Tax Escape

G.R. No. L-18384

September 20, 1965

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. HEIRS OF CESAR JALANDONI, ET AL., defendants-appellants. Office of the Solicitor General for plaintiff-appellee. Jaime R. Nuevas for defendants-appellants heirs of Cesar Jalandoni. Filemon Flores and Aniano Bagabaldo for defendants-appellants Angeles Jalandoni, et al.

BAUTISTA ANGELO, J.: Isabel Ledesma died intestate on June 23, 1948 leaving real properties situated in the provinces of Negros Occidental and Rizal and in the cities of Manila and Baguio, and personal properties consisting of shares of stock in various domestic corporations. She left as heirs her husband Bernardino Jalandoni and three children, namely, Cesar, Angeles and Delfin, all surnamed Jalandoni. On November 19, 1948, Cesar Jalandoni, one of the heirs, filed an estate and inheritance tax return reporting the following: (1) that the real and personal properties owned by the deceased and her surviving husband had a total market value of P1,324,555.80; (2) that after deducting therefrom the conjugal share of her husband and some expenses the net estate subject to estate tax was P28,148.04; and (3) that the amount subject to inheritance tax was P542,225.83. This return also shows that no testamentary or intestate proceedings were instituted. On the basis of this return the Bureau of Internal Revenue made an assessment on November 20, 1948 calling for the payment of the amounts of P31,435.95 and P58,863.52 as estate and inheritance taxes, respectively, stating therein that the assessment was "to be considered partial pending investigation of the return." These sums were paid by Cesar Jalandoni. After a preliminary investigation was made of the properties reported in the abovementioned return, a second assessment was made on January 27, 1953 by the Bureau of Internal Revenue showing that there was due from the estate the amounts of P5,539.67 and P9,899.37 as deficiency estate and inheritance taxes, respectively, for which reason a demand was made on Bernardino Jalandoni stating therein that the same was still "to be considered partial pending further investigation of the return," which amounts were paid by Bernardino Jalandoni on February 28, 1953. True to the foregoing reservation, the Bureau of Internal Revenue conducted another investigation and this time it found (1) that the market value of the lands reported in the return filed by Cesar Jalandoni was underdeclared in the amount of P365,149.50; (2) that seven lots which were registered in the Talisay-Silay cadastre of Negros Occidental as belonging to the deceased, including their improvements, were omitted from the return the same having a market value of P100,200.00; and (3) the shares of stock owned by the deceased in the Victorias Milling Company, Hawaiian-Philippine Company and Central Azucarera de la Carlota, though included in the return, were however underdeclared in the amount of P16,355.36, and on the basis of these findings a third assessment was made against the estate on May 9, 1956 wherein the heirs were required to pay the amounts of P29,995.30 and P49,842.05 as deficiency estate and inheritance taxes, respectively, including accrued interests, with the warning that failure on their part to pay the same would subject them to the payment of surcharge, interest, and penalty for late payment of the tax. In answer to this third assessment after notice was served on the administrator of the estate, Bernardino Jalandoni, Lorenzo J. Teves, in his capacity as counsel of the heirs of the deceased, wrote a letter to the Collector of Internal Revenue setting up the defense of prescription in the sense that the deficiency in the estate and inheritance taxes payment of which was required therein can no longer be collected since more than five years had already elapsed from the filing of the return invoking in his favor Section 331 of the National Internal Revenue Code. To this defense, the Collector retorted claiming that the stand of counsel cannot be

entertained for the reason that, it appearing that the estate and inheritance tax return which was filed by the administrator or by the heirs contained omissions which amount to fraud indicative of an intention to evade payment of the proper tax due the government, the taxes then being collected could still be demanded within ten years from the discovery of the falsity or omission pursuant to Section 332(a) of said Code, which period had not yet expired, and as a consequence, the assessment notice was reiterated with the request that the deficiency estate and inheritance taxes therein demanded be settled as soon as possible. And noting that the 30-day period within which the heirs could appeal the Collector's assessment to the Court of Tax Appeals had already elapsed, while on the other hand they indicated their unwillingness to settle the claim, the Collector of Internal Revenue filed the present case before the Court of First Instance of Manila pressing the collection of the deficiency estate and inheritance taxes assessed against the heirs of the deceased Isabel Ledesma Jalandoni. While this case was pending hearing on the merits, the lower court set a date for pre-trial in an effort to have the parties agree on a stipulation of facts, and this having failed, upon request of defendants, the lower court ordered the Collector of Internal Revenue to verify the allegation that the seven lots in Negros Occidental which were claimed not to have been included in the return filed by Cesar Jalandoni were in fact included therein, and to this effect the Collector designated Examiner Genaro Butas to conduct the examination. In his report Examiner Butas stated that of the seven lots that were previously reported not included in the return, two were actually declared therein, though he reaffirmed his previous finding as regards the other five lots and the market value of the sugar lands and rice lands left by the deceased and the value of the shares of stock owned by her in several domestic corporations. There being no additional evidence, oral or documentary, submitted by the parties, and passing solely on the allegations appearing in the pleadings which appear to be undisputed, the trial court rendered its decision on February 16, 1960 ordering defendants, jointly and severally, to pay plaintiff the sum of P79,837.35 as estate and inheritance taxes, plus the interest that had accrued thereon as a result of their delinquency. Defendants interposed the present appeal. It is claimed that the lower court erred in finding that the return submitted by Cesar Jalandoni in behalf of the heirs concerning the estate of the deceased for the purpose of the payment of the required estate and inheritance taxes is false and fraudulent there being no evidence on record showing that said return was filed in bad faith for which reason fraud cannot be imputed to appellants. As against this claim appellee advances the theory that since fraudulent intent is a state of mind which cannot be proven by direct evidence, the same may be inferred from facts and circumstances that appear to be undisputed as was done by the court a quo as follows: The difference between the amounts appearing in the returns filed and the undeclared properties of the estate of the deceased is a substantial understatement of the true value of the estate in question. The court is of the opinion, and so holds that the tax returns filed were false. A substantial understatement of stocks and the omission of seven (7) parcels of land belonging to the estate of the deceased, makes it impossible for the court to believe that the omission or understatements were due to inadvertence, negligence, or honest statement of error. Circumstances such as this are competent to base a finding of willful intent.
1aw phîl.nèt

And to bolster up this finding appellee submits the following facts which, it contends, appear in the record: (1) among the real properties belonging to the deceased five lots in Negros Occidental, including improvements thereon, with a market value of P58,570.00 were not included in the return filed by a representative of appellants; (2) the value of the sugar and rice lands that were reported in the return were underdeclared in the amount of P365,149.50; and (3) the market value of the shares of stock owned by the deceased in the Victorias Milling Company, Hawaiian-Philippine Company and the Central Azucarera de la Carlota was underdeclared in the amount of P16,355.36. In other words, it is claimed that a total amount of P440,074.86 which constitutes real asset of the estate has been deliberately omitted from the return thereby evincing an intention to evade the payment of the correct amount of tax due to the government. We are of the opinion that this finding is neither fair nor reasonable. To begin with, it should be here noted that when this case was pending hearing on the merits before the lower court, the latter, upon request of appellants, ordered the Collector of Internal Revenue to verify the allegation that there were seven lots in

Negros Occidental which were claimed not to have been included in the return filed by Cesar Jalandoni, and to this effect the Collector designated Examiner Genaro Butas to conduct the examination. Examiner Butas, after conducting the examination, submitted his report the pertinent of which reads: Lot No. Classification Assessed Value Fair Market Value 493 Sugarland P15,140.00 P21,630.00 710 390.00 550.00 521 21,000.00 30,000.00 954 820.00 1,230.00 939 1,210.00 1,720.00 Lot 6,080.00 6,080.00 229 House 12,000.00 12,000.00 Commercial 6,400.00 6,400.00 228 Concrete House 10,000.00 10,000.00 Camarin 500.00 500.00 TOTAL P73,650.00 P90,110.00

In other words, from the report of Examiner Butas the following may be gleaned: that of the seven lots alleged to have been excluded from the return, three were actually included, with the particularity that they were the most valuable, to wit: Lot 493 with a market value of P21,630.00; Lot 521 with a market value of P30,000.00; and Lot 229 with a market value of P12,000.00, while another lot was not also included because it belonged to Delfin Jalandoni, or Lot 228 which, including improvements, has a market value of P16,900.00. Hence, from the foregoing we find that the aggregate value of the aforesaid four lots is P86,610.00 which, if deducted from the total value of the seven lots amounting to P90,110.00, gives a balance of P3,500.00 as the value of the three remaining lots. These three lots being conjugal property, one-half thereof belonging to the deceased's spouse should still be deducted, thus leaving a small balance of P1,750.00. If to this we add that, as the record shows, these three lots were already declared in the return submitted by Bernardino Jalandoni as part of his property and his wife for purposes of income tax, there is reason to believe that their omission from the return submitted by Cesar Jalandoni was merely due to an honest mistake or inadvertence as properly explained by appellants. We can hardly dispute this conclusion as it would be stretching too much the imagination if we would find that, because of such inadvertence, which appears to be inconsequential, the heirs of the deceased deliberately omitted from the return the three lots with the only purpose of defrauding the government after declaring therein as asset of the estate property worth P1,324,555.80. The same thing may be said with regard to the alleged undervaluation of certain sugar and rice lands reported by Cesar Jalandoni which appellee fixes at P365,149.50, for the same can at most be considered as the result of an honest difference of opinion and not necessarily an intention to commit fraud. It should be stated that in the estate and inheritance tax returns submitted by Cesar Jalandoni on November 19, 1948 he reported said lands as belonging to the deceased with a statement of what in his opinion represent their reasonable actual value but which happened not to tally with the valuation made by the Collector of Internal Revenue. Certainly if there is any mistake in the valuation made by Jalandoni the same can only be considered as honest mistake, or one based on excusable inadvertence, he being not an expert in appraising real estate. The deficiency assessment, moreover, was made by the Collector of Internal Revenue more than five years from the filing of the return, and experience shows that such an intervening period is sufficiently long to, warrant an increase in value of real estate which is precisely what was found by the Collector of Internal Revenue with regard to the lands in question. It is certainly an error to impute fraud based on an honest difference of opinion. Finally, we find unreasonable to impute with regard to the appraisal made by appellants of the shares of stock of the deceased in Victorias Milling Company, Hawaiian-Philippine Company and Central Azucarera de la Carlota, simply because Cesar Jalandoni placed in his return an aggregate market value of P95,480.00, instead of mentioning the book value declared by said corporations in the returns filed by them with the Bureau of Internal Revenue. The fact that the value given in the returns did not tally with the book value appearing in the corporate books is not in itself indicative of fraud especially when we take into consideration the

circumstance that said book value only became known several months after the death of the deceased. Moreover, it is a known fact that stock securities frequently fluctuate in value and a mere difference of opinion in relation thereto cannot serve as proper basis for assessing an intention to defraud the government. Having reached the conclusion that the heirs of the deceased have not committed any act indicative of an intention to evade the payment of the inheritance or estate taxes due the government, as evidenced by their willingness in the past to pay all the taxes properly assessed against them, it is evident that the instant claim of appellee has already prescribed under Section 331 of the National Internal Revenue Code. And with this conclusion, a discussion of the other errors assigned by appellants would seem to be unnecessary. WHEREFORE, the decision appealed from is reversed and the complaint of appellee is dismissed. No pronouncement as to costs. Bengzon, C.J., Concepcion, Dizon, Makalintal, Bengzon, J.P., and Zaldivar, JJ., concur. Reyes, J.B.L. and Regala, JJ., took no part. G.R. No. L-13203 January 28, 1961

YUTIVO SONS HARDWARE COMPANY, petitioner, vs. COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents. Sycip, Quisumbing, Salazar & Associates for petitioner. Office of the Solicitor General for respondents. GUTIERREZ DAVID, J.: This is a petition for review of a decision of the Court of Tax Appeals ordering petitioner to pay to respondent Collector of Internal Revenue the sum of P1,266,176.73 as sales tax deficiency for the third quarter of 1947 to the fourth quarter of 1950; inclusive, plus 75% surcharge thereon, equivalent to P349,632.54, or a sum total of P2,215,809.27, plus costs of the suit. From the stipulation of facts and the evidence adduced by both parties, it appears that petitioner Yutivo Sons Hardware Co. (hereafter referred to as Yutivo) is a domestic corporation, organized under the laws of the Philippines, with principal office at 404 Dasmariñas St., Manila. Incorporated in 1916, it was engaged, prior to the last world war, in the importation and sale of hardware supplies and equipment. After the liberation, it resumed its business and until June of 1946 bought a number of cars and trucks from General Motors Overseas Corporation (hereafter referred to as GM for short), an American corporation licensed to do business in the Philippines. As importer, GM paid sales tax prescribed by sections 184, 185 and 186 of the Tax Code on the basis of its selling price to Yutivo. Said tax being collected only once on original sales, Yutivo paid no further sales tax on its sales to the public. On June 13, 1946, the Southern Motors, Inc. (hereafter referred to as SM) was organized to engage in the business of selling cars, trucks and spare parts. Its original authorized capital stock was P1,000,000 divided into 10,000 shares with a par value of P100 each. At the time of its incorporation 2,500 shares worth P250,000 appear to have been subscribed into equal proportions by Yu Khe Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington Sycip. The first three named subscribers are brothers, being sons of Yu Tiong Yee, one of Yutivo's founders. The latter two are respectively sons of Yu Tiong Sin and Albino Sycip, who are among the founders of Yutivo. After the incorporation of SM and until the withdrawal of GM from the Philippines in the middle of 1947, the cars and tracks purchased by Yutivo from GM were sold by Yutivo to SM which, in turn, sold them to the public in the Visayas and Mindanao.

When GM decided to withdraw from the Philippines in the middle of 1947, the U.S. manufacturer of GM cars and trucks appointed Yutivo as importer for the Visayas and Mindanao, and Yutivo continued its previous arrangement of selling exclusively to SM. In the same way that GM used to pay sales taxes based on its sales to Yutivo, the latter, as importer, paid sales tax prescribed on the basis of its selling price to SM, and since such sales tax, as already stated, is collected only once on original sales, SM paid no sales tax on its sales to the public. On November 7, 1950, after several months of investigation by revenue officers started in July, 1948, the Collector of Internal Revenue made an assessment upon Yutivo and demanded from the latter P1,804,769.85 as deficiency sales tax plus surcharge covering the period from the third quarter of 1947 to the fourth quarter of 1949; or from July 1, 1947 to December 31, 1949, claiming that the taxable sales were the retail sales by SM to the public and not the sales at wholesale made by, Yutivo to the latter inasmuch as SM and Yutivo were one and the same corporation, the former being the subsidiary of the latter. The assessment was disputed by the petitioner, and a reinvestigation of the case having been made by the agents of the Bureau of Internal Revenue, the respondent Collector in his letter dated November 15, 1952 countermanded his demand for sales tax deficiency on the ground that "after several investigations conducted into the matter no sufficient evidence could be gathered to sustain the assessment of this Office based on the theory that Southern Motors is a mere instrumentality or subsidiary of Yutivo." The withdrawal was subject, however, to the general power of review by the now defunct Board of Tax Appeals. The Secretary of Finance to whom the papers relative to the case were endorsed, apparently not agreeing with the withdrawal of the assessment, returned them to the respondent Collector for reinvestigation. After another investigation, the respondent Collector, in a letter to petitioner dated December 16, 1954, redetermined that the aforementioned tax assessment was lawfully due the government and in addition assessed deficiency sales tax due from petitioner for the four quarters of 1950; the respondents' last demand was in the total sum of P2,215,809.27 detailed as follows: Deficiency Sales Tax Assessment (First) of November 7, 1950 for deficiency sales Tax for the period from 3rd Qrtr 1947 to 4th Qrtr 1949 inclusive Additional Assessment for period from 1st to 4th Qrtr 1950, inclusive Total amount demanded per letter of December 16, 1954 75% Surcharge Total Amount Due

P1,031,296.60 P773,473.45 P1,804,769.05 234,880.13 176,160.09 411,040.22

P1,266,176.73 P949,632.54 P2,215,809.27

This second assessment was contested by the petitioner Yutivo before the Court of Tax Appeals, alleging that there is no valid ground to disregard the corporate personality of SM and to hold that it is an adjunct of petitioner Yutivo; (2) that assuming the separate personality of SM may be disregarded, the sales tax already paid by Yutivo should first be deducted from the selling price of SM in computing the sales tax due on each vehicle; and (3) that the surcharge has been erroneously imposed by respondent. Finding against Yutivo and sustaining the respondent Collector's theory that there was no legitimate or bona fide purpose in the organization of SM — the apparent objective of its organization being to evade the payment of taxes — and that it was owned (or the majority of the stocks thereof are owned) and controlled by Yutivo and is a mere subsidiary, branch, adjunct, conduit, instrumentality or alter ego of the latter, the Court of Tax Appeals — with Judge Roman Umali not taking part — disregarded its separate corporate existence and on April 27, 1957, rendered the decision now complained of. Of the two Judges who signed the decision, one voted for the modification of the computation of the sales tax as determined by the respondent Collector in his decision so as to give allowance for the reduction of the tax already paid (resulting in the reduction of the assessment to P820,509.91 exclusive of surcharges), while the other voted for affirmance. The dispositive part of the decision, however, affirmed the assessment made by the Collector. Reconsideration of this decision having been denied, Yutivo brought the case to this Court thru the present petition for review.

It is an elementary and fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other corporation petitions to which it may be connected. However, "when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime," the law will regard the corporation as an association of persons, or in the case of two corporations merge them into one. (Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 496, citing I Fletcher Cyclopedia of Corporation, Perm Ed., pp. 135 136; United States vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.) Another rule is that, when the corporation is the "mere alter ego or business conduit of a person, it may be disregarded." (Koppel [Phil.], Inc. vs. Yatco, supra.) After going over the voluminous record of the present case, we are inclined to rule that the Court of Tax Appeals was not justified in finding that SM was organized for no other purpose than to defraud the Government of its lawful revenues. In the first place, this corporation was organized in June, 1946 when it could not have caused Yutivo any tax savings. From that date up to June 30, 1947, or a period of more than one year, GM was the importer of the cars and trucks sold to Yutivo, which, in turn resold them to SM. During that period, it is not disputed that GM as importer, was the one solely liable for sales taxes. Neither Yutivo or SM was subject to the sales taxes on their sales of cars and trucks. The sales tax liability of Yutivo did not arise until July 1, 1947 when it became the importer and simply continued its practice of selling to SM. The decision, therefore, of the Tax Court that SM was organized purposely as a tax evasion device runs counter to the fact that there was no tax to evade. Making the observation from a newspaper clipping (Exh. "T") that "as early as 1945 it was known that GM was preparing to leave the Philippines and terminate its business of importing vehicles," the court below speculated that Yutivo anticipated the withdrawal of GM from business in the Philippines in June, 1947. This observation, which was made only in the resolution on the motion for reconsideration, however, finds no basis in the record. On the other hand, GM had been an importer of cars in the Philippines even before the war and had but recently resumed its operation in the Philippines in 1946 under an ambitious plan to expand its operation by establishing an assembly plant here, so that it could not have been expected to make so drastic a turnabout of not merely abandoning the assembly plant project but also totally ceasing to do business as an importer. Moreover, the newspaper clipping, Exh. "T", was published on March 24, 1947, and clipping, merely reported a rumored plan that GM would abandon the assembly plant project in the Philippines. There was no mention of the cessation of business by GM which must not be confused with the abandonment of the assembly plant project. Even as respect the assembly plant, the newspaper clipping was quite explicit in saying that the Acting Manager refused to confirm that rumor as late as March 24, 1947, almost a year after SM was organized. At this juncture, it should be stated that the intention to minimize taxes, when used in the context of fraud, must be proved to exist by clear and convincing evidence amounting to more than mere preponderance, and cannot be justified by a mere speculation. This is because fraud is never lightly to be presumed. (Vitelli & Sons vs. U.S 250 U.S. 355; Duffin vs. Lucas, 55 F (2d) 786; Budd vs. Commr., 43 F (2d) 509; Maryland Casualty Co. vs. Palmette Coal Co., 40 F (2d) 374; Schoonfield Bros., Inc. vs. Commr., 38 BTA 943; Charles Heiss vs. Commr 36 BTA 833; Kerbaugh vs. Commr 74 F (2d) 749; Maddas vs. Commr., 114 F. (2d) 548; Moore vs. Commr., 37 BTA 378; National City Bank of New York vs. Commr., 98 (2d) 93; Richard vs. Commr., 15 BTA 316; Rea Gane vs. Commr., 19 BTA 518). (See also Balter, Fraud Under Federal Law, pp. 301-302, citing numerous authorities: Arroyo vs. Granada, et al., 18 Phil. 484.) Fraud is never imputed and the courts never sustain findings of fraud upon circumstances which, at the most, create only suspicion. (Haygood Lumber & Mining Co. vs. Commr., 178 F (2d) 769; Dalone vs. Commr., 100 F (2d) 507). In the second place, SM was organized and it operated, under circumstance that belied any intention to evade sales taxes. "Tax evasion" is a term that connotes fraud thru the use of pretenses and forbidden devices to lessen or defeat taxes. The transactions between Yutivo and SM, however, have always been in the open, embodied in private and public documents, constantly subject to inspection by the tax authorities. As a matter of fact, after Yutivo became the importer of GM cars and trucks for Visayas and Mindanao, it merely continued the method of distribution that it had initiated long before GM withdrew from the Philippines. On the other hand, if tax saving was the only justification for the organization of SM, such justification certainly ceased with the passage of Republic Act No. 594 on February 16, 1951, governing payment of advance sales tax by the importer based on the landed cost of the imported article, increased by mark-ups of 25%, 50%, and 100%, depending on whether the imported article is taxed under sections 186, 185 and 184, respectively, of the

Tax Code. Under Republic Act No. 594, the amount at which the article is sold is immaterial to the amount of the sales tax. And yet after the passage of that Act, SM continued to exist up to the present and operates as it did many years past in the promotion and pursuit of the business purposes for which it was organized. In the third place, sections 184 to 186 of the said Code provides that the sales tax shall be collected "once only on every original sale, barter, exchange . . , to be paid by the manufacturer, producer or importer." The use of the word "original" and the express provision that the tax was collectible "once only" evidently has made the provisions susceptible of different interpretations. In this connection, it should be stated that a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid them by means which the law permits. (U.S. vs. Isham 17 Wall. 496, 506; Gregory vs. Helvering 293 U.S. 465, 469; Commr. vs. Tower, 327 U.S. 280; Lawton vs. Commr 194 F (2d) 380). Any legal means by the taxpayer to reduce taxes are all right Benry vs. Commr. 25 T. Cl. 78). A man may, therefore, perform an act that he honestly believes to be sufficient to exempt him from taxes. He does not incur fraud thereby even if the act is thereafter found to be insufficient. Thus in the case of Court Holding Co. vs. Commr. 2 T. Cl. 531, it was held that though an incorrect position in law had been taken by the corporation there was no suppression of the facts, and a fraud penalty was not justified. The evidence for the Collector, in our opinion, falls short of the standard of clear and convincing proof of fraud. As a matter of fact, the respondent Collector himself showed a great deal of doubt or hesitancy as to the existence of fraud. He even doubted the validity of his first assessment dated November 7, 1959. It must be remembered that the fraud which respondent Collector imputed to Yutivo must be related to its filing of sales tax returns of less taxes than were legally due. The allegation of fraud, however, cannot be sustained without the showing that Yutivo, in filing said returns, did so fully knowing that the taxes called for therein called for therein were less than what were legally due. Considering that respondent Collector himself with the aid of his legal staff, and after some two years of investigation and duty of investigation and study concluded in 1952 that Yutivo's sales tax returns were correct — only to reverse himself after another two years — it would seem harsh and unfair for him to say in 1954 that Yutivo fully knew in October 1947 that its sales tax returns were inaccurate. On this point, one other consideration would show that the intent to save taxes could not have existed in the minds of the organizers of SM. The sales tax imposed, in theory and in practice, is passed on to the vendee, and is usually billed separately as such in the sales invoice. As pointed out by petitioner Yutivo, had not SM handled the retail, the additional tax that would have been payable by it, could have been easily passed off to the consumer, especially since the period covered by the assessment was a "seller's market" due to the postwar scarcity up to late 1948, and the imposition of controls in the late 1949. It is true that the arrastre charges constitute expenses of Yutivo and its non-inclusion in the selling price by Yutivo cost the Government P4.00 per vehicle, but said non-inclusion was explained to have been due to an inadvertent accounting omission, and could hardly be considered as proof of willful channelling and fraudulent evasion of sales tax. Mere understatement of tax in itself does not prove fraud. (James Nicholson, 32 BTA 377, affirmed 90 F. (2) 978, cited in Merten's Sec. 55.11 p. 21) The amount involved, moreover, is extremely small inducement for Yutivo to go thru all the trouble of organizing SM. Besides, the non-inclusion of these small arrastre charges in the sales tax returns of Yutivo is clearly shown in the records of Yutivo, which is uncharacteristic of fraud (See Insular Lumber Co. vs. Collector, G.R. No. L-719, April 28, 1956.) We are, however, inclined to agree with the court below that SM was actually owned and controlled by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail and maintaining stores for spare parts as well as service repair shops. It is not disputed that the petitioner, which is engaged principally in hardware supplies and equipment, is completely controlled by the Yutivo, Young or Yu family. The founders of the corporation are closely related to each other either by blood or affinity, and most of its stockholders are members of the Yu (Yutivo or Young) family. It is, likewise, admitted that SM was organized by the leading stockholders of Yutivo headed by Yu Khe Thai. At the time of its incorporation 2,500 shares worth P250,000.00 appear to have been subscribed in five equal proportions by Yu Khe Thai, Yu Khe Siong, Yu Khe Jin, Yu Eng Poh and Washington Sycip. The first three named subscribers are brothers, being the sons of Yu Tien Yee, one of Yutivo's founders. Yu Eng Poh and Washington Sycip are respectively sons of Yu Tiong Sing and Alberto Sycip who are co-founders of Yutivo. According to the Articles of Incorporation of the said subscriptions, the amount of P62,500 was paid by the aforenamed subscribers, but

actually the said sum was advanced by Yutivo. The additional subscriptions to the capital stock of SM and subsequent transfers thereof were paid by Yutivo itself. The payments were made, however, without any transfer of funds from Yutivo to SM. Yutivo simply charged the accounts of the subscribers for the amount allegedly advanced by Yutivo in payment of the shares. Whether a charge was to be made against the accounts of the subscribers or said subscribers were to subscribe shares appears to constitute a unilateral act on the part of Yutivo, there being no showing that the former initiated the subscription. The transactions were made solely by and between SM and Yutivo. In effect, it was Yutivo who undertook the subscription of shares, employing the persons named or "charged" with corresponding account as nominal stockholders. Of course, Yu Khe Thai, Yu Khe Jin, Yu Khe Siong and Yu Eng Poh were manifestly aware of these subscriptions, but considering that they were the principal officers and constituted the majority of the Board of Directors of both Yutivo and SM, their subscriptions could readily or easily be that of Yutivo's Moreover, these persons were related to death other as brothers or first cousins. There was every reason for them to agree in order to protect their common interest in Yutivo and SM. The issued capital stock of SM was increased by additional subscriptions made by various person's but except Ng Sam Bak and David Sycip, "payments" thereof were effected by merely debiting 'or charging the accounts of said stockholders and crediting the corresponding amounts in favor of SM, without actually transferring cash from Yutivo. Again, in this instance, the "payments" were Yutivo, by effected by the mere unilateral act of Yutivo a accounts of the virtue of its control over the individual persons charged, would necessarily exercise preferential rights and control directly or indirectly, over the shares, it being the party which really undertook to pay or underwrite payment thereof. The shareholders in SM are mere nominal stockholders holding the shares for and in behalf of Yutivo, so even conceding that the original subscribers were stockholders bona fide Yutivo was at all times in control of the majority of the stock of SM and that the latter was a mere subsidiary of the former. True, petitioner and other recorded stockholders transferred their shareholdings, but the transfers were made to their immediate relatives, either to their respective spouses and children or sometimes brothers or sisters. Yutivo's shares in SM were transferred to immediate relatives of persons who constituted its controlling stockholders, directors and officers. Despite these purported changes in stock ownership in both corporations, the Board of Directors and officers of both corporations remained unchanged and Messrs. Yu Khe Thai, Yu Khe Siong Hu Khe Jin and Yu Eng Poll (all of the Yu or Young family) continued to constitute the majority in both boards. All these, as observed by the Court of Tax Appeals, merely serve to corroborate the fact that there was a common ownership and interest in the two corporations. SM is under the management and control of Yutivo by virtue of a management contract entered into between the two parties. In fact, the controlling majority of the Board of Directors of Yutivo is also the controlling majority of the Board of Directors of SM. At the same time the principal officers of both corporations are identical. In addition both corporations have a common comptroller in the person of Simeon Sy, who is a brother-in-law of Yutivo's president, Yu Khe Thai. There is therefore no doubt that by virtue of such control, the business, financial and management policies of both corporations could be directed towards common ends. Another aspect relative to Yutivo's control over SM operations relates to its cash transactions. All cash assets of SM were handled by Yutivo and all cash transactions of SM were actually maintained thru Yutivo. Any and all receipts of cash by SM including its branches were transmitted or transferred immediately and directly to Yutivo in Manila upon receipt thereof. Likewise, all expenses, purchases or other obligations incurred by SM are referred to Yutivo which in turn prepares the corresponding disbursement vouchers and payments in relation there, the payment being made out of the cash deposits of SM with Yutivo, if any, or in the absence thereof which occurs generally, a corresponding charge is made against the account of SM in Yutivo's books. The payments for and charges against SM are made by Yutivo as a matter of course and without need of any further request, the latter would advance all such cash requirements for the benefit of SM. Any and all payments and cash vouchers are made on Yutivo stationery and made under authority of Yutivo's corporate officers, without any copy thereof being furnished to SM. All detailed records such as cash disbursements, such as expenses, purchases, etc. for the account of SM, are kept by Yutivo and SM merely keeps a summary record thereof on the basis of information received from Yutivo.

All the above plainly show that cash or funds of SM, including those of its branches which are directly remitted to Yutivo, are placed in the custody and control of Yutivo, resources and subject to withdrawal only by Yutivo. SM's being under Yutivo's control, the former's operations and existence became dependent upon the latter. Consideration of various other circumstances, especially when taken together, indicates that Yutivo treated SM merely as its department or adjunct. For one thing, the accounting system maintained by Yutivo shows that it maintained a high degree of control over SM accounts. All transactions between Yutivo and SM are recorded and effected by mere debit or credit entries against the reciprocal account maintained in their respective books of accounts and indicate the dependency of SM as branch upon Yutivo. Apart from the accounting system, other facts corroborate or independently show that SM is a branch or department of Yutivo. Even the branches of SM in Bacolod, Iloilo, Cebu, and Davao treat Yutivo — Manila as their "Head Office" or "Home Office" as shown by their letters of remittances or other correspondences. These correspondences were actually received by Yutivo and the reference to Yutivo as the head or home office is obvious from the fact that all cash collections of the SM's branches are remitted directly to Yutivo. Added to this fact, is that SM may freely use forms or stationery of Yutivo The fact that SM is a mere department or adjunct of Yutivo is made more patent by the fact that arrastre conveying, and charges paid for the "operation of receiving, loading or unloading" of imported cars and trucks on piers and wharves, were charged against SM. Overtime charges for the unloading of cars and trucks as requested by Yutivo and incurred as part of its acquisition cost thereof, were likewise charged against and treated as expenses of SM. If Yutivo were the importer, these arrastre and overtime charges were Yutivo's expenses in importing goods and not SM's. But since those charges were made against SM, it plainly appears that Yutivo had sole authority to allocate its expenses even as against SM in the sense that the latter is a mere adjunct, branch or department of the former. Proceeding to another aspect of the relation of the parties, the management fees due from SM to Yutivo were taken up as expenses of SM and credited to the account of Yutivo. If it were to be assumed that the two organizations are separate juridical entities, the corresponding receipts or receivables should have been treated as income on the part of Yutivo. But such management fees were recorded as "Reserve for Bonus" and were therefore a liability reserve and not an income account. This reserve for bonus were subsequently distributed directly to and credited in favor of the employees and directors of Yutivo, thereby clearly showing that the management fees were paid directly to Yutivo officers and employees. Briefly stated, Yutivo financed principally, if not wholly, the business of SM and actually extended all the credit to the latter not only in the form of starting capital but also in the form of credits extended for the cars and vehicles allegedly sold by Yutivo to SM as well as advances or loans for the expenses of the latter when the capital had been exhausted. Thus, the increases in the capital stock were made in advances or "Guarantee" payments by Yutivo and credited in favor of SM. The funds of SM were all merged in the cash fund of Yutivo. At all times Yutivo thru officers and directors common to it and SM, exercised full control over the cash funds, policies, expenditures and obligations of the latter. Southern Motors being but a mere instrumentality, or adjunct of Yutivo, the Court of Tax Appeals correctly disregarded the technical defense of separate corporate entity in order to arrive at the true tax liability of Yutivo. Petitioner contends that the respondent Collector had lost his right or authority to issue the disputed assessment by reason of prescription. The contention, in our opinion, cannot be sustained. It will be noted that the first assessment was made on November 7, 1950 for deficiency sales tax from 1947 to 1949. The corresponding returns filed by petitioner covering the said period was made at the earliest on October 1, as regards the third quarter of 1947, so that it cannot be claimed that the assessment was not made within the five-year period prescribed in section 331 of the Tax Code invoked by petitioner. The assessment, it is admitted, was withdrawn by the Collector on insufficiency of evidence, but November 15, 1952 due to insufficiency of evidence, but the withdrawal was made subject to the approval of the Secretary of Finance and the Board of Tax Appeals, pursuant to the provisions of section 9 of Executive Order No. 401-A, series of 1951. The decision of the previous assessment of November 7, Collector countermanding the as 1950 was forwarded to the Board of Tax Appeals through the Secretary of Finance but that official, apparently disagreeing with the decision, sent it back for re-investigation. Consequently, the assessment of November 7, 1950 cannot be

considered to have been finally withdrawn. That the assessment was subsequently reiterated in the decision of respondent Collector on December 16, 1954 did not alter the fact that it was made seasonably. In this connection, it would appear that a warrant of distraint and levy had been issued on March 28, 1951 in relation with this case and by virtue thereof the properties of Yutivo were placed under constructive distraint. Said warrant and constructive distraint have not been lifted up to the present, which shows that the assessment of November 7, 1950 has always been valid and subsisting. Anent the deficiency sale tax for 1950, considering that the assessment thereof was made on December 16, 1954, the same was assessed well within the prescribed five-year period. Petitioner argues that the original assessment of November 7, 1950 did not extend the prescriptive period on assessment. The argument is untenable, for, as already seen, the assessment was never finally withdrawn, since it was not approved by the Secretary of Finance or of the Board of Tax Appeals. The authority of the Secretary to act upon the assessment cannot be questioned, for he is expressly granted such authority under section 9 of Executive Order No. 401-And under section 79 (c) of the Revised Administrative Code, he has "direct control, direction and supervision over all bureaus and offices under his jurisdiction and may, any provision of existing law to the contrary not withstanding, repeal or modify the decision of the chief of said Bureaus or offices when advisable in public interest." It should here also be stated that the assessment in question was consistently protested by petitioner, making several requests for reinvestigation thereof. Under the circumstances, petitioner may be considered to have waived the defense of prescription. "Estoppel has been employed to prevent the application of the statute of limitations against the government in certain instances in which the taxpayer has taken some affirmative action to prevent the collection of the tax within the statutory period. It is generally held that a taxpayer is estopped to repudiate waivers of the statute of limitations upon which the government relied. The cases frequently involve dissolved corporations. If no waiver has been given, the cases usually show come conduct directed to a postponement of collection, such, for example, as some variety of request to apply an overassessment. The taxpayer has 'benefited' and 'is not in a position to contest' his tax liability. A definite representation of implied authority may be involved, and in many cases the taxpayer has received the 'benefit' of being saved from the inconvenience, if not hardship of immediate collection. " Conceivably even in these cases a fully informed Commissioner may err to the sorrow of the revenues, but generally speaking, the cases present a strong combination of equities against the taxpayer, and few will seriously quarrel with their application of the doctrine of estoppel." (Mertens Law of Federal Income Taxation, Vol. 10-A, pp. 159-160.) It is also claimed that section 9 of Executive Order No. 401-A, series of 1951 — es involving an original assessment of more than P5,000 — refers only to compromises and refunds of taxes, but not to total withdrawal of the assessment. The contention is without merit. A careful examination of the provisions of both sections 8 and 9 of Executive Order No. 401-A, series of 1951, reveals the procedure prescribed therein is intended as a check or control upon the powers of the Collector of Internal Revenue in respect to assessment and refunds of taxes. If it be conceded that a decision of the Collector of Internal Revenue on partial remission of taxes is subject to review by the Secretary of Finance and the Board of Tax Appeals, then with more reason should the power of the Collector to withdraw totally an assessment be subject to such review. We find merit, however, in petitioner's contention that the Court of Tax Appeals erred in the imposition of the 5% fraud surcharge. As already shown in the early part of this decision, no element of fraud is present. Pursuant to Section 183 of the National Internal Revenue Code the 50% surcharge should be added to the deficiency sales tax "in case a false or fraudulent return is willfully made." Although the sales made by SM are in substance by Yutivo this does not necessarily establish fraud nor the willful filing of a false or fraudulent return.

The case of Court Holding Co. v. Commissioner of Internal Revenue (August 9, 1943, 2 TC 531, 541-549) is in point. The petitioner Court Holding Co. was a corporation consisting of only two stockholders, to wit: Minnie Miller and her husband Louis Miller. The only assets of third husband and wife corporation consisted of an apartment building which had been acquired for a very low price at a judicial sale. Louis Miller, the husband, who directed the company's business, verbally agreed to sell this property to Abe C. Fine and Margaret Fine, husband and wife, for the sum of $54,000.00, payable in various installments. He received $1,000.00 as down payment. The sale of this property for the price mentioned would have netted the corporation a handsome profit on which a large corporate income tax would have to be paid. On the afternoon of February 23, 1940, when the Millers and the Fines got together for the execution of the document of sale, the Millers announced that their attorney had called their attention to the large corporate tax which would have to be paid if the sale was made by the corporation itself. So instead of proceeding with the sale as planned, the Millers approved a resolution to declare a dividend to themselves "payable in the assets of the corporation, in complete liquidation and surrender of all the outstanding corporate stock." The building, which as above stated was the only property of the corporation, was then transferred to Mr. and Mrs. Miller who in turn sold it to Mr. and Mrs. Fine for exactly the same price and under the same terms as had been previously agreed upon between the corporation and the Fines. The return filed by the Court Holding Co. with the respondent Commissioner of Internal Revenue reported no taxable gain as having been received from the sale of its assets. The Millers, of course, reported a long term capital gain on the exchange of their corporate stock with the corporate property. The Commissioner of Internal Revenue contended that the liquidating dividend to stockholders had no purpose other than that of tax avoidance and that, therefore, the sale by the Millers to the Fines of the corporation's property was in substance a sale by the corporation itself, for which the corporation is subject to the taxable profit thereon. In requiring the corporation to pay the taxable profit on account of the sale, the Commissioner of Internal Revenue, imposed a surcharge of 25% for delinquency, plus an additional surcharge as fraud penalties. The U. S. Court of Tax Appeals held that the sale by the Millers was for no other purpose than to avoid the tax and was, in substance, a sale by the Court Holding Co., and that, therefore, the said corporation should be liable for the assessed taxable profit thereon. The Court of Tax Appeals also sustained the Commissioner of Internal Revenue on the delinquency penalty of 25%. However, the Court of Tax Appeals disapproved the fraud penalties, holding that an attempt to avoid a tax does not necessarily establish fraud; that it is a settled principle that a taxpayer may diminish his tax liability by means which the law permits; that if the petitioner, the Court Holding Co., was of the opinion that the method by which it attempted to effect the sale in question was legally sufficient to avoid the imposition of a tax upon it, its adoption of that methods not subject to censure; and that in taking a position with respect to a question of law, the substance of which was disclosed by the statement indorsed on it return, it may not be said that that position was taken fraudulently. We quote in full the pertinent portion of the decision of the Court of Tax Appeals: . ". . . The respondent's answer alleges that the petitioner's failure to report as income the taxable profit on the real estate sale was fraudulent and with intent to evade the tax. The petitioner filed a reply denying fraud and averring that the loss reported on its return was correct to the best of its knowledge and belief. We think the respondent has not sustained the burden of proving a fraudulent intent. We have concluded that the sale of the petitioner's property was in substance a sale by the petitioner, and that the liquidating dividend to stockholders had no purpose other than that of tax avoidance. But the attempt to avoid tax does not necessarily establish fraud. It is a settled principle that a taxpayer may diminish his liability by any means which the law permits. United States v. Isham, 17 Wall. 496; Gregory v. Helvering, supra; Chrisholm v. Commissioner, 79 Fed. (2d) 14. If the petitioner here was of the opinion that the method by which it attempted to effect the sale in question was legally sufficient to avoid the imposition of tax upon it, its adoption of that method is not subject to censure. Petitioner took a position with respect to a question of law, the substance of which was disclosed by the statement endorsed on its return. We can not say, under the record before us, that that position was taken fraudulently. The determination of the fraud penalties is reversed." When GM was the importer and Yutivo, the wholesaler, of the cars and trucks, the sales tax was paid only once and on the original sales by the former and neither the latter nor SM paid taxes on their subsequent sales. Yutivo might have, therefore, honestly believed that the payment by it, as importer, of the sales tax was enough as in the case of GM Consequently, in filing its return on the basis of its sales to SM and not on those by the

latter to the public, it cannot be said that Yutivo deliberately made a false return for the purpose of defrauding the government of its revenues which will justify the imposition of the surcharge penalty. We likewise find meritorious the contention that the Tax Court erred in computing the alleged deficiency sales tax on the selling price of SM without previously deducting therefrom the sales tax due thereon. The sales tax provisions (sees. 184.186, Tax Code) impose a tax on original sales measured by "gross selling price" or "gross value in money". These terms, as interpreted by the respondent Collector, do not include the amount of the sales tax, if invoiced separately. Thus, General Circular No. 431 of the Bureau of Internal Revenue dated July 29, 1939, which implements sections 184.186 of the Tax Code provides: " . . .'Gross selling price' or gross value in money' of the articles sold, bartered, exchanged, transferred as the term is used in the aforecited sections (sections 184, 185 and 186) of the National Internal Revenue Code, is the total amount of money or its equivalent which the purchaser pays to the vendor to receive or get the goods. However, if a manufacturer, producer, or importer, in fixing the gross selling price of an article sold by him has included an amount intended to cover the sales tax in the gross selling price of the articles, the sales tax shall be based on the gross selling price less the amount intended to cover the tax, if the same is billed to the purchaser as a separate item. General Circular No. 440 of the same Bureau reads: Amount intended to cover the tax must be billed as a separate em so as not to pay a tax on the tax. — On sales made after he third quarter of 1939, the amount intended to cover the sales tax must be billed to the purchaser as separate items in the, invoices in order that the reduction thereof from the gross ailing price may be allowed in the computation of the merchants' percentage tax on the sales. Unless billed to the purchaser as a separate item in the invoice, the amounts intended to cover the sales tax shall be considered as part of the gross selling price of the articles sold, and deductions thereof will not be allowed, (Cited in Dalupan, Nat. Int. Rev. Code, Annotated, Vol. II, pp. 52-53.) Yutivo complied with the above circulars on its sales to SM, and as separately billed, the sales taxes did not form part of the "gross selling price" as the measure of the tax. Since Yutivo had previously billed the sales tax separately in its sales invoices to SM General Circulars Nos. 431 and 440 should be deemed to have been complied. Respondent Collector's method of computation, as opined by Judge Nable in the decision complained of — . . . is unfair, because . . .(it is) practically imposing tax on a tax already paid. Besides, the adoption of the procedure would in certain cases elevate the bracket under which the tax is based. The late payment is already penalized, thru the imposition of surcharges, by adopting the theory of the Collector, we will be creating an additional penalty not contemplated by law." If the taxes based on the sales of SM are computed in accordance with Gen. Circulars Nos. 431 and 440 the total deficiency sales taxes, exclusive of the 25% and 50% surcharges for late payment and for fraud, would amount only to P820,549.91 as shown in the following computation: Sales Taxes Due Total Gross Selling and Computed Price Charged to under Gen. Cir Nos. the Public 431 & 400 P595,610.98 63,669.16 261,869.53 540,359.65 53,430.10 251,114.09 P12,507,83055 973,228.66 2,880,564.81 4,142,757.30 320,580.60 1,088,291.06

Gross Sales of Rates of Vehicles Exclusive Sales Tax of Sales Tax 5% 7% 10% 15% 20% 30% P11,912,219.57 909,559.50 2,618,695.28 3,602,397.65 267,150.50 837,146.97

50% 75% TOTAL

74,244.30 8,000.00 P20,220,413.77

37,122.16 6,000.00 P1,809,205.67

111,366.46 14,000.00 P22,038,619.44

Less Taxes Paid by Yutivo Deficiency Tax still due

988,655.76 P820,549.91

This is the exact amount which, according to Presiding Judge Nable of the Court of Tax Appeals, Yutivo would pay, exclusive of the surcharges. Petitioner finally contends that the Court of Tax Appeals erred or acted in excess of its jurisdiction in promulgating judgment for the affirmance of the decision of respondent Collector by less than the statutory requirement of at least two votes of its judges. Anent this contention, section 2 of Republic Act No. 1125, creating the Court of Tax Appeals, provides that "Any two judges of the Court of Tax Appeals shall constitute a quorum, and the concurrence of two judges shall be necessary to promulgate decision thereof. . . . " It is on record that the present case was heard by two judges of the lower court. And while Judge Nable expressed his opinion on the issue of whether or not the amount of the sales tax should be excluded from the gross selling price in computing the deficiency sales tax due from the petitioner, the opinion, apparently, is merely an expression of his general or "private sentiment" on the particular issue, for he concurred the dispositive part of the decision. At any rate, assuming that there is no valid decision for lack of concurrence of two judges, the case was submitted for decision of the court below on March 28, 1957 and under section 13 of Republic Act 1125, cases brought before said court hall be decided within 30 days after submission thereof. "If no decision is rendered by the Court within thirty days from the date a case is submitted for decision, the party adversely affected by said ruling, order or decision, may file with said Court a notice of his intention to appeal to the Supreme Court, and if no decision has as yet been rendered by the Court, the aggrieved party may file directly with the Supreme Court an appeal from said ruling, order or decision, notwithstanding the foregoing provisions of this section." The case having been brought before us on appeal, the question raised by petitioner as become purely academic. IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals under review is hereby modified in that petitioner shall be ordered to pay to respondent the sum of P820,549.91, plus 25% surcharge thereon for late payment. So ordered without costs. Bengzon, Labrador, Concepcion, Reyes, J.B.L., Barrera and Paredes, JJ., concur. Padilla, J., took no part. G.R. No. L-17618 August 31, 1964

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. NORTON and HARRISON COMPANY, respondent. Office of the Solicitor General for petitioner. Pio Joven for respondent. PAREDES, J.: This is an appeal interposed by the Commissioner of Internal Revenue against the following judgment of the Court of Tax Appeals: IN VIEW OF THE FOREGOING, we find no legal basis to support the assessment in question against petitioner. If at all, the assessment should have been directed against JACKBILT, the manufacturer.

Accordingly, the decision appealed from is reversed, and the surety bond filed to guarantee payment of said assessment is ordered cancelled. No pronouncement as to costs. Norton and Harrison is a corporation organized in 1911, (1) to buy and sell at wholesale and retail, all kinds of goods, wares, and merchandise; (2) to act as agents of manufacturers in the United States and foreign countries; and (3) to carry on and conduct a general wholesale and retail mercantile establishment in the Philippines. Jackbilt is, likewise, a corporation organized on February 16, 1948 primarily for the purpose of making, producing and manufacturing concrete blocks. Under date of July 27, 1948. Norton and Jackbilt entered into an agreement whereby Norton was made the sole and exclusive distributor of concrete blocks manufactured by Jackbilt. Pursuant to this agreement, whenever an order for concrete blocks was received by the Norton & Harrison Co. from a customer, the order was transmitted to Jackbilt which delivered the merchandise direct to the customer. Payment for the goods is, however, made to Norton, which in turn pays Jackbilt the amount charged the customer less a certain amount, as its compensation or profit. To exemplify the sales procedures adopted by the Norton and Jackbilt, the following may be cited. In the case of the sale of 420 pieces of concrete blocks to the American Builders on April 1, 1952, the purchaser paid to Norton the sum of P189.00 the purchase price. Out of this amount Norton paid Jackbilt P168.00, the difference obviously being its compensation. As per records of Jackbilt, the transaction was considered a sale to Norton. It was under this procedure that the sale of concrete blocks manufactured by Jackbilt was conducted until May 1, 1953, when the agency agreement was terminated and a management agreement between the parties was entered into. The management agreement provided that Norton would sell concrete blocks for Jackbilt, for a fixed monthly fee of P2,000.00, which was later increased to P5,000.00. During the existence of the distribution or agency agreement, or on June 10, 1949, Norton & Harrison acquired by purchase all the outstanding shares of stock of Jackbilt. Apparently, due to this transaction, the Commissioner of Internal Revenue, after conducting an investigation, assessed the respondent Norton & Harrison for deficiency sales tax and surcharges in the amount of P32,662.90, making as basis thereof the sales of Norton to the Public. In other words, the Commissioner considered the sale of Norton to the public as the original sale and not the transaction from Jackbilt. The period covered by the assessment was from July 1, 1949 to May 31, 1953. As Norton and Harrison did not conform with the assessment, the matter was brought to the Court of Tax Appeals. The Commissioner of Internal Revenue contends that since Jackbilt was owned and controlled by Norton & Harrison, the corporate personality of the former (Jackbilt) should be disregarded for sales tax purposes, and the sale of Jackbilt blocks by petitioner to the public must be considered as the original sales from which the sales tax should be computed. The Norton & Harrison Company contended otherwise — that is, the transaction subject to tax is the sale from Jackbilt to Norton. Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this stipulation of facts.
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The majority of the Tax Court, in relieving Norton & Harrison of liability under the assessment, made the following observations: The law applicable to the case is Section 186 of the National Internal Revenue Code which imposes a percentage tax of 7% on every original sale of goods, wares or merchandise, such tax to be based on the gross selling price of such goods, wares or merchandise. The term "original sale" has been defined as the first sale by every manufacturer, producer or importer. (Sec. 5, Com. Act No. 503.) Subsequent sales by persons other than the manufacturer, producer or importer are not subject to the sales tax. If JACKBILT actually sold concrete blocks manufactured by it to petitioner under the distributorship or agency agreement of July 27, 1948, such sales constituted the original sales which are taxable under Section 186 of the Revenue Code, while the sales made to the public by petitioner are subsequent sales which are not taxable. But it appears to us that there was no such sale by JACKBILT to petitioner. Petitioner merely acted as agent for JACKBILT in the marketing of its products. This is shown by the fact that petitioner merely accepted orders from the public for the purchase of JACKBILT blocks. The purchase orders were transmitted to JACKBILT which delivered the blocks to the

purchaser directly. There was no instance in which the blocks ordered by the purchasers were delivered to the petitioner. Petitioner never purchased concrete blocks from JACKBILT so that it never acquired ownership of such concrete blocks. This being so, petitioner could not have sold JACKBILT blocks for its own account. It did so merely as agent of JACKBILT. The distributorship agreement of July 27, 1948, is denominated by the parties themselves as an "agency for marketing" JACKBILT products. ... . xxx xxx xxx

Therefore, the taxable selling price of JACKBILT blocks under the aforesaid agreement is the price charged to the public and not the amount billed by JACKBILT to petitioner. The deficiency sales tax should have been assessed against JACKBILT and not against petitioner which merely acted as the former's agent. xxx xxx xxx

Presiding Judge Nable of the same Court expressed a partial dissent, stating: Upon the aforestated circumstances, which disclose Norton's control over and direction of Jackbilt's affairs, the corporate personality of Jackbilt should be disregarded, and the transactions between these two corporations relative to the concrete blocks should be ignored in determining the percentage tax for which Norton is liable. Consequently, the percentage tax should be computed on the basis of the sales of Jackbilt blocks to the public. The majority opinion is now before Us on appeal by the Commissioner of Internal Revenue, on four (4) assigned errors, all of which pose the following propositions: (1) whether the acquisition of all the stocks of the Jackbilt by the Norton & Harrison Co., merged the two corporations into a single corporation; (2) whether the basis of the computation of the deficiency sales tax should be the sale of the blocks to the public and not to Norton. It has been settled that the ownership of all the stocks of a corporation by another corporation does not necessarily breed an identity of corporate interest between the two companies and be considered as a sufficient ground for disregarding the distinct personalities (Liddell & Co., Inc. v. Coll. of Int. Rev. L-9687, June 30, 1961). However, in the case at bar, we find sufficient grounds to support the theory that the separate identities of the two companies should be disregarded. Among these circumstances, which we find not successfully refuted by appellee Norton are: (a) Norton and Harrison owned all the outstanding stocks of Jackbilt; of the 15,000 authorized shares of Jackbilt on March 31, 1958, 14,993 shares belonged to Norton and Harrison and one each to seven others; (b) Norton constituted Jackbilt's board of directors in such a way as to enable it to actually direct and manage the other's affairs by making the same officers of the board for both companies. For instance, James E. Norton is the President, Treasurer, Director and Stockholder of Norton. He also occupies the same positions in Jackbilt corporation, the only change being, in the Jackbilt, he is merely a nominal stockholder. The same is true with Mr. Jordan, F. M. Domingo, Mr. Mantaring, Gilbert Golden and Gerardo Garcia, while they are merely employees of the North they are Directors and nominal stockholders of the Jackbilt (c) Norton financed the operations of the Jackbilt, and this is shown by the fact that the loans obtained from the RFC and Bank of America were used in the expansion program of Jackbilt, to pay advances for the purchase of equipment, materials rations and salaries of employees of Jackbilt and other sundry expenses. There was no limit to the advances given to Jackbilt so much so that as of May 31, 1956, the unpaid advances amounted to P757,652.45, which were not paid in cash by Jackbilt, but was offset by shares of stock issued to Norton, the absolute and sole owner of Jackbilt; (d) Norton treats Jackbilt employees as its own. Evidence shows that Norton paid the salaries of Jackbilt employees and gave the same privileges as Norton employees, an indication that Jackbilt employees were also Norton's employees. Furthermore service rendered in any one of the two companies were taken into account for purposes of promotion; (e) Compensation given to board members of Jackbilt, indicate that Jackbilt is merely a department of Norton. The income tax return of Norton for 1954 shows that as President and Treasurer of Norton and Jackbilt, he received from Norton P56,929.95, but received from Jackbilt the measly amount of P150.00, a circumstance which points out that remuneration of purported officials of Jackbilt are deemed included in the salaries they received from Norton. The same is true in the case of Eduardo Garcia, an employee of Norton but a member of the Board of Jackbilt.

His Income tax return for 1956 reveals that he received from Norton in salaries and bonuses P4,220.00, but received from Jackbilt, by way of entertainment, representation, travelling and transportation allowances P3,000.00. However, in the withholding statement (Exh. 28-A), it was shown that the total of P4,200.00 and P3,000.00 (P7,220.00) was received by Garcia from Norton, thus portraying the oneness of the two companies. The Income Tax Returns of Albert Golden and Dioscoro Ramos both employees of Norton but board members of Jackbilt, also disclose the game method of payment of compensation and allowances. The offices of Norton and Jackbilt are located in the same compound. Payments were effected by Norton of accounts for Jackbilt and vice versa. Payments were also made to Norton of accounts due or payable to Jackbilt and vice versa. Norton and Harrison, while not denying the presence of the set up stated above, tried to explain that the control over the affairs of Jackbilt was not made in order to evade payment of taxes; that the loans obtained by it which were given to Jackbilt, were necessary for the expansion of its business in the manufacture of concrete blocks, which would ultimately benefit both corporations; that the transactions and practices just mentioned, are not unusual and extraordinary, but pursued in the regular course of business and trade; that there could be no confusion in the present set up of the two corporations, because they have separate Boards, their cash assets are entirely and strictly separate; cashiers and official receipts and bank accounts are distinct and different; they have separate income tax returns, separate balance sheets and profit and loss statements. These explanations notwithstanding an over-all appraisal of the circumstances presented by the facts of the case, yields to the conclusion that the Jackbilt is merely an adjunct, business conduit or alter ego, of Norton and Harrison and that the fiction of corporate entities, separate and distinct from each, should be disregarded. This is a case where the doctrine of piercing the veil of corporate fiction, should be made to apply. In the case of Liddell & Co. Inc. v. Coll. of Int. Rev., supra, it was held: There are quite a series of conspicuous circumstances that militates against the separate and distinct personality of Liddell Motors Inc., from Liddell & Co. We notice that the bulk of the business of Liddell & Co. was channel Red through Liddell Motors, Inc. On the other hand, Liddell Motors Inc. pursued no activities except to secure cars, trucks, and spare parts from Liddell & Co., Inc. and then sell them to the general public. These sales of vehicles by Liddell & Co, to Liddell Motors. Inc. for the most part were shown to have taken place on the same day that Liddell Motors, Inc. sold such vehicles to the public. We may even say that the cars and trucks merely touched the hands of Liddell Motors, Inc. as a matter of formality. xxx xxx xxx

Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. are corporations owned and controlled by Frank Liddell directly or indirectly is not by itself sufficient to justify the disregard of the separate corporate identity of one from the other. There is however, in this instant case, a peculiar sequence of the organization and activities of Liddell Motors, Inc. As opined in the case of Gregory v. Helvering "the legal right of a tax payer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted". But as held in another case, "where a corporation is a dummy, is unreal or a sham and serves no business purpose and is intended only as a blind, the corporate form may be ignored for the law cannot countenance a form that is bald and a mischievous fictions". ... a taxpayer may gain advantage of doing business thru a corporation if he pleases, but the revenue officers in proper cases, may disregard the separate corporate entity where it serves but as a shield for tax evasion and treat the person who actually may take benefits of the transactions as the person accordingly taxable. ... to allow a taxpayer to deny tax liability on the ground that the sales were made through another and distinct corporation when it is proved that the latter is virtually owned by the former or that they are practically one and the same is to sanction a circumvention of our tax laws. (and cases cited therein.) In the case of Yutivo Sons Hardware Co. v. Court of Tax Appeals, L-13203, Jan. 28, 1961, this Court made a similar ruling where the circumstances of unity of corporate identities have been shown and which are identical to those obtaining in the case under consideration. Therein, this Court said:

We are, however, inclined to agree with the court below that SM was actually owned and controlled by petitioner as to make it a mere subsidiary or branch of the latter created for the purpose of selling the vehicles at retail (here concrete blocks) ... . It may not be amiss to state in this connection, the advantages to Norton in maintaining a semblance of separate entities. If the income of Norton should be considered separate from the income of Jackbilt, then each would declare such earning separately for income tax purposes and thus pay lesser income tax. The combined taxable Norton-Jackbilt income would subject Norton to a higher tax. Based upon the 1954-1955 income tax return of Norton and Jackbilt (Exhs. 7 & 8), and assuming that both of them are operating on the same fiscal basis and their returns are accurate, we would have the following result: Jackbilt declared a taxable net income of P161,202.31 in which the income tax due was computed at P37,137.00 (Exh. 8); whereas Norton declared as taxable, a net income of P120,101.59, on which the income tax due was computed at P25,628.00. The total of these liabilities is P50,764.84. On the other hand, if the net taxable earnings of both corporations are combined, during the same taxable year, the tax due on their total which is P281,303.90 would be P70,764.00. So that, even on the question of income tax alone, it would be to the advantages of Norton that the corporations should be regarded as separate entities. WHEREFORE, the decision appealed from should be as it is hereby reversed and another entered making the appellee Norton & Harrison liable for the deficiency sales taxes assessed against it by the appellant Commissioner of Internal Revenue, plus 25% surcharge thereon. Costs against appellee Norton & Harrison. Bengzon, C.J., Bautista Angelo, Concepcion, Reyes J.B.L., Regala and Makalintal, JJ., concur. G.R. No. L-19707 August 17, 1967

PHILIPPINE ACETYLENE CO., INC., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents. Ponce Enrile, Siguion Reyna, Montecillo and Belo, for petitioner. Office of the Solicitor General for respondents. CASTRO, J.: The petitioner is a corporation engaged in the manufacture and sale of oxygen and acetylene gases. During the period from June 2, 1953 to June 30, 1958, it made various sales of its products to the National Power Corporation, an agency of the Philippine Government, and to the Voice of America an agency of the United States Government. The sales to the NPC amounted to P145,866.70, while those to the VOA amounted to P1,683, on account of which the respondent Commission of Internal Revenue assessed against, and demanded from, the petitioner the payment of P12,910.60 as deficiency sales tax and surcharge, pursuant to the following-provisions of the National Internal Revenue Code: Sec. 186. Percentage tax on sales of other articles.—There shall be levied, assessed and collected once only on every original sale, barter, exchange, and similar transaction either for nominal or valuable considerations, intended to transfer ownership of, or title to, the articles not enumerated in sections one hundred and eighty-four and one hundred and eighty-five a tax equivalent to seven per centum of the gross selling price or gross value in money of the articles so sold, bartered exchanged, or transferred, such tax to be paid by the manufacturer or producer: . . . . Sec. 183. Payment of percentage taxes.—(a) In general.—It shall be the duty of every person conducting business on which a percentage tax is imposed under this Title, to make a true and complete return of the amount of his, her, or its gross monthly sales, receipts or earnings, or gross value of output actually removed from the factory or mill warehouse and within twenty days after the end of each month, pay the tax due thereon: Provided, That any person retiring from a business subject to the percentage tax shall notify the nearest internal revenue officer thereof, file his return or declaration and pay the tax due thereon within twenty days after closing his business.

If the percentage tax on any business is not paid within the time specified above, the amount of the tax shall be increased by twenty-five per centum, the increment to be a part of the tax. The petitioner denied liability for the payment of the tax on the ground that both the NPC and the VOA are exempt from taxation. It asked for a reconsideration of the assessment and, failing to secure one, appealed to the Court of Tax Appeals. The court ruled that the tax on the sale of articles or goods in section 186 of the Code is a tax on the manufacturer and not on the buyer with the result that the "petitioner Philippine Acetylene Company, the manufacturer or producer of oxygen and acetylene gases sold to the National Power Corporation, cannot claim exemption from the payment of sales tax simply because its buyer — the National Power Corporation — is exempt from the payment of all taxes." With respect to the sales made to the VOA, the court held that goods purchased by the American Government or its agencies from manufacturers or producers are exempt from the payment of the sales tax under the agreement between the Government of the Philippines and that of the United States, provided the purchases are supported by certificates of exemption, and since purchases amounting to only P558, out of a total of P1,683, were not covered by certificates of exemption, only the sales in the sum of P558 were subject to the payment of tax. Accordingly, the assessment was revised and the petitioner's liability was reduced from P12,910.60, as assessed by the respondent commission, to P12,812.16. 1 The petitioner appealed to this Court. Its position is that it is not liable for the payment of tax on the sales it made to the NPC and the VOA because both entities are exempt from taxation. I The NPC enjoys tax exemption by virtue of an act2 of Congress which provides as follows: Sec. 2. To facilitate the payment of its indebtedness, the National Power Corporation shall be exempt from all taxes, except real property tax, and from all duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its provinces, cities and municipalities. It is contended that the immunity thus given to the NPC would be impaired by the imposition of a tax on sales made to it because while the tax is paid by the manufacturer or producer, the tax is ultimately shifted by the latter to the former. The petitioner invokes in support of its position a 1954 opinion of the Secretary of Justice which ruled that the NPC is exempt from the payment of all taxes "whether direct or indirect." We begin with an analysis of the nature of the percentage (sales) tax imposed by section 186 of the Code. Is it a tax on the producer or on the purchaser? Statutes of the type under consideration, which impose a tax on sales, have been described as "act[s] with schizophrenic symptoms,"3 as they apparently have two faces — one that of a vendor tax, the other, a vendee tax. Fortunately for us the provisions of the Code throw some light on the problem. The Code states that the sales tax "shall be paid by the manufacturer or producer,"4 who must "make a true and complete return of the amount of his, her or its gross monthly sales, receipts or earnings or gross value of output actually removed from the factory or mill warehouse and within twenty days after the end of each month, pay the tax due thereon."5 But it is argued that a sales tax is ultimately passed on to the purchaser, and that, so far as the purchaser is an entity like the NPC which is exempt from the payment of "all taxes, except real property tax," the tax cannot be collected from sales. Many years ago, Mr. Justice Oliver Wendell Holmes expressed dissatisfaction with the use of the phrase "pass the tax on." Writing the opinion of the U.S. Supreme Court in Lash's Products v. United States,6 he said: "The phrase 'passed the tax on' is inaccurate, as obviously the tax is laid and remains on the manufacturer and on him alone. The purchaser does not really pay the tax. He pays or may pay the seller more for the goods because of the seller's obligation, but that is all. . . . The price is the sum total paid for the goods. The amount added because of the tax is paid to get the goods and for nothing else. Therefore it is part of the price . . .".

It may indeed be that the incidence of the tax ultimately settles on the purchaser, but it is not for that reason alone that one may validly argue that it is a tax on the purchaser. The exemption granted to the NPC may be likened to the immunity of the Federal Government from state taxation and vice versa in the federal system of government of the United States. In the early case of Panhandle Oil Co. v. Mississippi7 the doctrine of intergovernment mental tax immunity was held as prohibiting the imposition of a tax on sales of gasoline made to the Federal Government. Said the Supreme court of the United States: A charge at the prescribed. rate is made on account of every gallon acquired by the United States. It is immaterial that the seller and not the purchaser is required to report and make payment to the state. Sale and purchase constitute a transaction by which the tax is measured and on which the burden rests. . . . The necessary operation of these enactments when so construed is directly to retard, impede and burden the exertion by the United States, of its constitutional powers to operate the fleet and hospital. . . . To use the number of gallons sold the United States as a measure of the privilege tax is in substance and legal effect to tax the sale. . . . And that is to tax the United States — to exact tribute on its transactions and apply the same to the support of the state.
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Justice Holmes did not agree. In a powerful dissent joined by Justices Brandeis and Stone, he said: If the plaintiff in error had paid the tax and added it to the price the government would have nothing to say. It could take the gasoline or leave it but it could not require the seller to abate his charge even if it had been arbitrarily increased in the hope of getting more from the government than could be got from the public at large. . . . It does not appear that the government would have refused to pay a price that included the tax if demanded, but if the government had refused it would not have exonerated the seller. . . . . . . I am not aware that the President, the Members of the Congress, the Judiciary or to come nearer to the case at hand, the Coast Guard or the officials of the Veterans' Hospital [to which the sales were made], because they are instrumentalities of government and cannot function naked and unfed, hitherto have been held entitled to have their bills for food and clothing cut down so far as their butchers and tailors have been taxed on their sales; and I had not supposed that the butchers and tailors could omit from their tax returns all receipts from the large class of customers to which I have referred. The question of interference with Government, I repeat, is one of reasonableness and degree and it seems to me that the interference in this case is too remote. But time was not long in coming to confirm the soundness of Holmes' position. Soon it became obvious that to test the constitutionality of a statute by determining the party on which the legal incidence of the tax fell was an unsatisfactory way of doing things. The fall of the bastion was signalled by Chief Justice Hughes' statement inJames v. Dravo Constructing Co.8 that "These cases [referring to Panhandle and Indian Motorcycle Co. v. United States, 283 U.S. 570 (1931)] have been distinguished and must be deemed to be limited to their particular facts." In 1941, Alabama v. King & Boozer9 held that the constitutional immunity of the United States from state taxation was not infringed by the imposition of a state sales tax with which the seller was chargeable but which he was required to collect from the buyer, in respect of materials purchased by a contractor with the United States on a cost-plus basis for use in carrying out its contract, despite the fact that the economic burden of the tax was borne by the United States. The asserted right of the one to be free of taxation by the other does not spell immunity from paying the added costs, attributable to the taxation of those who furnish supplies to the Government and who have been granted no tax immunity. So far as a different view has prevailed, see Panhandle Oil Co. v. Mississippi and Graves v. Texas Co., supra, we think it no longer tenable. Further inroads into the doctrine of Panhandle were made in 1943 when the U.S. Supreme Court held that immunity from state regulation in the performance of governmental functions by Federal officers and agencies did not extend to those who merely contracted to furnish supplies or render services to the government even though as a result of an increase in the price of such supplies or services attributable to the state regulation, its ultimate effect may be to impose an additional economic burden on the Government.10

But if a complete turnabout from the rule announced in Panhandle was yet to be made, it was so made in 1952 inEsso Standard Oil v. Evans11 which held that a contractor is not exempt from the payment of a state privilege tax on the business of storing gasoline simply because the Federal Government with which it has a contract for the storage of gasoline is immune from state taxation. This tax was imposed because Esso stored gasoline. It is not . . . based on the worth of the government property. Instead, the amount collected is graduated in accordance with the exercise of Esso's privilege to engage in such operations; so it is not "on" the federal property. . . . Federal ownership of the fuel will not immunize such a private contractor from the tax on storage. It may generally, as it did here, burden the United States financially. But since James vs. Dravo Contracting Co., 302 U.S. 134, 151, 82 L. ed. 155, 167, 58 S. Ct. 208, 114 ALR 318, this has been no fatal flaw. . . . 12 We have determined the current status of the doctrine of intergovernmental tax immunity in the United States, by showing the drift of the decisions following announcement of the original rule, to point up the that fact that even in those cases where exemption from tax was sought on the ground of state immunity, the attempt has not met with success. As Thomas Reed Powell noted in 1945 in reviewing the development of the doctrine: Since the Dravo case settled that it does not matter that the economic burden of the gross receipts tax may be shifted to the Government, it could hardly matter that the shift comes about by explicit agreement covering taxes rather than by being absorbed in a higher contract price by bidders for a contract. The situation differed from that in the Panhandle and similar cases in that they involved but two parties whereas here the transaction was tripartite. These cases are condemned in so far as they rested on the economic ground of the ultimate incidence of the burden being on the Government, but this condemnation still leaves open the question whether either the state or the United States when acting in governmental matters may be made legally liable to the other for a tax imposed on it as vendee. The carefully chosen language of the Chief Justice keeps these cases from foreclosing the issue. . . . Yet at the time it would have been a rash man who would find in this a dictum that a sales tax clearly on the Government as purchaser is invalid or a dictum that Congress may immunize its contractors.13 If a claim of exemption from sales tax based on state immunity cannot command assent, much less can a claim resting on statutory grant. It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the tax becomes a part of the price which the purchaser must pay. It does not matter that an additional amount is billed as tax to the purchaser. The method of listing the price and the tax separately and defining taxable gross receipts as the amount received less the amount of the tax added, merely avoids payment by the seller of a tax on the amount of the tax. The effect is still the same, namely, that the purchaser does not pay the tax. He pays or may pay the seller more for the goods because of the seller's obligation, but that is all and the amount added because of the tax is paid to get the goods and for nothing else.14 But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden of the tax is largely a matter of economics.15 Then it can no longer be contended that a sales tax is a tax on the purchaser. We therefore hold that the tax imposed by section 186 of the National Internal Revenue Code is a tax on the manufacturer or producer and not a tax on the purchaser except probably in a very remote and inconsequential sense. Accordingly its levy on the sales made to tax-exempt entities like the NPC is permissible. II

This conclusion should dispose of the same issue with respect to sales made to the VOA, except that a claim is here made that the exemption of such sales from taxation rests on stronger grounds. Even the Court of Tax Appeals appears to share this view as is evident from the following portion of its decision: With regard to petitioner's sales to the Voice of America, it appears that the petitioner and the respondent are in agreement that the Voice of America is an agency of the United States Government and as such, all goods purchased locally by it directly from manufacturers or producers are exempt from the payment of the sales tax under the provisions of the agreement between the Government of the Philippines and the Government of the United States, (See Commonwealth Act No. 733) provided such purchases are supported by serially numbered Certificates of Tax Exemption issued by the vendee-agency, as required by General Circular No. V-41, dated October 16, 1947. . . . The circular referred to reads: Goods purchased locally by U.S. civilian agencies directly from manufacturers, producers or importers shall be exempt from the sales tax. It was issued purportedly to implement the Agreement between the Republic of the Philippines and the United States of America Concerning Military Bases,16 but we find nothing in the language of the Agreement to warrant the general exemption granted by that circular. The pertinent provisions of the Agreement read: ARTICLE V. — Exemption from Customs and Other Duties No import, excise, consumption or other tax, duty or impost shall be charged on material, equipment, supplies or goods, including food stores and clothing, for exclusive use in the construction, maintenance, operation or defense of the bases, consigned to, or destined for, the United States authorities and certified by them to be for such purposes. ARTICLE XVIII.—Sales and Services Within the Bases 1. It is mutually agreed that the United States Shall have the right to establish on bases, free of all licenses; fees; sales, excise or other taxes, or imposts; Government agencies, including concessions, such as sales commissaries and post exchanges, messes and social clubs, for the exclusive use of the United States military forces and authorized civilian personnel and their families. The merchandise or services sold or dispensed by such agencies shall be free of all taxes, duties and inspection by the Philippine authorities. . . . Thus only sales made "for exclusive use in the construction, maintenance, operation or defense of the bases," in a word, only sales to the quartermaster, are exempt under article V from taxation. Sales of goods to any other party even if it be an agency of the United States, such as the VOA, or even to the quartermaster but for a different purpose, are not free from the payment of the tax. On the other hand, article XVIII exempts from the payment of the tax sales made within the base by (not sales to) commissaries and the like in recognition of the principle that a sales tax is a tax on the seller and not on the purchaser. It is a familiar learning in the American law of taxation that tax exemption must be strictly construed and 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 of the parties.17 Hence, in so far as the circular of the Bureau of Internal Revenue would give the tax exemptions in the Agreement an expansive construction it is void. We hold, therefore, that sales to the VOA are subject to the payment of percentage taxes under section 186 of the Code. The petitioner is thus liable for P12,910.60, computed as follows:

Sales to NPC Sales to VOA Total sales subject to tax 7% sales tax due thereon Add: 25% surcharge Total amount due and collectible

P145,866.70 P 1,683.00 P147,549.70 P 10,328.48 P 2,582.12 P 12,910.60

Accordingly, the decision a quo is modified by ordering the petitioner to pay to the respondent Commission the amount of P12,910.60 as sales tax and surcharge, with costs against the petitioner. Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Angeles and Fernando, JJ., concur. Concepcion, C.J., and Dizon, J., took no part. G.R. No. L-19667 November 29, 1966

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. AMERICAN RUBBER COMPANY and COURT OF TAX APPEALS, respondents. G.R. No. L-19801-03 November 29, 1966

AMERICAN RUBBER COMPANY, petitioner, vs. THE COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents. Nos. L-19667: Office of the Solicitor General for petitioner. Ozaeta, Gibbs and Ozaeta for respondents. Nos. L-19801-03: Ozaeta, Gibbs and Ozaeta for petitioner. Office of the Solicitor General for respondents. REYES, J.B.L., J.: These cases are brought on appeal from the Court of Tax Appeals by the State (G.R. No. L-19667) as well as by the American Rubber Company (G.R. Nos. L-19801, 19802, 19803). The factual background is the same in all four cases, and is not in controversy, having been stipulated between the parties. Petitioner, American Rubber Company, a domestic corporation, from January 1, 1955 to December 1, 1958, was engaged in producing rubber from its approximately 900 hectare rubber tree plantation, which it owned and operated in Latuan, Isabela, City of Basilan. Its products, known in the market as Preserved Latex, Pale Crepe No. 1, Pale Crepe No. 2, Ribbed Smoked Sheets Nos. 1 and 2, Flat Bark Rubber, 2X Brown Crepe and 3X Brown Crepe, are turned out in the following manner:

The initial step common to the production of all the foregoing rubber products is tapping, i.e., the collection of latex (rubber juice) from rubber trees. This is done by the daily cutting, early in the morning, of a spiral incision in the bark of rubber trees and placing a cup below the lower end of the incision to receive the flow of latex. The collecting cup is filled after two hours. The tapper then collects the latex into buckets and carries them to the collecting shed. The tapper subsequently pours the latex collected into big milk cans. The filled milk cans are then taken in motor vehicles to a coagulating shed, also within the premises of petitioner's plantation, where the latex is strained into coagulating tanks to remove foreign matter such as leaves and dirt. After these initial steps, the processes vary in the production of the various rubber products mentioned above. Said processes are described hereunder. Preserved Rubber Latex Fresh latex is diluted with 5 to 5-1/4 ounces of ammonia per gallon of latex. The mixture is thoroughly stirred and then poured into metal drums. The addition of ammonia preserves the latex in liquid form and prevents its deterioration or its acquisition of a repulsive smell, and at the same time preserves its uniform color. Latex which has been thus artificially preserved in its liquid form generally lasts for about a month without spoiling. On the other hand, fresh latex in its original state lasts for only about two hours, after which it becomes spoiled. Petitioner sells preserved latex only upon previous orders of customers who supply empty metal drum containers. Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2 To produce Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2, the petitioner adds to the latex in the coagulating tank about 15 or 16 ounces of glacial acetic acid per gallon of latex. The mixture is stirred thoroughly. Thereafter aluminum partitions are placed crosswise inside the tank so that the latex will coagulate into uniform slabs. Acetic acid is added to the latex to hasten coagulation which otherwise takes place naturally, and to preserve its fresh state and color. The similarity in the production of Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2 ends at the point of removing the coagulum (coagulated rubber sheets) from the coagulating tanks. To produce Pale Crepe No. 1, the coagulum is passed through a series of rollers until the desired thickness is attained, whereupon it is removed to the air-drying house situated inside petitioner's plantation and hung for a period of about twelve or thirteen days to dry. There are no mechanical driers used; the air-drying is done naturally. As soon as the Pale Crepe is dried, the sheets are sorted; those which are of uniform pale color are classified as Pale Crepe No. 2, whereupon they are baled and stored, ready for market. Ribbed & Smoked Sheets Nos. 1 and 2 are produced practically in the same manner as Pale Crepe, except that the coagulum is passed only once through a roller provided with ribs after which the flattened and ribbed coagulum is removed to petitioner's smoke-house where it is hung and cured by exposure to heat and smoke from wood fires for about six or seven days. The resulting smoked sheets are sorted and classified dependent upon color and opaqueness into ribbed smoked sheets (RSS) No. 1 and No. 2, baled, and stored ready for the market. No mechanical equipment is used in generating the smoke in the smoke-house. The petitioner's rollers are powered by engines although they could be turned by hand as it is done in smallrubber plantations. If Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2 are not air-dried and smoked they deteriorate, get spoiled, and the color varies. Flat Bark Rubber Each morning after a tapper makes a fresh incision in the bark of a rubber tree, he gathers the latex dripping from the ground around the tree, called "ground rubber", as well as the dried latex from the incisions made the previous day, called "bark rubber". Ground and bark rubber are not intentionally produced. No chemicals are added to the latex transformed into ground and bark rubber. This kind of dried latex is spoiled and has a bad odor.

Ground and bark rubber when gathered in sufficient quantities are passed numerous times through the rollers or mills until they form a uniform mass or sheet which, finally is called Flat Bark Rubber. No chemical is used to coagulate the dried ground and bark rubber because they are already coagulated. They are formed into sheets by means only of pressure of the mills or rollers through which they are passed. Flat Bark Rubber commands the lowest prices in the rubber market. 3X Brown Crepe Every morning, before a fresh incision is made in the bark of the rubber trees, the tapper collects not only ground and bark rubber but removes and collects the latex in the cups, known as "cup rubber". The cup rubbercoagulates and dries through natural processes and, when gathered in sufficient quantities, is milled and rolled through a series of rollers until by force of pressure it is formed into a mass of the desired thickness called "3X Brown Crepe." Like ground and bark rubber, no chemicals are added to cup rubber to produce 3X Brown Crepe. Cup rubber in its original form, like ground and bark rubber, is spoiled and has a bad odor. 2X Brown Crepe 2X Brown Crepe is obtained by milling or rolling the excess pieces of coagulated rubber latex which had been cut or trimmed from the from the ribbed smoked sheets No. 2 into a uniform mass. 2X Brown Crepe is produced in the same manner as the other sheets of crepe rubber, i.e., without the addition of any chemicals. Petitioner during the said period sold its foregoing rubber products locally and as prescribed by the respondent's regulations declared same for tax purposes which respondent accordingly assessed. Petitioner paid, under protest, the corresponding sales taxes thereon claiming exemption therefrom under Section 188 (b) of the National Internal Revenue Code. The following sales taxes on the aforementioned rubber products were paid under protest — From Jan. 1, 1955 to Dec. 31, 1956 From Jan. 1, 1957 to June 30, 1957 From July 1, 1957 to Dec. 31, 1958 P83,193.48 P20,504.99 P52,378.90

It is further stipulated that the sales tax collected from petitioner American Rubber Company on the local sales of its rubber products, following Internal Revenue General Circulars Nos. 431 and 440, had been separately itemized and billed by petitioner Company in the invoices issued to the customers, that paid both the value of therubber articles and the separately itemized sales tax, from January 1, 1955 to August 2, 1957. After paying under protest, the petitioner claimed refund of the sales taxes paid by it on the ground that under section 188, paragraph b, of the Internal Revenue Code, as amended,1 its rubber products were agricultural products exempt from sales tax, and upon refusal of the Commissioner of Internal Revenue, brought the case on appeal to the Court of Tax Appeals (C.T.A. Nos. 356, 440,, 632). The respondent Commissioner interposed defenses, denying that petitioner's products were agricultural ones within the exemption; claiming that there had been no exhaustion of administrative remedies; and argued that the sales tax having been passed to the buyers during the period that elapsed from January 1, 1955 to August 2, 1957, the petitioner did not have personality to demand, sue for and recover the aforesaid sales taxes, plus interest. In its decision, now under appeal, the Tax Court held Preserved Latex, Flat Bark Rubber, and 3X Brown Crepe to be agricultural products, "because the labor employed in the processing thereof is agricultural labor", and hence, the sales of such products were exempt from sales tax, but declared Pale Crepe No. 1, Ribbed Smoked Sheets Nos. 1 and 3, as well as 2X Brown Crepe (which is obtained from rolling excess pieces of Smoked Sheets) to be manufactured products, sales of which were subject to the tax. It overruled the defense of nonexhaustion of administrative remedies and upheld the Revenue Commissioner's stand that petitioner Company was not entitled to recover the sales tax that had been separately billed to its customers, and paid by the latter.

Hence, it dismissed the appeal in C.T.A. Nos. 356 and 440 and ordered respondent Commissioner to refund only P3,916.49 without interest, or costs. Both parties then duly appealed to this. The issues posed on these appeals are: (1) Whether the plaintiff's rubber products above described should be considered agricultural or manufactured for purposes of their subjection to the sales tax; (2) Whether plaintiff is or is not entitled to recover the sales tax paid by it, but passed on to and paid by the buyers of its products; and (3) Whether plaintiff is or is not entitled to interest on the sales tax paid by it under protest, in case recovery thereof is allowed. The first issue, in our opinion, is governed by the principles laid down by this Court in Philippine Packing Corporation vs. Collector of Internal Revenue, 100 Phil. 545 et seq. We there ruled that the exemption from sales tax established in section 188 (b) of the Internal Revenue Tax Code in favor of sales of agricultural products, whether in their original form or not, made by the producer or owner of the land where produced is not taken away merely because the produce undergoes processing at the hand of said producer or owner for the purpose of working his product into a more convenient and valuable form suited to meet the demand of an expanded market; that the exemption was not designed in favor of the small agricultural producer, already exempted by the subsequent paragraphs of the same section 188, but that said exemption is not incompatible with large scale agricultural production that incidentally required resort to preservative processes designed to increase or prolong marketability of the product. In the case before us, the parties have stipulated that fresh latex directly obtained from the rubber tree, which is clearly an agricultural product, becomes spoiled after only two hours. It has, therefore, a severely limited marketability. The addition of ammonia prevents its deterioration for about a month, and we see no reason why this preservative process should wrest away from the preserved latex the protective mantle of the tax exemption. Taking also into account the great distance that separates the plaintiff's plantation from the main rubberprocessing centers in Japan, the United States and Europe, and the difficulty in handling products in liquid form, it can be discerned without difficulty that preserved, latex, with its 30-day spoilage limit, is still severely handicapped for export and dollar earning purposes. To overcome these shortcomings, and extend its useful life almost indefinitely, it becomes necessary to separate and solidify the rubber granules diffused in the latex, and hence, according to the stipulation of facts and the evidence, acetic acid is added to hasten coagulation. There is nothing on record to show that the acetic acid in way produces anything that was not originally in the source, the liquid latex. The coagulum is then rolled and compacted and afterwards air dried to make Pale Crepe(1 and 2), or else cured and smoked to produce rubbersheets. Once again we see nothing in this processing to alter the agricultural nature of the result; what takes place is merely an accelerated coagulation and dessication that would naturally occur anyway, only within a longer period of time, coupled with greater spoilage of the product. Thus the operations carried out by plaintiff appear to be purely preservative in nature, made necessary, by its production of fresh rubber latex in a large scale. they are purely incidental to the latter, just as the canning of skinned and cored pineapples in syrup was held to be incidental to the large-scale cultivation of the fruit in the Philippine Packing Corporation case (ante). Being necessary to suit the product to the demands of the market, the operations in both cases should lead to the same result, non-taxability of the sales of the respective agricultural products. In not so holding, the Tax Court was in error. Even less justifiable is the position taken by the Revenue Commissioner in his appeal against the finding of the Tax Court that Flat Bark 3X Brown Crepe rubber are agricultural products. According to the record, these

sheets result from the drippings and waste rubber that have dried naturally, that are rolled and compacted into the desired thickness, without any other processing. As to 2X Brown Crepe which is compacted out of the trimmings and waste left over from the production of ribbed smoked sheets, no reason is seen why it should be treated differently from the ribbed smoked sheets themselves. In his appeal, the Revenue Commissioner contends that all of plaintiff's products should be deemed manufactured articles, on the strength of section 194 (n) of the Revenue Code defining a "manufacturer" as every person who by physical or chemical process alters the exterior texture or form or inner substances of any raw material or manufactured or partially manufactured product in such manner as to prepare it for a special use or uses to which it could not have been put to in its original condition, or who . . . alters the quality of any such raw material . . . as to reduce it to marketable shape . . . . But, as pointed out in the Philippine Packing Corporation case, this definition is not applicable to the exemption of agricultural products, "whether in their original form or not". The use of this last phrase in the statute clearly indicates that the agricultural product may be altered in texture or form without being divested of the exemption (cas cit. 100 Phil., p. 548). The exception would be sales of agricultural products while Republic Act No. 1612 was in effect because under this Act the freedom from sales tax became restricted to agricultural products "in their original form" only. So that plaintiff's sales from August 24, 1956 (approval of Republic Act 1612) to June 22, 1957 (when Republic Act 1856 became effective and restored the exemption to agricultural products "whether in their original form or not") became properly taxable. Under paragraphs (A)2 and B(4) of the additional stipulation of facts (CTA Rec. pp. 261-262, G.R. L-19801), the sales tax properly collected during this period of plaintiff's transactions amounted to P18,187.19 from August 24 to December 31, 1956; and P18,888.28 from January 1 to June 21, 1957, or a total of P37,075.47. This last amount is, therefore nonrecoverable.2 The second issue in this appeal concerns the holding of the Court of Tax Appeals that the plaintiff Company is not entitled to recover the sales tax paid by it from January, 1955 to August 2, 1957, because during that period the plaintiff had separately invoiced and billed the corresponding sales tax to the buyers of its products. In so holding, the Tax Court relied on our decisions in Medina vs. City of Baguio, 91 Phil. 854; Mendoza, Santos & Co. vs. Municipality of Meycawayan, L-6069-6070, April 30, 1954 (94 Phil. 1047); and Zosimo Rojas & Bros. vs. City of Cavite, L-10730, May 27, 1958. The basic ruling is that of Medina vs. City of Baguio, supra, where this Court affirmed the ruling of the court of First Instance to the effect that — "The amount collected from the theatergoers as additional price of admission tickets is not the property of plaintiffs or any of them. It is paid by the public. If anybody has the right to claim it, it is those who paid it. Only owners of property has the right to claim said property. The cine owner acted as mere agents of the city in collecting additional price charged in the sale of admission tickets." (Medina vs. City of Baguio, 91 Phil. 854) (Emphasis supplied) We agree with the plaintiff-appellant that the Medina ruling is not applicable to the present case, since the municipal taxes therein imposed were taxes on the admission tickets sold, so that, in effect, they were levies upon the theatergoers who bought them; so much so that (as the decision expressly ruled) the tax was collected by the theater owners as agents of the respective municipal treasurers. This does not obtain in the case at bar. The Medina ruling was merely followed in Rojas & Bros. vs. Cavite, supra; and in Mendoza, Santos & Co. vs. Municipality of Meycawayan, 94 Phil. 1047. By contrast with the municipal taxes involved in the preceding cases, the sales tax is by law imposed directly, not on the thing sold, but on the act (sale) of the manufacturer, producer or importer (Op. of the Secretary of Justice, June 15, 1946; 47 C.J.S., p. 1141), who is exclusively made liable for its timely payment. There is no proof that the tax paid by plaintiff is the very money paid by its customers. Where the tax money paid by the plaintiff came from is really no concern of the Government, but solely a matter between the plaintiff and its

customers. Anyway, once recovered, the plaintiff must hold the refund taxes in trust for the individual purchasers who advanced payment thereof, and whose names must appear in plaintiff's records. Moreover, the separate billing of the sales tax in appellant's invoices was a direct result of the respondent Commissioner's General Circular No. 440, providing that — if a manufacturer, producer, or importer, in fixing the gross selling price of an article sold by him, has included an amount intended to cover the sales tax in the gross selling price of the article, the sales tax shall be based on the gross selling price less the amount intended to cover the tax, if the same is billed to the purchaser as a separate item in the invoice. . . . (Emphasis supplied) In other words, the separate itemization of the sales tax in the invoices was permitted to avoid the taxpayer being compelled to pay a sales tax on the tax itself. It does not seem either just or proper that a step suggested by the Internal Revenue authorities themselves to protect the taxpayer from paying a double tax should now be used to block his action to recover taxes collected without legal sanction. Finally, a more important reason that militates against extensive and indiscriminate application of the Medina vs. City of Baguio ruling is that it would tend to perpetuate illegal taxation; for the individual customers to whom the tax is ultimately shifted will ordinarily not care to sue for its recovery, in view of the small amount paid by each and the high cost of litigation for the reclaiming of an illegal tax. In so far, therefore, as it favors the imposition, collection and retention of illegal taxes, and encourages a multiplicity of suits, the Tax Court's ruling under appeal violates morals and public policy. The plaintiff Company also urges that the refund of the taxes should include interest thereon. While this Court has allowed recovery of interest in some cases, it has done so only in cases of patent arbitrariness on the part of the Revenue authorities; and in this instance we agree with the Tax Court that no such patent arbitrariness has been shown. IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals is affirmed in Case G.R. No. L-19667 and modified in cases G.R. Nos. L-19801, L-19802 and L-19803, by declaring the sales taxes therein involved to have been improperly denied levied and collected and ordering respondent Commissioner of Internal Revenue to refund the same, except the taxes corresponding to the period from August 24, 1956 to June 22, 1957, during which Republic Act No. 1612 was in force. The amount of P37,075.47 paid by the taxpayer for this period is hereby declared properly collected and not refundable. Without special pronouncement as to costs. Concepcion, C.J., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur. G.R. No. L-31092 February 27, 1987 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. JOHN GOTAMCO & SONS, INC. and THE COURT OF TAX APPEALS, respondents.

YAP, J.: The question involved in this petition is whether respondent John Gotamco & Sons, Inc. should pay the 3% contractor's tax under Section 191 of the National Internal Revenue Code on the gross receipts it realized from the construction of the World Health Organization office building in Manila. The World Health Organization (WHO for short) is an international organization which has a regional office in Manila. As an international organization, it enjoys privileges and immunities which are defined more specifically in the Host Agreement entered into between the Republic of the Philippines and the said Organization on July 22, 1951. Section 11 of that Agreement provides, inter alia, that "the Organization, its assets, income and other

properties shall be: (a) exempt from all direct and indirect taxes. It is understood, however, that the Organization will not claim exemption from taxes which are, in fact, no more than charges for public utility services; . . . When the WHO decided to construct a building to house its own offices, as well as the other United Nations offices stationed in Manila, it entered into a further agreement with the Govermment of the Republic of the Philippines on November 26, 1957. This agreement contained the following provision (Article III, paragraph 2): The Organization may import into the country materials and fixtures required for the construction free from all duties and taxes and agrees not to utilize any portion of the international reserves of the Government. Article VIII of the above-mentioned agreement referred to the Host Agreement concluded on July 22, 1951 which granted the Organization exemption from all direct and indirect taxes. In inviting bids for the construction of the building, the WHO informed the bidders that the building to be constructed belonged to an international organization with diplomatic status and thus exempt from the payment of all fees, licenses, and taxes, and that therefore their bids "must take this into account and should not include items for such taxes, licenses and other payments to Government agencies." The construction contract was awarded to respondent John Gotamco & Sons, Inc. (Gotamco for short) onFebruary 10, 1958 for the stipulated price of P370,000.00, but when the building was completed the price reached a total of P452,544.00. Sometime in May 1958, the WHO received an opinion from the Commissioner of the Bureau of Internal Revenue stating that "as the 3% contractor's tax is an indirect tax on the assets and income of the Organization, the gross receipts derived by contractors from their contracts with the WHO for the construction of its new building, are exempt from tax in accordance with . . . the Host Agreement." Subsequently, however, on June 3, 1958, the Commissioner of Internal Revenue reversed his opinion and stated that "as the 3% contractor's tax is not a direct nor an indirect tax on the WHO, but a tax that is primarily due from the contractor, the same is not covered by . . . the Host Agreement." On January 2, 1960, the WHO issued a certification state 91 inter alia,: When the request for bids for the construction of the World Health Organization office building was called for, contractors were informed that there would be no taxes or fees levied upon them for their work in connection with the construction of the building as this will be considered an indirect tax to the Organization caused by the increase of the contractor's bid in order to cover these taxes. This was upheld by the Bureau of Internal Revenue and it can be stated that the contractors submitted their bids in good faith with the exemption in mind. The undersigned, therefore, certifies that the bid of John Gotamco & Sons, made under the condition stated above, should be exempted from any taxes in connection with the construction of the World Health Organization office building. On January 17, 1961, the Commissioner of Internal Revenue sent a letter of demand to Gotamco demanding payment of P 16,970.40, representing the 3% contractor's tax plus surcharges on the gross receipts it received from the WHO in the construction of the latter's building. Respondent Gotamco appealed the Commissioner's decision to the Court of Tax Appeals, which after trial rendered a decision, in favor of Gotamco and reversed the Commissioner's decision. The Court of Tax Appeal's decision is now before us for review on certiorari. In his first assignment of error, petitioner questions the entitlement of the WHO to tax exemption, contending that the Host Agreement is null and void, not having been ratified by the Philippine Senate as required by the

Constitution. We find no merit in this contention. While treaties are required to be ratified by the Senate under the Constitution, less formal types of international agreements may be entered into by the Chief Executive and become binding without the concurrence of the legislative body. 1 The Host Agreement comes within the latter category; it is a valid and binding international agreement even without the concurrence of the Philippine Senate. The privileges and immunities granted to the WHO under the Host Agreement have been recognized by this Court as legally binding on Philippine authorities. 2 Petitioner maintains that even assuming that the Host Agreement granting tax exemption to the WHO is valid and enforceable, the 3% contractor's tax assessed on Gotamco is not an "indirect tax" within its purview. Petitioner's position is that the contractor's tax "is in the nature of an excise tax which is a charge imposed upon the performance of an act, the enjoyment of a privilege or the engaging in an occupation. . . It is a tax due primarily and directly on the contractor, not on the owner of the building. Since this tax has no bearing upon the WHO, it cannot be deemed an indirect taxation upon it." We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. Said the respondent court: In context, direct taxes are those that are demanded from the very person who, it is intended or desired, should pay them; while indirect taxes are those that are demanded in the first instance from one person in the expectation and intention that he can shift the burden to someone else. (Pollock vs. Farmers, L & T Co., 1957 US 429, 15 S. Ct. 673, 39 Law. Ed. 759.) The contractor's tax is of course payable by the contractor but in the last analysis it is the owner of the building that shoulders the burden of the tax because the same is shifted by the contractor to the owner as a matter of self-preservation. Thus, it is an indirect tax. And it is an indirect tax on the WHO because, although it is payable by the petitioner, the latter can shift its burden on the WHO. In the last analysis it is the WHO that will pay the tax indirectly through the contractor and it certainly cannot be said that 'this tax has no bearing upon the World Health Organization. Petitioner claims that under the authority of the Philippine Acetylene Company versus Commissioner of Internal Revenue, et al., 3 the 3% contractor's tax fans directly on Gotamco and cannot be shifted to the WHO. The Court of Tax Appeals, however, held that the said case is not controlling in this case, since the Host Agreement specifically exempts the WHO from "indirect taxes." We agree. The Philippine Acetylene case involved a tax on sales of goods which under the law had to be paid by the manufacturer or producer; the fact that the manufacturer or producer might have added the amount of the tax to the price of the goods did not make the sales tax "a tax on the purchaser." The Court held that the sales tax must be paid by the manufacturer or producer even if the sale is made to tax-exempt entities like the National Power Corporation, an agency of the Philippine Government, and to the Voice of America, an agency of the United States Government. The Host Agreement, in specifically exempting the WHO from "indirect taxes," contemplates taxes which, although not imposed upon or paid by the Organization directly, form part of the price paid or to be paid by it. This is made clear in Section 12 of the Host Agreement which provides: While the Organization will not, as a general rule, in the case of minor purchases, claim exemption from excise duties, and from taxes on the sale of movable and immovable property which form part of the price to be paid, nevertheless, when the Organization is making important purchases for official use of property on which such duties and taxes have been charged or are chargeable the Government of the Republic of the Philippines shall make appropriate administrative arrangements for the remission or return of the amount of duty or tax. (Emphasis supplied). The above-quoted provision, although referring only to purchases made by the WHO, elucidates the clear intention of the Agreement to exempt the WHO from "indirect" taxation.

The certification issued by the WHO, dated January 20, 1960, sought exemption of the contractor, Gotamco, from any taxes in connection with the construction of the WHO office building. The 3% contractor's tax would be within this category and should be viewed as a form of an "indirect tax" On the Organization, as the payment thereof or its inclusion in the bid price would have meant an increase in the construction cost of the building. Accordingly, finding no reversible error committed by the respondent Court of Tax Appeals, the appealed decision is hereby affirmed. SO ORDERED. G.R. No. 88291 June 8, 1993 ERNESTO M. MACEDA, petitioner, vs. HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the President, HON. VICENTE JAYME, ETC., ET AL., respondents. Angara, Abello, Concepcion & Cruz for respondent Pilipinas Shell Petroleum Corporation. Siguion Reyna, Montecillo & Ongsiako for Caltex.

NOCON, J.: Just like lightning which does strike the same place twice in some instances, this matter of indirect tax exemption of the private respondent National Power Corporation (NPC) is brought to this Court a second time. Unfazed by the Decision We promulgated on May 31, 1991 1 petitioner Ernesto Maceda asks this Court to reconsider said Decision. Lest We be criticized for denying due process to the petitioner. We have decided to take a second look at the issues. In the process, a hearing was held on July 9, 1992 where all parties presented their respective arguments. Etched in this Court's mind are the paradoxical claims by both petitioner and private respondents that their respective positions are for the benefit of the Filipino people. I A Chronological review of the relevant NPC laws, specially with respect to its tax exemption provisions, at the risk of being repetitious is, therefore, in order. On November 3, 1936, Commonwealth Act No. 120 was enacted creating the National Power Corporation, a public corporation, mainly to develop hydraulic power from all water sources in the Philippines. 2 The sum of P250,000.00 was appropriated out of the funds in the Philippine Treasury for the purpose of organizing the NPC and conducting its preliminary work. 3 The main source of funds for the NPC was the flotation of bonds in the capital markets 4 and these bonds

. . . issued under the authority of this Act shall be exempt from the payment of all taxes by the Commonwealth of the Philippines, or by any authority, branch, division or political subdivision thereof and subject to the provisions of the Act of Congress, approved March 24, 1934, otherwise known as the Tydings McDuffle Law, which facts shall be stated upon the face of said bonds. . . . . 5
On June 24, 1938, C.A. No. 344 was enacted increasing to P550,000.00 the funds needed for the initial operations of the NPC and reiterating the provision of the flotation of bonds as soon as the first construction of any hydraulic power project was to be decided by the NPC Board. 6 The provision on tax exemption in relation to the issuance of the NPC bonds was neither amended nor deleted.

On September 30, 1939, C.A. No. 495 was enacted removing the provision on the payment of the bond's principal and interest in "gold coins" but adding that payment could be made in United States dollars. 7 The provision on tax exemption in relation to the issuance of the NPC bonds was neither amended nor deleted. On June 4, 1949, Republic Act No. 357 was enacted authorizing the President of the Philippines to guarantee, absolutely and unconditionally, as primary obligor, the payment of any and all NPC loans. 8 He was also authorized to contract on behalf of the NPC with the International Bank for Reconstruction and Development (IBRD) for NPC loans for the accomplishment of NPC's corporate objectives 9 and for the reconstruction and development of the economy of the country. 10 It was expressly stated that:

Any such loan or loans shall be exempt from taxes, duties, fees, imposts, charges, contributions and restrictions of the Republic of the Philippines, its provinces, cities and municipalities. 11
On the same date, R.A. No. 358 was enacted expressly authorizing the NPC, for the first time, to incur other types of indebtedness, aside from indebtedness incurred by flotation of bonds. 12 As to the pertinent tax exemption provision, the law stated as follows:

To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all taxes, duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its provinces, cities and municipalities. 13
On July 10, 1952, R.A. No. 813 was enacted amending R.A. No. 357 in that, aside from the IBRD, the President of the Philippines was authorized to negotiate, contract and guarantee loans with the Export-Import Bank of of Washigton, D.C., U.S.A., or any other international financial institution. 14 The tax provision for repayment of these loans, as stated in R.A. No. 357, was not amended. On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax exemption for real estate taxes. As enacted, the law states as follows:

To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all taxes, except real property tax, and from all duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its provinces, cities, and municipalities. 15
On September 8, 1955, R.A. No. 1397 was enacted directing that the NPC projects to be funded by the increased indebtedness 16 should bear the National Economic Council's stamp of approval. The tax exemption provision related to the payment of this total indebtedness was not amended nor deleted. On June 13, 1958, R.A. No. 2055 was enacted increasing the total amount of foreign loans NPC was authorized to incur to US$100,000,000.00 from the US$50,000,000.00 ceiling in R.A. No. 357. 17 The tax provision related to the repayment of these loans was not amended nor deleted. On June 13, 1958, R.A. No. 2058 was enacting fixing the corporate life of NPC to December 31, 2000. 18 All laws or provisions of laws and executive orders contrary to said R.A. No. 2058 were expressly repealed. 19 On June 18, 1960, R.A. No 2641 was enacted converting the NPC from a public corporation into a stock corporation with an authorized capital stock of P100,000,000.00 divided into 1,000.000 shares having a par value of P100.00 each, with said capital stock wholly subscribed to by the Government. 20 No tax exemption was incorporated in said Act. On June 17, 1961, R.A. No. 3043 was enacted increasing the above-mentioned authorized capital stock to P250,000,000.00 with the increase to be wholly subscribed by the Government. 21 No tax provision was incorporated in said Act.

On June 17, 1967, R.A. No 4897 was enacted. NPC's capital stock was increased again to P300,000,000.00, the increase to be wholly subscribed by the Government. No tax provision was incorporated in said Act. 22 On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC, C.A. No. 120, as amended. Declared as primary objectives of the nation were:

Declaration of Policy. — Congress hereby declares that (1) the comprehensive development, utilization and conservation of Philippine water resources for all beneficial uses, including power generation, and (2) the total electrification of the Philippines through the development of power from all sources to meet the needs of industrial development and dispersal and the needs of rural electrification are primary objectives of the nation which shall be pursued coordinately and supported by all instrumentalities and agencies of the government, including the financial institutions. 23
Section 4 of C.A. No. 120, was renumbered as Section 8, and divided into sections 8 (a) (Authority to incur Domestic Indebtedness) and Section 8 (b) (Authority to Incur Foreign Loans). As to the issuance of bonds by the NPC, Paragraph No. 3 of Section 8(a), states as follows:

The bonds issued under the authority of this subsection shall be exempt from the payment of all taxes by the Republic of the Philippines, or by any authority, branch, division or political subdivision thereof which facts shall be stated upon the face of said bonds. . . . 24
As to the foreign loans the NPC was authorized to contract, Paragraph No. 5, Section 8(b), states as follows:

The loans, credits and indebtedness contracted under this subsection and the payment of the principal, interest and other charges thereon, as well as the importation of machinery, equipment, materials and supplies by the Corporation, paid from the proceeds of any loan, credit or indebtedeness incurred under this Act, shall also be exempt from all taxes, fees, imposts, other charges and restrictions, including import restrictions, by the Republic of the Philippines, or any of its agencies and political subdivisions. 25
A new section was added to the charter, now known as Section 13, R.A. No. 6395, which declares the nonprofit character and tax exemptions of NPC as follows: The Corporation shall be non-profit and shall devote all its returns from its capital investment, as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, the Corporation is hereby declared exempt: (a) From the payment of all taxes, duties, fees, imposts, charges costs and service fees in any court or administrative proceedings in which it may be a party, restrictions and duties to the Republic of the Philippines, its provinces, cities, and municipalities and other government agencies and instrumentalities; (b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its provinces, cities, municipalities and other government agencies and instrumentalities; (c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of foreign goods required for its operations and projects; and

(d) From all taxes, duties, fees, imposts and all other charges its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the Corporation in the generation, transmission, utilization, and sale of electric power. 26
On November 7, 1972, Presidential Decree No. 40 was issued declaring that the electrification of the entire country was one of the primary concerns of the country. And in connection with this, it was specifically stated that:

The setting up of transmission line grids and the construction of associated generation facilities in Luzon, Mindanao and major islands of the country, including the Visayas, shall be the responsibility of the National Power Corporation (NPC) as the authorized implementing agency of the State. 27
xxx xxx xxx

It is the ultimate objective of the State for the NPC to own and operate as a single integrated system all generating facilities supplying electric power to the entire area embraced by any grid set up by the NPC. 28
On January 22, 1974, P.D. No. 380 was issued giving extra powers to the NPC to enable it to fulfill its role under aforesaid P.D. No. 40. Its authorized capital stock was raised to P2,000,000,000.00, 29 its total domestic indebtedness was pegged at a maximum of P3,000,000,000.00 at any one time, 30 and the NPC was authorized to borrow a total of US$1,000,000,000.00 31 in foreign loans. The relevant tax exemption provision for these foreign loans states as follows:

The loans, credits and indebtedness contracted under this subsection and the payment of the principal, interest and other charges thereon, as well as the importation of machinery, equipment, materials, supplies and services, by the Corporation, paid from the proceeds of any loan, credit or indebtedness incurred under this Act, shall also be exempt from all direct and indirect taxes, fees, imposts, other charges and restrictions, including import restrictions previously and presently imposed, and to be imposed by the Republic of the Philippines, or any of its agencies and political subdivisions. 32 (Emphasis supplied)
Section 13(a) and 13(d) of R.A. No 6395 were amended to read as follows: (a) From the payment of all taxes, duties, fees, imposts, charges and restrictions to the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities including the taxes, duties, fees, imposts and other charges provided for under the Tariff and Customs Code of the Philippines, Republic Act Numbered Nineteen Hundred Thirty-Seven, as amended, and as further amended by Presidential Decree No. 34 dated October 27, 1972, and Presidential Decree No. 69, dated November 24, 1972, and costs and service fees in any court or administrative proceedings in which it may be a party; xxx xxx xxx

(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the Corporation in the generation, transmission, utilization and sale of electric power. 33 (Emphasis supplied)

On February 26, 1970, P.D. No. 395 was issued removing certain restrictions in the NPC's sale of electricity to its different customers. 34 No tax exemption provision was amended, deleted or added. On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be appropriated annually to cover the unpaid subscription of the Government in the NPC authorized capital stock, which amount would be taken from taxes accruing to the General Funds of the Government, proceeds from loans, issuance of bonds, treasury bills or notes to be issued by the Secretary of Finance for this particular purpose. 35 On May 27, 1976 P.D. No. 938 was issued

(I)n view of the accelerated expansion programs for generation and transmission facilities which includes nuclear power generation, the present capitalization of National Power Corporation (NPC) and the ceilings for domestic and foreign borrowings are deemed insufficient; 36
xxx xxx xxx

(I)n the application of the tax exemption provisions of the Revised Charter, the non-profit character of NPC has not been fully utilized because of restrictive interpretation of the taxing agencies of the government on said provisions; 37
xxx xxx xxx

(I)n order to effect the accelerated expansion program and attain the declared objective of total electrification of the country, further amendments of certain sections of Republic Act No. 6395, as amended by Presidential Decrees Nos. 380, 395 and 758, have become imperative; 38
Thus NPC's capital stock was raised to P8,000,000,000.00, 39 the total domestic indebtedness ceiling was increased to P12,000,000,000.00, 40 the total foreign loan ceiling was raised to US$4,000,000,000.00 41 and Section 13 of R.A. No. 6395, was amended to read as follows:

The Corporation shall be non-profit and shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion. To enable the Corporation to pay to its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, the Corporation, including its subsidiaries, is hereby declared exempt from the payment of all forms of taxes, duties, fees, imposts as well as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings. 42
II On the other hand, the pertinent tax laws involved in this controversy are P.D. Nos. 882, 1177, 1931 and Executive Order No. 93 (S'86). On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC with regard to imports as follows: WHEREAS, importations by certain government agencies, including government-owned or controlled corporation, are exempt from the payment of customs duties and compensating tax; and WHEREAS, in order to reduce foreign exchange spending and to protect domestic industries, it is necessary to restrict and regulate such tax-free importations.

NOW THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers vested in me by the Constitution, and do hereby decree and order the following: Sec. 1. All importations of any government agency, including government-owned or controlled corporations which are exempt from the payment of customs duties and internal revenue taxes, shall be subject to the prior approval of an Inter-Agency Committee which shall insure compliance with the following conditions: (a) That no such article of local manufacture are available in sufficient quantity and comparable quality at reasonable prices; (b) That the articles to be imported are directly and actually needed and will be used exclusively by the grantee of the exemption for its operations and projects or in the conduct of its functions; and (c) The shipping documents covering the importation are in the name of the grantee to whom the goods shall be delivered directly by customs authorities. xxx xxx xxx Sec. 3. The Committee shall have the power to regulate and control the tax-free importation of government agencies in accordance with the conditions set forth in Section 1 hereof and the regulations to be promulgated to implement the provisions of this Decree. Provided, however, That any government agency or government-owned or controlled corporation, or any local manufacturer or business firm adversely affected by any decision or ruling of the Inter-Agency Committee may file an appeal with the Office of the President within ten days from the date of notice thereof. . . . . xxx xxx xxx Sec. 6. . . . . Section 13 of Republic Act No. 6395; . . .. and all similar provisions of all general and special laws and decrees are hereby amended accordingly. xxx xxx xxx On July 30, 1977, P.D. 1177 was issued as it was

. . . declared the policy of the State to formulate and implement a National Budget that is an instrument of national development, reflective of national objectives, strategies and plans. The budget shall be supportive of and consistent with the socio-economic development plan and shall be oriented towards the achievement of explicit objectives and expected results, to ensure that funds are utilized and operations are conducted effectively, economically and efficiently. The national budget shall be formulated within a context of a regionalized government structure and of the totality of revenues and other receipts, expenditures and borrowings of all levels of government-owned or controlled corporations. The budget shall likewise be prepared within the context of the national long-term plan and of a long-term budget program. 43
In line with such policy, the law decreed that All units of government, including government-owned or controlled corporations, shall pay income taxes, customs duties and other taxes and fees are imposed under revenues laws: provided, that organizations otherwise exempted by law from the payment of such taxes/duties may ask for a subsidy from the General Fund in the exact amount of taxes/duties due: provided, further, that a procedure shall be established by the

Secretary of Finance and the Commissioner of the Budget, whereby such subsidies shall automatically be considered as both revenue and expenditure of the General Fund. 44 The law also declared that —

[A]ll laws, decrees, executive orders, rules and regulations or parts thereof which are inconsistent with the provisions of the Decree are hereby repealed and/or modified accordingly. 45
On July 11, 1984, most likely due to the economic morass the Government found itself in after the Aquino assassination, P.D. No. 1931 was issued to reiterate that:

WHEREAS, Presidential Decree No. 1177 has already expressly repealed the grant of tax privileges to any government-owned or controlled corporation and all other units of government; 46
and since there was a

. . . need for government-owned or controlled corporations and all other units of government enjoying tax privileges to share in the requirements of development, fiscal or otherwise, by paying the duties, taxes and other charges due from them. 47
it was decreed that: Sec. 1. The provisions of special on general law to the contrary notwithstanding, all exemptions from the payment of duties, taxes, fees, imposts and other charges heretofore granted in favor of government-owned or controlled corporations including their subsidiaries, are hereby withdrawn. Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the recommendation of the Fiscal Incentives Review Board created under Presidential Decree No. 776, is hereby empowered to restore, partially or totally, the exemptions withdrawn by Section 1 above, any applicable tax and duty, taking into account, among others, any or all of the following: 1) The effect on the relative price levels; 2) The relative contribution of the corporation to the revenue generation effort; 3) The nature of the activity in which the corporation is engaged in; or 4) In general the greater national interest to be served. xxx xxx xxx Sec. 5. The provisions of Presidential Decree No. 1177 as well as all other laws, decrees, executive orders, administrative orders, rules, regulations or parts thereof which are inconsistent with this Decree are hereby repealed, amended or modified accordingly. On December 17, 1986, E.O. No. 93 (S'86) was issued with a view to correct presidential restoration or grant of tax exemption to other government and private entities without benefit of review by the Fiscal Incentives Review Board, to wit:

WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984 and October 14, 1984, respectively, withdrew the tax and duty exemption privileges, including the preferential tax treatment, of government and private entities with certain exceptions, in order that the requirements of national economic development, in terms of fiscals and other resources, may be met more adequately; xxx xxx xxx WHEREAS, in addition to those tax and duty exemption privileges were restored by the Fiscal Incentives Review Board (FIRB), a number of affected entities, government and private, had their tax and duty exemption privileges restored or granted by Presidential action without benefit or review by the Fiscal Incentives Review Board (FIRB); xxx xxx xxx Since it was decided that: [A]ssistance to government and private entities may be better provided where necessary by explicit subsidy and budgetary support rather than tax and duty exemption privileges if only to improve the fiscal monitoring aspects of government operations. It was thus ordered that: Sec. 1. The Provisions of any general or special law to the contrary notwithstanding, all tax and duty incentives granted to government and private entities are hereby withdrawn, except: a) those covered by the non-impairment clause of the Constitution; b) those conferred by effective internation agreement to which the Government of the Republic of the Philippines is a signatory; c) those enjoyed by enterprises registered with: (i) the Board of Investment pursuant to Presidential Decree No. 1789, as amended; (ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66 as amended; (iii) the Philippine Veterans Investment Development Corporation Industrial Authority pursuant to Presidential Decree No. 538, was amended. d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of Instructions No. 1416; e) those conferred under the four basic codes namely: (i) the Tariff and Customs Code, as amended; (ii) the National Internal Revenue Code, as amended; (iii) the Local Tax Code, as amended;

(iv) the Real Property Tax Code, as amended; f) those approved by the President upon the recommendation of the Fiscal Incentives Review Board. Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as amended, is hereby authorized to: a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part; b) revise the scope and coverage of tax and/or duty exemption that may be restored; c) impose conditions for the restoration of tax and/or duty exemption; d) prescribe the date of period of effectivity of the restoration of tax and/or duty exemption; e) formulate and submit to the President for approval, a complete system for the grant of subsidies to deserving beneficiaries, in lieu of or in combination with the restoration of tax and duty exemptions or preferential treatment in taxation, indicating the source of funding therefor, eligible beneficiaries and the terms and conditions for the grant thereof taking into consideration the international commitment of the Philippines and the necessary precautions such that the grant of subsidies does not become the basis for countervailing action. Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review Board shall take into account any or all of the following considerations: a) the effect on relative price levels; b) relative contribution of the beneficiary to the revenue generation effort; c) nature of the activity the beneficiary is engaged; and d) in general, the greater national interest to be served. xxx xxx xxx Sec. 5. All laws, orders, issuances, rules and regulations or parts thereof inconsistent with this Executive Order are hereby repealed or modified accordingly. E.O. No. 93 (S'86) was decreed to be effective 48 upon the promulgation of the rules and regulations, to be issued by the Ministry of Finance. 49 Said rules and regulations were promulgated and published in the Official Gazette on February 23, 1987. These became effective on the 15th day after promulgation 50 in the Official Gasetter, 51which 15th day was March 10, 1987. III Now to some definitions. We refer to the very simplistic approach that all would-be lawyers, learn in their TAXATION I course, which fro convenient reference, is as follows: Classifications or kinds of Taxes: According to Persons who pay or who bear the burden:

a. Direct Tax — the where the person supposed to pay the tax really pays it. WITHOUT transferring the burden to someone else. Examples: Individual income tax, corporate income tax, transfer taxes (estate tax, donor's tax), residence tax, immigration tax b. Indirect Tax — that where the tax is imposed upon goods BEFORE reaching the consumer who ultimately pays for it, not as a tax, but as a part of the purchase price.

Examples: the internal revenue indirect taxes (specific tax, percentage taxes, (VAT) and the tariff and customs indirect taxes (import duties, special import tax and other dues) 52
IV To simply matter, the issues raised by petitioner in his motion for reconsideration can be reduced to the following: (1) What kind of tax exemption privileges did NPC have? (2) For what periods in time were these privileges being enjoyed? (3) If there are taxes to be paid, who shall pay for these taxes? V Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as the phrase "all forms of taxes etc.," in its section 10, amending Section 13, R.A. No. 6395, as amended by P.D. No. 380, does not expressly include "indirect taxes." His point is not well-taken. A chronological review of the NPC laws will show that it has been the lawmaker's intention that the NPC was to be completely tax exempt from all forms of taxes — direct and indirect. NPC's tax exemptions at first applied to the bonds it was authorized to float to finance its operations upon its creation by virtue of C.A. No. 120. When the NPC was authorized to contract with the IBRD for foreign financing, any loans obtained were to be completely tax exempt. After the NPC was authorized to borrow from other sources of funds — aside issuance of bonds — it was again specifically exempted from all types of taxes "to facilitate payment of its indebtedness." Even when the ceilings for domestic and foreign borrowings were periodically increased, the tax exemption privileges of the NPC were maintained. NPC's tax exemption from real estate taxes was, however, specifically withdrawn by Rep. Act No. 987, as above stated. The exemption was, however, restored by R.A. No. 6395. Section 13, R.A. No. 6395, was very comprehensive in its enumeration of the tax exemptions allowed NPC. Its section 13(d) is the starting point of this bone of contention among the parties. For easy reference, it is reproduced as follows: [T]he Corporation is hereby declared exempt:

xxx xxx xxx (d) From all taxes, duties, fees, imposts and all other charges imposed by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the Corporation in the generation, transmission, utilization, and sale of electric power. P.D. No. 380 added phrase "directly or indirectly" to said Section 13(d), which now reads as follows: xxx xxx xxx (d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the Republic of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum products used by the Corporation in the generation, transmission, utilization and sale of electric power. (Emphasis supplied) Then came P.D. No. 938 which amended Sec. 13(a), (b), (c) and (d) into one very simple paragraph as follows: The Corporation shall be non-profit and shall devote all its returns from its capital investment as well as excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and obligations and in furtherance and effective implementation of the policy enunciated in Section one of this Act, the Corporation, including its subsidiaries, is hereby declared exempt from the payment of ALL FORMS OF taxes, duties, fees, imposts as well as costs and service fees including filing fees, appeal bonds, supersedeas bonds, in any court or administrative proceedings. (Emphasis supplied) Petitioner reminds Us that:

[I]t must be borne in mind that Presidential Decree Nos. 380 and 938 were issued by one man, acting as such the Executive and Legislative.
xxx xxx xxx

53

[S]ince both presidential decrees were made by the same person, it would have been very easy for him to retain the same or similar language used in P.D. No. 380 P.D. No. 938 if his intention were to preserve the indirect tax exemption of NPC. 54
Actually, P.D. No. 938 attests to the ingenuousness of then President Marcos no matter what his fault were. It should be noted that section 13, R.A. No. 6395, provided for tax exemptions for the following items: 13(a) : court or administrative proceedings; 13(b) : income, franchise, realty taxes; 13(c) : import of foreign goods required for its operations and projects; 13(d) : petroleum products used in generation of electric power. P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF TAXES, ETC.,", included 13(a) under the "as well as" clause and added PNOC subsidiaries as qualified for tax exemptions. This is the only conclusion one can arrive at if he has read all the NPC laws in the order of enactment or issuance as narrated above in part I hereof. President Marcos must have considered all the NPC statutes from

C.A. No. 120 up to its latest amendments, P.D. No. 380, P.D. No. 395 and P.D. No. 759, AND came up a very simple Section 13, R.A. No. 6395, as amended by P.D. No. 938.

55

with

One common theme in all these laws is that the NPC must be enable to pay its indebtedness 56 which, as of P.D. No. 938, was P12 Billion in total domestic indebtedness, at any one time, and U$4 Billion in total foreign loans at any one time. The NPC must be and has to be exempt from all forms of taxes if this goal is to be achieved. By virtue of P.D. No. 938 NPC's capital stock was raised to P8 Billion. It must be remembered that to pay the government share in its capital stock P.D. No. 758 was issued mandating that P200 Million would be appropriated annually to cover the said unpaid subscription of the Government in NPC's authorized capital stock. And significantly one of the sources of this annual appropriation of P200 million is TAX MONEY accruing to the General Fund of the Government. It does not stand to reason then that former President Marcos would order P200 Million to be taken partially or totally from tax money to be used to pay the Government subscription in the NPC, on one hand, and then order the NPC to pay all its indirect taxes, on the other. The above conclusion that then President Marcos lumped up Sections 13 (b), 13 (c) and (d) into the phrase "All FORMS OF" is supported by the fact that he did not do the same for the tax exemption provision for the foreign loans to be incurred. The tax exemption on foreign loans found in Section 8(b), R.A. No. 6395, reads as follows:

The loans, credits and indebtedness contracted under this subsection and the payment of the principal, interest and other charges thereon, as well as the importation of machinery, equipment, materials and supplies by the Corporation, paid from the proceeds of any loan, credit or indebtedness incurred under this Act, shall also be exempt from all taxes, fees, imposts, other charges and restrictions, including import restrictions, by the Republic of the Philippines, or any of its agencies and political subdivisions. 57
The same was amended by P.D. No. 380 as follows:

The loans, credits and indebtedness contracted this subsection and the payment of the principal, interest and other charges thereon, as well as the importation of machinery, equipment, materials, supplies and services, by the Corporation, paid from the proceeds of any loan, credit or indebtedness incurred under this Act, shall also be exempt from all direct and indirect taxes, fees, imposts, other charges and restrictions, including import restrictions previously and presently imposed, and to be imposed by the Republic of the Philippines, or any of its agencies and political subdivisions. 58 (Emphasis supplied)
P.D. No. 938 did not amend the same 59 and so the tax exemption provision in Section 8 (b), R.A. No. 6395, as amended by P.D. No. 380, still stands. Since the subject matter of this particular Section 8 (b) had to do only with loans and machinery imported, paid for from the proceeds of these foreign loans, THERE WAS NO OTHER SUBJECT MATTER TO LUMP IT UP WITH, and so, the tax exemption stood as is — with the express mention of "direct and indirect" tax exemptions. And this "direct and indirect" tax exemption privilege extended to "taxes, fees, imposts, other charges . . . to be imposed" in the future — surely, an indication that the lawmakers wanted the NPC to be exempt from ALL FORMS of taxes — direct and indirect. It is crystal clear, therefore, that NPC had been granted tax exemption privileges for both direct and indirect taxes under P.D. No. 938. VI Five (5) years on into the now discredited New Society, the Government decided to rationalize government receipts and expenditures by formulating and implementing a National Budget. 60 The NPC, being a

government owned and controlled corporation had to be shed off its tax exemption status privileges under P.D. No. 1177. It was, however, allowed to ask for a subsidy from the General Fund in the exact amount of taxes/duties due. Actually, much earlier, P.D. No. 882 had already repealed NPC's tax-free importation privileges. It allowed, however, NPC to appeal said repeal with the Office of the President and to avail of tax-free importation privileges under its Section 1, subject to the prior approval of an Inter-Agency Committed created by virtue of said P.D. No. 882. It is presumed that the NPC, being the special creation of the State, was allowed to continue its tax-free importations. This Court notes that petitioner brought to the attention of this Court, the matter of the abolition of NPC's tax exemption privileges by P.D. No. 1177 61 only in his Common Reply/Comment to private Respondents' "Opposition" and "Comment" to Motion for Reconsideration, four (4) months AFTER the motion for Reconsideration had been filed. During oral arguments heard on July 9, 1992, he proceeded to discuss this tax exemption withdrawal as explained by then Secretary of Justice Vicente Abad Santos in opinion No. 133 (S '77). 62 A careful perusal of petitioner's senate Blue Ribbon Committee Report No. 474, the basis of the petition at bar, fails to yield any mention of said P.D. No. 1177's effect on NPC's tax exemption privileges. 63 Applying by analogy Pulido vs. Pablo,64 the court declares that the matter of P.D. No. 1177 abolishing NPC's tax exemption privileges was not seasonably invoked 65 by the petitioner. Be that as it may, the Court still has to discuss the effect of P.D. No. 1177 on the NPC tax exemption privileges as this statute has been reiterated twice in P.D. No. 1931. The express repeal of tax privileges of any government-owned or controlled corporation (GOCC). NPC included, was reiterated in the fourth whereas clause of P.D. No. 1931's preamble. The subsidy provided for in Section 23, P.D. No. 1177, being inconsistent with Section 2, P.D. No. 1931, was deemed repealed as the Fiscal Incentives Revenue Board was tasked with recommending the partial or total restoration of tax exemptions withdrawn by Section 1, P.D. No. 1931. The records before Us do not indicate whether or not NPC asked for the subsidy contemplated in Section 23, P.D. No. 1177. Considering, however, that under Section 16 of P.D. No. 1177, NPC had to submit to the Office of the President its request for the P200 million mandated by P.D. No. 758 to be appropriated annually by the Government to cover its unpaid subscription to the NPC authorized capital stock and that under Section 22, of the same P.D. No. NPC had to likewise submit to the Office of the President its internal operating budget for review due to capital inputs of the government (P.D. No. 758) and to the national government's guarantee of the domestic and foreign indebtedness of the NPC, it is clear that NPC was covered by P.D. No. 1177. There is reason to believe that NPC availed of subsidy granted to exempt GOCC's that suddenly found themselves having to pay taxes. It will be noted that Section 23, P.D. No. 1177, mandated that the Secretary of Finance and the Commissioner of the Budget had to establish the necessary procedure to accomplish the tax payment/tax subsidy scheme of the Government. In effect, NPC, did not put any cash to pay any tax as it got from the General Fund the amounts necessary to pay different revenue collectors for the taxes it had to pay. In his memorandum filed July 16, 1992, petitioner submits: [T]hat with the enactment of P.D. No. 1177 on July 30, 1977, the NPC lost all its duty and tax exemptions, whether direct or indirect. And so there was nothing to be withdrawn or to be restored under P.D. No. 1931, issued on June 11, 1984. This is evident from sections 1 and 2 of said P.D. No. 1931, which reads: "Section 1. The provisions of special or general law to the contrary notwithstanding, all exemptions from the payment of duties, taxes, fees, imports and other charges heretofore granted in favor of government-owned or controlled corporations including their subsidiaries are hereby withdrawn." Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the recommendation of the Fiscal Incentives Review Board created under

P.D. No. 776, is hereby empowered to restore partially or totally, the exemptions withdrawn by section 1 above. . . . Hence, P.D. No. 1931 did not have any effect or did it change NPC's status. Since it had already lost all its tax exemptions privilege with the issuance of P.D. No. 1177 seven (7) years earlier or on July 30, 1977, there were no tax exemptions to be withdrawn by section 1 which could later be restored by the Minister of Finance upon the recommendation of the FIRB under Section 2 of P.D. No. 1931. Consequently, FIRB resolutions No. 10-85, and 1-86, were all illegally and validly issued since FIRB acted beyond their statutory authority by creating and not merely restoring the tax exempt status of NPC. The same is true for FIRB Res. No. 17-87 which restored NPC's tax exemption under E.O. No. 93 which likewise abolished all duties and tax exemptions but allowed the President upon recommendation of the FIRB to restore those abolished. The Court disagrees. Applying by analogy the weight of authority that:

When a revised and consolidated act re-enacts in the same or substantially the same terms the provisions of the act or acts so revised and consolidated, the revision and consolidation shall be taken to be a continuation of the former act or acts, although the former act or acts may be expressly repealed by the revised and consolidated act; and all rights and liabilities under the former act or acts are preserved and may be enforced. 66
the Court rules that when P.D. No. 1931 basically reenacted in its Section 1 the first half of Section 23, P.D. No. 1177, on withdrawal of tax exemption privileges of all GOCC's said Section 1, P.D. No. 1931 was deemed to be a continuation of the first half of Section 23, P.D. No. 1177, although the second half of Section 23, P.D. No. 177, on the subsidy scheme for former tax exempt GOCCs had been expressly repealed by Section 2 with its institution of the FIRB recommendation of partial/total restoration of tax exemption privileges. The NPC tax privileges withdrawn by Section 1. P.D. No. 1931, were, therefore, the same NPC tax exemption privileges withdrawn by Section 23, P.D. No. 1177. NPC could no longer obtain a subsidy for the taxes it had to pay. It could, however, under P.D. No. 1931, ask for a total restoration of its tax exemption privileges, which, it did, and the same were granted under FIRB Resolutions Nos. 10-85 67 and 1-86 68 as approved by the Minister of Finance. Consequently, contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and 1-86 were both legally and validly issued by the FIRB pursuant to P.D. No. 1931. FIRB did not created NPC's tax exemption status but merely restored it. 69 Some quarters have expressed the view that P.D. No. 1931 was illegally issued under the now rather infamous Amendment No. 6 70 as there was no showing that President Marcos' encroachment on legislative prerogatives was justified under the then prevailing condition that he could legislate "only if the Batasang Pambansa 'failed or was unable to act inadequately on any matter that in his judgment required immediate action' to meet the 'exigency'. 71 Actually under said Amendment No. 6, then President Marcos could issue decrees not only when the Interim Batasang Pambansa failed or was unable to act adequately on any matter for any reason that in his (Marcos') judgment required immediate action, but also when there existed a grave emergency or a threat or thereof. It must be remembered that said Presidential Decree was issued only around nine (9) months after the Philippines unilaterally declared a moratorium on its foreign debt payments 72 as a result of the economic crisis triggered by loss of confidence in the government brought about by the Aquino assassination. The Philippines was then trying to reschedule its debt payments. 73 One of the big borrowers was the NPC 74 which had a US$ 2.1 billion white elephant of a Bataan Nuclear Power Plant on its back. 75 From all indications, it must have

been this grave emergency of a debt rescheduling which compelled Marcos to issue P.D. No. 1931, under his Amendment 6 power.76 The rule, therefore, that under the 1973 Constitution "no law granting a tax exemption shall be passed without the concurrence of a majority of all the members of the Batasang Pambansa" 77 does not apply as said P.D. No. 1931 was not passed by the Interim Batasang Pambansa but by then President Marcos under His Amendment No. 6 power. P.D. No. 1931 was, therefore, validly issued by then President Marcos under his Amendment No. 6 authority. Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this time, President Aquino. Its section 2 allowed the NPC to apply for the restoration of its tax exemption privileges. The same was granted under FIRB Resolution No. 17-87 78 dated June 24, 1987 which restored NPC's tax exemption privileges effective, starting March 10, 1987, the date of effectivity of E.O. No. 93 (S'86). FIRB Resolution No. 17-87 was approved by the President on October 5, 1987. 79 There is no indication, however, from the records of the case whether or not similar approvals were given by then President Marcos for FIRB Resolutions Nos. 10-85 and 1- 86. This has led some quarters to believe that a "travesty of justice" might have occurred when the Minister of Finance approved his own recommendation as Chairman of the Fiscal Incentives Review Board as what happened in Zambales Chromate vs. Court of Appeals 80 when the Secretary of Agriculture and Natural Resources approved a decision earlier rendered by him when he was the Director of Mines, 81 and inAnzaldo vs. Clave 82 where Presidential Executive Assistant Clave affirmed, on appeal to Malacañang, his own decision as Chairman of the Civil Service Commission. 83 Upon deeper analysis, the question arises as to whether one can talk about "due process" being violated when FIRB Resolutions Nos. 10-85 and 1-86 were approved by the Minister of Finance when the same were recommended by him in his capacity as Chairman of the Fiscal Incentives Review Board. 84 In Zambales Chromite and Anzaldo, two (2) different parties were involved: mining groups and scientistdoctors, respectively. Thus, there was a need for procedural due process to be followed. In the case of the tax exemption restoration of NPC, there is no other comparable entity — not even a single public or private corporation — whose rights would be violated if NPC's tax exemption privileges were to be restored. While there might have been a MERALCO before Martial Law, it is of public knowledge that the MERALCO generating plants were sold to the NPC in line with the State policy that NPC was to be the State implementing arm for the electrification of the entire country. Besides, MERALCO was limited to Manila and its environs. And as of 1984, there was no more MERALCO — as a producer of electricity — which could have objected to the restoration of NPC's tax exemption privileges. It should be noted that NPC was not asking to be granted tax exemption privileges for the first time. It was just asking that its tax exemption privileges be restored. It is for these reasons that, at least in NPC's case, the recommendation and approval of NPC's tax exemption privileges under FIRB Resolution Nos. 10-85 and 1-86, done by the same person acting in his dual capacities as Chairman of the Fiscal Incentives Review Board and Minister of Finance, respectively, do not violate procedural due process. While as above-mentioned, FIRB Resolution No. 17-87 was approved by President Aquino on October 5, 1987, the view has been expressed that President Aquino, at least with regard to E.O. 93 (S'86), had no authority to sub-delegate to the FIRB, which was allegedly not a delegate of the legislature, the power delegated to her thereunder. A misconception must be cleared up. When E.O No. 93 (S'86) was issued, President Aquino was exercising both Executive and Legislative powers. Thus, there was no power delegated to her, rather it was she who was delegating her power. She delegated it

to the FIRB, which, for purposes of E.O No. 93 (S'86), is a delegate of the legislature. Clearly, she was not subdelegating her power. And E.O. No. 93 (S'86), as a delegating law, was complete in itself — it set forth the policy to be carried out 85 and it fixed the standard to which the delegate had to conform in the performance of his functions, qualities having been enunciated by this Court in Pelaez vs. Auditor General. 87

86

both

Thus, after all has been said, it is clear that the NPC had its tax exemption privileges restored from June 11, 1984 up to the present. VII The next question that projects itself is — who pays the tax? The answer to the question could be gleamed from the manner by which the Commissaries of the Armed Forces of the Philippines sell their goods. By virtue of P.D. No. 83, 88 veterans, members of the Armed of the Philippines, and their defendants but groceries and other goods free of all taxes and duties if bought from any AFP Commissaries. In practice, the AFP Commissary suppliers probably treat the unchargeable specific, ad valorem and other taxes on the goods earmarked for AFP Commissaries as an added cost of operation and distribute it over the total units of goods sold as it would any other cost. Thus, even the ordinary supermarket buyer probably pays for the specific,ad valorem and other taxes which theses suppliers do not charge the AFP Commissaries. 89 IN MUCH THE SAME MANNER, it is clear that private respondents-oil companies have to absorb the taxes they add to the bunker fuel oil they sell to NPC. It should be stated at this juncture that, as early as May 14, 1954, the Secretary of Justice renders an opinion, 90wherein he stated and We quote: xxx xxx xxx Republic Act No. 358 exempts the National Power Corporation from "all taxes, duties, fees, imposts, charges, and restrictions of the Republic of the Philippines and its provinces, cities, and municipalities." This exemption is broad enough to include all taxes, whether direct or indirect, which the National Power Corporation may be required to pay, such as the specific tax on petroleum products. That it is indirect or is of no amount [should be of no moment], for it is the corporation that ultimately pays it. The view which refuses to accord the exemption because the tax is first paid by the seller disregards realities and gives more importance to form than to substance. Equity and law always exalt substance over from. xxx xxx xxx Tax exemptions are undoubtedly to be construed strictly but not so grudgingly as knowledge that many impositions taxpayers have to pay are in the nature of indirect taxes. To limit the exemption granted the National Power Corporation to direct taxes notwithstanding the general and broad language of the statue will be to thwrat the legislative intention in giving exemption from all forms of taxes and impositions without distinguishing between those that are direct and those that are not. (Emphasis supplied) In view of all the foregoing, the Court rules and declares that the oil companies which supply bunker fuel oil to NPC have to pay the taxes imposed upon said bunker fuel oil sold to NPC. By the very nature of indirect taxation, the economic burden of such taxation is expected to be passed on through the channels of commerce to the user or consumer of the goods sold. Because, however, the NPC has been exempted from both direct

and indirect taxation, the NPC must beheld exempted from absorbing the economic burden of indirect taxation. This means, on the one hand, that the oil companies which wish to sell to NPC absorb all or part of the economic burden of the taxes previously paid to BIR, which could they shift to NPC if NPC did not enjoy exemption from indirect taxes. This means also, on the other hand, that the NPC may refuse to pay the part of the "normal" purchase price of bunker fuel oil which represents all or part of the taxes previously paid by the oil companies to BIR. If NPC nonetheless purchases such oil from the oil companies — because to do so may be more convenient and ultimately less costly for NPC than NPC itself importing and hauling and storing the oil from overseas — NPC is entitled to be reimbursed by the BIR for that part of the buying price of NPC which verifiably represents the tax already paid by the oil company-vendor to the BIR. It should be noted at this point in time that the whole issue of who WILL pay these indirect taxes HAS BEEN RENDERED moot and academic by E.O. No. 195 issued on June 16, 1987 by virtue of which the ad valorem tax rate on bunker fuel oil was reduced to ZERO (0%) PER CENTUM. Said E.O. no. 195 reads as follows: EXECUTIVE ORDER NO. 195 AMENDING PARAGRAPH (b) OF SECTION 128 OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED BY REVISING THE EXCISE TAX RATES OF CERTAIN PETROLEUM PRODUCTS. xxx xxx xxx Sec. 1. Paragraph (b) of Section 128 of the National Internal Revenue Code, as amended, is hereby amended to read as follows: Par. (b) — For products subject to ad valorem tax only: PRODUCT AD VALOREM TAX RATE 1. . . . 2. . . . 3. . . . 4. Fuel oil, commercially known as bunker oil and on similar fuel oils having more or less the same generating power 0% xxx xxx xxx Sec. 3. This Executive Order shall take effect immediately. Done in the city of Manila, this 17th day of June, in the year of Our Lord, nineteen hundred and eighty-seven. (Emphasis supplied) The oil companies can now deliver bunker fuel oil to NPC without having to worry about who is going to bear the economic burden of the ad valorem taxes. What this Court will now dispose of are petitioner's complaints that some indirect tax money has been illegally refunded by the Bureau of Internal Revenue to the NPC and that more claims for refunds by the NPC are being processed for payment by the BIR. A case in point is the Tax Credit Memo issued by the Bureau of Internal Revenue in favor of the NPC last July 7, 1986 for P58.020.110.79 which were for "erroneously paid specific and ad valorem taxes during the period from October 31, 1984 to April 27, 1985. 91 Petitioner asks Us to declare this Tax Credit Memo illegal as the

PNC did not have indirect tax exemptions with the enactment of P.D. No. 938. As We have already ruled otherwise, the only questions left are whether NPC Is entitled to a tax refund for the tax component of the price of the bunker fuel oil purchased from Caltex (Phils.) Inc. and whether the Bureau of Internal Revenue properly refunded the amount to NPC. After P.D. No. 1931 was issued on June 11, 1984 withdrawing the tax exemptions of all GOCCs — NPC included, it was only on May 8, 1985 when the BIR issues its letter authority to the NPC authorizing it to withdraw tax-free bunker fuel oil from the oil companies pursuant to FIRB Resolution No. 10-85. 92 Since the tax exemption restoration was retroactive to June 11, 1984 there was a need. therefore, to recover said amount as Caltex (PhiIs.) Inc. had already paid the BIR the specific and ad valorem taxes on the bunker oil it sold NPC during the period above indicated and had billed NPC correspondingly. 93 It should be noted that the NPC, in its letter-claim dated September 11, 1985 to the Commissioner of the Bureau of Internal Revenue DID NOT CATEGORICALLY AND UNEQUIVOCALLY STATE that itself paid the P58.020,110.79 as part of the bunker fuel oil price it purchased from Caltex (Phils) Inc. 94 The law governing recovery of erroneously or illegally, collected taxes is section 230 of the National Internal Revenue Code of 1977, as amended which reads as follows: Sec. 230. Recover of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any Manner wrongfully collected. until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment; Provided, however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly, to have been erroneously paid. xxx xxx xxx Inasmuch as NPC filled its claim for P58.020,110.79 on September 11, 1985, 95 the Commissioner correctly issued the Tax Credit Memo in view of NPC's indirect tax exemption. Petitioner, however, asks Us to restrain the Commissioner from acting favorably on NPC's claim for P410.580,000.00 which represents specific and ad valorem taxes paid by the oil companies to the BIR from June 11, 1984 to the early part of 1986. 96 A careful examination of petitioner's pleadings and annexes attached thereto does not reveal when the alleged claim for a P410,580,000.00 tax refund was filed. It is only stated In paragraph No. 2 of the Deed of Assignment 97executed by and between NPC and Caltex (Phils.) Inc., as follows: That the ASSIGNOR(NPC) has a pending tax credit claim with the Bureau of Internal Revenue amounting to P442,887,716.16. P58.020,110.79 of which is due to Assignor's oil purchases from the Assignee (Caltex [Phils.] Inc.) Actually, as the Court sees it, this is a clear case of a "Mexican standoff." We cannot restrain the BIR from refunding said amount because of Our ruling that NPC has both direct and indirect tax exemption privileges. Neither can We order the BIR to refund said amount to NPC as there is no pending petition for review on certiorari of a suit for its collection before Us. At any rate, at this point in time, NPC can no longer file any suit to collect said amount EVEN IF lt has previously filed a claim with the BIR because it is time-barred under Section 230 of the National Internal Revenue Code of 1977. as amended, which states:

In any case, no such suit or proceeding shall be begun after the expiration of two years from the date of payment of the tax or penalty REGARDLESS of any supervening cause that may arise afterpayment. . . . (Emphasis supplied) The date of the Deed of Assignment is June 6. 1986. Even if We were to assume that payment by NPC for the amount of P410,580,000.00 had been made on said date. it is clear that more than two (2) years had already elapsed from said date. At the same time, We should note that there is no legal obstacle to the BIR granting, even without a suit by NPC, the tax credit or refund claimed by NPC, assuming that NPC's claim had been made seasonably, and assuming the amounts covered had actually been paid previously by the oil companies to the BIR. WHEREFORE, in view of all the foregoing, the Motion for Reconsideration of petitioner is hereby DENIED for lack of merit and the decision of this Court promulgated on May 31, 1991 is hereby AFFIRMED. SO ORDERED. G.R. No. 140230 December 15, 2005 COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, Respondent. DECISION GARCIA, J.: In this petition for review on certiorari, the Commissioner of Internal Revenue (Commissioner) seeks the review and reversal of the September 17, 1999 Decision1 of the Court of Appeals (CA) in CA-G.R. No. SP 47895, affirming, in effect, the February 18, 1998 decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5178, a claim for tax refund/credit instituted by respondent Philippine Long Distance Company (PLDT) against petitioner for taxes it paid to the Bureau of Internal Revenue (BIR) in connection with its importation in 1992 to 1994 of equipment, machineries and spare parts. The facts: PLDT is a grantee of a franchise under Republic Act (R.A.) No. 7082 to install, operate and maintain a telecommunications system throughout the Philippines. For equipment, machineries and spare parts it imported for its business on different dates from October 1, 1992 to May 31, 1994, PLDT paid the BIR the amount of P164,510,953.00, broken down as follows: (a) compensating tax of P126,713,037.00; advance sales tax of P12,460,219.00 and other internal revenue taxes of P25,337,697.00. For similar importations made between March 1994 to May 31, 1994, PLDT paid P116,041,333.00 value-added tax (VAT). On March 15, 1994, PLDT addressed a letter to the BIR seeking a confirmatory ruling on its tax exemption privilege under Section 12 of R.A. 7082, which reads: Sec. 12. The grantee … shall be liable to pay the same taxes on their real estate, buildings, and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay. In addition thereto, the grantee, … shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee, its successors or assigns, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee … shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Sec. 2 of Executive Order No. 72 unless the latter

enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. (Emphasis supplied). Responding, the BIR issued on April 19, 1994 Ruling No. UN-140-94,3 pertinently reading, as follows: PLDT shall be subject only to the following taxes, to wit: xxx xxx xxx 7. The 3% franchise tax on gross receipts which shall be in lieu of all taxes on its franchise or earnings thereof. xxx xxx xxx The "in lieu of all taxes" provision under Section 12 of RA 7082 clearly exempts PLDT from all taxes including the 10% value-added tax (VAT) prescribed by Section 101 (a) of the same Code on its importations of equipment, machineries and spare parts necessary in the conduct of its business covered by the franchise, except the aforementioned enumerated taxes for which PLDT is expressly made liable. xxx xxx xxx In view thereof, this Office … hereby holds that PLDT, is exempt from VAT on its importation of equipment, machineries and spare parts … needed in its franchise operations. Armed with the foregoing BIR ruling, PLDT filed on December 2, 1994 a claim4 for tax credit/refund of the VAT, compensating taxes, advance sales taxes and other taxes it had been paying "in connection with its importation of various equipment, machineries and spare parts needed for its operations" . With its claim not having been acted upon by the BIR, and obviously to forestall the running of the prescriptive period therefor, PLDT filed with the CTA a petition for review,5 therein seeking a refund of, or the issuance of a tax credit certificate in, the amount ofP280,552,286.00, representing compensating taxes, advance sales taxes, VAT and other internal revenue taxes alleged to have been erroneously paid on its importations from October 1992 to May 1994. The petition was docketed in said court as CTA Case No. 5178. On February 18, 1998, the CTA rendered a decision6 granting PLDT‘s petition, pertinently saying: This Court has noted that petitioner has included in its claim receipts covering the period prior to December 16, 1992, thus, prescribed and barred from recovery. In conclusion, We find that the petitioner is entitled to the reduced amount of P223,265,276.00 after excluding from the final computation those taxes that were paid prior to December 16, 1992 as they fall outside the two-year prescriptive period for claiming for a refund as provided by law. The computation of the refundable amount is summarized as follows: COMPENSATING TAX Total amount claimed P126,713.037.00 Less: a) Amount already prescribed: xxx Total P 38,015,132.00 b) Waived by petitioner (Exh. B-216) P 1,440,874.00 P39,456,006.00

Amount refundable P87,257,031.00 ADVANCE SALES TAX Total amount claimed P12,460.219.00 Less amount already prescribed: P5,043,828.00 Amount refundable P7,416,391.00 OTHER BIR TAXES Total amount claimed P25,337,697.00 Less amount already prescribed: 11,187,740.00 Amount refundable P14,149,957.00 VALUE ADDED TAX Total amount claimed P116.041,333.00 Less amount waived by petitioner (unaccounted receipts) 1,599,436.00 Amount refundable P114,441,897.00 TOTAL AMOUNT REFUNDABLE P223,265,276.00, ============ (Breakdown omitted) and accordingly disposed, as follows: WHEREFORE, in view of all the foregoing, this Court finds the instant petition meritorious and in accordance with law. Accordingly, respondent is hereby ordered to REFUND or to ISSUE in favor of petitioner a Tax Credit Certificate in the reduced amount of P223,265,276.00 representing erroneously paid value-added taxes, compensating taxes, advance sales taxes and other BIR taxes on its importation of equipments (sic), machineries and spare parts for the period covering the taxable years 1992 to 1994. Noticeably, the CTA decision, penned by then Associate Justice Ramon O. de Veyra, with then CTA Presiding Judge Ernesto D. Acosta, concurring, is punctuated by a dissenting opinion7 of Associate Judge Amancio Q. Saga who maintained that the phrase "in lieu of all taxes" found in Section 12 of R.A. No. 7082, supra, refers to exemption from "direct taxes only" and does not cover "indirect taxes", such as VAT, compensating tax and advance sales tax. In time, the BIR Commissioner moved for a reconsideration but the CTA, in its Resolution8 of May 7, 1998, denied the motion, with Judge Amancio Q. Saga reiterating his dissent.9 Unable to accept the CTA decision, the BIR Commissioner elevated the matter to the Court of Appeals (CA) by way of petition for review, thereat docketed as CA-G.R. No. 47895.

As stated at the outset hereof, the appellate court, in the herein challenged Decision10 dated September 17, 1999, dismissed the BIR‘s petition, thereby effectively affirming the CTA‘s judgment. Relying on its ruling in an earlier case between the same parties and involving the same issue – CA-G.R. SP No. 40811, decided 16 February 1998 – the appellate court partly wrote in its assailed decision: This Court has already spoken on the issue of what taxes are referred to in the phrase "in lieu of all taxes" found in Section 12 of R.A. 7082. There are no reasons to deviate from the ruling and the same must be followed pursuant to the doctrine of stare decisis. xxx. "Stare decisis et non quieta movere. Stand by the decision and disturb not what is settled." Hence, this recourse by the BIR Commissioner on the lone assigned error that: THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT IS EXEMPT FROM THE PAYMENT OF VALUE-ADDED TAXES, COMPENSATING TAXES, ADVANCE SALES TAXES AND OTHER BIR TAXES ON ITS IMPORTATIONS, BY VIRTUE OF THE PROVISION IN ITS FRANCHISE THAT THE 3% FRANCHISE TAX ON ITS GROSS RECEIPTS SHALL BE IN LIEU OF ALL TAXES ON ITS FRANCHISE OR EARNINGS THEREOF. There is no doubt that, insofar as the Court of Appeals is concerned, the issue petitioner presently raises had been resolved by that court in CA-G.R. SP No. 40811, entitled Commissioner of Internal Revenue vs. Philippine Long Distance Company. There, the Sixteenth Division of the appellate court declared that under the express provision of Section 12 of R.A. 7082, supra, "the payment [by PLDT] of the 3% franchise tax of [its] gross receipts shall be in lieu of all taxes" exempts PLDT from payment of compensating tax, advance sales tax, VAT and other internal revenue taxes on its importation of various equipment, machinery and spare parts for the use of its telecommunications system. Dissatisfied with the CA decision in that case, the BIR Commissioner initially filed with this Court a motion for time to file a petition for review, docketed in this Court as G.R. No. 134386. However, on the last day for the filing of the intended petition, the then BIR Commissioner had a change of heart and instead manifested11 that he will no longer pursue G.R. No. 134386, there being no compelling grounds to disagree with the Court of Appeals‘ decision in CA-G.R. 40811. Consequently, on September 28, 1998, the Court issued a Resolution12 in G.R. No. 134386 notifying the parties that "no petition" was filed in said case and that the CA judgment sought to be reviewed therein "has now become final and executory". Pursuant to said Resolution, an Entry of Judgment13 was issued by the Court of Appeals in CA-G.R. SP No. 40811. Hence, the CA‘s dismissal of CAG.R. No. 47895 on the additional ground of stare decisis. Under the doctrine of stare decisis et non quieta movere, a point of law already established will, generally, be followed by the same determining court and by all courts of lower rank in subsequent cases where the same legal issue is raised.14 For reasons needing no belaboring, however, the Court is not at all concluded by the ruling of the Court of Appeals in its earlier CA-G.R. SP No. 47895. The Court has time and again stated that the rule on stare decisis promotes stability in the law and should, therefore, be accorded respect. However, blind adherence to precedents, simply as precedent, no longer rules. More important than anything else is that the court is right,15 thus its duty to abandon any doctrine found to be in violation of the law in force.16 As it were, the former BIR Commissioner‘s decision not to pursue his petition in G.R. No. 134386 denied the BIR, at least as early as in that case, the opportunity to obtain from the Court an authoritative interpretation of Section 12 of R.A. 7082. All is, however, not lost. For, the government is not estopped by acts or errors of its agents, particularly on matters involving taxes. Corollarily, the erroneous application of tax laws by public officers does not preclude the subsequent correct application thereof.17 Withal, the errors of certain administrative officers, if that be the case, should never be allowed to jeopardize the government‘s financial position.18 Hence, the need to address the main issue tendered herein.

According to the Court of Appeals, the "in lieu of all taxes" clause found in Section 12 of PLDT‘s franchise (R.A. 7082) covers all taxes, whether direct or indirect; and that said section states, in no uncertain terms, that PLDT‘s payment of the 3% franchise tax on all its gross receipts from businesses transacted by it under its franchise is in lieu of all taxes on the franchise or earnings thereof. In fine, the appellate court, agreeing with PLDT, posits the view that the word "all" encompasses any and all taxes collectible under the National Internal Revenue Code (NIRC), save those specifically mentioned in PLDT‘s franchise, such as income and real property taxes. The BIR Commissioner excepts. He submits that the exempting "in lieu of all taxes" clause covers direct taxes only, adding that for indirect taxes to be included in the exemption, the intention to include must be specific and unmistakable. He thus faults the Court of Appeals for erroneously declaring PLDT exempt from payment of VAT and other indirect taxes on its importations. To the Commissioner, PLDT‘s claimed entitlement to tax refund/credit is without basis inasmuch as the 3% franchise tax being imposed on PLDT is not a substitute for or in lieu of indirect taxes. The sole issue at hand is whether or not PLDT, given the tax component of its franchise, is exempt from paying VAT, compensating taxes, advance sales taxes and internal revenue taxes on its importations. Based on the possibility of shifting the incidence of taxation, or as to who shall bear the burden of taxation, taxes may be classified into either direct tax or indirect tax. In context, direct taxes are those that are exacted from the very person who, it is intended or desired, should pay them;19 they are impositions for which a taxpayer is directly liable on the transaction or business he is engaged in.20 On the other hand, indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else.21 Stated elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser as part of the price of goods sold or services rendered. To put the situation in graphic terms, by tacking the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax.22 Stated differently, a seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services, is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or end-user of such goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax.23 There can be no serious argument that PLDT, vis-à-vis its payment of internal revenue taxes on its importations in question, is effectively claiming exemption from taxes not falling under the category of direct taxes. The claim covers VAT, advance sales tax and compensating tax. The NIRC classifies VAT as "an indirect tax … the amount of [which] may be shifted or passed on to the buyer, transferee or lessee of the goods".24 As aptly pointed out by Judge Amancio Q. Saga in his dissent in C.T.A. Case No. 5178, the 10% VAT on importation of goods partakes of an excise tax levied on the privilege of importing articles. It is not a tax on the franchise of a business enterprise or on its earnings. It is imposed on all taxpayers who import goods (unless such importation falls under the category of an exempt transaction under Sec. 109 of the Revenue Code) whether or not the goods will eventually be sold, bartered, exchanged or utilized for personal consumption. The VAT on importation replaces the advance sales tax payable by regular importers who import articles for sale or as raw materials in the manufacture of finished articles for sale. 25 Advance sales tax has the attributes of an indirect tax because the tax-paying importer of goods for sale or of raw materials to be processed into merchandise can shift the tax or, to borrow from Philippine Acetylene Co, Inc. vs. Commissioner of Internal Revenue,26 lay the "economic burden of the tax", on the purchaser, by subsequently adding the tax to the selling price of the imported article or finished product.

Compensating tax also partakes of the nature of an excise tax payable by all persons who import articles, whether in the course of business or not.27 The rationale for compensating tax is to place, for tax purposes, persons purchasing from merchants in the Philippines on a more or less equal basis with those who buy directly from foreign countries.28 It bears to stress that the liability for the payment of the indirect taxes lies only with the seller of the goods or services, not in the buyer thereof. Thus, one cannot invoke one‘s exemption privilege to avoid the passing on or the shifting of the VAT to him by the manufacturers/suppliers of the goods he purchased.29 Hence, it is important to determine if the tax exemption granted to a taxpayer specifically includes the indirect tax which is shifted to him as part of the purchase price, otherwise it is presumed that the tax exemption embraces only those taxes for which the buyer is directly liable.30 Time and again, the Court has stated that taxation is the rule, exemption is the exception. Accordingly, statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority.31 To him, therefore, who claims a refund or exemption from tax payments rests the burden of justifying the exemption by words too plain to be mistaken and too categorical to be misinterpreted. 32 As may be noted, the clause "in lieu of all taxes" in Section 12 of RA 7082 is immediately followed by the limiting or qualifying clause "on this franchise or earnings thereof", suggesting that the exemption is limited to taxes imposed directly on PLDT since taxes pertaining to PLDT‘s franchise or earnings are its direct liability. Accordingly, indirect taxes, not being taxes on PLDT‘s franchise or earnings, are outside the purview of the " in lieu" provision. If we were to adhere to the appellate court‘s interpretation of the law that the "in lieu of all taxes" clauseencompasses the totality of all taxes collectible under the Revenue Code, then, the immediately following limiting clause "on this franchise and its earnings" would be nothing more than a pure jargon bereft of effect and meaning whatsoever. Needless to stress, this kind of interpretation cannot be accorded a governing sway following the familiar legal maxim redendo singula singulis meaning, take the words distributively and apply the reference. Under this principle, each word or phrase must be given its proper connection in order to give it proper force and effect, rendering none of them useless or superfluous. 33 Significantly, in Manila Electric Company [Meralco] vs. Vera,34 the Court declared the relatively broader exempting clause "shall be in lieu of all taxes and assessments of whatsoever nature … upon the privileges earnings, income franchise ... of the grantee" written in par. # 9 of Meralco‘s franchise as not so all encompassing as to embrace indirect tax, like compensating tax. There, the Court said: It is a well-settled rule or principle in taxation that a compensating tax … is an excise tax … one that is imposed on the performance of an act, the engaging in an occupation, or the enjoyment of a privilege. A tax levied upon property because of its ownership is a direct tax, whereas one levied upon property because of its use is an excise duty. …. The compensating tax being imposed upon … MERALCO, is an impost on its use of imported articles and is not in the nature of a direct tax on the articles themselves, the latter tax falling within the exemption. Thus, inInternational Business Machine Corporation vs. Collector of Internal Revenue, … which involved the collection of a compensating tax from the plaintiff-petitioner on business machines imported by it, this Court stated in unequivocal terms that "it is not the act of importation that is taxed under section 190 but the uses of imported goods not subjected to a sales tax" because the "compensating tax was expressly designated as a substitute to make up or compensate for the revenue lost to the government through the avoidance of sales taxes by means of direct purchases abroad. xxx xxx xxx xxx If it had been the legislative intent to exempt MERALCO from paying a tax on the use of imported equipments, the legislative body could have easily done so by expanding the provision of paragraph 9 and adding to the exemption such words as "compensating tax" or "purchases from abroad for use in its business," and the like.

It may be so that in Maceda vs. Macaraig, Jr.35 the Court held that an exemption from "all taxes" granted to the National Power Corporation (NPC) under its charter36 includes both direct and indirect taxes. But far from providing PLDT comfort, Maceda in fact supports the case of herein petitioner, the correct lesson of Macedabeing that an exemption from "all taxes" excludes indirect taxes, unless the exempting statute, like NPC‘s charter, is so couched as to include indirect tax from the exemption. Wrote the Court: xxx However, the amendment under Republic Act No. 6395 enumerated the details covered by the exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its operation. Presidential Decree No. 938 [NPC‘s amended charter) amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from "all forms of taxes, duties fees …." The use of the phrase "all forms" of taxes demonstrate the intention of the law to give NPC all the tax exemptions it has been enjoying before. …. xxx xxx xxx It is evident from the provisions of P.D. No. 938 that its purpose is to maintain the tax exemption of NPC from all forms of taxes including indirect taxes as provided under R.A. No. 6395 and P.D. 380 if it is to attain its goals. (Italics in the original; words in bracket added) Of similar import is what we said in Borja vs. Collector of Internal Revenue.37 There, the Court upheld the decision of the CTA denying a claim for refund of the compensating taxes paid on the importation of materials and equipment by a grantee of a heat and power legislative franchise containing an "in lieu" provision, rationalizing as follows: xxx Moreover, the petitioner‘s alleged exemption from the payment of compensating tax in the present case is not clear or expressed; unlike the exemption from the payment of income tax which was clear and expressed in the Carcar case. Unless it appears clearly and manifestly that an exemption is intended, the provision is to be construed strictly against the party claiming exemption. xxx. Jurisprudence thus teaches that imparting the "in lieu of all taxes" clause a literal meaning, as did the Court of Appeals and the CTA before it, is fallacious. It is basic that in construing a statute, it is the duty of courts to seek the real intent of the legislature, even if, by so doing, they may limit the literal meaning of the broad language.38 It cannot be over-emphasized that tax exemption represents a loss of revenue to the government and must, therefore, not rest on vague inference. When claimed, it must be strictly construed against the taxpayer who must prove that he falls under the exception. And, if an exemption is found to exist, it must not be enlarged by construction, since the reasonable presumption is that the state has granted in express terms all it intended to grant at all, and that, unless the privilege is limited to the very terms of the statute the favor would be extended beyond dispute in ordinary cases.39 All told, we fail to see how Section 12 of RA 7082 operates as granting PLDT blanket exemption from payment of indirect taxes, which, in the ultimate analysis, are not taxes on its franchise or earnings. PLDT has not shown its eligibility for the desired exemption. None should be granted. As a final consideration, the Court takes particular stock, as the CTA earlier did, of PLDT‘s allegation that the Bureau of Customs assessed the company for advance sales tax and compensating tax for importations entered between October 1, 1992 and May 31, 1994 when the value-added tax system already replaced, if not totally eliminated, advance sales and compensating taxes.40 Indeed, pursuant to Executive Order No. 27341 which took effect on January 1, 1988, a multi-stage value-added tax was put into place to replace the tax on original and subsequent sales tax.42 It stands to reason then, as urged by PLDT, that compensating tax and advance sales tax were no longer collectible internal revenue taxes under the NILRC when the Bureau of Customs made the assessments in question and collected the corresponding tax. Stated a bit differently, PLDT

was no longer under legal obligation to pay compensating tax and advance sales tax on its importation from 1992 to 1994. Parenthetically, petitioner has not made an issue about PLDT‘s allegations concerning the abolition of the provisions of the Tax Code imposing the payment of compensating and advance sales tax on importations and the non-existence of these taxes during the period under review. On the contrary, petitioner admits that the VAT on importation of goods has "replace[d] the compensating tax and advance sales tax under the old Tax Code".43 Given the above perspective, the amount PLDT paid in the concept of advance sales tax and compensating tax on the 1992 to 1994 importations were, in context, erroneous tax payments and would theoretically be refundable. It should be emphasized, however, that, such importations were, when made, already subject to VAT. Factoring in the fact that a portion of the claim was barred by prescription, the CTA had determined that PLDT is entitled to a total refundable amount of P94,673,422.00 (P87,257,031.00 of compensating tax + P7,416,391.00 =P94,673,422.00). Accordingly, it behooves the BIR to grant a refund of the advance sales tax and compensating tax in the total amount of P94,673,422.00, subject to the condition that PLDT present proof of payment of the corresponding VAT on said transactions. WHEREFORE, the petition is partially GRANTED. The Decision of the Court of Appeals in CA-G.R. No. 47895 dated September 17, 1999 is MODIFIED. The Commissioner of Internal Revenue is ORDERED to issue a Tax Credit Certificate or to refund to PLDT only the of P94,673,422.00 advance sales tax and compensating tax erroneously collected by the Bureau of Customs from October 1, 1992 to May 31, 1994, less the VAT which may have been due on the importations in question, but have otherwise remained uncollected. SO ORDERED. G.R. No. 173594 February 6, 2008

SILKAIR (SINGAPORE) PTE, LTD., petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, respondent. DECISION CARPIO MORALES, J.: Petitioner, Silkair (Singapore) Pte. Ltd. (Silkair), a corporation organized under the laws of Singapore which has a Philippine representative office, is an online international air carrier operating the Singapore-Cebu-DavaoSingapore, Singapore-Davao-Cebu-Singapore, and Singapore-Cebu-Singapore routes. On December 19, 2001, Silkair filed with the Bureau of Internal Revenue (BIR) a written application for the refund of P4,567,450.79 excise taxes it claimed to have paid on its purchases of jet fuel from Petron Corporation from January to June 2000.1 As the BIR had not yet acted on the application as of December 26, 2001, Silkair filed a Petition for Review2before the CTA following Commissioner of Internal Revenue v. Victorias Milling Co., Inc., et al.3 Opposing the petition, respondent Commissioner on Internal Revenue (CIR) alleged in his Answer that, among other things, Petitioner failed to prove that the sale of the petroleum products was directly made from a domestic oil company to the international carrier. The excise tax on petroleum products is the direct liability of the manufacturer/producer, and when added to the cost of the goods sold to the buyer, it is no longer a

tax but part of the price which the buyer has to pay to obtain the article.4 (Emphasis and underscoring supplied) By Decision of May 27, 2005, the Second Division of the CTA denied Silkair‘s petition on the ground that as the excise tax was imposed on Petron Corporation as the manufacturer of petroleum products, any claim for refund should be filed by the latter; and where the burden of tax is shifted to the purchaser, the amount passed on to it is no longer a tax but becomes an added cost of the goods purchased. Thus the CTA discoursed: The liability for excise tax on petroleum products that are being removed from its refinery is imposed on the manufacturer/producer (Section 130 of the NIRC of 1997). x x x xxxx While it is true that in the case of excise tax imposed on petroleum products, the seller thereof may shift the tax burden to the buyer, the latter is the proper party to claim for the refund in the case of exemption from excise tax. Since the excise tax was imposed upon Petron Corporation as the manufacturer of petroleum products, pursuant to Section 130(A)(2), and that the corresponding excise taxes were indeed, paid by it, . . . any claim for refund of the subject excise taxes should be filed by Petron Corporation as the taxpayer contemplated under the law. Petitioner cannot be considered as the taxpayer because it merely shouldered the burden of the excise tax and not the excise tax itself. Therefore, the right to claim for the refund of excise taxes paid on petroleum products lies with Petron Corporation who paid and remitted the excise tax to the BIR. Respondent, on the other hand, may only claim from Petron Corporation the reimbursement of the tax burden shifted to the former by the latter. The excise tax partaking the nature of an indirect tax, is clearly the liability of the manufacturer or seller who has the option whether or not to shift the burden of the tax to the purchaser. Where the burden of the tax is shifted to the [purchaser], the amount passed on to it is no longer a tax but becomes an added cost on the goods purchased which constitutes a part of the purchase price. The incidence of taxation or the person statutorily liable to pay the tax falls on Petron Corporation though the impact of taxation or the burden of taxation falls on another person, which in this case is petitioner Silkair.5 (Italics in the original; emphasis and underscoring supplied) Silkair filed a Motion for Reconsideration6 during the pendency of which or on September 12, 2005 the Bengzon Law Firm entered its appearance as counsel,7 without Silkair‘s then-counsel of record (Jimenez Gonzales Liwanag Bello Valdez Caluya & Fernandez or "JGLaw") having withdrawn as such. By Resolution8 of September 22, 2005, the CTA Second Division denied Silkair‘s motion for reconsideratio n. A copy of the Resolution was furnished Silkair‘s counsel JGLaw which received it on October 3, 2005. 9 On October 13, 2005, JGLaw, with the conformity of Silkair, filed its Notice of Withdrawal of Appearance.10 On even date, Silkair, through the Bengzon Law Firm, filed a Manifestation/Motion11 stating: Petitioner was formerly represented xxx by JIMENEZ GONZALES LIWANAG BELLO VALDEZ CALUYA & FERNANDEZ (JGLaw). 1. On 24 August 2005, petitioner served notice to JGLaw of its decision to cease all legal representation handled by the latter on behalf of the petitioner. Petitioner also requested JGLaw to make arrangements for the transfer of all files relating to its legal representation on behalf of petitioner to the undersigned counsel. x x x 2. The undersigned counsel was engaged to act as counsel for the petitioner in the aboveentitled case; and thus, filed its entry of appearance on 12 September 2005. x x x

3. The undersigned counsel, through petitioner, has received information that the Honorable Court promulgated a Resolution on petitioner‘s Motion for Reconsideration. To date, the undersigned counsel has yet to receive an official copy of the above-mentioned Resolution. In light of the foregoing, undersigned counsel hereby respectfully requests for an official copy of the Honorable Court‘s Resolution on petitioner‘s Motion for Reconsideration x x x.12 (Underscoring supplied) On October 14, 2005, the Bengzon Law Firm received its requested copy of the September 22, 2005 13 CTA Second Division Resolution. Thirty-seven days later or on October 28, 2005, Silkair, through said counsel, filed a Motion for Extension of Time to File Petition for Review14 before the CTA En Banc which gave it until November 14, 2005 to file a petition for review. On November 11, 2005, Silkair filed another Motion for Extension of Time.15 On even date, the Bengzon Law Firm informed the CTA of its withdrawal of appearance as counsel for Silkair with the information, that Silkair would continue to be represented by Atty. Teodoro A. Pastrana, who used to be with the firm but who had become a partner of the Pastrana and Fallar Law Offices.16 The CTA En Banc granted Silkair‘s second Motion for Extension of Time, giving Silkair until November 24, 2005 to file its petition for review. On November 17, 2005, Silkair filed its Petition for Review17 before the CTA En Banc. By Resolution of May 19,2006, the CTA En Banc dismissed18 Silkair‘s petition for review for having been filed out of time in this wise: A petitioner is given a period of fifteen (15) days from notice of award, judgment, final order or resolution, or denial of motion for new trial or reconsideration to appeal to the proper forum, in this case, the CTA En Banc. This is clear from both Section 11 and Section 9 of Republic Act No. 9282 x x x. xxxx The petitioner, through its counsel of record Jimenez, Gonzalez, L[iwanag], Bello, Valdez, Caluya & Fernandez Law Offices, received the Resolution dated September 22, 2005 on October 3, 2005. At that time, the petitioner had two counsels of record, namely, Jimenez, Gonzales, L[iwanag], Bello, Valdez, Caluya & Fernandez Law Offices and The Bengzon Law Firm which filed its Entry of Appearance on September 12, 2005. However, as of said date, Atty. Mary Jane B. Austria-Delgado of Jimenez, Gonzales, L[iwanag], Bello, Valdez, Caluya & Fernandez Law Offices was still the counsel of record considering that the Notice of Withdrawal of Appearance signed by Atty. Mary Jane B. AustriaDelgado was filed only on October 13, 2005 or ten (10) days after receipt of the September 22, 2005 Resolution of the Court‘s Second Division. This notwithstanding, Section 2 of Rule 13 of the Rules of Court provides that if any party has appeared by counsel, service upon him shall be made upon his counsel or one of them, unless service upon the party himself is ordered by the Court. Where a party is represented by more than one counsel of record, "notice to any one of the several counsel on record is equivalent to notice to all the counsel (Damasco vs. Arrieta, et. al., 7 SCRA 224)." Considering that petitioner, through its counsel of record, had received the September 22, 2005 Resolution as early as October 3, 2005, it had only until October 18, 2005 within which to file its Petition for Review. Petitioner only managed to file the Petition for Review with the Court En Bancon November 17, 2005 or [after] thirty (30) days had lapsed from the final date of October 18, 2005 to appeal. The argument that it requested Motions for Extension of Time on October 28, 2005 or ten (10) days from the appeal period and the second Motion for Extension of Time to file its Petition for Review on November 11, 2005 and its allowance by the CTA En Banc notwithstanding, the questioned Decision is no longer appealable for failure to timely file the necessary Petition for Review.19 (Emphasis in the original)

In a Separate Concurring Opinion,20 CTA Associate Justice Juanito C. Castañeda, Jr. posited that Silkair is not the proper party to claim the tax refund. Silkair filed a Motion for Reconsideration21 which the CTA En Banc denied.22 Hence, the present Petition for Review23 which raises the following issues: I. WHETHER OR NOT THE PETITION FOR REVIEW FILED WITH THE HONORABLE COURT OF TAX APPEALS EN BANC WAS TIMELY FILED. II. APPEAL BEING AN ESSENTIAL PART OF OUR JUDICIAL SYSTEM, WHETHER OR NOT PETITIONER SHOULD BE DEPRIVED OF ITS RIGHT TO APPEAL ON THE BASIS OF TECHNICALITY. III. ASSUMING THE HONORABLE SUPREME COURT WOULD HOLD THAT THE FILING OF THE PETITITON FOR REVIEW WITH THE HONORABLE COURT OF TAX APPEALS EN BANC WAS TIMELY, WHETHER OR NOT THE PETITIONER IS THE PROPER PARTY TO CLAIM FOR REFUND OR TAX CREDIT.24(Underscoring supplied) Silkair posits that "the instant case does not involve a situation where the petitioner was represented by two (2) counsels on record, such that notice to the former counsel would be held binding on the petitioner, as in the case of Damasco v. Arrieta, etc., et al.25 x x x heavily relied upon by the respondent";26 and that "the case of Dolores De Mesa Abad v. Court of Appeals27 has more appropriate application to the present case."28 In Dolores De Mesa Abad, the trial court issued an order of November 19, 1974 granting the therein private respondents‘ Motion for Annulment of documents and titles. The order was received by the therein petitioner‘s counsel of record, Atty. Escolastico R. Viola, on November 22, 1974 prior to which or on July 17, 1974, Atty. Vicente Millora of the Millora, Tobias and Calimlim Law Office had filed an "Appearance and Manifestation." Atty. Millora received a copy of the trial court‘s order on December 9, 1974. On January 4, 1975, the therein petitioners, through Atty. Ernesto D. Tobias also of the Millora, Tobias and Calimlim Law Office, filed their Notice of Appeal and Cash Appeal Bond as well as a Motion for Extension of the period to file a Record on Appeal. They filed the Record on Appeal on January 24, 1975. The trial court dismissed the appeal for having been filed out of time, which was upheld by the Court of Appeals on the ground that the period within which to appeal should be counted from November 22, 1974, the date Atty. Viola received a copy of the November 19, 1974 order. The appellate court held that Atty. Viola was still the counsel of record, he not having yet withdrawn his appearance as counsel for the therein petitioners. On petition for certiorari,29 this Court held x x x [R]espondent Court reckoned the period of appeal from the time petitioners‘ original counsel, Atty. Escolastico R. Viola, received the Order granting the Motion for Annulment of documents and titles on November 22, 1974. But as petitioners stress, Atty. Vicente Millora of the Millora, Tobias and Calimlim Law Office had filed an "Appearance and Manifestation" on July 16, 1974. Where there may have been no specific withdrawal by Atty. Escolastico R. Viola, for which he should be admonished, by the appearance of a new counsel, it can be said that Atty. Viola had ceased as counsel for petitioners. In fact, Orders subsequent to the aforesaid date were already sent by the trial Court to the Millora, Tobias and Calimlim Law Office and not to Atty. Viola. Under the circumstances, December 9, 1974 is the controlling date of receipt by petitioners‘ counsel and from which the period of appeal from the Order of November 19, 1974 should be reckoned. That being the case, petitioner‘s x x x appeal filed on January 4, 1975 was timely filed.30 (Underscoring supplied) The facts of Dolores De Mesa Abad are not on all fours with those of the present case. In any event, more recent jurisprudence holds that in case of failure to comply with the procedure established by Section 26, Rule 13831 of the Rules of Court re the withdrawal of a lawyer as a counsel in a case, the attorney of record is regarded as the counsel who should be served with copies of the judgments, orders and pleadings.32 Thus, where no notice of withdrawal or substitution of counsel has been shown, notice to counsel of record is, for all

purposes, notice to the client.33 The court cannot be expected to itself ascertain whether the counsel of record has been changed.34 In the case at bar, JGLaw filed its Notice of Withdrawal of Appearance on October 13, 200535 after the Bengzon Law Firm had entered its appearance. While Silkair claims it dismissed JGLaw as its counsel as early as August 24, 2005, the same was communicated to the CTA only on October 13, 2005.36 Thus, JGLaw was still Silkair‘s counsel of record as of October 3, 2005 when a copy of the September 22, 2005 resolution of the CTA Second Division was served on it. The service upon JGLaw on October 3, 2005 of the September 22, 2005 resolution of CTA Second Division was, therefore, for all legal intents and purposes, service to Silkair, and the CTA correctly reckoned the period of appeal from such date. TECHNICALITY ASIDE, on the merits, the petition just the same fails. Silkair bases its claim for refund or tax credit on Section 135 (b) of the NIRC of 1997 which reads Sec. 135. Petroleum Products sold to International Carriers and Exempt Entities of Agencies. – Petroleum products sold to the following are exempt from excise tax: xxxx (b) Exempt entities or agencies covered by tax treaties, conventions, and other international agreements for their use and consumption: Provided, however, That the country of said foreign international carrier or exempt entities or agencies exempts from similar taxes petroleum products sold to Philippine carriers, entities or agencies; x x x x x x x, and Article 4(2) of the Air Transport Agreement between the Government of the Republic of the Philippines and the Government of the Republic of Singapore (Air Transport Agreement between RP and Singapore) which reads Fuel, lubricants, spare parts, regular equipment and aircraft stores introduced into, or taken on board aircraft in the territory of one Contracting party by, or on behalf of, a designated airline of the other Contracting Party and intended solely for use in the operation of the agreed services shall, with the exception of charges corresponding to the service performed, be exempt from the same customs duties, inspection fees and other duties or taxes imposed in the territories of the first Contracting Party , even when these supplies are to be used on the parts of the journey performed over the territory of the Contracting Party in which they are introduced into or taken on board. The materials referred to above may be required to be kept under customs supervision and control. The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another.37 Section 130 (A) (2) of the NIRC provides that "[u]nless otherwise specifically allowed, the return shall be filed and the excise tax paid by the manufacturer or producer before removal of domestic products from place of production." Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore. Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser.38 Silkair nevertheless argues that it is exempt from indirect taxes because the Air Transport Agreement between RP and Singapore grants exemption "from the same customs duties, inspection fees and other duties or taxes imposed in the territory of the first Contracting Party."39 It invokes Maceda v. Macaraig, Jr.40 which upheld the claim for tax credit or refund by the National Power Corporation (NPC) on the ground that the NPC is exempt even from the payment of indirect taxes.

Silkairs‘s argument does not persuade. In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company,41 this Court clarified the ruling in Maceda v. Macaraig, Jr., viz: It may be so that in Maceda vs. Macaraig, Jr., the Court held that an exemption from "all taxes" granted to the National Power Corporation (NPC) under its charter includes both direct and indirect taxes. But far from providing PLDT comfort, Maceda in fact supports the case of herein petitioner, the correct lesson ofMaceda being that an exemption from "all taxes" excludes indirect taxes, unless the exempting statute, like NPC‘s charter, is so couched as to include indirect tax from the exemption. Wrote the Court: x x x However, the amendment under Republic Act No. 6395 enumerated the details covered by the exemption. Subsequently, P.D. 380, made even more specific the details of the exemption of NPC to cover, among others, both direct and indirect taxes on all petroleum products used in its operation. Presidential Decree No. 938 [NPC‘s amended chart er] amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from "all forms of taxes, duties[,] fees…" The use of the phrase "all forms" of taxes demonstrates the intention of the law to give NPC all the tax exemptions it has been enjoying before… xxxx It is evident from the provisions of P.D. No. 938 that its purpose is to maintain the tax exemption of NPC from all forms of taxes including indirect taxes as provided under R.A. No. 6395 and P.D. 380 if it is to attain its goals. (Italics in the original; emphasis supplied)42 The exemption granted under Section 135 (b) of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore cannot, without a clear showing of legislative intent, be construed as including indirect taxes. Statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority, 43 and if an exemption is found to exist, it must not be enlarged by construction.44 WHEREFORE, the petition is DENIED. Costs against petitioner. SO ORDERED. G.R. No. 151135 July 2, 2004

CONTEX CORPORATION, petitioner, vs. HON. COMMISSIONER OF INTERNAL REVENUE, respondent.

DECISION

QUISUMBING, J.:

For review is the Decision1 dated September 3, 2001, of the Court of Appeals, in CA-G.R. SP No. 62823, which reversed and set aside the decision2 dated October 13, 2000, of the Court of Tax Appeals (CTA). The CTA had ordered the Commissioner of Internal Revenue (CIR) to refund the sum of P683,061.90 to petitioner as erroneously paid input value-added tax (VAT) or in the alternative, to issue a tax credit certificate for said amount. Petitioner also assails the appellate court‘s Resolution, 3 dated December 19, 2001, denying the motion for reconsideration. Petitioner is a domestic corporation engaged in the business of manufacturing hospital textiles and garments and other hospital supplies for export. Petitioner‘s place of business is at the Subic Bay Freeport Zone (SBFZ). It is duly registered with the Subic Bay Metropolitan Authority (SBMA) as a Subic Bay Freeport Enterprise, pursuant to the provisions of Republic Act No. 7227.4 As an SBMA-registered firm, petitioner is exempt from all local and national internal revenue taxes except for the preferential tax provided for in Section 12 (c) 5 of Rep. Act No. 7227. Petitioner also registered with the Bureau of Internal Revenue (BIR) as a non-VAT taxpayer under Certificate of Registration RDO Control No. 95-180-000133. From January 1, 1997 to December 31, 1998, petitioner purchased various supplies and materials necessary in the conduct of its manufacturing business. The suppliers of these goods shifted unto petitioner the 10% VAT on the purchased items, which led the petitioner to pay input taxes in the amounts of P539,411.88 and P504,057.49 for 1997 and 1998, respectively.6 Acting on the belief that it was exempt from all national and local taxes, including VAT, pursuant to Rep. Act No. 7227, petitioner filed two applications for tax refund or tax credit of the VAT it paid. Mr. Edilberto Carlos, revenue district officer of BIR RDO No. 19, denied the first application letter, dated December 29, 1998. Unfazed by the denial, petitioner on May 4, 1999, filed another application for tax refund/credit, this time directly with Atty. Alberto Pagabao, the regional director of BIR Revenue Region No. 4. The second letter sought a refund or issuance of a tax credit certificate in the amount of P1,108,307.72, representing erroneously paid input VAT for the period January 1, 1997 to November 30, 1998. When no response was forthcoming from the BIR Regional Director, petitioner then elevated the matter to the Court of Tax Appeals, in a petition for review docketed as CTA Case No. 5895. Petitioner stressed that Section 112(A)7 if read in relation to Section 106(A)(2)(a)8 of the National Internal Revenue Code, as amended and Section 12(b)9 and (c) of Rep. Act No. 7227 would show that it was not liable in any way for any value-added tax. In opposing the claim for tax refund or tax credit, the BIR asked the CTA to apply the rule that claims for refund are strictly construed against the taxpayer. Since petitioner failed to establish both its right to a tax refund or tax credit and its compliance with the rules on tax refund as provided for in Sections 204 10 and 22911 of the Tax Code, its claim should be denied, according to the BIR. On October 13, 2000, the CTA decided CTA Case No. 5895 as follows: WHEREFORE, in view of the foregoing, the Petition for Review is hereby PARTIALLY GRANTED. Respondent is hereby ORDERED to REFUND or in the alternative to ISSUE A TAX CREDIT CERTIFICATE in favor of Petitioner the sum of P683,061.90, representing erroneously paid input VAT. SO ORDERED.12 In granting a partial refund, the CTA ruled that petitioner misread Sections 106(A)(2)(a) and 112(A) of the Tax Code. The tax court stressed that these provisions apply only to those entities registered as VAT taxpayers whose sales are zero-rated. Petitioner does not fall under this category, since it is a non-VAT taxpayer as evidenced by the Certificate of Registration RDO Control No. 95-180-000133 issued by RDO Rosemarie Ragasa of BIR RDO No. 18 of the Subic Bay Freeport Zone and thus it is exempt from VAT, pursuant to Rep. Act No. 7227, said the CTA.

Nonetheless, the CTA held that the petitioner is exempt from the imposition of input VAT on its purchases of supplies and materials. It pointed out that under Section 12(c) of Rep. Act No. 7227 and the Implementing Rules and Regulations of the Bases Conversion and Development Act of 1992, all that petitioner is required to pay as a SBFZ-registered enterprise is a 5% preferential tax. The CTA also disallowed all refunds of input VAT paid by the petitioner prior to June 29, 1997 for being barred by the two-year prescriptive period under Section 229 of the Tax Code. The tax court also limited the refund only to the input VAT paid by the petitioner on the supplies and materials directly used by the petitioner in the manufacture of its goods. It struck down all claims for input VAT paid on maintenance, office supplies, freight charges, and all materials and supplies shipped or delivered to the petitioner‘s Makati and Pasay City offices. Respondent CIR then filed a petition, docketed as CA-G.R. SP No. 62823, for review of the CTA decision by the Court of Appeals. Respondent maintained that the exemption of Contex Corp. under Rep. Act No. 7227 was limited only to direct taxes and not to indirect taxes such as the input component of the VAT. The Commissioner pointed out that from its very nature, the value-added tax is a burden passed on by a VAT registered person to the end users; hence, the direct liability for the tax lies with the suppliers and not Contex. Finding merit in the CIR‘s arguments, the appellate court decided CA-G.R. SP No. 62823 in his favor, thus: WHEREFORE, premises considered, the appealed decision is hereby REVERSED AND SET ASIDE. Contex‘s claim for refund of erroneously paid taxes is DENIED accordingly. SO ORDERED.13 In reversing the CTA, the Court of Appeals held that the exemption from duties and taxes on the importation of raw materials, capital, and equipment of SBFZ-registered enterprises under Rep. Act No. 7227 and its implementing rules covers only "the VAT imposable under Section 107 of the [Tax Code], which is a direct liability of the importer, and in no way includes the value-added tax of the seller-exporter the burden of which was passed on to the importer as an additional costs of the goods."14 This was because the exemption granted by Rep. Act No. 7227 relates to the act of importation and Section 10715 of the Tax Code specifically imposes the VAT on importations. The appellate court applied the principle that tax exemptions are strictly construed against the taxpayer. The Court of Appeals pointed out that under the implementing rules of Rep. Act No. 7227, the exemption of SBFZ-registered enterprises from internal revenue taxes is qualified as pertaining only to those for which they may be directly liable. It then stated that apparently, the legislative intent behind Rep. Act No. 7227 was to grant exemptions only to direct taxes, which SBFZ-registered enterprise may be liable for and only in connection with their importation of raw materials, capital, and equipment as well as the sale of their goods and services. Petitioner timely moved for reconsideration of the Court of Appeals decision, but the motion was denied. Hence, the instant petition raising as issues for our resolution the following: A. WHETHER OR NOT THE EXEMPTION FROM ALL LOCAL AND NATIONAL INTERNAL REVENUE TAXES PROVIDED IN REPUBLIC ACT NO. 7227 COVERS THE VALUE ADDED TAX PAID BY PETITIONER, A SUBIC BAY FREEPORT ENTERPRISE ON ITS PURCHASES OF SUPPLIES AND MATERIALS. B. WHETHER OR NOT THE COURT OF TAX APPEALS CORRECTLY HELD THAT PETITIONER IS ENTITLED TO A TAX CREDIT OR REFUND OF THE VAT PAID ON ITS PURCHASES OF SUPPLIES AND RAW MATERIALS FOR THE YEARS 1997 AND 1998.16 Simply stated, we shall resolve now the issues concerning: (1) the correctness of the finding of the Court of Appeals that the VAT exemption embodied in Rep. Act No. 7227 does not apply to petitioner as a purchaser; and (2) the entitlement of the petitioner to a tax refund on its purchases of supplies and raw materials for 1997 and 1998.

On the first issue, petitioner argues that the appellate court‘s restrictive interpretation of petitioner‘s VAT exemption as limited to those covered by Section 107 of the Tax Code is erroneous and devoid of legal basis. It contends that the provisions of Rep. Act No. 7227 clearly and unambiguously mandate that no local and national taxes shall be imposed upon SBFZ-registered firms and hence, said law should govern the case. Petitioner calls our attention to regulations issued by both the SBMA and BIR clearly and categorically providing that the tax exemption provided for by Rep. Act No. 7227 includes exemption from the imposition of VAT on purchases of supplies and materials. The respondent takes the diametrically opposite view that while Rep. Act No. 7227 does grant tax exemptions, such grant is not all-encompassing but is limited only to those taxes for which a SBFZ-registered business may be directly liable. Hence, SBFZ locators are not relieved from the indirect taxes that may be shifted to them by a VAT-registered seller. At this juncture, it must be stressed that the VAT is an indirect tax. As such, the amount of tax paid on the goods, properties or services bought, transferred, or leased may be shifted or passed on by the seller, transferor, or lessor to the buyer, transferee or lessee.17 Unlike a direct tax, such as the income tax, which primarily taxes an individual‘s ability to pay based on his income or net wealth, an indirect tax, such as the VAT, is a tax on consumption of goods, services, or certain transactions involving the same. The VAT, thus, forms a substantial portion of consumer expenditures. Further, in indirect taxation, there is a need to distinguish between the liability for the tax and the burden of the tax. As earlier pointed out, the amount of tax paid may be shifted or passed on by the seller to the buyer. What is transferred in such instances is not the liability for the tax, but the tax burden. In adding or including the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax. What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax.18 Stated differently, a seller who is directly and legally liable for payment of an indirect tax, such as the VAT on goods or services is not necessarily the person who ultimately bears the burden of the same tax. It is the final purchaser or consumer of such goods or services who, although not directly and legally liable for the payment thereof, ultimately bears the burden of the tax.19 Exemptions from VAT are granted by express provision of the Tax Code or special laws. Under VAT, the transaction can have preferential treatment in the following ways: (a) VAT Exemption. An exemption means that the sale of goods or properties and/or services and the use or lease of properties is not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously paid.20 This is a case wherein the VAT is removed at the exempt stage (i.e., at the point of the sale, barter or exchange of the goods or properties). The person making the exempt sale of goods, properties or services shall not bill any output tax to his customers because the said transaction is not subject to VAT. On the other hand, a VAT-registered purchaser of VAT-exempt goods/properties or services which are exempt from VAT is not entitled to any input tax on such purchase despite the issuance of a VAT invoice or receipt. 21 (b) Zero-rated Sales. These are sales by VAT-registered persons which are subject to 0% rate, meaning the tax burden is not passed on to the purchaser. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations.22 Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast, exemption only removes the VAT at the exempt stage, and it will actually increase, rather than reduce the total taxes paid by the exempt firm‘s business or non-retail customers. It is for this reason that a sharp distinction must be made between zero-rating and exemption in designating a value-added tax.23 Apropos, the petitioner‘s claim to VAT exemption in the instant case for its purchases of supplies and raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227, which basically exempts them from

all national and local internal revenue taxes, including VAT and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.24 On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not controverted by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per Certificate of Registration25 issued by the BIR. As such, it is exempt from VAT on all its sales and importations of goods and services. Petitioner‘s claim, however, for exemption from VAT for its purchases of supplies and raw materials is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities can claim Input VAT Credit/Refund. The point of contention here is whether or not the petitioner may claim a refund on the Input VAT erroneously passed on to it by its suppliers. While it is true that the petitioner should not have been liable for the VAT inadvertently passed on to it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner is not the proper party to claim such VAT refund. Section 4.100-2 of BIR‘s Revenue Regulations 7-95, as amended, or the "Consolidated Value-Added Tax Regulations" provide: Sec. 4.100-2. Zero-rated Sales. A zero-rated sale by a VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output tax. However, the input tax on his purchases of goods, properties or services related to such zero-rated sale shall be available as tax credit or refund in accordance with these regulations. The following sales by VAT-registered persons shall be subject to 0%: (a) Export Sales "Export Sales" shall mean ... (5) Those considered export sales under Articles 23 and 77 of Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987, and other special laws, e.g. Republic Act No. 7227, otherwise known as the Bases Conversion and Development Act of 1992. ... (c) Sales to persons or entities whose exemption under special laws, e.g. R.A. No. 7227 duly registered and accredited enterprises with Subic Bay Metropolitan Authority (SBMA) and Clark Development Authority (CDA), R. A. No. 7916, Philippine Economic Zone Authority (PEZA), or international agreements, e.g. Asian Development Bank (ADB), International Rice Research Institute (IRRI), etc. to which the Philippines is a signatory effectively subject such sales to zero-rate." Since the transaction is deemed a zero-rated sale, petitioner‘s supplier may claim an Input VAT credit with no corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the petitioner. On the second issue, it may not be amiss to re-emphasize that the petitioner is registered as a NON-VAT taxpayer and thus, is exempt from VAT. As an exempt VAT taxpayer, it is not allowed any tax credit on VAT (input tax) previously paid. In fine, even if we are to assume that exemption from the burden of VAT on petitioner‘s purchases did exist, petitioner is still not entitled to any tax credit or refund on the input tax previously paid as petitioner is an exempt VAT taxpayer.

Rather, it is the petitioner‘s suppliers who are the proper parties to claim the tax credit and accordingly refund the petitioner of the VAT erroneously passed on to the latter. Accordingly, we find that the Court of Appeals did not commit any reversible error of law in holding that petitioner‘s VAT exemption under Rep. Act No. 7227 is limited to the VAT on which it is directly liable as a seller and hence, it cannot claim any refund or exemption for any input VAT it paid, if any, on its purchases of raw materials and supplies. WHEREFORE, the petition is DENIED for lack of merit. The Decision dated September 3, 2001, of the Court of Appeals in CA-G.R. SP No. 62823, as well as its Resolution of December 19, 2001 are AFFIRMED. No pronouncement as to costs. SO ORDERED. G.R. No. 153866 February 11, 2005

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE TECHNOLOGY (PHILIPPINES), respondent. DECISION PANGANIBAN, J.: Business companies registered in and operating from the Special Economic Zone in Naga, Cebu -- like herein respondent -- are entities exempt from all internal revenue taxes and the implementing rules relevant thereto, including the value-added taxes or VAT. Although export sales are not deemed exempt transactions, they are nonetheless zero-rated. Hence, in the present case, the distinction between exempt entities and exempttransactions has little significance, because the net result is that the taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise, has complied with all requisites for claiming a tax refund of or credit for the input VAT it paid on capital goods it purchased. Thus, the Court of Tax Appeals and the Court of Appeals did not err in ruling that it is entitled to such refund or credit. The Case Before us is a Petition for Review1 under Rule 45 of the Rules of Court, seeking to set aside the May 27, 2002 Decision2 of the Court of Appeals (CA) in CA-GR SP No. 66093. The decretal portion of the Decision reads as follows: "WHEREFORE, foregoing premises considered, the petition for review is DENIED for lack of merit."3 The Facts The CA quoted the facts narrated by the Court of Tax Appeals (CTA), as follows: "As jointly stipulated by the parties, the pertinent facts x x x involved in this case are as follows: 1. [Respondent] is a resident foreign corporation duly registered with the Securities and Exchange Commission to do business in the Philippines, with principal office address at the new Cebu Township One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu; 2. [Petitioner] is sued in his official capacity, having been duly appointed and empowered to perform the duties of his office, including, among others, the duty to act and approve claims for refund or tax credit;

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

The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum represented the unutilized but substantiated input VAT paid on capital goods purchased for the period covering April 1, 1998 to June 30, 1999. The appellate court reasoned that respondent had availed itself only of the fiscal incentives under Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not of those under both Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916. Respondent was, therefore, considered exempt only from the payment of income tax when it opted for the income tax holiday in lieu of the 5 percent preferential tax on gross income earned. As a VAT-registered entity, though, it was still subject to the payment of other national internal revenue taxes, like the VAT. Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-1 of RR 7-95 were applicable. Having paid the input VAT on the capital goods it purchased, respondent correctly filed the administrative and judicial claims for its refund within the two-year prescriptive period. Such payments were -to the extent of the refundable value -- duly supported by VAT invoices or official receipts, and were not yet offset against any output VAT liability. Hence this Petition.5 Sole Issue Petitioner submits this sole issue for our consideration: "Whether or not respondent is entitled to the refund or issuance of Tax Credit Certificate in the amount ofP12,122,922.66 representing alleged unutilized input VAT paid on capital goods purchased for the period April 1, 1998 to June 30, 1999."6 The Court‘s Ruling The Petition is unmeritorious. Sole Issue: Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or Credit for Input VAT No doubt, as a PEZA-registered enterprise within a special economic zone,7 respondent is entitled to the fiscal incentives and benefits8 provided for in either PD 669 or EO 226.10 It shall, moreover, enjoy all privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 722711 and 7844.12 Preferential Tax Treatment Under Special Laws If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary, respondent shall not be subject to internal revenue laws and regulations for raw materials, supplies, articles, equipment, machineries, spare parts and wares, except those prohibited by law, brought into the zone to be stored, broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise processed, manipulated, manufactured, mixed or used directly or indirectly in such activities.13 Even so, respondent would enjoy a net-operating loss carry over; accelerated depreciation; foreign exchange and financial assistance; and exemption from export taxes, local taxes and licenses.14 Comparatively, the same exemption from internal revenue laws and regulations applies if EO 22615 is chosen. Under this law, respondent shall further be entitled to an income tax holiday; additional deduction for labor expense; simplification of customs procedure; unrestricted use of consigned equipment; access to a bonded manufacturing warehouse system; privileges for foreign nationals employed; tax credits on domestic capital equipment, as well as for taxes and duties on raw materials; and exemption from contractors‘ taxes, wharfage

dues, taxes and duties on imported capital equipment and spare parts, export taxes, duties, imposts and fees,16local taxes and licenses, and real property taxes.17 A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of raw materials, capital and equipment18 -- is, ipso facto, also accorded to the zone19 under RA 7916. Furthermore, the latter law -- notwithstanding other existing laws, rules and regulations to the contrary -- extends20 to that zone the provision stating that no local or national taxes shall be imposed therein.21 No exchange control policy shall be applied; and free markets for foreign exchange, gold, securities and future shall be allowed and maintained.22Banking and finance shall also be liberalized under minimum Bangko Sentral regulation with the establishment of foreign currency depository units of local commercial banks and offshore banking units of foreign banks.23 In the same vein, respondent benefits under RA 7844 from negotiable tax credits24 for locally-produced materials used as inputs. Aside from the other incentives possibly already granted to it by the Board of Investments, it also enjoys preferential credit facilities25 and exemption from PD 1853.26 From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment. 27 It is not subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on capital goods is an internal revenue tax from which petitioner as an entity is exempt. Although the transactions involving such tax are not exempt, petitioner as a VAT-registered person,28 however, is entitled to their credits. Nature of the VAT and the Tax Credit Method Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on every importation of goods, whether or not in the course of trade or business, or imposed on each sale, barter, exchange or lease of goods or properties or on each rendition of services in the course of trade or business29 as they pass along the production and distribution chain, the tax being limited only to the value added30 to such goods, properties or services by the seller, transferor or lessor.31 It is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services. 32 As such, it should be understood not in the context of the person or entity that is primarily, directly and legally liable for its payment, but in terms of its nature as a tax on consumption.33 In either case, though, the same conclusion is arrived at. The law34 that originally imposed the VAT in the country, as well as the subsequent amendments of that law, has been drawn from the tax credit method.35 Such method adopted the mechanics and self-enforcement features of the VAT as first implemented and practiced in Europe and subsequently adopted in New Zealand and Canada.36Under the present method that relies on invoices, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases, inputs and imports. 37 If at the end of a taxable quarter the output taxes38 charged by a seller39 are equal to the input taxes40 passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes that the excess has to be paid.41 If, however, the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters.42 Should the input taxes result from zero-rated or effectively zero-rated transactions or from the acquisition of capital goods,43 any excess over the output taxes shall instead be refunded44 to the taxpayer or credited45 against other internal revenue taxes.46 Zero-Rated and Effectively Zero-Rated Transactions Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated transactions as to their source. Zero-rated transactions generally refer to the export sale of goods and supply of services. 47 The tax rate is set at zero.48 When applied to the tax base, such rate obviously results in no tax chargeable against the purchaser. The seller of such transactions charges no output tax,49 but can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.

Effectively zero-rated transactions, however, refer to the sale of goods50 or supply of services51 to persons or entities whose exemption under special laws or international agreements to which the Philippines is a signatory effectively subjects such transactions to a zero rate.52 Again, as applied to the tax base, such rate does not yield any tax chargeable against the purchaser. The seller who charges zero output tax on such transactions can also claim a refund of or a tax credit certificate for the VAT previously charged by suppliers. Zero Rating and Exemption In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that results from either one of them is not. Applying the destination principle53 to the exportation of goods, automatic zero rating54 is primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller internationally competitive by allowing the refund or credit of input taxes that are attributable to export sales.55 Effective zero rating, on the contrary, is intended to benefit the purchaser who, not being directly and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted by the suppliers. In both instances of zero rating, there is total relief for the purchaser from the burden of the tax.56 But in an exemption there is only partial relief,57 because the purchaser is not allowed any tax refund of or credit for input taxes paid.58 Exempt Transaction >and Exempt Party The object of exemption from the VAT may either be the transaction itself or any of the parties to the transaction.59 An exempt transaction, on the one hand, involves goods or services which, by their nature, are specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the tax status -- VATexempt or not -- of the party to the transaction.60 Indeed, such transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid. An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code, a special law or an international agreement to which the Philippines is a signatory, and by virtue of which its taxable transactions become exempt from the VAT.61 Such party is also not subject to the VAT, but may be allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT or non-VAT taxpayer. As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or passed on by the seller to the purchaser of the goods, properties or services.62 While the liability is imposed on one person, theburden may be passed on to another. Therefore, if a special law merely exempts a party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase transaction is not exempt. Applying this principle to the case at bar, the purchase transactions entered into by respondent are not VAT-exempt. Special laws may certainly exempt transactions from the VAT.63 However, the Tax Code provides that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register. Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10 percent,64 depending again on the application of the destination principle.65 If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -- for use or consumption outside the Philippines, these shall be subject to 0 percent.66 If entered into with a purchaser for

use or consumption in the Philippines, then these shall be subject to 10 percent, 67 unless the purchaser is exempt from the indirect burden of the VAT, in which case it shall also be zero-rated. Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate, 68 because the ecozone within which it is registered is managed and operated by the PEZA as a separate customs territory.69 This means that in such zone is created the legal fiction of foreign territory.70 Under the cross-border principle71 of the VAT system being enforced by the Bureau of Internal Revenue (BIR),72 no VAT shall be imposed to form part of the cost of goods destined for consumption outside of the territorial border of the taxing authority. If exports of goods and services from the Philippines to a foreign country are free of the VAT,73 then the same rule holds for such exports from the national territory -- except specifically declared areas -- to an ecozone. Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-registered person in the customs territory are deemed imports from a foreign country.74 An ecozone -- indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign soil.75 This legal fiction is necessary to give meaningful effect to the policies of the special law creating the zone.76 If respondent is located in an export processing zone77within that ecozone, sales to the export processing zone, even without being actually exported, shall in fact be viewed as constructively exported under EO 226.78 Considered as export sales,79 such purchase transactions by respondent would indeed be subject to a zero rate.80 Tax Exemptions Broad and Express Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal revenue laws and regulations. This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a tax on consumption, for which the direct liability is imposed on one person but the indirect burden is passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases. Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not to distinguish. Moreover, the exemption is both express and pervasive for the following reasons: First, RA 7916 states that "no taxes, local and national, shall be imposed on business establishments operating within the ecozone."81 Since this law does not exclude the VAT from the prohibition, it is deemed included.Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview of the general rule. Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of the law. That no VAT shall be imposed directly upon business establishments operating within the ecozone under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also prohibited indirectly. Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for real property taxes that presently are imposed on land owned by developers.82 This similar and repeated prohibition is an unambiguous ratification of the law‘s intent in not imposing local or national taxes on business enterprises within the ecozone. Third, foreign and domestic merchandise, raw materials, equipment and the like "shall not be subject to x x x internal revenue laws and regulations" under PD 6683 -- the original charter of PEZA (then EPZA) that was later amended by RA 7916.84 No provisions in the latter law modify such exemption.

Although this exemption puts the government at an initial disadvantage, the reduced tax collection ultimately redounds to the benefit of the national economy by enticing more business investments and creating more employment opportunities.85 Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except those prohibited by law -- "shall not be subject to x x x internal revenue laws and regulations x x x"86 if brought to the ecozone‘s restricted area87 for manufacturing by registered export enterprises,88 of which respondent is one. These rules also apply to all enterprises registered with the EPZA prior to the effectivity of such rules. 89 Fifth, export processing zone enterprises registered90 with the Board of Investments (BOI) under EO 226 patently enjoy exemption from national internal revenue taxes on imported capital equipment reasonably needed and exclusively used for the manufacture of their products;91 on required supplies and spare part for consigned equipment;92 and on foreign and domestic merchandise, raw materials, equipment and the like -except those prohibited by law -- brought into the zone for manufacturing.93 In addition, they are given credits for the value of the national internal revenue taxes imposed on domestic capital equipment also reasonably needed and exclusively used for the manufacture of their products,94 as well as for the value of such taxes imposed on domestic raw materials and supplies that are used in the manufacture of their export products and that form part thereof.95 Sixth, the exemption from local and national taxes granted under RA 722796 are ipso facto accorded to ecozones.97 In case of doubt, conflicts with respect to such tax exemption privilege shall be resolved in favor of the ecozone.98 And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in the production of export goods,99 and for locally produced raw materials, capital equipment and spare parts used by exporters of non-traditional products100 -- shall also be continuously enjoyed by similar exporters within the ecozone.101Indeed, the latter exporters are likewise entitled to such tax exemptions and credits. Tax Refund as Tax Exemption To be sure, statutes that grant tax exemptions are construed strictissimi juris102 against the taxpayer103 and liberally in favor of the taxing authority.104 Tax refunds are in the nature of such exemptions.105 Accordingly, the claimants of those refunds bear the burden of proving the factual basis of their claims;106 and of showing, by words too plain to be mistaken, that the legislature intended to exempt them.107 In the present case, all the cited legal provisions are teeming with life with respect to the grant of tax exemptions too vivid to pass unnoticed. In addition, respondent easily meets the challenge. Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The end result, however, is that it is not subject to the VAT. The non-taxability of transactions that are otherwise taxable is merely a necessary incident to the tax exemption conferred by law upon it as an entity, not upon the transactions themselves.108 Nonetheless, its exemption as an entity and the non-exemption of its transactions lead to the same result for the following considerations: First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to execute or administer such laws109 will have to be adopted. Their prior tax issuances have held inconsistent positions brought about by their probable failure to comprehend and fully appreciate the nature of the VAT as a tax on consumption and the application of the destination principle.110 Revenue Memorandum Circular No. (RMC) 7499, however, now clearly and correctly provides that any VAT-registered supplier‘s sale of goods, property or services from the customs territory to any registered enterprise operating in the ecozone -- regardless of the class or type of the latter‘s PEZA registration -- is legally entitled to a zero rate.111 Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its very soul.

In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the establishment of export processing zones, seeks "to encourage and promote foreign commerce as a means of x x x strengthening our export trade and foreign exchange position, of hastening industrialization, of reducing domestic unemployment, and of accelerating the development of the country."112 RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the special economic zones, "the government shall actively encourage, promote, induce and accelerate a sound and balanced industrial, economic and social development of the country x x x through the establishment, among others, of special economic zones x x x that shall effectively attract legitimate and productive foreign investments."113 Under EO 226, the "State shall encourage x x x foreign investments in industry x x x which shall x x x meet the tests of international competitiveness[,] accelerate development of less developed regions of the country[,] and result in increased volume and value of exports for the economy."114 Fiscal incentives that are cost-efficient and simple to administer shall be devised and extended to significant projects "to compensate for market imperfections, to reward performance contributing to economic development,"115 and "to stimulate the establishment and assist initial operations of the enterprise."116 Wisely accorded to ecozones created under RA 7916117 was the government‘s policy -- spelled out earlier in RA 7227 -- of converting into alternative productive uses118 the former military reservations and their extensions,119as well as of providing them incentives120 to enhance the benefits that would be derived from them121 in promoting economic and social development.122 Finally, under RA 7844, the State declares the need "to evolve export development into a national effort"123 in order to win international markets. By providing many export and tax incentives,124 the State is able to drive home the point that exporting is indeed "the key to national survival and the means through which the economic goals of increased employment and enhanced incomes can most expeditiously be achieved."125 The Tax Code itself seeks to "promote sustainable economic growth x x x; x x x increase economic activity; and x x x create a robust environment for business to enable firms to compete better in the regional as well as the global market."126 After all, international competitiveness requires economic and tax incentives to lower the cost of goods produced for export. State actions that affect global competition need to be specific and selective in the pricing of particular goods or services.127 All these statutory policies are congruent to the constitutional mandates of providing incentives to needed investments,128 as well as of promoting the preferential use of domestic materials and locally produced goods and adopting measures to help make these competitive.129 Tax credits for domestic inputs strengthen backward linkages. Rightly so, "the rule of law and the existence of credible and efficient public institutions are essential prerequisites for sustainable economic development."130 VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund Registration is an indispensable requirement under our VAT law.131 Petitioner alleges that respondent did register for VAT purposes with the appropriate Revenue District Office. However, it is now too late in the day for petitioner to challenge the VAT-registered status of respondent, given the latter‘s prior representation before the lower courts and the mode of appeal taken by petitioner before this Court. The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from internal revenue laws and regulations the equipment -- including capital goods -- that registered enterprises will use, directly or indirectly, in manufacturing.132 EO 226 even reiterates this privilege among the incentives it gives to such enterprises.133 Petitioner merely asserts that by virtue of the PEZA registration alone of respondent, the latter is not subject to the VAT. Consequently, the capital goods and services respondent has purchased are not considered used in the VAT business, and no VAT refund or credit is due.134 This is a non sequitur. By the VAT‘s very nature as a tax on consumption, the capital goods and services res pondent has purchased are subject to the VAT, although at zero rate. Registration does not determine taxability under the VAT law.

Moreover, the facts have already been determined by the lower courts. Having failed to present evidence to support its contentions against the income tax holiday privilege of respondent,135 petitioner is deemed to have conceded. It is a cardinal rule that "issues and arguments not adequately and seriously brought below cannot be raised for the first time on appeal."136 This is a "matter of procedure"137 and a "question of fairness."138 Failure to assert "within a reasonable time warrants a presumption that the party entitled to assert it either has abandoned or declined to assert it."139 The BIR regulations additionally requiring an approved prior application for effective zero rating140 cannot prevail over the clear VAT nature of respondent‘s transactions. The scope of such regulations is not "within the statutory authority x x x granted by the legislature.141 First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot purport to do any more than interpret the latter.142 The courts will not countenance one that overrides the statute it seeks to apply and implement.143 Other than the general registration of a taxpayer the VAT status of which is aptly determined, no provision under our VAT law requires an additional application to be made for such taxpayer‘s transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not and cannot become exempt simply because an application therefor was not made or, if made, was denied. To allow the additional requirement is to give unfettered discretion to those officials or agents who, without fluid consideration, are bent on denying a valid application. Moreover, the State can never be estopped by the omissions, mistakes or errors of its officials or agents.144 Second, grantia argumenti that such an application is required by law, there is still the presumption of regularity in the performance of official duty.145 Respondent‘s registration carries with it the presumption that, in the absence of contradictory evidence, an application for effective zero rating was also filed and approval thereof given. Besides, it is also presumed that the law has been obeyed146 by both the administrative officials and the applicant. Third, even though such an application was not made, all the special laws we have tackled exempt respondent not only from internal revenue laws but also from the regulations issued pursuant thereto. Leniency in the implementation of the VAT in ecozones is an imperative, precisely to spur economic growth in the country and attain global competitiveness as envisioned in those laws. A VAT-registered status, as well as compliance with the invoicing requirements,147 is sufficient for the effective zero rating of the transactions of a taxpayer. The nature of its business and transactions can easily be perused from, as already clearly indicated in, its VAT registration papers and photocopied documents attached thereto. Hence, its transactions cannot be exempted by its mere failure to apply for their effective zero rating. Otherwise, their VAT exemption would be determined, not by their nature, but by the taxpayer‘s negligence -- a result not at all contemplated. Administrative convenience cannot thwart legislative mandate. Tax Refund or Credit in Order Having determined that respondent‘s purchase transactions are subject to a zero VAT rate, the tax refund or credit is in order. As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO 226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5 percent preferential tax regime. The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law,148 for EO 226149also has provisions to contend with. These two regimes are in fact incompatible and cannot be availed of simultaneously by the same entity. While EO 226 merely exempts it from income taxes, the PEZA law exempts it from all taxes.

Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of income tax for a certain number of years, depending on its registration as a pioneer or a non-pioneer enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned in lieu of local and national taxes imposable upon business establishments within the ecozone cannot outrightly determine a VAT exemption. Being subject to VAT, payments erroneously collected thereon may then be refunded or credited. Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916, Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such provision merely exempts respondent from taxes imposed on business. To repeat, the VAT is a tax imposed on consumption, not on business. Although respondent as an entity is exempt, the transactions it enters into are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may certainly be refunded or credited. Compliance with All Requisites for VAT Refund or Credit As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT refund or credit.150 First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex, in which this Court held that the petitioner therein was registered as a non-VAT taxpayer.151 Hence, for being merely VAT-exempt, the petitioner in that case cannot claim any VAT refund or credit. Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices and have not been offset against any output taxes. Although enterprises registered with the BOI after December 31, 1994 would no longer enjoy the tax credit incentives on domestic capital equipment -- as provided for under Article 39(d), Title III, Book I of EO 226152 -- starting January 1, 1996, respondent would still have the same benefit under a general and express exemption contained in both Article 77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones by RA 7916. There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones from national and local taxes, but also to grant them tax credits. This fact was revealed by the sponsorship speeches in Congress during the second reading of House Bill No. 14295, which later became RA 7916, as shown below: "MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local taxes; x x x tax credit for locally-sourced inputs x x x." xxxxxxxxx "MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment conducive for investors, the bill offers incentives such as the exemption from local and national taxes, x x x tax credits for locally sourced inputs x x x."153 And third, no question as to either the filing of such claims within the prescriptive period or the validity of the VAT returns has been raised. Even if such a question were raised, the tax exemption under all the special laws cited above is broad enough to cover even the enforcement of internal revenue laws, including prescription.154 Summary To summarize, special laws expressly grant preferential tax treatment to business establishments registered and operating within an ecozone, which by law is considered as a separate customs territory. As such, respondent is exempt from all internal revenue taxes, including the VAT, and regulations pertaining thereto. It has opted for the income tax holiday regime, instead of the 5 percent preferential tax regime. As a matter of law and procedure, its registration status entitling it to such tax holiday can no longer be questioned. Its sales transactions intended for export may not be exempt, but like its purchase transactions, they are zero-rated. No prior application for the effective zero rating of its transactions is necessary. Being VAT-registered and having

satisfactorily complied with all the requisites for claiming a tax refund of or credit for the input VAT paid on capital goods purchased, respondent is entitled to such VAT refund or credit. WHEREFORE, the Petition is DENIED and the Decision AFFIRMED. No pronouncement as to costs. SO ORDERED. G.R. No. 147188 September 14, 2004

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. THE ESTATE OF BENIGNO P. TODA, JR., Represented by Special Co-administrators Lorna Kapunan and Mario Luza Bautista, respondents. DECISION DAVIDE, JR., C.J.: This Court is called upon to determine in this case whether the tax planning scheme adopted by a corporation constitutes tax evasion that would justify an assessment of deficiency income tax. The petitioner seeks the reversal of the Decision1 of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 affirming the 3 January 2000 Decision2 of the Court of Tax Appeals (CTA) in C.T.A. Case No. 5328,3 which held that the respondent Estate of Benigno P. Toda, Jr. is not liable for the deficiency income tax of Cibeles Insurance Corporation (CIC) in the amount of P79,099,999.22 for the year 1989, and ordered the cancellation and setting aside of the assessment issued by Commissioner of Internal Revenue Liwayway Vinzons-Chato on 9 January 1995. The case at bar stemmed from a Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for deficiency income tax arising from an alleged simulated sale of a 16-storey commercial building known as Cibeles Building, situated on two parcels of land on Ayala Avenue, Makati City. On 2 March 1989, CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the building stands for an amount of not less than P90 million.4 On 30 August 1989, Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold the same property on the same day to Royal Match Inc. (RMI) for P200 million. These two transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the same notary public.5 For the sale of the property to RMI, Altonaga paid capital gains tax in the amount of P10 million.6 On 16 April 1990, CIC filed its corporate annual income tax return7 for the year 1989, declaring, among other things, its gain from the sale of real property in the amount of P75,728.021. After crediting withholding taxes ofP254,497.00, it paid P26,341,2078 for its net taxable income of P75,987,725. On 12 July 1990, Toda sold his entire shares of stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced by a Deed of Sale of Shares of Stocks.9 Three and a half years later, or on 16 January 1994, Toda died. On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice10 and demand letter to the CIC for deficiency income tax for the year 1989 in the amount of P79,099,999.22.

The new CIC asked for a reconsideration, asserting that the assessment should be directed against the old CIC, and not against the new CIC, which is owned by an entirely different set of stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and the CIC free from all tax liabilities for the fiscal years 1987-1989.11 On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-administrators Lorna Kapunan and Mario Luza Bautista, received a Notice of Assessment12 dated 9 January 1995 from the Commissioner of Internal Revenue for deficiency income tax for the year 1989 in the amount of P79,099,999.22, computed as follows: Income Tax – 1989 Net Income per return Add: Additional gain on sale of real property taxable under ordinary corporate income but were substituted with individual capital gains(P200M – 100M) Total Net Taxable Income per investigation Tax Due thereof at 35% Less: Payment already made 1. Per return 2. Thru Capital Gains Tax made by R.A. Altonaga P26,595,704.00 10,000,000.00 36,595,704.00 P 24,999,999.75 Add: 50% Surcharge 25% Surcharge Total Add: Interest 20% from 4/16/90-4/30/94 (.808) TOTAL AMT. DUE & COLLECTIBLE 35,349,999.65 P 79,099,999.22 ============== 12,499,999.88 6,249,999.94 P 43,749,999.57 Balance of tax due P 61,595,703.75 P75,987,725.00 100,000,000.00 P175,987,725.00

The Estate thereafter filed a letter of protest.13 In the letter dated 19 October 1995,14 the Commissioner dismissed the protest, stating that a fraudulent scheme was deliberately perpetuated by the CIC wholly owned and controlled by Toda by covering up the additional gain of P100 million, which resulted in the change in the income structure of the proceeds of the sale of the two parcels of land and the building thereon to an individual capital gains, thus evading the higher corporate income tax rate of 35%. On 15 February 1996, the Estate filed a petition for review15 with the CTA alleging that the Commissioner erred in holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the properties is unreasonable and unsupported; and that the right of the Commissioner to assess CIC had already prescribed. In his Answer16 and Amended Answer,17 the Commissioner argued that the two transactions actually constituted a single sale of the property by CIC to RMI, and that Altonaga was neither the buyer of the property

from CIC nor the seller of the same property to RMI. The additional gain of P100 million (the difference between the second simulated sale for P200 million and the first simulated sale for P100 million) realized by CIC was taxed at the rate of only 5% purportedly as capital gains tax of Altonaga, instead of at the rate of 35% as corporate income tax of CIC. The income tax return filed by CIC for 1989 with intent to evade payment of the tax was thus false or fraudulent. Since such falsity or fraud was discovered by the BIR only on 8 March 1991, the assessment issued on 9 January 1995 was well within the prescriptive period prescribed by Section 223 (a) of the National Internal Revenue Code of 1986, which provides that tax may be assessed within ten years from the discovery of the falsity or fraud. With the sale being tainted with fraud, the separate corporate personality of CIC should be disregarded. Toda, being the registered owner of the 99.991% shares of stock of CIC and the beneficial owner of the remaining 0.009% shares registered in the name of the individual directors of CIC, should be held liable for the deficiency income tax, especially because the gains realized from the sale were withdrawn by him as cash advances or paid to him as cash dividends. Since he is already dead, his estate shall answer for his liability. In its decision18 of 3 January 2000, the CTA held that the Commissioner failed to prove that CIC committed fraud to deprive the government of the taxes due it. It ruled that even assuming that a pre-conceived scheme was adopted by CIC, the same constituted mere tax avoidance, and not tax evasion. There being no proof of fraudulent transaction, the applicable period for the BIR to assess CIC is that prescribed in Section 203 of the NIRC of 1986, which is three years after the last day prescribed by law for the filing of the return. Thus, the government‘s right to assess CIC prescribed on 15 April 1993. The assessment issued on 9 January 1995 was, therefore, no longer valid. The CTA also ruled that the mere ownership by Toda of 99.991% of the capital stock of CIC was not in itself sufficient ground for piercing the separate corporate personality of CIC. Hence, the CTA declared that the Estate is not liable for deficiency income tax of P79,099,999.22 and, accordingly, cancelled and set aside the assessment issued by the Commissioner on 9 January 1995. In its motion for reconsideration,19 the Commissioner insisted that the sale of the property owned by CIC was the result of the connivance between Toda and Altonaga. She further alleged that the latter was a representative, dummy, and a close business associate of the former, having held his office in a property owned by CIC and derived his salary from a foreign corporation (Aerobin, Inc.) duly owned by Toda for representation services rendered. The CTA denied20 the motion for reconsideration, prompting the Commissioner to file a petition for review21 with the Court of Appeals. In its challenged Decision of 31 January 2001, the Court of Appeals affirmed the decision of the CTA, reasoning that the CTA, being more advantageously situated and having the necessary expertise in matters of taxation, is "better situated to determine the correctness, propriety, and legality of the income tax assessments assailed by the Toda Estate."22 Unsatisfied with the decision of the Court of Appeals, the Commissioner filed the present petition invoking the following grounds: I. THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT COMMITTED NO FRAUD WITH INTENT TO EVADE THE TAX ON THE SALE OF THE PROPERTIES OF CIBELES INSURANCE CORPORATION. II. THE COURT OF APPEALS ERRED IN NOT DISREGARDING THE SEPARATE CORPORATE PERSONALITY OF CIBELES INSURANCE CORPORATION. III. THE COURT OF APPEALS ERRED IN HOLDING THAT THE RIGHT OF PETITIONER TO ASSESS RESPONDENT FOR DEFICIENCY INCOME TAX FOR THE YEAR 1989 HAD PRESCRIBED. The Commissioner reiterates her arguments in her previous pleadings and insists that the sale by CIC of the Cibeles property was in connivance with its dummy Rafael Altonaga, who was financially incapable of purchasing it. She further points out that the documents themselves prove the fact of fraud in that (1) the two sales were done simultaneously on the same date, 30 August 1989; (2) the Deed of Absolute Sale between Altonaga and RMI was notarized ahead of the alleged sale between CIC and Altonaga, with the former registered in the Notarial Register of Jocelyn H. Arreza Pabelana as Doc. 91, Page 20, Book I, Series of 1989;

and the latter, as Doc. No. 92, Page 20, Book I, Series of 1989, of the same Notary Public; (3) as early as 4 May 1989, CIC received P40 million from RMI, and not from Altonaga. The said amount was debited by RMI in its trial balance as of 30 June 1989 as investment in Cibeles Building. The substantial portion of P40 million was withdrawn by Toda through the declaration of cash dividends to all its stockholders. For its part, respondent Estate asserts that the Commissioner failed to present the income tax return of Altonaga to prove that the latter is financially incapable of purchasing the Cibeles property. To resolve the grounds raised by the Commissioner, the following questions are pertinent: 1. Is this a case of tax evasion or tax avoidance? 2. Has the period for assessment of deficiency income tax for the year 1989 prescribed? and 3. Can respondent Estate be held liable for the deficiency income tax of CIC for the year 1989, if any? We shall discuss these questions in seriatim. Is this a case of tax evasion or tax avoidance? Tax avoidance and tax evasion are the two most common ways used by taxpayers in escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned by law. This method should be used by the taxpayer in good faith and at arms length. Tax evasion, on the other hand, is a scheme used outside of those lawful means and when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.23 Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the payment of less than that known by the taxpayer to be legally due, or the non-payment of tax when it is shown that a tax is due; (2) an accompanying state of mind which is described as being "evil," in "bad faith," "willfull," or "deliberate and not accidental"; and (3) a course of action or failure of action which is unlawful. 24 All these factors are present in the instant case. It is significant to note that as early as 4 May 1989, prior to the purported sale of the Cibeles property by CIC to Altonaga on 30 August 1989, CIC received P40 million from RMI,25 and not from Altonaga. That P40 million was debited by RMI and reflected in its trial balance26 as "other inv. – Cibeles Bldg." Also, as of 31 July 1989, another P40 million was debited and reflected in RMI‘s trial balance as "other inv. – Cibeles Bldg." This would show that the real buyer of the properties was RMI, and not the intermediary Altonaga.
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The investigation conducted by the BIR disclosed that Altonaga was a close business associate and one of the many trusted corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant accountant of CIC and an old timer in the company.27 But Mr. Prieto did not testify on this matter, hence, that information remains to be hearsay and is thus inadmissible in evidence. It was not verified either, since the letter-request for investigation of Altonaga was unserved,28 Altonaga having left for the United States of America in January 1990. Nevertheless, that Altonaga was a mere conduit finds support in the admission of respondent Estate that the sale to him was part of the tax planning scheme of CIC. That admission is borne by the records. In its Memorandum, respondent Estate declared: Petitioner, however, claims there was a "change of structure" of the proceeds of sale. Admitted one hundred percent. But isn‘t this precisely the definition of tax planning? Change th e structure of the funds and pay a lower tax. Precisely, Sec. 40 (2) of the Tax Code exists, allowing tax free transfers of property for stock, changing the structure of the property and the tax to be paid. As long as it is done legally, changing the structure of a transaction to achieve a lower tax is not against the law. It is absolutely allowed.

Tax planning is by definition to reduce, if not eliminate altogether, a tax. Surely petitioner [ sic] cannot be faulted for wanting to reduce the tax from 35% to 5%.29 [Underscoring supplied]. The scheme resorted to by CIC in making it appear that there were two sales of the subject properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a legitimate tax planning. Such scheme is tainted with fraud. Fraud in its general sense, "is deemed to comprise anything calculated to deceive, including all acts, omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed, resulting in the damage to another, or by which an undue and unconscionable advantage is taken of another."30 Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax to be paid especially that the transfer from him to RMI would then subject the income to only 5% individual capital gains tax, and not the 35% corporate income tax. Altonaga‘s sole purpose of acquiring and transferring title of the subject properties on the same day was to create a tax shelter. Altonaga never controlled the property and did not enjoy the normal benefits and burdens of ownership. The sale to him was merely a tax ploy, a sham, and without business purpose and economic substance. Doubtless, the execution of the two sales was calculated to mislead the BIR with the end in view of reducing the consequent income tax liability.
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In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted more on the mitigation of tax liabilities than for legitimate business purposes constitutes one of tax evasion.31 Generally, a sale or exchange of assets will have an income tax incidence only when it is consummated. 32 The incidence of taxation depends upon the substance of a transaction. The tax consequences arising from gains from a sale of property are not finally to be determined solely by the means employed to transfer legal title. Rather, the transaction must be viewed as a whole, and each step from the commencement of negotiations to the consummation of the sale is relevant. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. To permit the true nature of the transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress.33 To allow a taxpayer to deny tax liability on the ground that the sale was made through another and distinct entity when it is proved that the latter was merely a conduit is to sanction a circumvention of our tax laws. Hence, the sale to Altonaga should be disregarded for income tax purposes.34 The two sale transactions should be treated as a single direct sale by CIC to RMI. Accordingly, the tax liability of CIC is governed by then Section 24 of the NIRC of 1986, as amended (now 27 (A) of the Tax Reform Act of 1997), which stated as follows: Sec. 24. Rates of tax on corporations. – (a) Tax on domestic corporations.- A tax is hereby imposed upon the taxable net income received during each taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or organized but not including general professional partnerships, in accordance with the following: Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred thousand pesos; and Thirty-five percent upon the amount by which the taxable net income exceeds one hundred thousand pesos. CIC is therefore liable to pay a 35% corporate tax for its taxable net income in 1989. The 5% individual capital gains tax provided for in Section 34 (h) of the NIRC of 198635 (now 6% under Section 24 (D) (1) of the Tax Reform Act of 1997) is inapplicable. Hence, the assessment for the deficiency income tax issued by the BIR must be upheld.

Has the period of assessment prescribed? No. Section 269 of the NIRC of 1986 (now Section 222 of the Tax Reform Act of 1997) read: Sec. 269. 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 after the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission: 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 collection thereof… . Put differently, in cases of (1) fraudulent returns; (2) false returns with intent to evade tax; and (3) failure to file a return, the period within which to assess tax is ten years from discovery of the fraud, falsification or omission, as the case may be. It is true that in a query dated 24 August 1989, Altonaga, through his counsel, asked the Opinion of the BIR on the tax consequence of the two sale transactions.36 Thus, the BIR was amply informed of the transactions even prior to the execution of the necessary documents to effect the transfer. Subsequently, the two sales were openly made with the execution of public documents and the declaration of taxes for 1989. However, these circumstances do not negate the existence of fraud. As earlier discussed those two transactions were tainted with fraud. And even assuming arguendo that there was no fraud, we find that the income tax return filed by CIC for the year 1989 was false. It did not reflect the true or actual amount gained from the sale of the Cibeles property. Obviously, such was done with intent to evade or reduce tax liability. As stated above, the prescriptive period to assess the correct taxes in case of false returns is ten years from the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof was claimed to have been discovered only on 8 March 1991.37 The assessment for the 1989 deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the correct assessment for deficiency income tax was well within the prescriptive period. Is respondent Estate liable for the 1989 deficiency income tax of Cibeles Insurance Corporation? A corporation has a juridical personality distinct and separate from the persons owning or composing it. Thus, the owners or stockholders of a corporation may not generally be made to answer for the liabilities of a corporation and vice versa. There are, however, certain instances in which personal liability may arise. It has been held in a number of cases that personal liability of a corporate director, trustee, or officer along, albeit not necessarily, with the corporation may validly attach when: 1. He assents to the (a) patently unlawful act of the corporation, (b) bad faith or gross negligence in directing its affairs, or (c) conflict of interest, resulting in damages to the corporation, its stockholders, or other persons; 2. He consents to the issuance of watered down stocks or, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; 3. He agrees to hold himself personally and solidarily liable with the corporation; or 4. He is made, by specific provision of law, to personally answer for his corporate action. 38 It is worth noting that when the late Toda sold his shares of stock to Le Hun T. Choa, he knowingly and voluntarily held himself personally liable for all the tax liabilities of CIC and the buyer for the years 1987, 1988, and 1989. Paragraph g of the Deed of Sale of Shares of Stocks specifically provides: g. Except for transactions occurring in the ordinary course of business, Cibeles has no liabilities or obligations, contingent or otherwise, for taxes, sums of money or insurance claims other than those

reported in its audited financial statement as of December 31, 1989, attached hereto as "Annex B" and made a part hereof. The business of Cibeles has at all times been conducted in full compliance with all applicable laws, rules and regulations. SELLER undertakes and agrees to hold the BUYER and Cibeles free from any and all income tax liabilities of Cibeles for the fiscal years 1987, 1988 and 1989.39 [Underscoring Supplied]. When the late Toda undertook and agreed "to hold the BUYER and Cibeles free from any all income tax liabilities of Cibeles for the fiscal years 1987, 1988, and 1989," he thereby voluntarily held himself personally liable therefor. Respondent estate cannot, therefore, deny liability for CIC‘s deficiency income tax for the year 1989 by invoking the separate corporate personality of CIC, since its obligation arose from Toda‘s contractual undertaking, as contained in the Deed of Sale of Shares of Stock. WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET ASIDE, and another one is hereby rendered ordering respondent Estate of Benigno P. Toda Jr. to pay P79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the year 1989, plus legal interest from 1 May 1994 until the amount is fully paid. Costs against respondent. SO ORDERED.

G.R. No. 119775

[G. R. No. 119775. October 24, 2003]

JOHN HAY PEOPLES ALTERNATIVE COALITION, MATEO CARIÑO FOUNDATION INC., CENTER FOR ALTERNATIVE SYSTEMS FOUNDATION INC., REGINA VICTORIA A. BENAFIN REPRESENTED AND JOINED BY HER MOTHER MRS. ELISA BENAFIN, IZABEL M. LUYK REPRESENTED AND JOINED BY HER MOTHER MRS. REBECCA MOLINA LUYK, KATHERINE PE REPRESENTED AND JOINED BY HER MOTHER ROSEMARIE G. PE, SOLEDAD S. CAMILO, ALICIA C. PACALSO ALIAS “KEVAB,” BETTY I. STRASSER, RUBY C. GIRON, URSULA C. PEREZ ALIAS “BA-YAY,” EDILBERTO T. CLARAVALL, CARMEN CAROMINA, LILIA G. YARANON, DIANE MONDOC, petitioners, vs. VICTOR LIM, PRESIDENT, BASES CONVERSION DEVELOPMENT AUTHORITY; JOHN HAY PORO POINT DEVELOPMENT CORPORATION, CITY OF BAGUIO, TUNTEX (B.V.I.) CO. LTD., ASIAWORLD INTERNATIONALE GROUP, INC., DEPARTMENT OF ENVIRONMENT AND NATURAL RESOURCES, respondents.

DECISION
CARPIO MORALES, J.:

By the present petition for prohibition, mandamus and declaratory relief with prayer for a temporary restraining order (TRO) and/or writ of preliminary injunction, petitioners assail, in the main, the constitutionality of Presidential Proclamation No. 420, Series of 1994, ―CREATING AND DESIGNATING A PORTION OF THE AREA COVERED BY THE FORMER CAMP JOHN [HAY] AS THE JOHN HAY SPECIAL ECONOMIC ZONE PURSUANT TO REPUBLIC ACT NO. 7227.‖ Republic Act No. 7227, AN ACT ACCELERATING THE CONVERSION OF MILITARY RESERVATIONS INTO OTHER PRODUCTIVE USES, CREATING THE BASES CONVERSION AND DEVELOPMENT AUTHORITY FOR THIS PURPOSE, PROVIDING FUNDS THEREFOR AND FOR OTHER PURPOSES, otherwise known as the ―Bases Conversion and Development Act of 1992,‖ which was enacted on March 13, 1992, set out th e policy of the government to accelerate the sound and balanced conversion into alternative productive uses of the former military bases under the 1947 PhilippinesUnited States of America Military Bases Agreement, namely, the Clark and Subic military reservations as well as their extensions including the John Hay Station (Camp John Hay or the camp) in the City of Baguio.
[1]

As noted in its title, R.A. No. 7227 created public respondent Bases Conversion and Development Authority (BCDA), vesting it with powers pertaining to the multifarious aspects of carrying out the ultimate objective of utilizing the base areas in accordance with the declared government policy.
[2]

R.A. No. 7227 likewise created the Subic Special Economic [and Free Port] Zone (Subic SEZ) the metes and bounds of which were to be delineated in a proclamation to be issued by the President of the Philippines.
[3]

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

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

On August 16, 1993, BCDA entered into a Memorandum of Agreement and Escrow Agreement with private respondents Tuntex (B.V.I.) Co., Ltd (TUNTEX) and Asiaworld Internationale Group, Inc. (ASIAWORLD), private corporations registered under the laws of the British Virgin Islands, preparatory to the formation of a joint venture for the development of Poro Point in La Union and Camp John Hay as premier tourist destinations and recreation centers. Four months later or on December 16, 1993, BCDA, TUNTEX and ASIAWORD executed a Joint Venture Agreement whereby they bound themselves to put up a joint venture company known as the Baguio International Development and Management Corporation which would lease areas within Camp John Hay and Poro Point for the purpose of turning such places into principal tourist and recreation spots, as originally envisioned by the parties under their Memorandum of Agreement.
[6]

The Baguio City government meanwhile passed a number of resolutions in response to the actions taken by BCDA as owner and administrator of Camp John Hay. By Resolution of September 29, 1993, the Sangguniang Panlungsod of Baguio City (the sanggunian) officially asked BCDA to exclude all the barangays partly or totally located within Camp John Hay from the reach or coverage of any plan or program for its development.
[7]

By a subsequent Resolution dated January 19, 1994, the sanggunian sought from BCDA an abdication, waiver or quitclaim of its ownership over the home lots being occupied by residents of nine (9) barangays surrounding the military reservation.
[8]

Still by another resolution passed on February 21, 1994, the sanggunian adopted and submitted to BCDA a 15-point concept for the development of Camp John Hay. The sanggunian’s vision expressed, among other things, a kind of development that affords protection to the environment, the making of a family-oriented type of tourist destination, priority in employment opportunities for Baguio residents and free access to the base area, guaranteed participation of the city government in the management and operation of the camp, exclusion of the previously named nine barangays from the area for development, and liability for local taxes of businesses to be established within the camp.
[9] [10]

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

On May 11, 1994, the sanggunian passed a resolution requesting the Mayor to order the determination of realty taxes which may otherwise be collected from real properties of Camp John Hay. The resolution was intended to intelligently guide the sanggunian in determining its position on whether Camp John Hay be declared a SEZ, it (the sanggunian) being of the view that such declaration would exempt the camp‘s property and the economic activity therein from local or national taxation.
[13]

More than a month later, however, the sanggunian passed Resolution No. 255, (Series of 1994), seeking and supporting, subject to its concurrence, the issuance by then President Ramos of a presidential proclamation declaring an area of 288.1 hectares of the camp as a SEZ in accordance with the provisions of R.A. No. 7227. Together with this resolution was submitted a draft of the proposed proclamation for consideration by the President.
[14] [15]

On July 5, 1994 then President Ramos issued Proclamation No. 420, the title of which was earlier indicated, which established a SEZ on a portion of Camp John Hay and which reads as follows:
[16]

xxx Pursuant to the powers vested in me by the law and the resolution of concurrence by the City Council of Baguio, I, FIDEL V. RAMOS, President of the Philippines, do hereby create and designate a portion of the area covered by the former John Hay reservation as embraced, covered, and defined by the 1947 Military Bases Agreement between the Philippines and the United States of America, as amended, as the John Hay Special Economic Zone, and accordingly order: SECTION 1. Coverage of John Hay Special Economic Zone. – The John Hay Special Economic Zone shall cover the area consisting of Two Hundred Eighty Eight and one/tenth (288.1) hectares, more or less, of the total of Six Hundred SeventySeven (677) hectares of the John Hay Reservation, more or less, which have been surveyed and verified by the Department of Environment and Natural Resources (DENR) as defined by the following technical description: A parcel of land, situated in the City of Baguio, Province of Benguet, Island of Luzon, and particularly described in survey plans Psd-131102-002639 and Ccs-131102000030 as approved on 16 August 1993 and 26 August 1993, respectively, by the Department of Environment and Natural Resources, in detail containing : Lot 1, Lot 2, Lot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 13, Lot 14, Lot 15, and Lot 20 of Ccs-131102-000030

-andLot 3, Lot 4, Lot 5, Lot 6, Lot 7, Lot 8, Lot 9, Lot 10, Lot 11, Lot 14, Lot 15, Lot 16, Lot 17, and Lot 18 of Psd-131102-002639 being portions of TCT No. T-3812, LRC Rec. No. 87. With a combined area of TWO HUNDRED EIGHTY EIGHT AND ONE/TENTH HECTARES (288.1 hectares); Provided that the area consisting of approximately Six and two/tenth (6.2) hectares, more or less, presently occupied by the VOA and the residence of the Ambassador of the United States, shall be considered as part of the SEZ only upon turnover of the properties to the government of the Republic of the Philippines. Sec. 2. Governing Body of the John Hay Special Economic Zone. – Pursuant to Section 15 of Republic Act No. 7227, the Bases Conversion and Development Authority is hereby established as the governing body of the John Hay Special Economic Zone and, as such, authorized to determine the utilization and disposition of the lands comprising it, subject to private rights, if any, and in consultation and coordination with the City Government of Baguio after consultation with its inhabitants, and to promulgate the necessary policies, rules, and regulations to govern and regulate the zone thru the John Hay Poro Point Development Corporation, which is its implementing arm for its economic development and optimum utilization. Sec. 3. Investment Climate in John Hay Special Economic Zone. – Pursuant to Section 5(m) and Section 15 of Republic Act No. 7227, the John Hay Poro Point Development Corporation shall implement all necessary policies, rules, and regulations governing the zone, including investment incentives, in consultation with pertinent government departments. Among others, the zone shall have all the applicable incentives of the Special Economic Zone under Section 12 of Republic Act No. 7227 and those applicable incentives granted in the Export Processing Zones, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and new investment laws that may hereinafter be enacted. Sec. 4. Role of Departments, Bureaus, Offices, Agencies and Instrumentalities. – All Heads of departments, bureaus, offices, agencies, and instrumentalities of the government are hereby directed to give full support to Bases Conversion and Development Authority and/or its implementing subsidiary or joint venture to facilitate the necessary approvals to expedite the implementation of various projects of the conversion program. Sec. 5. Local Authority. – Except as herein provided, the affected local government units shall retain their basic autonomy and identity.

Sec. 6. Repealing Clause. – All orders, rules, and regulations, or parts thereof, which are inconsistent with the provisions of this Proclamation, are hereby repealed, amended, or modified accordingly. Sec. 7. Effectivity. This proclamation shall take effect immediately. Done in the City of Manila, this 5th day of July, in the year of Our Lord, nineteen hundred and ninety-four. The issuance of Proclamation No. 420 spawned the present petition for prohibition, mandamus and declaratory relief which was filed on April 25, 1995 challenging, in the main, its constitutionality or validity as well as the legality of the Memorandum of Agreement and Joint Venture Agreement between public respondent BCDA and private respondents TUNTEX and ASIAWORLD.
[17]

Petitioners allege as grounds for the allowance of the petition the following:
I. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1990 (sic) IN SO FAR AS IT GRANTS TAX EXEMPTIONS IS INVALID AND ILLEGAL AS IT IS AN UNCONSTITUTIONAL EXERCISE BY THE PRESIDENT OF A POWER GRANTED ONLY TO THE LEGISLATURE. II. PRESIDENTIAL PROCLAMATION NO. 420, IN SO FAR AS IT LIMITS THE POWERS AND INTERFERES WITH THE AUTONOMY OF THE CITY OF BAGUIO IS INVALID, ILLEGAL AND UNCONSTITUTIONAL. III. PRESIDENTIAL PROCLAMATION NO. 420, SERIES OF 1994 IS UNCONSTITUTIONAL IN THAT IT VIOLATES THE RULE THAT ALL TAXES SHOULD BE UNIFORM AND EQUITABLE.

IV. THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE AND PUBLIC RESPONDENTS BASES CONVERSION DEVELOPMENT AUTHORITY HAVING BEEN ENTERED INTO ONLY BY DIRECT NEGOTIATION IS ILLEGAL. V. THE TERMS AND CONDITIONS OF THE MEMORANDUM OF AGREEMENT ENTERED INTO BY AND BETWEEN PRIVATE AND PUBLIC RESPONDENT BASES CONVERSION DEVELOPMENT AUTHORITY IS (sic) ILLEGAL. VI. THE CONCEPTUAL DEVELOPMENT PLAN OF RESPONDENTS NOT HAVING UNDERGONE ENVIRONMENTAL IMPACT ASSESSMENT IS BEING ILLEGALLY CONSIDERED WITHOUT A VALID ENVIRONMENTAL IMPACT ASSESSMENT.

A temporary restraining order and/or writ of preliminary injunction was prayed for to enjoin BCDA, John Hay Poro Point Development Corporation and the city government from implementing Proclamation No. 420, and TUNTEX and ASIAWORLD from proceeding with their plan respecting

Camp John Hay‘s development pursuant to their Joint Venture Agreement with BCDA.
[18]

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

In maintaining the validity of Proclamation No. 420, respondents contend that by extending to the John Hay SEZ economic incentives similar to those enjoyed by the Subic SEZ which was established under R.A. No. 7227, the proclamation is merely implementing the legislative intent of said law to turn the US military bases into hubs of business activity or investment. They underscore the point that the government‘s policy of bases conversion can not be achieved without extending the same tax exemptions granted by R.A. No. 7227 to Subic SEZ to other SEZs. Denying that Proclamation No. 420 is in derogation of the local autonomy of Baguio City or that it is violative of the constitutional guarantee of equal protection, respondents assail petitioners‘ lack of standing to bring the present suit even as taxpayers and in the absence of any actual case or controversy to warrant this Court‘s exercise of its power of judicial review over the proclamation. Finally, respondents seek the outright dismissal of the petition for having been filed in disregard of the hierarchy of courts and of the doctrine of exhaustion of administrative remedies. Replying, petitioners aver that the doctrine of exhaustion of administrative remedies finds no application herein since they are invoking the exclusive authority of this Court under Section 21 of R.A. No. 7227 to enjoin or restrain implementation of projects for conversion of the base areas; that the established exceptions to the aforesaid doctrine obtain in the present petition; and that they possess the standing to bring the petition which is a taxpayer‘s suit.
[20]

Public respondents have filed their Rejoinder and the parties have filed their respective memoranda.
[21]

Before dwelling on the core issues, this Court shall first address the preliminary procedural questions confronting the petition.

The judicial policy is and has always been that this Court will not entertain direct resort to it except when the redress sought cannot be obtained in the proper courts, or when exceptional and compelling circumstances warrant availment of a remedy within and calling for the exercise of this Court‘s primary jurisdiction. Neither will it entertain an action for declaratory relief, which is partly the nature of this petition, over which it has no original jurisdiction.
[22]

Nonetheless, as it is only this Court which has the power under Section 21 of R.A. No. 7227 to enjoin implementation of projects for the development of the former US military reservations, the issuance of which injunction petitioners pray for, petitioners‘ direct filing of the present petition with it is allowed. Over and above this procedural objection to the present suit, this Court retains full discretionary power to take cognizance of a petition filed directly to it if compelling reasons, or the nature and importance of the issues raised, warrant. Besides, remanding the case to the lower courts now would just unduly prolong adjudication of the issues.
[23] [24]

The transformation of a portion of the area covered by Camp John Hay into a SEZ is not simply a re-classification of an area, a mere ascription of a status to a place. It involves turning the former US military reservation into a focal point for investments by both local and foreign entities. It is to be made a site of vigorous business activity, ultimately serving as a spur to the country‘s long awaited economic growth. For, as R.A. No. 7227 unequivocally declares, it is the government‘s policy to enhance the benefits to be derived from the base areas in order to promote the economic and social development of Central Luzon in particular and the country in general. Like the Subic SEZ, the John Hay SEZ should also be turned into a ―self-sustaining, industrial, commercial, financial and investment center.‖
[25] [26]

More than the economic interests at stake, the development of Camp John Hay as well as of the other base areas unquestionably has critical links to a host of environmental and social concerns. Whatever use to which these lands will be devoted will set a chain of events that can affect one way or another the social and economic way of life of the communities where the bases are located, and ultimately the nation in general. Underscoring the fragility of Baguio City‘s ecology with its problem on the scarcity of its water supply, petitioners point out that the local and national government are faced with the challenge of how to provide for an ecologically sustainable, environmentally sound, equitable transition for the city in the wake of Camp John Hay‘s reversion to the mass of government property. But that is why R.A. No. 7227 emphasizes the ―sound and
[27]

balanced conversion of the Clark and Subic military reservations and their extensions consistent with ecological and environmental standards.‖ It cannot thus be gainsaid that the matter of conversion of the US bases into SEZs, in this case Camp John Hay, assumes importance of a national magnitude.
[28]

Convinced then that the present petition embodies crucial issues, this Court assumes jurisdiction over the petition. As far as the questioned agreements between BCDA and TUNTEX and ASIAWORLD are concerned, the legal questions being raised thereon by petitioners have indeed been rendered moot and academic by the revocation of such agreements. There are, however, other issues posed by the petition, those which center on the constitutionality of Proclamation No. 420, which have not been mooted by the said supervening event upon application of the rules for the judicial scrutiny of constitutional cases. The issues boil down to:
(1) (2) Whether the present petition complies with the requirements for this Court‘s exercise of jurisdiction over constitutional issues; Whether Proclamation No. 420 is constitutional by providing for national and local tax exemption within and granting other economic incentives to the John Hay Special Economic Zone; and Whether Proclamation No. 420 is constitutional for limiting or interfering with the local autonomy of Baguio City;

(3)

It is settled that when questions of constitutional significance are raised, the court can exercise its power of judicial review only if the following requisites are present: (1) the existence of an actual and appropriate case; (2) a personal and substantial interest of the party raising the constitutional question; (3) the exercise of judicial review is pleaded at the earliest opportunity; and (4) the constitutional question is the lis mota of the case.
[29]

An actual case or controversy refers to an existing case or controversy that is appropriate or ripe for determination, not conjectural or anticipatory. The controversy needs to be definite and concrete, bearing upon the legal relations of parties who are pitted against each other due to their adverse legal interests. There is in the present case a real clash of interests and rights between petitioners and respondents arising from the issuance of a presidential proclamation that converts a portion of the area covered by Camp John Hay into a SEZ, the former insisting that such proclamation contains unconstitutional provisions, the latter claiming otherwise.
[30] [31]

R.A. No. 7227 expressly requires the concurrence of the affected local government units to the creation of SEZs out of all the base areas in the country. The grant by the law on local government units of the right of concurrence on the bases‘ conversion is equivalent to vesting a legal standing on them, for it is in effect a recognition of the real interests that communities nearby or surrounding a particular base area have in its utilization. Thus, the interest of petitioners, being inhabitants of Baguio, in assailing the legality of Proclamation No. 420, is personal and substantial such that they have sustained or will sustain direct injury as a result of the government act being challenged. Theirs is a material interest, an interest in issue affected by the proclamation and not merely an interest in the question involved or an incidental interest, for what is at stake in the enforcement of Proclamation No. 420 is the very economic and social existence of the people of Baguio City.
[32] [33] [34]

Petitioners‘ locus standi parallels that of the petitioner and other residents of Bataan, specially of the town of Limay, in Garcia v. Board of Investments where this Court characterized their interest in the establishment of a petrochemical plant in their place as actual, real, vital and legal, for it would affect not only their economic life but even the air they breathe.
[35]

Moreover, petitioners Edilberto T. Claravall and Lilia G. Yaranon were duly elected councilors of Baguio at the time, engaged in the local governance of Baguio City and whose duties included deciding for and on behalf of their constituents the question of whether to concur with the declaration of a portion of the area covered by Camp John Hay as a SEZ. Certainly then, petitioners Claravall and Yaranon, as city officials who voted against the sanggunian Resolution No. 255 (Series of 1994) supporting the issuance of the now challenged Proclamation No. 420, have legal standing to bring the present petition.
[36]

That there is herein a dispute on legal rights and interests is thus beyond doubt. The mootness of the issues concerning the questioned agreements between public and private respondents is of no moment. “By the mere enactment of the questioned law or the approval of the challenged act, the dispute is deemed to have ripened into a judicial controversy even without any other overt act. Indeed, even a singular violation of the Constitution and/or the law is enough to awaken judicial duty.”
[37]

As to the third and fourth requisites of a judicial inquiry, there is likewise no question that they have been complied with in the case at bar. This is an action filed purposely to bring forth constitutional issues, ruling on

which this Court must take up. Besides, respondents never raised issues with respect to these requisites, hence, they are deemed waived. Having cleared the way for judicial review, the constitutionality of Proclamation No. 420, as framed in the second and third issues above, must now be addressed squarely. The second issue refers to petitioners‘ objection against the creation by Proclamation No. 420 of a regime of tax exemption within the John Hay SEZ. Petitioners argue that nowhere in R. A. No. 7227 is there a grant of tax exemption to SEZs yet to be established in base areas, unlike the grant under Section 12 thereof of tax exemption and investment incentives to the therein established Subic SEZ. The grant of tax exemption to the John Hay SEZ, petitioners conclude, thus contravenes Article VI, Section 28 (4) of the Constitution which provides that ―No law granting any tax exemption shall be passed without the concurrence of a majority of all the members of Congress.‖ Section 3 of Proclamation No. 420, the challenged provision, reads: Sec. 3. Investment Climate in John Hay Special Economic Zone. – Pursuant to Section 5(m) and Section 15 of Republic Act No. 7227, the John Hay Poro Point Development Corporation shall implement all necessary policies, rules, and regulations governing the zone, including investment incentives, in consultation with pertinent government departments. Among others, the zone shall have all the applicable incentives of the Special Economic Zone under Section 12 of Republic Act No. 7227 and those applicable incentivesgranted in the Export Processing Zones, the Omnibus Investment Code of 1987, the Foreign Investment Act of 1991, and new investment laws that may hereinafter be enacted. (Emphasis and underscoring supplied) Upon the other hand, Section 12 of R.A. No. 7227 provides: xxx (a) Within the framework and subject to the mandate and limitations of the Constitution and the pertinent provisions of the Local Government Code, the Subic Special Economic Zone shall be developed into a self-sustaining, industrial, commercial, financial and investment center to generate employment opportunities in and around the zone and to attract and promote productive foreign investments; b) The Subic Special Economic Zone shall be operated and managed as a separate customs territory ensuring free flow or movement of goods and capital within, into and exported out of the Subic Special Economic Zone, as well as provide incentives

such as tax and duty free importations of raw materials, capital and equipment. However, exportation or removal of goods from the territory of the Subic Special Economic Zone to the other parts of the Philippine territory shall be subject to customs duties and taxes under the Customs and Tariff Code and other relevant tax laws of the Philippines; (c) The provisions of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed within the Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone shall be remitted to the National Government, one percent (1%) each to the local government units affected by the declaration of the zone in proportion to their population area, and other factors. In addition, there is hereby established a development fund of one percent (1%) of the gross income earned by all businesses and enterprises within the Subic Special Economic Zone to be utilized for the Municipality of Subic, and other municipalities contiguous to be base areas. In case of conflict between national and local laws with respect to tax exemption privileges in the Subic Special Economic Zone, the same shall be resolved in favor of the latter; (d) No exchange control policy shall be applied and free markets for foreign exchange, gold, securities and futures shall be allowed and maintained in the Subic Special Economic Zone; (e) The Central Bank, through the Monetary Board, shall supervise and regulate the operations of banks and other financial institutions within the Subic Special Economic Zone; (f) Banking and Finance shall be liberalized with the establishment of foreign currency depository units of local commercial banks and offshore banking units of foreign banks with minimum Central Bank regulation; (g) Any investor within the Subic Special Economic Zone whose continuing investment shall not be less than Two Hundred fifty thousand dollars ($250,000), his/her spouse and dependent children under twenty-one (21) years of age, shall be granted permanent resident status within the Subic Special Economic Zone. They shall have freedom of ingress and egress to and from the Subic Special Economic Zone without any need of special authorization from the Bureau of Immigration and Deportation. The Subic Bay Metropolitan Authority referred to in Section 13 of this Act may also issue working visas renewable every two (2) years to foreign executives and other aliens possessing highly-technical skills which no Filipino within the Subic Special Economic Zone possesses, as certified by the Department of Labor and Employment. The names of aliens granted permanent residence status and working

visas by the Subic Bay Metropolitan Authority shall be reported to the Bureau of Immigration and Deportation within thirty (30) days after issuance thereof; x x x (Emphasis supplied) It is clear that under Section 12 of R.A. No. 7227 it is only the Subic SEZ which was granted by Congress with tax exemption, investment incentives and the like. There is no express extension of the aforesaid benefits to other SEZs still to be created at the time via presidential proclamation. The deliberations of the Senate confirm the exclusivity to Subic SEZ of the tax and investment privileges accorded it under the law, as the following exchanges between our lawmakers show during the second reading of the precursor bill of R.A. No. 7227 with respect to the investment policies that would govern Subic SEZ which are now embodied in the aforesaid Section 12 thereof: xxx Senator Maceda: This is what I was talking about. We get into problems here because all of these following policies are centered around the concept of free port. And in the main paragraph above, we have declared both Clark and Subic as special economic zones, subject to these policies which are, in effect, a free-port arrangement. Senator Angara: The Gentleman is absolutely correct, Mr. President. So we must confine these policies only to Subic. May I withdraw then my amendment, and instead provide that “THE SPECIAL ECONOMIC ZONE OF SUBIC SHALL BE ESTABLISHED IN ACCORDANCE WITH THE FOLLOWING POLICIES.” Subject to style, Mr. President. Thus, it is very clear that these principles and policies are applicable only to Subic as a free port. Senator Paterno: Mr. President. The President: Senator Paterno is recognized. Senator Paterno: I take it that the amendment suggested by Senator Angara would then prevent the establishment of other special economic zones observing these policies.

Senator Angara: No, Mr. President, because during our short caucus, Senator Laurel raised the point that if we give this delegation to the President to establish other economic zones, that may be an unwarranted delegation. So we agreed that we will simply limit the definition of powers and description of the zone to Subic, but that does not exclude the possibility of creating other economic zones within the baselands. Senator Paterno: But if that amendment is followed, no other special economic zone may be created under authority of this particular bill. Is that correct, Mr. President? Senator Angara: Under this specific provision, yes, Mr. President. This provision now will be confined only to Subic.
[38]

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

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

tax. Other than Congress, the Constitution may itself provide for specific tax exemptions, or local governments may pass ordinances on exemption only from local taxes.
[42] [43] [44]

The challenged grant of tax exemption would circumvent the Constitution‘s imposition that a law granting any tax exemption must have the concurrence of a majority of all the members of Congress. In the same vein, the other kinds of privileges extended to the John Hay SEZ are by tradition and usage for Congress to legislate upon.
[45]

Contrary to public respondents‘ suggestions, the claimed statutory exemption of the John Hay SEZ from taxation should be manifest and unmistakable from the language of the law on which it is based; it must be expressly granted in a statute stated in a language too clear to be mistaken. Tax exemption cannot be implied as it must be categorically and unmistakably expressed.
[46] [47]

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

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

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

xxx

(a) To own, hold and/or administer the military reservations of John Hay Air Station, Wallace Air Station, O’Donnell Transmitter Station, San Miguel Naval Communications Station, Mt. Sta. Rita Station (Hermosa, Bataan) and those portions of Metro Manila Camps which may be transferred to it by the President; x x x (Underscoring supplied) With such broad rights of ownership and administration vested in BCDA over Camp John Hay, BCDA virtually has control over it, subject to certain limitations provided for by law. By designating BCDA as the governing agency of the John Hay SEZ, the law merely emphasizes or reiterates the statutory role or functions it has been granted. The unconstitutionality of the grant of tax immunity and financial incentives as contained in the second sentence of Section 3 of Proclamation No. 420 notwithstanding, the entire assailed proclamation cannot be declared unconstitutional, the other parts thereof not being repugnant to law or the Constitution. The delineation and declaration of a portion of the area covered by Camp John Hay as a SEZ was well within the powers of the President to do so by means of a proclamation. The requisite prior concurrence by the Baguio City government to such proclamation appears to have been given in the form of a duly enacted resolution by the sanggunian. The other provisions of the proclamation had been proven to be consistent with R.A. No. 7227.
[51]

Where part of a statute is void as contrary to the Constitution, while another part is valid, the valid portion, if separable from the invalid, may stand and be enforced. This Court finds that the other provisions in Proclamation No. 420 converting a delineated portion of Camp John Hay into the John Hay SEZ are separable from the invalid second sentence of Section 3 thereof, hence they stand.
[52]

WHEREFORE, the second sentence of Section 3 of Proclamation No. 420 is hereby declared NULL AND VOID and is accordingly declared of no legal force and effect. Public respondents are hereby enjoined from implementing the aforesaid void provision. Proclamation No. 420, without the invalidated portion, remains valid and effective. SO ORDERED.
G.R. No. 112024 January 28, 1999 PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs.

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

QUISUMBING, J.: This petition for review assails the Resolution 1 of the Court of Appeals dated September 22, 1993 affirming the Decision 2 and a Resolution 3 of the Court Of Tax Appeals which denied the claims of the petitioner for tax refund and tax credits, and disposing as follows: IN VIEW OF ALL, THE FOREGOING, the instant petition for review, is DENIED due course. The Decision of the Court of Tax Appeals dated May 20, 1993 and its resolution dated July 20, 1993, are hereby AFFIRMED in toto.

SO ORDERED. 4
The Court of Tax Appeals earlier ruled as follows: WHEREFORE, Petitioner's claim for refund/tax credits of overpaid income tax for 1985 in the amount of P5,299,749.95 is hereby denied for having been filed beyond the reglementary period. The 1986 claim for refund amounting to P234,077.69 is likewise denied since petitioner has opted and in all likelihood automatically credited the same to the succeeding year. The petition for review is dismissed for lack of merit.

SO ORDERED. 5
The facts on record show the antecedent circumstances pertinent to this case. Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation duly organized under Philippine laws, filed its quarterly income tax returns for the first and second quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. The taxes due were settled by applying PBCom's tax credit memos and accordingly, the Bureau of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for P3,401,701.00 and P1,615,253.00, respectively. Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the year-ended December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for the year. But during these two years, PBCom earned rental income from leased properties. The lessees withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and P234,077.69 in 1986. On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others, for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second quarters of 1985. Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69. Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals (CTA). The petition was docketed as CTA Case No. 4309 entitled: "Philippine Bank of Communications vs. Commissioner of Internal Revenue." The losses petitioner incurred as per the summary of petitioner's claims for refund and tax credit for 1985 and 1986, filed before the Court of Tax Appeals, are as follows:

1985 1986 ——— ——— Net Income (Loss) (P25,317,288.00) (P14,129,602.00) Tax Due NIL NIL Quarterly tax. Payments Made 5,016,954.00 — Tax Withheld at Source 282,795.50 234,077.69 ———————— ——————— Excess Tax Payments P5,299,749.50* P234,077.69 =============== ============= * CTA's decision reflects PBCom's 1985 tax claim as P5,299,749.95. A forty five centavo difference was noted. On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the request of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the ground that it was filed beyond the twoyear reglementary period provided for by law. The petitioner's claim for refund in 1986 amounting to P234,077.69 was likewise denied on the assumption that it was automatically credited by PBCom against its tax payment in the succeeding year. On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTA's decision but the same was denied due course for lack of merit. 6 Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with the Court of Appeals. However on September 22, 1993, the Court of Appeals affirmed in toto the CTA's resolution dated July 20, 1993. Hence this petition now before us. The issues raised by the petitioner are:

I. Whether taxpayer PBCom — which relied in good faith on the formal assurances of BIR in RMC No. 7-85 and did not immediately file with the CTA a petition for review asking for the refund/tax credit of its 1985-86 excess quarterly income tax payments — can be prejudiced by the subsequent BIR rejection, applied retroactivity, of its assurances in RMC No. 7-85 that the prescriptive period for the refund/tax credit of excess quarterly income tax payments is not two years but ten (10). 7 II. Whether the Court of Appeals seriously erred in affirming the CTA decision which denied PBCom's claim for the refund of P234,077.69 income tax overpaid in 1986 on the mere speculation, without proof, that there were taxes due in 1987 and that PBCom availed of tax-crediting that year. 8

Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the plea for tax refund or tax credits on the ground of prescription, despite petitioner's reliance on RMC No. 7-85, changing the prescriptive period of two years to ten years? Petitioner argues that its claims for refund and tax credits are not yet barred by prescription relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1, 1985. The circular states that overpaid income taxes are not covered by the two-year prescriptive period under the tax Code and that taxpayers may claim refund or tax credits for the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the Civil Code. The pertinent portions of the circular reads: REVENUE MEMORANDUM CIRCULAR NO. 7-85 SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS CORPORATE INCOME TAX RESULTING FROM THE FILING OF THE FINAL ADJUSTMENT RETURN. TO: All Internal Revenue Officers and Others Concerned. Sec. 85 And 86 Of the National Internal Revenue Code provide: xxx xxx xxx The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77 which provide; xxx xxx xxx It has been observed, however, that because of the excess tax payments, corporations file claims for recovery of overpaid income tax with the Court of Tax Appeals within the two-year period from the date of payment, in accordance with sections 292 and 295 of the National Internal Revenue Code. It is obvious that the filing of the case in court is to preserve the judicial right of the corporation to claim the refund or tax credit. It should he noted, however, that this is not a case of erroneously or illegally paid tax under the provisions of Sections 292 and 295 of the Tax Code. In the above provision of the Regulations the corporation may request for the refund of the overpaid income tax or claim for automatic tax credit. To insure prompt action on corporate annual income tax returns showing refundable amounts arising from overpaid quarterly income taxes, this Office has promulgated Revenue Memorandum Order No. 32-76 dated June 11, 1976, containing the procedure in processing said returns. Under these procedures, the returns are merely pre-audited which consist mainly of checking mathematical accuracy of the figures of the return. After which, the refund or tax credit is granted, and, this procedure was adopted to facilitate immediate action on cases like this.

In this regard, therefore, there is no need to file petitions for review in the Court of Tax Appeals in order to preserve the right to claim refund or tax credit the two year period. As already stated, actions hereon by the Bureau are immediate after only a cursory pre-audit of the income tax returns. Moreover, a taxpayer may recover from the Bureau of Internal Revenue excess income tax paid under the provisions of Section 86 of the Tax Code within 10 years from the date of payment considering that it is an obligation created by law (Article 1144 of the Civil Code). 9 (Emphasis supplied.)

Petitioner argues that the government is barred from asserting a position contrary to its declared circular if it would result to injustice to taxpayers. Citing ABS CBN Broadcasting Corporation vs. Court of Tax Appeals 10 petitioner claims that rulings or circulars promulgated by the Commissioner of Internal Revenue have no retroactive effect if it would be prejudicial to taxpayers, In ABS-CBN case, the Court held that the government is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom or where there has been a misrepresentation to the taxpayer. Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for this rules as follows: Sec. 246 Non-retroactivity of rulings— Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding section or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers except in the following cases: a). where the taxpayer deliberately misstates or omits material facts from his return or in any document required of him by the Bureau of Internal Revenue; b). where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts on which the ruling is based; c). where the taxpayer acted in bad faith. Respondent Commissioner of Internal Revenue, through Solicitor General, argues that the two-year prescriptive period for filing tax cases in court concerning income tax payments of Corporations is reckoned from the date of filing the Final Adjusted Income Tax Return, which is generally done on April 15 following the close of the calendar year. As precedents, respondent Commissioner cited cases which adhered to this principle, to wit ACCRA Investments Corp. vs. Court of Appeals, et al., 11 and Commissioner of Internal Revenue vs. TMX Sales, Inc., et al.. 12 Respondent Commissioner also states that since the Final Adjusted Income Tax Return of the petitioner for the taxable year 1985 was supposed to be filed on April 15, 1986, the latter had only until April 15, 1988 to seek relief from the court. Further, respondent Commissioner stresses that when the petitioner filed the case before the CTA on November 18, 1988, the same was filed beyond the time fixed by law, and such failure is fatal to petitioner's cause of action. After a careful study of the records and applicable jurisprudence on the matter, we find that, contrary to the petitioner's contention, the relaxation of revenue regulations by RMC 7-85 is not warranted as it disregards the two-year prescriptive period set by law. Basic is the principle that "taxes are the lifeblood of the nation." The primary purpose is to generate funds for the State to finance the needs of the citizenry and to advance the common weal. 13 Due process of law under the Constitution does not require judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that the government chiefly relies to obtain the means to carry on its operations and it is of utmost importance that the modes adopted to enforce the collection of taxes levied should be summary and interfered with as little as possible. 14 From the same perspective, claims for refund or tax credit should be exercised within the time fixed by law because the BIR being an administrative body enforced to collect taxes, its functions should not be unduly delayed or hampered by incidental matters. Sec. 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for the prescriptive period for filing a court proceeding for the recovery of tax erroneously or illegally collected, viz.:

Sec. 230. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been paid under protest or duress. In any case, no such suit or proceedings shall begun after the expiration of two years from the date of payment of the tax or penalty regardless of any supervening cause that may arise after payment;Provided however, That the Commissioner may, even without a written claim therefor, refund or credit any tax, where on the face of the return upon which payment was made, such payment appears clearly to have been erroneously paid. (Emphasis supplied) The rule states that the taxpayer may file a claim for refund or credit with the Commissioner of Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is commenced. The two-year prescriptive period provided, should be computed from the time of filing the Adjustment Return and final payment of the tax for the year. In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co ., 15 this Court explained the application of Sec. 230 of 1977 NIRC, as follows:

Clearly, the prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. In the present case, this date is April 16, 1984, and two years from this date would be April 16, 1986. . . . As we have earlier said in the TMX Sales case, Sections 68. 16 69, 17 and 70 18 on Quarterly Corporate Income Tax Payment and Section 321 should be considered in conjunction with it 19
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. 20 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 the case of People vs. Lim, 22 it was held that rules and regulations issued by administrative officials to implement a law cannot go beyond the terms and provisions of the latter.

Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only inconsistent with but is contrary to the provisions and spirit of Act. No 4003 as amended, because whereas the prohibition prescribed in said Fisheries Act was for any single period of time not exceeding five years duration, FAO No 37-1 fixed no period, that is to say, it establishes an absolute ban for all time. This discrepancy between Act No. 4003 and FAO No. 37-1 was probably due to an oversight on the part of Secretary of Agriculture and Natural Resources. Of course, in case of discrepancy, the basic Act prevails, for the reason that the regulation or rule issued to implement a law cannot go beyond the terms and provisions of the latter. . . . In this connection, the attention of the technical men in the offices of Department Heads who draft rules and regulation is called to the importance and

necessity of closely following the terms and provisions of the law which they intended to implement, this to avoid any possible misunderstanding or confusion as in the present case. 23
Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. 24 As pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative interpretation which is not in harmony with Sec. 230 of 1977 NIRC. for being contrary to the express provision of a statute. Hence, his interpretation could not be given weight for to do so would, in effect, amend the statute.

It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC No. 7-85, is estopped by the principle of non-retroactively of BIR rulings. Again We do not agree. The Memorandum Circular, stating that a taxpayer may recover the excess income tax paid within 10 years from date of payment because this is an obligation created by law, was issued by the Acting Commissioner of Internal Revenue. On the other hand, the decision, stating that the taxpayer should still file a claim for a refund or tax credit and corresponding petition fro review within the two-year prescription period, and that the lengthening of the period of limitation on refund from two to ten years would be adverse to public policy and run counter to the positive mandate of Sec. 230, NIRC, - was the ruling and judicial interpretation of the Court of Tax Appeals. Estoppel has no application in the case at bar because it was not the Commissioner of Internal Revenue who denied petitioner's claim of refund or tax credit. Rather, it was the Court of Tax Appeals who denied (albeit correctly) the claim and in effect, ruled that the RMC No. 7-85 issued by the Commissioner of Internal Revenue is an administrative interpretation which is out of harmony with or contrary to the express provision of a statute (specifically Sec. 230, NIRC), hence, cannot be given weight for to do so would in effect amend the statute. 25
Art. 8 of the Civil Code 26 recognizes judicial decisions, applying or interpreting statutes as part of the legal system of the country. But administrative decisions do not enjoy that level of recognition. A memorandumcircular of a bureau head could not operate to vest a taxpayer with shield against judicial action. For 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. 27 Moreover, the non-retroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this case because the nullity of RMC No. 7-85 was declared by respondent courts and not by the Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this Court, a claim for refund is in the nature of a claim for exemption and should be construed in strictissimi juris against the taxpayer. 28 On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming CTA's decision denying its claim for refund of P234,077.69 (tax overpaid in 1986), based on mere speculation, without proof, that PBCom availed of the automatic tax credit in 1987. Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either(a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year. The corporation must signify in its annual corporate adjustment return (by marking the option box provided in the BIR form) its intention, whether to request for a refund or claim for an automatic tax credit for the succeeding taxable year. To ease the administration of tax collection, these remedies are in the alternative, and the choice of one precludes the other. As stated by respondent Court of Appeals:

Finally, as to the claimed refund of income tax over-paid in 1986 — the Court of Tax Appeals, after examining the adjusted final corporate annual income tax return for taxable year 1986, found out that petitioner opted to apply for automatic tax credit. This was the basis used (vis-avis the fact that the 1987 annual corporate tax return was not offered by the petitioner as evidence) by the CTA in concluding that petitioner had indeed availed of and applied the automatic tax credit to the succeeding year, hence it can no longer ask for refund, as to [sic] the two remedies of refund and tax credit are alternative. 30
That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977 NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which we must respect. Moreover, the 1987 annual corporate tax return of the petitioner was not offered as evidence to contovert said fact. Thus, we are bound by the findings of fact by respondent courts, there being no showing of gross error or abuse on their part to disturb our reliance thereon. 31 WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals appealed from is AFFIRMED, with COSTS against the petitioner.
1âwphi1.nêt

SO ORDERED. G.R. No. 127105 June 25, 1999 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents.

GONZAGA-REYES, J.: This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming the decision of the Court of Tax Appeals in CTA Case No. 5136. The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit: [Respondent], a domestic corporation organized and operating under the Philippine laws, entered into a license agreement with SC Johnson and Son, United States of America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted the right to use the trademark, patents and technology owned by the latter including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son, U. S. A. The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064 (Exh. "A"). For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which [respondent] paid for the period covering July 1992 to May 1993 in the total amount of P1,603,443.00 (Exhs. "B" to "L" and submarkings). On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that, "the antecedent facts attending [respondent's] case fall squarely within the same circumstances

under which said MacGeorge and Gillete rulings were issued. Since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the [respondent]. We therefore submit that royalties paid by the [respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)]" (Petition for Review [filed with the Court of Appeals], par. 12). [Respondent's] claim for there fund of P963,266.00 was computed as follows: Gross 25% 10% Month/ Royalty Withholding Withholding Year Fee Tax Paid Tax Balance ——— ——— ——— ——— ——— July 1992 559,878 139,970 55,988 83,982 August 567,935 141,984 56,794 85,190 September 595,956 148,989 59,596 89,393 October 634,405 158,601 63,441 95,161 November 620,885 155,221 62,089 93,133 December 383,276 95,819 36,328 57,491 Jan 1993 602,451 170,630 68,245 102,368 February 565,845 141,461 56,585 84,877 March 547,253 136,813 54,725 82,088 April 660,810 165,203 66,081 99,122 May 603,076 150,769 60,308 90,461 ———— ———— ———— ———

P6,421,770 P1,605,443 P642,177 P963,266 1
======== ======== ======== ======== The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc. (S.C. Johnson) then filed a petition for review before the Court of Tax Appeals (CTA) where the case was docketed as CTA Case No. 5136, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993. On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the amount of P963,266.00 representing overpaid withholding tax on royalty payments, beginning July, 1992 to May, 1993. 2

The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals which rendered the decision subject of this appeal on November 7, 1996 finding no merit in the petition and affirming in toto the CTA ruling. 3 This petition for review was filed by the Commissioner of Internal Revenue raising the following issue: THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS ENTITLED TO THE "MOST FAVORED NATION" TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY. Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the "most favored nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties derived by a resident of the United States from sources within the Philippines only if the circumstances of the resident of the United States are similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains no "matching credit" provision as that provided under Article 24 of the RP-West Germany Tax Treaty, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RPWest Germany Tax Treaty. Even assuming that the phrase "paid under similar circumstances" refers to the payment of royalties, and not taxes, as held by the Court of Appeals, still, the "most favored nation" clause cannot be invoked for the reason that when a tax treaty contemplates circumstances attendant to the payment of a tax, or royalty remittances for that matter, these must necessarily refer to circumstances that are taxrelated. Finally, petitioner argues that since S.C. Johnson's invocation of the "most favored nation" clause is in the nature of a claim for exemption from the application of the regular tax rate of 25% for royalties, the provisions of the treaty must be construed strictly against it. In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied (1) because it contains a defective certification against forum shopping as required under SC Circular No. 28-91, that is, the certification was not executed by the petitioner herself but by her counsel; and (2) that the "most favored nation" clause under the RP-US Tax Treaty refers to royalties paid under similar circumstances as those royalties subject to tax in other treaties; that the phrase "paid under similar circumstances" does not refer to payment of the tax but to the subject matter of the tax, that is, royalties, because the "most favored nation" clause is intended to allow the taxpayer in one state to avail of more liberal provisions contained in another tax treaty wherein the country of residence of such taxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation in that other tax treaty is the same as that in the original tax treaty under which the taxpayer is liable; thus, the RP-US Tax Treaty speaks of "royalties of the same kind paid under similar circumstances". S.C. Johnson also contends that the Commissioner is estopped from insisting on her interpretation that the phrase "paid under similar circumstances" refers to the manner in which the tax is paid, for the reason that said interpretation is embodied in Revenue Memorandum Circular ("RMC") 39-92 which was already abandoned by the Commissioner's predecessor in 1993; and was expressly revoked in BIR Ruling No. 052-95 which stated that royalties paid to an American licensor are subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. Said ruling should be given retroactive effect except if such is prejudicial to the taxpayer pursuant to Section 246 of the National Internal Revenue Code. Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed by petitioner's counsel is not a fatal defect as to warrant the dismissal of this petition since Circular No. 28-91 applies only to original actions and not to appeals, as in the instant case. Moreover, the requirement that the certification should be signed by petitioner and not by counsel does not apply to petitioner who has only the Office of the Solicitor General as statutory counsel. Petitioner reiterates that even if the phrase "paid under similar circumstances" embodied in the most favored nation clause of the RP-US Tax Treaty refers to the payment of royalties and not taxes, still the presence or absence of a "matching credit" provision in the said RP-US Tax Treaty would constitute a material circumstance to such payment and would be determinative of the said clause's application.
1âw phi 1.nêt

We address first the objection raised by private respondent that the certification against forum shopping was not executed by the petitioner herself but by her counsel, the Office of the Solicitor General (O.S.G.) through one of its Solicitors, Atty. Tomas M. Navarro.

SC Circular No. 28-91 provides: SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE SUPREME COURT AND THE COURT OF APPEALS TO PREVENT FORUM SHOPPING OR MULTIPLE FILING OF PETITIONS AND COMPLAINTS TO: xxx xxx xxx The attention of the Court has been called to the filing of multiple petitions and complaints involving the same issues in the Supreme Court, the Court of Appeals or other tribunals or agencies, with the result that said courts, tribunals or agencies have to resolve the same issues. (1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court of Appeals, the petitioner aside from complying with pertinent provisions of the Rules of Court and existing circulars, must certify under oath to all of the following facts or undertakings: (a) he has not theretofore commenced any other action or proceeding involving the same issues in the Supreme Court, the Court of Appeals, or any tribunal or agency; . . . (2) Any violation of this revised Circular will entail the following sanctions: (a) it shall be a cause for the summary dismissal of the multiple petitions or complaints; . . . The circular expressly requires that a certificate of non-forum shopping should be attached to petitions filed before this Court and the Court of Appeals. Petitioner's allegation that Circular No. 28-91 applies only to original actions and not to appeals as in the instant case is not supported by the text nor by the obvious intent of the Circular which is to prevent multiple petitions that will result in the same issue being resolved by different courts. Anent the requirement that the party, not counsel, must certify under oath that he has not commenced any other action involving the same issues in this Court or the Court of Appeals or any other tribunal or agency, we are inclined to accept petitioner's submission that since the OSG is the only lawyer for the petitioner, which is a government agency mandated under Section 35, Chapter 12, title III, Book IV of the 1987 Administrative Code 4 to be represented only by the Solicitor General, the certification executed by the OSG in this case constitutes substantial compliance with Circular No. 28-91. With respect to the merits of this petition, the main point of contention in this appeal is the interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to be imposed by the Philippines upon royalties received by a non-resident foreign corporation. The provision states insofar as pertinent that — 1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2) However, the tax imposed by that Contracting State shall not exceed. a) In the case of the United States, 15 percent of the gross amount of the royalties, and b) In the case of the Philippines, the least of:

(i) 25 percent of the gross amount of the royalties; (ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. xxx xxx xxx (emphasis supplied) Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is entitled to the concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the RP-Germany Tax Treaty which provides: (2) However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed: xxx xxx xxx b) 10 percent of the gross amount of royalties arising from the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process, or from the use of or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the gross amount of such royalties against German income and corporation tax for the taxes payable in the Philippines on such royalties where the tax rate is reduced to 10 or 15 percent under such treaty. Article 24 of the RPGermany Tax Treaty states — 1) Tax shall be determined in the case of a resident of the Federal Republic of Germany as follows: xxx xxx xxx b) Subject to the provisions of German tax law regarding credit for foreign tax, there shall be allowed as a credit against German income and corporation tax payable in respect of the following items of income arising in the

Republic of the Philippines, the tax paid under the laws of the Philippines in accordance with this Agreement on: xxx xxx xxx dd) royalties, as defined in paragraph 3 of Article 12; xxx xxx xxx c) For the purpose of the credit referred in subparagraph; b) the Philippine tax shall be deemed to be xxx xxx xxx cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent according to paragraph 2 of Article 12, 20 percent of the gross amount of such royalties. xxx xxx xxx According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under circumstances similar to those in the RP-West Germany Tax Treaty since there is no provision for a 20 percent matching credit in the former convention and private respondent cannot invoke the concessional tax rate on the strength of the most favored nation clause in the RP-US Tax Treaty. Petitioner's position is explained thus: Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on income from sources within the Philippines is allowed as a credit against German income and corporation tax on the same income. In the case of royalties for which the tax is reduced to 10 or 15 percent according to paragraph 2 of Article 12 of the RP-West Germany Tax Treaty, the credit shall be 20% of the gross amount of such royalty. To illustrate, the royalty income of a German resident from sources within the Philippines arising from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, is taxed at 10% of the gross amount of said royalty under certain conditions. The rate of 10% is imposed if credit against the German income and corporation tax on said royalty is allowed in favor of the German resident. That means the rate of 10% is granted to the German taxpayer if he is similarly granted a credit against the income and corporation tax of West Germany. The clear intent of the "matching credit" is to soften the impact of double taxation by different jurisdictions.

The RP-US Tax Treaty contains no similar "matching credit" as that provided under the RP-West Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Therefore, the "most favored nation" clause in the RP-West Germany Tax Treaty cannot be availed of in interpreting the provisions of the RP-US Tax Treaty. 5
The petition is meritorious. We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of Appeals, that the phrase "paid under similar circumstances in Article 13 (2) (b), (iii) of the RP-US Tax Treaty should be interpreted to refer to payment of royalty, and not to the payment of the tax, for the reason that the phrase "paid under similar circumstances" is followed by the phrase "to a resident of a third state". The respondent court held that "Words are to be understood in the context in which they are used", and since what is paid to a

resident of a third state is not a tax but a royalty "logic instructs" that the treaty provision in question should refer to royalties of the same kind paid under similar circumstances. The above construction is based principally on syntax or sentence structure but fails to take into account the purpose animating the treaty provisions in point. To begin with, we are not aware of any law or rule pertinent to the payment of royalties, and none has been brought to our attention, which provides for the payment of royalties under dissimilar circumstances. The tax rates on royalties and the circumstances of payment thereof are the same for all the recipients of such royalties and there is no disparity based on nationality in the circumstances of such payment. 6 On the other hand, a cursory reading of the various tax treaties will show that there is no similarity in the provisions on relief from or avoidance of double taxation 7 as this is a matter of negotiation between the contracting parties. 8 As will be shown later, this dissimilarity is true particularly in the treaties between the Philippines and the United States and between the Philippines and West Germany. The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the avoidance of double taxation. 9 The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. 10 More precisely, the tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. 11 The apparent rationale for doing away with double taxation is of encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. 12 Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate. 13 Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. 14 The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two methods of relief — the exemption method and the credit method. In the exemption method, the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer's remaining income or capital. On the other hand, in the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax. 15 In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the other country. 16 Thus the petitioner correctly opined that the phrase "royalties paid under similar circumstances" in the most favored nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that are taxrelated". In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use property or rights, i.e. trademarks, patents and technology, located within the Philippines. 17 The United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that may be collected by the state of source. 18 Furthermore, the method employed to give relief from double taxation is the allowance of a tax credit to citizens or residents of the United States (in an appropriate amount based upon the taxes paid or accrued to the Philippines) against the United States tax, but such

amount shall not exceed the limitations provided by United States law for the taxable year. 19 Under Article 13 thereof, the Philippines may impose one of three rates — 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; or the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state. Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-Germany Tax Treaty are paid under similar circumstances. This would mean that private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty. The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against German income and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for double taxation, does not provide for similar crediting of 20% of the gross amount of royalties paid. Said Article 23 reads: Article 23 Relief from double taxation Double taxation of income shall be avoided in the following manner: 1) In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle thereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within the Philippines or on income from sources outside the United States) provided by United States law for the taxable year. . . . The reason for construing the phrase "paid under similar circumstances" as used in Article 13 (2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is anchored upon a logical reading of the text in the light of the fundamental purpose of such treaty which is to grant an incentive to the foreign investor by lowering the tax and at the same time crediting against the domestic tax abroad a figure higher than what was collected in the Philippines. In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to be achieved and that the general purpose is a more important aid to the meaning of a law than any rule which grammar may lay down. 20 It is the duty of the courts to look to the object to be accomplished, the evils to be remedied, or the purpose to be subserved, and should give the law a reasonable or liberal construction which will best effectuate its purpose. 21 The Vienna Convention on the Law of Treaties states that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. 22

As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors to invest in the Philippines — a crucial economic goal for developing countries. 23 The goal of double taxation conventions would be thwarted if such treaties did not provide for effective measures to minimize, if not completely eliminate, the tax burden laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the state of source, in this case, by the Philippines, there should be a concomitant commitment on the part of the state of residence to grant some form of tax relief, whether this be in the form of a tax credit or exemption. 24 Otherwise, the tax which could have been collected by the Philippine government will simply be collected by another state, defeating the object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If the state of residence does not grant some form of tax relief to the investor, no benefit would redound to the Philippines, i.e., increased investment resulting from a favorable tax regime, should it impose a lower tax rate on the royalty earnings of the investor, and it would be better to impose the regular rate rather than lose much-needed revenues to another country. At the same time, the intention behind the adoption of the provision on "relief from double taxation" in the two tax treaties in question should be considered in light of the purpose behind the most favored nation clause. The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the "most favored" among other countries. 25 The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. 26 The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RPWest Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark, patent, and technology. The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from the design behind the most grant equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment. We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances. It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. 27The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law. 28 Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; however, there is nothing on record to support a claim that the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty. WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of the Court of Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals are hereby SET ASIDE. SO ORDERED. G.R. No. 154068 August 3, 2007

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ROSEMARIE ACOSTA, as represented by Virgilio A. Abogado, respondent.

DECISION QUISUMBING, J.: Assailed in this petition for review are the Decision1 and Resolution2 dated February 13, 2002 and May 29, 2002, respectively, of the Court of Appeals in CA-G.R. SP No. 55572 which had reversed the Resolution3 dated August 4, 1999 of the Court of Tax Appeals in C.T.A. Case No. 5828 and ordered the latter to resolve respondent‘s petition for review. The facts are as follows: Respondent is an employee of Intel Manufacturing Phils., Inc. (Intel). For the period January 1, 1996 to December 31, 1996, respondent was assigned in a foreign country. During that period, Intel withheld the taxes due on respondent‘s compensation income and remitted to the Bureau of Internal Revenue (BIR) the amount ofP308,084.56. On March 21, 1997, respondent and her husband filed with the BIR their Joint Individual Income Tax Return for the year 1996. Later, on June 17, 1997, respondent, through her representative, filed an amended return and a Non-Resident Citizen Income Tax Return, and paid the BIR P17,693.37 plus interests in the amount of P14,455.76. On October 8, 1997, she filed another amended return indicating an overpayment of P358,274.63. Claiming that the income taxes withheld and paid by Intel and respondent resulted in an overpayment ofP340,918.92,4 respondent filed on April 15, 1999 a petition for review docketed as C.T.A. Case No. 5828 with the Court of Tax Appeals (CTA). The Commissioner of Internal Revenue (CIR) moved to dismiss the petition for failure of respondent to file the mandatory written claim for refund before the CIR. In its Resolution dated August 4, 1999, the CTA dismissed respondent‘s petition. For one, the CTA ruled that respondent failed to file a written claim for refund with the CIR, a condition precedent to the filing of a petition for review before the CTA.5 Second, the CTA noted that respondent‘s omission, inadvertently or otherwise, t o allege in her petition the date of filing the final adjustment return, deprived the court of its jurisdiction over the subject matter of the case.6 The decretal portion of the CTA‘s resolution states: WHEREFORE, in view of all the foregoing, Respondent‘s Motion to Dismiss is GRANTED. Accordingly[,] the Petition for Review is hereby DISMISSED. SO ORDERED.7 Upon review, the Court of Appeals reversed the CTA and directed the latter to resolve respondent‘s petition for review. Applying Section 204(c)8 of the 1997 National Internal Revenue Code (NIRC), the Court of Appeals ruled that respondent‘s filing of an amended return indicating an overpayment was sufficient compliance with the requirement of a written claim for refund.9 The decretal portion of the Court of Appeals‘ decision reads: WHEREFORE, finding the petition to be meritorious, this Court GRANTS it due course and REVERSES the appealed Resolutions and DIRECTS the Court of Tax Appeal[s] to resolve the petition for review on the merits. SO ORDERED.10 Petitioner sought reconsideration, but it was denied. Hence, the instant petition raising the following questions of law: I. WHETHER OR NOT THE 1997 TAX REFORM ACT CAN BE APPLIED RETROACTIVELY.

II. WHETHER OR NOT THE CTA HAS JURISDICTION TO TAKE [COGNIZANCE] OF RESPONDENT‘S PETITION FOR REVIEW.11 While the main concern in this controversy is the CTA‘s jurisdiction, we must first resolve two iss ues. First, does the amended return filed by respondent indicating an overpayment constitute the written claim for refund required by law, thereby vesting the CTA with jurisdiction over this case? Second, can the 1997 NIRC be applied retroactively? Petitioner avers that an amended return showing an overpayment does not constitute the written claim for refund required under Section 23012 of the 1993 NIRC13 (old Tax Code). He claims that an actual written claim for refund is necessary before a suit for its recovery may proceed in any court. On the other hand, respondent contends that the filing of an amended return indicating an overpayment ofP358,274.63 constitutes a written claim for refund pursuant to the clear proviso stated in the last sentence of Section 204(c) of the 1997 NIRC (new Tax Code), to wit: xxxx …Provided, however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund. xxxx Along the same vein, respondent invokes the liberal application of technicalities in tax refund cases, conformably with our ruling in BPI-Family Savings Bank, Inc. v. Court of Appeals.14 We are, however, unable to agree with respondent‘s submission on this score. The applicable law on refund of taxes pertaining to the 1996 compensation income is Section 230 of the old Tax Code, which was the law then in effect, and not Section 204(c) of the new Tax Code, which was effective starting only on January 1, 1998. Noteworthy, the requirements under Section 230 for refund claims are as follows: 1. A written claim for refund or tax credit must be filed by the taxpayer with the Commissioner; 2. The claim for refund must be a categorical demand for reimbursement; 3. The claim for refund or tax credit must be filed, or the suit or proceeding therefor must be commenced in court within two (2) years from date of payment of the tax or penalty regardless of any supervening cause.15 (Emphasis ours.) In our view, the law is clear. A claimant must first file a written claim for refund, categorically demanding recovery of overpaid taxes with the CIR, before resorting to an action in court. This obviously is intended, first, to afford the CIR an opportunity to correct the action of subordinate officers; and second, to notify the government that such taxes have been questioned, and the notice should then be borne in mind in estimating the revenue available for expenditure.16 Thus, on the first issue, we rule against respondent‘s contention. Entrenched in our jurisprudence is the principle that tax refunds are in the nature of tax exemptions which are construed strictissimi juris against the taxpayer and liberally in favor of the government. As tax refunds involve a return of revenue from the government, the claimant must show indubitably the specific provision of law from which her right arises; it cannot be allowed to exist upon a mere vague implication or inference17 nor can it be extended beyond the ordinary and reasonable intendment of the language actually used by the legislature in granting the refund.18 To

repeat, strict compliance with the conditions imposed for the return of revenue collected is a doctrine consistently applied in this jurisdiction.19 Under the circumstances of this case, we cannot agree that the amended return filed by respondent constitutes the written claim for refund required by the old Tax Code, the law prevailing at that time. Neither can we apply the liberal interpretation of the law based on our pronouncement in the case of BPI-Family Savings Bank, Inc. v. Court of Appeals, as the taxpayer therein filed a written claim for refund aside from presenting other evidence to prove its claim, unlike this case before us. On the second issue, petitioner argues that the 1997 NIRC cannot be applied retroactively as the instant case involved refund of taxes withheld on a 1996 income. Respondent, however, points out that when the petition was filed with the CTA on April 15, 1999, the 1997 NIRC was already in effect, hence, Section 204(c) should apply, despite the fact that the refund being sought pertains to a 1996 income tax. Note that the issue on the retroactivity of Section 204(c) of the 1997 NIRC arose because the last paragraph of Section 204(c) was not found in Section 230 of the old Code. After a thorough consideration of this matter, we find that we cannot give retroactive application to Section 204(c) abovecited. We have to stress that tax laws are prospective in operation, unless the language of the statute clearly provides otherwise. 20 Moreover, it should be emphasized that a party seeking an administrative remedy must not merely initiate the prescribed administrative procedure to obtain relief, but also pursue it to its appropriate conclusion before seeking judicial intervention in order to give the administrative agency an opportunity to decide the matter itself correctly and prevent unnecessary and premature resort to court action.21 This the respondent did not follow through. Additionally, it could not escape notice that at the time respondent filed her amended return, the 1997 NIRC was not yet in effect. Hence, respondent had no reason at that time to think that the filing of an amended return would constitute the written claim for refund required by applicable law. Furthermore, as the CTA stressed, even the date of filing of the Final Adjustment Return was omitted, inadvertently or otherwise, by respondent in her petition for review. This omission was fatal to respondent‘s claim, for it deprived the CTA of its jurisdiction over the subject matter of the case. Finally, we cannot agree with the Court of Appeals‘ finding that the nature of the instant case calls for the application of remedial laws. Revenue statutes are substantive laws and in no sense must their application be equated with that of remedial laws. As well said in a prior case, revenue laws are not intended to be liberally construed.22 Considering that taxes are the lifeblood of the government and in Holmes‘s memorable metaphor, the price we pay for civilization, tax laws must be faithfully and strictly implemented. WHEREFORE, the petition is GRANTED. Both the assailed Decision and Resolution dated February 13, 2002 and May 29, 2002, respectively, of the Court of Appeals in CA-G.R. SP No. 55572 are REVERSED and SET ASIDE. The Resolution dated August 4, 1999 of the Court of Tax Appeals in C.T.A. Case No. 5828 is herebyREINSTATED. No pronouncement as to costs. SO ORDERED. G.R. No. 185568 March 21, 2012

COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. PETRON CORPORATION, Respondent. DECISION SERENO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure filed by the Commissioner of Internal Revenue (CIR) assailing the Decision1 dated 03 December 2008 of the Court of Tax Appeals En Banc (CTA En Banc) in CTA EB No. 311. The assailed Decision reversed and set aside the Decision2dated 04 May 2007 of the Court of Tax Appeals Second Division (CTA Second Division) in CTA Case No. 6423, which ordered respondent Petron Corporation (Petron) to pay deficiency excise taxes for the taxable years 1995 to 1998, together with surcharges and delinquency interests imposed thereon. Respondent Petron is a corporation engaged in the production of petroleum products and is a Board of Investment (BOI) – registered enterprise in accordance with the provisions of the Omnibus Investments Code of 1987 (E.O. 226) under Certificate of Registration Nos. 89-1037 and D95-136.3 The Facts The CTA En Banc in CTA EB Case No. 311 adopted the findings of fact by the CTA Second Division in CTA Case No. 6423. Considering that there are no factual issues in this case, we likewise adopt the findings of fact by the CTA En Banc, as follows: As culled from the records and as agreed upon by the parties in their Joint Stipulation of Facts and Issues, these are the facts of the case. During the period covering the taxable years 1995 to 1998, petitioner (herein respondent Petron) had been an assignee of several Tax Credit Certificates (TCCs) from various BOI-registered entities for which petitioner utilized in the payment of its excise tax liabilities for the taxable years 1995 to 1998. The transfers and assignments of the said TCCs were approved by the Department of Finance‘s One Stop Shop Inter-Agency Tax Credit and Duty Drawback Center (DOF Center), composed of representatives from the appropriate government agencies, namely, the Department of Finance (DOF), the Board of Investments (BOI), the Bureau of Customs (BOC) and the Bureau of Internal Revenue (BIR). Taking ground on a BOI letter issued on 15 May 1998 which states that ‗hydraulic oil, penetrating oil, diesel fuels and industrial gases are classified as supplies and considered the suppliers thereof as qualified transferees of tax credit,‘ petitioner acknowledged and accepted the transfers of the TCCs from the various BOI-registered entities. Petitioner‘s acceptance and use of the TCCs as payment of its excise tax liabilities for the taxable year s 1995 to 1998, had been continuously approved by the DOF as well as the BIR‘s Collection Program Division through its surrender and subsequent issuance by the Assistant Commissioner of the Collection Service of the BIR of the Tax Debit Memos (TDMs). On January 30, 2002, respondent [herein petitioner CIR] issued the assailed Assessment against petitioner for deficiency excise taxes for the taxable years 1995 to 1998, in the total amount of P 739,003,036.32, inclusive of surcharges and interests, based on the ground that the TCCs utilized by petitioner in its payment of excise taxes have been cancelled by the DOF for having been fraudulently issued and transferred, pursuant to its EXCOM Resolution No. 03-05-99. Thus, petitioner, through letters dated August 31, 1999 and September 1, 1999, was required by the DOF Center to submit copies of its sales invoices and delivery receipts showing the consummation of the sale transaction to certain TCC transferors. Instead of submitting the documents required by the respondent, on February 27, 2002, petitioner filed its protest letter to the ‗Assessment‘ on the grounds, among others, that: a. The BIR did not comply with the requirements of Revenue Regulations 12-99 in issuing the "assessment" letter dated January 30, 2002, hence, the assessment made against it is void; b. The assignment/transfer of the TCCs to petitioner by the TCC holders was submitted to, examined and approved by the concerned government agencies which processed the assignment in accordance with law and revenue regulations;

c. There is no basis for the imposition of the 50% surcharge in the amount of P 159,460,900.00 and interest penalties in the amount of P 260,620,335.32 against it; d. Some of the items included in the ‗assessment‘ are already pending l itigation and are subject of the case entitled ‗Commissioner of Internal Revenue vs. Petron Corporation,‘ C.A. GR SP No. 55330 (CTA Case No. 5657) and hence, should no longer be included in the ‗assessment‘; and e. The assessment and collection of alleged excise tax deficiencies sought to be collected by the BIR against petitioner through the January 30, 2002 letter are already barred by prescription under Section 203 of the National Internal Revenue Code. On 27 March 2002, respondent, through Assistant Commissioner Edwin R. Abella served a Warrant of Distraint and/or Levy on petitioner to enforce payment of the P 739,003,036.32 tax deficiencies. Respondent allegedly served the Warrant of Distraint and/or Levy against petitioner without first acting on its letter-protest. Thus, construing the Warrant of Distraint and/or Levy as the final adverse decision of the BIR on its protest of the assessment, petitioner filed the instant petition before this Honorable Court [referring to the CTA Second Division] on April 2, 2002. On April 30, 2002, respondent filed his Answer, raising the following as his Special Affirmative Defenses: 6. In a post-audit conducted by the One-Stop Inter-Agency Tax Credit and Duty Drawback Center (Center) of the Department of Finance (DOF), pursuant to the Center‘s Excom Resolution No. 03-0599, it was found that TCCs issued to Alliance Thread Co., Inc., Allstar Spinning, Inc., Diamond Knitting Corp., Fiber Technology Corp., Filstar Textile Industrial Corp., FLB International Fiber Corp., Jantex Philippines, Inc., Jibtex Industrial Corp., Master Colour System Corp. and Spintex International, Inc. were fraudulently obtained and were fraudulently transferred to petitioner. As a result of said findings, the TCCs and the Tax Debit Memos (TDMs) issued by the Center to petitioner against said TCCs were cancelled by the DOF; 7. Prior to the cancellation of the aforesaid TCCs and TDMs, petitioner had utilized the same in the payment of its excise tax liabilities. With such cancellation, the TCCs and TDMs have no value in money or money‘s worth and, therefore, the excise taxes for which they were used as payment are now deemed unpaid; 8. The cancellation by the DOF of the aforesaid TCCs and TDMs has the presumption of regularity upon which respondent may validly rely; 9. Petitioner was informed by the DOF of the post-audit conducted on the TCCs and was given the opportunity to submit documents showing that the TCCs were transferred to it in payment of petroleum products allegedly delivered by it to the TCC transferors upon which the TCC transfers were approved, with the admonition that failure to submit the required documents would result in the cancellation of the transfers. Petitioner was also informed of the cancellation of the TCCs and TDMs and the reason for their cancellation; 10. Since petitioner is deemed not to have paid its excise tax liabilities, a pre-assessment notice is not required under Section 228 of the Tax Code; 11. The letter dated January 20, 2002 (should be January 30, 2002), demanding payment of petitioner‘s excise tax liabilities explicitly states the basis for said demand, i.e., the cancellation of the TCCs and TDMs; 12. The government is never estopped from collecting legitimate taxes due to the error committed by its agents (Visayas Cebu Terminal Inc., vs. Commissioner of Internal Revenue, 13 SCRA 257; Atlas Consolidated Mining and Development Corporation vs. Commissioner of Internal Revenue, 102 SCRA

246). The acceptance by the Bureau of Internal Revenue of the TCCs fraudulently obtained and fraudulently transferred to petitioner as payment of its excise tax liabilities turned out to be a mistake after the post-audit was conducted. Hence, said payments were void and the excise taxes may be validly collected from petitioner. 13. As found in the post-audit, petitioner and the TCC transferors committed fraud in the transfer of the TCCs when they made appear (sic) that the transfers were in consideration for the delivery of petroleum products by petitioner to the TCCs transferors, for which reason said transfers were approved by the Center, when in fact there were no such deliveries; 14. Petitioner used the TCCs fraudulently obtained and fraudulently transferred in the payment of excise taxes declared in its excise tax returns with intent to evade tax to the extent of the value represented by the TCCs, thereby rendering the returns fraudulent; 15. Since petitioner wilfully filed fraudulent returns, it is liable for the 50% surcharge and 20% annual interest imposed under Sections 248 and 249 of the Tax Code; 16. Since petitioner wilfully filed fraudulent returns with intent to evade tax, the prescriptive period to collect the tax is ten (10) years from the discovery of the fraud pursuant to Section 222 of the Tax Code; and 17. The case pending in the Court of Appeals (CA-G.R. Sp. No. 55330 [CTA Case No. 5657]), and the case at bar have distinct causes of action. The former involves the invalid transfers of the TCCs to petitioner on the theory that it is not a qualified transferee thereof, while the latter involves the fraudulent procurement of said TCCs and the fraudulent transfers thereof to petitioner. However, on November 12, 2002, respondent filed a Manifestation informing this Court that on May 29, 2002, it had reduced the amount of deficiency excise taxes to P 720,923,224.74 as a result of its verification that some of the TCCs which formed part of the original "Assessment" were already included in a case previously filed with this Court. In effect, the amount of deficiency excise taxes is recomputed as follows: Transferor Alliance Thread Co. Inc. Allstar Spinning, Inc. Diamond Knitting Corporation Fiber Technology Corp. Filstar Textile Corp. FLB International Fiber Corp. Jantex Philippines, Inc. Jibtex Industrial Corp. Master Colour system Corp. Spintex International Inc. Total Basic Tax P 12,078,823.00 37,265,310.00 36,764,587.00 25,300,911.00 40,767,783.00 25,934,695.00 12,036,192.00 15,506,302.00 33,333,536.00 14,912,408.00 P 253,900,547.00 Surcharge P 6,039,411.50 18,632,655.00 18,382,293.50 12,650,455.50 20,383,891.50 12,967,347.50 6,018,096.00 7,753,151.00 16,666,768.00 7,456,204.00 P 126,950,273.50 Interest P 16,147,293.21 49,781,486.95 49,264,758.35 34,295,655.90 54,802,550.16 34,977,257.14 15,812,547.24 20,610,319.52 44,822,167.06 19,558,368.71 P 340,072,404.24 Total P 34,265,527.21 105,679,451.95 104,411,638.85 72,247,022.40 115,954,224.66 73,879,299.64 33,866,835.24 43,869,772.52 94,822,471.06 41,926,980.71 P 720,923,224.74

During the pendency of the case, but after respondent had already submitted his Formal Offer of Evidence for this Court‘s consideration, he filed an ‗Urgent Motion to Reopen Case‘ on August 24, 2004 on the ground that additional evidence consisting of documents presented to the Center in support of the TCC transferor‘s claims for tax credit as well as document supporting the applications for approval of the transfer of the TCCs to

petitioner, must be presented to prove the fraudulent issuance and transfer of the subject TCCs. Respondent submits that it is imperative on his part to do so considering that, without necessarily admitting that the evidence presented in the case of Pilipinas Shell Petroleum Corporation vs. Commissioner of Internal Revenue, to prove fraud is not clear and convincing, he may suffer the same fate that had befallen upon therein respondent when this Court held, among others, that ‗there is no clear and convincing evidence that the Tax Credit Certificates (TCCs) transferred to Shell (for brevity) and used by it in the payment of excise taxes, were fraudulently issued to the TCC transferors and were fraudulently transferred to Shell.‘ An ‗Opposition to Urgent Motion to Reopen Case‘ was filed by petitioner on September 3, 2004 contending th at to sustain respondent‘s motion would ‗smack of procedural disorder and spawn a reversion of the proceedings. While litigation is not a game of technicalities, it is a truism that every case must be presented in accordance with the prescribed procedure to insure an orderly administration of justice.‘ On October 4, 2004, this Court resolved to grant respondent‘s Motion and allowed respondent to present additional evidence in support of his arguments, but deferred the resolution of respondent‘s original Formal Offer of Evidence until after the respondent has terminated his presentation of evidence. Subsequent to this Court‘s Resolution, respondent then filed on October 20, 2004, a Request for the Issuance of Subpoena Duces Tecum to the Executive Director of the Center or his duly authorized representative, and on October 21, 2004, a Subpoena Ad Testificandum to Ms. Elizabeth R. Cruz, also of the Center. Petitioner filed a ‗Motion for Reconsideration (Re: Resolution dated October 4, 2004)‘ on October 27, 2004, with respondent filing his ‗Opposition‘ on November 4, 2004, and petitioner subsequently filing its ‗Reply to Opposition‘ on December 20, 2004. Petitioner‘s motion was denied by this Court in a Resolution dated February 28, 2005 for lack of merit. On March 18, 2005, petitioner filed an ‗Urgent Motion to Revert Case to the First Division‘ with respondent‘s ‗Manifestation‘ filed on April 6, 2005 stating that ‗the question of which Division of this Honorable Court shall hear the instant case is an internal matter which is better left to the sound discretion of this Honorable Court without interference by a party litigant‘. On April 28, 2005, this Court denied the Motion of petitioner for lack of merit. On November 7, 2005, the Court finally resolved respondent‘s ‗Formal Offer of Evidence‘ filed on May 7, 2004 and ‗Supplemental Formal Offer of Evidence‘ filed on August 25, 2005. On November 22, 2005, respondent filed a ‗Motion for Partial Reconsideration‘ of the Court‘s Resolution to admit Exhibits 31 and 31 -A on the ground that he already submitted and offered certified true copies of said exhibits, which the Court granted in its Resolution on January 19, 2006. However, on February 10, 2006, respondent filed a ‗Motion to Amend Formal Offer of Evidence‘ praying t hat he be allowed to amend his formal offer since some exhibits although attached thereto were inadvertently not mentioned in the Formal Offer of Evidence. Petitioner‘s ‗Opposition‘ was filed on March 14, 2006. This Court granted respondent‘s motion in the Resolution dated April 24, 2006 and considering that the parties already filed their respective Memoranda, this case was then considered submitted for decision. On May 16, 2006, however, respondent filed an ‗Omnibus Motion‘ praying that this Court take ju dicial notice of the fact that the TCCs issued by the Center, including the TCCs in this instant case, contained the standard ‗Liability Clause‘ and that the case be consolidated with CTA Case No. 6136, on the ground that both cases involve the same parties and common questions of law or fact. An ‗Opposition/Comment on Omnibus Motion‘ was filed by petitioner on June 26, 2006, and ‗Reply to Opposition/Comment‘ was filed by respondent on July 17, 2006. In a Resolution promulgated on September 1, 2006, this Court granted respondent‘s motion only insofar as taking judicial notice of the fact that each of the dorsal side of the TCCs contains the subject ‗liability clause‘, but denied respondent‘s motion to consolidate considering that C.T.A. Case No. 6136 was already submitted for decision on April 24, 2006.4 The Ruling of the Court of Tax Appeals–Second Division

(CTA Case No. 6423) On 04 May 2007, the CTA Second Division promulgated a Decision in CTA Case No. 6423, the dispositive portion of which reads: WHEREFORE, premises considered, the instant Petition for Review is hereby DENIED for lack of merit. Accordingly, petitioner is ORDERED TO PAY the respondent the reduced amount of SIX HUNDRED MILLION SEVEN HUNDRED SIXTY NINE THOUSAND THREE HUNDRED FIFTY THREE AND 95/100 PESOS (P600,769,353.95), representing petitioner‘s deficiency excise taxes for the taxable years 1995 to 1998, recomputed as follows: Transferor Alliance Thread Co. Inc. Allstar Spinning, Inc. Diamond Knitting Corporation Fiber Technology Corp. Filstar Textile Corp. FLB International Fiber Corp. Jantex Philippines, Inc. Jibtex Industrial Corp. Master Colour system Corp. Spintex International Inc. Total Basic Tax P 12,078,823.00 37,265,310.00 36,764,587.00 25,300,911.00 40,767,783.00 25,934,695.00 12,036,192.00 15,506,302.00 33,333,536.00 14,912,408.00 P 253,900,547.00 25% Surcharge P 3,019,705.75 9,316,327.50 9,191,146.75 6,325,227.75 10,191,945.75 6,483,673.75 3,009,048.00 3,876,575.50 8,333,384.00 3,728,102.00 P 63,475,136.75 20% Interest P 13,456,077.68 41,484,572.46 41,053,965.29 28,579,713.25 45,668,791.80 29,147,714.28 13,177,122.70 17,175,266.27 37,351,805.88 16,298,640.59 P 283,393,670.20 Total P 28,554,606.43 88,066,209.96 87,009,699.04 60,205,852.00 96,628,520.55 61,566,083.03 28,222,362.70 36,558,143.77 79,018,725.88 34,939,150.59 P 600,769,353.95

In addition, petitioner is ORDERED TO PAY the respondent TWENTY FIVE PERCENT (25%) LATE PAYMENT SURCHARGE AND TWENTY PERCENT (20%) DELIQUENCY INTEREST per annum on the amount of SIX HUNDRED MILLION SEVEN HUNDRED SIXTY NINE THOUSAND THREE HUNDRED FIFTY THREE & 95/100 PESOS (P 600,769,353.95), computed from June 27, 2002 until the amount is fully paid. SO ORDERED.5 The CTA Second Division held Petron liable for deficiency excise taxes on the ground that the cancellation by the DOF of the TCCs previously issued to and utilized by respondent to settle its tax liabilities had the effect of nonpayment of the latter‘s excise taxes. These taxes corresponded to the value of the TCCs Petron used for payment. The CTA Second Division ruled that payment can only occur if the instrument used to discharge an obligation represents its stated value.6 It further ruled that Petron‘s acceptance of the TCCs was considered a contract entered into by respondent with the CIR and subject to post-audit,7 which was considered a suspensive condition governed by Article 1181 of the Civil Code.8 Further, the CTA Second Division found that the circumstances pertaining to the issuance of the subject TCCs and their transfer to Petron "brim with fraud."9 Hence, the said court concluded that since the TCCs used by Petron were found to be spurious, respondent was deemed to have not paid its excise taxes and ought to be liable to the CIR in the amount of P 600,769,353.95 plus 25% interests and 20% surcharges.10 Petron filed a Motion for Reconsideration11 of the Decision of the CTA Second Division, which denied the motion in a Resolution dated 14 August 2007.12 The court reiterated its conclusion that the TCCs utilized by Petron to pay the latter‘s excise tax liabilities did not result in payment after these TCCs were found to be fraudulent in the post-audit by the DOF. The CTA Second Division also affirmed its ruling that Petron was liable

for a 25% late payment surcharge and 20% surcharges under Section 24813 of the National Internal Revenue Code (NIRC) of 1997.14 Aggrieved, Petron appealed the Decision to the CTA En Banc through a Petition for Review, which was docketed as CTA EB No. 311. In its Petition, Petron alleged that the Second Division erred in holding respondent liable to pay the amount of P 600,769,353.95 in deficiency excise taxes with penalties and interests covering the taxable years 1995-1998. Petron prayed that the said Decision be reversed and set aside, and that CIR be enjoined from collecting the contested excise tax deficiency assessment.15 The CTA En Banc summed up into one issue the grounds relied upon by Petron in its Petition for Review, as follows: Whether or not the Second Division erred in holding petitioner liable for the amount of P 600,769,353.95 as deficiency excise taxes for the years 1995-1998, including surcharges and interest, plus 25% surcharge and 20% delinquency interest per annum from June 27, 2002 until the amount is fully paid.16 The Ruling of the Court of Tax Appeals En Banc (CTA EB Case No. 311) On 03 December 2008, the CTA En Banc promulgated a Decision, which reversed and set aside the CTA Second Division on 04 May 2007. The former absolved Petron from any deficiency excise tax liability for taxable years 1995 to 1998. Its ruling in favor of Petron was anchored on this Court‘s pronouncements in Pilipinas Shell Petroleum Corp. v. Commissioner of Internal Revenue (Shell),17 which found that the factual background and legal issues therein were similar to those in the present case. In resolving the issues, the CTA En Banc adopted the main points in Shell, which it quoted at length as basis for deciding the appeal in favor of Petron. The gist of the main points of Shell cited by the said court is as follows: a) The issued TCCs are immediately valid and effective and are not subject to a post-audit as a suspensive condition18 b) A TCC is subject only to the following conditions: i) Post-audit in the event of a computational discrepancy ii) A reduction for any outstanding account with the BIR and/or BOC iii) A revalidation of the TCC if not utilized within one year from issuance or date of utilization19 c) A transferee of a TCC should only be a BOI-registered firm under the Implementing Rules and Regulations of Executive Order (E.O.) No. 226.20 d) The liability clause in the TCCs provides only for the solidary liability of the transferee relative to its transfer in the event it is a party to the fraud.21 e) A transferee can rely on the Center‘s approval of the TCCs‘ transfer and subsequent acceptance as payment of the transferee‘s excise tax liability.22 f) A TCC cannot be cancelled by the Center, as it was already cancelled after the transferee had applied it as payment for the latter‘s excise tax liabilities.23

The CTA En Banc also found that Petron had no participation in or knowledge of the fraudulent issuance and transfer of the subject TCCs. In fact, the parties made a joint stipulation on this matter in CTA Case No. 6423 before the CTA Second Division.24 In resolving the issue of whether the government is estopped from collecting taxes due to the fault of its agents, the CTA En Banc quoted Shell as follows: While we agree with respondent that the State in the performance of government function is not estopped by the neglect or omission of its agents, and nowhere is this truer than in the field of taxation, yet this principle cannot be applied to work injustice against an innocent party.25 (Emphasis supplied.) Finally, the CTA En Banc ruled that Petron was considered an innocent transferee of the subject TCCs and may not be prejudiced by a re-assessment of excise tax liabilities that respondent has already settled, when due, with the use of the TCCs.26 Petron is thus considered to have not fraudulently filed its excise tax returns. Consequently, the assessment issued by the CIR against it had no legal basis.27 The dispositive portion of the assailed 03 December 2008 Decision of the CTA En Banc reads: WHEREFORE, the instant petition for Review is hereby GRANTED. Accordingly, the May 4, 2007 Decision and August 14, 2007 Resolution of the CTA Second Division in CTA Case No. 6423 entitled, "Petron Corporation, petitioner vs. Commissioner of Internal Revenue, respondent", are hereby REVERSED and SET ASIDE. In addition, the demand and collection of the deficiency excise taxes of PETRON in the amount of P 600,769,353.95 excluding penalties and interest covering the taxable years 1995 to 1998 are hereby CANCELLED and SET ASIDE, and respondent-Commissioner of Internal Revenue is hereby ENJOINED from collecting the said amount from PETRON. SO ORDERED.28 The CIR moved for the reconsideration of the CTA En Banc Decision, but the motion was denied in a Resolution dated 14 August 2007.29 The Issues The CIR appealed the Decision of the CTA En Banc by filing a Petition for Review on Certiorari under Rule 45 of the Rules of Court.30 Petitioner assails the Decision by raising the following issues: The court of tax appeals committed reversible error in holding that respondent petron is not liable for its excise tax liabilities from 1995 to 1998. Arguments I The cta en banc erred in finding that respondent petron was not shown to have participated in the fraudulent acts. The finding of the cta second division that the tax credit certificates were fraudulently transferred by the transferor-companies to respondent is supported by substantial evidence. Respondent was involved in the perpetration of fraud in the tccs‘ transfer and utilization. II Respondent cannot validly claim the right of innocent transferee for value. As assignee/transferee of the tccs, respondent merely succeeded to the rights of the tcc assignors/transferors. Accordingly, if the tccs assigned to respondent were void, it did not acquire any valid title over the tccs. III

The government is not Estopped from collecting taxes due to the mistakes of its agents. IV Respondent is liable for 25% surcharge and 20% interest per annum pursuant to the provisions of sections 248 and 249 of the NIRC. Moreover, since respondent‘s returns were false, the assessment prescribes in ten (10) years from the discovery of the falsity thereof pursuant to section 22 of the same code.31 The Court‘s Ruling We DENY the CIR‘s Petition for lack of merit. Article 21 of E.O. 226 defines a tax credit as follows: ARTICLE 21. "Tax credit" shall mean any of the credits against taxes and/or duties equal to those actually paid or would have been paid to evidence which a tax credit certificate shall be issued by the Secretary of Finance or his representative, or the Board, if so delegated by the Secretary of Finance. The tax credit certificates including those issued by the Board pursuant to laws repealed by this Code but without in any way diminishing the scope of negotiability under their laws of issue are transferable under such conditions as may be determined by the Board after consultation with the Department of Finance. The tax credit certificate shall be used to pay taxes, duties, charges and fees due to the National Government; Provided, That the tax credits issued under this Code shall not form part of the gross income of the grantee/transferee for income tax purposes under Section 29 of the National Internal Revenue Code and are therefore not taxable: Provided, further, That such tax credits shall be valid only for a period of ten (10) years from date of issuance. Under Article 39 (j) of the Omnibus Investment Code of 1987,32 tax credits are granted to entities registered with the Bureau of Investment (BOI) and are given for taxes and duties paid on raw materials used for the manufacture of their export products. A TCC is defined under Section 1 of Revenue Regulation (RR) No. 5-2000, issued by the BIR on 15 August 2000, as follows: B. Tax Credit Certificate — means a certification, duly issued to the taxpayer named therein, by the Commissioner or his duly authorized representative, reduced in a BIR Accountable Form in accordance with the prescribed formalities, acknowledging that the grantee-taxpayer named therein is legally entitled a tax credit, the money value of which may be used in payment or in satisfaction of any of his internal revenue tax liability (except those excluded), or may be converted as a cash refund, or may otherwise be disposed of in the manner and in accordance with the limitations, if any, as may be prescribed by the provisions of these Regulations. RR 5-2000 prescribes the regulations governing the manner of issuance of TCCs and the conditions for their use, revalidation and transfer. Under the said regulation, a TCC may be used by the grantee or its assignee in the payment of its direct internal revenue tax liability.33 It may be transferred in favor of an assignee subject to the following conditions: 1) the TCC transfer must be with prior approval of the Commissioner or the duly authorized representative; 2) the transfer of a TCC should be limited to one transfer only; and 3) the transferee shall strictly use the TCC for the payment of the assignee‘s direct internal revenue tax liability and shall not be convertible to cash.34 A TCC is valid only for 10 years subject to the following rules: (1) it must be utilized within five (5) years from the date of issue; and (2) it must be revalidated thereafter or be otherwise considered invalid.35 The processing of a TCC is entrusted to a specialized agency called the "One-Stop-Shop Inter-Agency Tax Credit and Duty Drawback Center" ("Center"), created on 07 February 1992 under Administrative Order (A.O.) No. 226. Its purpose is to expedite the processing and approval of tax credits and duty drawbacks. 36 The Center is composed of a representative from the DOF as its chairperson; and the members thereof are representatives of the Bureau of Investment (BOI), Bureau of Customs (BOC) and Bureau of Internal Revenue

(BIR), who are tasked to process the TCC and approve its application as payment of an assignee‘s tax liability.37 A TCC may be assigned through a Deed of Assignment, which the assignee submits to the Center for its approval. Upon approval of the deed, the Center will issue a DOF Tax Debit Memo (DOF-TDM),38 which will be utilized by the assignee to pay the latter‘s tax liabilities for a specified period. Upon surrender of the TCC and the DOF-TDM, the corresponding Authority to Accept Payment of Excise Taxes (ATAPET) will be issued by the BIR Collection Program Division and will be submitted to the issuing office of the BIR for acceptance by the Assistant Commissioner of Collection Service. This act of the BIR signifies its acceptance of the TCC as payment of the assignee‘s excise taxes. Thus, it is apparent that a TCC undergoes a stringent process of verification by various specialized government agencies before it is accepted as payment of an assignee‘s tax liability. In the case at bar, the CIR disputes the ruling of the CTA En Banc, which found Petron to have had no participation in the fraudulent procurement and transfer of the TCCs. Petitioner believes that there was substantial evidence to support its allegation of a fraudulent transfer of the TCCs to Petron.39 The CIR further contends that respondent was not a qualified transferee of the TCCs, because the latter did not supply petroleum products to the companies that were the assignors of the subject TCCs.40 The CIR bases its contentions on the DOF‘s post-audit findings stating that, for the periods covering 1995 to 1998, Petron did not deliver fuel and other petroleum products to the companies (the transferor companies) that had assigned the subject TCCs to respondent. Petitioner further alleges that the findings indicate that the transferor companies could not have had such a high volume of export sales declared to the Center and made the basis for the issuance of the TCCs assigned to Petron.41 Thus, the CIR impugns the CTA En Banc ruling that respondent was a transferee in good faith and for value of the subject TCCs.42 Not finding merit in the CIR‘s contention, we affirm the ruling of the CTA En Banc finding that Petron is a transferee in good faith and for value of the subject TCCs. From the records, we observe that the CIR had no allegation that there was a deviation from the process for the approval of the TCCs, which Petron used as payment to settle its excise tax liabilities for the years 1995 to 1998. The CIR quotes the CTA Second Division and urges us to affirm the latter‘s Decision, which found Petron to have participated in the fraudulent issuance and transfer of the TCCs. However, any merit in the position of petitioner on this issue is negated by the Joint Stipulation it entered into with Petron in the proceedings before the said Division. As correctly noted by the CTA En Banc, herein parties jointly stipulated before the Second Division in CTA Case No. 6423 as follows: 13. That petitioner (Petron) did not participate in the procurement and issuance of the TCCs, which TCCs were transferred to Petron and later utilized by Petron in payment of its excise taxes.43 This stipulation of fact by the CIR amounts to an admission and, having been made by the parties in a stipulation of facts at pretrial, is treated as a judicial admission. Under Section 4, Rule 129 of the Rules of Court, a judicial admission requires no proof.44 The Court cannot lightly set it aside, especially when the opposing party relies upon it and accordingly dispenses with further proof of the fact already admitted. The exception provided in Rule 129, Section 4 is that an admission may be contradicted only by a showing that it was made through a palpable mistake, or that no such admission was made. In this case, however, exception to the rule does not exist. We agree with the pronouncement of the CTA En Banc that Petron has not been shown or proven to have participated in the alleged fraudulent acts involved in the transfer and utilization of the subject TCCs. Petron had the right to rely on the joint stipulation that absolved it from any participation in the alleged fraud pertaining to the issuance and procurement of the subject TCCs. The joint stipulation made by the parties consequently obviated the opportunity of the CIR to present evidence on this matter, as no proof is required for an admission

made by a party in the course of the proceedings.45 Thus, the CIR cannot now be allowed to change its stand and renege on that admission. Moreover, a close examination of the arguments proffered by the CIR in their Petition calls for a reevaluation of the sufficiency of evidence in the case. The CIR seeks to persuade this Court to believe that there is substantial evidence to prove that Petron committed a misrepresentation, because the petroleum products were delivered not to the transferor but to other companies.46 Thus, the TCCs assigned by the transferor companies to Petron were fraudulent. Clearly, a recalibration of the sufficiency of evidence presented by the CIR is needed for a different conclusion to be reached. The fundamental rule is that the scope of our judicial review under Rule 45 of the Rules of Court is confined only to errors of law and does not extend to questions of fact.47 It is basic that where it is the sufficiency of evidence that is being questioned, there is a question of fact.48 Evidently, the CIR does not point out any specific provision of law that was wrongly interpreted by the CTA En Banc in the latter‘s assailed Decision. Petitioner anchors it contention on the alleged existence of the sufficiency of evidence it had proffered to prove that Petron was involved in the perpetration of fraud in the transfer and utilization of the subject TCCs, an allegation that the CTA En Banc failed to consider. We have consistently held that it is not the function of this Court to analyze or weigh the evidence all over again, unless there is a showing that the findings of the lower court are totally devoid of support or are glaringly erroneous as to constitute palpable error or grave abuse of discretion.49 Such an exception does not obtain in the circumstances of this case. The CIR claims that Petron was not an innocent transferee for value, because the TCCs assigned to respondent were void. Petitioner based its allegations on the post-audit report of the DOF, which declared that the subject TCCs were obtained through fraud and, thus, had no monetary value.50 The CIR adds that the TCCs were subject to a post-audit by the Center to complete the payment of the excise tax liability to which they were applied. Petitioner further contends that the Liability Clause of the TCCs makes the transferee or assignee solidarily liable with the original grantee for any fraudulent act pertinent to their procurement and transfer. The CIR assails the contrary ruling of the CTA En Banc, which confined the solidary liability only to the original grantee of the TCCs. Thus, petitioner believes that the correct interpretation of the Liability Clause in the TCCs makes Petron and the transferor companies or the original grantee solidarily liable for any fraudulent act or violation of the pertinent laws relating to the transfers of the TCCs. 51 We are not persuaded by the CIR‘s position on this matter. The Liability Clause of the TCCs reads: Both the TRANSFEROR and the TRANSFEREE shall be jointly and severally liable for any fraudulent act or violation of the pertinent laws, rules and regulations relating to the transfer of this TAX CREDIT CERTIFICATE. The scope of this solidary liability, as stated in the TCCs, was clarified by this Court in Shell, as follows: The above clause to our mind clearly provides only for the solidary liability relative to the transfer of the TCCs from the original grantee to a transferee. There is nothing in the above clause that provides for the liability of the transferee in the event that the validity of the TCC issued to the original grantee by the Center is impugned or where the TCC is declared to have been fraudulently procured by the said original grantee. Thus, the solidary liability, if any, applies only to the sale of the TCC to the transferee by the original grantee. Any fraud or breach of law or rule relating to the issuance of the TCC by the Center to the transferor or the original grantee is the latter's responsibility and liability. The transferee in good faith and for value may not be unjustly prejudiced by the fraud committed by the claimant or transferor in the procurement or issuance of the TCC from the Center. It is not only unjust but well-nigh violative of the constitutional right not to be deprived of one's property without due process of law. Thus, a re-assessment of tax liabilities previously paid through TCCs by a transferee in good faith and for value is utterly confiscatory, more so when surcharges and interests are likewise assessed. A transferee in good faith and for value of a TCC who has relied on the Center's representation of the genuineness and validity of the TCC transferred to it may not be legally required to pay again the tax covered

by the TCC which has been belatedly declared null and void, that is, after the TCCs have been fully utilized through settlement of internal revenue tax liabilities. Conversely, when the transferee is party to the fraud as when it did not obtain the TCC for value or was a party to or has knowledge of its fraudulent issuance, said transferee is liable for the taxes and for the fraud committed as provided for by law. 52 (Emphasis supplied.) We also find that the post-audit report, on which the CIR based its allegations, does not have the effect of a suspensive condition that would determine the validity of the TCCs. We held in Petron v. CIR (Petron),53 which is on all fours with the instant case, that TCCs are valid and effective from their issuance and are not subject to a post-audit as a suspensive condition for their validity. Our ruling in Petron finds guidance from our earlier ruling in Shell, which categorically states that a TCC is valid and effective upon its issuance and is not subject to a post-audit. The implication on the instant case of the said earlier ruling is that Petron has the right to rely on the validity and effectivity of the TCCs that were assigned to it. In finally determining their effectivity in the settlement of respondent‘s excise tax liabilities, the validity of those TCCs should not depend on the results of the DOF‘s post-audit findings. We held thus in Petron: As correctly pointed out by Petron, however, the issue about the immediate validity of TCCs and the use thereof in payment of tax liabilities and duties are not matters of first impression for this Court. Taking into consideration the definition and nature of tax credits and TCCs, this Court's Second Division definitively ruled in the aforesaid Pilipinas Shell case that the post audit is not a suspensive condition for the validity of TCCs, thus: Art. 1181 tells us that the condition is suspensive when the acquisition of rights or demandability of the obligation must await the occurrence of the condition. However, Art. 1181 does not apply to the present case since the parties did NOT agree to a suspensive condition. Rather, specific laws, rules, and regulations govern the subject TCCs, not the general provisions of the Civil Code. Among the applicable laws that cover the TCCs are EO 226 or the Omnibus Investments Code, Letter of Instructions No. 1355, EO 765, RP-US Military Agreement, Sec. 106 (c) of the Tariff and Customs Code, Sec. 106 of the NIRC, BIR Revenue Regulations (RRs), and others. Nowhere in the aforementioned laws does the post-audit become necessary for the validity or effectivity of the TCCs. Nowhere in the aforementioned laws is it provided that a TCC is issued subject to a suspensive condition. xxx xxx xxx

. . . (T)he TCCs are immediately valid and effective after their issuance. As aptly pointed out in the dissent of Justice Lovell Bautista in CTA EB No. 64, this is clear from the Guidelines and instructions found at the back of each TCC, which provide: 1. This Tax Credit Certificate (TCC) shall entitle the grantee to apply the tax credit against taxes and duties until the amount is fully utilized, in accordance with the pertinent tax and customs laws, rules and regulations. xxx xxx xxx

4. To acknowledge application of payment, the One-Stop-Shop Tax Credit Center shall issue the corresponding Tax Debit Memo (TDM) to the grantee. The authorized Revenue Officer/Customs Collector to which payment/utilization was made shall accomplish the Application of Tax Credit at the back of the certificate and affix his signature on the column provided." The foregoing guidelines cannot be clearer on the validity and effectivity of the TCC to pay or settle tax liabilities of the grantee or transferee, as they do not make the effectivity and validity of the TCC dependent on the outcome of a post-audit. In fact, if we are to sustain the appellate tax court, it would be absurd to make the effectivity of the payment of a TCC dependent on a post-audit since there is no contemplation of the situation wherein there is no post-audit. Does the payment made become effective if no post-audit is conducted? Or does the so-called suspensive condition still apply as no law, rule, or regulation specifies a period when a postaudit should or could be conducted with a prescriptive period? Clearly, a tax payment through a TCC cannot be

both effective when made and dependent on a future event for its effectivity. Our system of laws and procedures abhors ambiguity. Moreover, if the TCCs are considered to be subject to post-audit as a suspensive condition, the very purpose of the TCC would be defeated as there would be no guarantee that the TCC would be honored by the government as payment for taxes. No investor would take the risk of utilizing TCCs if these were subject to a post-audit that may invalidate them, without prescribed grounds or limits as to the exercise of said post-audit. The inescapable conclusion is that the TCCs are not subject to post-audit as a suspensive condition, and are thus valid and effective from their issuance.54 In addition, Shell and Petron recognized an exception that holds the transferee/assignee liable if proven to have been a party to the fraud or to have had knowledge of the fraudulent issuance of the subject TCCs. As earlier mentioned, the parties entered into a joint stipulation of facts stating that Petron did not participate in the procurement or issuance of those TCCs. Thus, we affirm the CTA En Banc‘s ruling that respondent was an innocent transferee for value thereof. On the issue of estoppel, petitioner contends that the TCCs, which the Center had continually approved as payment for respondent‘s excise tax liabilities, were subsequently found to be void. Thus, the CIR insists that the government is not estopped from collecting from Petron the excise tax liabilities that had accrued to the latter as a result of the voidance of these TCCs. Petitioner argues that the State should not be prejudiced by the neglect or omission of government employees entrusted with the collection of taxes.55 We are not persuaded by the CIR‘s argument. We recognize the well-entrenched principle that estoppel does not apply to the government, especially on matters of taxation. Taxes are the nation‘s lifeblood through which government agencies continue to operate and with which the State discharges its functions for the welfare of its constituents.56 As an exception, however, this general rule cannot be applied if it would work injustice against an innocent party.57
1âwphi1

Petron, in this case, was not proven to have had any participation in or knowledge of the CIR‘s allegation of the fraudulent transfer and utilization of the subject TCCs. Respondent‘s status as a transferee in good faith and for value of these TCCs has been established and even stipulated upon by petitioner.58 Respondent was thereby provided ample protection from the adverse findings subsequently made by the Center.59 Given the circumstances, the CIR‘s invocation of the non-applicability of estoppel in this case is misplaced. On the final issue it raised, the CIR contends that a 25% surcharge and a 20% interest per annum must be imposed upon Petron for respondent‘s excise tax liabilities as mandated under Sections 248 and 249 of the National Internal Revenue Code (NIRC).60 Petitioner considers the tax returns filed by respondent for the years 1995 to 1998 as fraudulent on the basis of the post-audit finding that the TCCs were void. It argues that the prescriptive period within which to lawfully assess Petron for its tax liabilities has not prescribed under Section 222 (a)61 of the Tax Code. The CIR explains that respondent‘s assessment on 30 January 2002 of respondent‘s deficiency excise tax for the years 1995 to 1998 was well within the ten-year prescription period.62 In the light of the main ruling in this case, we affirm the CTA En Banc Decision finding Petron to be an innocent transferee for value of the subject TCCs. Consequently, the Tax Returns it filed for the years 1995 to 1998 are not considered fraudulent. Hence, the CIR had no legal basis to assess the excise taxes or any penalty surcharge or interest thereon, as respondent had already paid the appropriate excise taxes using the subject TCCs. WHEREFORE, the CIR‘s Petition is DENIED for lack of merit. The CTA En Banc Decision dated 03 December 2008 in CTA EB No. 311 is hereby AFFIRMED in toto. No pronouncement as to costs. SO ORDERED.

G.R. No. 125704 August 28, 1998 PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF TAX APPEALS,respondents.

ROMERO, J.: Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on April 8, 1996 in CA-G.R. SP No. 36975 1 affirming the Court of Tax Appeals decision in CTA Case No. 4872 dated March 16, 1995 2 ordering it to pay the amount of P110,677,668.52 as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977.
The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the total amount of P123,821.982.52 computed as follows: PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE TAX DUE 2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91 3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60 4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88
————— ————— —————— ——————

47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39
————— ————— —————— ——————

1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25 2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88
————— ————— —————— ——————

43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13
————— ————— —————— —————— 90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52
3

========= ========= ========= =========

In a letter dated August 20, 1992, 4 Philex protested the demand for payment of the tax liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the

amount of P119,977,037.02 plus interest. Therefore these claims for tax credit/refund should be applied against the tax liabilities, citing our ruling inCommissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc. 5 In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in Philex's position. Since these pending claims have not yet been established or determined with certainty, it follows that no legal compensation can take place. Hence, the BIR reiterated its demand that Philex settle the amount plus interest within 30 days from the receipt of the letter. In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund against its excise tax obligation, Philex raised the issue to the Court of Tax Appeals on November 6, 1992. 7 In the course of the proceedings, the BIR issued Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of Philex of P123,821,982.52; effectively lowered the latter's tax obligation to P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit:
Thus, for legal compensation to take place, both obligations must be liquidated and demandable. "Liquidated" debts are those where the exact amount has already been determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In the instant case, the claims of the Petitioner for VAT refund is still pending litigation, and still has to be determined by this Court (C.T.A. Case No. 4707). A fortiori, the liquidated debt of the Petitioner to the government cannot, therefore, be set-off against the unliquidated claim which Petitioner conceived to exist in its favor 8 (see Compañia General de Tabacos vs. French and Unson, No. 14027, November 8, 1918, 39 Phil. 34).

Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on compensation since claim for taxes is not a debt or contract." 9 The dispositive portion of the CTA decision 10 provides:
In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and Petitioner is hereby ORDERED to PAY the Respondent the amount of P110,677,668.52 representing excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Section 248 and 249 of the Tax Code, as amended.

Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed as CA-GR. CV No. 36975. 11Nonetheless, on April 8, 1996, the Court of Appeals a Affirmed the Court of Tax Appeals observation. The pertinent portion of which reads: 12
WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the decision dated March 16, 1995 is AFFIRMED.

Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution dated July 11, 1996. 13 However, a few days after the denial of its motion for reconsideration, Philex was able to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and 1994, computed as follows: 14
Period Covered Tax Credit Date By Claims For Certificate of VAT refund/credit Number Issue Amount 1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01

1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61 1989 007732 11 July 1996 P37,322,799.19 1990-1991 007751 16 July 1996 P84,662,787.46 1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95

In view of the grant of its VAT input credit/refund, Philex now contends that the same should, ipso jure, off-set its excise tax liabilities 15 since both had already become "due and demandable, as well as fully liquidated;" 16 hence, legal compensation can properly take place.
We see no merit in this contention.

In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. 17There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. 18 We find no cogent reason to deviate from the aforementioned distinction. Prescinding from this premise, in Francia v. Intermediate Appellate Court, 19 we categorically held that taxes cannot be subject to set-off or compensation, thus:
We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.

The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on Audit, 20 which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.

Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines Inc., wherein we ruled that a pending refund may be set off against an existing tax liability even though the refund has not yet been approved by the Commissioner, 21 is no longer without any support in statutory law. It is important to note, that the premise of our ruling in the aforementioned case was anchored on Section 51 (d) of the National Revenue Code of 1939. However, when the National Internal Revenue Code of 1977 was enacted, the same provision upon which the Itogon-Suyoc pronouncement was based was omitted. 22 Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex. Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the imposition of surcharge and interest for the non-payment of the excise taxes within the time prescribed was unjustified. Philex posits the theory that it had no obligation to pay the excise tax liabilities within the prescribed period since, after all, it still has pending claims for VAT input credit/refund with BIR. 23 We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in tax law that taxes are the lifeblood of the government and so should be collected without unnecessary

hindrance. 24 Evidently, to countenance Philex's whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence. To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. 25 Hence, a tax does not depend upon the consent of the taxpayer. 26 If any taxpayer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the collection of the tax is contingent on the result of the lawsuit it filed against the government. 27 Moreover, Philex's theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax liabilities. Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the government is immaterial for the imposition of charges and penalties prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory and the BIR is not vested with any authority to waive the collection thereof. 28 The same cannot be condoned for flimsy reasons, 29 similar to the one advanced by Philex in justifying its non-payment of its tax liabilities. Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the National Internal Revenue Code of 1977, which requires the refund of input taxes within 60 days, 31 when it took five years for the latter to grant its tax claim for VAT input credit/refund. 32 In this regard, we agree with Philex. While there is no dispute that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund, 33 however, once the claimant has submitted all the required documents it is the function of the BIR to assess these documents with purposeful dispatch. After all, since taxpayers owe honestly to government it is but just that government render fair service to the taxpayers. 34 In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more diligent and judicious with their duty, it could have granted the refund earlier. We need not remind the BIR that simple justice requires the speedy refund of wrongly-held taxes. 35 Fair dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of its function. As aptly held in Roxas v. Court of Tax Appeals: 36
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg" And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously.

Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is a settled rule that in the performance of governmental function, the State is not bound by the neglect of its agents and officers. Nowhere is this more true than in the field of taxation. 37 Again, while we understand Philex's predicament, it must be stressed that the same is not a valid reason for the non-payment of its tax liabilities. To be sure, this is not to state that the taxpayer is devoid of remedy against public servants or employees, especially BIR examiners who, in investigating tax claims are seen to drag their feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for refund, the latter can seek judicial remedy before the Court of Tax Appeals in the manner prescribed by law. 38 Second, if the

inaction can be characterized as willful neglect of duty, then recourse under the Civil Code and the Tax Code can also be availed of.
Art. 27 of the Civil Code provides: Art. 27. Any person suffering material or moral loss because a public servant or employee refuses or neglects, without just cause, to perform his official duty may file an action for damages and other relief against the latter, without prejudice to any disciplinary action that may be taken. More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states: xxx xxx xxx (c) Wilfully neglecting to give receipts, as by law required for any sum collected in the performance of duty or wilfully neglecting to perform, any other duties enjoyed by law.

Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in the performance of official duties.39 In no uncertain terms must we stress that every public employee or servant must strive to render service to the people with utmost diligence and efficiency. Insolence and delay have no place in government service. The BIR, being the government collecting arm, must and should do no less. It simply cannot be apathetic and laggard in rendering service to the taxpayer if it wishes to remain true to its mission of hastening the country's development. We take judicial notice of the taxpayer's generally negative perception towards the BIR; hence, it is up to the latter to prove its detractors wrong.
In sum, while we can never condone the BIR's apparent callousness in performing its duties, still, the same cannot justify Philex's non-payment of its tax liabilities. The adage "no one should take the law into his own hands" should have guided Philex's action. WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED. SO ORDERED.

SEC. 76. - Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either: (A)Pay the balance of tax still due; or (B)Carry-over the excess credit; or (C)Be credited or refunded with the excess amount paid, as the case may be. In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor