acquired a well-known technical meaning, of which the members of the
Constitutional Commission are deemed cognizant.
38
Under the Education Act of 1982, such
term refers to schools.
39
The school system is synonymous with formal education,
40
which
"refers to the hierarchically structured and chronologically graded learnings organized and
provided by the formal school system and for which certification is required in order for the
learner to progress through the grades or move to the higher levels."
41
The Court has examined
the "Amended Articles of Incorporation" and "By-Laws"
43
of the YMCA, but found nothing in
them that even hints that it is a school or an educational institution.
44

Furthermore, under the Education Act of 1982, even non-formal education is understood to be
school-based and "private auspices such as foundations and civic-spirited organizations" are
ruled out.
45
It is settled that the term "educational institution," when used in laws granting tax
exemptions, refers to a ". . . school seminary, college or educational establishment . . .
."
46
Therefore, the private respondent cannot be deemed one of the educational institutions
covered by the constitutional provision under consideration.
. . . Words used in the Constitution are to be taken in their ordinary acceptation.
While in its broadest and best sense education embraces all forms and phases of
instruction, improvement and development of mind and body, and as well of
religious and moral sentiments, yet in the common understanding and application
it means a place where systematic instruction in any or all of the useful branches
of learning is given by methods common to schools and institutions of learning.
That we conceive to be the true intent and scope of the term [educational
institutions,] as used in the
Constitution.
47

Moreover, without conceding that Private Respondent YMCA is an educational institution, the
Court also notes that the former did not submit proof of the proportionate amount of the subject
income that was actually, directly and exclusively used for educational purposes. Article XIII,
Section 5 of the YMCA by-laws, which formed part of the evidence submitted, is patently
insufficient, since the same merely signified that "[t]he net income derived from the rentals of
the commercial buildings shall be apportioned to the Federation and Member Associations as the
National Board may decide."
48
In sum, we find no basis for granting the YMCA exemption from
income tax under the constitutional provision invoked.
Cases Cited by Private
Respondent Inapplicable
The cases
49
relied on by private respondent do not support its cause. YMCA of Manila v.
Collector of Internal Revenue
50
and Abra Valley College, Inc. v. Aquino
51
are not applicable,
because the controversy in both cases involved exemption from the payment of property tax, not
income tax. Hospital de San Juan de Dios, Inc. v. Pasay City
52
is not in point either, because it
involves a claim for exemption from the payment of regulatory fees, specifically electrical
inspection fees, imposed by an ordinance of Pasay City an issue not at all related to that
involved in a claimed exemption from the payment of income taxes imposed on property leases.
In Jesus Sacred Heart College v. Com. of Internal Revenue,
53
the party therein, which claimed
an exemption from the payment of income tax, was an educational institution which submitted
substantial evidence that the income subject of the controversy had been devoted or used solely
for educational purposes. On the other hand, the private respondent in the present case has not
given any proof that it is an educational institution, or that part of its rent income is actually,
directly and exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy with private respondent. It
appreciates the nobility of its cause. However, the Court's power and function are limited merely
to applying the law fairly and objectively. It cannot change the law or bend it to suit its
sympathies and appreciations. Otherwise, it would be overspilling its role and invading the realm
of legislation.
We concede that private respondent deserves the help and the encouragement of the government.
It needs laws that can facilitate, and not frustrate, its humanitarian tasks. But the Court regrets
that, given its limited constitutional authority, it cannot rule on the wisdom or propriety of
legislation. That prerogative belongs to the political departments of government. Indeed, some of
the members of the Court may even believe in the wisdom and prudence of granting more tax
exemptions to private respondent. But such belief, however well-meaning and sincere, cannot
bestow upon the Court the power to change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court of Appeals dated
September 28, 1995 and February 29, 1996 are hereby REVERSED and SET ASIDE. The
Decision of the Court of Appeals dated February 16, 1995 is REINSTATED, insofar as it ruled
that the income derived by petitioner from rentals of its real property is subject to income tax. No
pronouncement as to costs.
SO ORDERED.


















Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 153793 August 29, 2006
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman (Attorney-in-fact) Respondent.
D E C I S I O N
YNARES-SANTIAGO, J .:
Petitioner Commissioner of Internal Revenue (CIR) appeals from the January 18, 2002
Decision
1
of the Court of Appeals in CA-G.R. SP No. 59794, which granted the tax refund of
respondent Juliane Baier-Nickel and reversed the June 28, 2000 Decision
2
of the Court of Tax
Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails the May 8, 2002 Resolution
3
of
the Court of Appeals denying its motion for reconsideration.
The facts show that respondent Juliane Baier-Nickel, a non-resident German citizen, is the
President of JUBANITEX, Inc., a domestic corporation engaged in "[m]anufacturing, marketing
on wholesale only, buying or otherwise acquiring, holding, importing and exporting, selling and
disposing embroidered textile products."
4
Through JUBANITEXs General Manager, Marina Q.
Guzman, the corporation appointed and engaged the services of respondent as commission agent.
It was agreed that respondent will receive 10% sales commission on all sales actually concluded
and collected through her efforts.
5

In 1995, respondent received the amount of P1,707,772.64, representing her sales commission
income from which JUBANITEX withheld the corresponding 10% withholding tax amounting to
P170,777.26, and remitted the same to the Bureau of Internal Revenue (BIR). On October 17,
1997, respondent filed her 1995 income tax return reporting a taxable income of P1,707,772.64
and a tax due of P170,777.26.
6

On April 14, 1998, respondent filed a claim to refund the amount of P170,777.26 alleged to have
been mistakenly withheld and remitted by JUBANITEX to the BIR. Respondent contended that
her sales commission income is not taxable in the Philippines because the same was a
compensation for her services rendered in Germany and therefore considered as income from
sources outside the Philippines.
The next day, April 15, 1998, she filed a petition for review with the CTA contending that no
action was taken by the BIR on her claim for refund.
7
On June 28, 2000, the CTA rendered a
decision denying her claim. It held that the commissions received by respondent were actually
her remuneration in the performance of her duties as President of JUBANITEX and not as a
mere sales agent thereof. The income derived by respondent is therefore an income taxable in the
Philippines because JUBANITEX is a domestic corporation.
On petition with the Court of Appeals, the latter reversed the Decision of the CTA, holding that
respondent received the commissions as sales agent of JUBANITEX and not as President
thereof. And since the "source" of income means the activity or service that produce the income,
the sales commission received by respondent is not taxable in the Philippines because it arose
from the marketing activities performed by respondent in Germany. The dispositive portion of
the appellate courts Decision, reads:
WHEREFORE, premises considered, the assailed decision of the Court of Tax Appeals dated
June 28, 2000 is hereby REVERSED and SET ASIDE and the respondent court is hereby
directed to grant petitioner a tax refund in the amount of Php 170,777.26.
SO ORDERED.
8

Petitioner filed a motion for reconsideration but was denied.
9
Hence, the instant recourse.
Petitioner maintains that the income earned by respondent is taxable in the Philippines because
the source thereof is JUBANITEX, a domestic corporation located in the City of Makati. It thus
implied that source of income means the physical source where the income came from. It further
argued that since respondent is the President of JUBANITEX, any remuneration she received
from said corporation should be construed as payment of her overall managerial services to the
company and should not be interpreted as a compensation for a distinct and separate service as a
sales commission agent.
Respondent, on the other hand, claims that the income she received was payment for her
marketing services. She contended that income of nonresident aliens like her is subject to tax
only if the source of the income is within the Philippines. Source, according to respondent is
the situs of the activity which produced the income. And since the source of her income were her
marketing activities in Germany, the income she derived from said activities is not subject to
Philippine income taxation.
The issue here is whether respondents sales commission income is taxable in the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC), states:
SEC. 25. Tax on Nonresident Alien Individual.
(A) Nonresident Alien Engaged in Trade or Business Within the Philippines.
(1) In General. A nonresident alien individual engaged in trade or business in the Philippines
shall be subject to an income tax in the same manner as an individual citizen and a resident alien
individual, on taxable income received from all sources within the Philippines. A nonresident
alien individual who shall come to the Philippines and stay therein for an aggregate period of
more than one hundred eighty (180) days during any calendar year shall be deemed a
nonresident alien doing business in the Philippines, Section 22(G) of this Code
notwithstanding.
x x x x
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines.
There shall be levied, collected and paid for each taxable year upon the entire income received
from all sources within the Philippines by every nonresident alien individual not engaged in trade
or business within the Philippines x x x a tax equal to twenty-five percent (25%) of such income.
x x x
Pursuant to the foregoing provisions of the NIRC, non-resident aliens, whether or not engaged in
trade or business, are subject to Philippine income taxation on their income received from all
sources within the Philippines. Thus, the keyword in determining the taxability of non-resident
aliens is the incomes "source." In construing the meaning of "source" in Section 25 of the
NIRC, resort must be had on the origin of the provision.
The first Philippine income tax law enacted by the Philippine Legislature was Act No.
2833,
10
which took effect on January 1, 1920.
11
Under Section 1 thereof, nonresident aliens are
likewise subject to tax on income "from all sources within the Philippine Islands," thus
SECTION 1. (a) There shall be levied, assessed, collected, and paid annually upon the entire net
income received in the preceding calendar year from all sources by every individual, a citizen or
resident of the Philippine Islands, a tax of two per centum upon such income; and a like tax shall
be levied, assessed, collected, and paid annually upon the entire net income received in the
preceding calendar year from all sources within the Philippine Islands by every individual, a
nonresident alien, including interest on bonds, notes, or other interest-bearing obligations of
residents, corporate or otherwise.
Act No. 2833 substantially reproduced the United States (U.S.) Revenue Law of 1916 as
amended by U.S. Revenue Law of 1917.
12
Being a law of American origin, the authoritative
decisions of the official charged with enforcing it in the U.S. have peculiar persuasive force in
the Philippines.
13

The Internal Revenue Code of the U.S. enumerates specific types of income to be treated as from
sources within the U.S. and specifies when similar types of income are to be treated as from
sources outside the U.S.
14
Under the said Code, compensation for labor and personal services
performed in the U.S., is generally treated as income from U.S. sources; while compensation for
said services performed outside the U.S., is treated as income from sources outside the U.S.
15
A
similar provision is found in Section 42 of our NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
x x x x
(3) Services. Compensation for labor or personal services performed in the Philippines;
x x x x
(C) Gross Income From Sources Without the Philippines. x x x
x x x x
(3) Compensation for labor or personal services performed without the Philippines;
The following discussions on sourcing of income under the Internal Revenue Code of the U.S.,
are instructive:
The Supreme Court has said, in a definition much quoted but often debated, that income may be
derived from three possible sources only: (1) capital and/or (2) labor; and/or (3) the sale of
capital assets. While the three elements of this attempt at definition need not be accepted as all-
inclusive, they serve as useful guides in any inquiry into whether a particular item is from
"sources within the United States" and suggest an investigation into the nature and location of
the activities or property which produce the income.
If the income is from labor the place where the labor is done should be decisive; if it is done in
this country, the income should be from "sources within the United States." If the income is from
capital, the place where the capital is employed should be decisive; if it is employed in this
country, the income should be from "sources within the United States." If the income is from the
sale of capital assets, the place where the sale is made should be likewise decisive.
Much confusion will be avoided by regarding the term "source" in this fundamental light. It is
not a place, it is an activity or property. As such, it has a situs or location, and if that situs or
location is within the United States the resulting income is taxable to nonresident aliens and
foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913
basis of taxing nonresident aliens and foreign corporations and to make the test of taxability the
"source," or situs of the activities or property which produce the income. The result is that, on the
one hand, nonresident aliens and nonresident foreign corporations are prevented from deriving
income from the United States free from tax, and, on the other hand, there is no undue imposition
of a tax when the activities do not take place in, and the property producing income is not
employed in, this country. Thus, if income is to be taxed, the recipient thereof must be resident
within the jurisdiction, or the property or activities out of which the income issues or is derived
must be situated within the jurisdiction so that the source of the income may be said to have a
situs in this country.
The underlying theory is that the consideration for taxation is protection of life and property and
that the income rightly to be levied upon to defray the burdens of the United States Government
is that income which is created by activities and property protected by this Government or
obtained by persons enjoying that protection.
16

The important factor therefore which determines the source of income of personal services is not
the residence of the payor, or the place where the contract for service is entered into, or the place
of payment, but the place where the services were actually rendered.
17

In Alexander Howden & Co., Ltd. v. Collector of Internal Revenue,
18
the Court addressed the
issue on the applicable source rule relating to reinsurance premiums paid by a local insurance
company to a foreign insurance company in respect of risks located in the Philippines. It was
held therein that the undertaking of the foreign insurance company to indemnify the local
insurance company is the activity that produced the income. Since the activity took place in the
Philippines, the income derived therefrom is taxable in our jurisdiction. Citing Mertens, The Law
of Federal Income Taxation, the Court emphasized that the technical meaning of source of
income is the property, activity or service that produced the same. Thus:
The source of an income is the property, activity or service that produced the income. The
reinsurance premiums remitted to appellants by virtue of the reinsurance contracts, accordingly,
had for their source the undertaking to indemnify Commonwealth Insurance Co. against liability.
Said undertaking is the activity that produced the reinsurance premiums, and the same took place
in the Philippines. x x x the reinsured, the liabilities insured and the risk originally underwritten
by Commonwealth Insurance Co., upon which the reinsurance premiums and indemnity were
based, were all situated in the Philippines. x x x
19

In Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC),
20
the
issue was whether BOAC, a foreign airline company which does not maintain any flight to and
from the Philippines is liable for Philippine income taxation in respect of sales of air tickets in
the Philippines, through a general sales agent relating to the carriage of passengers and cargo
between two points both outside the Philippines. Ruling in the affirmative, the Court applied the
case of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue, and reiterated the rule
that the source of income is that "activity" which produced the income. It was held that the "sale
of tickets" in the Philippines is the "activity" that produced the income and therefore BOAC
should pay income tax in the Philippines because it undertook an income producing activity in
the country.
Both the petitioner and respondent cited the case of Commissioner of Internal Revenue v. British
Overseas Airways Corporation in support of their arguments, but the correct interpretation of the
said case favors the theory of respondent that it is the situs of the activity that determines
whether such income is taxable in the Philippines. The conflict between the majority and the
dissenting opinion in the said case has nothing to do with the underlying principle of the law on
sourcing of income. In fact, both applied the case of Alexander Howden & Co., Ltd. v. Collector
of Internal Revenue. The divergence in opinion centered on whether the sale of tickets in the
Philippines is to be construed as the "activity" that produced the income, as viewed by the
majority, or merely the physical source of the income, as ratiocinated by Justice Florentino P.
Feliciano in his dissent. The majority, through Justice Ameurfina Melencio-Herrera, as ponente,
interpreted the sale of tickets as a business activity that gave rise to the income of BOAC.
Petitioner cannot therefore invoke said case to support its view that source of income is the
physical source of the money earned. If such was the interpretation of the majority, the Court
would have simply stated that source of income is not the business activity of BOAC but the
place where the person or entity disbursing the income is located or where BOAC physically
received the same. But such was not the import of the ruling of the Court. It even explained in
detail the business activity undertaken by BOAC in the Philippines to pinpoint the taxable
activity and to justify its conclusion that BOAC is subject to Philippine income taxation. Thus
BOAC, during the periods covered by the subject assessments, maintained a general sales agent
in the Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and
issuing tickets; (2) breaking down the whole trip into series of trips each trip in the series
corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the basis of their participation in the
services rendered through the mode of interline settlement as prescribed by Article VI of the
Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the functions
which are normally incident to, and are in progressive pursuit of, the purpose and object of its
organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is
the very lifeblood of the airline business, the generation of sales being the paramount objective.
There should be no doubt then that BOAC was "engaged in" business in the Philippines through
a local agent during the period covered by the assessments. x x x
21

x x x x
The source of an income is the property, activity or service that produced the income. For the
source of income to be considered as coming from the Philippines, it is sufficient that the income
is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the
Philippines is the activity that produces the income. The tickets exchanged hands here and
payments for fares were also made here in Philippine currency. The situs of the source of
payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the Philippine government. In consideration of
such protection, the flow of wealth should share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a common carrier, it
constitutes the contract between the ticket-holder and the carrier. It gives rise to the obligation of
the purchaser of the ticket to pay the fare and the corresponding obligation of the carrier to
transport the passenger upon the terms and conditions set forth thereon. The ordinary ticket
issued to members of the traveling public in general embraces within its terms all the elements to
constitute it a valid contract, binding upon the parties entering into the relationship.
22

The Court reiterates the rule that "source of income" relates to the property, activity or service
that produced the income. With respect to rendition of labor or personal service, as in the instant
case, it is the place where the labor or service was performed that determines the source of the
income. There is therefore no merit in petitioners interpretation which equates source of income
in labor or personal service with the residence of the payor or the place of payment of the
income.
Having disposed of the doctrine applicable in this case, we will now determine whether
respondent was able to establish the factual circumstances showing that her income is exempt
from Philippine income taxation.
The decisive factual consideration here is not the capacity in which respondent received the
income, but the sufficiency of evidence to prove that the services she rendered were performed in
Germany. Though not raised as an issue, the Court is clothed with authority to address the same
because the resolution thereof will settle the vital question posed in this controversy.
23

The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimi jurisagainst the taxpayer.
24
To those therefore, who claim a refund rest the
burden of proving that the transaction subjected to tax is actually exempt from taxation.
In the instant case, the appointment letter of respondent as agent of JUBANITEX stipulated that
the activity or the service which would entitle her to 10% commission income, are "sales actually
concluded and collected through [her] efforts."
25
What she presented as evidence to prove that
she performed income producing activities abroad, were copies of documents she allegedly faxed
to JUBANITEX and bearing instructions as to the sizes of, or designs and fabrics to be used in
the finished products as well as samples of sales orders purportedly relayed to her by clients.
However, these documents do not show whether the instructions or orders faxed ripened into
concluded or collected sales in Germany. At the very least, these pieces of evidence show that
while respondent was in Germany, she sent instructions/orders to JUBANITEX. As to whether
these instructions/orders gave rise to consummated sales and whether these sales were truly
concluded in Germany, respondent presented no such evidence. Neither did she establish
reasonable connection between the orders/instructions faxed and the reported monthly sales
purported to have transpired in Germany.
The paucity of respondents evidence was even noted by Atty. Minerva Pacheco, petitioners
counsel at the hearing before the Court of Tax Appeals. She pointed out that respondent
presented no contracts or orders signed by the customers in Germany to prove the sale
transactions therein.
26
Likewise, in her Comment to the Formal Offer of respondents evidence,
she objected to the admission of the faxed documents bearing instruction/orders marked as
Exhibits "R,"
27
"V," "W", and "X,"
28
for being self serving.
29
The concern raised by petitioners
counsel as to the absence of substantial evidence that would constitute proof that the sale
transactions for which respondent was paid commission actually transpired outside the
Philippines, is relevant because respondent stayed in the Philippines for 89 days in 1995. Except
for the months of July and September 1995, respondent was in the Philippines in the months of
March, May, June, and August 1995,
30
the same months when she earned commission income
for services allegedly performed abroad. Furthermore, respondent presented no evidence to
prove that JUBANITEX does not sell embroidered products in the Philippines and that her
appointment as commission agent is exclusively for Germany and other European markets.
In sum, we find that the faxed documents presented by respondent did not constitute substantial
evidence, or that relevant evidence that a reasonable mind might accept as adequate to support
the conclusion
31
that it was in Germany where she performed the income producing service
which gave rise to the reported monthly sales in the months of March and May to September of
1995. She thus failed to discharge the burden of proving that her income was from sources
outside the Philippines and exempt from the application of our income tax law. Hence, the claim
for tax refund should be denied.
The Court notes that in Commissioner of Internal Revenue v. Baier-Nickel,
32
a previous case for
refund of income withheld from respondents remunerations for services rendered abroad, the
Court in a Minute Resolution dated February 17, 2003,
33
sustained the ruling of the Court of
Appeals that respondent is entitled to refund the sum withheld from her sales commission
income for the year 1994. This ruling has no bearing in the instant controversy because the
subject matter thereof is the income of respondent for the year 1994 while, the instant case deals
with her income in 1995. Otherwise, stated, res judicata has no application here. Its elements
are: (1) there must be a final judgment or order; (2) the court that rendered the judgment must
have jurisdiction over the subject matter and the parties; (3) it must be a judgment on the merits;
(4) there must be between the two cases identity of parties, of subject matter, and of causes of
action.
34
The instant case, however, did not satisfy the fourth requisite because there is no
identity as to the subject matter of the previous and present case of respondent which deals with
income earned and activities performed for different taxable years.
WHEREFORE, the petition is GRANTED and the January 18, 2002 Decision and May 8, 2002
Resolution of the Court of Appeals in CA-G.R. SP No. 59794, are REVERSED and SET
ASIDE. The June 28, 2000 Decision of the Court of Tax Appeals in C.T.A. Case No. 5633,
which denied respondents claim for refund of income tax paid for the year 1995
is REINSTATED.
SO ORDERED.

EN BANC
[G. R. No. 119775. October 24, 2003]
JOHN HAY PEOPLES ALTERNATIVE COALITION, MATEO CARIO FOUNDATION INC., CENTER FOR ALTERNATIVE
SYSTEMS FOUNDATION INC., REGINA VICTORIA A. BENAFIN REPRESENTED AND JOINED BY HER MOTHER
MRS. ELISA BENAFIN, IZABEL M. LUYK REPRESENTED AND JOINED BY HER MOTHER MRS. REBECCA
MOLINA LUYK, KATHERINE PE REPRESENTED AND JOINED BY HER MOTHER ROSEMARIE G. PE, SOLEDAD
S. CAMILO, ALICIA C. PACALSO ALIAS KEVAB, BETTY I. STRASSER, RUBY C. GIRON, URSULA C. PEREZ
ALIAS BA-YAY, EDILBERTO T. CLARAVALL, CARMEN CAROMINA, LILIA G. YARANON, DIANE
MONDOC, petitioners, vs. VICTOR LIM, PRESIDENT, BASES CONVERSION DEVELOPMENT AUTHORITY; JOHN
HAY PORO POINT DEVELOPMENT CORPORATION, CITY OF BAGUIO, TUNTEX (B.V.I.) CO. LTD., ASIAWORLD
INTERNATIONALE GROUP, INC., DEPARTMENT OF ENVIRONMENT AND NATURAL RESOURCES, respondents.
D E C I S I O N
CARPIO MORALES, J .:
By the present petition for prohibition, mandamus and declaratory relief with prayer for a
temporary restraining order (TRO) and/or writ of preliminary injunction, petitioners assail, in the
main, the constitutionality of Presidential Proclamation No. 420, Series of 1994, CREATING
AND DESIGNATING A PORTION OF THE AREA COVERED BY THE FORMER CAMP
JOHN [HAY] AS THE JOHN HAY SPECIAL ECONOMIC ZONE PURSUANT TO
REPUBLIC ACT NO. 7227.
Republic Act No. 7227, AN ACT ACCELERATING THE CONVERSION OF MILITARY
RESERVATIONS INTO OTHER PRODUCTIVE USES, CREATING THE BASES
CONVERSION AND DEVELOPMENT AUTHORITY FOR THIS PURPOSE, PROVIDING
FUNDS THEREFOR AND FOR OTHER PURPOSES, otherwise known as the Bases
Conversion and Development Act of 1992, which was enacted on March 13, 1992, set out the
policy of the government to accelerate the sound and balanced conversion into alternative
productive uses of the former military bases under the 1947 Philippines-United States of
America Military Bases Agreement, namely, the Clark and Subic military reservations as well as
their extensions including the John Hay Station (Camp John Hay or the camp) in the City of
Baguio.
[1]

As noted in its title, R.A. No. 7227 created public respondent Bases Conversion and
Development Authority
[2]
(BCDA), vesting it with powers pertaining to the multifarious aspects
of carrying out the ultimate objective of utilizing the base areas in accordance with the declared
government policy.
R.A. No. 7227 likewise created the Subic Special Economic [and Free Port] Zone (Subic
SEZ) the metes and bounds of which were to be delineated in a proclamation to be issued by the
President of the Philippines.
[3]

R.A. No. 7227 granted the Subic SEZ incentives ranging from tax and duty-free
importations, exemption of businesses therein from local and national taxes, to other hallmarks
of a liberalized financial and business climate.
[4]

And R.A. No. 7227 expressly gave authority to the President to create through executive
proclamation, subject to the concurrence of the local government units directly affected, other
Special Economic Zones (SEZ) in the areas covered respectively by the Clark military
reservation, the Wallace Air Station in San Fernando, La Union, and Camp John Hay.
[5]

On August 16, 1993, BCDA entered into a Memorandum of Agreement and Escrow
Agreement with private respondents Tuntex (B.V.I.) Co., Ltd (TUNTEX) and Asiaworld
Internationale Group, Inc. (ASIAWORLD), private corporations registered under the laws of the
British Virgin Islands, preparatory to the formation of a joint venture for the development of
Poro Point in La Union and Camp John Hay as premier tourist destinations and recreation
centers. Four months later or on December 16, 1993, BCDA, TUNTEX and ASIAWORD
executed a Joint Venture Agreement
[6]
whereby they bound themselves to put up a joint venture
company known as the Baguio International Development and Management Corporation which
would lease areas within Camp John Hay and Poro Point for the purpose of turning such places
into principal tourist and recreation spots, as originally envisioned by the parties under their
Memorandum of Agreement.
The Baguio City government meanwhile passed a number of resolutions in response to the
actions taken by BCDA as owner and administrator of Camp John Hay.
By Resolution
[7]
of September 29, 1993, the Sangguniang Panlungsod of Baguio City
(the sanggunian) officially asked BCDA to exclude all the barangays partly or totally located
within Camp John Hay from the reach or coverage of any plan or program for its development.
By a subsequent Resolution
[8]
dated January 19, 1994, the sanggunian sought from BCDA
an abdication, waiver or quitclaim of its ownership over the home lots being occupied by
residents of nine (9) barangays surrounding the military reservation.
Still by another resolution passed on February 21, 1994, the sanggunian adopted and
submitted to BCDA a 15-point concept for the development of Camp John
Hay.
[9]
The sangguniansvision expressed, among other things, a kind of development that
affords protection to the environment, the making of a family-oriented type of tourist destination,
priority in employment opportunities for Baguio residents and free access to the base area,
guaranteed participation of the city government in the management and operation of the camp,
exclusion of the previously named nine barangays from the area for development, and liability
for local taxes of businesses to be established within the camp.
[10]

BCDA, TUNTEX and ASIAWORLD agreed to some, but rejected or modified the other
proposals of the sanggunian.
[11]
They stressed the need to declare Camp John Hay a SEZ as a
condition precedent to its full development in accordance with the mandate of R.A. No. 7227.
[12]

On May 11, 1994, the sanggunian passed a resolution requesting the Mayor to order the
determination of realty taxes which may otherwise be collected from real properties of Camp
John Hay.
[13]
The resolution was intended to intelligently guide the sanggunian in determining its
position on whether Camp John Hay be declared a SEZ, it (the sanggunian) being of the view
that such declaration would exempt the camps property and the economic activity therein from
local or national taxation.
More than a month later, however, the sanggunian passed Resolution No. 255, (Series of
1994),
[14]
seeking and supporting, subject to its concurrence, the issuance by then President
Ramos of a presidential proclamation declaring an area of 288.1 hectares of the camp as a SEZ in
accordance with the provisions of R.A. No. 7227. Together with this resolution was submitted a
draft of the proposed proclamation for consideration by the President.
[15]

On July 5, 1994 then President Ramos issued Proclamation No. 420,
[16]
the title of which
was earlier indicated, which established a SEZ on a portion of Camp John Hay and which reads
as follows:
x x x
Pursuant to the powers vested in me by the law and the resolution of concurrence by the City
Council of Baguio, I, FIDEL V. RAMOS, President of the Philippines, do hereby create and
designate a portion of the area covered by the former John Hay reservation as embraced,
covered, and defined by the 1947 Military Bases Agreement between the Philippines and the
United States of America, as amended, as the John Hay Special Economic Zone, and accordingly
order:
SECTION 1. Coverage of John Hay Special Economic Zone. The John Hay Special
Economic Zone shall cover the area consisting of Two Hundred Eighty Eight and one/tenth
(288.1) hectares, more or less, of the total of Six Hundred Seventy-Seven (677) hectares of the
John Hay Reservation, more or less, which have been surveyed and verified by the Department
of Environment and Natural Resources (DENR) as defined by the following technical
description:
A parcel of land, situated in the City of Baguio, Province of Benguet, Island of Luzon, and
particularly described in survey plans Psd-131102-002639 and Ccs-131102-000030 as approved
on 16 August 1993 and 26 August 1993, respectively, by the Department of Environment and
Natural Resources, in detail containing :
Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13, Lot 14, Lot 15, and Lot 20 of Ccs-131102-
000030
-and-
Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 8, Lot 9, Lot 10, Lot 11, Lot 14, Lot 15, Lot 16, Lot 17, and
Lot 18 of Psd-131102-002639 being portions of TCT No. T-3812, LRC Rec. No. 87.
With a combined area of TWO HUNDRED EIGHTY EIGHT AND ONE/TENTH HECTARES
(288.1 hectares); Provided that the area consisting of approximately Six and two/tenth (6.2)
hectares, more or less, presently occupied by the VOA and the residence of the Ambassador of
the United States, shall be considered as part of the SEZ only upon turnover of the properties to
the government of the Republic of the Philippines.
Sec. 2. Governing Body of the John Hay Special Economic Zone. Pursuant to Section 15 of
Republic Act No. 7227, the Bases Conversion and Development Authority is hereby established
as the governing body of the John Hay Special Economic Zone and, as such, authorized to
determine the utilization and disposition of the lands comprising it, subject to private rights, if
any, and in consultation and coordination with the City Government of Baguio after consultation
with its inhabitants, and to promulgate the necessary policies, rules, and regulations to govern
and regulate the zone thru the John Hay Poro Point Development Corporation, which is its
implementing arm for its economic development and optimum utilization.
Sec. 3. Investment Climate in John Hay Special Economic Zone. Pursuant to Section 5(m) and
Section 15 of Republic Act No. 7227, the John Hay Poro Point Development Corporation shall
implement all necessary policies, rules, and regulations governing the zone, including investment
incentives, in consultation with pertinent government departments. Among others, the zone shall
have all the applicable incentives of the Special Economic Zone under Section 12 of Republic
Act No. 7227 and those applicable incentives granted in the Export Processing Zones, the
Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and new investment
laws that may hereinafter be enacted.
Sec. 4. Role of Departments, Bureaus, Offices, Agencies and Instrumentalities. All Heads of
departments, bureaus, offices, agencies, and instrumentalities of the government are hereby
directed to give full support to Bases Conversion and Development Authority and/or its
implementing subsidiary or joint venture to facilitate the necessary approvals to expedite the
implementation of various projects of the conversion program.
Sec. 5. Local Authority. Except as herein provided, the affected local government units shall
retain their basic autonomy and identity.
Sec. 6. Repealing Clause. All orders, rules, and regulations, or parts thereof, which are
inconsistent with the provisions of this Proclamation, are hereby repealed, amended, or modified
accordingly.
Sec. 7. Effectivity. This proclamation shall take effect immediately.
Done in the City of Manila, this 5
th
day of July, in the year of Our Lord, nineteen hundred and
ninety-four.
The issuance of Proclamation No. 420 spawned the present petition
[17]
for
prohibition, mandamus and declaratory relief which was filed on April 25, 1995 challenging, in
the main, its constitutionality or validity as well as the legality of the Memorandum of
Agreement and Joint Venture Agreement between public respondent BCDA and private
respondents TUNTEX andASIAWORLD.
Petitioners allege as grounds for the allowance of the petition the following:
I. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1990 (sic) IN SO FAR
AS IT GRANTS TAX EXEMPTIONS IS INVALID AND ILLEGAL AS IT IS AN
UNCONSTITUTIONAL EXERCISE BY THE PRESIDENT OF A POWER
GRANTED ONLY TO THE LEGISLATURE.
II. PRESIDENTIAL PROCLAMATION NO. 420, IN SO FAR AS IT LIMITS THE
POWERS AND INTERFERES WITH THE AUTONOMY OF THE CITY OF
BAGUIO IS INVALID, ILLEGAL AND UNCONSTITUTIONAL.
III. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1994 IS
UNCONSTITUTIONAL IN THAT IT VIOLATES THE RULE THAT ALL
TAXES SHOULD BE UNIFORM AND EQUITABLE.
IV. THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND
BETWEEN PRIVATE AND PUBLIC RESPONDENTS BASES CONVERSION
DEVELOPMENT AUTHORITY HAVING BEENENTERED INTO ONLY BY
DIRECT NEGOTIATION IS ILLEGAL.
V. THE TERMS AND CONDITIONS OF THE MEMORANDUM OF
AGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE AND PUBLIC
RESPONDENT BASES CONVERSION DEVELOPMENT
AUTHORITY IS (sic) ILLEGAL.
VI. THE CONCEPTUAL DEVELOPMENT PLAN OF RESPONDENTS NOT
HAVING UNDERGONE ENVIRONMENTAL IMPACT ASSESSMENT IS
BEING ILLEGALLY CONSIDERED WITHOUT A VALID ENVIRONMENTAL
IMPACT ASSESSMENT.
A temporary restraining order and/or writ of preliminary injunction was prayed for to enjoin
BCDA, John Hay Poro Point Development Corporation and the city government from
implementing Proclamation No. 420, and TUNTEX and ASIAWORLD from proceeding with
their plan respecting Camp John Hays development pursuant to their Joint Venture Agreement
with BCDA.
[18]

Public respondents, by their separate Comments, allege as moot and academic the issues
raised by the petition, the questioned Memorandum of Agreement and Joint Venture Agreement
having already been deemed abandoned by the inaction of the parties thereto prior to the filing of
the petition as in fact, by letter of November 21, 1995, BCDA formally notified TUNTEX and
ASIAWORLD of the revocation of their said agreements.
[19]

In maintaining the validity of Proclamation No. 420, respondents contend that by extending
to the John Hay SEZ economic incentives similar to those enjoyed by the Subic SEZ which was
established under R.A. No. 7227, the proclamation is merely implementing the legislative intent
of said law to turn the US military bases into hubs of business activity or investment. They
underscore the point that the governments policy of bases conversion can not be achieved
without extending the same tax exemptions granted by R.A. No. 7227 to Subic SEZ to other
SEZs.
Denying that Proclamation No. 420 is in derogation of the local autonomy of Baguio City or
that it is violative of the constitutional guarantee of equal protection, respondents assail
petitioners lack of standing to bring the present suit even as taxpayers and in the absence of any
actual case or controversy to warrant this Courts exercise of its power of judicial review over
the proclamation.
Finally, respondents seek the outright dismissal of the petition for having been filed in
disregard of the hierarchy of courts and of the doctrine of exhaustion of administrative remedies.
Replying,
[20]
petitioners aver that the doctrine of exhaustion of administrative remedies finds
no application herein since they are invoking the exclusive authority of this Court under Section
21 of R.A. No. 7227 to enjoin or restrain implementation of projects for conversion of the base
areas; that the established exceptions to the aforesaid doctrine obtain in the present petition; and
that they possess the standing to bring the petition which is a taxpayers suit.
Public respondents have filed their Rejoinder
[21]
and the parties have filed their respective
memoranda.
Before dwelling on the core issues, this Court shall first address the preliminary procedural
questions confronting the petition.
The judicial policy is and has always been that this Court will not entertain direct resort to it
except when the redress sought cannot be obtained in the proper courts, or when exceptional and
compelling circumstances warrant availment of a remedy within and calling for the exercise of
this Courts primary jurisdiction.
[22]
Neither will it entertain an action for declaratory relief,
which is partly the nature of this petition, over which it has no original jurisdiction.
Nonetheless, as it is only this Court which has the power under Section 21
[23]
of R.A. No.
7227 to enjoin implementation of projects for the development of the former US military
reservations, the issuance of which injunction petitioners pray for, petitioners direct filing of the
present petition with it is allowed. Over and above this procedural objection to the present suit,
this Court retains full discretionary power to take cognizance of a petition filed directly to it if
compelling reasons, or the nature and importance of the issues raised, warrant.
[24]
Besides,
remanding the case to the lower courts now would just unduly prolong adjudication of the issues.
The transformation of a portion of the area covered by Camp John Hay into a SEZ is not
simply a re-classification of an area, a mere ascription of a status to a place. It involves turning
the former US military reservation into a focal point for investments by both local and foreign
entities. It is to be made a site of vigorous business activity, ultimately serving as a spur to the
countrys long awaited economic growth. For, as R.A. No. 7227 unequivocally declares, it is the
governments policy to enhance the benefits to be derived from the base areas in order to
promote the economic and social development of Central Luzon in particular and the country in
general.
[25]
Like the Subic SEZ, the John Hay SEZ should also be turned into a self-sustaining,
industrial, commercial, financial and investment center.
[26]

More than the economic interests at stake, the development of Camp John Hay as well as of
the other base areas unquestionably has critical links to a host of environmental and social
concerns. Whatever use to which these lands will be devoted will set a chain of events that can
affect one way or another the social and economic way of life of the communities where the
bases are located, and ultimately the nation in general.
Underscoring the fragility of Baguio Citys ecology with its problem on the scarcity of its
water supply, petitioners point out that the local and national government are faced with the
challenge of how to provide for an ecologically sustainable, environmentally sound, equitable
transition for the city in the wake of Camp John Hays reversion to the mass of government
property.
[27]
But that is why R.A. No. 7227 emphasizes the sound and balanced conversion of
the Clark and Subic military reservations and their extensions consistent with ecological
and environmental standards.
[28]
It cannot thus be gainsaid that the matter of conversion of the
US bases into SEZs, in this case Camp John Hay, assumes importance of a national magnitude.
Convinced then that the present petition embodies crucial issues, this Court assumes
jurisdiction over the petition.
As far as the questioned agreements between BCDA and TUNTEX and ASIAWORLD are
concerned, the legal questions being raised thereon by petitioners have indeed been rendered
moot and academic by the revocation of such agreements. There are, however, other issues
posed by the petition, those which center on the constitutionality of Proclamation No. 420, which
have not been mooted by the said supervening event upon application of the rules for the judicial
scrutiny of constitutional cases. The issues boil down to:
(1) Whether the present petition complies with the requirements for this Courts
exercise of jurisdiction over constitutional issues;
(2) Whether Proclamation No. 420 is constitutional by providing for national and
local tax exemption within and granting other economic incentives to the John
Hay Special Economic Zone; and
(3) Whether Proclamation No. 420 is constitutional for limiting or interfering with
the local autonomy of Baguio City;
It is settled that when questions of constitutional significance are raised, the court can
exercise its power of judicial review only if the following requisites are present: (1) the existence
of an actual and appropriate case; (2) a personal and substantial interest of the party raising the
constitutional question; (3) the exercise of judicial review is pleaded at the earliest opportunity;
and (4) the constitutional question is the lis mota of the case.
[29]

An actual case or controversy refers to an existing case or controversy that is appropriate or
ripe for determination, not conjectural or anticipatory.
[30]
The controversy needs to be definite
and concrete, bearing upon the legal relations of parties who are pitted against each other due to
their adverse legal interests.
[31]
There is in the present case a real clash of interests and rights
between petitioners and respondents arising from the issuance of a presidential proclamation that
converts a portion of the area covered by Camp John Hay into a SEZ, the former insisting that
such proclamation contains unconstitutional provisions, the latter claiming otherwise.
R.A. No. 7227 expressly requires the concurrence of the affected local government units to
the creation of SEZs out of all the base areas in the country.
[32]
The grant by the law on local
government units of the right of concurrence on the bases conversion is equivalent to vesting a
legal standing on them, for it is in effect a recognition of the real interests that communities
nearby or surrounding a particular base area have in its utilization. Thus, the interest of
petitioners, being inhabitants of Baguio, in assailing the legality of Proclamation No. 420, is
personal and substantial such that they have sustained or will sustain direct injury as a result of
the government act being challenged.
[33]
Theirs is a material interest, an interest in issue affected
by the proclamation and not merely an interest in the question involved or an incidental
interest,
[34]
for what is at stake in the enforcement of Proclamation No. 420 is the very economic
and social existence of the people of Baguio City.
Petitioners locus standi parallels that of the petitioner and other residents of Bataan,
specially of the town of Limay, in Garcia v. Board of Investments
[35]
where this Court
characterized their interest in the establishment of a petrochemical plant in their place as actual,
real, vital and legal, for it would affect not only their economic life but even the air they breathe.
Moreover, petitioners Edilberto T. Claravall and Lilia G. Yaranon were duly elected
councilors of Baguio at the time, engaged in the local governance of Baguio City and whose
duties included deciding for and on behalf of their constituents the question of whether to concur
with the declaration of a portion of the area covered by Camp John Hay as a SEZ. Certainly
then, petitioners Claravall and Yaranon, as city officials who voted
against
[36]
the sanggunian Resolution No. 255 (Series of 1994) supporting the issuance of the
now challenged Proclamation No. 420, have legal standing to bring the present petition.
That there is herein a dispute on legal rights and interests is thus beyond doubt. The
mootness of the issues concerning the questioned agreements between public and private
respondents is of no moment.
By the mere enactment of the questioned law or the approval of the challenged act, the dispute
is deemed to have ripened into a judicial controversy even without any other overt act. Indeed,
even a singular violation of the Constitution and/or the law is enough to awaken judicial
duty.
[37]

As to the third and fourth requisites of a judicial inquiry, there is likewise no question that
they have been complied with in the case at bar. This is an action filed purposely to bring forth
constitutional issues, ruling on which this Court must take up. Besides, respondents never raised
issues with respect to these requisites, hence, they are deemed waived.
Having cleared the way for judicial review, the constitutionality of Proclamation No. 420, as
framed in the second and third issues above, must now be addressed squarely.
The second issue refers to petitioners objection against the creation by Proclamation No.
420 of a regime of tax exemption within the John Hay SEZ. Petitioners argue that nowhere in R.
A. No. 7227 is there a grant of tax exemption to SEZs yet to be established in base areas, unlike
the grant under Section 12 thereof of tax exemption and investment incentives to the therein
established Subic SEZ. The grant of tax exemption to the John Hay SEZ, petitioners conclude,
thus contravenes Article VI, Section 28 (4) of the Constitution which provides that No law
granting any tax exemption shall be passed without the concurrence of a majority of all the
members of Congress.
Section 3 of Proclamation No. 420, the challenged provision, reads:
Sec. 3. Investment Climate in John Hay Special Economic Zone. Pursuant to Section 5(m) and
Section 15 of Republic Act No. 7227, the John Hay Poro Point Development Corporation shall
implement all necessary policies, rules, and regulations governing the zone, including investment
incentives, in consultation with pertinent government departments. Among others, the zone
shall have all the applicable incentives of the Special Economic Zone under Section 12 of
Republic Act No. 7227 and those applicable incentives granted in the Export Processing
Zones, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and
new investment laws that may hereinafter be enacted. (Emphasis and underscoring supplied)
Upon the other hand, Section 12 of R.A. No. 7227 provides:
x x x
(a) Within the framework and subject to the mandate and limitations of the Constitution and
the pertinent provisions of the Local Government Code, the Subic Special Economic Zone shall
be developed into a self-sustaining, industrial, commercial, financial and investment center to
generate employment opportunities in and around the zone and to attract and promote productive
foreign investments;
b) The Subic Special Economic Zone shall be operated and managed as a separate customs
territory ensuring free flow or movement of goods and capital within, into and exported out of
the Subic Special Economic Zone, as well as provide incentives such as tax and duty free
importations of raw materials, capital and equipment. However, exportation or removal of goods
from the territory of the Subic Special Economic Zone to the other parts of the Philippine
territory shall be subject to customs duties and taxes under the Customs and Tariff Code and
other relevant tax laws of the Philippines;
(c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, no
taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of
paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises
within the Subic Special Economic Zone shall be remitted to the National Government, one
percent (1%) each to the local government units affected by the declaration of the zone in
proportion to their population area, and other factors. In addition, there is hereby established a
development fund of one percent (1%) of the gross income earned by all businesses and
enterprises within the Subic Special Economic Zone to be utilized for the Municipality of Subic,
and other municipalities contiguous to be base areas. In case of conflict between national and
local laws with respect to tax exemption privileges in the Subic Special Economic Zone, the
same shall be resolved in favor of the latter;
(d) No exchange control policy shall be applied and free markets for foreign exchange, gold,
securities and futures shall be allowed and maintained in the Subic Special Economic Zone;
(e) The Central Bank, through the Monetary Board, shall supervise and regulate the operations
of banks and other financial institutions within the Subic Special Economic Zone;
(f) Banking and Finance shall be liberalized with the establishment of foreign currency
depository units of local commercial banks and offshore banking units of foreign banks with
minimum Central Bank regulation;
(g) Any investor within the Subic Special Economic Zone whose continuing investment shall
not be less than Two Hundred fifty thousand dollars ($250,000), his/her spouse and dependent
children under twenty-one (21) years of age, shall be granted permanent resident status within
the Subic Special Economic Zone. They shall have freedom of ingress and egress to and from
the Subic Special Economic Zone without any need of special authorization from the Bureau of
Immigration and Deportation. The Subic Bay Metropolitan Authority referred to in Section 13
of this Act may also issue working visas renewable every two (2) years to foreign executives and
other aliens possessing highly-technical skills which no Filipino within the Subic Special
Economic Zone possesses, as certified by the Department of Labor and Employment. The names
of aliens granted permanent residence status and working visas by the Subic Bay Metropolitan
Authority shall be reported to the Bureau of Immigration and Deportation within thirty (30) days
after issuance thereof;
x x x (Emphasis supplied)
It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ which was
granted by Congress with tax exemption, investment incentives and the like. There is no express
extension of the aforesaid benefits to other SEZs still to be created at the time via presidential
proclamation.
The deliberations of the Senate confirm the exclusivity to Subic SEZ of the tax and
investment privileges accorded it under the law, as the following exchanges between our
lawmakers show during the second reading of the precursor bill of R.A. No. 7227 with respect to
the investment policies that would govern Subic SEZ which are now embodied in the aforesaid
Section 12 thereof:
x x x
Senator Maceda: This is what I was talking about. We get into problems here because all of
these following policies are centered around the concept of free port. And in the main paragraph
above, we have declared both Clark and Subic as special economic zones, subject to these
policies which are, in effect, a free-port arrangement.
Senator Angara: The Gentleman is absolutely correct, Mr. President. So we must confine these
policies only to Subic.
May I withdraw then my amendment, and instead provide that THE SPECIAL ECONOMIC
ZONE OF SUBIC SHALL BE ESTABLISHED IN ACCORDANCE WITH THE
FOLLOWING POLICIES. Subject to style, Mr. President.
Thus, it is very clear that these principles and policies are applicable only to Subic as a free port.
Senator Paterno: Mr. President.
The President: Senator Paterno is recognized.
Senator Paterno: I take it that the amendment suggested by Senator Angara would then prevent
the establishment of other special economic zones observing these policies.
Senator Angara: No, Mr. President, because during our short caucus, Senator Laurel raised the
point that if we give this delegation to the President to establish other economic zones, that may
be an unwarranted delegation.
So we agreed that we will simply limit the definition of powers and description of the zone to
Subic, but that does not exclude the possibility of creating other economic zones within the
baselands.
Senator Paterno: But if that amendment is followed, no other special economic zone may be
created under authority of this particular bill. Is that correct, Mr. President?
Senator Angara: Under this specific provision, yes, Mr. President. This provision now will be
confined only to Subic.
[38]

x x x (Underscoring supplied).
As gathered from the earlier-quoted Section 12 of R.A. No. 7227, the privileges given to
Subic SEZ consist principally of exemption from tariff or customs duties, national and local
taxes of business entities therein (paragraphs (b) and (c)), free market and trade of specified
goods or properties (paragraph d), liberalized banking and finance (paragraph f), and relaxed
immigration rules for foreign investors (paragraph g). Yet, apart from these, Proclamation No.
420 also makes available to the John Hay SEZ benefits existing in other laws such as the
privilege of export processing zone-based businesses of importing capital equipment and raw
materials free from taxes, duties and other restrictions;
[39]
tax and duty exemptions, tax holiday,
tax credit, and other incentives under the Omnibus Investments Code of 1987;
[40]
and the
applicability to the subject zone of rules governing foreign investments in the Philippines.
[41]

While the grant of economic incentives may be essential to the creation and success of
SEZs, free trade zones and the like, the grant thereof to the John Hay SEZ cannot be sustained.
The incentives under R.A. No. 7227 are exclusive only to the Subic SEZ, hence, the extension of
the same to the John Hay SEZ finds no support therein. Neither does the same grant of privileges
to the John Hay SEZ find support in the other laws specified under Section 3 of Proclamation
No. 420, which laws were already extant before the issuance of the proclamation or the
enactment of R.A. No. 7227.
More importantly, the nature of most of the assailed privileges is one of tax exemption. It is
the legislature, unless limited by a provision of the state constitution, that has full power to
exempt any person or corporation or class of property from taxation, its power to exempt being
as broad as its power to tax.
[42]
Other than Congress, the Constitution may itself provide for
specific tax exemptions,
[43]
or local governments may pass ordinances on exemption only from
local taxes.
[44]

The challenged grant of tax exemption would circumvent the Constitutions imposition that
a law granting any tax exemption must have the concurrence of a majority of all the members of
Congress.
[45]
In the same vein, the other kinds of privileges extended to the John Hay SEZ are by
tradition and usage for Congress to legislate upon.
Contrary to public respondents suggestions, the claimed statutory exemption of the John
Hay SEZ from taxation should be manifest and unmistakable from the language of the law on
which it is based; it must be expressly granted in a statute stated in a language too clear to be
mistaken.
[46]
Tax exemption cannot be implied as it must be categorically and unmistakably
expressed.
[47]

If it were the intent of the legislature to grant to the John Hay SEZ the same tax exemption
and incentives given to the Subic SEZ, it would have so expressly provided in the R.A. No.
7227.
This Court no doubt can void an act or policy of the political departments of the government
on either of two groundsinfringement of the Constitution or grave abuse of discretion.
[48]

This Court then declares that the grant by Proclamation No. 420 of tax exemption and other
privileges to the John Hay SEZ is void for being violative of the Constitution. This renders it
unnecessary to still dwell on petitioners claim that the same grant violates the equal protection
guarantee.
With respect to the final issue raised by petitioners that Proclamation No. 420 is
unconstitutional for being in derogation of Baguio Citys local autonomy, objection is
specifically mounted against Section 2 thereof in which BCDA is set up as the governing body of
the John Hay SEZ.
[49]

Petitioners argue that there is no authority of the President to subject the John Hay SEZ to
the governance of BCDA which has just oversight functions over SEZ; and that to do so is to
diminish the city governments power over an area within its jurisdiction, hence, Proclamation
No. 420 unlawfully gives the President power of control over the local government instead of
just mere supervision.
Petitioners arguments are bereft of merit. Under R.A. No. 7227, the BCDA is entrusted
with, among other things, the following purpose:
[50]

x x x
(a) To own, hold and/or administer the military reservations of John Hay Air Station, Wallace
Air Station, ODonnell Transmitter Station, San Miguel Naval Communications Station, Mt. Sta.
Rita Station (Hermosa, Bataan) and those portions of Metro Manila Camps which may be
transferred to it by the President;
x x x (Underscoring supplied)
With such broad rights of ownership and administration vested in BCDA over Camp John Hay,
BCDA virtually has control over it, subject to certain limitations provided for by law. By
designating BCDA as the governing agency of the John Hay SEZ, the law merely emphasizes or
reiterates the statutory role or functions it has been granted.
The unconstitutionality of the grant of tax immunity and financial incentives as contained in
the second sentence of Section 3 of Proclamation No. 420 notwithstanding, the entire assailed
proclamation cannot be declared unconstitutional, the other parts thereof not being repugnant to
law or the Constitution. The delineation and declaration of a portion of the area covered by
Camp John Hay as a SEZ was well within the powers of the President to do so by means of a
proclamation.
[51]
The requisite prior concurrence by the Baguio City government to such
proclamation appears to have been given in the form of a duly enacted resolution by
the sanggunian. The other provisions of the proclamation had been proven to be consistent with
R.A. No. 7227.
Where part of a statute is void as contrary to the Constitution, while another part is valid, the
valid portion, if separable from the invalid, may stand and be enforced.
[52]
This Court finds that
the other provisions in Proclamation No. 420 converting a delineated portion of Camp John Hay
into the John Hay SEZ are separable from the invalid second sentence of Section 3 thereof,
hence they stand.
WHEREFORE, the second sentence of Section 3 of Proclamation No. 420 is hereby
declared NULL AND VOID and is accordingly declared of no legal force and effect. Public
respondents are hereby enjoined from implementing the aforesaid void provision.
Proclamation No. 420, without the invalidated portion, remains valid and effective.
SO ORDERED.







Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 149636 June 8, 2005
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BANK OF COMMERCE, respondent.
D E C I S I O N
CALLEJO, SR., J .:
This is a petition for review on certiorari of the Decision
1
of the Court of Appeals (CA) in CA-
G.R. SP No. 52706, affirming the ruling of the Court of Tax Appeals (CTA)
2
in CTA Case No.
5415.
The facts of the case are undisputed.
In 1994 and 1995, the respondent Bank of Commerce derived passive income in the form of
interests or discounts from its investments in government securities and private commercial
papers. On several occasions during the said period, it paid 5% gross receipts tax on its income,
as reflected in its quarterly percentage tax returns. Included therein were the respondent banks
passive income from the said investments amounting toP85,384,254.51, which had already been
subjected to a final tax of 20%.
Meanwhile, on January 30, 1996, the CTA rendered judgment in Asia Bank Corporation v.
Commissioner of Internal Revenue, CTA Case No. 4720, holding that the 20% final withholding
tax on interest income from banks does not form part of taxable gross receipts for Gross Receipts
Tax (GRT) purposes. The CTA relied on Section 4(e) of Revenue Regulations (Rev. Reg.) No.
12-80.
Relying on the said decision, the respondent bank filed an administrative claim for refund with
the Commissioner of Internal Revenue on July 19, 1996. It claimed that it had overpaid its gross
receipts tax for 1994 to 1995 byP853,842.54, computed as follows:
Gross receipts subjected
to
Final Tax Derived from
Passive Investment P85,384,254.51

x 20%

20% Final Tax Withheld 17,076,850.90
at Source x 5%


P 853,842.54
Before the Commissioner could resolve the claim, the respondent bank filed a petition for review
with the CTA, lest it be barred by the mandatory two-year prescriptive period under Section 230
of the Tax Code (now Section 229 of the Tax Reform Act of 1997).
In his answer to the petition, the Commissioner interposed the following special and affirmative
defenses:

5. The alleged refundable/creditable gross receipts taxes were collected and paid pursuant
to law and pertinent BIR implementing rules and regulations; hence, the same are not
refundable. Petitioner must prove that the income from which the refundable/creditable
taxes were paid from, were declared and included in its gross income during the taxable
year under review;
6. Petitioners allegation that it erroneously and excessively paid its gross receipt tax
during the year under review does not ipso facto warrant the refund/credit. Petitioner
must prove that the exclusions claimed by it from its gross receipts must be an allowable
exclusion under the Tax Code and its pertinent implementing Rules and Regulations.
Moreover, it must be supported by evidence;
7. Petitioner must likewise prove that the alleged refundable/creditable gross receipt taxes
were neither automatically applied as tax credit against its tax liability for the succeeding
quarter/s of the succeeding year nor included as creditable taxes declared and applied to
the succeeding taxable year/s;
8. Claims for tax refund/credit are construed in strictissimi juris against the taxpayer as it
partakes the nature of an exemption from tax and it is incumbent upon the petitioner to
prove that it is entitled thereto under the law. Failure on the part of the petitioner to prove
the same is fatal to its claim for tax refund/credit;
9. Furthermore, petitioner must prove that it has complied with the provision of Section
230 (now Section 229) of the Tax Code, as amended.
3

The CTA summarized the issues to be resolved as follows: whether or not the final income tax
withheld should form part of the gross receipts
4
of the taxpayer for GRT purposes; and whether
or not the respondent bank was entitled to a refund of P853,842.54.
5

The respondent bank averred that for purposes of computing the 5% gross receipts tax, the final
withholding tax does not form part of gross receipts.
6
On the other hand, while the
Commissioner conceded that the Court defined "gross receipts" as "all receipts of taxpayers
excluding those which have been especially earmarked by law or regulation for the government
or some person other than the taxpayer" in CIR v. Manila Jockey Club, Inc.,
7
he claimed that
such definition was applicable only to a proprietor of an amusement place, not a banking
institution which is an entirely different entity altogether. As such, according to the
Commissioner, the ruling of the Court inManila Jockey Club was inapplicable.
In its Decision dated April 27, 1999, the CTA by a majority decision
8
partially granted the
petition and ordered that the amount of P355,258.99 be refunded to the respondent bank.
The fallo of the decision reads:
WHEREFORE, in view of all the foregoing, respondent is hereby ORDERED to REFUND in
favor of petitioner Bank of Commerce the amount of P355,258.99 representing validly proven
erroneously withheld taxes from interest income derived from its investments in government
securities for the years 1994 and 1995.
9

In ruling for respondent bank, the CTA relied on the ruling of the Court in Manila Jockey Club,
and held that the term "gross receipts" excluded those which had been especially earmarked by
law or regulation for the government or persons other than the taxpayer. The CTA also cited its
rulings in China Banking Corporation v. CIR
10
and Equitable Banking Corporation v. CIR.
11

The CTA ratiocinated that the aforesaid amount of P355,258.99 represented the claim of the
respondent bank, which was filed within the two-year mandatory prescriptive period and was
substantiated by material and relevant evidence. The CTA applied Section 204(3) of the National
Internal Revenue Code (NIRC).
12

The Commissioner then filed a petition for review under Rule 43 of the Rules of Court before the
CA, alleging that:
(1) There is no provision of law which excludes the 20% final income tax withheld under
Section 50(a) of the Tax Code in the computation of the 5% gross receipts tax.
(2) The Tax Court erred in applying the ruling in Collector of Internal Revenue vs.
Manila Jockey Club (108 Phil. 821) in the resolution of the legal issues involved in the
instant case.
13

The Commissioner reiterated his stand that the ruling of this Court in Manila Jockey Club, which
was affirmed inVisayan Cebu Terminal Co., Inc. v. Commissioner of Internal Revenue,
14
is not
decisive. He averred that the factual milieu in the said case is different, involving as it did the
"wager fund." The Commissioner further pointed out that in Manila Jockey Club, the Court ruled
that the race tracks commission did not form part of the gross receipts, and as such were not
subjected to the 20% amusement tax. On the other hand, the issue in Visayan Cebu Terminal was
whether or not the gross receipts corresponding to 28% of the total gross income of the service
contractor delivered to the Bureau of Customs formed part of the gross receipts was subject to
3% of contractors tax under Section 191 of the Tax Code. It was further pointed out that the
respondent bank, on the other hand, was a banking institution and not a contractor. The petitioner
insisted that the term "gross receipts" is self-evident; it includes all items of income of the
respondent bank regardless of whether or not the same were allocated or earmarked for a specific
purpose, to distinguish it from net receipts.
On August 14, 2001, the CA rendered judgment dismissing the petition. Citing Sections 51 and
58(A) of the NIRC, Section 4(e) of Rev. Reg. No. 12-80
15
and the ruling of this Court in Manila
Jockey Club, the CA held that theP17,076,850.90 representing the final withholding tax derived
from passive investments subjected to final tax should not be construed as forming part of the
gross receipts of the respondent bank upon which the 5% gross receipts tax should be imposed.
The CA declared that the final withholding tax in the amount of P17,768,509.00 was a trust fund
for the government; hence, does not form part of the respondents gross receipts. The legal
ownership of the amount had already been vested in the government. Moreover, the CA
declared, the respondent did not reap any benefit from the said amount. As such, subjecting the
said amount to the 5% gross receipts tax would result in double taxation. The appellate court
further cited CIR v. Tours Specialists, Inc.,
16
and declared that the ruling of the Court in Manila
Jockey Club was decisive of the issue.
The Commissioner now assails the said decision before this Court, contending that:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE 20% FINAL
WITHHOLDING TAX ON BANKS INTEREST INCOME DOES NOT FORM PART OF
THE TAXABLE GROSS RECEIPTS IN COMPUTING THE 5% GROSS RECEIPTS TAX
(GRT, for brevity).
17

The petitioner avers that the reliance by the CTA and the CA on Section 4(e) of Rev. Reg. No.
12-80 is misplaced; the said provision merely authorizes the determination of the amount of
gross receipts based on the taxpayers method of accounting under then Section 37 (now Section
43) of the Tax Code. The petitioner asserts that the said provision ceased to exist as of October
15, 1984, when Rev. Reg. No. 17-84 took effect. The petitioner further points out that under
paragraphs 7(a) and (c) of Rev. Reg. No. 17-84, interest income of financial institutions
(including banks) subject to withholding tax are included as part of the "gross receipts" upon
which the gross receipts tax is to be imposed. Citing the ruling of the CA in Commissioner of
Internal Revenue v. Asianbank Corporation
18
(which likewise cited Bank of America NT & SA v.
Court of Appeals,
19
) the petitioner posits that in computing the 5% gross receipts tax, the income
need not be actually received. For income to form part of the taxable gross receipts, constructive
receipt is enough. The petitioner is, likewise, adamant in his claim that the final withholding tax
from the respondent banks income forms part of the taxable gross receipts for purposes of
computing the 5% of gross receipts tax. The petitioner posits that the ruling of this Court
in Manila Jockey Club is not decisive of the issue in this case.
The petition is meritorious.
The issues in this case had been raised and resolved by this Court in China Banking Corporation
v. Court of Appeals,
20
and CIR v. Solidbank Corporation.
21

Section 27(D)(1) of the Tax Code reads:
(D) Rates of Tax on Certain Passive Incomes.
(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit
Substitutes and from Trust Funds and Similar Arrangements, and Royalties. A final tax at
the rate of twenty percent (20%) is hereby imposed upon the amount of interest on currency bank
deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and
similar arrangements received by domestic corporations, and royalties, derived from sources
within the Philippines: Provided, however, That interest income derived by a domestic
corporation from a depository bank under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half percent (7%) of such interest
income.
On the other hand, Section 57(A)(B) of the Tax Code authorizes the withholding of final tax on
certain income creditable at source:
SEC. 57. Withholding of Tax at Source.
(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations,
the Secretary of Finance may promulgate, upon the recommendation of the
Commissioner, requiring the filing of income tax return by certain income payees, the tax
imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2),
25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4),
28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4),
28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33; and 282 of this Code on specified items of
income shall be withheld by payor-corporation and/or person and paid in the same
manner and subject to the same conditions as provided in Section 58 of this Code.
(B) Withholding of Creditable Tax at Source. The Secretary of Finance may, upon
the recommendation of the Commissioner, require the withholding of a tax on the items
of income payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%)
but not more than thirty-two percent (32%) thereof, which shall be credited against the
income tax liability of the taxpayer for the taxable year.
The tax deducted and withheld by withholding agents under the said provision shall be held as a
special fund in trust for the government until paid to the collecting officer.
22

Section 121 (formerly Section 119) of the Tax Code provides that a tax on gross receipts derived
from sources within the Philippines by all banks and non-bank financial intermediaries shall be
computed in accordance with the schedules therein:
(a) On interest, commissions and discounts from lending activities as well as
income from financial leasing, on the basis of remaining maturities of instruments
from which such receipts are derived:
Short-term maturity (not in excess of two (2) years) 5%
Medium-term maturity (over two (2) years but not exceeding four (4)
years)
3%
Long-term maturity

(1) Over four (4) years but not exceeding seven (7) years 1%
(2) Over seven (7) years 0%
(b) On dividends 0%
(c) On royalties, rentals of property, real or personal, profits from
exchange and all other items treated as gross income under Section 32 of
this Code 5%
Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru
pre-termination, then the maturity period shall be reckoned to end as of the date of pre-
termination for purposes of classifying the transaction as short, medium or long-term and the
correct rate of tax shall be applied accordingly.
Nothing in this Code shall preclude the Commissioner from imposing the same tax herein
provided on persons performing similar banking activities.
The Tax Code does not define "gross receipts." Absent any statutory definition, the Bureau of
Internal Revenue has applied the term in its plain and ordinary meaning.
23

In National City Bank v. CIR,
24
the CTA held that gross receipts should be interpreted as the
whole amount received as interest, without deductions; otherwise, if deductions were to be made
from gross receipts, it would be considered as "net receipts." The CTA changed course, however,
when it promulgated its decision in Asia Bank; it applied Section 4(e) of Rev. Reg. No. 12-80
and the ruling of this Court in Manila Jockey Club, holding that the 20% final withholding tax on
the petitioner banks interest income should not form part of its taxable gross receipts, since the
final tax was not actually received by the petitioner bank but went to the coffers of the
government.
The Court agrees with the contention of the petitioner that the appellate courts reliance on Rev.
Reg. No. 12-80, the rulings of the CTA in Asia Bank, and of this Court in Manila Jockey
Club has no legal and factual bases. Indeed, the Court ruled in China Banking Corporation v.
Court of Appeals
25
that:
In Far East Bank & Trust Co. v. Commissioner and Standard Chartered Bank v.
Commissioner, both promulgated on 16 November 2001, the tax court ruled that the final
withholding tax forms part of the banks gross receipts in computing the gross receipts tax. The
tax court held that Section 4(e) of Revenue Regulations No. 12-80 did not prescribe the
computation of the amount of gross receipts but merely authorized "the determination of the
amount of gross receipts on the basis of the method of accounting being used by the taxpayer."
The word "gross" must be used in its plain and ordinary meaning. It is defined as "whole, entire,
total, without deduction." A common definition is "without deduction."
26
"Gross" is also defined
as "taking in the whole; having no deduction or abatement; whole, total as opposed to a sum
consisting of separate or specified parts."
27
Gross is the antithesis of net.
28
Indeed, in China
Banking Corporation v. Court of Appeals,
29
the Court defined the term in this wise:
As commonly understood, the term "gross receipts" means the entire receipts without any
deduction. Deducting any amount from the gross receipts changes the result, and the meaning, to
net receipts. Any deduction from gross receipts is inconsistent with a law that mandates a tax on
gross receipts, unless the law itself makes an exception. As explained by the Supreme Court of
Pennsylvania in Commonwealth of Pennsylvania v. Koppers Company, Inc., -
Highly refined and technical tax concepts have been developed by the accountant and legal
technician primarily because of the impact of federal income tax legislation. However, this in no
way should affect or control the normal usage of words in the construction of our statutes; and
we see nothing that would require us not to include the proceeds here in question in the gross
receipts allocation unless statutorily such inclusion is prohibited. Under the ordinary basic
methods of handling accounts, the term gross receipts, in the absence of any statutory definition
of the term, must be taken to include the whole total gross receipts without any deductions, x x
x. [Citations omitted] (Emphasis supplied)"
Likewise, in Laclede Gas Co. v. City of St. Louis, the Supreme Court of Missouri held:
The word "gross" appearing in the term "gross receipts," as used in the ordinance, must have
been and was there used as the direct antithesis of the word "net." In its usual and ordinary
meaning "gross receipts" of a business is the whole and entire amount of the receipts without
deduction, x x x. On the contrary, "net receipts" usually are the receipts which remain after
deductions are made from the gross amount thereof of the expenses and cost of doing business,
including fixed charges and depreciation. Gross receipts become net receipts after certain proper
deductions are made from the gross. And in the use of the words "gross receipts," the instant
ordinance, of course, precluded plaintiff from first deducting its costs and expenses of doing
business, etc., in arriving at the higher base figure upon which it must pay the 5% tax under this
ordinance. (Emphasis supplied)
Absent a statutory definition, the term "gross receipts" is understood in its plain and ordinary
meaning. Words in a statute are taken in their usual and familiar signification, with due regard to
their general and popular use. The Supreme Court of Hawaii held in Bishop Trust Company v.
Burns that -
xxx It is fundamental that in construing or interpreting a statute, in order to ascertain the intent of
the legislature, the language used therein is to be taken in the generally accepted and usual sense.
Courts will presume that the words in a statute were used to express their meaning in common
usage. This principle is equally applicable to a tax statute. [Citations omitted] (Emphasis
supplied)
The Court, likewise, declared that Section 121 of the Tax Code expressly subjects interest
income of banks to the gross receipts tax. "Such express inclusion of interest income in taxable
gross receipts creates a presumption that the entire amount of the interest income, without any
deduction, is subject to the gross receipts tax. Indeed, there is a presumption that receipts of a
person engaging in business are subject to the gross receipts tax. Such presumption may only be
overcome by pointing to a specific provision of law allowing such deduction of the final
withholding tax from the taxable gross receipts, failing which, the claim of deduction has no leg
to stand on. Moreover, where such an exception is claimed, the statute is construed strictly in
favor of the taxing authority. The exemption must be clearly and unambiguously expressed in the
statute, and must be clearly established by the taxpayer claiming the right thereto. Thus, taxation
is the rule and the claimant must show that his demand is within the letter as well as the spirit of
the law."
30

In this case, there is no law which allows the deduction of 20% final tax from the respondent
banks interest income for the computation of the 5% gross receipts tax. On the other hand,
Section 8(a)(c), Rev. Reg. No. 17-84 provides that interest earned on Philippine bank deposits
and yield from deposit substitutes are included as part of the tax base upon which the gross
receipts tax is imposed. Such earned interest refers to the gross interest without deduction since
the regulations do not provide for any such deduction. The gross interest, without deduction, is
the amount the borrower pays, and the income the lender earns, for the use by the borrower of
the lenders money. The amount of the final tax plainly covers for the interest earned and is
consequently part of the taxable gross receipt of the lender.
31

The bare fact that the final withholding tax is a special trust fund belonging to the government
and that the respondent bank did not benefit from it while in custody of the borrower does not
justify its exclusion from the computation of interest income. Such final withholding tax covers
for the respondent banks income and is the amount to be used to pay its tax liability to the
government. This tax, along with the creditable withholding tax, constitutes payment which
would extinguish the respondent banks obligation to the government. The bank can only pay the
money it owns, or the money it is authorized to pay.
32

In the same vein, the respondent banks reliance on Section 4(e) of Rev. Reg. No. 12-80 and the
ruling of the CTA in Asia Bank is misplaced. The Courts discussion in China Banking
Corporation
33
is instructive on this score:
CBC also relies on the Tax Courts ruling in Asia Bank that Section 4(e) of Revenue Regulations
No. 12-80 authorizes the exclusion of the final tax from the banks taxable gross receipts.
Section 4(e) provides that:
Sec. 4. x x x
(e) Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and
other non-bank financial intermediaries not performing quasi-banking functions. - The rates of
taxes to be imposed on the gross receipts of such financial institutions shall be based on all items
of income actually received. Mere accrual shall not be considered, but once payment is received
on such accrual or in cases of prepayment, then the amount actually received shall be included in
the tax base of such financial institutions, as provided hereunder: x x x. (Emphasis supplied by
Tax Court)
Section 4(e) states that the gross receipts "shall be based on all items of income actually
received." The tax court in Asia Bank concluded that "it is but logical to infer that the final tax,
not having been received by petitioner but instead went to the coffers of the government, should
no longer form part of its gross receipts for the purpose of computing the GRT."
The Tax Court erred glaringly in interpreting Section 4(e) of Revenue Regulations No. 12-80.
Income may be taxable either at the time of its actual receipt or its accrual, depending on the
accounting method of the taxpayer. Section 4(e) merely provides for an exception to the rule,
making interest income taxable for gross receipts tax purposes only upon actual receipt. Interest
is accrued, and not actually received, when the interest is due and demandable but the borrower
has not actually paid and remitted the interest, whether physically or constructively. Section 4(e)
does not exclude accrued interest income from gross receipts but merely postpones its inclusion
until actual payment of the interest to the lending bank. This is clear when Section 4(e) states
that "[m]ere accrual shall not be considered, but once payment is received on such accrual or in
case of prepayment, then the amount actually received shall be included in the tax base of such
financial institutions x x x."
Actual receipt of interest income is not limited to physical receipt. Actual receipt may either be
physical receipt or constructive receipt. When the depository bank withholds the final tax to pay
the tax liability of the lending bank, there is prior to the withholding a constructive receipt by the
lending bank of the amount withheld. From the amount constructively received by the lending
bank, the depository bank deducts the final withholding tax and remits it to the government for
the account of the lending bank. Thus, the interest income actually received by the lending bank,
both physically and constructively, is the net interest plus the amount withheld as final tax.
The concept of a withholding tax on income obviously and necessarily implies that the amount
of the tax withheld comes from the income earned by the taxpayer. Since the amount of the tax
withheld constitutes income earned by the taxpayer, then that amount manifestly forms part of
the taxpayers gross receipts. Because the amount withheld belongs to the taxpayer, he can
transfer its ownership to the government in payment of his tax liability. The amount withheld
indubitably comes from income of the taxpayer, and thus forms part of his gross receipts.
The Court went on to explain in that case that far from supporting the petitioners contention, its
ruling in Manila Jockey Club, in fact even buttressed the contention of the Commissioner. Thus:
CBC cites Collector of Internal Revenue v. Manila Jockey Club as authority that the final
withholding tax on interest income does not form part of a banks gross receipts because the final
tax is "earmarked by regulation" for the government. CBCs reliance on the Manila Jockey
Club is misplaced. In this case, the Court stated that Republic Act No. 309 and Executive Order
No. 320 apportioned the total amount of the bets in horse races as follows:
87 % as dividends to holders of winning tickets, 12 % as "commission" of the Manila Jockey
Club, of which % was assigned to the Board of Races and 5% was distributed as prizes for
owners of winning horses and authorized bonuses for jockeys.
A subsequent law, Republic Act No. 1933 ("RA No. 1933"), amended the sharing by ordering
the distribution of the bets as follows:
Sec. 19. Distribution of receipts. The total wager funds or gross receipts from the sale of pari-
mutuel tickets shall be apportioned as follows: eighty-seven and one-half per centum shall be
distributed in the form of dividends among the holders of win, place and show horses, as the case
may be, in the regular races; six and one-half per centum shall be set aside as the commission of
the person, racetrack, racing club, or any other entity conducting the races; five and one-half per
centum shall be set aside for the payment of stakes or prizes for win, place and show horses and
authorized bonuses for jockeys; and one-half per centum shall be paid to a special fund to be
used by the Games and Amusements Board to cover its expenses and such other purposes
authorized under this Act. xxx. (Emphasis supplied)
Under the "distribution of receipts" expressly mandated in Section 19 of RA No. 1933, the gross
receipts "apportioned" to Manila Jockey Club referred only to its own 6 % commission. There
is no dispute that the 5 % share of the horse-owners and jockeys, and the % share of the
Games and Amusements Board, do not form part of Manila Jockey Clubs gross receipts. RA
No. 1933 took effect on 22 June 1957, three years before the Court decided Manila Jockey
Club on 30 June 1960.
Even under the earlier law, Manila Jockey Club did not own the entire 12 % commission.
Manila Jockey Club owned, and could keep and use, only 7% of the total bets. Manila Jockey
Club merely held in trust the balance of 5 % for the benefit of the Board of Races and the
winning horse-owners and jockeys, the real owners of the 5 1/2 % share.
The Court in Manila Jockey Club quoted with approval the following Opinion of the Secretary of
Justice made priorto RA No. 1933:
There is no question that the Manila Jockey Club, Inc. owns only 7-1/2% [sic] of the bets
registered by the Totalizer. This portion represents its share or commission in the total amount of
money it handles and goes to the funds thereof as its own property which it may legally disburse
for its own purposes. The 5% [sic] does not belong to the club. It is merely held in trust for
distribution as prizes to the owners of winning horses. It is destined for no other object than the
payment of prizes and the club cannot otherwise appropriate this portion without incurring
liability to the owners of winning horses. It can not be considered as an item of expense because
the sum used for the payment of prizes is not taken from the funds of the club but from a certain
portion of the total bets especially earmarked for that purpose. (Emphasis supplied)
Consequently, the Court ruled that the 5 % balance of the commission, not being owned by
Manila Jockey Club, did not form part of its gross receipts for purposes of the amusement tax.
Manila Jockey Club correctly paid the amusement tax based only on its own 7% commission
under RA No. 309 and Executive Order No. 320.
Manila Jockey Club does not support CBCs contention but rather the Commissioners position.
The Court ruled inManila Jockey Club that receipts not owned by the Manila Jockey Club but
merely held by it in trust did not form part of Manila Jockey Clubs gross receipts. Conversely,
receipts owned by the Manila Jockey Club would form part of its gross receipts.
34

We reverse the ruling of the CA that subjecting the Final Withholding Tax (FWT) to the 5% of
gross receipts tax would result in double taxation. In CIR v. Solidbank Corporation,
35
we ruled,
thus:
We have repeatedly said that the two taxes, subject of this litigation, are different from each
other. The basis of their imposition may be the same, but their natures are different, thus leading
us to a final point. Is there double taxation?
The Court finds none.
Double taxation means taxing the same property twice when it should be taxed only once; that is,
"xxx taxing the same person twice by the same jurisdiction for the same thing." It is obnoxious
when the taxpayer is taxed twice, when it should be but once. Otherwise described as "direct
duplicate taxation," the two taxes must be imposed on the same subject matter, for the same
purpose, by the same taxing authority, within the same jurisdiction, during the same taxing
period; and they must be of the same kind or character.
First, the taxes herein are imposed on two different subject matters. The subject matter of
the FWT is the passive income generated in the form of interest on deposits and yield on
deposit substitutes, while the subject matter of the GRT is the privilege of engaging in the
business of banking.
A tax based on receipts is a tax on business rather than on the property; hence, it is an
excise rather than a property tax. It is not an income tax, unlike the FWT. In fact, we have
already held that one can be taxed for engaging in business and further taxed differently
for the income derived therefrom. Akin to our ruling inVelilla v. Posadas, these two taxes
are entirely distinct and are assessed under different provisions.
Second, although both taxes are national in scope because they are imposed by the same
taxing authority the national government under the Tax Code and operate within the
same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods
they affect are different. The FWT is deducted and withheld as soon as the income is
earned, and is paid after every calendar quarter in which it is earned. On the other hand,
the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in
which it is earned.
Third, these two taxes are of different kinds or characters. The FWT is an income tax
subject to withholding, while the GRT is a percentage tax not subject to withholding.
In short, there is no double taxation, because there is no taxing twice, by the same taxing
authority, within the same jurisdiction, for the same purpose, in different taxing periods, some of
the property in the territory. Subjecting interest income to a 20% FWT and including it in the
computation of the 5% GRT is clearly not double taxation.
IN LIGHT OF THE FOREGOING, the petition is GRANTED. The decision of the Court of
Appeals in CA-G.R. SP No. 52706 and that of the Court of Tax Appeals in CTA Case No. 5415
are SET ASIDE and REVERSED. The CTA is hereby ORDERED to DISMISS the petition of
respondent Bank of Commerce. No costs.
SO ORDERED.