Taxation Law II (Final Term)

Second Set of Cases:

1. G.R. No. 175723 February 4, 2014

THE CITY OF MANILA, represented by MAYOR JOSE L. ATIENZA, JR., and MS. LIBERTY M. TOLEDO,
in her capacity as the City Treasurer of Manila, Petitioners,
vs.
HON. CARIDAD H. GRECIA-CUERDO, in her capacity as Presiding Judge of the Regional Trial Court,
Branch 112, Pasay City; SM MART, INC.; SM PRIME HOLDINGS, INC.; STAR APPLIANCES CENTER;
SUPERVALUE, INC.; ACE HARDWARE PHILIPPINES, INC.; WATSON PERSONAL CARE STORES,
PHILS., INC.; JOLLIMART PHILS., CORP.; SURPLUS MARKETING CORPORATION and SIGNATURE
LINES, Respondents.

DECISION

PERALTA, J.:

Before the Court is a special civil action for certiorari under Rule 65 of the Rules of Court seeking to reverse
and set aside the Resolutions1 dated April 6, 2006 and November 29, 2006 of the Court of Appeals (CA) in
CA-G.R. SP No. 87948.

The antecedents of the case, as summarized by the CA, are as follows:

The record shows that petitioner City of Manila, through its treasurer, petitioner Liberty Toledo, assessed
taxes for the taxable period from January to December 2002 against private respondents SM Mart, Inc., SM
Prime Holdings, Inc., Star Appliances Center, Supervalue, Inc., Ace Hardware Philippines, Inc., Watsons
Personal Care Stores Phils., Inc., Jollimart Philippines Corp., Surplus Marketing Corp. and Signature Lines. In
addition to the taxes purportedly due from private respondents pursuant to Section 14, 15, 16, 17 of the
Revised Revenue Code of Manila (RRCM), said assessment covered the local business taxes petitioners
were authorized to collect under Section 21 of the same Code. Because payment of the taxes assessed was
a precondition for the issuance of their business permits, private respondents were constrained to pay the
₱19,316,458.77 assessment under protest.

On January 24, 2004, private respondents filed [with the Regional Trial Court of Pasay City] the complaint
denominated as one for "Refund or Recovery of Illegally and/or Erroneously-Collected Local Business Tax,
Prohibition with Prayer to Issue TRO and Writ of Preliminary Injunction"

which was docketed as Civil Case No. 04-0019-CFM before public respondent's sala [at Branch 112]. In the
amended complaint they filed on February 16, 2004, private respondents alleged that, in relation to Section 21
thereof, Sections 14, 15, 16, 17, 18, 19 and 20 of the RRCM were violative of the limitations and guidelines
under Section 143 (h) of Republic Act. No. 7160 [Local Government Code] on double taxation. They further
averred that petitioner city's Ordinance No. 8011 which amended pertinent portions of the RRCM had already
been declared to be illegal and unconstitutional by the Department of Justice.2

In its Order3 dated July 9, 2004, the RTC granted private respondents' application for a writ of preliminary
injunction.

Petitioners filed a Motion for Reconsideration4 but the RTC denied it in its Order5 dated October 15, 2004.

Petitioners then filed a special civil action for certiorari with the CA assailing the July 9, 2004 and October 15,
2004 Orders of the RTC.6

In its Resolution promulgated on April 6, 2006, the CA dismissed petitioners' petition for certiorari holding that
it has no jurisdiction over the said petition. The CA ruled that since appellate jurisdiction over private
respondents' complaint for tax refund, which was filed with the RTC, is vested in the Court of Tax Appeals
(CTA), pursuant to its expanded jurisdiction under Republic Act No. 9282 (RA 9282), it follows that a petition
for certiorari seeking nullification of an interlocutory order issued in the said case should, likewise, be filed with
the CTA.

Petitioners filed a Motion for Reconsideration,7 but the CA denied it in its Resolution dated November 29,
2006.

Hence, the present petition raising the following issues:

 I- Whether or not the Honorable Court of Appeals gravely erred in dismissing the case for lack of
jurisdiction.

II- Whether or not the Honorable Regional Trial Court gravely abuse[d] its discretion amounting to lack
or excess of jurisdiction in enjoining by issuing a Writ of Injunction the petitioners, their agents and/or
authorized representatives from implementing Section 21 of the Revised Revenue Code of Manila, as
amended, against private respondents.

III- Whether or not the Honorable Regional Trial Court gravely abuse[d] its discretion amounting to
lack or excess of jurisdiction in issuing the Writ of Injunction despite failure of private respondents to
make a written claim for tax credit or refund with the City Treasurer of Manila.

IV- Whether or not the Honorable Regional Trial Court gravely abuse[d] its discretion amounting to
lack or excess of jurisdiction considering that under Section 21 of the Manila Revenue Code, as
amended, they are mere collecting agents of the City Government.

V- Whether or not the Honorable Regional Trial Court gravely abuse[d] its discretion amounting to lack
or excess of jurisdiction in issuing the Writ of Injunction because petitioner City of Manila and its
constituents would result to greater damage and prejudice thereof. (sic)8

Without first resolving the above issues, this Court finds that the instant petition should be denied for being
moot and academic.

Upon perusal of the original records of the instant case, this Court discovered that a Decision9 in the main
case had already been rendered by the RTC on August 13, 2007, the dispositive portion of which reads as
follows:

WHEREFORE, in view of the foregoing, this Court hereby renders JUDGMENT in favor of the plaintiff and
against the defendant to grant a tax refund or credit for taxes paid pursuant to Section 21 of the Revenue
Code of the City of Manila as amended for the year 2002 in the following amounts:

To plaintiff SM Mart, Inc. - P 11,462,525.02

To plaintiff SM Prime Holdings, Inc. - 3,118,104.63

To plaintiff Star Appliances Center - 2,152,316.54

To plaintiff Supervalue, Inc. - 1,362,750.34

To plaintiff Ace Hardware Phils., Inc. - 419,689.04
To plaintiff Watsons Personal Care Health - 231,453.62

Stores Phils., Inc.

To plaintiff Jollimart Phils., Corp. - 140,908.54

To plaintiff Surplus Marketing Corp. - 220,204.70

To plaintiff Signature Mktg. Corp. - 94,906.34

TOTAL: - P 19,316,458.77

Defendants are further enjoined from collecting taxes under Section 21, Revenue Code of Manila from herein
plaintiff.

SO ORDERED.10

The parties did not inform the Court but based on the records, the above Decision had already become final
and executory per the Certificate of Finality11 issued by the same trial court on October 20, 2008. In fact, a Writ
of Execution12 was issued by the RTC on November 25, 2009. In view of the foregoing, it clearly appears that
the issues raised in the present petition, which merely involve the incident on the preliminary injunction issued
by the RTC, have already become moot and academic considering that the trial court, in its decision on the
merits in the main case, has already ruled in favor of respondents and that the same decision is now final and
executory. Well entrenched is the rule that where the issues have become moot and academic, there is no
justiciable controversy, thereby rendering the resolution of the same of no practical use or value.13
In any case, the Court finds it necessary to resolve the issue on jurisdiction raised by petitioners owing to its
significance and for future guidance of both bench and bar. It is a settled principle that courts will decide a
question otherwise moot and academic if it is capable of repetition, yet evading review.14

However, before proceeding, to resolve the question on jurisdiction, the Court deems it proper to likewise
address a procedural error which petitioners committed.

Petitioners availed of the wrong remedy when they filed the instant special civil action for certiorari under Rule
65 of the Rules of Court in assailing the Resolutions of the CA which dismissed their petition filed with the said
court and their motion for reconsideration of such dismissal. There is no dispute that the assailed Resolutions
of the CA are in the nature of a final order as they disposed of the petition completely. It is settled that in
cases where an assailed judgment or order is considered final, the remedy of the aggrieved party is appeal.
Hence, in the instant case, petitioner should have filed a petition for review on certiorari under Rule 45, which
is a continuation of the appellate process over the original case.15

Petitioners should be reminded of the equally-settled rule that a special civil action for certiorari under Rule 65
is an original or independent action based on grave abuse of discretion amounting to lack or excess of
jurisdiction and it will lie only if there is no appeal or any other plain, speedy, and adequate remedy in the
ordinary course of law.16 As such, it cannot be a substitute for a lost appeal.17

Nonetheless, in accordance with the liberal spirit pervading the Rules of Court and in the interest of
substantial justice, this Court has, before, treated a petition for certiorari as a petition for review on certiorari,
particularly (1) if the petition for certiorari was filed within the reglementary period within which to file a petition
for review on certiorari; (2) when errors of judgment are averred; and (3) when there is sufficient reason to
justify the relaxation of the rules.18 Considering that the present petition was filed within the 15-day
reglementary period for filing a petition for review on certiorari under Rule 45, that an error of judgment is
averred, and because of the significance of the issue on jurisdiction, the Court deems it proper and justified to
relax the rules and, thus, treat the instant petition for certiorari as a petition for review on certiorari.

Having disposed of the procedural aspect, we now turn to the central issue in this case. The basic question
posed before this Court is whether or not the CTA has jurisdiction over a special civil action for certiorari
assailing an interlocutory order issued by the RTC in a local tax case.

This Court rules in the affirmative.

On June 16, 1954, Congress enacted Republic Act No. 1125 (RA 1125) creating the CTA and giving to the
said court jurisdiction over the following:

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

(2) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or
other money charges; seizure, detention or release of property affected fines, forfeitures or other
penalties imposed in relation thereto; or other matters arising under the Customs Law or other law or
part of law administered by the Bureau of Customs; and

(3) Decisions of provincial or City Boards of Assessment Appeals in cases involving the assessment
and taxation of real property or other matters arising under the Assessment Law, including rules and
regulations relative thereto.

On March 30, 2004, the Legislature passed into law Republic Act No. 9282 (RA 9282) amending RA 1125 by
expanding the jurisdiction of the CTA, enlarging its membership and elevating its rank to the level of a
collegiate court with special jurisdiction. Pertinent portions of the amendatory act provides thus:

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

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

1. Decisions of the Commissioner of Internal Revenue in cases involving disputed

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

3. Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally
decided or resolved by them in the exercise of their original or appellate jurisdiction;

4. Decisions of the Commissioner of Customs in cases involving liability for customs duties,
fees or other money charges, seizure, detention or release of property affected, fines,
forfeitures or other penalties in relation thereto, or other matters arising under the Customs
Law or other laws administered by the Bureau of Customs;

5. Decisions of the Central Board of Assessment Appeals in the exercise of its appellate
jurisdiction over cases involving the assessment and taxation of real property originally
decided by the provincial or city board of assessment appeals;

6. Decisions of the Secretary of Finance on customs cases elevated to him automatically for
review from decisions of the Commissioner of Customs which are adverse to the Government
under Section 2315 of the Tariff and Customs Code;

7. Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product,
commodity or article, and the Secretary of Agriculture in the case of agricultural product,
commodity or article, involving dumping and countervailing duties under Section 301 and 302,
respectively, of the Tariff and Customs Code, and safeguard measures under Republic Act
No. 8800, where either party may appeal the decision to impose or not to impose said duties.

b. Jurisdiction over cases involving criminal offenses as herein provided:

1. Exclusive original jurisdiction over all criminal offenses arising from violations of the National
Internal Revenue Code or Tariff and Customs Code and other laws administered by the
Bureau of Internal Revenue or the Bureau of Customs: Provided, however, That offenses or
felonies mentioned in this paragraph where the principal amount of taxes and fees, exclusive
of charges and penalties, claimed is less than One million pesos (₱1,000,000.00) or where
there is no specified amount claimed shall be tried by the regular Courts and the jurisdiction of
the CTA shall be appellate. Any provision of law or the Rules of Court to the contrary
notwithstanding, the criminal action and the corresponding civil action for the recovery of civil
liability for taxes and penalties shall at all times be simultaneously instituted with, and jointly
determined in the same proceeding by the CTA, the filing of the criminal action being deemed
to necessarily carry with it the filing of the civil action, and no right to reserve the filing of such
civil action separately from the criminal action will be recognized.

2. Exclusive appellate jurisdiction in criminal offenses:

a. Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax cases originally
decided by them, in their respected territorial jurisdiction.

b. Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise
of their appellate jurisdiction over tax cases originally decided by the Metropolitan Trial Courts, Municipal Trial
Courts and Municipal Circuit Trial Courts in their respective jurisdiction.

c. Jurisdiction over tax collection cases as herein provided:

1. Exclusive original jurisdiction in tax collection cases involving final and executory
assessments for taxes, fees, charges and penalties: Provides, however, that collection cases
where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is
less than One million pesos (₱1,000,000.00) shall be tried by the proper Municipal Trial Court,
Metropolitan Trial Court and Regional Trial Court.

2. Exclusive appellate jurisdiction in tax collection cases:

a. Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax collection cases
originally decided by them, in their respective territorial jurisdiction.
b. Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the Exercise
of their appellate jurisdiction over tax collection cases originally decided by the Metropolitan Trial Courts,
Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective jurisdiction.19

A perusal of the above provisions would show that, while it is clearly stated that the CTA has exclusive
appellate jurisdiction over decisions, orders or resolutions of the RTCs in local tax cases originally decided or
resolved by them in the exercise of their original or appellate jurisdiction, there is no categorical statement
under RA 1125 as well as the amendatory RA 9282, which provides that th e CTA has jurisdiction over
petitions for certiorari assailing interlocutory orders issued by the RTC in local tax cases filed before it.

The prevailing doctrine is that the authority to issue writs of certiorari involves the exercise of original
jurisdiction which must be expressly conferred by the Constitution or by law and cannot be implied from the
mere existence of appellate jurisdiction.20 Thus, in the cases of Pimentel v. COMELEC,21 Garcia v. De
Jesus,22 Veloria v. COMELEC,23Department of Agrarian Reform Adjudication Board v. Lubrica,24 and Garcia v.
Sandiganbayan,25 this Court has ruled against the jurisdiction of courts or tribunals over petitions for certiorari
on the ground that there is no law which expressly gives these tribunals such power.26 It must be observed,
however, that with the exception of Garcia v. Sandiganbayan,27 these rulings pertain not to regular courts but
to tribunals exercising quasi-judicial powers. With respect to the Sandiganbayan, Republic Act No. 824928 now
provides that the special criminal court has exclusive original jurisdiction over petitions for the issuance of the
writs of mandamus, prohibition, certiorari, habeas corpus, injunctions, and other ancillary writs and processes
in aid of its appellate jurisdiction.

In the same manner, Section 5 (1), Article VIII of the 1987 Constitution grants power to the Supreme Court, in
the exercise of its original jurisdiction, to issue writs of certiorari, prohibition and mandamus. With respect to
the Court of Appeals, Section 9 (1) of Batas Pambansa Blg. 129 (BP 129) gives the appellate court, also in
the exercise of its original jurisdiction, the power to issue, among others, a writ of certiorari,whether or not in
aid of its appellate jurisdiction. As to Regional Trial Courts, the power to issue a writ of certiorari, in the
exercise of their original jurisdiction, is provided under Section 21 of BP 129.

The foregoing notwithstanding, while there is no express grant of such power, with respect to the CTA,
Section 1, Article VIII of the 1987 Constitution provides, nonetheless, that judicial power shall be vested in one
Supreme Court and in such lower courts as may be established by law and that judicial power includes the
duty of the courts of justice to settle actual controversies involving rights which are legally demandable and
enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of any branch or instrumentality of the Government.

On the strength of the above constitutional provisions, it can be fairly interpreted that the power of the CTA
includes that of determining whether or not there has been grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of the RTC in issuing an interlocutory order in cases falling within the
exclusive appellate jurisdiction of the tax court. It, thus, follows that the CTA, by constitutional mandate, is
vested with jurisdiction to issue writs of certiorari in these cases.

Indeed, in order for any appellate court to effectively exercise its appellate jurisdiction, it must have the
authority to issue, among others, a writ of certiorari. In transferring exclusive jurisdiction over appealed tax
cases to the CTA, it can reasonably be assumed that the law intended to transfer also such power as is
deemed necessary, if not indispensable, in aid of such appellate jurisdiction. There is no perceivable reason
why the transfer should only be considered as partial, not total.

Consistent with the above pronouncement, this Court has held as early as the case of J.M. Tuason & Co., Inc.
v. Jaramillo, et al.29 that "if a case may be appealed to a particular court or judicial tribunal or body, then said
court or judicial tribunal or body has jurisdiction to issue the extraordinary writ of certiorari, in aid of its
appellate jurisdiction."30 This principle was affirmed in De Jesus v. Court of Appeals,31 where the Court stated
that "a court may issue a writ of certiorari in aid of its appellate jurisdiction if said court has jurisdiction to
review, by appeal or writ of error, the final orders or decisions of the lower court."32 The rulings in J.M. Tuason
and De Jesus were reiterated in the more recent cases of Galang, Jr. v. Geronimo33 and Bulilis v. Nuez.34

Furthermore, Section 6, Rule 135 of the present Rules of Court provides that when by law, jurisdiction is
conferred on a court or judicial officer, all auxiliary writs, processes and other means necessary to carry it into
effect may be employed by such court or officer.

If this Court were to sustain petitioners' contention that jurisdiction over their certiorari petition lies with the CA,
this Court would be confirming the exercise by two judicial bodies, the CA and the CTA, of jurisdiction over
basically the same subject matter – precisely the split-jurisdiction situation which is anathema to the orderly
administration of justice.35 The Court cannot accept that such was the legislative motive, especially
considering that the law expressly confers on the CTA, the tribunal with the specialized competence over tax
and tariff matters, the role of judicial review over local tax cases without mention of any other court that may
exercise such power. Thus, the Court agrees with the ruling of the CA that since appellate jurisdiction over
private respondents' complaint for tax refund is vested in the CTA, it follows that a petition for certiorari
seeking nullification of an interlocutory order issued in the said case should, likewise, be filed with the same
court. To rule otherwise would lead to an absurd situation where one court decides an appeal in the main
case while another court rules on an incident in the very same case.

Stated differently, it would be somewhat incongruent with the pronounced judicial abhorrence to split
jurisdiction to conclude that the intention of the law is to divide the authority over a local tax case filed with the
RTC by giving to the CA or this Court jurisdiction to issue a writ of certiorari against interlocutory orders of the
RTC but giving to the CTA the jurisdiction over the appeal from the decision of the trial court in the same
case. It is more in consonance with logic and legal soundness to conclude that the grant of appellate
jurisdiction to the CTA over tax cases filed in and decided by the RTC carries with it the power to issue a writ
of certiorari when necessary in aid of such appellate jurisdiction. The supervisory power or jurisdiction of the
CTA to issue a writ of certiorari in aid of its appellate jurisdiction should co-exist with, and be a complement to,
its appellate jurisdiction to review, by appeal, the final orders and decisions of the RTC, in order to have
complete supervision over the acts of the latter.36

A grant of appellate jurisdiction implies that there is included in it the power necessary to exercise it
effectively, to make all orders that will preserve the subject of the action, and to give effect to the final
determination of the appeal. It carries with it the power to protect that jurisdiction and to make the decisions of
the court thereunder effective. The court, in aid of its appellate jurisdiction, has authority to control all auxiliary
and incidental matters necessary to the efficient and proper exercise of that jurisdiction. For this purpose, it
1âwphi1

may, when necessary, prohibit or restrain the performance of any act which might interfere with the proper
exercise of its rightful jurisdiction in cases pending before it.37

Lastly, it would not be amiss to point out that a court which is endowed with a particular jurisdiction should
have powers which are necessary to enable it to act effectively within such jurisdiction. These should be
regarded as powers which are inherent in its jurisdiction and the court must possess them in order to enforce
its rules of practice and to suppress any abuses of its process and to defeat any attempted thwarting of such
process.

In this regard, Section 1 of RA 9282 states that the CTA shall be of the same level as the CA and shall
possess all the inherent powers of a court of justice.

Indeed, courts possess certain inherent powers which may be said to be implied from a general grant of
jurisdiction, in addition to those expressly conferred on them. These inherent powers are such powers as are
necessary for the ordinary and efficient exercise of jurisdiction; or are essential to the existence, dignity and
functions of the courts, as well as to the due administration of justice; or are directly appropriate, convenient
and suitable to the execution of their granted powers; and include the power to maintain the court's jurisdiction
and render it effective in behalf of the litigants.38

Thus, this Court has held that "while a court may be expressly granted the incidental powers necessary to
effectuate its jurisdiction, a grant of jurisdiction, in the absence of prohibitive legislation, implies the necessary
and usual incidental powers essential to effectuate it, and, subject to existing laws and constitutional
provisions, every regularly constituted court has power to do all things that are reasonably necessary for the
administration of justice within the scope of its jurisdiction and for the enforcement of its judgments and
mandates."39 Hence, demands, matters or questions ancillary or incidental to, or growing out of, the main
action, and coming within the above principles, may be taken cognizance of by the court and determined,
since such jurisdiction is in aid of its authority over the principal matter, even though the court may thus be
called on to consider and decide matters which, as original causes of action, would not be within its
cognizance.40

Based on the foregoing disquisitions, it can be reasonably concluded that the authority of the CTA to take
cognizance of petitions for certiorari questioning interlocutory orders issued by the RTC in a local tax case is
included in the powers granted by the Constitution as well as inherent in the exercise of its appellate
jurisdiction.

Finally, it would bear to point out that this Court is not abandoning the rule that, insofar as quasi-judicial
tribunals are concerned, the authority to issue writs of certiorari must still be expressly conferred by the
Constitution or by law and cannot be implied from the mere existence of their appellate jurisdiction. This
doctrine remains as it applies only to quasi-judicial bodies.

WHEREFORE, the petition is DENIED.

SO ORDERED.

DIOSDADO M. PERALTA
Associate Justice
 2. G.R. No. 210987 November 24, 2014

THE PHILIPPINE AMERICAN LIFE AND GENERAL INSURANCE COMPANY, Petitioner,

vs.
THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE, Respondents.

DECISION

VELASCO, JR., J.:

Nature of the Case

Before the Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing and
seeking the reversal of the Resolutions of the Court of Appeals (CA) in CA-G.R. SP No. 127984, dated May
23, 20131 and January 21, 2014, which dismissed outright the petitioner's appeal from the Secretary of
Finance's review of BIR Ruling No. 015-122 for lack of jurisdiction.

The Facts

Petitioner The Philippine American Life and General Insurance Company (Philamlife) used to own 498,590
Class A shares in Philam Care Health Systems, Inc. (PhilamCare), representing 49.89% of the latter's
outstanding capital stock. In 2009, petitioner, in a bid to divest itself of its interests in the health maintenance
organization industry, offered to sell its shareholdings in PhilamCare through competitive bidding. Thus, on
September 24, 2009, petitioner's Class A shares were sold for USD 2,190,000, or PhP 104,259,330 based on
the prevailing exchange rate at the time of the sale, to STI Investments, Inc., who emerged as the highest
bidder.3

After the sale was completed and the necessary documentary stamp and capital gains taxes were paid,
Philamlife filed an application for a certificate authorizing registration/tax clearance with the Bureau of Internal
Revenue (BIR) Large Taxpayers Service Division to facilitate the transfer of the shares. Months later,
petitioner was informed that it needed to secure a BIR ruling in connection with its application due to potential
donor’s tax liability. In compliance, petitioner, on January 4, 2012, requested a ruling4 to confirm that the sale
was not subject to donor’s tax, pointing out, in its request, the following: that the transaction cannot attract
donor’s tax liability since there was no donative intent and,ergo, no taxable donation, citing BIR Ruling [DA-
(DT-065) 715-09] dated November 27, 2009;5 that the shares were sold at their actual fair market value and at
arm’s length; that as long as the transaction conducted is at arm’s length––such that a bona fide business
arrangement of the dealings is done inthe ordinary course of business––a sale for less than an adequate
consideration is not subject to donor’s tax; and that donor’s tax does not apply to saleof shares sold in an
open bidding process.

On January 4, 2012, however, respondent Commissioner on Internal Revenue (Commissioner) denied

Philamlife’s request through BIR Ruling No. 015-12. As determined by the Commissioner, the selling price of
the shares thus sold was lower than their book value based on the financial statements of PhilamCare as of
the end of 2008.6 As such, the Commisioner held, donor’s tax became imposable on the price difference
pursuant to Sec. 100 of the National Internal Revenue Code (NIRC), viz:

SEC. 100. Transfer for Less Than Adequate and full Consideration.- Where property, other than real property
referred to in Section 24(D), is transferred for less than an adequate and full consideration in money or
money’s worth, then the amount by which the fair market value of the property exceeded the value of the
consideration shall, for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be
included in computing the amount of gifts made during the calendar year.

The afore-quoted provision, the Commissioner added, is implemented by Revenue Regulation 6-2008 (RR 6-
2008), which provides:

SEC. 7. SALE, BARTER OR EXCHANGE OF SHARES OF STOCK NOT TRADED THROUGH A LOCAL
STOCK EXCHANGE PURSUANT TO SECS. 24(C), 25(A)(3), 25(B), 27(D)(2), 28(A)(7)(c), 28(B)(5)(c) OF
THE TAX CODE, AS AMENDED. —

xxxx
(c) Determination of Amount and Recognition of Gain or Loss –

(c.1) In the case of cash sale, the selling price shall be the consideration per deed of sale.

xxxx

(c.1.4) In case the fair market value of the shares of stock sold, bartered, or exchanged is greater than the
amount of money and/or fair market value of the property received, the excess of the fair market value of the
shares of stock sold, bartered or exchanged overthe amount of money and the fair market value of the
property, if any, received as consideration shall be deemed a gift subject to the donor’stax under Section 100
of the Tax Code, as amended.

xxxx

(c.2) Definition of ‘fair market value’of Shares of Stock. – For purposes of this Section, ‘fair market value’ of
the share of stock sold shall be:

xxxx

(c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges, the book value of the
shares of stock as shown in the financial statements duly certified by an independent certified public
accountant nearest to the date of sale shall be the fair market value.

In view of the foregoing, the Commissioner ruled that the difference between the book value and the selling
price in the sales transaction is taxable donation subject to a 30% donor’s tax under Section 99(B) of the
NIRC.7Respondent Commissioner likewise held that BIR Ruling [DA-(DT-065) 715-09], on which petitioner
anchored its claim, has already been revoked by Revenue Memorandum Circular (RMC) No. 25-2011.8

Aggrieved, petitioner requested respondent Secretary of Finance (Secretary) to review BIR Ruling No. 015-
12, but to no avail. For on November 26, 2012, respondent Secretary affirmed the Commissioner’s assailed
ruling in its entirety.9

Ruling of the Court of Appeals

Not contented with the adverse results, petitioner elevated the case to the CA via a petition for review under
Rule 43, assigning the following errors:10

A.

The Honorable Secretary of Finance gravely erred in not finding that the application of Section 7(c.2.2) of RR
06-08 in the Assailed Ruling and RMC 25-11 is void insofar as it altersthe meaning and scope of Section 100
of the Tax Code.

B.

The Honorable Secretary of Finance gravely erred in finding that Section 100 of the Tax Code is applicable
tothe sale of the Sale of Shares.

1.

The Sale of Shares were sold at their fair market value and for fair and full consideration in money or
money’s worth.

2.

The sale of the Sale Shares is a bona fide business transaction without any donative intent and is
therefore beyond the ambit of Section 100 of the Tax Code.

3.

It is superfluous for the BIR to require an express provision for the exemption of the sale of the Sale
Shares from donor’s tax since Section 100 of the Tax Code does not explicitly subject the transaction
to donor’s tax.

C.
The Honorable Secretary of Finance gravely erred in failing to find that in the absence of any of the grounds
mentioned in Section 246 of the Tax Code, rules and regulations, rulings or circulars – such as RMC 25-11 –
cannot be given retroactive application to the prejudice of Philamlife.

On May 23, 2013, the CA issued the assailed Resolution dismissing the CA Petition, thusly:

WHEREFORE, the Petition for Review dated January 9, 2013 is DISMISSED for lack of jurisdiction.

SO ORDERED.

In disposing of the CA petition, the appellate court ratiocinated that it is the Court of Tax Appeals (CTA),
pursuant to Sec. 7(a)(1) of Republic Act No. 1125 (RA 1125),11 as amended, which has jurisdiction over the
issues raised. The outright dismissal, so the CA held, is predicated on the postulate that BIR Ruling No. 015-
12 was issued in the exercise of the Commissioner’s power to interpret the NIRC and other tax laws.
Consequently, requesting for its review can be categorized as "other matters arising under the NIRC or other
laws administered by the BIR," which is under the jurisdiction of the CTA, not the CA.

Philamlife eventually sought reconsideration but the CA, in its equally assailed January 21, 2014 Resolution,
maintained its earlier position. Hence, the instant recourse.

Issues

Stripped to the essentials, the petition raises the following issues in both procedure and substance:

1. Whether or not the CA erred in dismissing the CA Petition for lack of jurisdiction; and

2. Whether or not the price difference in petitioner’s adverted sale of shares in PhilamCare attracts
donor’s tax.

Procedural Arguments

a. Petitioner’s contentions

Insisting on the propriety of the interposed CA petition, Philamlife, while conceding that respondent
Commissioner issued BIR Ruling No. 015-12 in accordance with her authority to interpret tax laws, argued
nonetheless that such ruling is subject to review by the Secretary of Finance under Sec. 4 of the NIRC, to wit:

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

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under this Code orother laws or portions thereof
administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive
appellate jurisdiction of the Court of Tax Appeals. Petitioner postulates that there is a need to differentiate the
rulings promulgated by the respondent Commissioner relating to those rendered under the first paragraph of
Sec. 4 of the NIRC, which are appealable to the Secretary of Finance, from those rendered under the second
paragraph of Sec. 4 of the NIRC, which are subject to review on appeal with the CTA.

This distinction, petitioner argues, is readily made apparent by Department Order No. 7-02,12 as circularized by
RMC No. 40-A-02.

Philamlife further averred that Sec.7 of RA 1125, as amended, does not find application in the case at bar
since it only governs appeals from the Commissioner’s rulings under the second paragraph and does not
encompass rulings from the Secretary of Finance in the exercise of his power of review under the first, as
what was elevated to the CA. It added that under RA 1125, as amended, the only decisions of the Secretary
appealable to the CTA are those rendered in customs cases elevated to him automatically under Section
2315 of the Tariff and Customs Code.13

There is, thus, a gap in the law when the NIRC, as couched, and RA 1125, as amended, failed to supply
where the rulings of the Secretary in its exercise of its power of review under Sec. 4 of the NIRC are
appealable to. This gap, petitioner submits, was remedied by British American Tobacco v. Camacho14 wherein
the Court ruled that where what is assailed is the validity or constitutionality of a law, or a rule or regulation
issued by the administrative agency, the regular courts have jurisdiction to pass upon the same.
In sum, appeals questioning the decisions of the Secretary of Finance in the exercise of its power of review
under Sec. 4 of the NIRC are not within the CTA’s limited special jurisdiction and, according to petitioner, are
appealable to the CA via a Rule 43 petition for review.

b. Respondents’ contentions

Before the CA, respondents countered petitioner’s procedural arguments by claiming that even assuming
arguendo that the CTA does not have jurisdiction over the case, Philamlife, nevertheless,committed a fatal
error when it failed to appeal the Secretary of Finance’s ruling to the Office of the President (OP). As made
apparent by the rules, the Department of Finance is not among the agencies and quasi-judicial bodies
enumerated under Sec. 1, Rule 43 of the Rules of Court whose decisions and rulings are appealable through
a petition for review.15 This is in stark contrast to the OP’s specific mention under the same provision, so
respondents pointed out.

To further reinforce their argument, respondents cite the President’s power of review emanating from his
power of control as enshrined under Sec. 17 of Article VII of the Constitution, which reads:

Section 17.The President shall have control of all the executive departments, bureaus, and offices. He shall
ensure that the laws be faithfully executed.

The nature and extent of the President’s constitutionally granted power of control have beendefined in a
plethora of cases, most recently in Elma v. Jacobi,16 wherein it was held that:

x x x This power of control, which even Congress cannot limit, let alone withdraw, means the power of the
Chief Executive to review, alter, modify, nullify, or set aside what a subordinate, e.g., members of the Cabinet
and heads of line agencies, had done in the performance of their duties and to substitute the judgment of the
former for that of the latter.

In their Comment on the instant petition, however, respondents asseverate that the CA did not err in its
holding respecting the CTA’s jurisdiction over the controversy.

The Court’s Ruling

The petition is unmeritorious.

Reviews by the Secretary of Finance pursuant to Sec. 4 of the NIRC are appealable to the CTA

To recapitulate, three different, if not conflicting, positions as indicated below have been advanced by the
parties and by the CA as the proper remedy open for assailing respondents’ rulings:

1. Petitioners: The ruling of the Commissioner is subject to review by the Secretary under Sec. 4 of
the NIRC, and that of the Secretary to the CA via Rule 43;

2. Respondents: The ruling of the Commissioner is subject to review by the Secretary under Sec. 4 of
the NIRC, and that of the Secretary to the Office of the President before appealing to the CA via a
Rule 43 petition; and

3. CA: The ruling of the Commissioner is subject to review by the CTA.

We now resolve.

Preliminarily, it bears stressing that there is no dispute that what is involved herein is the respondent
Commissioner’s exercise of power under the first paragraph of Sec. 4 of the NIRC––the power to interpret tax
laws. This, in fact, was recognized by the appellate court itself, but erroneously held that her action in the
exercise of such power is appealable directly to the CTA. As correctly pointed out by petitioner, Sec. 4 of the
NIRC readily provides that the Commissioner’s power to interpret the provisions of this Code and other tax
laws is subject to review by the Secretary of Finance. The issue that now arises is this––where does one seek
immediate recourse from the adverse ruling of the Secretary of Finance in its exercise of its power of review
under Sec. 4?

Admittedly, there is no provision in law that expressly provides where exactly the ruling of the Secretary of
Finance under the adverted NIRC provision is appealable to. However, We find that Sec. 7(a)(1) of RA 1125,
as amended, addresses the seeming gap in the law asit vests the CTA, albeit impliedly, with jurisdiction over
the CA petition as "other matters" arising under the NIRC or other laws administered by the BIR. As stated:

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

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

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

Even though the provision suggests that it only covers rulings of the Commissioner, We hold that it is,
nonetheless, sufficient enough to include appeals from the Secretary’s review under Sec. 4 of the NIRC.

It is axiomatic that laws should be given a reasonable interpretation which does not defeat the very purpose
for which they were passed.17 Courts should not follow the letter of a statute when to do so would depart from
the true intent of the legislature or would otherwise yield conclusions inconsistent with the purpose of the
act.18 This Court has, in many cases involving the construction of statutes, cautioned against narrowly
interpreting a statute as to defeat the purpose of the legislator, and rejected the literal interpretation of statutes
if todo so would lead to unjust or absurd results.19

Indeed, to leave undetermined the mode of appeal from the Secretary of Finance would be an injustice to
taxpayers prejudiced by his adverse rulings. To remedy this situation, Weimply from the purpose of RA 1125
and its amendatory laws that the CTA is the proper forum with which to institute the appeal. This is not, and
should not, in any way, be taken as a derogation of the power of the Office of President but merely as
recognition that matters calling for technical knowledge should be handled by the agency or quasi-judicial
body with specialization over the controversy. As the specialized quasi-judicial agency mandated to
adjudicate tax, customs, and assessment cases, there can be no other court of appellate jurisdiction that can
decide the issues raised inthe CA petition, which involves the tax treatment of the shares of stocks sold.
Petitioner, though, nextinvites attention to the ruling in Ursal v. Court of Tax Appeals20 to argue against
granting the CTA jurisdiction by implication, viz:

Republic Act No. 1125 creating the Court of Tax Appeals did not grant it blanket authority to decide any and
all tax disputes. Defining such special court’s jurisdiction, the Act necessarily limited its authority to those
matters enumerated therein. Inline with this idea we recently approved said court’s order rejecting an appeal
to it by Lopez & Sons from the decision of the Collector ofCustoms, because in our opinion its jurisdiction
extended only to a review of the decisions of the Commissioner of Customs, as provided bythe statute — and
not to decisions of the Collector of Customs. (Lopez & Sons vs. The Court of Tax Appeals, 100 Phil., 850, 53
Off. Gaz., [10] 3065).

xxxx

x x x Republic Act No. 1125 is a complete law by itself and expressly enumerates the matters which the Court
of Tax Appeals may consider; such enumeration excludes all others by implication. Expressio unius est
exclusio alterius.

Petitioner’s contention is untenable. Lest the ruling in Ursalbe taken out of context, but worse as a precedent,
it must be noted that the primary reason for the dismissal of the said case was that the petitioner therein
lacked the personality to file the suit with the CTA because he was not adversely affected by a decision or
ruling of the Collector of Internal Revenue, as was required under Sec. 11 of RA 1125.21 As held:

We share the view that the assessor had no personality to resort to the Court of Tax Appeals. The rulings of
the Board of Assessment Appeals did not "adversely affect" him. At most it was the City of Cebu that had
been adversely affected in the sense that it could not thereafter collect higher realty taxes from the
abovementioned property owners. His opinion, it is true had been overruled; but the overruling inflicted no
material damage upon him or his office. And the Court of Tax Appeals was not created to decide mere
conflicts of opinion between administrative officers or agencies. Imagine an income tax examiner resorting to
the Court of Tax Appeals whenever the Collector of Internal Revenue modifies, or lower his assessment on
the return of a tax payer!22

The appellate power of the CTA includes certiorari

Petitioner is quick to point out, however, that the grounds raised in its CA petition included the nullity of
Section 7(c.2.2) of RR 06-08 and RMC 25-11. In an attempt to divest the CTA jurisdiction over the
controversy, petitioner then cites British American Tobacco, wherein this Court has expounded on the limited
jurisdiction of the CTA in the following wise:

While the above statute confers on the CTA jurisdiction to resolve tax disputes in general, this does not
include cases where the constitutionality of a law or rule is challenged. Where what is assailed is the validity
or constitutionality of a law, or a rule or regulation issued by the administrative agency in the performance of
its quasi legislative function, the regular courts have jurisdiction to pass upon the same. The determination of
whether a specific rule or set of rules issued by an administrative agency contravenes the law or the
constitution is within the jurisdiction of the regular courts. Indeed, the Constitution vests the power of judicial
review or the power to declare a law, treaty, international or executive agreement, presidential decree, order,
instruction, ordinance, or regulation inthe courts, including the regional trial courts. This is within the scope of
judicial power, which includes the authority of the courts to determine inan appropriate action the validity of
the acts of the political departments. Judicial power includes the duty of the courts of justice to settle actual
controversies involving rights which are legally demandable and enforceable, and to determine whether or not
there has been a grave abuse of discretion amounting to lack or excess of jurisdiction on the part of any
branch or instrumentality of the Government.23

Vis-a-vis British American Tobacco, it bears to stress what appears to be a contrasting ruling in Asia
International Auctioneers, Inc. v. Parayno, Jr., to wit:

Similarly, in CIR v. Leal, pursuant to Section 116 of Presidential Decree No. 1158 (The National Internal
Revenue Code, as amended) which states that "[d]ealers in securities shall pay a tax equivalent to six (6%)
per centum of their gross income. Lending investors shall pay a tax equivalent to five (5%) per cent, of their
gross income," the CIR issued Revenue Memorandum Order (RMO) No. 15-91 imposing 5% lending
investor’s tax on pawnshops based on their gross income and requiring all investigating units of the BIR to
investigate and assess the lending investor’s tax due from them. The issuance of RMO No. 15-91 was an
offshoot of the CIR’s finding that the pawnshop business is akin to that of "lending investors" as defined in
Section 157(u) of the Tax Code. Subsequently, the CIR issued RMC No. 43-91 subjecting pawn tickets to
documentary stamp tax. Respondent therein, Josefina Leal, owner and operator of Josefina’s Pawnshop,
asked for a reconsideration of both RMO No. 15-91 and RMC No. 43-91, but the same was denied by
petitioner CIR. Leal then filed a petition for prohibition with the RTC of San Mateo, Rizal, seeking to prohibit
petitioner CIR from implementing the revenue orders. The CIR, through the OSG, filed a motion to dismiss on
the ground of lack of jurisdiction. The RTC denied the motion. Petitioner filed a petition for certiorari and
prohibition with the CA which dismissed the petition "for lack of basis." In reversing the CA, dissolving the Writ
of Preliminary Injunction issued by the trial court and ordering the dismissal of the case before the trial court,
the Supreme Court held that "[t]he questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or
opinions of the Commissioner implementing the Tax Code on the taxability of pawnshops." They were issued
pursuant to the CIR’s power under Section 245 of the Tax Code "to make rulings or opinions in connection
with the implementation of the provisions of internal revenue laws, including ruling on the classification of
articles of sales and similar purposes."The Court held that under R.A. No. 1125 (An Act Creating the Court of
Tax Appeals), as amended, such rulings of the CIR are appealable to the CTA.

In the case at bar, the assailed revenue regulations and revenue memorandum circulars are actually rulings
or opinions of the CIR on the tax treatment of motor vehicles sold at public auction within the SSEZ to
implement Section 12 of R.A. No. 7227 which provides that "exportation or removal of goods from the territory
of the [SSEZ] to the other parts of the Philippine territory shall be subject to customs duties and taxes under
the Customs and Tariff Codeand other relevant tax laws of the Philippines." They were issued pursuant to the
power of the CIR under Section 4 of the National Internal Revenue Code x x x.24 (emphasis added)

The respective teachings in British American Tobacco and Asia International Auctioneers, at first blush,
appear to bear no conflict––that when the validity or constitutionality of an administrative rule or regulation is
assailed, the regular courts have jurisdiction; and if what is assailed are rulings or opinions of the
Commissioner on tax treatments, jurisdiction over the controversy is lodged with the CTA. The problem with
the above postulates, however, is that they failed to take into consideration one crucial point––a taxpayer can
raise both issues simultaneously.

Petitioner avers that there is now a trend wherein both the CTA and the CA disclaim jurisdiction over tax
cases: on the one hand, mere prayer for the declaration of a tax measure’s unconstitutionality or invalidity
before the CTA can result in a petition’s outright dismissal, and on the other hand, the CA will likewise dismiss
the same petition should it find that the primary issue is not the tax measure’s validity but the assessment or
taxability of the transaction or subject involved. To illustrate this point, petitioner cites the assailed Resolution,
thusly: Admittedly, in British American Tobacco vs. Camacho, the Supreme Court has ruled that the
determination of whether a specific rule or set of rules issued by an administrative agency contravenes the
law or the constitution is within the jurisdiction of the regular courts, not the CTA.

xxxx

Petitioner essentially questions the CIR’s ruling that Petitioner’s sale of shares is a taxable donation under
Sec. 100 of the NIRC. The validity of Sec. 100 of the NIRC, Sec. 7 (C.2.2) and RMC 25-11 is merely
questioned incidentally since it was used by the CIR as bases for its unfavourable opinion. Clearly, the
Petition involves an issue on the taxability of the transaction rather than a direct attack on the constitutionality
of Sec. 100, Sec.7 (c.2.2.) of RR 06-08 and RMC 25-11. Thus, the instant Petition properly pertains to the
CTA under Sec. 7 of RA 9282.
As a result of the seemingly conflicting pronouncements, petitioner submits that taxpayers are now at a
quandary on what mode of appeal should be taken, to which court or agency it should be filed, and which
case law should be followed.

Petitioner’s above submission is specious.

In the recent case of City of Manila v. Grecia-Cuerdo,25 the Court en banc has ruled that the CTA now has the
power of certiorari in cases within its appellate jurisdiction. To elucidate:

The prevailing doctrine is that the authority to issue writs of certiorari involves the exercise of original
jurisdiction which must be expressly conferred by the Constitution or by law and cannot be implied from the
mere existence of appellate jurisdiction. Thus, x x x this Court has ruled against the jurisdiction of courts or
tribunals over petitions for certiorari on the ground that there is no law which expressly gives these tribunals
such power. Itmust be observed, however, that x x x these rulings pertain not to regular courts but to tribunals
exercising quasijudicial powers. With respect tothe Sandiganbayan, Republic Act No. 8249 now provides that
the special criminal court has exclusive original jurisdiction over petitions for the issuance of the writs of
mandamus, prohibition, certiorari, habeas corpus, injunctions, and other ancillary writs and processes in aid of
its appellate jurisdiction.

In the same manner, Section 5 (1), Article VIII of the 1987 Constitution grants power to the Supreme Court, in
the exercise of its original jurisdiction, to issue writs of certiorari, prohibition and mandamus. With respect to
the Court of Appeals, Section 9 (1) of Batas Pambansa Blg. 129 (BP 129) gives the appellate court, also in
the exercise of its original jurisdiction, the power to issue, among others, a writ of certiorari, whether or not in
aid of its appellate jurisdiction. As to Regional Trial Courts, the power to issue a writ of certiorari, in the
exercise of their original jurisdiction, is provided under Section 21 of BP 129.

The foregoing notwithstanding, while there is no express grant of such power, with respect to the CTA,
Section 1, Article VIII of the 1987 Constitution provides, nonetheless, that judicial power shall be vested in one
Supreme Court and in such lower courts as may be established by law and that judicial power includes the
duty of the courts of justice to settle actual controversies involving rights which are legally demandable and
enforceable, and to determine whether or not there has been a grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of any branch or instrumentality of the Government.

On the strength of the above constitutional provisions, it can be fairly interpreted that the power of the CTA
includes that of determining whether or not there has been grave abuse of discretion amounting to lack or
excess of jurisdiction on the part of the RTC in issuing an interlocutory order in cases falling within the
exclusive appellate jurisdiction of the tax court. It, thus, follows that the CTA, by constitutional mandate, is
vested with jurisdiction to issue writs of certiorari in these cases.

Indeed, in order for any appellate court to effectively exercise its appellate jurisdiction, it must have the
authority to issue, among others, a writ of certiorari. In transferring exclusive jurisdiction over appealed tax
cases to the CTA, it can reasonably be assumed that the law intended to transfer also such power as is
deemed necessary, if not indispensable, in aid of such appellate jurisdiction. There is no perceivable reason
why the transfer should only be considered as partial, not total. (emphasis added)

Evidently, City of Manilacan be considered as a departure from Ursal in that in spite of there being no express
grant in law, the CTA is deemed granted with powers of certiorari by implication. Moreover, City of Manila
diametrically opposes British American Tobacco to the effect that it is now within the power of the CTA,
through its power of certiorari, to rule on the validity of a particular administrative ruleor regulation so long as it
is within its appellate jurisdiction. Hence, it can now rule not only on the propriety of an assessment or tax
treatment of a certain transaction, but also on the validity of the revenue regulation or revenue memorandum
circular on which the said assessment is based.

Guided by the doctrinal teaching in resolving the case at bar, the fact that the CA petition not only contested
the applicability of Sec. 100 of the NIRC over the sales transaction but likewise questioned the validity of Sec.
7 (c.2.2) of RR 06-08 and RMC 25-11 does not divest the CTA of its jurisdiction over the controversy, contrary
to petitioner's arguments.

The price difference is subject to donor's tax

Petitioner's substantive arguments are unavailing. The absence of donative intent, if that be the case, does
not exempt the sales of stock transaction from donor's tax since Sec. 100 of the NIRC categorically states that
the amount by which the fair market value of the property exceeded the value of the consideration shall be
deemed a gift. Thus, even if there is no actual donation, the difference in price is considered a donation by
1âwphi 1

fiction of law.
Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely sets the parameters for
determining the "fair market value" of a sale of stocks. Such issuance was made pursuant to the
Commissioner's power to interpret tax laws and to promulgate rules and regulations for their implementation.

Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after the sale, was being applied
retroactively in contravention to Sec. 246 of the NIRC.26 Instead, it merely called for the strict application of
Sec. 100, which was already in force the moment the NIRC was enacted.

WHEREFORE, the petition is hereby DISMISSED. The Resolutions of the Court of Appeals in CA-G.R. SP
No. 127984 dated May 23, 2013 and January 21, 2014 are hereby AFFIRMED.

SO ORDERED.

PRESBITERO J. VELASCO, JR.

Associate Justice

Footnotes

5
"The legislative intendment of the deemed gift provision under Section 100 of the Tax Code is to
discourage the parties to a sale from manipulating their selling price in order to save on income taxes.
This is because under the Tax Code, the measurement of gain from a disposition of property merely
considers the amount realized from the sale, which is the selling price minus the basis of the property
sold. Hence, if the parties would declare a lower selling price per document of sale than the actual
amount of money which changed hands, there is foregone revenue and the government is placed at a
very disadvantageous position."

6
Rollo, p. 190.

7
NIRC, Sec. 99(B): Tax Payable by Donor if Donee is a Stranger. - When the donee or beneficiary is
stranger, the tax payable by the donor shall be thirty percent (30%) of the net gifts. For the purpose of
this tax, a "stranger", is a person who is not a:

(1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant;
or

(2) Relative by consanguinity in the collateral line within the fourth degree of relationship.

8
"It is noteworthy to state that the above provision (Section 100 of the Tax Code) does not mention of
any exempt transaction. The above provision is clear and free from any doubt and/or ambiguity.
Hence, there is no room for interpretation. There is only room for application."

12
Providing for the Implementing Rules of the First Paragraph of Section 4 of the National

Internal Revenue Code of 1997, Repealing for this Purpose Department Order No. 005-99 and
Revenue Administrative Order No. 1-99.

WHEREAS, Section 4 of Republic Act No. 8424 (the National Internal Revenue Code of 1997,
‘the NIRC’ for brevity) vests with the Commissioner of Internal Revenue exclusive and original
jurisdiction to interpret its provisions and other tax laws, subject to review by the Secretary of
Finance;

xxxx

WHEREAS, there is a need to further provide for the implementing rules of the first paragraph
of

Section 4 of the NIRC.

xxxx

Section 1. Scope of this Order. – This Department Order shall apply to all rulings of the
Bureau of Internal Revenue (BIR) that implement the provisions of the NIRC and other tax
laws.
 Section 2. Validity of Rulings. – A ruling by the Commissioner of Internal Revenue shall be
presumed valid until overturned or modified by the Secretary of Finance.

Section 3. Rulings adverse to the taxpayer. – A taxpayer who receives an adverse ruling from
the Commissioner of Internal Revenue may, within thirty (30) days from the date of receipt of
such ruling, seek its review by the Secretary of Finance. x x x

13
Sec. 7(a)(6), RA 1125, as amended:

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

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

x x x x 6. Decisions of the Secretary of Finance on customs cases elevated to him

automatically for review from decisions of the Commissioner of Customs which are adverse to
the Government under Section 2315 of the Tariff and Customs Code.

14
G.R. No. 163583, August 20, 2008, 562 SCRA 511.

15
Section 1. Scope. — This Rule shall apply to appeals from judgments or final orders of the Court of
Tax Appeals and from awards, judgments, final orders or resolutions of or authorized by any quasi-
judicial agency in the exercise of its quasi-judicial functions. Among these agencies are the Civil
Service Commission, Central Board of Assessment Appeals, Securities and Exchange Commission,
Office of the President, Land Registration Authority, Social Security Commission, Civil Aeronautics
Board, Bureau of Patents, Trademarks and Technology Transfer, National Electrification
Administration, Energy Regulatory Board, National Telecommunications Commission, Department of
Agrarian Reform under Republic Act No. 6657, Government Service Insurance System, Employees
Compensation Commission, Agricultural Invention Board, Insurance Commission, Philippine Atomic
Energy Commission, Board of Investments, Construction Industry Arbitration Commission, and
voluntary arbitrators authorized by law.

21
SEC. 11. Who may appeal; effect of appeal. — Any person, association or corporation adversely
affected by a decision or ruling of the Collector of Internal Revenue, the Collector of Customs or any
provincial or city Board of Assessment Appeals may file an appeal in the Court of Tax Appeals within
thirty days after the receipt of such decision or ruling.

26
EC. 246. Non-Retroactivity of Rulings. - Any revocation, modification or reversal of any of the rules
and regulations promulgated in accordance with the preceding Sections or any of the rulings or
circulars promulgated by the Commissioner shall not be given retroactive application if the revocation,
modification or reversal will be prejudicial to the taxpayers, except in the following cases:

(a) Where the taxpayer deliberately misstates or omits material facts from his return or any
document required of him by the Bureau of Jnternal Revenue;

(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based; or

(c) Where the taxpayer acted in bad faith.

 3. G.R. No. 198756 January 13, 2015

BANCO DE ORO, BANK OF COMMERCE, CHINA BANKING CORPORATION, METROPOLITAN BANK &
TRUST COMPANY, PHILIPPINE BANK OF COMMUNICATIONS, PHILIPPINE NATIONAL BANK,
PHILIPPINE VETERANS BANK AND PLANTERS DEVELOPMENT BANK, Petitioners,

RIZAL COMMERCIAL BANKING CORPORATION AND RCBC CAPITAL CORPORATION, Petitioners-

Intervenors,

CAUCUS OF DEVELOPMENT NGO NETWORKS, Petitioner-Intervenor,

vs.
REPUBLIC OF THE PHILIPPINES, THE COMMISSIONER OF INTERNAL REVENUE, BUREAU OF
INTERNAL REVENUE, SECRETARY OF FINANCE, DEPARTMENT OF FINANCE, THE NATIONAL
TREASURER AND BUREAU OF TREASURY, Respondent.

DECISION

LEONEN, J.:

The case involves the proper tax treatment of the discount or interest income arising from the ₱35 billion
worth of 10-year zero-coupon treasury bonds issued by the Bureau of Treasury on October 18, 2001
(denominated as the Poverty Eradication and Alleviation Certificates or the PEA Ce Bonds by the Caucus of
Development NGO Networks).

On October 7, 2011, the Commissioner of Internal Revenue issued BIR Ruling No. 370-20111 (2011 BIR
Ruling), declaring that the PEACe Bonds being deposit substitutes are subject to the 20% final withholding
tax. Pursuant to this ruling, the Secretary of Finance directed the Bureau of Treasury to withhold a 20% final
tax from the face value of the PEACe Bonds upon their payment at maturity on October 18, 2011.

This is a petition for certiorari, prohibition and/or mandamus2 filed by petitioners under Rule 65 of the Rules of
Court seeking to:

a. ANNUL Respondent BIR's Ruling No. 370-2011 dated 7 October 2011 [and] other related rulings
issued by BIR of similar tenor and import, for being unconstitutional and for having been issued
without jurisdiction or with grave abuse of discretion amounting to lack or· excess of jurisdiction ... ;

b. PROHIBIT Respondents, particularly the BTr; from withholding or collecting the 20% FWT from the
payment of the face value of the Government Bonds upon their maturity;

c. COMMAND Respondents, particularly the BTr, to pay the full amount of the face value of the
Government Bonds upon maturity ... ; and

d. SECURE a temporary restraining order (TRO), and subsequently a writ of preliminary injunction,
enjoining Respondents, particularly the BIR and the BTr, from withholding or collecting 20% FWT on
the Government Bonds and the respondent BIR from enforcing the assailed 2011 BIR Ruling, as well
asother related rulings issued by the BIR of similar tenor and import, pending the resolution by [the
court] of the merits of [the] Petition.3

Factual background

By letter4 dated March 23, 2001, the Caucus of Development NGO Networks (CODE-NGO) "with the
assistance of its financial advisors, Rizal Commercial Banking Corp. ("RCBC"), RCBC Capital Corp. ("RCBC
Capital"), CAPEX Finance and Investment Corp. ("CAPEX") and SEED Capital Ventures, Inc.
(SEED),"5 requested an approval from the Department of Finance for the issuance by the Bureau of Treasury
of 10-year zerocoupon Treasury Certificates (T-notes).6 The T-notes would initially be purchased by a special
purpose vehicle on behalf of CODE-NGO, repackaged and sold at a premium to investors as the PEACe
Bonds.7 The net proceeds from the sale of the Bonds"will be used to endow a permanent fund (Hanapbuhay®
Fund) to finance meritorious activities and projects of accredited non-government organizations (NGOs)
throughout the country."8

Prior to and around the time of the proposal of CODE-NGO, other proposals for the issuance of zero-coupon
bonds were also presented by banks and financial institutions, such as First Metro Investment Corporation
(proposal dated March 1, 2001),9 International Exchange Bank (proposal dated July 27, 2000),10 Security Bank
Corporation and SB Capital Investment Corporation (proposal dated July 25, 2001),11 and ATR-Kim Eng Fixed
Income, Inc. (proposal dated August 25, 1999).12 "[B]oth the proposals of First Metro Investment Corp. and
ATR-Kim Eng Fixed Income indicate that the interest income or discount earned on the proposed zerocoupon
bonds would be subject to the prevailing withholding tax."13

A zero-coupon bondis a bond bought at a price substantially lower than its face value (or at a deep discount),
with the face value repaid at the time of maturity.14 It does not make periodic interest payments, or have
socalled "coupons," hence the term zero-coupon bond.15 However, the discount to face value constitutes the
return to the bondholder.16

On May 31, 2001, the Bureau of Internal Revenue, in reply to CODENGO’s letters dated May 10, 15, and 25,
2001, issued BIR Ruling No. 020-200117 on the tax treatment of the proposed PEACe Bonds. BIR Ruling No.
020-2001, signed by then Commissioner ofInternal Revenue René G. Bañez confirmed that the PEACe
Bonds would not be classified as deposit substitutes and would not be subject to the corresponding
withholding tax:

Thus, to be classified as "deposit substitutes", the borrowing of funds must be obtained from twenty (20) or
more individuals or corporate lenders at any one time. In the light of your representation that the PEACe
Bonds will be issued only to one entity, i.e., Code NGO, the same shall not be considered as "deposit
substitutes" falling within the purview of the above definition. Hence, the withholding tax on deposit substitutes
will not apply.18 (Emphasis supplied)

The tax treatment of the proposed PEACe Bonds in BIR Ruling No. 020-2001 was subsequently reiterated in
BIR Ruling No. 035-200119 dated August 16, 2001 and BIR Ruling No. DA-175-0120 dated September 29, 2001
(collectively, the 2001 Rulings). In sum, these rulings pronounced that to be able to determine whether the
financial assets, i.e., debt instruments and securities are deposit substitutes, the "20 or more individual or
corporate lenders" rule must apply. Moreover, the determination of the phrase "at any one time" for purposes
of determining the "20 or more lenders" is to be determined at the time of the original issuance. Such being
the case, the PEACe Bonds were not to be treated as deposit substitutes.

Meanwhile, in the memorandum21 dated July 4, 2001, Former Treasurer Eduardo Sergio G. Edeza (Former
Treasurer Edeza) questioned the propriety of issuing the bonds directly to a special purpose vehicle
considering that the latter was not a Government Securities Eligible Dealer (GSED).22 Former Treasurer
Edeza recommended that the issuance of the Bonds "be done through the ADAPS"23 and that CODE-NGO
"should get a GSED to bid in [sic] its behalf."24

Subsequently, in the notice to all GSEDs entitled Public Offering of Treasury Bonds25 (Public Offering) dated
October 9, 2001, the Bureau of Treasury announced that "₱30.0B worth of 10-year Zero[-] Coupon Bonds
[would] be auctioned on October 16, 2001[.]"26 The notice stated that the Bonds "shall be issued to not
morethan 19 buyers/lenders hence, the necessity of a manual auction for this maiden issue."27 It also required
the GSEDs to submit their bids not later than 12 noon on auction date and to disclose in their bid submissions
the names of the institutions bidding through them to ensure strict compliance with the 19 lender limit.28 Lastly,
it stated that "the issue being limitedto 19 lenders and while taxable shall not be subject to the 20% final
withholding [tax]."29

On October 12, 2001, the Bureau of Treasury released a memo30 on the "Formula for the Zero-Coupon Bond."
The memo stated inpart that the formula (in determining the purchase price and settlement amount) "is only
applicable to the zeroes that are not subject to the 20% final withholding due to the 19 buyer/lender limit."31

A day before the auction date or on October 15, 2001, the Bureau of Treasury issued the "Auction Guidelines
for the 10-year Zero-Coupon Treasury Bond to be Issued on October 16, 2001" (Auction Guidelines).32 The
Auction Guidelines reiterated that the Bonds to be auctioned are "[n]ot subject to 20% withholding tax as the
issue will be limited to a maximum of 19 lenders in the primary market (pursuant to BIR Revenue Regulation
No. 020 2001)."33The Auction Guidelines, for the first time, also stated that the Bonds are "[e]ligible as liquidity
reserves (pursuant to MB Resolution No. 1545 dated 27 September 2001)[.]"34

On October 16, 2001, the Bureau of Treasury held an auction for the 10-year zero-coupon bonds.35 Also on
the same date, the Bureau of Treasury issued another memorandum36 quoting excerpts of the ruling issued by
the Bureau of Internal Revenue concerning the Bonds’ exemption from 20% final withholding tax and the
opinion of the Monetary Board on reserve eligibility.37

During the auction, there were 45 bids from 15 GSEDs.38 The bidding range was very wide, from as low as
12.248% to as high as 18.000%.39 Nonetheless, the Bureau of Treasury accepted the auction results.40 The
cut-off was at 12.75%.41

After the auction, RCBC which participated on behalf of CODE-NGO was declared as the winning bidder
having tendered the lowest bids.42 Accordingly, on October 18, 2001, the Bureau of Treasury issued ₱35
billion worth of Bonds at yield-to-maturity of 12.75% to RCBC for approximately ₱10.17 billion,43 resulting in a
discount of approximately ₱24.83 billion.
Also on October 16, 2001, RCBC Capital entered into an underwriting Agreement44 with CODE-NGO, whereby
RCBC Capital was appointed as the Issue Manager and Lead Underwriter for the offering of the PEACe
Bonds.45RCBC Capital agreed to underwrite46 on a firm basis the offering, distribution and sale of the 35 billion
Bonds at the price of ₱11,995,513,716.51.47 In Section 7(r) of the underwriting agreement, CODE-NGO
represented that "[a]ll income derived from the Bonds, inclusive of premium on redemption and gains on the
trading of the same, are exempt from all forms of taxation as confirmed by Bureau of Internal Revenue (BIR)
letter rulings dated 31 May 2001 and 16 August 2001, respectively."48

RCBC Capital sold the Government Bonds in the secondary market for an issue price of ₱11,995,513,716.51.
Petitioners purchased the PEACe Bonds on different dates.49

BIR rulings

On October 7, 2011, "the BIR issued the assailed 2011 BIR Ruling imposing a 20% FWT on the Government
Bonds and directing the BTr to withhold said final tax at the maturity thereof, [allegedly without] consultation
with Petitioners as bond holders, and without conducting any hearing."50

"It appears that the assailed 2011 BIR Ruling was issued in response to a query of the Secretary of Finance
on the proper tax treatment of the discount or interest income derived from the Government Bonds."51 The
Bureau of Internal Revenue, citing three (3) of its rulings rendered in 2004 and 2005, namely: BIR Ruling No.
007-0452 dated July 16, 2004; BIR Ruling No. DA-491-0453 dated September 13, 2004; and BIR Ruling No.
008-0554 dated July 28, 2005, declared the following:

The Php 24.3 billion discount on the issuance of the PEACe Bonds should be subject to 20% Final Tax on
interest income from deposit substitutes. It is now settled that all treasury bonds (including PEACe Bonds),
regardless of the number of purchasers/lenders at the time of origination/issuance are considered deposit
substitutes. In the case of zero-coupon bonds, the discount (i.e. difference between face value and purchase
price/discounted value of the bond) is treated as interest income of the purchaser/holder. Thus, the Php 24.3
interest income should have been properly subject to the 20% Final Tax as provided in Section 27(D)(1) of the
Tax Code of 1997. . . .

....

However, at the time of the issuance of the PEACe Bonds in 2001, the BTr was not able tocollect the final tax
on the discount/interest income realized by RCBC as a result of the 2001 Rulings. Subsequently, the issuance
of BIR Ruling No. 007-04 dated July 16, 2004 effectively modifies and supersedes the 2001 Rulings by stating
that the [1997] Tax Code is clear that the "term public means borrowing from twenty (20) or more individual or
corporate lenders at any one time." The word "any" plainly indicates that the period contemplated is the entire
term of the bond, and not merely the point of origination or issuance. . . . Thus, by taking the PEACe bonds
out of the ambit of deposits [sic] substitutes and exempting it from the 20% Final Tax, an exemption in favour
of the PEACe Bonds was created when no such exemption is found in the law.55

On October 11, 2011, a "Memo for Trading Participants No. 58-2011 was issued by the Philippine Dealing
System Holdings Corporation and Subsidiaries ("PDS Group"). The Memo provides that in view of the
pronouncement of the DOF and the BIR on the applicability of the 20% FWT on the Government Bonds, no
transferof the same shall be allowed to be recorded in the Registry of Scripless Securities ("ROSS") from 12
October 2011 until the redemption payment date on 18 October 2011. Thus, the bondholders of record
appearing on the ROSS as of 18 October 2011, which include the Petitioners, shall be treated by the BTr
asthe beneficial owners of such securities for the relevant [tax] payments to be imposed thereon."56

On October 17, 2011, replying to anurgent query from the Bureau of Treasury, the Bureau of Internal
Revenue issued BIR Ruling No. DA 378-201157 clarifying that the final withholding tax due on the discount or
interest earned on the PEACe Bonds should "be imposed and withheld not only on RCBC/CODE NGO but
also [on] ‘all subsequent holders of the Bonds.’"58

On October 17, 2011, petitioners filed a petition for certiorari, prohibition, and/or mandamus (with urgent
application for a temporary restraining order and/or writ of preliminary injunction)59 before this court.

On October 18, 2011, this court issued a temporary restraining order (TRO)60 "enjoining the implementation of
BIR Ruling No. 370-2011 against the [PEACe Bonds,] . . . subject to the condition that the 20% final
withholding tax on interest income there from shall be withheld by the petitioner banks and placed in escrow
pending resolution of [the] petition."61

On October 28, 2011, RCBC and RCBC Capital filed a motion for leave of court to intervene and to admit
petition-in-intervention62 dated October 27, 2011, which was granted by this court on November 15, 2011.63
Meanwhile, on November 9, 2011, petitioners filed their "Manifestation with Urgent Ex Parte Motion to Direct
Respondents to Comply with the TRO."64 They alleged that on the same day that the temporary restraining
order was issued, the Bureau of Treasury paid to petitioners and other bondholders the amounts representing
the face value of the Bonds, net however of the amounts corresponding to the 20% final withholding tax on
interest income, and that the Bureau of Treasury refused to release the amounts corresponding to the 20%
final withholding tax.65On November 15, 2011, this court directed respondents to: "(1) SHOW CAUSE why
they failed to comply with the October 18, 2011 resolution; and (2) COMPLY with the Court’s resolution in
order that petitioners may place the corresponding funds in escrow pending resolution of the petition."66

On the same day, CODE-NGO filed a motion for leave to intervene (and to admit attached petition-in-
intervention with comment on the petitionin-intervention of RCBC and RCBC Capital).67 The motion was
granted by this court on November 22, 2011.68

On December 1, 2011, public respondents filed their compliance.69 They explained that: 1) "the
implementation of [BIR Ruling No. 370-2011], which has already been performed on October 18, 2011 with
the withholding of the 20% final withholding tax on the face value of the PEACe bonds, is already fait accompli
. . . when the Resolution and TRO were served to and received by respondents BTr and National Treasurer
[on October 19, 2011]";70 and 2) the withheld amount has ipso facto become public funds and cannot be
disbursed or released to petitioners without congressional appropriation.71 Respondents further aver
that"[i]nasmuch as the . . . TRO has already become moot . . . the condition attached to it, i.e., ‘that the 20%
final withholding tax on interest income therefrom shall be withheld by the banks and placed in escrow . . .’has
also been rendered moot[.]"72

On December 6, 2011, this court noted respondents' compliance.73

On February 22, 2012, respondents filed their consolidated comment74 on the petitions-in-intervention filed by
RCBC and RCBC Capital and On November 27, 2012, petitioners filed their "Manifestation with Urgent
Reiterative Motion (To Direct Respondents to Comply with the Temporary Restraining Order)."75

On December 4, 2012, this court: (a) noted petitioners’ manifestation with urgent reiterative motion (to direct
respondents to comply with the temporary restraining order); and (b) required respondents to comment
thereon.76

Respondents’ comment77 was filed on April 15,2013, and petitioners filed their reply78 on June 5, 2013.

Issues

The main issues to be resolved are:

I. Whether the PEACe Bonds are "deposit substitutes" and thus subject to 20% final withholding tax
under the 1997 National Internal Revenue Code. Related to this question is the interpretation of the
phrase "borrowing from twenty (20) or more individual or corporate lenders at any one time" under
Section 22(Y) of the 1997 National Internal Revenue Code, particularly on whether the reckoning of
the 20 lenders includes trading of the bonds in the secondary market; and

II. If the PEACe Bonds are considered "deposit substitutes," whether the government or the Bureau of
Internal Revenue is estopped from imposing and/or collecting the 20% final withholding tax from the
face value of these Bonds

a. Will the imposition of the 20% final withholding tax violate the non-impairment clause of the
Constitution?

b. Will it constitute a deprivation of property without due process of law?

c. Will it violate Section 245 of the 1997 National Internal Revenue Code on non-retroactivity
of rulings?

Arguments of petitioners, RCBC and RCBC

Capital, and CODE-NGO

Petitioners argue that "[a]s the issuer of the Government Bonds acting through the BTr, the Government is
obligated . . . to pay the face value amount of Ph₱35 Billion upon maturity without any deduction
whatsoever."79 They add that "the Government cannot impair the efficacy of the [Bonds] by arbitrarily,
oppressively and unreasonably imposing the withholding of 20% FWT upon the [Bonds] a mere eleven (11)
days before maturity and after several, consistent categorical declarations that such bonds are exempt from
the 20% FWT, without violating due process"80 and the constitutional principle on non-impairment of
contracts.81 Petitioners aver that at the time they purchased the Bonds, they had the right to expect that they
would receive the full face value of the Bonds upon maturity, in view of the 2001 BIR Rulings.82 "[R]egardless
of whether or not the 2001 BIR Rulings are correct, the fact remains that [they] relied [on] good faith
thereon."83

At any rate, petitioners insist that the PEACe Bonds are not deposit substitutes as defined under Section
22(Y) of the 1997 National Internal Revenue Code because there was only one lender (RCBC) to whom the
Bureau of Treasury issued the Bonds.84 They allege that the 2004, 2005, and 2011 BIR Rulings "erroneously
interpreted that the number of investors that participate in the ‘secondary market’ is the determining factor in
reckoning the existence or non-existence of twenty (20) or more individual or corporate
lenders."85 Furthermore, they contend that the Bureau of Internal Revenue unduly expanded the definition of
deposit substitutes under Section 22 of the 1997 National Internal Revenue Code in concluding that "the mere
issuance of government debt instruments and securities is deemed as falling within the coverage of ‘deposit
substitutes[.]’"86 Thus, "[t]he 2011 BIR Ruling clearly amount[ed] to an unauthorized act of administrative
legislation[.]"87

Petitioners further argue that their income from the Bonds is a "trading gain," which is exempt from income
tax.88They insist that "[t]hey are not lenders whose income is considered as ‘interest income or yield’ subject to
the 20% FWT under Section 27 (D)(1) of the [1997 National Internal Revenue Code]"89 because they
"acquired the Government Bonds in the secondary or tertiary market."90

Even assuming without admitting that the Government Bonds are deposit substitutes, petitioners argue that
the collection of the final tax was barred by prescription.91 They point out that under Section 7 of DOF
Department Order No. 141-95,92 the final withholding tax "should have been withheld at the time of their
issuance[.]"93 Also, under Section 203 of the 1997 National Internal Revenue Code, "internal revenuetaxes,
such as the final tax, [should] be assessed within three (3) years after the last day prescribed by law for the
filing of the return."94

Moreover, petitioners contend that the retroactive application of the 2011 BIR Ruling without prior notice to
them was in violation of their property rights,95 their constitutional right to due process96 as well as Section 246
of the 1997 National Internal Revenue Code on non-retroactivity of rulings.97 Allegedly, it would also have "an
adverse effect of colossal magnitude on the investors, both localand foreign, the Philippine capital market,
and most importantly, the country’s standing in the international commercial community."98 Petitioners
explained that "unless enjoined, the government’s threatened refusal to pay the full value of the Government
Bonds will negatively impact on the image of the country in terms of protection for property rights (including
financial assets), degree of legal protection for lender’s rights, and strength of investor protection."99 They cited
the country’s ranking in the World Economic Forum: 75th in the world in its 2011–2012 Global
Competitiveness Index, 111th out of 142 countries worldwide and 2nd to the last among ASEAN countries in
terms of Strength of Investor Protection, and 105th worldwide and last among ASEAN countries in terms of
Property Rights Index and Legal Rights Index.100 It would also allegedly "send a reverberating message to the
whole world that there is no certainty, predictability, and stability of financial transactions in the capital
markets[.]"101 "[T]he integrity of Government-issued bonds and notes will be greatly shattered and the credit of
the Philippine Government will suffer"102 if the sudden turnaround of the government will be allowed,103 and it
will reinforce "investors’ perception that the level of regulatory risk for contracts entered into by the Philippine
Government is high,"104 thus resulting in higher interestrate for government-issued debt instruments and
lowered credit rating.105

Petitioners-intervenors RCBC and RCBC Capital contend that respondent Commissioner of Internal Revenue
"gravely and seriously abused her discretion in the exercise of her rule-making power"106 when she issued the
assailed 2011 BIR Ruling which ruled that "all treasury bonds are ‘deposit substitutes’ regardless of the
number of lenders, in clear disregard of the requirement of twenty (20)or more lenders mandated under the
NIRC."107 They argue that "[b]y her blanket and arbitrary classification of treasury bonds as deposit substitutes,
respondent CIR not only amended and expanded the NIRC, but effectively imposed a new tax on privately-
placed treasury bonds."108Petitioners-intervenors RCBC and RCBC Capital further argue that the 2011 BIR
Ruling will cause substantial impairment of their vested rights109 under the Bonds since the ruling imposes new
conditions by "subjecting the PEACe Bonds to the twenty percent (20%) final withholding tax notwithstanding
the fact that the terms and conditions thereof as previously represented by the Government, through
respondents BTr and BIR, expressly state that it is not subject to final withholding tax upon their
maturity."110 They added that "[t]he exemption from the twenty percent (20%) final withholding tax [was] the
primary inducement and principal consideration for [their] participat[ion] in the auction and underwriting of the
PEACe Bonds."111

Like petitioners, petitioners-intervenors RCBC and RCBC Capital also contend that respondent Commissioner
of Internal Revenue violated their rights to due process when she arbitrarily issued the 2011 BIR Ruling
without prior notice and hearing, and the oppressive timing of such ruling deprived them of the opportunity to
challenge the same.112
Assuming the 20% final withholding tax was due on the PEACe Bonds, petitioners-intervenors RCBC and
RCBC Capital claim that respondents Bureau of Treasury and CODE-NGO should be held liable "as [these]
parties explicitly represented . . . that the said bonds are exempt from the final withholding tax."113

Finally, petitioners-intervenors RCBC and RCBC Capital argue that "the implementation of the [2011 assailed
BIR Ruling and BIR Ruling No. DA 378-2011] will have pernicious effects on the integrity of existing securities,
which is contrary to the State policies of stabilizing the financial system and of developing capital markets."114

For its part, CODE-NGO argues that: (a) the 2011 BIR Ruling and BIR Ruling No. DA 378-2011 are "invalid
because they contravene Section 22(Y) of the 1997 [NIRC] when the said rulings disregarded the applicability
of the ‘20 or more lender’ rule to government debt instruments"[;]115 (b) "when [it] sold the PEACe Bonds in the
secondary market instead of holding them until maturity, [it] derived . . . long-term trading gain[s], not interest
income, which [are] exempt . . . under Section 32(B)(7)(g) of the 1997 NIRC"[;]116 (c) "the tax exemption
privilege relating to the issuance of the PEACe Bonds . . . partakes of a contractual commitment granted by
the Government in exchange for a valid and material consideration [i.e., the issue price paid and savings in
borrowing cost derived by the Government,] thus protected by the non-impairment clause of the 1987
Constitution"[;]117 and (d) the 2004, 2005, and 2011 BIR Rulings "did not validly revoke the 2001 BIR Rulings
since no notice of revocation was issued to [it], RCBC and [RCBC Capital] and petitioners[-bondholders], nor
was there any BIR administrative guidance issued and published[.]"118CODE-NGO additionally argues that
impleading it in a Rule 65 petition was improper because: (a) it involves determination of a factual
question;119 and (b) it is premature and states no cause of action as it amounts to an anticipatory third-party
claim.120

Arguments of respondents

Respondents argue that petitioners’ direct resort to this court to challenge the 2011 BIR Ruling violates the
doctrines of exhaustion of administrative remedies and hierarchy ofcourts, resulting in a lack of cause of
action that justifies the dismissal of the petition.121 According to them, "the jurisdiction to review the rulings of
the [Commissioner of Internal Revenue], after the aggrieved party exhausted the administrative remedies,
pertains to the Court of Tax Appeals."122 They point out that "a case similar to the present Petition was [in fact]
filed with the CTA on October 13, 2011[,] [docketed as] CTA Case No. 8351 [and] entitled, ‘Rizal Commercial
Banking Corporation and RCBC Capital Corporation vs. Commissioner of Internal Revenue, et al.’"123

Respondents further take issue on the timeliness of the filing of the petition and petitions-in-
intervention.124 They argue that under the guise of mainly assailing the 2011 BIR Ruling, petitioners are
indirectly attacking the 2004 and 2005 BIR Rulings, of which the attack is legally prohibited, and the petition
insofar as it seeks to nullify the 2004 and 2005 BIR Rulings was filed way out of time pursuant to Rule 65,
Section 4.125

Respondents contend that the discount/interest income derived from the PEACe Bonds is not a trading gain
but interest income subject to income tax.126 They explain that "[w]ith the payment of the Ph₱35 Billion
proceeds on maturity of the PEACe Bonds, Petitioners receive an amount of money equivalent to about
Ph₱24.8 Billion as payment for interest. Such interest is clearly an income of the Petitioners considering that
the same is a flow of wealth and not merely a return of capital – the capital initially invested in the Bonds
being approximately Ph₱10.2 Billion[.]"127

Maintaining that the imposition of the 20% final withholding tax on the PEACe Bonds does not constitute an
impairment of the obligations of contract, respondents aver that: "The BTr has no power to contractually grant
a tax exemption in favour of Petitioners thus the 2001 BIR Rulings cannot be considered a material term of
the Bonds"[;]128 "[t]here has been no change in the laws governing the taxability of interest income from deposit
substitutes and said laws are read into every contract"[;]129 "[t]he assailed BIR Rulings merely interpret the
term "deposit substitute" in accordance with the letter and spirit of the Tax Code"[;]130 "[t]he withholding of the
20% FWT does not result in a default by the Government as the latter performed its obligations to the
bondholders in full"[;]131 and "[i]f there was a breach of contract or a misrepresentation it was between
RCBC/CODE-NGO/RCBC Cap and the succeeding purchasers of the PEACe Bonds."132

Similarly, respondents counter that the withholding of "[t]he 20% final withholding tax on the PEACe Bonds
does not amount to a deprivation of property without due process of law."133 Their imposition of the 20% final
withholding tax is not arbitrary because they were only performing a duty imposed by law;134 "[t]he 2011 BIR
Ruling is aninterpretative rule which merely interprets the meaning of deposit substitutes [and upheld] the
earlier construction given to the termby the 2004 and 2005 BIR Rulings."135 Hence, respondents argue that
"there was no need to observe the requirements of notice, hearing, and publication[.]"136

Nonetheless, respondents add that "there is every reason to believe that Petitioners — all major financial
institutions equipped with both internal and external accounting and compliance departments as wellas
access to both internal and external legal counsel; actively involved in industry organizations such as the
Bankers Association of the Philippines and the Capital Market Development Council; all actively taking part in
the regular and special debt issuances of the BTr and indeed regularly proposing products for issue by BTr —
had actual notice of the 2004 and 2005 BIR Rulings."137 Allegedly, "the sudden and drastic drop — including
virtually zero trading for extended periods of six months to almost a year — in the trading volume of the
PEACe Bonds after the release of BIR Ruling No. 007-04 on July 16, 2004 tend to indicate that market
participants, including the Petitioners herein, were aware of the ruling and its consequences for the PEACe
Bonds."138

Moreover, they contend that the assailed 2011 BIR Ruling is a valid exercise of the Commissioner of Internal
Revenue’s rule-making power;139 that it and the 2004 and 2005 BIR Rulings did not unduly expand the
definition of deposit substitutes by creating an unwarranted exception to the requirement of having 20 or more
lenders/purchasers;140 and the word "any" in Section 22(Y) of the National Internal Revenue Code plainly
indicates that the period contemplated is the entire term of the bond and not merely the point of origination or
issuance.141

Respondents further argue that a retroactive application of the 2011 BIR Ruling will not unjustifiably prejudice
petitioners.142 "[W]ith or without the 2011 BIR Ruling, Petitioners would be liable topay a 20% final withholding
tax just the same because the PEACe Bonds in their possession are legally in the nature of deposit
substitutes subject to a 20% final withholding tax under the NIRC."143 Section 7 of DOF Department Order No.
141-95 also provides that incomederived from Treasury bonds is subject to the 20% final withholding
tax.144 "[W]hile revenue regulations as a general rule have no retroactive effect, if the revocation is due to the
fact that the regulation is erroneous or contrary to law, such revocation shall have retroactive operation as to
affect past transactions, because a wrong construction of the law cannot give rise to a vested right that can be
invoked by a taxpayer."145

Finally, respondents submit that "there are a number of variables and factors affecting a capital
market."146 "[C]apital market itself is inherently unstable."147 Thus, "[p]etitioners’ argument that the 20% final
withholding tax . . . will wreak havoc on the financial stability of the country is a mere supposition that is not a
justiciable issue."148

On the prayer for the temporary restraining order, respondents argue that this order "could no longer be
implemented [because] the acts sought to be enjoined are already fait accompli."149 They add that "to disburse
the funds withheld to the Petitioners at this time would violate Section 29[,] Article VI of the Constitution
prohibiting ‘money being paid out of the Treasury except in pursuance of an appropriation made by
law[.]’"150 "The remedy of petitioners is to claim a tax refund under Section 204(c) of the Tax Code should their
position be upheld by the Honorable Court."151

Respondents also argue that "the implementation of the TRO would violate Section 218 of the Tax Code in
relation to Section 11 of Republic Act No. 1125 (as amended by Section 9 of Republic Act No. 9282) which
prohibits courts, except the Court of Tax Appeals, from issuing injunctions to restrain the collection of any
national internal revenue tax imposed by the Tax Code."152

Summary of arguments

In sum, petitioners and petitioners-intervenors, namely, RCBC, RCBC Capital, and CODE-NGO argue that:

1. The 2011 BIR Ruling is ultra vires because it is contrary to the 1997 National Internal Revenue
Code when it declared that all government debt instruments are deposit substitutes regardless of the
20-lender rule; and

2. The 2011 BIR Ruling cannot be applied retroactively because:

a) It will violate the contract clause;

● It constitutes a unilateral amendment of a material term (tax exempt status) in the Bonds,
represented by the government as an inducement and important consideration for the
purchase of the Bonds;

b) It constitutes deprivation ofproperty without due process because there was no prior notice
to bondholders and hearing and publication;

c) It violates the rule on non-retroactivity under the 1997 National Internal Revenue Code;

d) It violates the constitutional provision on supporting activities of non-government

organizations and development of the capital market; and

e) The assessment had already prescribed.

Respondents counter that:

1) Respondent Commissioner of Internal Revenue did not act with grave abuse of discretion in issuing the
challenged 2011 BIR Ruling:

a. The 2011 BIR Ruling, being an interpretative rule, was issued by virtue of the Commissioner of
Internal Revenue’s power to interpret the provisions of the 1997 National Internal Revenue Code and
other tax laws;

b. Commissioner of Internal Revenue merely restates and confirms the interpretations contained in
previously issued BIR Ruling Nos. 007-2004, DA-491-04,and 008-05, which have already effectively
abandoned or revoked the 2001 BIR Rulings;

c. Commissioner of Internal Revenue is not bound by his or her predecessor’s rulings especially when
the latter’s rulings are not in harmony with the law; and

d. The wrong construction of the law that the 2001 BIR Rulings have perpetrated cannot give rise to a
vested right. Therefore, the 2011 BIR Ruling can be given retroactive effect.

2) Rule 65 can be resorted to only if there is no appeal or any plain, speedy, and adequate remedy in the
ordinary course of law:

a. Petitioners had the basic remedy offiling a claim for refund of the 20% final withholding tax they allege to
have been wrongfully collected; and

b. Non-observance of the doctrine of exhaustion of administrative remedies and of hierarchy of courts.

Court’s ruling

Procedural Issues
Non-exhaustion of
administrative remedies proper

Under Section 4 of the 1997 National Internal Revenue Code, interpretative rulings are reviewable by the
Secretary of Finance.

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

Thus, it was held that "[i]f superior administrative officers [can] grant the relief prayed for, [then] special civil
actions are generally not entertained."153 The remedy within the administrative machinery must be resorted to
first and pursued to its appropriate conclusion before the court’s judicial power can be sought.154

Nonetheless, jurisprudence allows certain exceptions to the rule on exhaustion of administrative remedies:

[The doctrine of exhaustion of administrative remedies] is a relative one and its flexibility is called upon by the
peculiarity and uniqueness of the factual and circumstantial settings of a case. Hence, it is disregarded (1)
when there is a violation of due process, (2) when the issue involved is purely a legal question,155 (3) when the
administrative action is patently illegal amounting to lack or excess of jurisdiction,(4) when there is estoppel
on the part of the administrative agency concerned,(5) when there is irreparable injury, (6) when the
respondent is a department secretary whose acts as an alter ego of the President bears the implied and
assumed approval of the latter, (7) when to require exhaustion of administrative remedies would be
unreasonable, (8) when it would amount to a nullification of a claim, (9) when the subject matter is a private
land in land case proceedings, (10) when the rule does not provide a plain, speedy and adequate remedy,
(11) when there are circumstances indicating the urgency of judicial intervention.156 (Emphasis supplied,
citations omitted)

The exceptions under (2) and (11)are present in this case. The question involved is purely legal, namely: (a)
the interpretation of the 20-lender rule in the definition of the terms public and deposit substitutes under the
1997 National Internal Revenue Code; and (b) whether the imposition of the 20% final withholding tax on the
PEACe Bonds upon maturity violates the constitutional provisions on non-impairment of contracts and due
process. Judicial intervention is likewise urgent with the impending maturity of the PEACe Bonds on October
18, 2011.
The rule on exhaustion of administrative remedies also finds no application when the exhaustion will result in
an exercise in futility.157

In this case, an appeal to the Secretary of Finance from the questioned 2011 BIR Ruling would be a futile
exercise because it was upon the request of the Secretary of Finance that the 2011 BIR Ruling was issued by
the Bureau of Internal Revenue. It appears that the Secretary of Finance adopted the Commissioner of
Internal Revenue’s opinions as his own.158 This position was in fact confirmed in the letter159 dated October 10,
2011 where he ordered the Bureau of Treasury to withhold the amount corresponding to the 20% final
withholding tax on the interest or discounts allegedly due from the bondholders on the strength of the 2011
BIR Ruling. Doctrine on hierarchy of courts

We agree with respondents that the jurisdiction to review the rulings of the Commissioner of Internal Revenue
pertains to the Court of Tax Appeals. The questioned BIR Ruling Nos. 370-2011 and DA 378-2011 were
issued in connection with the implementation of the 1997 National Internal Revenue Code on the taxability of
the interest income from zero-coupon bonds issued by the government.

Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals), as amended by Republic Act No.
9282,160such rulings of the Commissioner of Internal Revenue are appealable to that court, thus:

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

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

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

....

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

....

SEC. 18. Appeal to the Court of Tax Appeals En Banc. - No civil proceeding involving matters arising under
the National Internal Revenue Code, the Tariff and Customs Code or the Local Government Code shall be
maintained, except as herein provided, until and unless an appeal has been previously filed with the CTA and
disposed of in accordance with the provisions of this Act.

In Commissioner of Internal Revenue v. Leal,161 citing Rodriguez v. Blaquera,162 this court emphasized the
jurisdiction of the Court of Tax Appeals over rulings of the Bureau of Internal Revenue, thus:

While the Court of Appeals correctly took cognizance of the petition for certiorari, however, let it be stressed
that the jurisdiction to review the rulings of the Commissioner of Internal Revenue pertains to the Court of Tax
Appeals, not to the RTC.

The questioned RMO No. 15-91 and RMC No. 43-91 are actually rulings or opinions of the Commissioner
implementing the Tax Code on the taxability of pawnshops.. . .

....

Such revenue orders were issued pursuant to petitioner's powers under Section 245 of the Tax Code, which
states:

"SEC. 245. Authority of the Secretary of Finance to promulgate rules and regulations. — The Secretary of
Finance, upon recommendation of the Commissioner, shall promulgate all needful rules and regulations for
the effective enforcement of the provisions of this Code.

The authority of the Secretary of Finance to determine articles similar or analogous to those subject to a rate
of sales tax under certain category enumerated in Section 163 and 165 of this Code shall be without prejudice
to the power of the Commissioner of Internal Revenue to make rulings or opinions in connection with the
implementation of the provisionsof internal revenue laws, including ruling on the classification of articles of
sales and similar purposes." (Emphasis in the original)

....

The Court, in Rodriguez, etc. vs. Blaquera, etc., ruled:

"Plaintiff maintains that this is not an appeal from a ruling of the Collector of Internal Revenue, but merely an
attempt to nullify General Circular No. V-148, which does not adjudicate or settle any controversy, and that,
accordingly, this case is not within the jurisdiction of the Court of Tax Appeals.

We find no merit in this pretense. General Circular No. V-148 directs the officers charged with the collection of
taxes and license fees to adhere strictly to the interpretation given by the defendant tothe statutory provisions
abovementioned, as set forth in the Circular. The same incorporates, therefore, a decision of the Collector of
Internal Revenue (now Commissioner of Internal Revenue) on the manner of enforcement of the said statute,
the administration of which is entrusted by law to the Bureau of Internal Revenue. As such, it comes within the
purview of Republic Act No. 1125, Section 7 of which provides that the Court of Tax Appeals ‘shall exercise
exclusive appellate jurisdiction to review by appeal . . . decisions of the Collector of Internal Revenue in . . .
matters arising under the National Internal Revenue Code or other law or part of the law administered by the
Bureau of Internal Revenue.’"163

In exceptional cases, however, this court entertained direct recourse to it when "dictated by public welfare and
the advancement of public policy, or demanded by the broader interest of justice, or the orders complained of
were found to be patent nullities, or the appeal was considered as clearly an inappropriate remedy."164

In Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department of
Interior and Local Government,165 this court noted that the petition for prohibition was filed directly before it "in
disregard of the rule on hierarchy of courts. However, [this court] opt[ed] to take primary jurisdiction over the .
. . petition and decide the same on its merits in viewof the significant constitutional issues raised by the parties
dealing with the tax treatment of cooperatives under existing laws and in the interest of speedy justice and
prompt disposition of the matter."166

Here, the nature and importance of the issues raised167 to the investment and banking industry with regard to a
definitive declaration of whether government debt instruments are deposit substitutes under existing laws, and
the novelty thereof, constitute exceptional and compelling circumstances to justify resort to this court in the
first instance.

The tax provision on deposit substitutes affects not only the PEACe Bonds but also any other financial
instrument or product that may be issued and traded in the market. Due to the changing positions of the
Bureau of Internal Revenue on this issue, there isa need for a final ruling from this court to stabilize the
expectations in the financial market.

Finally, non-compliance with the rules on exhaustion of administrative remedies and hierarchy of courts had
been rendered moot by this court’s issuance of the temporary restraining order enjoining the implementation
of the 2011 BIR Ruling. The temporary restraining order effectively recognized the urgency and necessity of
direct resort to this court.

Substantive issues

Tax treatment of deposit

substitutes

Under Sections 24(B)(1), 27(D)(1),and 28(A)(7) of the 1997 National Internal Revenue Code, a final
withholdingtax at the rate of 20% is imposed on interest on any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements. These provisions
read:

SEC. 24. Income Tax Rates.

....

(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby
imposed upon the amount of interest fromany currency bank deposit and yield or any other monetary benefit
from deposit substitutes and from trust funds and similar arrangements; . . . Provided, further, That interest
income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this
Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment
before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and
withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on
the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than four (4) years - 12%; and

Less than three (3) years - 20%. (Emphasis supplied)

SEC. 27. Rates of Income Tax on Domestic Corporations. -

....

(D) Rates of Tax on Certain Passive Incomes. -

(1) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust
Funds and Similar Arrangements, and Royalties. - A final tax at the rate of twenty percent (20%) is hereby
imposed upon the amount of interest on currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements received by domestic corporations, and
royalties, derived from sources within the Philippines: Provided, however, That interest income derived by a
domestic corporation from a depository bank under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income.
(Emphasis supplied)

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

(A) Tax on Resident Foreign Corporations. -

....

(7) Tax on Certain Incomes Received by a Resident Foreign Corporation. -

(a) Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes, Trust Funds and
Similar Arrangements and Royalties. - Interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived
from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of
such interest: Provided, however, That interest income derived by a resident foreign corporation from a
depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at
the rate of seven and one-half percent (7 1/2%) of such interest income. (Emphasis supplied)

This tax treatment of interest from bank deposits and yield from deposit substitutes was first introduced in the
1977 National Internal Revenue Code through Presidential Decree No. 1739168 issued in 1980. Later,
Presidential Decree No. 1959, effective on October 15, 1984, formally added the definition of deposit
substitutes, viz:

(y) ‘Deposit substitutes’ shall mean an alternative form of obtaining funds from the public, other than deposits,
through the issuance, endorsement, or acceptance of debt instruments for the borrower's own account, for the
purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the
needs of their agent or dealer.These promissory notes, repurchase agreements, certificates of assignment or
participation and similar instrument with recourse as may be authorized by the Central Bank of the
Philippines, for banks and non-bank financial intermediaries or by the Securities and Exchange Commission
of the Philippines for commercial, industrial, finance companies and either non-financial companies: Provided,
however, that only debt instruments issued for inter-bank call loans to cover deficiency in reserves against
deposit liabilities including those between or among banks and quasi-banks shall not be considered as
deposit substitute debt instruments. (Emphasis supplied)

Revenue Regulations No. 17-84, issued to implement Presidential Decree No. 1959, adopted verbatim the
same definition and specifically identified the following borrowings as "deposit substitutes":

SECTION 2. Definitions of Terms. . . .

(h) "Deposit substitutes" shall mean –

....

(a) All interbank borrowings by or among banks and non-bank financial institutions authorized to
engage in quasi-banking functions evidenced by deposit substitutes instruments, except interbank call
loans to cover deficiency in reserves against deposit liabilities as evidenced by interbank loan advice
or repayment transfer tickets.

(b) All borrowings of the national and local government and its instrumentalities including the Central
Bank of the Philippines, evidenced by debt instruments denoted as treasury bonds, bills, notes,
certificates of indebtedness and similar instruments.

(c) All borrowings of banks, non-bank financial intermediaries, finance companies, investment
companies, trust companies, including the trust department of banks and investment houses,
evidenced by deposit substitutes instruments. (Emphasis supplied)

The definition of deposit substitutes was amended under the 1997 National Internal Revenue Code with the
addition of the qualifying phrase for public – borrowing from 20 or more individual or corporate lenders at any
one time. Under Section 22(Y), deposit substitute is defined thus: SEC. 22. Definitions- When used in this
Title:

....

(Y) The term ‘deposit substitutes’ shall mean an alternative form of obtaining funds from the public(the term
'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other than
deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrower’s own
account, for the purpose of relending or purchasing of receivables and other obligations, or financing their
own needs or the needs of their agent or dealer. These instruments may include, but need not be limited to,
bankers’ acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements
entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank,
certificates of assignment or participation and similar instruments with recourse: Provided, however, That debt
instruments issued for interbank call loans with maturity of not more than five (5) days to cover deficiency in
reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be
considered as deposit substitute debt instruments. (Emphasis supplied)

Under the 1997 National Internal Revenue Code, Congress specifically defined "public" to mean "twenty (20)
or more individual or corporate lenders at any one time." Hence, the number of lenders is determinative of
whether a debt instrument should be considered a deposit substitute and consequently subject to the 20%
final withholding tax.

20-lender rule

Petitioners contend that "there [is]only one (1) lender (i.e. RCBC) to whom the BTr issued the Government
Bonds."169 On the other hand, respondents theorize that the word "any" "indicates that the period contemplated
is the entire term of the bond and not merely the point of origination or issuance[,]"170 such that if the debt
instruments "were subsequently sold in secondary markets and so on, insuch a way that twenty (20) or more
buyers eventually own the instruments, then it becomes indubitable that funds would be obtained from the
"public" as defined in Section 22(Y) of the NIRC."171 Indeed, in the context of the financial market, the words
"at any one time" create an ambiguity.

Financial markets

Financial markets provide the channel through which funds from the surplus units (households and business
firms that have savings or excess funds) flow to the deficit units (mainly business firms and government that
need funds to finance their operations or growth). They bring suppliers and users of funds together and
provide the means by which the lenders transform their funds into financial assets, and the borrowers receive
these funds now considered as their financial liabilities. The transfer of funds is represented by a security,
such as stocks and bonds. Fund suppliers earn a return on their investment; the return is necessary to ensure
that funds are supplied to the financial markets.172

"The financial markets that facilitate the transfer of debt securities are commonly classified by the maturity of
the securities[,]"173 namely: (1) the money market, which facilitates the flow of short-term funds (with maturities
of one year or less); and (2) the capital market, which facilitates the flow of long-term funds (with maturities of
more than one year).174
Whether referring to money marketsecurities or capital market securities, transactions occur either in the
primary market or in the secondary market.175 "Primary markets facilitate the issuance of new securities.
Secondary markets facilitate the trading of existing securities, which allows for a change in the ownership of
the securities."176 The transactions in primary markets exist between issuers and investors, while secondary
market transactions exist among investors.177

"Over time, the system of financial markets has evolved from simple to more complex ways of carrying out
financial transactions."178 Still, all systems perform one basic function: the quick mobilization of money from the
lenders/investors to the borrowers.179

Fund transfers are accomplished in three ways: (1) direct finance; (2) semidirect finance; and (3) indirect
finance.180

With direct financing, the "borrower and lender meet each other and exchange funds in returnfor financial
assets"181(e.g., purchasing bonds directly from the company issuing them). This method provides certain
limitations such as: (a) "both borrower and lender must desire to exchange the same amount of funds at the
same time"[;]182 and (b) "both lender and borrower must frequently incur substantial information costs simply to
find each other."183

In semidirect financing, a securities broker or dealer brings surplus and deficit units together, thereby reducing
information costs.184 A Broker185 is "an individual or financial institution who provides information concerning
possible purchases and sales of securities. Either a buyer or a seller of securities may contact a broker,
whose job is simply to bring buyers and sellers together."186 A dealer187 "also serves as a middleman between
buyers and sellers, but the dealer actually acquires the seller’s securities in the hope of selling them at a later
time at a more favorable price."188 Frequently, "a dealer will split up a large issue of primary securities into
smaller units affordable by . . . buyers . . . and thereby expand the flow of savings into investment."189 In semi
direct financing, "[t]he ultimate lender still winds up holding the borrower’s securities, and therefore the lender
must be willing to accept the risk, liquidity, and maturity characteristics of the borrower’s [debt security]. There
still must be a fundamental coincidence of wants and needs between [lenders and borrowers] for semidirect
financial transactions to take place."190

"The limitations of both direct and semidirect finance stimulated the development of indirect financial
transactions, carried out with the help of financial intermediaries"191 or financial institutions, like banks,
investment banks, finance companies, insurance companies, and mutual funds.192 Financial intermediaries
accept funds from surplus units and channel the funds to deficit units.193 "Depository institutions [such as
banks] accept deposits from surplus units and provide credit to deficit units through loans and purchase of
[debt] securities."194 Nondepository institutions, like mutual funds, issue securities of their own (usually in
smaller and affordable denominations) to surplus units and at the same time purchase debt securities of
deficit units.195 "By pooling the resources of[small savers, a financial intermediary] can service the credit needs
of large firms simultaneously."196

The financial market, therefore, is an agglomeration of financial transactions in securities performed by market
participants that works to transfer the funds from the surplus units (or investors/lenders) to those who need
them (deficit units or borrowers).

Meaning of "at any one time"

Thus, from the point of view of the financial market, the phrase "at any one time" for purposes of determining
the "20 or more lenders" would mean every transaction executed in the primary or secondary market in
connection with the purchase or sale of securities.

For example, where the financial assets involved are government securities like bonds, the reckoning of "20
or more lenders/investors" is made at any transaction in connection with the purchase or sale of the
Government Bonds, such as:

1. Issuance by the Bureau of Treasury of the bonds to GSEDs in the primary market;

2. Sale and distribution by GSEDs to various lenders/investors in the secondary market;

3. Subsequent sale or trading by a bondholder to another lender/investor in the secondary market

usually through a broker or dealer; or

4. Sale by a financial intermediary-bondholder of its participation interests in the bonds to individual or

corporate lenders in the secondary market.
When, through any of the foregoing transactions, funds are simultaneously obtained from 20 or
morelenders/investors, there is deemed to be a public borrowing and the bonds at that point intime are
deemed deposit substitutes. Consequently, the seller is required to withhold the 20% final withholding tax on
the imputed interest income from the bonds.

For debt instruments that are

not deposit substitutes, regular
income tax applies

It must be emphasized, however, that debt instruments that do not qualify as deposit substitutes under the
1997 National Internal Revenue Code are subject to the regular income tax.

The phrase "all income derived from whatever source" in Chapter VI, Computation of Gross Income, Section
32(A) of the 1997 National Internal Revenue Code discloses a legislative policy to include all income not
expressly exempted as within the class of taxable income under our laws.

"The definition of gross income isbroad enough to include all passive incomes subject to specific tax rates or
final taxes."197 Hence, interest income from deposit substitutes are necessarily part of taxable income.
"However, since these passive incomes are already subject to different rates and taxed finally at source, they
are no longer included in the computation of gross income, which determines taxable income."198 "Stated
otherwise . . . if there were no withholding tax system in place in this country, this 20 percent portion of the
‘passive’ income of [creditors/lenders] would actually be paid to the [creditors/lenders] and then remitted by
them to the government in payment of their income tax."199

This court, in Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo,200 explained the rationale
behind the withholding tax system:

The withholding [of tax at source] was devised for three primary reasons: first, to provide the taxpayer a
convenient manner to meet his probable income tax liability; second, to ensure the collection of income tax
which can otherwise be lost or substantially reduced through failure to file the corresponding returns[;] and
third, to improve the government’s cash flow. This results in administrative savings, prompt and efficient
collection of taxes, prevention of delinquencies and reduction of governmental effort to collect taxes through
more complicated means and remedies.201 (Citations omitted)

"The application of the withholdings system to interest on bank deposits or yield from deposit substitutes is
essentially to maximize and expedite the collection of income taxes by requiring its payment at the source."202

Hence, when there are 20 or more lenders/investors in a transaction for a specific bond issue, the seller
isrequired to withhold the 20% final income tax on the imputed interest income from the bonds.

Interest income v. gains from sale or redemption

The interest income earned from bonds is not synonymous with the "gains" contemplated under Section
32(B)(7)(g)203 of the 1997 National Internal Revenue Code, which exempts gains derived from trading,
redemption, or retirement of long-term securities from ordinary income tax.

The term "gain" as used in Section 32(B)(7)(g) does not include interest, which represents forbearance for the
use of money. Gains from sale or exchange or retirement of bonds orother certificate of indebtedness fall
within the general category of "gainsderived from dealings in property" under Section 32(A)(3), while interest
from bonds or other certificate of indebtedness falls within the category of "interests" under Section
32(A)(4).204 The use of the term "gains from sale" in Section 32(B)(7)(g) shows the intent of Congress not
toinclude interest as referred under Sections 24, 25, 27, and 28 in the exemption.205

Hence, the "gains" contemplated in Section 32(B)(7)(g) refers to: (1) gain realized from the trading of the
bonds before their maturity date, which is the difference between the selling price of the bonds in the
secondary market and the price at which the bonds were purchased by the seller; and (2) gain realized by the
last holder of the bonds when the bonds are redeemed at maturity, which is the difference between the
proceeds from the retirement of the bonds and the price atwhich such last holder acquired the bonds. For
discounted instruments,like the zero-coupon bonds, the trading gain shall be the excess of the selling price
over the book value or accreted value (original issue price plus accumulated discount from the time of
purchase up to the time of sale) of the instruments.206

The Bureau of Internal

Revenue rulings
The Bureau of Internal Revenue’s interpretation as expressed in the three 2001 BIR Rulings is not consistent
with law.207 Its interpretation of "at any one time" to mean at the point of origination alone is unduly restrictive.

BIR Ruling No. 370-2011 is likewise erroneous insofar as it stated (relying on the 2004 and 2005 BIR Rulings)
that "all treasury bonds . . . regardlessof the number of purchasers/lenders at the time of origination/issuance
are considered deposit substitutes."208 Being the subject of this petition, it is, thus, declared void because it
completely disregarded the 20 or more lender rule added by Congress in the 1997 National Internal Revenue
Code. It also created a distinction for government debt instruments as against those issued by private
corporations when there was none in the law.

Tax statutes must be reasonably construed as to give effect to the whole act. Their constituent provisions
must be read together, endeavoring to make every part effective, harmonious, and sensible.209 That
construction which will leave every word operative will be favored over one that leaves some word, clause, or
sentence meaningless and insignificant.210

It may be granted that the interpretation of the Commissioner of Internal Revenue in charge of executing the
1997 National Internal Revenue Code is an authoritative construction ofgreat weight, but the principle is not
absolute and may be overcome by strong reasons to the contrary. If through a misapprehension of law an
officer has issued an erroneous interpretation, the error must be corrected when the true construction is
ascertained.

In Philippine Bank of Communications v. Commissioner of Internal Revenue,211 this court upheld the
nullification of Revenue Memorandum Circular (RMC) No. 7-85 issued by the Acting Commissioner of Internal
Revenue because it was contrary to the express provision of Section 230 of the 1977 National Internal
Revenue Codeand, hence, "[cannot] be given weight for to do so would, in effect, amend the statute."212 Thus:

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the prescriptive period of
two years to ten years on claims of excess quarterly income tax payments, such circular created a clear
inconsistency with the provision of Sec. 230 of 1977 NIRC. In so doing, the BIR did not simply interpret the
law; rather it legislated guidelines contrary to the statute passed by Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of
more specific and less general interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such
interpretation is not conclusive and will be ignored if judicially found to be erroneous. Thus, courts will not
countenance administrative issuances that override, instead of remaining consistent and in harmony with, the
law they seek to apply and implement.213(Citations omitted)

This court further held that "[a] memorandum-circular of a bureau head could not operate to vest a taxpayer
with a shield against judicial action [because] there are no vested rights to speak of respecting a wrong
construction of the law by the administrative officials and such wrong interpretation could not place the
Government in estoppel to correct or overrule the same."214 In Commissioner of Internal Revenue v. Michel J.
Lhuillier Pawnshop, Inc.,215 this court nullified Revenue Memorandum Order (RMO) No. 15-91 and RMC No.
43-91, which imposed a 5% lending investor's tax on pawnshops.216 It was held that "the [Commissioner]
cannot, in the exercise of [its interpretative] power, issue administrative rulings or circulars not consistent with
the law sought to be applied. Indeed, administrative issuances must not override, supplant or modify the law,
but must remain consistent with the law they intend to carry out. Only Congress can repeal or amend the
law."217

In Misamis Oriental Association of Coco Traders, Inc. v. Department of Finance Secretary,218 this court stated
that the Commissioner of Internal Revenue is not bound by the ruling of his predecessors,219 but, to the
contrary, the overruling of decisions is inherent in the interpretation of laws:

[I]n considering a legislative rule a court is free to make three inquiries: (i) whether the rule is within the
delegated authority of the administrative agency; (ii) whether itis reasonable; and (iii) whether it was issued
pursuant to proper procedure. But the court is not free to substitute its judgment as to the desirability or
wisdom of the rule for the legislative body, by its delegation of administrative judgment, has committed those
questions to administrative judgments and not to judicial judgments. In the case of an interpretative rule, the
inquiry is not into the validity but into the correctness or propriety of the rule. As a matter of power a court,
when confronted with an interpretative rule, is free to (i) give the force of law to the rule; (ii) go to the opposite
extreme and substitute its judgment; or (iii) give some intermediate degree of authoritative weight to the
interpretative rule.

In the case at bar, we find no reason for holding that respondent Commissioner erred in not considering copra
as an "agricultural food product" within the meaning of § 103(b) of the NIRC. As the Solicitor General
contends, "copra per se is not food, that is, it is not intended for human consumption. Simply stated, nobody
eats copra for food." That previous Commissioners considered it so, is not reason for holding that the present
interpretation is wrong. The Commissioner of Internal Revenue is not bound by the ruling of his predecessors.
To the contrary, the overruling of decisions is inherent in the interpretation of laws.220 (Emphasis supplied,
citations omitted)

Tax treatment of income

derived from the PEACe Bonds

The transactions executed for the sale of the PEACe Bonds are:

1. The issuance of the 35 billion Bonds by the Bureau of Treasury to RCBC/CODE-NGO at 10.2
billion; and

2. The sale and distribution by RCBC Capital (underwriter) on behalf of CODE-NGO of the PEACe
Bonds to undisclosed investors at ₱11.996 billion.

It may seem that there was only one lender — RCBC on behalf of CODE-NGO — to whom the PEACe Bonds
were issued at the time of origination. However, a reading of the underwriting agreement221 and RCBC term
sheet222reveals that the settlement dates for the sale and distribution by RCBC Capital (as underwriter for
CODE-NGO) of the PEACe Bonds to various undisclosed investors at a purchase price of approximately
₱11.996 would fall on the same day, October 18, 2001, when the PEACe Bonds were supposedly issued to
CODE-NGO/RCBC. In reality, therefore, the entire ₱10.2 billion borrowing received by the Bureau of Treasury
in exchange for the ₱35 billion worth of PEACe Bonds was sourced directly from the undisclosed number of
investors to whom RCBC Capital/CODE-NGO distributed the PEACe Bonds — all at the time of origination or
issuance. At this point, however, we do not know as to how many investors the PEACe Bonds were sold to by
RCBC Capital.

Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are deemed
deposit substitutes within the meaning of Section 22(Y) of the 1997 National Internal Revenue Code and
RCBC Capital/CODE-NGO would have been obliged to pay the 20% final withholding tax on the interest or
discount from the PEACe Bonds. Further, the obligation to withhold the 20% final tax on the corresponding
interest from the PEACe Bonds would likewise be required of any lender/investor had the latter turnedaround
and sold said PEACe Bonds, whether in whole or part, simultaneously to 20 or more lenders or investors.

We note, however, that under Section 24223 of the 1997 National Internal Revenue Code, interest income
received by individuals from longterm deposits or investments with a holding period of not less than five (5)
years is exempt from the final tax.

Thus, should the PEACe Bonds be found to be within the coverage of deposit substitutes, the proper
procedure was for the Bureau of Treasury to pay the face value of the PEACe Bonds to the bondholders and
for the Bureau of Internal Revenue to collect the unpaid final withholding tax directly from RCBC
Capital/CODE-NGO, orany lender or investor if such be the case, as the withholding agents.

The collection of tax is not

barred by prescription

The three (3)-year prescriptive period under Section 203 of the 1997 National Internal Revenue Code to
assess and collect internal revenue taxes is extended to 10 years in cases of (1) fraudulent returns; (2) false
returns with intent to evade tax; and (3) failureto file a return, to be computed from the time of discovery of the
falsity, fraud, or omission. Section 203 states:

SEC. 203. Period of Limitation Upon Assessment and Collection. - Except as provided in Section 222, internal
revenue taxes shall be assessed within three (3) years after the last day prescribed by law for the filing of the
return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the
expiration of such period: Provided, That in a case where a return is filed beyond the period prescribed by
law, the three (3)-year period shall be counted from the day the return was filed. For purposes of this Section,
a return filed before the last day prescribed by law for the filing thereof shall be considered as filed on such
last day. (Emphasis supplied)

....

SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes.

(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may
be assessed, or a proceeding in court for the collection of such tax may be filed without assessment, at any
time within ten (10) years after the discovery of the falsity, fraud or omission: Provided, That in a fraud
assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in
the civil or criminal action for the collection thereof.

Thus, should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or more
lenders/investors, the Bureau of Internal Revenue may still collect the unpaid tax from RCBC Capital/CODE-
NGO within 10 years after the discovery of the omission.

In view of the foregoing, there is no need to pass upon the other issues raised by petitioners and petitioners-
intervenors.

Reiterative motion on the temporary restraining order

Respondents’ withholding of the

20% final withholding tax on
October 18, 2011 was justified

Under the Rules of Court, court orders are required to be "served upon the parties affected."224 Moreover,
service may be made personally or by mail.225 And, "[p]ersonal service is complete upon actual delivery [of the
order.]"226This court’s temporary restraining order was received only on October 19, 2011, or a day after the
PEACe Bonds had matured and the 20% final withholding tax on the interest income from the same was
withheld.

Publication of news reports in the print and broadcast media, as well as on the internet, is not a recognized
mode of service of pleadings, court orders, or processes. Moreover, the news reports227 cited by petitioners
were posted minutes before the close of office hours or late in the evening of October 18, 2011, and they did
not givethe exact contents of the temporary restraining order.

"[O]ne cannot be punished for violating an injunction or an order for an injunction unless it is shown that
suchinjunction or order was served on him personally or that he had notice of the issuance or making of such
injunction or order."228

At any rate, "[i]n case of doubt, a withholding agent may always protect himself or herself by withholding the
tax due"229 and return the amount of the tax withheld should it be finally determined that the income paid is not
subject to withholding.230 Hence, respondent Bureau of Treasury was justified in withholding the amount
corresponding to the 20% final withholding tax from the proceeds of the PEACe Bonds, as it received this
court’s temporary restraining order only on October 19, 2011, or the day after this tax had been withheld.

Respondents’ retention of the

amounts withheld is a defiance
of the temporary restraining
order

Nonetheless, respondents’ continued failure to release to petitioners the amount corresponding to the 20%
final withholding tax in order that it may be placed in escrow as directed by this court constitutes a defiance of
this court’s temporary restraining order.231

The temporary restraining order is not moot. The acts sought to be enjoined are not fait accompli. For an act
to be considered fait accompli, the act must have already been fully accomplished and consummated.232 It
must be irreversible, e.g., demolition of properties,233 service of the penalty of imprisonment,234 and hearings on
cases.235When the act sought to be enjoined has not yet been fully satisfied, and/or is still continuing in
nature,236 the defense of fait accomplicannot prosper.

The temporary restraining order enjoins the entire implementation of the 2011 BIR Ruling that constitutes both
the withholding and remittance of the 20% final withholding tax to the Bureau of Internal Revenue. Even
though the Bureau of Treasury had already withheld the 20% final withholding tax237 when it received the
temporary restraining order, it had yet to remit the monies it withheld to the Bureau of Internal Revenue, a
remittance which was due only on November 10, 2011.238 The act enjoined by the temporary restraining order
had not yet been fully satisfied and was still continuing.

Under DOF-DBM Joint Circular No. 1-2000A239 dated July 31, 2001 which prescribes to national government
agencies such as the Bureau of Treasury the procedure for the remittance of all taxes it withheld to the
Bureau of Internal Revenue, a national agency shall file before the Bureau of Internal Revenue a Tax
Remittance Advice (TRA) supported by withholding tax returns on or before the 10th day of the following
month after the said taxes had been withheld.240 The Bureau of Internal Revenue shall transmit an original
copy of the TRA to the Bureau of Treasury,241which shall be the basis for recording the remittance of the tax
collection.242 The Bureau of Internal Revenue will then record the amount of taxes reflected in the TRA as tax
collection in the Journal ofTax Remittance by government agencies based on its copies of the
TRA.243 Respondents did not submit any withholding tax return or TRA to provethat the 20% final withholding
tax was indeed remitted by the Bureau of Treasury to the Bureau of Internal Revenue on October 18, 2011.

Respondent Bureau of Treasury’s Journal Entry Voucher No. 11-10-10395244 dated October 18, 2011
submitted to this court shows:

Account Code Debit Amount Credit Amount

Bonds Payable-L/T, Dom-Zero 442-360 35,000,000,000.00
Coupon T/Bonds
(Peace Bonds) – 10 yr

Sinking Fund-Cash (BSF) 198-001 30,033,792,203.59

Due to BIR 412-002 4,966,207,796.41

To record redemption of 10yr Zero
coupon (Peace Bond) net of the 20% final
withholding tax pursuant to BIR Ruling No.
378-2011, value date, October 18, 2011 per
BTr letter authority and BSP Bank
Statements.

The foregoing journal entry, however, does not prove that the amount of ₱4,966,207,796.41, representing the
20% final withholding tax on the PEACe Bonds, was disbursed by it and remitted to the Bureau of Internal
Revenue on October 18, 2011. The entries merely show that the monies corresponding to 20% final
withholding tax was set aside for remittance to the Bureau of Internal Revenue.

We recall the November 15, 2011 resolution issued by this court directing respondents to "show cause why
they failed to comply with the [TRO]; and [to] comply with the [TRO] in order that petitioners may place the
corresponding funds in escrow pending resolution of the petition."245 The 20% final withholding tax was
effectively placed in custodia legiswhen this court ordered the deposit of the amount in escrow. The Bureau of
Treasury could still release the money withheld to petitioners for the latter to place in escrow pursuant to this
court’s directive. There was no legal obstacle to the release of the 20% final withholding tax to petitioners.
Congressional appropriation is not required for the servicing of public debts in view of the automatic
appropriations clause embodied in Presidential Decree Nos. 1177 and 1967.

Section 31 of Presidential Decree No. 1177 provides:

Section 31. Automatic Appropriations. All expenditures for (a) personnel retirement premiums, government
service insurance, and other similar fixed expenditures, (b) principal and interest on public debt, (c) national
government guarantees of obligations which are drawn upon, are automatically appropriated: provided, that
no obligations shall be incurred or payments made from funds thus automatically appropriated except as
issued in the form of regular budgetary allotments.

Section 1 of Presidential Decree No. 1967 states:

Section 1. There is hereby appropriated, out of any funds in the National Treasury not otherwise appropriated,
such amounts as may be necessary to effect payments on foreign or domestic loans, or foreign or domestic
loans whereon creditors make a call on the direct and indirect guarantee of the Republic of the Philippines,
obtained by:

a. the Republic of the Philippines the proceeds of which were relent to government-owned or
controlled corporations and/or government financial institutions;

b. government-owned or controlled corporations and/or government financial institutions the proceeds

of which were relent to public or private institutions;

c. government-owned or controlled corporations and/or financial institutions and guaranteed by the

Republic of the Philippines;

d. other public or private institutions and guaranteed by government owned or controlled corporations
and/or government financial institutions.
The amount of ₱35 billion that includes the monies corresponding to 20% final withholding tax is a lawfuland
valid obligation of the Republic under the Government Bonds. Since said obligation represents a public debt,
the release of the monies requires no legislative appropriation.

Section 2 of Republic Act No. 245 likewise provides that the money to be used for the payment of
Government Bonds may be lawfully taken from the continuing appropriation out of any monies in the National
Treasury and is not required to be the subject of another appropriation legislation: SEC. 2. The Secretary of
Finance shall cause to be paid out of any moneys in the National Treasury not otherwise appropriated, or
from any sinking funds provided for the purpose by law, any interest falling due, or accruing, on any portion of
the public debt authorized by law. He shall also cause to be paid out of any such money, or from any such
sinking funds the principal amount of any obligations which have matured, or which have been called for
redemption or for which redemption has been demanded in accordance with terms prescribed by him prior to
date of issue. . . In the case of interest-bearing obligations, he shall pay not less than their face value; in the
case of obligations issued at a discount he shall pay the face value at maturity; or if redeemed prior to
maturity, such portion of the face value as is prescribed by the terms and conditions under which such
obligations were originally issued. There are hereby appropriated as a continuing appropriation out of any
moneys in the National Treasury not otherwise appropriated, such sums as may be necessary from time to
time to carry out the provisions of this section. The Secretary of Finance shall transmit to Congress during the
first month of each regular session a detailed statement of all expenditures made under this section during the
calendar year immediately preceding.

Thus, DOF Department Order No. 141-95, as amended, states that payment for Treasury bills and bonds
shall be made through the National Treasury’s account with the Bangko Sentral ng Pilipinas, to wit:

Section 38. Demand Deposit Account.– The Treasurer of the Philippines maintains a Demand Deposit
Account with the Bangko Sentral ng Pilipinas to which all proceeds from the sale of Treasury Bills and Bonds
under R.A. No. 245, as amended, shall be credited and all payments for redemption of Treasury Bills and
Bonds shall be charged. 1âwphi 1

Regarding these legislative enactments ordaining an automatic appropriations provision for debt servicing,
this court has held:

Congress . . . deliberates or acts on the budget proposals of the President, and Congress in the exercise of its
own judgment and wisdom formulates an appropriation act precisely following the process established by the
Constitution, which specifies that no money may be paid from the Treasury except in accordance with an
appropriation made by law.

Debt service is not included inthe General Appropriation Act, since authorization therefor already exists under
RA Nos. 4860 and 245, as amended, and PD 1967. Precisely in the light of this subsisting authorization as
embodied in said Republic Acts and PD for debt service, Congress does not concern itself with details for
implementation by the Executive, butlargely with annual levels and approval thereof upon due deliberations as
part of the whole obligation program for the year. Upon such approval, Congress has spoken and cannot be
said to havedelegated its wisdom to the Executive, on whose part lies the implementation or execution of the
legislative wisdom.246 (Citation omitted)

Respondent Bureau of Treasury had the duty to obey the temporary restraining order issued by this court,
which remained in full force and effect, until set aside, vacated, or modified. Its conduct finds no justification
and is reprehensible.247

WHEREFORE, the petition for review and petitions-in-intervention are GRANTED. BIR Ruling Nos. 370-2011
and DA 378-2011 are NULLIFIED.

Furthermore, respondent Bureau of Treasury is REPRIMANDED for its continued retention of the amount
corresponding to the 20% final withholding tax despite this court's directive in the temporary restraining order
and in the resolution dated November 15, 2011 to deliver the amounts to the banks to be placed in escrow
pending resolution of this case.

Respondent Bureau of Treasury is hereby ORDERED to immediately ·release and pay to the bondholders the
amount corresponding-to the 20% final withholding tax that it withheld on October 18, 2011.

MARVIC M.V.F. LEONEN

Associate Justice
 4. G.R. No. L-21731 March 31, 1966

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,

vs.
LIM TIAN TENG SONS and CO., INC., defendant-appellant.

Office of the Solicitor General for the plaintiff-appellant.

P. B. Uy Calderon for the defendant-appellee.

BENGZON, J.P., J.:

Lim Tian Teng Sons & Co., Inc., a domestic corporation with principal office in Cebu City, engaged in 1951
and 1952, among others, in the exportation of copra. The copra was weighed before shipment in the port of
departure and upon arrival in the port of destination. The weight before shipment was called copra outturn. To
allow for lose in weight due to shrinkage, said exporter collected only 95% of the amount appearing in the
letter of credit covering every copra outturn. The 5% balance remained outstanding until final liquidation and
adjustment.

On March 30, 1953 Lim Tian Teng Sons & Co., Inc. filed its income tax return for 1952 based on accrued
income and expenses. Its return showed a loss of P56,109.98. It took up as part of the beginning inventory for
1952 the copra outturn shipped in 1951 in the sum of P95,500.00 already partially collected, as part of its
outstanding stock as of December 31, 1951.

In the audit and examination of taxpayer's 1952 income tax return, the Collector of Internal Revenue
eliminated the P95,500.00 outturn from the beginning inventory for 1952 and considered it as accrued income
for 1951. This increased taxpayer's 1952 net income by P95,500.00 which, considering disallowances in the
sum of P9,980.85, raised the taxpayer's net taxable income for 1952 to P50,370.87. Accordingly, in a letter
dated January 16, 1957 (Exhibit C), received by Lim Tian Teng Sons & Co., Inc. on January 30, 1957, the
Collector of Internal Revenue assessed a deficiency income tax of P10,074.00 and 50% surcharge thereon
amounting to P5,037.00 and demanded payment thereof not later than February 15, 1957.

On January 31, 1957 Lim Tian Teng Sons & Co., Inc. requested reinvestigation of its 1952 income tax liability.
The Collector of Internal Revenue did not reply; instead, he referred the case to the Solicitor General for
collection by judicial action.

On September 20, 1957 the Solicitor General demanded from Lim Tian Teng Sons & Co., Inc. the payment of
P15,111.50 within five days, stating that otherwise judicial action would be instituted without further notice. In
a letter dated October 5, 1957, received by the Collector of Internal Revenue on October 7, 1957, Lim Tian
Teng Sons & Co., Inc. reiterated its request for reinvestigation. It also wrote the Solicitor General on October
8, 1957 requesting that it be allowed to present its explanation together with supporting papers relative to its
income tax liability. The Solicitor General transmitted the letter to the Collection of Internal Revenue.
Thereupon, the Deputy Collector of Internal Revenue, by his letter dated October 16, 1957, informed the
taxpayer that its request for reinvestigation would be granted provided it executed within ten days a waiver of
the statute of limitations as required in General Circular V-258 dated August 20, 1957. In his letter dated
December 10, 1957, the Deputy Collector of Internal Revenue extended the period within which to execute
and file with him the waiver of the statute of limitations to December 31, 1957, but advised that if no waiver is
forthcoming on or before said date, judicial action for collection would be instituted without further notice.
Receipt of this letter is denied by appellant company.

As Lim Tian Teng Sons & Co., Inc. failed to file a waiver of the statute of limitations, the Collector of Internal
Revenue instituted eight months after, specifically on September 2, 1958, an action in the Court of First
Instance of Cebu for the collection of deficiency income tax.

After hearing the parties, the court below rendered the following judgment.

IN VIEW OF THE FOREGOING, judgment is hereby rendered, declaring the assessment (Exh. D, D-
1) of income tax in the sum of P15,111.00 due from the defendant to the plaintiff for the year 1952
valid, final and executory; condemning the defendant to pay the same to the plaintiff with interest at
one (1) per centum monthly from October 28, 1957 until fully paid.

With costs against the defendant.

IT IS SO ORDERED.
Not satisfied with the decision, the Collector of Internal Revenue moved for its reconsideration on the ground
that it did not include the 5% surcharge for late payment of tax. The motion was denied for the reason that the
taxpayer has already been ordered to pay a surcharge of 50%.

Both parties appealed, raising only questions of law.

Plaintiff cites as errors the non-imposition of the 5% surcharge for the late payment of tax and the
computation of delinquency interest from October 8, 1957.

Defendant, on the other hand, assails the jurisdiction of the lower court, its finding that the assessment in
question has become final and executory, the correctness of the assessment and the imposition of the 50%
surcharge. 1äwphï1.ñët

We will discuss first the taxpayer's appeal. It maintains that the lower court has no jurisdiction to entertain this
case on the ground that the Collector of Internal Revenue has not yet issued his final decision on its requests
for reinvestigation. The taxpayer's stand is that final decision of the Collector of Internal Revenue on the
disputed assessment is a condition precedent to the filing of an action in the Court of First Instance for the
collection of a tax. This argument has no merit. The Collector of Internal Revenue is authorized to collect
delinquent internal revenue taxes either by distraint and levy or by judicial action or both simultaneously.1 The
only requisite before he can collect the tax is that he must first assess the same within the time fixed by
law.2 And in the case of a false or fraudulent return with intent to evade the tax or of a failure to file a return, a
proceeding in court for the collection of such tax may be begun without assessment.3

Nowhere in the Tax Code is the Collector of Internal Revenue required to rule first on a taxpayer's request for
reinvestigation before he can go to court for the purpose of collecting the tax assessed. On the contrary,
Section 305 of the same Code withholds from all courts, except the Court of Tax Appeals under Section 11 of
Republic Act 1125, the authority to restrain the collection of any national internal-revenue tax, fee or charge,
thereby indicating the legislative policy to allow the Collector of Internal Revenue much latitude in the speedy
and prompt collection of taxes. The reason is obvious. It is upon taxation that the government chiefly relies to
obtain the means the carry on its operations, and it is of the utmost importance that the modes adopted to
enforce collection of taxes levied should be summary and interfered with as little as possible. No government
could exist if all litigants were permitted to delay the collection of its taxes.4

Moreover, before the creation of the Court of Tax Appeals the remedy of a taxpayer who desired to contest an
assessment issued, by the Collector of Internal Revenue was to pay the tax and bring an action in the
ordinary courts for its recovery pursuant to Section 306 of the Code.5 Collection or payment of the tax was not
made, to, wait until after the Collector of Internal Revenue has resolved all issues raised by the taxpayer
against an assessment. Republic Act 1125 creating the Court of Appeals allows the taxpayer to dispute the
correctness legality of an assessment both in the purely administrative level and in said court, but it does not
stop the Collector of Internal Revenue from collecting the tax through any of the means provided for in Section
316 of the Tax Code, except when enjoined by said Court of Tax Appeals. Section 11 of Republic Act 1125
states in part:

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

We will now resolve the issue of whether or not the court a quo erred in considering as final and executory the
assessment contained in the letter of the Collector of Internal Revenue dated January 16, 1957. As stated,
defendant received said assessment on January 30, 1957 and on the following day requested reinvestigation
of its tax liability. The Collector of Internal Revenue however did not reply to the request for reinvestigation.
Instead, he referred the case to the Solicitor General for collection of the tax. The lower court interpreted this
action of the Collector of Internal Revenue as a denial of defendant's request for reinvestigation.

Said court, to our mind, committed no error. For what is more indicative of the Collector's decision against
reinvestigation than his insistence to collect the tax? This decision was communicated to defendant in a letter
dated September 20, 1957 of the office of the Solicitor General which must have been received by defendant
not later than October 8, 1957 for on said date it acknowledged receipt thereof. It had thirty days from October
8, 1957 within which to appeal to the Court of Tax Appeals pursuant to Section 11 of Republic Act
1125.6 Instead of appealing to the Tax Court, however, the defendant herein in a letter dated October 8, 1957
reiterated its request for reinvestigation.
On October 15, 1957 the Collector of Internal Revenue wrote defendant that its "request for a reinvestigation
will be granted only upon compliance with General Circular No. V-258 dated August 20, 1957, which requires
as a prerequisite to the grant of a reinvestigation the execution of a waiver of the statute of limitations". In a
subsequent letter, he extended the period within which to submit the aforesaid waiver to December 31, 1957.

In effect, the Collector of Internal Revenue placed in the hands of the defendant the holding of a
reinvestigation. However, no such reinvestigation was made inasmuch as taxpayer failed to submit a written
waiver of the statute of limitations on or before December 31, 1957. Such omission automatically brought
about the denial of the request for reinvestigation.

Taxpayer however questions the legality of requiring waiver of the statute of limitations before the grant of
reinvestigation as provided for in General Circular No.
V-258. This question was not raised in the Bureau of Internal Revenue. Suffice it to say in this connection that
General Circular No. V-258 was promulgated pursuant to Section 338 of the Tax Code. The authority
thereunder of the Secretary of Finance to issue rules and regulations for the effective enforcement of the
provisions of the Tax Code has been sustained by this Court in previous cases.7

Even if we do not count the period from October 8, 1957 (the date when taxpayer received notice of the denial
of its request for reinvestigation) to December 31, 1957 (the deadline for the submission of the written waiver
of the statute of limitations) in reckoning the 30-day period within which the taxpayer may appeal to the Court
of Tax Appeals, said period had long lapsed when the Collector of Internal Revenue filed the complaint in this
case on September 2, 1958.

Taxpayer failure to appeal to the Court of Tax Appeals in due time made the assessment in question final,
executory and demandable.8 And when the action was instituted on September 2, 1958 to enforce the
deficiency assessment in question, it was already barred from disputing the correctness of the assessment or
invoking any defense that would reopen the question of his tax liability on merits.9 Otherwise, the period of
thirty days for appeal to the Court of Tax Appeals would make little sense. 10

In a proceeding like this the taxpayer's defenses are similar to those of the defendant in a case for the
enforcement of a judgment by judicial action under Section 6 of Rule 39 of the Rules of Court. No inquiry can
be made therein as to the merits of the original case or the justness of the judgment relied upon, other than by
evidence of want of jurisdiction, of collusion between the parties, or of fraud in the party offering the record
with respect to the proceedings. 11 As held by this Court in Insular Government vs.
Nico 12 the taxpayer may raise only the questions whether or not the Collector of Internal Revenue had
jurisdiction to do the particular act, and whether any fraud was committed in the doing of the act. In that case,
Doroteo Nico was fined by the Collector of Internal Revenue for violation of subparagraphs (d), (e) and (g) of
Section 28 as well as Sections 36, 101 and 107 of Act 1189. Under Section 54 of the same Act the taxpayer
was given the right to appeal from the decision of the Collector of Internal Revenue to the Court of First
Instance within a period of ten days from notice of imposition of the fine. Nico did not appeal, neither did he
pay the fine. Pursuant to Section 33 of the Act, the Collector of Internal Revenue filed an action in the Court of
First Instance to enforce his decision and collect the fine. The decision of the Collector of Internal Revenue
having become final, this Court, on appeal, allowed no further inquiry into the merits of the same.

For the satisfaction of defendant, however, it may be worth stating that on its merits, the assessment in
question is correct. It is not controverted that, as appearing from its 1952 income tax return Lim Tian Teng
Sons & Co., Inc. employs the "accrual" method of accounting. Following such accounting method the copra
outturn in the amount of P95,500.00 outstanding as of December 31, 1951, should have been treated as
accrued income for 1951, instead of as stock on hand on January 1, 1952.

Defendant took up the copra outturn in question as copra on hand in the beginning inventory for 1952. Said
beginning inventory, together with expenses, copra purchased during the year and copra on hand as of
December 31, 1952 were deducted as "cost of goods sold" from the total gross sales for the purpose of
determining the net sales. Since the P95,500.00 copra outturn formed part of the "cost of goods sold", it
diminished the net sales by P95,500.00, thereby also decreasing defendant's net taxable income by the same
amount. This procedure of treating the copra outturn in question is inconsistent with defendants accounting
method.

From the record, then, there is every indication that taxpayer's 1952 income tax return is fraudulent, as
alleged in paragraph (7) of the complaint in this case. Firstly, taxpayer's beginning inventory for 1952 did not
state the truth in considering the copra outturn as copra on hand, for on December 31, 1951 such copra was
not any more in taxpayer's bodega. It was in transit to a foreign port. And the taxpayer no longer owned the
copra. As a matter of fact, it already received payment for the same. Secondly, by observing regularly its own
system of accounting, taxpayer had no choice but to account the copra outturn as accrued income. This it did
not do. For such deviation, we see no other purpose than to lessen, if not obliterate as in fact it did, its income
tax liability per its return. The lower court therefore did not err in imposing the 50% surcharge.
We now come to the appeal of the Government. It maintains that the lower court erred in not imposing on
defendant's tax liability a surcharge of 5% for late payment. Subsection (c), Section 51 of the Tax Code
states:

SEC. 51. Assessment and payment of income tax. —

xxx xxx xxx

(c) Surcharge and interest in case of delinquency. - To any sum or sums due and unpaid after the
dates prescribed in subsections (b), (c) and (d) for the payment of the same, there shall be added the
sum of five per centum on the amount of tax unpaid and interest at the rate of one per centum a
month upon said tax from the time the same became due . . . . (Emphasis supplied)

As may be gleaned from the above-quoted provision, the 5% surcharge is mandatory and automatically due,
once the tax is not paid on time. "Shall" is the word that law uses a word normally imperative and a "language
of demand". 13 Applicable herein is what has been said of a similar provision — the present Section 183 of the
Tax Code — stating that:

If the percentage tax on any business is not paid within the time prescribed above the amount of the
tax shall be increased by twenty-five per centum, the increment to be part of the tax. (Emphasis
supplied)

Said this Court in Lim Co Chui vs. Posadas 14:

This provision is mandatory. It provides a plan which works out automatically. It confers no discretion
on the Collector of Internal Revenue. That, official may not disregard the law and substitute therefor
his own personal judgment.

Finally, the Government questions the computation of the delinquency interest, due on the deficiency
tax, from October 8, 1957. It insists that payment of such interest should commence from February 15, 1957.
Such contention is well-founded. Pursuant to Section 51(d), "the assessment made by the Collector of Internal
Revenue shall be paid ... immediately upon notification of the amount of such assessment." Now, the income
tax assessment notice gave defendant up to February 15, 1957 to pay the deficiency tax in question. No
payment was made. Hence, pursuant to Section 51 (e), quoted earlier, interest on the unpaid tax fell due
starting February 16, 1957 and continues to accrue until full payment of the tax.

Wherefore, the decision appealed from is modified. Lim Tian Teng Sons & Co., Inc. is hereby ordered to pay
the sum of P10,074.00 as deficiency income tax for 1952 plus 50% and 5% surcharges thereon for fraud and
late payment, respectively, and 1% monthly interest upon said tax of P10,074.00, computed from February
16, 1957 until the tax is fully paid. With costs against defendant-appellant. So ordered.

Bengzon, C.J., Bautista Angelo, Concepcion, Reyes, J.B.L., Barrera, Regala, Makalintal, Zaldivar and
Sanchez, JJ., concur.
Dizon, J., is on leave.
 5. G.R. No. 144942 July 4, 2002

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
LA SUERTE CIGAR AND CIGARETTE FACTORY, respondent.

RESOLUTION

VITUG, J.:

In its resolution, dated 15 November 2000, this Court denied the Petition for Review on Certiorari submitted
by the Commissioner of Internal Revenue for non-compliance with the procedural requirement of verification
explicit in Section 4, Rule 7, of the 1997 Rules of Civil Procedure and, furthermore, because the appeal was
not pursued by the Solicitor General. When the motion for reconsideration filed by petitioner was likewise
denied, petitioner filed the instant motion seeking an elucidation on the supposed discrepancy between the
pronouncement of this Court, on the one hand, that would require the participation of the Office of the Solicitor
General and pertinent provisions of the Tax Code, on the other hand, that allow the legal officers of the
Bureau of Internal Revenue (BIR) to institute and conduct judicial action in behalf of the Government under
Section 220 of the Tax Reform Act of 1997 (R.A. 8424 effective 01 January 1998). -

"SECTION 220. Form and Mode of Proceeding in Actions Arising under this Code. - Civil and criminal actions
and proceedings instituted in behalf of the Government under the authority of this Code or other law enforced
by the Bureau of Internal Revenue shall be brought in the name of the Government of the Philippines
and shall be conducted by legal officers of the Bureau of Internal Revenue but no civil or criminal action for
the recovery of taxes or the enforcement of any fine, penalty or forfeiture under this Code shall be filed in
court without the approval of the Commissioner." (Underscoring supplied)

Ordered to comment, the Office of the Solicitor General expressed the view that under the aforequoted
Section 220 of the Tax Reform Act, amending Section 221 of the 1993 Tax Code, "the primary responsibility
to conduct civil and criminal actions lies with the legal officers of the Bureau of Internal Revenue, such that it
is no longer necessary for BIR legal officers to be deputized by the Office of the Solicitor General or the
Secretary of Justice before they can commence any action under the 1997 Tax Code."1

The institution or commencement before a proper court of civil and criminal actions and proceedings arising
under the Tax Reform Act which "shall be conducted by legal officers of the Bureau of Internal Revenue" is
not in dispute. An appeal from such court, however, is not a matter of right. Section 220 of the Tax
Reform Act must not be understood as overturning the long established procedure before this Court
in requiring the Solicitor General to represent the interest of the Republic. This Court continues to
maintain that it is the Solicitor General who has the primary responsibility to appear for the
government in appellate proceedings.2 This pronouncement finds justification in the various laws defining
the Office of the Solicitor General, beginning with Act No. 135, which took effect on 16 June 1901, up to the
present Administrative Code of 1987.3 Section 35, Chapter 12, Title III, Book IV, of the said Code outlines the
powers and functions of the Office of the Solicitor General which includes, but not limited to, its duty to -

"(1) Represent the Government in the Supreme Court and the Court of Appeals in all criminal
proceedings; represent the Government and its officers in the Supreme Court, the Court of Appeals,
and all other courts or tribunals in all civil actions and special proceedings in which the Government or
any officer thereof in his official capacity is a party.

"x x x xxx xxx

"(3) Appear in any court in any action involving the validity of any treaty, law, executive order or
proclamation, rule or regulation when in his judgment his intervention is necessary or when requested
by the Court."

In Gonzales vs. Chavez,4 the Supreme Court has said that, from the historical and statutory perspectives, the
Solicitor General is the "principal law officer and legal defender of the government."

An exception to the above rule is that enunciated in the case of Orbos vs. Civil Service Commission,5 thus:

"In the discharge of this task the Solicitor General must see to it that the best interest of the government is
upheld within the limits set by law. When confronted with a situation where one government office takes an
adverse position against another government agency, x x x the Solicitor General should not refrain from
performing his duty as the lawyer of the government. It is incumbent upon him to present to the court what he
1âwphi1

considers would legally uphold the best interest of the government although it may run counter to a client's
position. In such an instance the government office adversely affected by the position taken by the Solicitor
General, if it still believes in the merit of its case, may appear in its own behalf through its legal personnel or
representative."6

The present controversy ruminate upon the singular issue of whether or not Revenue Regulation 1767 issued
by petitioner, in relation to Section 137 of the Internal Revenue Code in the imposition of a tax on stemmed-
leaf tobacco, deviated from the tax code. This question basically inquires then into whether or not the revenue
regulation has exceeded, on constitutional grounds, the allowable limits of legislative delegation.

Aware that the dismissal of the petition could have lasting effect on government tax revenues, the lifeblood of
the state, the Court heeds the plea of petitioner for a chance to prosecute its case. It does appear from the
statements of the Commissioner of Internal Revenue, seeking clarification on the issue of legal
representation, that it has labored and acted in good faith.

Relative to the lack of verification required of petitions, this Court has held in a number of instances that such
a deficiency can be excused or dispensed with in meritorious cases, the defect being neither jurisdictional nor
always fatal.7 Verification is mainly intended to ensure that the allegations in the pleading are true and correct
and not mere speculations. The Court may thus order the correction of the pleading or act on an unverified
pleading, if the attending circumstances are such that strict compliance would not fully serve substantial
justice8 which, after all, is the basic aim for the rules of procedure.9

WHEREFORE, the Court hereby directs the Office of the Solicitor General (a) to enter its appearance for
petitioner and (b) to manifest whether or not it is adopting the instant petition, both within ten (10) days from
receipt of this resolution. The Court shall act on the motion for reconsideration of its resolution, dated 15
November 2000, after receipt by the Court of the appearance and manifestation of the Office of the Solicitor
General hereinabove required.

SO ORDERED.

Davide, Jr., C.J., Bellosillo, Puno, Kapunan, Mendoza, Panganiban, Ynares-Santiago, Sandoval-Gutierrez,
Carpio, Austria-Martinez, and Corona, JJ., concur.
Quisumbing, J., abroad.
 6. G.R. Nos. 167274-75 July 21, 2008

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

vs.
FORTUNE TOBACCO CORPORATION, Respondent.

DECISION

TINGA, J.:

Simple and uncomplicated is the central issue involved, yet whopping is the amount at stake in this case.

After much wrangling in the Court of Tax Appeals (CTA) and the Court of Appeals, Fortune Tobacco
Corporation (Fortune Tobacco) was granted a tax refund or tax credit representing specific taxes erroneously
collected from its tobacco products. The tax refund is being re-claimed by the Commissioner of Internal
Revenue (Commissioner) in this petition.

The following undisputed facts, summarized by the Court of Appeals, are quoted in the assailed
Decision1 dated 28 September 2004:

CAG.R. SP No. 80675

xxxx

Petitioner2 is a domestic corporation duly organized and existing under and by virtue of the laws of the
Republic of the Philippines, with principal address at Fortune Avenue, Parang, Marikina City.

Petitioner is the manufacturer/producer of, among others, the following cigarette brands, with tax rate
classification based on net retail price prescribed by Annex "D" to R.A. No. 4280, to wit:

Brand Tax Rate

Champion M 100 ₱1.00

Salem M 100 ₱1.00

Salem M King ₱1.00

Camel F King ₱1.00

Camel Lights Box 20’s ₱1.00

Camel Filters Box 20’s ₱1.00

Winston F Kings ₱5.00

Winston Lights ₱5.00

Immediately prior to January 1, 1997, the above-mentioned cigarette brands were subject to ad valorem tax
pursuant to then Section 142 of the Tax Code of 1977, as amended. However, on January 1, 1997, R.A. No.
8240 took effect whereby a shift from the ad valorem tax (AVT) system to the specific tax system was made
and subjecting the aforesaid cigarette brands to specific tax under [S]ection 142 thereof, now renumbered as
Sec. 145 of the Tax Code of 1997, pertinent provisions of which are quoted thus:

Section 145. Cigars and Cigarettes-

(A) Cigars. – There shall be levied, assessed and collected on cigars a tax of One peso (₱1.00) per
cigar.

"(B) Cigarettes packed by hand. – There shall be levied, assessesed and collected on cigarettes
packed by hand a tax of Forty centavos (P0.40) per pack.

(C) Cigarettes packed by machine. – There shall be levied, assessed and collected on cigarettes
packed by machine a tax at the rates prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos
(₱10.00) per pack, the tax shall be Twelve (₱12.00) per pack;
 (2) If the net retail price (excluding the excise tax and the value added tax) exceeds Six pesos
and Fifty centavos (₱6.50) but does not exceed Ten pesos (₱10.00) per pack, the tax shall
be Eight Pesos (₱8.00) per pack.

(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos
(₱5.00) but does not exceed Six Pesos and fifty centavos (₱6.50) per pack, the tax shall
be Five pesos (₱5.00) per pack;

(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five
pesos (₱5.00) per pack, the tax shall be One peso (₱1.00) per pack;

"Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of
R.A. No. 8240 shall be taxed under the highest classification of any variant of that brand.

The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No.
8240 shall not be lower than the tax, which is due from each brand on October 1, 1996. Provided, however,
that in cases were (sic) the excise tax rate imposed in paragraphs (1), (2), (3) and (4) hereinabove will result
in an increase in excise tax of more than seventy percent (70%), for a brand of cigarette, the increase shall
take effect in two tranches: fifty percent (50%) of the increase shall be effective in 1997 and one hundred
percent (100%) of the increase shall be effective in 1998.

Duly registered or existing brands of cigarettes or new brands thereof packed by machine shall only be
packed in twenties.

The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3) and (4) hereof, shall be
increased by twelve percent (12%) on January 1, 2000. (Emphasis supplied)

New brands shall be classified according to their current net retail price.

For the above purpose, ‘net retail price’ shall mean the price at which the cigarette is sold on retail in twenty
(20) major supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount
intended to cover the applicable excise tax and value-added tax. For brands which are marketed only outside
Metro [M]anila, the ‘net retail price’ shall mean the price at which the cigarette is sold in five (5) major
supermarkets in the region excluding the amount intended to cover the applicable excise tax and the value-
added tax.

The classification of each brand of cigarettes based on its average retail price as of October 1, 1996, as set
forth in Annex "D," shall remain in force until revised by Congress.

Variant of a brand shall refer to a brand on which a modifier is prefixed and/or suffixed to the root name of
the brand and/or a different brand which carries the same logo or design of the existing brand.

To implement the provisions for a twelve percent (12%) increase of excise tax on, among others, cigars and
cigarettes packed by machines by January 1, 2000, the Secretary of Finance, upon recommendation of the
respondent Commissioner of Internal Revenue, issued Revenue Regulations No. 17-99, dated December 16,
1999, which provides the increase on the applicable tax rates on cigar and cigarettes as follows:

PRESENT SPECIFIC TAX NEW SPECIFIC TAX

SECTION ARTICLES RATE PRIOR TO JAN. 1, RATE EFFECTIVE JAN.
2000 1, 2000
145 (A) P1.00/cigar ₱1.12/cigar
(B)Cigarettes packed by
machine
(1) Net retail price (excluding ₱12.00/pack ₱13.44/ pack
VAT and excise) exceeds
₱10.00 per pack
(2) Exceeds ₱10.00 per pack ₱8.00/pack ₱8.96/pack
(3) Net retail price (excluding ₱5.00/pack ₱5.60/pack
VAT and excise) is ₱5.00 to
₱6.50 per pack
(4) Net Retail Price (excluding ₱1.00/pack ₱1.12/pack
VAT and excise) is below ₱5.00
 per pack

Revenue Regulations No. 17-99 likewise provides in the last paragraph of Section 1 thereof, "(t)hat the new
specific tax rate for any existing brand of cigars, cigarettes packed by machine, distilled spirits, wines
and fermented liquor shall not be lower than the excise tax that is actually being paid prior to January
1, 2000."

For the period covering January 1-31, 2000, petitioner allegedly paid specific taxes on all brands
manufactured and removed in the total amounts of ₱585,705,250.00.

On February 7, 2000, petitioner filed with respondent’s Appellate Division a claim for refund or tax credit of its
purportedly overpaid excise tax for the month of January 2000 in the amount of ₱35,651,410.00

On June 21, 2001, petitioner filed with respondent’s Legal Service a letter dated June 20, 2001 reiterating all
the claims for refund/tax credit of its overpaid excise taxes filed on various dates, including the present claim
for the month of January 2000 in the amount of ₱35,651,410.00.

As there was no action on the part of the respondent, petitioner filed the instant petition for review with this
Court on December 11, 2001, in order to comply with the two-year period for filing a claim for refund.

In his answer filed on January 16, 2002, respondent raised the following Special and Affirmative Defenses;

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

by the Bureau;
5. The amount of ₱35,651,410 being claimed by petitioner as alleged overpaid excise tax for the
month of January 2000 was not properly documented.
6. In an action for tax refund, the burden of proof is on the taxpayer to establish its right to refund, and
failure to sustain the burden is fatal to its claim for refund/credit.
7. Petitioner must show that it has complied with the provisions of Section 204(C) in relation [to]
Section 229 of the Tax Code on the prescriptive period for claiming tax refund/credit;
8. Claims for refund are construed strictly against the claimant for the same partake of tax exemption
from taxation; and
9. The last paragraph of Section 1 of Revenue Regulation[s] [No.]17-99 is a valid implementing
regulation which has the force and effect of law."

CA G.R. SP No. 83165

The petition contains essentially similar facts, except that the said case questions the CTA’s December 4,
2003 decision in CTA Case No. 6612 granting respondent’s3 claim for refund of the amount of
₱355,385,920.00 representing erroneously or illegally collected specific taxes covering the period January 1,
2002 to December 31, 2002, as well as its March 17, 2004 Resolution denying a reconsideration thereof.x x x

In both CTA Case Nos. 6365 & 6383 and CTA No. 6612, the Court of Tax Appeals reduced the issues to be
resolved into two as stipulated by the parties, to wit: (1) Whether or not the last paragraph of Section 1 of
Revenue Regulation[s] [No.] 17-99 is in accordance with the pertinent provisions of Republic Act [No.] 8240,
now incorporated in Section 145 of the Tax Code of 1997; and (2) Whether or not petitioner is entitled to a
refund of ₱35,651,410.00 as alleged overpaid excise tax for the month of January 2000. x x x x

Hence, the respondent CTA in its assailed October 21, 2002 [twin] Decisions[s] disposed in CTA Case Nos.
6365 & 6383:

WHEREFORE, in view of the foregoing, the court finds the instant petition meritorious and in accordance with
law. Accordingly, respondent is hereby ORDERED to REFUND to petitioner the amount of ₱35,651.410.00
representing erroneously paid excise taxes for the period January 1 to January 31, 2000.

SO ORDERED.

Herein petitioner sought reconsideration of the above-quoted decision. In [twin] resolution[s] [both] dated July
15, 2003, the Tax Court, in an apparent change of heart, granted the petitioner’s consolidated motions for
reconsideration, thereby denying the respondent’s claim for refund.

However, on consolidated motions for reconsideration filed by the respondent in CTA Case Nos. 6363 and
6383, the July 15, 2002 resolution was set aside, and the Tax Court ruled, this time with a semblance of
finality, that the respondent is entitled to the refund claimed. Hence, in a resolution dated November 4, 2003,
the tax court reinstated its December 21, 2002 Decision and disposed as follows:
WHEREFORE, our Decisions in CTA Case Nos. 6365 and 6383 are hereby REINSTATED. Accordingly,
respondent is hereby ORDERED to REFUND petitioner the total amount of ₱680,387,025.00 representing
erroneously paid excise taxes for the period January 1, 2000 to January 31, 2000 and February 1, 2000 to
December 31, 2001.

SO ORDERED.

Meanwhile, on December 4, 2003, the Court of Tax Appeals rendered decision in CTA Case No. 6612
granting the prayer for the refund of the amount of ₱355,385,920.00 representing overpaid excise tax for the
period covering January 1, 2002 to December 31, 2002. The tax court disposed of the case as follows:

IN VIEW OF THE FOREGOING, the Petition for Review is GRANTED. Accordingly, respondent is hereby
ORDERED to REFUND to petitioner the amount of ₱355,385,920.00 representing overpaid excise tax for the
period covering January 1, 2002 to December 31, 2002.

SO ORDERED.

Petitioner sought reconsideration of the decision, but the same was denied in a Resolution dated March 17,
2004.4(Emphasis supplied) (Citations omitted)

The Commissioner appealed the aforesaid decisions of the CTA. The petition questioning the grant of refund
in the amount of ₱680,387,025.00 was docketed as CA-G.R. SP No. 80675, whereas that assailing the grant
of refund in the amount of ₱355,385,920.00 was docketed as CA-G.R. SP No. 83165. The petitions were
consolidated and eventually denied by the Court of Appeals. The appellate court also denied reconsideration
in its Resolution5 dated 1 March 2005.

In its Memorandum6 22 dated November 2006, filed on behalf of the Commissioner, the Office of the Solicitor
General (OSG) seeks to convince the Court that the literal interpretation given by the CTA and the Court of
Appeals of Section 145 of the Tax Code of 1997 (Tax Code) would lead to a lower tax imposable on 1
January 2000 than that imposable during the transition period. Instead of an increase of 12% in the tax rate
effective on 1 January 2000 as allegedly mandated by the Tax Code, the appellate court’s ruling would result
in a significant decrease in the tax rate by as much as 66%.

The OSG argues that Section 145 of the Tax Code admits of several interpretations, such as:

1. That by January 1, 2000, the excise tax on cigarettes should be the higher tax imposed under the
specific tax system and the tax imposed under the ad valorem tax system plus the 12% increase
imposed by par. 5, Sec. 145 of the Tax Code;
2. The increase of 12% starting on January 1, 2000 does not apply to the brands of cigarettes listed
under Annex "D" referred to in par. 8, Sec. 145 of the Tax Code;
3. The 12% increment shall be computed based on the net retail price as indicated in par. C, sub-par.
(1)-(4), Sec. 145 of the Tax Code even if the resulting figure will be lower than the amount already
being paid at the end of the transition period. This is the interpretation followed by both the CTA and
the Court of Appeals.7

This being so, the interpretation which will give life to the legislative intent to raise revenue should govern, the
OSG stresses.

Finally, the OSG asserts that a tax refund is in the nature of a tax exemption and must, therefore, be
construed strictly against the taxpayer, such as Fortune Tobacco.

In its Memorandum8 dated 10 November 2006, Fortune Tobacco argues that the CTA and the Court of
Appeals merely followed the letter of the law when they ruled that the basis for the 12% increase in the tax
rate should be the net retail price of the cigarettes in the market as outlined in paragraph C, sub paragraphs
(1)-(4), Section 145 of the Tax Code. The Commissioner allegedly has gone beyond his delegated rule-
making power when he promulgated, enforced and implemented Revenue Regulation No. 17-99, which
effectively created a separate classification for cigarettes based on the excise tax "actually being paid prior to
January 1, 2000."9

It should be mentioned at the outset that there is no dispute between the fact of payment of the taxes sought
to be refunded and the receipt thereof by the Bureau of Internal Revenue (BIR). There is also no question
about the mathematical accuracy of Fortune Tobacco’s claim since the documentary evidence in support of
the refund has not been controverted by the revenue agency. Likewise, the claims have been made and the
actions have been filed within the two (2)-year prescriptive period provided under Section 229 of the Tax
Code.
The power to tax is inherent in the State, such power being inherently legislative, based on the principle that
taxes are a grant of the people who are taxed, and the grant must be made by the immediate representatives
of the people; and where the people have laid the power, there it must remain and be exercised.10

This entire controversy revolves around the interplay between Section 145 of the Tax Code and Revenue
Regulation 17-99. The main issue is an inquiry into whether the revenue regulation has exceeded the
allowable limits of legislative delegation.

For ease of reference, Section 145 of the Tax Code is again reproduced in full as follows:

Section 145. Cigars and Cigarettes-

(A) Cigars.—There shall be levied, assessed and collected on cigars a tax of One peso (₱1.00) per
cigar.
(B). Cigarettes packed by hand.—There shall be levied, assessed and collected on cigarettes
packed by hand a tax of Forty centavos (₱0.40) per pack.
(C) Cigarettes packed by machine.—There shall be levied, assessed and collected on cigarettes
packed by machine a tax at the rates prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos
(₱10.00) per pack, the tax shall be Twelve pesos (₱12.00) per pack;

(2) If the net retail price (excluding the excise tax and the value added tax) exceeds Six pesos
and Fifty centavos (₱6.50) but does not exceed Ten pesos (₱10.00) per pack, the tax shall be
Eight Pesos (₱8.00) per pack.

(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos
(₱5.00) but does not exceed Six Pesos and fifty centavos (₱6.50) per pack, the tax shall be
Five pesos (₱5.00) per pack;

(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five
pesos (₱5.00) per pack, the tax shall be One peso (₱1.00) per pack;

Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of
R.A. No. 8240 shall be taxed under the highest classification of any variant of that brand.

The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No.
8240 shall not be lower than the tax, which is due from each brand on October 1, 1996. Provided, however,
That in cases where the excise tax rates imposed in paragraphs (1), (2), (3) and (4) hereinabove will result in
an increase in excise tax of more than seventy percent (70%), for a brand of cigarette, the increase shall take
effect in two tranches: fifty percent (50%) of the increase shall be effective in 1997 and one hundred percent
(100%) of the increase shall be effective in 1998.

Duly registered or existing brands of cigarettes or new brands thereof packed by machine shall only be
packed in twenties.

The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3) and (4) hereof, shall be
increased by twelve percent (12%) on January 1, 2000.

New brands shall be classified according to their current net retail price.

For the above purpose, ‘net retail price’ shall mean the price at which the cigarette is sold on retail in twenty
(20) major supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount
intended to cover the applicable excise tax and value-added tax. For brands which are marketed only outside
Metro Manila, the ‘net retail price’ shall mean the price at which the cigarette is sold in five (5) major intended
to cover the applicable excise tax and the value-added tax.

The classification of each brand of cigarettes based on its average retail price as of October 1, 1996, as set
forth in Annex "D," shall remain in force until revised by Congress.

Variant of a brand’ shall refer to a brand on which a modifier is prefixed and/or suffixed to the root name of
the brand and/or a different brand which carries the same logo or design of the existing brand.11 (Emphasis
supplied)
Revenue Regulation 17-99, which was issued pursuant to the unquestioned authority of the Secretary of
Finance to promulgate rules and regulations for the effective implementation of the Tax Code,12 interprets the
above-quoted provision and reflects the 12% increase in excise taxes in the following manner:

PRESENT SPECIFIC TAX NEW SPECIFIC TAX

SECTION DESCRIPTION OF ARTICLES RATES PRIOR TO JAN. 1, RATE Effective Jan.. 1,
2000 2000
145 (A) P1.00/cigar ₱1.12/cigar
(B)Cigarettes packed by Machine
(1) Net Retail Price (excluding VAT ₱12.00/pack ₱13.44/pack
and Excise) exceeds ₱10.00 per
pack
(2) Net Retail Price (excluding VAT ₱8.00/pack ₱8.96/pack
and Excise) is ₱6.51 up to ₱10.00
per pack
(3) Net Retail Price (excluding VAT ₱5.00/pack ₱5.60/pack
and excise) is ₱5.00 to ₱6.50 per
pack
(4) Net Retail Price (excluding VAT ₱1.00/pack ₱1.12/pack
and excise) is below ₱5.00 per
pack)

This table reflects Section 145 of the Tax Code insofar as it mandates a 12% increase effective on 1 January
2000 based on the taxes indicated under paragraph C, sub-paragraph (1)-(4). However, Revenue Regulation
No. 17-99 went further and added that "[T]he new specific tax rate for any existing brand of cigars, cigarettes
packed by machine, distilled spirits, wines and fermented liquor shall not be lower than the excise tax that is
actually being paid prior to January 1, 2000."13

Parenthetically, Section 145 states that during the transition period, i.e., within the next three (3) years from
the effectivity of the Tax Code, the excise tax from any brand of cigarettes shall not be lower than the tax due
from each brand on 1 October 1996. This qualification, however, is conspicuously absent as regards the 12%
increase which is to be applied on cigars and cigarettes packed by machine, among others, effective on 1
January 2000. Clearly and unmistakably, Section 145 mandates a new rate of excise tax for cigarettes packed
by machine due to the 12% increase effective on 1 January 2000 without regard to whether the revenue
collection starting from this period may turn out to be lower than that collected prior to this date.

By adding the qualification that the tax due after the 12% increase becomes effective shall not be lower than
the tax actually paid prior to 1 January 2000, Revenue Regulation No. 17-99 effectively imposes a tax which
is the higher amount between the ad valorem tax being paid at the end of the three (3)-year transition period
and the specific tax under paragraph C, sub-paragraph (1)-(4), as increased by 12%—a situation not
supported by the plain wording of Section 145 of the Tax Code.

This is not the first time that national revenue officials had ventured in the area of unauthorized administrative
legislation.

In Commissioner of Internal Revenue v. Reyes,14 respondent was not informed in writing of the law and the
facts on which the assessment of estate taxes was made pursuant to Section 228 of the 1997 Tax Code, as
amended by Republic Act (R.A.) No. 8424. She was merely notified of the findings by the Commissioner, who
had simply relied upon the old provisions of the law and Revenue Regulation No. 12-85 which was based on
the old provision of the law. The Court held that in case of discrepancy between the law as amended and the
implementing regulation based on the old law, the former necessarily prevails. The law must still be followed,
even though the existing tax regulation at that time provided for a different procedure.15

In Commissioner of Internal Revenue v. Central Luzon Drug Corporation,16 the tax authorities gave the term
"tax credit" in Sections 2(i) and 4 of Revenue Regulation 2-94 a meaning utterly disparate from what R.A. No.
7432 provides. Their interpretation muddled up the intent of Congress to grant a mere discount privilege and
not a sales discount. The Court, striking down the revenue regulation, held that an administrative agency
issuing regulations may not enlarge, alter or restrict the provisions of the law it administers, and it cannot
engraft additional requirements not contemplated by the legislature. The Court emphasized that tax
administrators are not allowed to expand or contract the legislative mandate and that the "plain meaning rule"
or verba legis in statutory construction should be applied such that where the words of a statute are clear,
plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation.
As we have previously declared, rule-making power must be confined to details for regulating the mode or
proceedings in order to carry into effect the law as it has been enacted, and it cannot be extended to amend
or expand the statutory requirements or to embrace matters not covered by the statute. Administrative
regulations must always be in harmony with the provisions of the law because any resulting discrepancy
between the two will always be resolved in favor of the basic law.17

In Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc.,18 Commissioner Jose Ong issued
Revenue Memorandum Order (RMO) No. 15-91, as well as the clarificatory Revenue Memorandum Circular
(RMC) 43-91, imposing a 5% lending investor’s tax under the 1977 Tax Code, as amended by Executive
Order (E.O.) No. 273, on pawnshops. The Commissioner anchored the imposition on the definition of lending
investors provided in the 1977 Tax Code which, according to him, was broad enough to include pawnshop
operators. However, the Court noted that pawnshops and lending investors were subjected to different tax
treatments under the Tax Code prior to its amendment by the executive order; that Congress never intended
to treat pawnshops in the same way as lending investors; and that the particularly involved section of the Tax
Code explicitly subjected lending investors and dealers in securities only to percentage tax. And so the Court
affirmed the invalidity of the challenged circulars, stressing that "administrative issuances must not override,
supplant or modify the law, but must remain consistent with the law they intend to carry out."19

In Philippine Bank of Communications v. Commissioner of Internal Revenue,20 the then acting Commissioner
issued RMC 7-85, changing the prescriptive period of two years to ten years for claims of excess quarterly
income tax payments, thereby creating a clear inconsistency with the provision of Section 230 of the 1977 Tax
Code. The Court nullified the circular, ruling that the BIR did not simply interpret the law; rather it legislated
guidelines contrary to the statute passed by Congress. The Court held:

It bears repeating that Revenue memorandum-circulars are considered administrative rulings (in the sense of
more specific and less general interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great respect by the courts. Nevertheless, such
interpretation is not conclusive and will be ignored if judicially found to be erroneous. Thus, courts will not
countenance administrative issuances that override, instead of remaining consistent and in harmony with, the
law they seek to apply and implement.21

In Commissioner of Internal Revenue v. CA, et al.,22 the central issue was the validity of RMO 4-87 which had
construed the amnesty coverage under E.O. No. 41 (1986) to include only assessments issued by the BIR
after the promulgation of the executive order on 22 August 1986 and not assessments made to that date.
Resolving the issue in the negative, the Court held:

x x x all such issuances must not override, but must remain consistent and in harmony with, the law they seek
to apply and implement. Administrative rules and regulations are intended to carry out, neither to supplant nor
to modify, the law.23 x x x

If, as the Commissioner argues, Executive Order No. 41 had not been intended to include 1981-1985 tax
liabilities already assessed (administratively) prior to 22 August 1986, the law could have simply so provided
in its exclusionary clauses. It did not. The conclusion is unavoidable, and it is that the executive order has
been designed to be in the nature of a general grant of tax amnesty subject only to the cases specifically
excepted by it.24

In the case at bar, the OSG’s argument that by 1 January 2000, the excise tax on cigarettes should be the
higher tax imposed under the specific tax system and the tax imposed under the ad valorem tax system plus
the 12% increase imposed by paragraph 5, Section 145 of the Tax Code, is an unsuccessful attempt to justify
what is clearly an impermissible incursion into the limits of administrative legislation. Such an interpretation is
not supported by the clear language of the law and is obviously only meant to validate the OSG’s thesis that
Section 145 of the Tax Code is ambiguous and admits of several interpretations.

The contention that the increase of 12% starting on 1 January 2000 does not apply to the brands of cigarettes
listed under Annex "D" is likewise unmeritorious, absurd even. Paragraph 8, Section 145 of the Tax Code
simply states that, "[T]he classification of each brand of cigarettes based on its average net retail price as of
October 1, 1996, as set forth in Annex ‘D’, shall remain in force until revised by Congress." This declaration
certainly does not lend itself to the interpretation given to it by the OSG. As plainly worded, the average net
retail prices of the listed brands under Annex "D," which classify cigarettes according to their net retail price
into low, medium or high, obviously remain the bases for the application of the increase in excise tax rates
effective on 1 January 2000.

The foregoing leads us to conclude that Revenue Regulation No. 17-99 is indeed indefensibly flawed. The
Commissioner cannot seek refuge in his claim that the purpose behind the passage of the Tax Code is to
generate additional revenues for the government. Revenue generation has undoubtedly been a major
consideration in the passage of the Tax Code. However, as borne by the legislative record,25 the shift from
the ad valorem system to the specific tax system is likewise meant to promote fair competition among the
players in the industries concerned, to ensure an equitable distribution of the tax burden and to simplify tax
administration by classifying cigarettes, among others, into high, medium and low-priced based on their net
retail price and accordingly graduating tax rates.

At any rate, this advertence to the legislative record is merely gratuitous because, as we have held, the
meaning of the law is clear on its face and free from the ambiguities that the Commissioner imputes. We
simply cannot disregard the letter of the law on the pretext of pursuing its spirit.26

Finally, the Commissioner’s contention that a tax refund partakes the nature of a tax exemption does not
apply to the tax refund to which Fortune Tobacco is entitled. There is parity between tax refund and tax
exemption only when the former is based either on a tax exemption statute or a tax refund statute. Obviously,
that is not the situation here. Quite the contrary, Fortune Tobaccos claim for refund is premised on its
erroneous payment of the tax, or better still the government’s exaction in the absence of a law.

Tax exemption is a result of legislative grace. And he who claims an exemption from the burden of taxation
must justify his claim by showing that the legislature intended to exempt him by words too plain to be
mistaken.27 The rule is that tax exemptions must be strictly construed such that the exemption will not be held
to be conferred unless the terms under which it is granted clearly and distinctly show that such was the
intention.28

A claim for tax refund may be based on statutes granting tax exemption or tax refund. In such case, the rule of
strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an
exemption, a legislative grace, which cannot be allowed unless granted in the most explicit and categorical
language. The taxpayer must show that the legislature intended to exempt him from the tax by words too plain
to be mistaken.29

Tax refunds (or tax credits), on the other hand, are not founded principally on legislative grace but on the legal
principle which underlies all quasi-contracts abhorring a person’s unjust enrichment at the expense of
another.30The dynamic of erroneous payment of tax fits to a tee the prototypic quasi-contract, solutio indebiti,
which covers not only mistake in fact but also mistake in law.31

The Government is not exempt from the application of solutio indebiti.32 Indeed, the taxpayer expects fair
dealing from the Government, and the latter has the duty to refund without any unreasonable delay what it
has erroneously collected.33 If the State expects its taxpayers to observe fairness and honesty in paying their
taxes, it must hold itself against the same standard in refunding excess (or erroneous) payments of such
taxes. It should not unjustly enrich itself at the expense of taxpayers.34 And so, given its essence, a claim for
tax refund necessitates only preponderance of evidence for its approbation like in any other ordinary civil
case.

Under the Tax Code itself, apparently in recognition of the pervasive quasi-contract principle, a claim for tax
refund may be based on the following: (a) erroneously or illegally assessed or collected internal revenue
taxes; (b) penalties imposed without authority; and (c) any sum alleged to have been excessive or in any
manner wrongfully collected.35

What is controlling in this case is the well-settled doctrine of strict interpretation in the imposition of taxes, not
the similar doctrine as applied to tax exemptions. The rule in the interpretation of tax laws is that a statute will
not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be
imposed without clear and express words for that purpose. Accordingly, the general rule of requiring
adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of
a taxing act are not to be extended by implication. In answering the question of who is subject to tax statutes,
it is basic that in case of doubt, such statutes are to be construed most strongly against the government and
in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed
beyond what statutes expressly and clearly import.36 As burdens, taxes should not be unduly exacted nor
assumed beyond the plain meaning of the tax laws.37

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA G.R. SP No. 80675, dated
28 September 2004, and its Resolution, dated 1 March 2005, are AFFIRMED. No pronouncement as to costs.

SO ORDERED.

DANTE O. TINGA
Associate Justice
 7. G.R. No. L-41919-24 May 30, 1980

QUIRICO P. UNGAB, petitioner,

vs.
HON. VICENTE N. CUSI, JR., in his capacity as Judge of the Court of First Instance, Branch 1, 16TH
Judicial District, Davao City, THE COMMISSIONER OF INTERNAL REVENUE, and JESUS N. ACEBES,
in his capacity as State Prosecutor, respondents.

CONCEPCION JR., J:

Petition for certiorari and prohibition with preliminary injunction and restraining order to annul and set aside
the informations filed in Criminal Case Nos. 1960, 1961, 1962, 1963, 1964, and 1965 of the Court of First
Instance of Davao, all entitled: "People of the Philippines, plaintiff, versus Quirico Ungab, accused;" and to
restrain the respondent Judge from further proceeding with the hearing and trial of the said cases.

It is not disputed that sometime in July, 1974, BIR Examiner Ben Garcia examined the income tax returns filed
by the herein petitioner, Quirico P. Ungab, for the calendar year ending December 31, 1973. In the course of
his examination, he discovered that the petitioner failed to report his income derived from sales of banana
saplings. As a result, the BIR District Revenue Officer at Davao City sent a "Notice of Taxpayer" to the
petitioner informing him that there is due from him (petitioner) the amount of P104,980.81, representing
income, business tax and forest charges for the year 1973 and inviting petitioner to an informal conference
where the petitioner, duly assisted by counsel, may present his objections to the findings of the BIR
Examiner. 1 Upon receipt of the notice, the petitioner wrote the BIR District Revenue Officer protesting the
assessment, claiming that he was only a dealer or agent on commission basis in the banana sapling business
and that his income, as reported in his income tax returns for the said year, was accurately stated. BIR
Examiner Ben Garcia, however, was fully convinced that the petitioner had filed a fraudulent income tax return
so that he submitted a "Fraud Referral Report," to the Tax Fraud Unit of the Bureau of Internal Revenue. After
examining the records of the case, the Special Investigation Division of the Bureau of Internal Revenue found
sufficient proof that the herein petitioner is guilty of tax evasion for the taxable year 1973 and recommended
his prosecution: têñ.£îhqw â£

(1) For having filed a false or fraudulent income tax return for 1973 with intent to evade his just
taxes due the government under Section 45 in relation to Section 72 of the National Internal
Revenue Code;

(2) For failure to pay a fixed annual tax of P50.00 a year in 1973 and 1974, or a total of unpaid
fixed taxes of P100.00 plus penalties of 175.00 or a total of P175.00, in accordance with
Section 183 of the National Internal Revenue Code;

(3) For failure to pay the 7% percentage tax, as a producer of banana poles or saplings, on the
total sales of P129,580.35 to the Davao Fruit Corporation, depriving thereby the government
of its due revenue in the amount of P15,872.59, inclusive of surcharge. 2

In a second indorsement to the Chief of the Prosecution Division, dated December 12, 1974, the
Commissioner of Internal Revenue approved the prosecution of the petitioner. 3

Thereafter, State Prosecutor Jesus Acebes who had been designated to assist all Provincial and City Fiscals
throughout the Philippines in the investigation and prosecution, if the evidence warrants, of all violations of the
National Internal Revenue Code, as amended, and other related laws, in Administrative Order No. 116 dated
December 5, 1974, and to whom the case was assigned, conducted a preliminary investigation of the case,
and finding probable cause, filed six (6) informations against the petitioner with the Court of First Instance of
Davao City, to wit: têñ.£îhqwâ£

(1) Criminal Case No. 1960 — Violation of Sec. 45, in relation to Sec. 72 of the National
Internal-Revenue Code, for filing a fraudulent income tax return for the calendar year ending
December 31, 1973; 4

(2) Criminal Case No. 1961 — Violation of Sec. 182 (a), in relation to Secs. 178, 186, and 208
of the National Internal Revenue Code, for engaging in business as producer of saplings, from
January, 1973 to December, 1973, without first paying the annual fixed or privilege tax
thereof; 5

(3) Criminal Case No. 1962 — Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the
National Internal Revenue Code, for failure to render a true and complete return on the gross
 quarterly sales, receipts and earnings in his business as producer of banana saplings and to
pay the percentage tax due thereon, for the quarter ending December 31, 1973; 6

(4) Criminal Case No. 1963 — Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the
National Internal Revenue Code, for failure to render a true and complete return on the gross
quarterly sales receipts and earnings in his business as producer of saplings, and to pay the
percentage tax due thereon, for the quarter ending on March 31, 1973; 7

(5) Criminal Case No. 1964 — Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the
National Internal Revenue Code, for failure to render a true and complete return on the gross
quarterly sales, receipts and earnings in his business as producer of banana saplings for the
quarter ending on June 30, 1973, and to pay the percentage tax due thereon; 8

(6) Criminal Case No. 1965 — Violation of Sec. 183 (a), in relation to Secs. 186 and 209 of the
National Internal Revenue Code, for failure to render a true and complete return on the gross
quarterly sales, receipts and earnings as producer of banana saplings, for the quarter ending
on September 30, 1973, and to pay the percentage tax due thereon. 9

On September 16, 1975, the petitioner filed a motion to quash the informations upon the grounds that: (1) the
informations are null and void for want of authority on the part of the State Prosecutor to initiate and prosecute
the said cases; and (2) the trial court has no jurisdiction to take cognizance of the above-entitled cases in view
of his pending protest against the assessment made by the BIR Examiner. 10 However, the trial court denied
the motion on October 22, 1975. 11 Whereupon, the petitioner filed the instant recourse. As prayed for, a
temporary restraining order was issued by the Court, ordering the respondent Judge from further proceeding
with the trial and hearing of Criminal Case Nos. 1960, 1961, 1962, 1963, 1964, and 1965 of the Court of First
Instance of Davao, all entitled: "People of the Philippines, plaintiff, versus Quirico Ungab, accused."

The petitioner seeks the annulment of the informations filed against him on the ground that the respondent
State Prosecutor is allegedly without authority to do so. The petitioner argues that while the respondent State
Prosecutor may initiate the investigation of and prosecute crimes and violations of penal laws when duly
authorized, certain requisites, enumerated by this Court in its decision in the case of Estrella vs.
Orendain, 12 should be observed before such authority may be exercised; otherwise, the provisions of the
Charter of Davao City on the functions and powers of the City Fiscal will be meaningless because according
to said charter he has charge of the prosecution of all crimes committed within his jurisdiction; and since
"appropriate circumstances are not extant to warrant the intervention of the State Prosecution to initiate the
investigation, sign the informations and prosecute these cases, said informations are null and void." The ruling
adverted to by the petitioner reads, as follows: têñ.£îhqwâ£

In view of all the foregoing considerations, it is the ruling of this Court that under Sections
1679 and 1686 of the Revised Administrative Code, in any instance where a provincial or city
fiscal fails, refuses or is unable, for any reason, to investigate or prosecute a case and, in the
opinion of the Secretary of Justice it is advisable in the public interest to take a different course
of action, the Secretary of Justice may either appoint as acting provincial or city fiscal to
handle the investigation or prosecution exclusively and only of such case, any practicing
attorney or some competent officer of the Department of Justice or office of any city or
provincial fiscal, with complete authority to act therein in all respects as if he were the
provincial or city fiscal himself, or appoint any lawyer in the government service, temporarily to
assist such city of provincial fiscal in the discharge of his duties, with the same complete
authority to act independently of and for such city or provincial fiscal provided that no such
appointment may be made without first hearing the fiscal concerned and never after the
corresponding information has already been filed with the court by the corresponding city or
provincial fiscal without the conformity of the latter, except when it can be patently shown to
the court having cognizance of the case that said fiscal is intent on prejudicing the interests of
justice. The same sphere of authority is true with the prosecutor directed and authorized under
Section 3 of Republic Act 3783, as amended and/or inserted by Republic Act 5184. The
observation in Salcedo vs. Liwag, supra, regarding the nature of the power of the Secretary of
Justice over fiscals as being purely over administrative matters only was not really necessary,
as indicated in the above relation of the facts and discussion of the legal issues of said case,
for the resolution thereof. In any event, to any extent that the opinion therein may be
inconsistent herewith the same is hereby modified.

The contention is without merit. Contrary to the petitioner's claim, the rule therein established had not been
violated. The respondent State Prosecutor, although believing that he can proceed independently of the City
Fiscal in the investigation and prosecution of these cases, first sought permission from the City Fiscal of
Davao City before he started the preliminary investigation of these cases, and the City Fiscal, after being
shown Administrative Order No. 116, dated December 5, 1974, designating the said State Prosecutor to
assist all Provincial and City fiscals throughout the Philippines in the investigation and prosecution of all
violations of the National Internal Revenue Code, as amended, and other related laws, graciously allowed the
respondent State Prosecutor to conduct the investigation of said cases, and in fact, said investigation was
conducted in the office of the City Fiscal. 13

The petitioner also claims that the filing of the informations was precipitate and premature since the
Commissioner of Internal Revenue has not yet resolved his protests against the assessment of the Revenue
District Officer; and that he was denied recourse to the Court of Tax Appeals.

The contention is without merit. What is involved here is not the collection of taxes where the assessment of
the Commissioner of Internal Revenue may be reviewed by the Court of Tax Appeals, but a criminal
prosecution for violations of the National Internal Revenue Code which is within the cognizance of courts of
first instance. While there can be no civil action to enforce collection before the assessment procedures
provided in the Code have been followed, there is no requirement for the precise computation and
assessment of the tax before there can be a criminal prosecution under the Code. têñ.£îhqwâ£

The contention is made, and is here rejected, that an assessment of the deficiency tax due is
necessary before the taxpayer can be prosecuted criminally for the charges preferred. The
crime is complete when the violator has, as in this case, knowingly and willfully filed fraudulent
returns with intent to evade and defeat a part or all of the tax. 14

An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to

defeat and evade the income tax. A crime is complete when the violator has knowingly and
willfuly filed a fraudulent return with intent to evade and defeat the tax. The perpetration of the
crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate
return, and the government's failure to discover the error and promptly to assess has no
connections with the commission of the crime. 15

Besides, it has been ruled that a petition for reconsideration of an assessment may affect the suspension of
the prescriptive period for the collection of taxes, but not the prescriptive period of a criminal action for
violation of law. 16Obviously, the protest of the petitioner against the assessment of the District Revenue
Officer cannot stop his prosecution for violation of the National Internal Revenue Code. Accordingly, the
respondent Judge did not abuse his discretion in denying the motion to quash filed by the petitioner.

WHEREFORE, the petition should be, as it is hereby dismissed. The temporary restraining order heretofore
issued is hereby set aside. With costs against the petitioner.

SO ORDERED.

Barredo (Chairman), Aquino, Abad Santos and De Castro, JJ., concur. 1äw p

jallorico, Taxation II
nd
2 Sem, SY 2018-2019