COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent.
On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, the eldest of whom is Manuel B. Pineda, a lawyer.
Estate proceedings were had in the Court of First Instance of Manila (Case No. 71129) wherein the surviving widow was appointed administratrix.
The estate was divided among and awarded to the heirs and the proceedings terminated on June 8, 1948. Manuel B. Pineda's share amounted to about
P2,500.00.
After the estate proceedings were closed, the Bureau of Internal Revenue investigated the income tax liability of the estate for the years 1945, 1946,
1947 and 1948 and it found that the corresponding income tax returns were not filed. Thereupon, the representative of the Collector of Internal
Revenue filed said returns for the estate on the basis of information and data obtained from the aforesaid estate proceedings and issued an assessment
for the following:
1. Deficiency income tax
1945
P135.83
1946
436.95
1947
1,206.91
Add: 5% surcharge
1% monthly interest
from November 30,
1953 to April 15, 1957
Compromise for late
filing
Compromise for late
payment
Total amount due

P1,779.69
88.98

720.77
80.00
40.00
P2,707.44
===========
P14.50
===========

Additional residence tax for

1945
3. Real Estate dealer's tax for
the fourth quarter of 1946 and
P207.50
the whole year of 1947
===========
2.

Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed to the Court of Tax Appeals alleging that he was
appealing "only that proportionate part or portion pertaining to him as one of the heirs."
After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision of the Commissioner on the ground that his right to
assess and collect the tax has prescribed. The Commissioner appealed and this Court affirmed the findings of the Tax Court in respect to the
assessment for income tax for the year 1947 but held that the right to assess and collect the taxes for 1945 and 1946 has not prescribed. For 1945 and
1946 the returns were filed on August 24, 1953; assessments for both taxable years were made within five years therefrom or on October 19, 1953;
and the action to collect the tax was filed within five years from the latter date, on August 7, 1957. For taxable year 1947, however, the return was
filed on March 1, 1948; the assessment was made on October 19, 1953, more than five years from the date the return was filed; hence, the right to
assess income tax for 1947 had prescribed. Accordingly, We remanded the case to the Tax Court for further appropriate proceedings. 1
In the Tax Court, the parties submitted the case for decision without additional evidence.
On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B. Pineda liable for the payment corresponding to his share of
the following taxes:
Deficiency income tax
1945
1946
Real estate dealer's
fixed tax 4th quarter
of 1946 and whole
year of 1947

P135.83
436.95

P187.50

The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B. Pineda liable for the payment of all the taxes found
by the Tax Court to be due from the estate in the total amount of P760.28 instead of only for the amount of taxes corresponding to his share in the
estate.1awphl.nt
Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid income tax due the estate only up to the extent of and
in proportion to any share he received. He relies on Government of the Philippine Islands v. Pamintuan2 where We held that "after the partition of an
estate, heirs and distributees are liable individually for the payment of all lawful outstanding claims against the estate in proportion to the amount or
value of the property they have respectively received from the estate."
We hold that the Government can require Manuel B. Pineda to pay the full amount of the taxes assessed.
Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to the estate/taxpayer. As an heir he is individually
answerable for the part of the tax proportionate to the share he received from the inheritance. 3 His liability, however, cannot exceed the amount of his
share.4

As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of the property in his possession. The reason is that the
Government has a lien on the P2,500.00 received by him from the estate as his share in the inheritance, for unpaid income taxes 4a for which said
estate is liable, pursuant to the last paragraph of Section 315 of the Tax Code, which we quote hereunder:
If any person, corporation, partnership, joint-account (cuenta en participacion), association, or insurance company liable to pay the income
tax, neglects or refuses to pay the same after demand, the amount shall be a lien in favor of the Government of the Philippines from the
time when the assessment was made by the Commissioner of Internal Revenue until paid with interest, penalties, and costs that may accrue
in addition thereto upon all property and rights to property belonging to the taxpayer: . . .
By virtue of such lien, the Government has the right to subject the property in Pineda's possession, i.e., the P2,500.00, to satisfy the income tax
assessment in the sum of P760.28. After such payment, Pineda will have a right of contribution from his co-heirs, 5 to achieve an adjustment of the
proper share of each heir in the distributable estate.
All told, the Government has two ways of collecting the tax in question. One, by going after all the heirs and collecting from each one of them the
amount of the tax proportionate to the inheritance received. This remedy was adopted in Government of the Philippine Islands v. Pamintuan, supra.
In said case, the Government filed an action against all the heirs for the collection of the tax. This action rests on the concept that hereditary property
consists only of that part which remains after the settlement of all lawful claims against the estate, for the settlement of which the entire estate is first
liable.6 The reason why in case suit is filed against all the heirs the tax due from the estate is levied proportionately against them is to achieve thereby
two results: first, payment of the tax; and second, adjustment of the shares of each heir in the distributed estate as lessened by the tax.
Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights to property belonging to the taxpayer for
unpaid income tax, is by subjecting said property of the estate which is in the hands of an heir or transferee to the payment of the tax due, the estate.
This second remedy is the very avenue the Government took in this case to collect the tax. The Bureau of Internal Revenue should be given, in
instances like the case at bar, the necessary discretion to avail itself of the most expeditious way to collect the tax as may be envisioned in the
particular provision of the Tax Code above quoted, because taxes are the lifeblood of government and their prompt and certain availability is an
imperious need.7 And as afore-stated in this case the suit seeks to achieve only one objective: payment of the tax. The adjustment of the respective
shares due to the heirs from the inheritance, as lessened by the tax, is left to await the suit for contribution by the heir from whom the Government
recovered said tax.
WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered to pay to the Commissioner of Internal Revenue the sum
of P760.28 as deficiency income tax for 1945 and 1946, and real estate dealer's fixed tax for the fourth quarter of 1946 and for the whole year 1947,
without prejudice to his right of contribution for his co-heirs. No costs. So ordered.

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.
From the decision of the Court of First Instance of Manila (in Civil Case No. 34100) ordering it to pay to plaintiff Republic of the Philippines the
sum of P4,802.37 with 6% interest thereon from the date of the filing of the complaint until fully paid, plus costs, defendant Mambulao Lumber
Company interposed the present appeal.1
The facts of the case are briefly stated in the decision of the trial court, to wit: .
The facts of this case are not contested and may be briefly summarized as follows: (a) under the first cause of action, for forest charges
covering the period from September 10, 1952 to May 24, 1953, defendants admitted that they have a liability of P587.37, which liability is
covered by a bond executed by defendant General Insurance & Surety Corporation for Mambulao Lumber Company, jointly and severally
in character, on July 29, 1953, in favor of herein plaintiff; (b) under the second cause of action, both defendants admitted a joint and several
liability in favor of plaintiff in the sum of P296.70, also covered by a bond dated November 27, 1953; and (c) under the third cause of
action, both defendants admitted a joint and several liability in favor of plaintiff for P3,928.30, also covered by a bond dated July 20, 1954.
These three liabilities aggregate to P4,802.37. If the liability of defendants in favor of plaintiff in the amount already mentioned is admitted,
then what is the defense interposed by the defendants? The defense presented by the defendants is quite unusual in more ways than one. It
appears from Exh. 3 that from July 31, 1948 to December 29, 1956, defendant Mambulao Lumber Company paid to the Republic of the
Philippines P8,200.52 for 'reforestation charges' and for the period commencing from April 30, 1947 to June 24, 1948, said defendant paid
P927.08 to the Republic of the Philippines for 'reforestation charges'. These reforestation were paid to the plaintiff in pursuance of Section
1 of Republic Act 115 which provides that there shall be collected, in addition to the regular forest charges provided under Section 264 of
Commonwealth Act 466 known as the National Internal Revenue Code, the amount of P0.50 on each cubic meter of timber... cut out and
removed from any public forest for commercial purposes. The amount collected shall be expended by the director of forestry, with the
approval of the secretary of agriculture and commerce, for reforestation and afforestation of watersheds, denuded areas ... and other public
forest lands, which upon investigation, are found needing reforestation or afforestation .... The total amount of the reforestation charges
paid by Mambulao Lumber Company is P9,127.50, and it is the contention of the defendant Mambulao Lumber Company that since the
Republic of the Philippines has not made use of those reforestation charges collected from it for reforesting the denuded area of the land
covered by its license, the Republic of the Philippines should refund said amount, or, if it cannot be refunded, at least it should be
compensated with what Mambulao Lumber Company owed the Republic of the Philippines for reforestation charges. In line with this
thought, defendant Mambulao Lumber Company wrote the director of forestry, on February 21, 1957 letter Exh. 1, in paragraph 4 of which
said defendant requested "that our account with your bureau be credited with all the reforestation charges that you have imposed on us from
July 1, 1947 to June 14, 1956, amounting to around P2,988.62 ...". This letter of defendant Mambulao Lumber Company was answered by
the director of forestry on March 12, 1957, marked Exh. 2, in which the director of forestry quoted an opinion of the secretary of justice, to
the effect that he has no discretion to extend the time for paying the reforestation charges and also explained why not all denuded areas are
being reforested.
The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by defendant-appellant company to plaintiff-appellee as
reforestation charges from 1947 to 1956 may be set off or applied to the payment of the sum of P4,802.37 as forest charges due and owing from
appellant to appellee. It is appellant's contention that said sum of P9,127.50, not having been used in the reforestation of the area covered by its
license, the same is refundable to it or may be applied in compensation of said sum of P4,802.37 due from it as forest charges.1wph1.t

We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides:
SECTION 1. There shall be collected, in addition to the regular forest charges provided for under Section two hundred and sixty-four of
Commonwealth Act Numbered Four Hundred Sixty-six, known as the National Internal Revenue Code, the amount of fifty centavos on
each cubic meter of timber for the first and second groups and forty centavos for the third and fourth groups cut out and removed from any
public forest for commercial purposes. The amount collected shall be expended by the Director of Forestry, with the approval of the
Secretary of Agriculture and Natural Resources (commerce), for reforestation and afforestation of watersheds, denuded areas and cogon
and open lands within forest reserves, communal forest, national parks, timber lands, sand dunes, and other public forest lands, which upon
investigation, are found needing reforestation or afforestation, or needing to be under forest cover for the growing of economic trees for
timber, tanning, oils, gums, and other minor forest products or medicinal plants, or for watersheds protection, or for prevention of erosion
and floods and preparation of necessary plans and estimate of costs and for reconnaisance survey of public forest lands and for such other
expenses as may be deemed necessary for the proper carrying out of the purposes of this Act.
All revenues collected by virtue of, and pursuant to, the provisions of the preceding paragraph and from the sale of barks, medical plants
and other products derived from plantations as herein provided shall constitute a fund to be known as Reforestation Fund, to be expended
exclusively in carrying out the purposes provided for under this Act. All provincial or city treasurers and their deputies shall act as agents of
the Director of Forestry for the collection of the revenues or incomes derived from the provisions of this Act. (Emphasis supplied.)
Under this provision, it seems quite clear that the amount collected as reforestation charges from a timber licenses or concessionaire shall constitute a
fund to be known as the Reforestation Fund, and that the same shall be expended by the Director of Forestry, with the approval of the Secretary of
Agriculture and Natural Resources for the reforestation or afforestation, among others, of denuded areas which, upon investigation, are found to be
needing reforestation or afforestation. Note that there is nothing in the law which requires that the amount collected as reforestation charges should be
used exclusively for the reforestation of the area covered by the license of a licensee or concessionaire, and that if not so used, the same should be
refunded to him. Observe too, that the licensee's area may or may not be reforested at all, depending on whether the investigation thereof by the
Director of Forestry shows that said area needs reforestation. The conclusion seems to be that the amount paid by a licensee as reforestation charges
is in the nature of a tax which forms a part of the Reforestation Fund, payable by him irrespective of whether the area covered by his license is
reforested or not. Said fund, as the law expressly provides, shall be expended in carrying out the purposes provided for thereunder, namely, the
reforestation or afforestation, among others, of denuded areas needing reforestation or afforestation.
Appellant maintains that the principle of a compensation in Article 1278 of the new Civil Code 2 is applicable, such that the sum of P9,127.50 paid by
it as reforestation charges may compensate its indebtedness to appellee in the sum of P4,802.37 as forest charges. But in the view we take of this
case, appellant and appellee are not mutually creditors and debtors of each other. Consequently, the law on compensation is inapplicable. On this
point, the trial court correctly observed: .
Under Article 1278, NCC, compensation should take place when two persons in their own right are creditors and debtors of each other.
With respect to the forest charges which the defendant Mambulao Lumber Company has paid to the government, they are in the coffers of
the government as taxes collected, and the government does not owe anything, crystal clear that the Republic of the Philippines and the
Mambulao Lumber Company are not creditors and debtors of each other, because compensation refers to mutual debts. ..
And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in question, can be the subject of set-off or
compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of set-off, which are
construed uniformly, in the light of public policy, to exclude the remedy in an action or any indebtedness of the state or municipality to one
who is liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since they do not arise out of the
contract or transaction sued on. ... (80 C.J.S. 73-74. ) .
The general rule, based on grounds of public policy is well-settled that no set-off is admissible against demands for taxes levied for general
or local governmental purposes. The reason on which the general rule is based, is that taxes are not in the nature of contracts between the
party and party but grow out of a duty to, and are the positive acts of the government, to the making and enforcing of which, the personal
consent of individual taxpayers is not required. ... If the taxpayer can properly refuse to pay his tax when called upon by the Collector,
because he has a claim against the governmental body which is not included in the tax levy, it is plain that some legitimate and necessary
expenditure must be curtailed. If the taxpayer's claim is disputed, the collection of the tax must await and abide the result of a lawsuit, and
meanwhile the financial affairs of the government will be thrown into great confusion. (47 Am. Jur. 766-767.)
WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all respects, with costs against the defendant-appellant. So
ordered.
MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott Price, respondents.
This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking
to annul certain orders of the court and for an order in this Court directing the respondent court below to execute the judgment in favor of the
Government against the estate of Walter Scott Price for internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30, 1960, this Court declared as final and
executory the order for the payment by the estate of the estate and inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the
Court of First Instance of Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate of the Late Walter Scott Price." In order
to enforce the claims against the estate the fiscal presented a petition dated June 21, 1961, to the court below for the execution of the judgment. The
petition was, however, denied by the court which held that the execution is not justifiable as the Government is indebted to the estate under
administration in the amount of P262,200. The orders of the court below dated August 20, 1960 and September 28, 1960, respectively, are as follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price, Administratrix of the estate of her late husband Walter
Scott Price and Director Zoilo Castrillo of the Bureau of Lands dated September 19, 1956 and acknowledged before Notary Public
Salvador V. Esguerra, legal adviser in Malacaang to Executive Secretary De Leon dated December 14, 1956, the note of His Excellency,
Pres. Carlos P. Garcia, to Director Castrillo dated August 2, 1958, directing the latter to pay to Mrs. Price the sum ofP368,140.00, and an
extract of page 765 of Republic Act No. 2700 appropriating the sum of P262.200.00 for the payment to the Leyte Cadastral Survey, Inc.,
represented by the administratrix Simeona K. Price, as directed in the above note of the President. Considering these facts, the Court orders
that the payment of inheritance taxes in the sum of P40,058.55 due the Collector of Internal Revenue as ordered paid by this Court on July
5, 1960 in accordance with the order of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the amount
of P262,200.00 due and payable to the Administratrix Simeona K. Price, in this estate, the balance to be paid by the Government to her
without further delay. (Order of August 20, 1960)
The Court has nothing further to add to its order dated August 20, 1960 and it orders that the payment of the claim of the Collector of
Internal Revenue be deferred until the Government shall have paid its accounts to the administratrix herein amounting to P262,200.00. It
may not be amiss to repeat that it is only fair for the Government, as a debtor, to its accounts to its citizens-creditors before it can insist in
the prompt payment of the latter's account to it, specially taking into consideration that the amount due to the Government draws interests
while the credit due to the present state does not accrue any interest. (Order of September 28, 1960)
The petition to set aside the above orders of the court below and for the execution of the claim of the Government against the estate must be denied
for lack of merit. The ordinary procedure by which to settle claims of indebtedness against the estate of a deceased person, as an inheritance tax, is
for the claimant to present a claim before the probate court so that said court may order the administrator to pay the amount thereof. To such effect is
the decision of this Court in Aldamiz vs. Judge of the Court of First Instance of Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:
. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the payment of debts and expenses of administration.
The proper procedure is for the court to order the sale of personal estate or the sale or mortgage of real property of the deceased and all
debts or expenses of administrator and with the written notice to all the heirs legatees and devisees residing in the Philippines, according to
Rule 89, section 3, and Rule 90, section 2. And when sale or mortgage of real estate is to be made, the regulations contained in Rule 90,
section 7, should be complied with.1wph1.t
Execution may issue only where the devisees, legatees or heirs have entered into possession of their respective portions in the estate prior
to settlement and payment of the debts and expenses of administration and it is later ascertained that there are such debts and expenses to be
paid, in which case "the court having jurisdiction of the estate may, by order for that purpose, after hearing, settle the amount of their
several liabilities, and order how much and in what manner each person shall contribute, and may issue execution if circumstances require"
(Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.) And this is not the instant case.
The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle the estate of a deceased person, the properties
belonging to the estate are under the jurisdiction of the court and such jurisdiction continues until said properties have been distributed among the
heirs entitled thereto. During the pendency of the proceedings all the estate is in custodia legis and the proper procedure is not to allow the sheriff, in
case of the court judgment, to seize the properties but to ask the court for an order to require the administrator to pay the amount due from the estate
and required to be paid.
Another ground for denying the petition of the provincial fiscal is the fact that the court having jurisdiction of the estate had found that the claim of
the estate against the Government has been recognized and an amount of P262,200 has already been appropriated for the purpose by a corresponding
law (Rep. Act No. 2700). Under the above circumstances, both the claim of the Government for inheritance taxes and the claim of the intestate for
services rendered have already become overdue and demandable is well as fully liquidated. Compensation, therefore, takes place by operation of law,
in accordance with the provisions of Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes effect by operation of law, and extinguished
both debts to the concurrent amount, eventhough the creditors and debtors are not aware of the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against the estate of the deceased Walter Scott Price.
Furthermore, the petition for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the remedy.
The petition is, therefore, dismissed, without costs.

ENGRACIO FRANCIA, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.
The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate Appellate Court, to set aside
the auction sale of his property which took place on December 5, 1977, and to allow him to recover a 203 square meter lot which was,
sold at public auction to Ho Fernandez and ordered titled in the latter's name.
The antecedent facts are as follows:
Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at Barrio San Isidro, now District
of Sta. Clara, Pasay City, Metro Manila. The lot, with an area of about 328 square meters, is described and covered by Transfer
Certificate of Title No. 4739 (37795) of the Registry of Deeds of Pasay City.
On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of the Philippines for the sum
of P4,116.00 representing the estimated amount equivalent to the assessed value of the aforesaid portion.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his property was sold at public
auction by the City Treasurer of Pasay City pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property Tax
Code in order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the property.
Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle ship bananas.
On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry of New Certificate of Title"
filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795) and the issuance in his name of a new certificate of title.
Upon verification through his lawyer, Francia discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the City
Treasurer on December 11, 1978. The auction sale and the final bill of sale were both annotated at the back of TCT No. 4739 (37795)
by the Register of Deeds.
On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint on January 24, 1980.
On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended complaint and
ordering:
(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in favor of the
defendant Ho Fernandez over the parcel of land including the improvements thereon, subject to
whatever encumbrances appearing at the back of TCT No. 4739 (37795) and ordering the same
TCT No. 4739 (37795) cancelled.
(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's fees. (p. 30,
Record on Appeal)
The Intermediate Appellate Court affirmed the decision of the lower court in toto.
Hence, this petition for review.
Francia prefaced his arguments with the following assignments of grave errors of law:
I
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW IN NOT HOLDING PETITIONER'S
OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH
THE GOVERNMENT IS INDEBTED TO THE FORMER.
II
RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS ERROR IN NOT HOLDING THAT
PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE
ON DECEMBER 5, 1977 TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.
III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00 PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY
INADEQUATE AS TO SHOCK ONE'S CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF PROPERTY WITHOUT
DUE PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp. 10, 17, 20-21, Rollo)
We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that his property was sold at public
auction without notice to him and that the price paid for the property was shockingly inadequate, amounting to fraud and deprivation
without due process of law.
A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his petition upon himself. While we
commiserate with him at the loss of his property, the law and the facts militate against the grant of his petition. We are constrained to
dismiss it.
Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He claims that the government
owed him P4,116.00 when a portion of his land was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by
operation of law as of October 15, 1977.
There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own right are reciprocally debtors
and creditors of each other, are extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the requirements
provided by Article 1279, to wit:
(1) that each one of the obligors be bound principally and that he be at the same time a principal creditor of the other;
xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx
This principal contention of the petitioner has no merit. 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.
In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue Taxes can not be the subject of
set-off or compensation. We stated that:
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off under the statutes of
set-off, which are construed uniformly, in the light of public policy, to exclude the remedy in an action or any
indebtedness of the state or municipality to one who is liable to the state or municipality for taxes. Neither are they a
proper subject of recoupment since they do not arise out of the contract or transaction sued on. ... (80 C.J.S., 7374).
"The general rule based on grounds of public policy is well-settled that no set-off admissible against demands for
taxes levied for general or local governmental purposes. The reason on which the general rule is based, is that taxes
are not in the nature of contracts between the party and party but grow out of duty to, and are the positive acts of the
government to the making and enforcing of which, the personal consent of individual taxpayers is not required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a claim against the
governmental body not included in the tax levy.
This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "... internal revenue taxes can not be the
subject of compensation: Reason: government and taxpayer are not mutually creditors and debtors of each other' under Article 1278 of
the Civil Code and a "claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off."
There are other factors which compel us to rule against the petitioner. The tax was due to the city government while the expropriation
was effected by the national government. Moreover, the amount of P4,116.00 paid by the national government for the 125 square meter
portion of his lot was deposited with the Philippine National Bank long before the sale at public auction of his remaining property. Notice
of the deposit dated September 28, 1977 was received by the petitioner on September 30, 1977. The petitioner admitted in his
testimony that he knew about the P4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy matter to
withdraw P2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public auction.
Petitioner had one year within which to redeem his property although, as well be shown later, he claimed that he pocketed the notice of
the auction sale without reading it.
Petitioner contends that "the auction sale in question was made without complying with the mandatory provisions of the statute
governing tax sale. No evidence, oral or otherwise, was presented that the procedure outlined by law on sales of property for tax
delinquency was followed. ... Since defendant Ho Fernandez has the affirmative of this issue, the burden of proof therefore rests upon
him to show that plaintiff was duly and properly notified ... .(Petition for Review, Rollo p. 18; emphasis supplied)
We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the burden of proof to show that there
was compliance with all the prescribed requisites for a tax sale.
The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:
xxx xxx xxx
... [D]ue process of law to be followed in tax proceedings must be established by proof and the general rule is that the
purchaser of a tax title is bound to take upon himself the burden of showing the regularity of all proceedings leading
up to the sale. (emphasis supplied)
There is no presumption of the regularity of any administrative action which results in depriving a taxpayer of his property through a tax
sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19 Phil. 261). This is actually an exception to the rule that
administrative proceedings are presumed to be regular.
But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been complied with, the petitioner can
not, however, deny that he did receive the notice for the auction sale. The records sustain the lower court's finding that:
[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not properly notified of the auction sale.
Surprisingly, however, he admitted in his testimony that he received the letter dated November 21, 1977 (Exhibit "I")
as shown by his signature (Exhibit "I-A") thereof. He claimed further that he was not present on December 5, 1977
the date of the auction sale because he went to Iligan City. As long as there was substantial compliance with the
requirements of the notice, the validity of the auction sale can not be assailed ... .
We quote the following testimony of the petitioner on cross-examination, to wit:
Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you that the
property in question shall be sold at public auction to the highest bidder on December 5, 1977

pursuant to Sec. 74 of PD 464. Will you tell the Court whether you received the original of this
letter?
A. I just signed it because I was not able to read the same. It was just sent by mail carrier.
Q. So you admit that you received the original of Exhibit I and you signed upon receipt thereof but
you did not read the contents of it?
A. Yes, sir, as I was in a hurry.
Q. After you received that original where did you place it?
A. I placed it in the usual place where I place my mails.
Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he ignored such notice. By his very own
admission that he received the notice, his now coming to court assailing the validity of the auction sale loses its force.
Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy of price is not material (De Leon v.
Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917
Unrep.). See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held that "alleged gross inadequacy of price is not
material when the law gives the owner the right to redeem as when a sale is made at public auction, upon the theory that the lesser the
price, the easier it is for the owner to effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:
... [R]espondent treasurer now claims that the prices for which the lands were sold are unconscionable considering
the wide divergence between their assessed values and the amounts for which they had been actually sold. However,
while in ordinary sales for reasons of equity a transaction may be invalidated on the ground of inadequacy of price, or
when such inadequacy shocks one's conscience as to justify the courts to interfere, such does not follow when the
law gives to the owner the right to redeem, as when a sale is made at public auction, upon the theory that the lesser
the price the easier it is for the owner to effect the redemption. And so it was aptly said: "When there is the right to
redeem, inadequacy of price should not be material, because the judgment debtor may reacquire the property or also
sell his right to redeem and thus recover the loss he claims to have suffered by reason of the price obtained at the
auction sale."
The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et al. (188 Wash. 162, 61 P. 2d, 1290):
If mere inadequacy of price is held to be a valid objection to a sale for taxes, the collection of taxes in this manner
would be greatly embarrassed, if not rendered altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the
correct rule is stated as follows: "where land is sold for taxes, the inadequacy of the price given is not a valid
objection to the sale." This rule arises from necessity, for, if a fair price for the land were essential to the sale, it would
be useless to offer the property. Indeed, it is notorious that the prices habitually paid by purchasers at tax sales are
grossly out of proportion to the value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369).
In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P. 555):
Like most cases of this character there is here a certain element of hardship from which we would be glad to relieve,
but do so would unsettle long-established rules and lead to uncertainty and difficulty in the collection of taxes which
are the life blood of the state. We are convinced that the present rules are just, and that they bring hardship only to
those who have invited it by their own neglect.
We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in value. Precisely because of the
widening of Buendia Avenue in Pasay City, which necessitated the expropriation of adjoining areas, real estate values have gone up in
the area. However, the price quoted by the petitioner for a 203 square meter lot appears quite exaggerated. At any rate, the foregoing
reasons which answer the petitioner's claims lead us to deny the petition.
And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no strong considerations of substantial
justice in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963 up to the date of the auction sale. He claims to have
pocketed the notice of sale without reading it which, if true, is still an act of inexplicable negligence. He did not withdraw from the
expropriation payment deposited with the Philippine National Bank an amount sufficient to pay for the back taxes. The petitioner did not
pay attention to another notice sent by the City Treasurer on November 3, 1978, during the period of redemption, regarding his tax
delinquency. There is furthermore no showing of bad faith or collusion in the purchase of the property by Mr. Fernandez. The petitioner
has no standing to invoke equity in his attempt to regain the property by belatedly asking for the annulment of the sale.
WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision of the respondent court is affirmed.
SO ORDERED.
PHILIPPINE ACETYLENE CO., INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.
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.1wph1.t
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 in James 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 in Esso 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

P145,866.70

Sales to VOA

P 1,683.00

Total sales subject to tax

P147,549.70

7% sales tax due thereon

P 10,328.48

Add: 25% surcharge

Total amount due and collectible

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.
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.
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).

P 2,582.12
P 12,910.60

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 small rubber 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 rubber coagulates 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

P83,193.48

From Jan. 1, 1957 to June 30,

1957

P20,504.99

From July 1, 1957 to Dec. 31,

1958

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 the rubber 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 non-exhaustion 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 rubber processing 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 rubber sheets. 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 largescale 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 non-recoverable.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.

ERNESTO M. MACEDA, petitioner,

vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the President; HON. VICENTE R. JAYME, in his
capacity as Secretary of the Department of Finance; HON. SALVADOR MISON, in his capacity as Commissioner, Bureau of Customs;
HON. JOSE U. ONG, in his capacity as Commissioner of Internal Revenue; NATIONAL POWER CORPORATION; the FISCAL
INCENTIVES REVIEW BOARD; Caltex (Phils.) Inc.; Pilipinas Shell Petroleum Corporation; Philippine National Oil Corporation; and
Petrophil Corporation, respondents.
This petition seeks to nullify certain decisions, orders, rulings, and resolutions of respondents Executive Secretary, Secretary of Finance,
Commissioner of Internal Revenue, Commissioner of Customs and the Fiscal Incentives Review Board FIRB for exempting the National Power
Corporation (NPC) from indirect tax and duties.
The relevant facts are not in dispute.
On November 3, 1986, Commonwealth Act No. 120 created the NPC as a public corporation to undertake the development of hydraulic power and
the production of power from other sources. 1
On June 4, 1949, Republic Act No. 358 granted NPC tax and duty exemption privileges under
Sec. 2. 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.
On September 10, 1971, Republic Act No. 6395 revised the charter of the NPC wherein Congress declared as a national policy the total electrification
of the Philippines through the development of power from all sources to meet the needs of industrial development and rural electrification which
should be pursued coordinately and supported by all instrumentalities and agencies of the government, including its financial institutions. 2 The
corporate existence of NPC was extended to carry out this policy, specifically to undertake the development of hydro electric generation of power and
the production of electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide basis. 3 Being
a non-profit corporation, Section 13 of the law provided in detail the exemption of the NPC from all taxes, duties, fees, imposts and other charges by
the government and its instrumentalities.
On January 22, 1974, Presidential Decree No. 380 amended section 13, paragraphs (a) and (d) of Republic Act No. 6395 by specifying, among
others, the exemption of NPC from such taxes, duties, fees, imposts and other charges imposed "directly or indirectly," on all petroleum products
used by NPC in its operation. Presidential Decree No. 938 dated May 27, 1976 further amended the aforesaid provision by integrating the tax
exemption in general terms under one paragraph.
On June 11, 1984, Presidential Decree No. 1931 withdrew all tax exemption privileges granted in favor of government-owned or controlled
corporations including their subsidiaries. 4 However, said law empowered the President and/or the then Minister of Finance, upon recommendation
of the FIRB to restore, partially or totally, the exemption withdrawn, or otherwise revise the scope and coverage of any applicable tax and duty.
Pursuant to said law, on February 7, 1985, the FIRB issued Resolution No. 10-85 restoring the tax and duty exemption privileges of NPC from June
11, 1984 to June 30, 1985. On January 7, 1986, the FIRB issued resolution No. 1-86 indefinitely restoring the NPC tax and duty exemption privileges
effective July 1, 1985.
However, effective March 10, 1987, Executive Order No. 93 once again withdrew all tax and duty incentives granted to government and private
entities which had been restored under Presidential Decree Nos. 1931 and 1955 but it gave the authority to FIRB to restore, revise the scope and
prescribe the date of effectivity of such tax and/or duty exemptions.
On June 24, 1987 the FIRB issued Resolution No. 17-87 restoring NPC's tax and duty exemption privileges effective March 10, 1987. On October 5,
1987, the President, through respondent Executive Secretary Macaraig, Jr., confirmed and approved FIRB Resolution No. 17-87.
As alleged in the petition, the following are the background facts:
The following are the facts relevant to NPC's questioned claim for refunds of taxes and duties originally paid by respondents Caltex,
Petrophil and Shell for specific and ad valorem taxes to the BIR; and for Customs duties and ad valorem taxes paid by PNOC, Shell and
Caltex to the Bureau of Customs on its crude oil importation.
Many of the factual statements are reproduced from the Senate Committee on Accountability of Public Officers and Investigations (Blue
Ribbon) Report No. 474 dated January 12, 1989 and approved by the Senate on April 21, 1989 (copy attached hereto as Annex "A") and are
identified in quotation marks:
1. Since May 27, 1976 when P.D. No. 938 was issued until June 11, 1984 when P.D. No. 1931 was promulgated abolishing the tax
exemptions of all government-owned or-controlled corporations, the oil firms never paid excise or specific and ad valorem taxes for
petroleum products sold and delivered to the NPC. This non-payment of taxes therefore spanned a period of eight (8) years. (par. 23, p. 7,
Annex "A")
During this period, the Bureau of Internal Revenue was not collecting specific taxes on the purchases of NPC of petroleum products from
the oil companies on the erroneous belief that the National Power Corporation (NPC) was exempt from indirect taxes as reflected in the
letter of Deputy Commissioner of Internal Revenue (DCIR) Romulo Villa to the NPC dated October 29, 1980 granting blanket authority to
the NPC to purchase petroleum products from the oil companies without payment of specific tax (copy of this letter is attached hereto as
petitioner's Annex "B").
2. The oil companies started to pay specific and ad valorem taxes on their sales of oil products to NPC only after the promulgation of P.D.
No. 1931 on June 11, 1984, withdrawing all exemptions granted in favor of government-owned or-controlled corporations and empowering
the FIRB to recommend to the President or to the Minister of Finance the restoration of the exemptions which were withdrawn.
"Specifically, Caltex paid the total amount of P58,020,110.79 in specific and ad valorem taxes for deliveries of petroleum products to NPC
covering the period from October 31, 1984 to April 27, 1985." (par. 23, p. 7, Annex "A")

3. Caltex billings to NPC until June 10, 1984 always included customs duty without the tax portion. Beginning June 11, 1984, when P.D.
1931 was promulgated abolishing NPC's tax exemptions, Caltex's billings to NPC always included both duties and taxes. (Caturla, tsn, Oct.
10, 1988, pp. 1-5) (par. 24, p, 7, Annex "A")
4. For the sales of petroleum products delivered to NPC during the period from October, 1984 to April, 1985, NPC was billed a total of
P522,016,77.34 (sic) including both duties and taxes, the specific tax component being valued at P58,020,110.79. (par. 25, p. 8, Annex
"A").
5. Fiscal Incentives Review Board (FIRB) Resolution 10-85, dated February 7, 1985, certified true copy of which is hereto attached as
Annex "C", restored the tax exemption privileges of NPC effective retroactively to June 11, 1984 up to June 30, 1985. The first paragraph
of said resolution reads as follows:
1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National Power Corporation under C.A. No.
120, as amended, are restored up to June 30, 1985.
Because of this restoration (Annex "G") the NPC applied on September 11, 1985 with the BIR for a "refund of Specific Taxes paid on
petroleum products . . . in the total amount of P58,020,110.79. (par. 26, pp. 8-9, Annex "A")
6. In a letter to the president of the NPC dated May 8, 1985 (copy attached as petitioner's Annex "D"), Acting BIR Commissioner Ruben
Ancheta declared:
FIRB Resolution No. 10-85 serves as sufficient basis to allow NPC to purchase petroleum products from the oil companies free
of specific and ad valorem taxes, during the period in question.
The "period in question" is June 1 1, 1 984 to June 30, 1 985.
7. On June 6, 1985The president of the NPC, Mr. Gabriel Itchon, wrote Mr. Cesar Virata, Chairman of the FIRB (Annex "E"), requesting
"the FIRB to resolve conflicting rulings on the tax exemption privileges of the National Power Corporation (NPC)." These rulings involve
FIRB Resolutions No. 1-84 and 10-85. (par. 40, p. 12, Annex "A")
8. In a letter to the President of NPC (Annex "F"), dated June 26, 1985, Minister Cesar Virata confirmed the ruling of May 8, 1985 of
Acting BIR Commissioner Ruben Ancheta, (par. 41, p. 12, Annex "A")
9. On October 22, 1985, however, under BIR Ruling No. 186-85, addressed to Hanil Development Co., Ltd., a Korean contractor of NPC
for its infrastructure projects, certified true copy of which is attached hereto as petitioner's Annex "E", BIR Acting Commissioner Ruben
Ancheta ruled:
In Reply please be informed that after a re-study of Section 13, R.A. 6395, as amended by P.D. 938, this Office is of the opinion,
and so holds, that the scope of the tax exemption privilege enjoyed by NPC under said section covers only taxes for which it is
directly liable and not on taxes which are only shifted to it. (Phil. Acetylene vs. C.I.R. et al., G.R. L-19707, Aug. 17, 1967) Since
contractor's tax is directly payable by the contractor, not by NPC, your request for exemption, based on the stipulation in the
aforesaid contract that NPC shall assume payment of your contractor's tax liability, cannot be granted for lack of legal basis."
(Annex "H") (emphasis added)
Said BIR ruling clearly states that NPC's exemption privileges covers (sic) only taxes for which it is directly liable and does not cover taxes
which are only shifted to it or for indirect taxes. The BIR, through Ancheta, reversed its previous position of May 8, 1985 adopted by
Ancheta himself favoring NPC's indirect tax exemption privilege.
10. Furthermore, "in a BIR Ruling, unnumbered, "dated June 30, 1986, "addressed to Caltex (Annex "F"), the BIR Commissioner declared
that PAL's tax exemption is limited to taxes for which PAL is directly liable, and that the payment of specific and ad valorem taxes on
petroleum products is a direct liability of the manufacturer or producer thereof". (par. 51, p. 15, Annex "A")
11. On January 7, 1986, FIRB Resolution No. 1-86 was issued restoring NPC's tax exemptions retroactively from July 1, 1985 to a
indefinite period, certified true copy of which is hereto attached as petitioner's Annex "H".
12. NPC's total refund claim was P468.58 million but only a portion thereof i.e. the P58,020,110.79 (corresponding to Caltex) was
approved and released by way of a Tax Credit Memo (Annex "Q") dated July 7, 1986, certified true copy of which [is) attached hereto as
petitioner's Annex "F," which was assigned by NPC to Caltex. BIR Commissioner Tan approved the Deed of Assignment on July 30, 1987,
certified true copy of which is hereto attached as petitioner's Annex "G"). (pars. 26, 52, 53, pp. 9 and 15, Annex "A")
The Deed of Assignment stipulated among others that NPC is assigning the tax credit to Caltex in partial settlement of its outstanding
obligations to the latter while Caltex, in turn, would apply the assigned tax credit against its specific tax payments for two (2) months. (per
memorandum dated July 28, 1986 of DCIR Villa, copy attached as petitioner Annex "G")
13. As a result of the favorable action taken by the BIR in the refund of the P58.0 million tax credit assigned to Caltex, the NPC reiterated
its request for the release of the balance of its pending refunds of taxes paid by respondents Petrophil, Shell and Caltex covering the period
from June 11, 1984 to early part of 1986 amounting to P410.58 million. (The claim of the first two (2) oil companies covers the period
from June 11, 1984 to early part of 1986; while that of Caltex starts from July 1, 1985 to early 1986). This request was denied on August
18, 1986, under BIR Ruling 152-86 (certified true copy of which is attached hereto as petitioner's Annex "I"). The BIR ruled that NPC's tax
free privilege to buy petroleum products covered only the period from June 11, 1984 up to June 30, 1985. It further declared that, despite
FIRB No. 1-86, NPC had already lost its tax and duty exemptions because it only enjoys special privilege for taxes for which it is directly
liable. This ruling, in effect, denied the P410 Million tax refund application of NPC (par. 28, p. 9, Annex "A")
14. NPC filed a motion for reconsideration on September 18, 1986. Until now the BIR has not resolved the motion. (Benigna, II 3, Oct. 17,
1988, p. 2; Memorandum for the Complainant, Oct. 26, 1988, p. 15)." (par. 29, p. 9, Annex "A")

15. On December 22, 1986, in a 2nd Indorsement to the Hon. Fulgencio S. Factoran, Jr., BIR Commissioner Tan, Jr. (certified true copy of
which is hereto attached and made a part hereof as petitioner's Annex "J"), reversed his previous position and states this time that all
deliveries of petroleum products to NPC are tax exempt, regardless of the period of delivery.
16. On December 17, 1986, President Corazon C. Aquino enacted Executive Order No. 93, entitled "Withdrawing All Tax and Duty
Incentives, Subject to Certain Exceptions, Expanding the Powers of the Fiscal Incentives Review Board and Other Purposes."
17. On June 24, 1987, the FIRB issued Resolution No. 17-87, which restored NPC's tax exemption privilege and included in the exemption
"those pertaining to its domestic purchases of petroleum and petroleum products, and the restorations were made to retroact effective
March 10, 1987, a certified true copy of which is hereto attached and made a part hereof as Annex "K".
18. On August 6, 1987, the Hon. Sedfrey A. Ordoez, Secretary of Justice, issued Opinion No. 77, series of 1987, opining that "the power
conferred upon Fiscal Incentives Review Board by Section 2a (b), (c) and (d) of Executive order No. 93 constitute undue delegation of
legislative power and, therefore, [are] unconstitutional," a copy of which is hereto attached and made a part hereof as Petitioner's Annex
"L."
19. On October 5, 1987, respondent Executive Secretary Macaraig, Jr. in a Memorandum to the Chairman of the FIRB a certified true copy
of which is hereto attached and made a part hereof as petitioner's Annex "M," confirmed and approved FIRB Res. No. 17-87 dated June 24,
1987, allegedly pursuant to Sections 1 (f) and 2 (e) of Executive Order No. 93.
20. Secretary Vicente Jayme in a reply dated May 20, 1988 to Secretary Catalino Macaraig, who by letter dated May 2, 1988 asked him to
rule "on whether or not, as the law now stands, the National Power Corporation is still exempt from taxes, duties . . . on its local purchases
of . . . petroleum products . . ." declared that "NPC under the provisions of its Revised Charter retains its exemption from duties and taxes
imposed on the petroleum products purchased locally and used for the generation of electricity," a certified true copy of which is attached
hereto as petitioner's Annex "N." (par. 30, pp. 9-10, Annex "A")
21. Respondent Executive Secretary came up likewise with a confirmatory letter dated June 1 5, 1988 but without the usual official form of
"By the Authority of the President," a certified true copy of which is hereto attached and made a part hereof as Petitioner's Annex "O".
22. The actions of respondents Finance Secretary and the Executive Secretary are based on the RESOLUTION No. 17-87 of FIRB
restoring the tax and duty exemption of the respondent NPC pertaining to its domestic purchases of petroleum products (petitioner's Annex
K supra).
23. Subsequently, the newspapers particularly, the Daily Globe, in its issue of July 11, 1988 reported that the Office of the President and the
Department of Finance had ordered the BIR to refund the tax payments of the NPC amounting to Pl.58 Billion which includes the P410
Million Tax refund already rejected by BIR Commissioner Tan, Jr., in his BIR Ruling No. 152-86. And in a letter dated July 28, 1988 of
Undersecretary Marcelo B. Fernando to BIR Commissioner Tan, Jr. the Pl.58 Billion tax refund was ordered released to NPC (par. 31, p. 1
0, Annex "A")
24. On August 8, 1988, petitioner "wrote both Undersecretary Fernando and Commissioner Tan requesting them to hold in abeyance the
release of the Pl.58 billion and await the outcome of the investigation in regard to Senate Resolution No. 227," copies attached as
Petitioner's Annexes "P" and "P-1 " (par. 32, p. 10, Annex "A").
Reacting to this letter of the petitioner, Undersecretary Fernando wrote Commissioner Tan of the BIR dated August, 1988 requesting him to
hold in abeyance the release of the tax refunds to NPC until after the termination of the Blue Ribbon investigation.
25. In the Bureau of Customs, oil companies import crude oil and before removal thereof from customs custody, the corresponding customs
duties and ad valorem taxes are paid. Bunker fuel oil is one of the petroleum products processed from the crude oil; and same is sold to
NPC. After the sale, NPC applies for tax credit covering the duties and ad valorem exemption under its Charter. Such applications are
processed by the Bureau of Customs and the corresponding tax credit certificates are issued in favor of NPC which, in turn assigns it to the
oil firm that imported the crude oil. These certificates are eventually used by the assignee-oil firms in payment of their other duty and tax
liabilities with the Bureau of Customs. (par. 70, p. 19, Annex "A")
A lesser amount totalling P740 million, covering the period from 1985 to the present, is being sought by respondent NPC for refund from
the Bureau of Customs for duties paid by the oil companies on the importation of crude oil from which the processed products sold locally
by them to NPC was derived. However, based on figures submitted to the Blue Ribbon Committee of the Philippine Senate which
conducted an investigation on this matter as mandated by Senate Resolution No. 227 of which the herein petitioner was the sponsor, a much
bigger figure was actually refunded to NPC representing duties and ad valorem taxes paid to the Bureau of Customs by the oil companies
on the importation of crude oil from 1979 to 1985.
26. Meantime, petitioner, as member of the Philippine Senate introduced P.S. Res. No. 227, entitled:
Resolution Directing the Senate Blue Ribbon Committee, In Aid of Legislation, To conduct a Formal and Extensive Inquiry into
the Reported Massive Tax Manipulations and Evasions by Oil Companies, particularly Caltex (Phils.) Inc., Pilipinas Shell and
Petrophil, Which Were Made Possible By Their Availing of the Non-Existing Exemption of National Power Corporation (NPC)
from Indirect Taxes, Resulting Recently in Their Obtaining A Tax Refund Totalling P1.55 Billion From the Department of
Finance, Their Refusal to Pay Since 1976 Customs Duties Amounting to Billions of Pesos on Imported Crude Oil Purportedly for
the Use of the National Power Corporation, the Non-Payment of Surtax on Windfall Profits from Increases in the Price of Oil
Products in August 1987 amounting Maybe to as Much as Pl.2 Billion Surtax Paid by Them in 1984 and For Other Purposes.
27. Acting on the above Resolution, the Blue Ribbon Committee of the Senate did conduct a lengthy formal inquiry on the matter, calling
all parties interested to the witness stand including representatives from the different oil companies, and in due time submitted its
Committee Report No. 474 . . . The Blue Ribbon Committee recommended the following courses of action.
1. Cancel its approval of the tax refund of P58,020,110.70 to the National Power Corporation (NPC) and its approval of Tax
Credit memo covering said amount (Annex "P" hereto), dated July 7, 1986, and cancel its approval of the Deed of Assignment

(Annex "Q" hereto) by NPC to Caltex, dated July 28, 1986, and collect from Caltex its tax liabilities which were erroneously
treated as paid or settled with the use of the tax credit certificate that NPC assigned to said firm.:
1.1. NPC did not have any indirect tax exemption since May 27, 1976 when PD 938 was issued. Therefore, the grant of
a tax refund to NPC in the amount of P58 million was illegal, and therefore, null and void. Such refund was a nullity
right from the beginning. Hence, it never transferred any right in favor of NPC.
2. Stop the processing and/or release of Pl.58 billion tax refund to NPC and/or oil companies on the same ground that the NPC,
since May 27, 1976 up to June 17, 1987 was never granted any indirect tax exemption. So, the P1.58 billion represent taxes
legally and properly paid by the oil firms.
3. Start collection actions of specific or excise and ad valorem taxes due on petroleum products sold to NPC from May 27, 1976
(promulgation of PD 938) to June 17, 1987 (issuance of EO 195).
B. For the Bureau of Customs (BOC) to do the following:
1. Start recovery actions on the illegal duty refunds or duty credit certificates for purchases of petroleum products by NPC and allegedly
granted under the NPC charter covering the years 1978-1988 . . .
28. On March 30, 1989, acting on the request of respondent Finance Secretary for clearance to direct the Bureau of Internal Revenue and of
Customs to proceed with the processing of claims for tax credits/refunds of the NPC, respondent Executive Secretary rendered his ruling,
the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, the clearance is hereby GRANTED and, accordingly, unless restrained by proper authorities, that department
and/or its line-tax bureaus may now proceed with the processing of the claims of the National Power Corporation for duty and tax free exemption
and/or tax credits/ refunds, if there be any, in accordance with the ruling of that Department dated May 20,1988, as confirmed by this Office on June
15, 1988 . . . 5
Hence, this petition for certiorari, prohibition and mandamus with prayer for a writ of preliminary injunction and/or restraining order, praying among
others that:
1. Upon filing of this petition, a temporary restraining order forthwith be issued against respondent FIRB Executive Secretary Macaraig,
and Secretary of Finance Jayme restraining them and other persons acting for, under, and in their behalf from enforcing their resolution,
orders and ruling, to wit:
A. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's Annex "K");
B. Memorandum-Order of the Office of the President dated October 5, 1987 (petitioner's Annex "M");
C. Order of the Executive Secretary dated June 15, 1988 (petitioner's Annex "O");
D. Order of the Executive Secretary dated March 30, l989 (petitioner's Annex "Q"); and
E. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's Annex "N").
2. Said temporary restraining order should also include respondent Commissioners of Customs Mison and Internal Revenue Ong
restraining them from processing and releasing any pending claim or application by respondent NPC for tax and duty refunds.
3. Thereafter, and during the pendency of this petition, to issue a writ or preliminary injunction against above-named respondents and all
persons acting for and in their behalf.
4. A decision be rendered in favor of the petitioner and against the respondents:
A. Declaring that respondent NPC did not enjoy indirect tax exemption privilege since May 27, 1976 up to the present;
B. Nullifying the setting aside the following:
1. FIRB Resolution No. 17-87 dated June 24, 1987 (petitioner's Annex "K");
2. Memorandum-Order of the Office of the President dated October 5, 1987 (petitioner's Annex "M");
3. Order of the Executive Secretary dated June 15, 1988 (petitioner's Annex "O");
4. Order of the Executive Secretary dated March 30, 1989 (petitioner's Annex "Q");
5. Ruling of the Finance Secretary dated May 20, 1988 (petitioner's Annex "N"
6. Tax Credit memo dated July 7, 1986 issued to respondent NPC representing tax refund for P58,020,110.79 (petitioner's Annex
"F");
7. Deed of Assignment of said tax credit memo to respondent Caltex dated July 30, 1987 (petitioner's Annex "G");
8. Application of the assigned tax credit of Caltex in payment of its tax liabilities with the Bureau of Internal Revenue and

9. Illegal duty and tax refunds issued by the Bureau of Customs to respondent NPC by way of tax credit certificates from 1979 up
to the present.
C. Declaring as illegal and null and void the pending claims for tax and duty refunds by respondent NPC with the Bureau of Customs and
the Bureau of Internal Revenue;
D. Prohibiting respondents Commissioner of Customs and Commissioner of Internal Revenue from enforcing the abovequestioned
resolution, orders and ruling of respondents Executive Secretary, Secretary of Finance, and FIRB by processing and releasing respondent
NPC's tax and duty refunds;
E. Ordering the respondent Commissioner of Customs to deny as being null and void the pending claims for refund of respondent NPC
with the Bureau of Customs covering the period from 1985 to the present; to cancel and invalidate the illegal payment made by respondents
Caltex, Shell and PNOC by using the tax credit certificates assigned to them by NPC and to recover from respondents Caltex, Shell and
PNOC all the amounts appearing in said tax credit certificates which were used to settle their duty and tax liabilities with the Bureau of
Customs.
F. Ordering respondent Commissioner of Internal Revenue to deny as being null and void the pending claims for refund of respondent NPC
with the Bureau of Internal Revenue covering the period from June 11, 1984 to June 17, 1987.
PETITIONER prays for such other relief and remedy as may be just and equitable in the premises. 6
The issues raised in the petition are the following:
To determine whether respondent NPC is legally entitled to the questioned tax and duty refunds, this Honorable Court must resolve the
following issues:
Main issue
Whether or not the respondent NPC has ceased to enjoy indirect tax and duty exemption with the enactment of P.D. No. 938 on May 27,
1976 which amended P.D. No. 380, issued on January 11, 1974.
Corollary issues
1. Whether or not FIRB Resolution No. 10-85 dated February 7, 1985 which restored NPC's tax exemption privilege effective June 11,
1984 to June 30, 1985 and FIRB Resolution No. 1-86 dated January 7, 1986 restoring NPC's tax exemption privilege effective July 1, 1985
included the restoration of indirect tax exemption to NPC and
2. Whether or not FIRB could validly and legally issue Resolution No. 17-87 dated June 24, 1987 which restored NPC's tax exemption
privilege effective March 10, 1987; and if said Resolution was validly issued, the nature and extent of the tax exemption privilege restored
to NPC. 7
In a resolution dated June 6, 1989, the Court, without giving due course to the petition, required respondents to comment thereon, within ten (10)
days from notice. The respondents having submitted their comment, on October 10, 1989 the Court required petitioner to file a consolidated reply to
the same. After said reply was filed by petitioner on November 15, 1989 the Court gave due course to the petition, considering the comments of
respondents as their answer to the petition, and requiring the parties to file simultaneously their respective memoranda within twenty (20) days from
notice. The parties having submitted their respective memoranda, the petition was deemed submitted for resolution.
First the preliminary issues.
Public respondents allege that petitioner does not have the standing to challenge the questioned orders and resolution.
In the petition it is alleged that petitioner is "instituting this suit in his capacity as a taxpayer and a duly-elected Senator of the Philippines." Public
respondent argues that petitioner must show he has sustained direct injury as a result of the action and that it is not sufficient for him to have a mere
general interest common to all members of the public.8
The Court however agrees with the petitioner that as a taxpayer he may file the instant petition following the ruling in Lozada when it involves illegal
expenditure of public money. The petition questions the legality of the tax refund to NPC by way of tax credit certificates and the use of said assigned
tax credits by respondent oil companies to pay for their tax and duty liabilities to the BIR and Bureau of Customs.
Assuming petitioner has the personality to file the petition, public respondents also allege that the proper remedy for petitioner is an appeal to the
Court of Tax Appeals under Section 7 of R.A. No. 125 instead of this petition. However Section 11 of said law provides
Sec. 11. Who may appeal; effect of appealAny person, association or corporation adversely affected by a decision or ruling of the
Commissioner of Internal Revenue, the Collector of Customs (Commissioner of Customs) or any provincial or City Board of Assessment
Appeals may file an appeal in the Court of Tax Appeals within thirty days after receipt of such decision or ruling.
From the foregoing, it is only the taxpayer adversely affected by a decision or ruling of the Commissioner of Internal Revenue, the Commissioner of
Customs or any provincial or city Board of Assessment Appeal who may appeal to the Court of Tax Appeals. Petitioner does not fall under this
category.
Public respondents also contend that mandamus does not lie to compel the Commissioner of Internal Revenue to impose a tax assessment not found
by him to be proper. It would be tantamount to a usurpation of executive functions. 9
Even in Meralco, this Court recognizes the situation when mandamus can control the discretion of the Commissioners of Internal Revenue and
Customs when the exercise of discretion is tainted with arbitrariness and grave abuse as to go beyond statutory authority. 10

Public respondents then assert that a writ of prohibition is not proper as its function is to prevent an unlawful exercise of jurisdiction 11 or to prevent
the oppressive exercise of legal authority. 12 Precisely, petitioner questions the lawfulness of the acts of public respondents in this case.
Now to the main issue.
It may be useful to make a distinction, for the purpose of this disposition, between a direct tax and an indirect tax. A direct tax is a tax for which a
taxpayer is directly liable on the transaction or business it engages in. Examples are the custom duties and ad valorem taxes paid by the oil companies
to the Bureau of Customs for their importation of crude oil, and the specific and ad valorem taxes they pay to the Bureau of Internal Revenue after
converting the crude oil into petroleum products.
On the other hand, "indirect taxes are taxes primarily paid by persons who can shift the burden upon someone else ." 13 For example, the excise and
ad valorem taxes that oil companies pay to the Bureau of Internal Revenue upon removal of petroleum products from its refinery can be shifted to its
buyer, like the NPC, by adding them to the "cash" and/or "selling price."
The main thrust of the petition is that under the latest amendment to the NPC charter by Presidential Decree No. 938, the exemption of NPC from
indirect taxation was revoked and repealed. While petitioner concedes that NPC enjoyed broad exemption privileges from both direct and indirect
taxes on the petroleum products it used, under Section 13 of Republic Act No, 6395 and more so under Presidential Decree No. 380, however, by the
deletion of the phrases "directly or indirectly" and "on all petroleum products used by the Corporation in the generation, transmission, utilization and
sale of electric power" he contends that the exemption from indirect taxes was withdrawn by P.D. No. 938.
Petitioner further states that the exemption of NPC provided in Section 13 of Presidential Decree No. 938 regarding the payments of "all forms of
taxes, etc." cannot be interpreted to include indirect tax exemption. He cites Philippine Aceytelene Co. Inc. vs. Commissioner of Internal Revenue. 14
Petitioner emphasizes the principle in taxation that the exception contained in the tax statutes must be strictly construed against the one claiming the
exemption, and that the rule that a tax statute granting exemption must be strictly construed against the one claiming the exemption is similar to the
rule that a statute granting taxing power is to be construed strictly, with doubts resolved against its existence. 15 Petitioner cites rulings of the BIR
that the phrase exemption from "all taxes, etc." from "all forms of taxes" and "in lieu of all taxes" covers only taxes for which the taxpayer is directly
liable. 16
On the corollary issues. First, FIRB Resolution Nos. 10-85 and 10-86 issued under Presidential Decree No. 1931, the relevant provision of which are
to wit:
P.D. No. 1931 provides as follows:
Sec. 1. The provisions of special or general law to the contrary notwithstanding, all exemptions from the payment of duties, taxes . . .
heretofore granted in favor of government-owned or controlled corporations are hereby withdrawn. (Emphasis supplied.)
Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the recommendation of the Fiscal Incentives Review
Board . . . is hereby empowered to restore, partially or totally, the exemptions withdrawn by Section 1 above . . . (Emphasis supplied.)
The relevant provisions of FIRB resolution Nos. 10-85 and 1-86 are the following:
Resolution. No. 10-85
BE IT RESOLVED AS IT IS HEREBY RESOLVED, That:
1. Effective June 11, 1984, the tax and duty exemption privileges enjoyed by the National Power Corporation under C.A. No. 120 as amended are
restored up to June 30, 1985.
2. Provided, That to restoration does not apply to the following:
a. importations of fuel oil (crude equivalent) and coal as per FIRB Resolution No. 1-84;
b. commercially-funded importations; and
c. interest income derived from any investment source.
3. Provided further, That in case of importations funded by international financing agreements, the NPC is hereby required to furnish the FIRB on a
periodic basis the particulars of items received or to be received through such arrangements, for purposes of tax and duty exemptions privileges. 17
Resolution No. 1-86
BE IT RESOLVED AS IT IS HEREBY RESOLVED: That:
1. Effective July 1, 1985, the tax and duty exemption privileges enjoyed by the National Power Corporation (NPC) under Commonwealth Act No.
120, as amended, are restored: Provided, That importations of fuel oil (crude oil equivalent), and coal of the herein grantee shall be subject to the
basic and additional import duties; Provided, further, that the following shall remain fully taxable:
a. Commercially-funded importations; and
b. Interest income derived by said grantee from bank deposits and yield or any other monetary benefits from deposit substitutes,
trust funds and other similar arrangements.
2. The NPC as a government corporation is exempt from the real property tax on land and improvements owned by it provided that the beneficial use
of the property is not transferred to another pursuant to the provisions of Sec. 10(a) of the Real Property Tax Code, as amended. 18

Petitioner does not question the validity and enforceability of FIRB Resolution Nos. 10-85 and 1-86. Indeed, they were issued in compliance with the
requirement of Section 2, P.D. No. 1931, whereby the FIRB should make the recommendation subject to the approval of "the President of the
Philippines and/or the Minister of Finance." While said Resolutions do not appear to have been approved by the President, they were nevertheless
approved by the Minister of Finance who is also duly authorized to approve the same. In fact it was the Minister of Finance who signed and
promulgated said resolutions. 19
The observation of Mr. Justice Sarmiento in the dissenting opinion that FIRB Resolution Nos. 10-85 and 1-86 which were promulgated by then
Acting Minister of Finance Alfredo de Roda, Jr. and Minister of Finance Cesar E.A Virata, as Chairman of FIRB respectively, should be separately
approved by said Minister of Finance as required by P.D. 1931 is, a superfluity. An examination of the said resolutions which are reproduced in full in
the dissenting opinion show that the said officials signed said resolutions in the dual capacity of Chairman of FIRB and Minister of Finance.
Mr. Justice Sarmiento also makes reference to the case National Power Corporation vs. Province of Albay, 20 wherein the Court observed that under
P.D. No. 776 the power of the FIRB was only recommendatory and requires the approval of the President to be valid. Thus, in said case the Court
held that FIRB Resolutions Nos. 10-85 and 1-86 not having been approved by the President were not valid and effective while the validity of FIRB
17-87 was upheld as it was duly approved by the Office of the President on October 5, 1987.
However, under Section 2 of P.D. No. 1931 of June 11, 1984, hereinabove reproduced, which amended P.D. No. 776, it is clearly provided for that
such FIRB resolution, may be approved by the "President of the Philippines and/or the Minister of Finance." To repeat, as FIRB Resolutions Nos. 1085 and 1-86 were duly approved by the Minister of Finance, hence they are valid and effective. To this extent, this decision modifies or supersedes
the Court's earlier decision in Albay afore-referred to.
Petitioner, however, argues that under both FIRB resolutions, only the tax and duty exemption privileges enjoyed by the NPC under its charter, C.A.
No. 120, as amended, are restored, that is, only its direct tax exemption privilege; and that it cannot be interpreted to cover indirect taxes under the
principle that tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority.
Petitioner argues that the release by the BIR of the P58.0 million refund to respondent NPC by way of a tax credit certificate 21 which was assigned
to respondent Caltex through a deed of assignment approved by the BIR 22 is patently illegal. He also contends that the pending claim of respondent
NPC in the amount of P410.58 million with respondent BIR for the sale and delivery to it of bunker fuel by respondents Petrophil, Shell and Caltex
from July 1, 1985 up to 1986, being illegal, should not be released.
Now to the second corollary issue involving the validity of FIRB Resolution No. 17-87 issued on June 24, 1987. It was issued under authority of
Executive Order No. 93 dated December 17, 1986 which grants to the FIRB among others, the power to recommend the restoration of the tax and
duty exemptions/incentives withdrawn thereunder.
Petitioner stresses that on August 6, 1987 the Secretary of Justice rendered Opinion No. 77 to the effect that the powers conferred upon the FIRB by
Section 2(a), (b), and (c) and (4) of Executive Order No. 93 "constitute undue delegation of legislative power and is, therefore, unconstitutional."
Petitioner observes that the FIRB did not merely recommend but categorically restored the tax and duty exemption of the NPC so that the
memorandum of the respondent Executive Secretary dated October 5, 1987 approving the same is a surplusage.
Further assuming that FIRB Resolution No. 17-87 to have been legally issued, following the doctrine in Philippine Aceytelene, petitioner avers that
the restoration cannot cover indirect taxes and it cannot create new indirect tax exemption not otherwise granted in the NPC charter as amended by
Presidential Decree No. 938.
The petition is devoid of merit.
The NPC is a non-profit public corporation created for the general good and welfare 23 wholly owned by the government of the Republic of the
Philippines. 24 From the very beginning of its corporate existence, the NPC enjoyed preferential tax treatment 25 to enable the Corporation to pay
the indebtedness and obligation and in furtherance and effective implementation of the policy enunciated in Section one of "Republic Act No. 6395"
26 which provides:
Sec. 1. Declaration of PolicyCongress 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 need 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 its financial institutions.
From the changes made in the NPC charter, the intention to strengthen its preferential tax treatment is obvious.
Under Republic Act No. 358, its exemption is provided as follows:
Sec. 2. 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."
Under Republic Act No. 6395:
Sec. 13. Non-profit Character of the Corporation; Exemption from all Taxes, Duties, Fees, Imposts and other Charges by Government and
Governmental Instrumentalities. 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, 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 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. (Emphasis supplied.)
Under Presidential Decree No. 380:
Sec. 13. Non-profit Character of the Corporation: Exemption from all Taxes, Duties, Fees, Imposts and other Charges by the Government
and Government Instrumentalities. 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:
(a) From the payment of all taxes, duties, fees, imposts, charges, costs and services 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, 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 governmental 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
operation and projects; and
(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 produced used by the Corporation
in the generation, transmission, utilization, and sale of electric power. (Emphasis supplied.)
Under Presidential Decree No. 938:
Sec. 13. Non-profit Character of the Corporation: Exemption from All Taxes, Duties, Fees, Imposts and Other Charges by the Government
and Government Instrumentalities.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 the indebtedness and obligations and in furtherance
and effective implementation of the policy enunciated in Section One of this Act, the Corporation, including its subsidiaries 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.)
It is noted that in the earlier law, R.A. No. 358 the exemption was worded in general terms, as to cover "all taxes, duties, fees, imposts, charges,
etc. . . ." However, the amendment under Republic Act No. 6395 enumerated the details covered by the exemption. Subsequently, P.D. No. 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 amended the tax exemption by simplifying the same law in general terms. It succinctly exempts NPC from
"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."
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. The
rationale for this exemption is that being non-profit the NPC "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 the indebtedness and obligations and in furtherance and effective implementation of the
policy enunciated in Section one of this Act, . . ." 27
The preamble of P.D. No. 938 states
WHEREAS, in the application of the tax exemption provision of the Revised Charter, the non-profit character of the NPC has not been
fully utilized because of restrictive interpretations of the taxing agencies of the government on said provisions. . . . (Emphasis supplied.)
It is evident from the foregoing that the lawmaker did not intend that the said provisions of P.D. No. 938 shall be construed strictly against NPC. On
the contrary, the law mandates that it should be interpreted liberally so as to enhance the tax exempt status of NPC.
Hence, petitioner cannot invoke the rule on strictissimi juris with respect to the interpretation of statutes granting tax exemptions to NPC.
Moreover, it is a recognized principle that the rule on strict interpretation does not apply in the case of exemptions in favor of a government political
subdivision or instrumentality. 28
The basis for applying the rule of strict construction to statutory provisions granting tax exemptions or deductions, even more obvious than
with reference to the affirmative or levying provisions of tax statutes, is to minimize differential treatment and foster impartiality, fairness,
and equality of treatment among tax payers.
The reason for the rule does not apply in the case of exemptions running to the benefit of the government itself or its agencies. In such case
the practical effect of an exemption is merely to reduce the amount of money that has to be handled by government in the course of its
operations. For these reasons, provisions granting exemptions to government agencies may be construed liberally, in favor of non tax
liability of such agencies. 29
In the case of property owned by the state or a city or other public corporations, the express exemption should not be construed with the same degree
of strictness that applies to exemptions contrary to the policy of the state, since as to such property "exemption is the rule and taxation the exception."
30

The contention of petitioner that the exemption of NPC from indirect taxes under Section 13 of R.A. No. 6395 and P.D. No. 380, is deemed repealed
by P.D. No. 938 when the reference to it was deleted is not well-taken.
Repeal by implication is not favored unless it is manifest that the legislature so intended. As laws are presumed to be passed with deliberation and
with knowledge of all existing ones on the subject, it is logical to conclude that in passing a statute it is not intended to interfere with or abrogate a
former law relating to the same subject matter, unless the repugnancy between the two is not only irreconcilable but also clear and convincing as a
result of the language used, or unless the latter Act fully embraces the subject matter of the earlier. 31 The first effort of a court must always be to
reconcile or adjust the provisions of one statute with those of another so as to give sensible effect to both provisions. 32
The legislative intent must be ascertained from a consideration of the statute as a whole, and not of an isolated part or a particular provision alone. 33
When construing a statute, the reason for its enactment should be kept in mind and the statute should be construed with reference to its intended
scope and purpose 34 and the evil sought to be remedied. 35
The NPC is a government instrumentality with the enormous task of undertaking development of hydroelectric generation of power and production
of electricity from other sources, as well as the transmission of electric power on a nationwide basis, to improve the quality of life of the people
pursuant to the State policy embodied in Section E, Article II of the 1987 Constitution.
It is evident from the provision 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 for under R.A. No. 6895 and P.D. No. 380 if it is to attain its goals.
Further, the construction of P.D. No. 938 by the Office charged with its implementation should be given controlling weight. 36
Since the May 8, 1985 ruling of Commissioner Ancheta, to the letter of the Secretary of Finance of June 26, 1985 confirming said ruling, the letters
of the BIR of August 18, 1986, and December 22, 1986, the letter of the Secretary of Finance of February 19, 1987, the Memorandum of the
Executive Secretary of October 9, 1987, by authority of the President, confirming and approving FIRB Resolution No. 17-87, the letter of the
Secretary of Finance of May 20, 1988 to the Executive Secretary rendering his opinion as requested by the latter, and the latter's reply of June 15,
1988, it was uniformly held that the grant of tax exemption to NPC under C.A. No. 120, as amended, included exemption from payment of all taxes
relative to NPC's petroleum purchases including indirect taxes. 37 Thus, then Secretary of Finance Vicente Jayme in his letter of May 20, 1988 to the
Executive Secretary Macaraig aptly stated the justification for this tax exemption of NPC
The issue turns on the effect to the exemption of NPC from taxes of the deletion of the phrase 'taxes imposed indirectly on oil products and
its exemption from 'all forms of taxes.' It is suggested that the change in language evidenced an intention to exempt NPC only from taxes
directly imposed on or payable by it; since taxes on fuel-oil purchased by it; since taxes on fuel-oil purchased by NPC locally are levied on
and paid by its oil suppliers, NPC thereby lost its exemption from those taxes. The principal authority relied on is the 1967 case of
Philippine Acetylene Co., Inc. vs. Commissioner of Internal Revenue, 20 SCRA 1056.
First of all, tracing the changes made through the years in the Revised Charter, the strengthening of NPC's preferential tax treatment was
clearly the intention. To the extent that the explanatory "whereas clauses" may disclose the intent of the law-maker, the changes effected by
P.D. 938 can only be read as being expansive rather than restrictive, including its version of Section 13.
Our Tax Code does not recognize that there are taxes directly imposed and those imposed indirectly. The textbook distinction between a
direct and an indirect tax may be based on the possibility of shifting the incidence of the tax. A direct tax is one which is demanded from
the very person intended to be the payor, although it may ultimately be shifted to another. An example of a direct tax is the personal income
tax. On the other hand, indirect taxes are those which are demanded from one person in the expectation and intention that he shall
indemnify himself at the expense of another. An example of this type of tax is the sales tax levied on sales of a commodity.
The distinction between a direct tax and one indirectly imposed (or an indirect tax) is really of no moment. What is more relevant is that
when an "indirect tax" is paid by those upon whom the tax ultimately falls, it is paid not as a tax but as an additional part of the cost or of
the market price of the commodity.
This distinction was made clear by Chief Justice Castro in the Philippine Acetylene case, when he analyzed the nature of the percentage
(sales) tax to determine whether it is a tax on the producer or on the purchaser of the commodity. Under out Tax Code, the sales tax falls
upon the manufacturer or producer. The phrase "pass on" the tax was criticized as being inaccurate. Justice Castro says that the tax remains
on the manufacturer alone. The purchaser does not pay the tax; he pays an amount added to the price because of the tax. Therefore, the tax
is not "passed on" and does not for that reason become an "indirect tax" on the purchaser. It is eminently possible that the law maker in
enacting P.D. 938 in 1976 may have used lessons from the analysis of Chief Justice Castro in 1967 Philippine Acetylene case.
When P.D. 938 which exempted NPC from "all forms of taxes" was issued in May 1976, the so-called oil crunch had already drastically
pushed up crude oil Prices from about $1.00 per bbl in 1971 to about $10 and a peak (as it turned out) of about $34 per bbl in 1981. In
1974-78, NPC was operating the Meralco thermal plants under a lease agreement. The power generated by the leased plants was sold to
Meralco for distribution to its customers. This lease and sale arrangement was entered into for the benefit of the consuming public, by
reducing the burden on the swiftly rising world crude oil prices. This objective was achieved by the use of NPC's "tax umbrella under its
Revised Charterthe exemption from specific taxes on locally purchased fuel oil. In this context, I can not interpret P.D. 938 to have
withdrawn the exemption from tax on fuel oil to which NPC was already entitled and which exemption Government in fact was utilizing to
soften the burden of high crude prices.
There is one other consideration which I consider pivotal. The taxes paid by oil companies on oil products sold to NPC, whether paid to
them by NPC or no never entered into the rates charged by NPC to its customers not even during those periods of uncertainty engendered
by the issuance of P.D. 1931 and E. 0. 93 on NP/Cs tax status. No tax component on the fuel have been charged or recovered by NPC
through its rates.
There is an import duty on the crude oil imported by the local refineries. After the refining process, specific and ad valorem taxes are levied
on the finished products including fuel oil or residue upon their withdrawal from the refinery. These taxes are paid by the oil companies as
the manufacturer thereof.
In selling the fuel oil to NPC, the oil companies include in their billings the duty and tax component. NPC pays the oil companies' invoices
including the duty component but net of the tax component. NPC then applies for drawback of customs duties paid and for a credit in

amount equivalent to the tax paid (by the oil companies) on the products purchased. The tax credit is assigned to the oil companiesas
payment, in effect, of the tax component shown in the sales invoices. (NOTE: These procedures varied over timeThere were instances
when NPC paid the tax component that was shifted to it and then applied for tax credit. There were also side issues raised because of P.D.
1931 and E.O. 93 which withdrew all exemptions of government corporations. In these latter instances, the resolutions of the Fiscal
Incentives Review Board (FIRB) come into play. These incidents will not be touched upon for purposes of this discussion).
NPC rates of electricity are structured such that changes in its cost of fuel are automatically (without need of fresh approvals) reflected in
the subsequent months billing rates.
This Fuel Cost Adjustment clause protects NPC's rate of return. If NPC should ever accept liability to the tax and duty component on the
oil products, such amount will go into its fuel cost and be passed on to its customers through corresponding increases in rates. Since 1974,
when NPC operated the oil-fired generating stations leased from Meralco (which plants it bought in 1979), until the present time, no tax on
fuel oil ever went into NPC's electric rates.
That the exemption of NPC from the tax on fuel was not withdrawn by P.D. 938 is impressed upon me by yet another circumstance. It is
conceded that NPC at the very least, is exempt from taxes to which it is directly liable. NPC therefore could very well have imported its fuel
oil or crude residue for burning at its thermal plants. There would have been no question in such a case as to its exemption from all duties
and taxes, even under the strictest interpretation that can be put forward. However, at the time P.D. 938 was issued in 1976, there were
already operating in the Philippines three oil refineries. The establishment of these refineries in the Philippines involved heavy investments,
were economically desirable and enabled the country to import crude oil and process / refine the same into the various petroleum products
at a savings to the industry and the public. The refining process produced as its largest output, in volume, fuel oil or residue, whose
conventional economic use was for burning in electric or steam generating plants. Had there been no use locally for the residue, the oil
refineries would have become largely unviable.
Again, in this circumstances, I cannot accept that P.D. 938 would have in effect forced NPC to by-pass the local oil refineries and import its
fossil fuel requirements directly in order to avail itself of its exemption from "direct taxes." The oil refineries had to keep operating both
for economic development and national security reasons. In fact, the restoration by the FIRB of NPC's exemption after P.D. 1931 and E.O.
93 expressly excluded direct fuel oil importations, so as not to prejudice the continued operations of the local oil refineries.
To answer your query therefore, it is the opinion of this Department that NPC under the provisions of its Revised Charter retains its
exemption from duties and taxes imposed on the petroleum products purchased locally and used for the generation of electricity.
The Department in issuing this ruling does so pursuant to its power and function to supervise and control the collection of government
revenues by the application and implementation of revenue laws. It is prepared to take the measures supplemental to this ruling necessary
to carry the same into full effect.
As presented rather extensively above, the NPC electric power rates did not carry the taxes and duties paid on the fuel oil it used. The
point is that while these levies were in fact paid to the government, no part thereof was recovered from the sale of electricity produced. As a
consequence, as of our most recent information, some P1.55 B in claims represent amounts for which the oil suppliers and NPC are "outof-pocket. There would have to be specific order to the Bureaus concerned for the resumption of the processing of these claims." 38
In the latter of June 15, 1988 of then Executive Secretary Macaraig to the then Secretary of Finance, the said opinion ruling of the latter was
confirmed and its implementation was directed. 39
The Court finds and so holds that the foregoing reasons adduced in the aforestated letter of the Secretary of Finance as confirmed by the then
Executive Secretary are well-taken. When the NPC was exempted from all forms of taxes, duties, fees, imposts and other charges, under P.D. No.
938, it means exactly what it says, i.e., all forms of taxes including those that were imposed directly or indirectly on petroleum products used in its
operation.
Reference is made in the dissenting opinion to contrary rulings of the BIR that the exemption of the NPC extends only to taxes for which it is directly
liable and not to taxes merely shifted to it. However, these rulings are predicated on Philippine Acytelene.
The doctrine in Philippine Acytelene decided in 1967 by this Court cannot apply to the present case. It involved the sales tax of products the plaintiff
sold to NPC from June 2, 1953 to June 30,1958 when NPC was enjoying tax exemption from all taxes under Commonwealth Act No. 120, as
amended by Republic Act No. 358 issued on June 4, 1949 hereinabove reproduced.
In said case, this Court held, that the sales tax is due from the manufacturer and not the buyer, so plaintiff cannot claim exemptions simply because
the NPC, the buyer, was exempt.
However, on September 10, 1971, Republic Act No. 6395 was passed as the revised charter of NPC whereby Section 13 thereof was amended by
emphasizing its non-profit character and expanding the extent of its tax exemption.
As petitioner concedes, Section 13(d) aforestated of this amendment under Republic Act No. 6345 spells out clearly the exemption of the NPC from
indirect taxes. And as hereinabove stated, in P.D. No. 380, the exemption of NPC from indirect taxes was emphasized when it was specified to
include those imposed "directly and indirectly."
Thereafter, under P.D. No. 938 the tax exemption of NPC was integrated under Section 13 defining the same in general terms to cover "all forms of
taxes, duties, fees, imposts, etc." which, as hereinabove discussed, logically includes exemption from indirect taxes on petroleum products used in its
operation.
This is the status of the tax exemptions the NPC was enjoying when P.D. No. 1931 was passed, on the authority of which FIRB Resolution Nos. 1085 and 1-86 were issued, and when Executive Order No. 93 was promulgated, by which FIRB Resolution 17-87 was issued.
Thus, the ruling in Philippine Acetylene cannot apply to this case due to the different environmental circumstances. As a matter of fact, the
amendments of Section 13, under R.A. No. 6395, P.D. No, 380 and P.D. No. 838 appear to have been brought about by the earlier inconsistent rulings
of the tax agencies due to the doctrine in Philippine Acetylene, so as to leave no doubt as to the exemption of the NPC from indirect taxes on

petroleum products it uses in its operation. Effectively, said amendments superseded if not abrogated the ruling in Philippine Acetylene that the tax
exemption of NPC should be limited to direct taxes only.
In the light of the foregoing discussion the first corollary issue must consequently be resolved in the affirmative, that is, FIRB Resolution No. 10-85
dated February 7, 1985 and FIRB Resolution No. 1-86 dated January 7, 1986 which restored NPC's tax exemption privileges included the restoration
of the indirect tax exemption of the NPC on petroleum products it used.
On the second corollary issue as to the validity of FIRB resolution No. 17-87 dated June 24, 1987 which restored NPC's tax exemption privilege
effective March 10, 1987, the Court finds that the same is valid and effective.
It provides as follows:
BE IT RESOLVED, AS IT IS HEREBY RESOLVED, That the tax and duty exemption privileges of the National Power Corporation,
including those pertaining to its domestic purchases of petroleum and petroleum products, granted under the terms and conditions of
Commonwealth Act No. 120 (Creating the National Power Corporation, defining its powers, objectives and functions, and for other
purposes), as amended, are restored effective March 10, 1987, subject to the following conditions:
1. The restoration of the tax and duty exemption privileges does not apply to the following:
1.1. Importation of fuel oil (crude equivalent) and coal;
1.2. Commercially-funded importations (i.e., importations which include but are not limited to those financed by the NPC's own
internal funds, domestic borrowings from any source whatsoever, borrowing from foreign-based private financial institutions,
etc.); and
1.3. Interest income derived from any source.
2. The NPC shall submit to the FIRB a report of its expansion program, including details of disposition of relieved tax and duty payments
for such expansion on an annual basis or as often as the FIRB may require it to do so. This report shall be in addition to the usual FIRB
reporting requirements on incentive availment. 40
Executive Order No. 93 provides as follows
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 international agreements to which the Government of the Republic of the Philippines is a
signatory;
c) those enjoyed-by enterprises registered with:
(i) the Board of Investments 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, as amended;
d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of Instruction 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/of duty exemption that may be restored.
c) impose conditions for the restoration of tax and/or duty exemption;
d) prescribe the date or 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 commitments 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;
d) in general, the greater national interest to be served.
True it is that the then Secretary of Justice in Opinion No. 77 dated August 6, 1977 was of the view that the powers conferred upon the FIRB by
Sections 2(a), (b), (c), and (d) of Executive Order No. 93 constitute undue delegation of legislative power and is therefore unconstitutional. However,
he was overruled by the respondent Executive Secretary in a letter to the Secretary of Finance dated March 30, 1989. The Executive Secretary, by
authority of the President, has the power to modify, alter or reverse the construction of a statute given by a department secretary.41
A reading of Section 3 of said law shows that it set the policy to be the greater national interest. The standards of the delegated power are also clearly
provided for.
The required "standard" need not be expressed. In Edu vs. Ericta 42 and in De la Llana vs. Alba 43 this Court held: "The standard may be either
express or implied. If the former, the non-delegated objection is easily met. The standard though does not have to be spelled out specifically. It could
be implied from the policy and purpose of the act considered as a whole."
In People vs. Rosenthal 44 the broad standard of "public interest" was deemed sufficient. In Calalang vs. Williams, 45, it was "public welfare" and in
Cervantes vs. Auditor General, 46 it was the purpose of promotion of "simplicity, economy and efficiency." And, implied from the purpose of the law
as a whole, "national security" was considered sufficient standard 47 and so was "protection of fish fry or fish eggs. 48
The observation of petitioner that the approval of the President was not even required in said Executive Order of the tax exemption privilege
approved by the FIRB unlike in previous similar issuances, is not well-taken. On the contrary, under Section l(f) of Executive Order No. 93,
aforestated, such tax and duty exemptions extended by the FIRB must be approved by the President. In this case, FIRB Resolution No. 17-87 was
approved by the respondent Executive Secretary, by authority of the President, on October 15, 1987. 49
Mr. Justice Isagani A. Cruz commenting on the delegation of legislative power stated
The latest in our jurisprudence indicates that delegation of legislative power has become the rule and its non-delegation the exception. The
reason is the increasing complexity of modern life and many technical fields of governmental functions as in matters pertaining to tax
exemptions. This is coupled by the growing inability of the legislature to cope directly with the many problems demanding its attention.
The growth of society has ramified its activities and created peculiar and sophisticated problems that the legislature cannot be expected
reasonably to comprehend. Specialization even in legislation has become necessary. To many of the problems attendant upon present day
undertakings, the legislature may not have the competence, let alone the interest and the time, to provide the required direct and efficacious,
not to say specific solutions. 50
Thus, in the case of Tablarin vs. Gutierrez, 51 this Court enunciated the rationale in favor of delegation of legislative functions
One thing however, is apparent in the development of the principle of separation of powers and that is that the maxim of delegatus non
potest delegare or delegati potestas non potest delegare, adopted this practice (Delegibus et Consuetudiniis Anglia edited by G.E.
Woodline, Yale University Press, 1922, Vol. 2, p. 167) but which is also recognized in principle in the Roman Law d. 17.18.3) has been
made to adapt itself to the complexities of modern government, giving rise to the adoption, within certain limits, of the principle of
subordinate legislation, not only in the United States and England but in practically all modern governments. (People vs. Rosenthal and
Osmea, 68 Phil. 318, 1939). Accordingly, with the growing complexities of modern life, the multiplication of the subjects of governmental
regulation, and the increased difficulty of administering the laws, there is a constantly growing tendency toward the delegation of greater
power by the legislative, and toward the approval of the practice by the Courts. (Emphasis supplied.)
The legislative authority could not or is not expected to state all the detailed situations wherein the tax exemption privileges of persons or entities
would be restored. The task may be assigned to an administrative body like the FIRB.
Moreover, all presumptions are indulged in favor of the constitutionality and validity of the statute. Such presumption can be overturned if its
invalidity is proved beyond reasonable doubt. Otherwise, a liberal interpretation in favor of constitutionality of legislation should be adopted. 52
E.O. No. 93 is complete in itself and constitutes a valid delegation of legislative power to the FIRB And as above discussed, the tax exemption
privilege that was restored to NPC by FIRB Resolution No. 17-87 of June 1987 includes exemption from indirect taxes and duties on petroleum
products used in its operation.
Indeed, the validity of Executive Order No. 93 as well as of FIRB Resolution No. 17-87 has been upheld in Albay. 53
In the dissenting opinion of Mr. Justice Cruz, it is stated that P.D. Nos. 1931 and 1955 issued by President Marcos in 1984 are invalid as they were
presumably promulgated under the infamous Amendment No. 6 and that as they cover tax exemption, under Section 17(4), Article VIII of the 1973
Constitution, the same cannot be passed "without the concurrence of the majority of all the members of the Batasan Pambansa." And, even conceding
that the reservation of legislative power in the President was valid, it is opined that it was not validly exercised as there is no showing that such
presidential encroachment was justified under the conditions then existing. Consequently, it is concluded that Executive Order No. 93, which was

intended to implement said decrees, is also illegal. The authority of the President to sub-delegate to the FIRB powers delegated to him is also
questioned.
In Albay, 54 as above stated, this Court upheld the validity of P.D. Nos. 776 and 1931. The latter decree withdrew tax exemptions of governmentowned or controlled corporations including their subsidiaries but authorized the FIRB to restore the same. Nevertheless, in Albay, as abovediscussed, this Court ruled that the tax exemptions under FIRB Resolution Nos. 10-85 and 1-86 cannot be enforced as said resolutions were only
recommendatory and were not duly approved by the President of the Philippines as required by P.D. No. 776. 55 The Court also sustained in Albay
the validity of Executive Order No. 93, and of the tax exemptions restored under FIRB Resolution No. 17-87 which was issued pursuant thereto, as it
was duly approved by the President as required by said executive order.
Moreover, under Section 3, Article XVIII of the Transitory Provisions of the 1987 Constitution, it is provided that:
All existing laws, decrees, executive orders, proclamation, letters of instructions, and other executive issuances not inconsistent with this
constitution shall remain operative until amended, repealed or revoked.
Thus, P.D. Nos. 776 and 1931 are valid and operative unless it is shown that they are inconsistent with the Constitution.1wphi1
Even assuming arguendo that P.D. Nos. 776, 1931 and Executive Order No. 93 are not valid and are unconstitutional, the result would be the same, as
then the latest applicable law would be P.D. No. 938 which amended the NPC charter by granting exemption to NPC from all forms of taxes. As
above discussed, this exemption of NPC covers direct and indirect taxes on petroleum products used in its operation. This is as it should be, if We are
to hold as invalid and inoperative the withdrawal of such tax exemptions under P.D. No. 1931 as well as under Executive Order No. 93 and the
delegation of the power to restore these exemptions to the FIRB.
The Court realizes the magnitude of the consequences of this decision. To reiterate, in Albay this Court ruled that the NPC is liable for real estate
taxes as of June 11, 1984 (the date of promulgation of P.D. No. 1931) when NPC had ceased to enjoy tax exemption privileges since FIRB Resolution
Nos. 1085 and 1-86 were not validly issued. The real estate tax liability of NPC from June 11, 1984 to December 1, 1990 is estimated to amount to
P7.49 billion plus another P4.76 billion in fuel import duties the firm had earlier paid to the government which the NPC now proposed to pass on to
the consumers by another 33-centavo increase per kilowatt hour in power rates on top of the 17-centavo increase per kilowatt hour that took effect
just over a week ago., 56 Hence, another case has been filed in this Court to stop this proposed increase without a hearing.
As above-discussed, at the time FIRB Resolutions Nos. 10-85 and 1-86 were issued, P.D. No. 776 dated August 24, 1975 was already amended by
P.D. No. 1931 ,57 wherein it is provided that such FIRB resolutions may be approved not only by the President of the Philippines but also by the
Minister of Finance. Such resolutions were promulgated by the Minister of Finance in his own right and also in his capacity as FIRB Chairman. Thus,
a separate approval thereof by the Minister of Finance or by the President is unnecessary.
As earlier stated a reexamination of the ruling in Albay on this aspect is therefore called for and consequently, Albay must be considered superseded
to this extent by this decision. This is because P.D. No. 938 which is the latest amendment to the NPC charter granting the NPC exemption from all
forms of taxes certainly covers real estate taxes which are direct taxes.
This tax exemption is intended not only to insure that the NPC shall continue to generate electricity for the country but more importantly, to assure
cheaper rates to be paid by the consumers.
The allegation that this is in effect allowing tax evasion by oil companies is not quite correct.1a\^/phi1 There are various arrangements in the
payment of crude oil purchased by NPC from oil companies. Generally, the custom duties paid by the oil companies are added to the selling price
paid by NPC. As to the specific and ad valorem taxes, they are added a part of the seller's price, but NPC pays the price net of tax, on condition that
NPC would seek a tax refund to the oil companies. No tax component on fuel had been charged or recovered by NPC from the consumers through its
power rates. 58 Thus, this is not a case of tax evasion of the oil companies but of tax relief for the NPC. The billions of pesos involved in these
exemptions will certainly inure to the ultimate good and benefit of the consumers who are thereby spared the additional burden of increased power
rates to cover these taxes paid or to be paid by the NPC if it is held liable for the same.
The fear of the serious implication of this decision in that NPC's suppliers, importers and contractors may claim the same privilege should be
dispelled by the fact that (a) this decision particularly treats of only the exemption of the NPC from all taxes, duties, fees, imposts and all other
charges imposed by the government on the petroleum products it used or uses for its operation; and (b) Section 13(d) of R.A. No. 6395 and Section
13(d) of P.D. No. 380, both specifically exempt the NPC from all taxes, duties, fees, imposts and all other charges imposed by the government on all
petroleum products used in its operation only, which is the very exemption which this Court deems to be carried over by the passage of P.D. No. 938.
As a matter of fact in Section 13(d) of P.D. No. 380 it is specified that the aforesaid exemption from taxes, etc. covers those "directly or indirectly"
imposed by the "Republic of the Philippines, its provincies, cities, municipalities and other government agencies and instrumentalities" on said
petroleum products. The exemption therefore from direct and indirect tax on petroleum products used by NPC cannot benefit the suppliers, importers
and contractors of NPC of other products or services.
The Court realizes the laudable objective of petitioner to improve the revenue of the government. The amount of revenue received or expected to be
received by this tax exemption is, however, not going to any of the oil companies. There would be no loss to the government. The said amount shall
accrue to the benefit of the NPC, a government corporation, so as to enable it to sustain its tremendous task of providing electricity for the country
and at the least cost to the consumers. Denying this tax exemption would mean hampering if not paralyzing the operations of the NPC. The resulting
increased revenue in the government will also mean increased power rates to be shouldered by the consumers if the NPC is to survive and continue to
provide our power requirements. 59 The greater interest of the people must be paramount.
WHEREFORE, the petition is DISMISSED for lack of merit. No pronouncement as to costs.
SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
JOHN GOTAMCO & SONS, INC. and THE COURT OF TAX APPEALS, respondents.

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) on February 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 taxexempt 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.