G.R. No.
48532 August 31, 1992 Petitioners claim that public respondent Court of Tax Appeals erred
HERNANDO B. CONWI, JAIME E. DY-LIACCO, VICENTE D. HERRERA,
BENJAMIN T. ILDEFONSO, ALEXANDER LACSON, JR., ADRIAN O.
MICIANO, EDUARDO A. RIALP, LEANDRO G. SANTILLAN, and JAIME
A. SOQUES, petitioners,
vs.
THE HONORABLE COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.
NOCON, J.:
Petitioners pray that his Court reverse the Decision of the public
respondent Court of Tax Appeals, promulgated September 26,
1977 1 denying petitioners' claim for tax refunds, and order the
Commissioner of Internal Revenue to refund to them their income
taxes which they claim to have been erroneously or illegally paid or
collected.
As summarized by the Solicitor General, the facts of the cases are as
follows:
Petitioners are Filipino citizens and employees of Procter and
Gamble, Philippine Manufacturing Corporation, with offices at
Sarmiento Building, Ayala Avenue, Makati, Rizal. Said corporation is a
subsidiary of Procter & Gamble, a foreign corporation based in
Cincinnati, Ohio, U.S.A. During the years 1970 and 1971 petitioners
were assigned, for certain periods, to other subsidiaries of Procter &
Gamble, outside of the Philippines, during which petitioners were
paid U.S. dollars as compensation for services in their foreign
assignments. (Paragraphs III, Petitions for Review, C.T.A. Cases Nos.
2511 and 2594, Exhs. D, D-1 to D-19). When petitioners in C.T.A. Case
No. 2511 filed their income tax returns for the year 1970, they
computed the tax due by applying the dollar-to-peso conversion on
the basis of the floating rate ordained under B.I.R. Ruling No. 70-027
dated May 14, 1970, as follows:
From January 1 to February 20, 1970 at the conversion rate of P3.90
to U.S. $1.00;
From February 21 to December 31, 1970 at the conversion rate of
P6.25 to U.S. $1.00
Petitioners in C.T.A. Case No. 2594 likewise used the above
conversion rate in converting their dollar income for 1971 to
Philippine peso. However, on February 8, 1973 and October 8, 1973,
petitioners in said cases filed with the office of the respondent
Commissioner, amended income tax returns for the above-
mentioned years, this time using the par value of the peso as
prescribed in Section 48 of Republic Act No. 265 in relation to Section
6 of Commonwealth Act No. 265 in relation to Section 6 of
Commonwealth Act No. 699 as the basis for converting their
respective dollar income into Philippine pesos for purposes of
computing and paying the corresponding income tax due from them.
The aforesaid computation as shown in the amended income tax
returns resulted in the alleged overpayments, refund and/or tax
credit. Accordingly, claims for refund of said over-payments were
filed with respondent Commissioner. Without awaiting the
resolution of the Commissioner of the Internal Revenue on their
claims, petitioners filed their petitioner for review in the above-
mentioned cases.
Respondent Commissioner filed his Answer to petitioners' petition
for review in C.T.A. Case No. 2511 on July 31, 1973, while his Answer
in C.T.A. Case No. 2594 was filed on August 7, 1974.
Upon joint motion of the parties on the ground that these two cases
involve common question of law and facts, that respondent Court of
Tax Appeals heard the cases jointly. In its decision dated September
26, 1977, the respondent Court of Tax Appeals held that the proper
conversion rate for the purpose of reporting and paying the
Philippine income tax on the dollar earnings of petitioners are the
rates prescribed under Revenue Memorandum Circulars Nos. 7-71
and 41-71. Accordingly, the claim for refund and/or tax credit of
petitioners in the above-entitled cases was denied and the petitions
for review dismissed, with costs against petitioners. Hence, this
petition for review on certiorari. 2
in holding:
1. That petitioners' dollar earnings are receipts derived from foreign
exchange transactions.
2. That the proper rate of conversion of petitioners' dollar earnings
for tax purposes in the prevailing free market rate of exchange and
not the par value of the peso; and
3. That the use of the par value of the peso to convert petitioners'
dollar earnings for tax purposes into Philippine pesos is "unrealistic"
and, therefore, the prevailing free market rate should be the rate
used.
Respondent Commissioner of Internal Revenue, on the other hand,
refutes petitioners' claims as follows:
At the outset, it is submitted that the subject matter of these two
cases are Philippine income tax for the calendar years 1970 (CTA
Case No. 2511) and 1971 (CTA Case No. 2594) and, therefore, should
be governed by the provisions of the National Internal Revenue Code
and its implementing rules and regulations, and not by the provisions
of Central Bank Circular No. 42 dated May 21, 1953, as contended by
petitioners.
Section 21 of the National Internal Revenue Code, before its
amendment by Presidential Decrees Nos. 69 and 323 which took
effect on January 1, 1973 and January 1, 1974, respectively, imposed
a tax upon the taxable net income received during each taxable year
from all sources by a citizen of the Philippines, whether residing here
or abroad.
Petitioners are citizens of the Philippines temporarily residing
abroad by virtue of their employment. Thus, in their tax returns for
the period involved herein, they gave their legal residence/address
as c/o Procter & Gamble PMC, Ayala Ave., Makati, Rizal (Annexes "A"
to "A-8" and Annexes "C" to "C-8", Petition for Review, CTA Nos. 2511
and 2594).
Petitioners being subject to Philippine income tax, their dollar
earnings should be converted into Philippine pesos in computing the
income tax due therefrom, in accordance with the provisions of
Revenue Memorandum Circular No. 7-71 dated February 11, 1971
for 1970 income and Revenue Memorandum Circular No. 41-71
dated December 21, 1971 for 1971 income, which reiterated BIR
Ruling No. 70-027 dated May 4, 1970, to wit:
For internal revenue tax purposes, the free marker rate of conversion
(Revenue Circulars Nos. 7-71 and 41-71) should be applied in order
to determine the true and correct value in Philippine pesos of the
income of petitioners. 3
After a careful examination of the records, the laws involved and the
jurisprudence on the matter, We are inclined to agree with
respondents Court of Tax Appeals and Commissioner of Internal
Revenue and thus vote to deny the petition.
This basically an income tax case. For the proper resolution of these
cases income may be defined as an amount of money coming to a
person or corporation within a specified time, whether as payment
for services, interest or profit from investment. Unless otherwise
specified, it means cash or its equivalent. 4 Income can also be though
of as flow of the fruits of one's labor. 5
Petitioners are correct as to their claim that their dollar earnings are
not receipts derived from foreign exchange transactions. For a
foreign exchange transaction is simply that a transaction in
foreign exchange, foreign exchange being "the conversion of an
amount of money or currency of one country into an equivalent
amount of money or currency of another." 6 When petitioners were
assigned to the foreign subsidiaries of Procter & Gamble, they were
earning in their assigned nation's currency and were ALSO spending
in said currency. There was no conversion, therefore, from one
currency to another.
Public respondent Court of Tax Appeals did err when it concluded
that the dollar incomes of petitioner fell under Section 2(f)(g) and
(m) of C.B. Circular No. 42. 7
Page 1 of 31
The issue now is, what exchange rate should be used to determine WHEREFORE, the petitioners are denied for lack of merit. The
the peso equivalent of the foreign earnings of petitioners for income dismissal by the respondent Court of Tax Appeals of petitioners'
tax purposes. Petitioners claim that since the dollar earnings do not claims for tax refunds for the income tax period for 1970 and 1971 is
fall within the classification of foreign exchange transactions, there AFFIRMED. Costs against petitioners.
occurred no actual inward remittances, and, therefore, they are not
included in the coverage of Central Bank Circular No. 289 which MOBIL PHILIPPINES, INC., G.R. No. 154092
provides for the specific instances when the par value of the peso Petitioner,
shall not be the conversion rate used. They conclude that their Present:
earnings should be converted for income tax purposes using the par
value of the Philippine peso. Davide, Jr., C.J.,
Respondent Commissioner argues that CB Circular No. 289 speaks of (Chairman),
receipts for export products, receipts of sale of foreign exchange or - versus - Quisumbing,
foreign borrowings and investments but not income tax. He also Ynares-Santiago,
claims that he had to use the prevailing free market rate of exchange Carpio, and
in these cases because of the need to ascertain the true and correct Azcuna, JJ.
amount of income in Philippine peso of dollar earners for Philippine
income tax purposes. THE CITY TREASURER OF Promulgated:
A careful reading of said CB Circular No. 289 8 shows that the subject MAKATI and the CHIEF OF THE
matters involved therein are export products, invisibles, receipts of LICENSE DIVISION OF THE CITY
foreign exchange, foreign exchange payments, new foreign OF MAKATI, July 14, 2005
borrowing and Respondents.
investments nothing by way of income tax payments. Thus,
petitioners are in error by concluding that since C.B. Circular No. 289 QUISUMBING, J.:
does not apply to them, the par value of the peso should be the This petition for review on certiorari seeks the reversal of
guiding rate used for income tax purposes. the Decision[1] dated November 22, 2001 of the Regional Trial Court
The dollar earnings of petitioners are the fruits of their labors in the of Pasig City, Branch 268, in Civil Case No. 67599, subsequently
foreign subsidiaries of Procter & Gamble. It was a definite amount of affirmed in an Order[2] dated May 15, 2002.
money which came to them within a specified period of time of two Petitioner is a domestic corporation engaged in the manufacturing,
yeas as payment for their services. importing, exporting and wholesaling of petroleum products, while
Section 21 of the National Internal Revenue Code, amended up to respondents are the local government officials of the City of Makati
August 4, 1969, states as follows: charged with the implementation of the Revenue Code of the City of
Sec. 21. Rates of tax on citizens or residents. A tax is hereby Makati, as well as the collection and assessment of business taxes,
imposed upon the taxable net income received during each taxable license fees and permit fees within said city.[3]
year from all sources by every individual, whether a citizen of the Prior to September 1998, petitioners principal office was at the
Philippines residing therein or abroad or an alien residing in the National Development Company Building, in 116 Tordesillas St.,
Philippines, determined in accordance with the following schedule: Salcedo Village, Makati City. On August 20, 1998, petitioner filed an
xxx xxx xxx application with the City Treasurer of Makati for the retirement of its
And in the implementation for the proper enforcement of the business within the City of Makati as it moved its principal place of
National Internal Revenue Code, Section 338 thereof empowers the business to Pasig City.[4]
Secretary of Finance to "promulgate all needful rules and In its application, petitioner declared its gross sales/receipts as
regulations" to effectively enforce its provisions. 9 follows:
Pursuant to this authority, Revenue Memorandum Circular Nos. 7- Gross Sales Receipts for Calendar P 453,799,493.29
71 10 and 41-71 11 were issued to prescribed a uniform rate of Year 1997
exchange from US dollars to Philippine pesos for INTERNAL Gross Sales Receipts for Calendar
REVENUE TAX PURPOSES for the years 1970 and 1971, respectively. Year 1998 267,952,766.67[5]
Said revenue circulars were a valid exercise of the authority given to January to August
the Secretary of Finance by the Legislature which enacted the
Internal Revenue Code. And these are presumed to be a valid Upon evaluation of petitioners application, then OIC of the License
interpretation of said code until revoked by the Secretary of Finance Division, Ms. Jesusa E. Cuneta, issued to petitioner, a billing
himself. 12 slip[6] assessing the following taxes against petitioner:
Petitioners argue that since there were no remittances and
acceptances of their salaries and wages in US dollars into the For the 4th Quarter of 1998 (based on 1997 gross sales)
Philippines, they are exempt from the coverage of such circulars. As Manufacturer P 14,439.54
Petitioners forget that they are citizens of the Philippines, and their As Wholesaler 550,778.58
income, within or without, and in these cases wholly without, are Garbage Fee 1,250.00
subject to income tax. Sec. 21, NIRC, as amended, does not brook any Sub-Total P 566,468.12
exemption.
Since petitioners have already paid their 1970 and 1971 income For the Gross Sales made in 1998
taxes under the uniform rate of exchange prescribed under the As Manufacturer P 40,008.33
aforestated Revenue Memorandum Circulars, there is no reason for As Wholesaler 1,291,630.51
respondent Commissioner to refund any taxes to petitioner as said Sub-Total __1,331,638.84
Revenue Memorandum Circulars, being of long standing and not TOTAL ASSESSED BUSINESS TAXES P 1,898,106.96[7]
contrary to law, are valid. 13 On September 11, 1998, petitioner paid the assessed amount
Although it has become a worn-out cliche, the fact still remains that of P1,898,106.96 under protest. The City Treasurer issued therefor
"taxes are the lifeblood of the government" and one of the duties of a Official Receipt No. 9065025C[8] and approved the petitioners
Filipino citizen is to pay his income tax. application for retirement of business from Makati to Pasig City.

Page 2 of 31
On July 21, 1999, petitioner filed a claim for P1,331,638.84
refund.[9] On August 11, 1999, petitioner received a letter[10] denying
the claim for refund on the ground that petitioner was merely
transferring and not retiring its business, and that the gross sales
realized while petitioner still maintained office in Makati from
January 1 to August 31, 1998 should be taxed in the City of Makati.[11]
Petitioner subsequently filed a petition with the Regional Trial Court
of Pasig City, Branch 268, seeking the refund of business taxes
erroneously collected by the City of Makati.
In its Decision, the trial court ruled as follows:
In summary, the pertinent law provides that a person or entity doing
business in the Municipality shall be subject to business tax. The tax
shall be fixed by the quarter. The initial tax for the quarter in which a
business starts to operate shall be two and one-half percent (2%) of
one percent (1%) of its capital investment. Thereafter, the tax shall
be computed based on the gross sales or receipts of the preceding
quarter. In the succeeding calendar year, regardless of when the
business started to operate, the tax shall be based on the gross sales
or receipts for the preceding calendar year. That tax shall accrue on
the first day of January of each year and payment shall be made
within the first 20 days of January or of each subsequent quarter as
the case may be.
Considering therefore that the business tax accrues only on the first
day of January as provided in Sec. 3A.07 and becomes payable within
the first 20 days thereof or of each subsequent quarter, the payments
made by Mobil in the year 1998 are therefore payments for the
business tax for 1997 which accrued in January of 1998 and became
payable within the first 20 days of January or of each subsequent
quarter. Thus, upon retirement in August 1998, the taxes for said
year which should accrue in January 1999 [become] immediately
payable before the application for retirement can be approved (Ibid,
(g), Sec. 3A.08). The assessment of the Chief of the License Division of
Makati is therefore with legal basis and does not constitute double
taxation.
WHEREFORE, premises considered, the instant petition for refund is
hereby DENIED and the case is dismissed for lack of merit.
SO ORDERED.[12]
Petitioner filed a Motion for Reconsideration[13] which was denied in
an Order dated May 15, 2002, hence this appeal.
Before us, petitioner alleges now that,
THE TRIAL COURT ERRED IN HOLDING THAT PETITIONERS
BUSINESS TAX PAYMENTS MADE IN 1998 ARE ACTUALLY
PAYMENTS FOR BUSINESS TAXES IN 1997. THIS CONCLUSION IS
CONTROVERTED BY MAKATI CITYS REVENUE CODE, AND, IN FACT,
CONSTITUTES DOUBLE TAXATION.[14]
Simply stated, the issue is: Are the business taxes paid by petitioner
in 1998, business taxes for 1997 or 1998?
According to petitioner, the 1997 gross sales/revenue is merely the
basis for the amount of business taxes due for the privilege of
carrying on a business in the year when the tax was paid.
For their part, respondents argue that since local taxes, which
include business taxes, are paid either within the first twenty days of
January of each year or of each subsequent quarter, as the case may
be, what the taxpayer actually pays during the recorded calendar
year is actually its business tax for the preceding year.
Prefatorily, it is necessary to distinguish between a business tax vis--
vis an income tax.
Business taxes imposed in the exercise of police power for regulatory
purposes are paid for the privilege of carrying on a business in the
year the tax was paid. It is paid at the beginning of the year as a fee to
allow the business to operate for the rest of the year. It is deemed a
prerequisite to the conduct of business.
Income tax, on the other hand, is a tax on all yearly profits arising
from property, professions, trades or offices, or as a tax on a persons
income, emoluments, profits and the like. It is tax on income, whether
net or gross realized in one taxable year.[15] It is due on or before the
15th day of the 4th month following the close of the taxpayers taxable
year and is generally regarded as an excise tax, levied upon the right
of a person or entity to receive income or profits.
The trial court erred when it said that the payments made by
petitioner in 1998 are payments for business tax incurred in 1997
which only accrued in January 1998. Likewise, it erred when it ruled
that petitioner was still liable for business taxes based on its gross
income/revenue for January to August 1998.
Section 3A.04 of the Makati City Revenue Code states:
Sec.3A.04. Computation of tax for newly-started business. In the case
of newly-started business under Sec. 3A.02, (a), (b), (c), (d), (e), (f),
(g), (h), (i), (j), (k), (l), and (m) above, the tax shall be fixed by the
quarter. The initial tax of the quarter in which the business starts to
operate shall be two and one half percent (2 %) of one percent (1%)
of the capital investment.
In the succeeding quarter or quarters, in cases where the business
opens before the last quarter of the year, the tax shall be based on the
gross sales or receipt for the preceding quarter at one-half ( ) of the
rates fixed therefor by the pertinent schedule in Section 3A.02, (a),
(b), (c), (d), (e), (f), (g), (h), (i), (j), (k), (l), and (m).
In the succeeding calendar year, regardless of when the business
started to operate, the tax shall be based on the gross sales or
receipts for the preceding calendar year, or any fraction thereof as
provided in the same pertinent schedules.[16]
Under the Makati Revenue Code, it appears that the business tax, like
income tax, is computed based on the previous years figures. This is
the reason for the confusion. A newly-started business is already
liable for business taxes (i.e. license fees) at the start of the quarter
when it commences operations. In computing the amount of tax due
for the first quarter of operations, the business capital investment is
used as the basis. For the subsequent quarters of the first year, the
tax is based on the gross sales/receipts for the previous quarter. In
the following year(s), the business is then taxed based on the gross
sales or receipts of the previous year. The business taxes paid in the
year 1998 is for the privilege of engaging in business for the same
year, and not for having engaged in business for 1997.
Upon its transfer, petitioner was apparently subjected to Sec. 3A.11
par. (g) which states:
...
(g) Retirement of business.
...
For purposes thereof, termination shall mean that business
operation are stopped completely.
...
(2) If it is found that the retirement or termination of the business is
legitimate, [a]nd the tax due therefrom be less than the tax due for
the current year based on the gross sales or receipts, the difference
in the amount of the tax shall be paid before the business is
considered officially retired or terminated.[17]
Based on this foregoing provision, on the year an establishment
retires or terminates its business within the municipality, it would be
required to pay the difference in the amount if the tax collected,
based on the previous years gross sales or receipts, is less than the
actual tax due based on the current years gross sales or receipts.
For the year 1998, petitioner paid a total of P2,262,122.48 to the City
Treasurer of Makati[18] as business taxes for the year 1998. The
amount of tax as computed based on petitioners gross sales for 1998
is only P1,331,638.84. Since the amount paid is more than the
amount computed based on petitioners actual gross sales for 1998,
petitioner upon its retirement is not liable for additional taxes to the
City of Makati. Thus, we find that the respondent erroneously treated
the assessment and collection of business tax as if it were income tax,
by rendering an additional assessment of P1,331,638.84 for the
revenue generated for the year 1998.
Page 3 of 31
WHEREFORE, the assailed Decision is hereby REVERSED and
respondents City Treasurer and Chief of the License Division of
Makati City are ordered to REFUNDto petitioner business taxes paid
in the amount of P1,331,638.84. Costs against respondents.
[G.R. No. 108067. January 20, 2000]
CYANAMID PHILIPPINES, INC., petitioner, vs. THE COURT OF
APPEALS, THE COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.
DECISION
QUISUMBING, J.:
Petitioner disputes the decision[1] of the Court of Appeals which
affirmed the decision[2] of the Court of Tax Appeals, ordering
petitioner to pay respondent Commissioner of Internal Revenue the
amount of three million, seven hundred seventy-four thousand, eight
hundred sixty seven pesos and fifty centavos (P3,774,867.50) as 25%
surtax on improper accumulation of profits for 1981, plus 10%
surcharge and 20% annual interest from January 30, 1985 to January
30, 1987, under Sec. 25 of the National Internal Revenue Code.
The Court of Tax Appeals made the following factual findings:
Petitioner, Cyanamid Philippines, Inc., a corporation organized under
Philippine laws, is a wholly owned subsidiary of American Cyanamid
Co. based in Maine, USA. It is engaged in the manufacture of
pharmaceutical products and chemicals, a wholesaler of imported
finished goods, and an importer/indentor.
On February 7, 1985, the CIR sent an assessment letter to petitioner
and demanded the payment of deficiency income tax of one hundred
nineteen thousand eight hundred seventeen (P119,817.00) pesos for
taxable year 1981, as follows:
"Net income disclosed by the return as audited
Add: Discrepancies:
Professional fees/yr.
per investigation 17018
Total Adjustment
Net income per Investigation
Less: Personal and additional exemptions
Amount subject to tax
Income tax due thereon .25% Surtax 2,385,231.50
Less: Amount already assessed .
BALANCE .
_______ monthly interest from ..1,389,636.00
_________
Compromise penalties ...
TOTAL AMOUNT DUE ..3,774,867.50
Sc-lex
On March 4, 1985, petitioner protested the assessments particularly,
(1) the 25% Surtax Assessment of P3,774,867.50; (2) 1981
Deficiency Income Assessment of P119,817.00; and 1981 Deficiency
Percentage Assessment of P8,846.72.[4] Petitioner, through its
external accountant, Sycip, Gorres, Velayo & Co., claimed, among
others, that the surtax for the undue accumulation of earnings was
not proper because the said profits were retained to increase
petitioners working capital and it would be used for reasonable
business needs of the company. Petitioner contended that it availed
of the tax amnesty under Executive Order No. 41, hence enjoyed
amnesty from civil and criminal prosecution granted by the law.
On October 20, 1987, the CIR in a letter addressed to SGV & Co.,
refused to allow the cancellation of the assessment notices and
rendered its resolution, as follows:
"It appears that your client availed of Executive Order No. 41 under
File No. 32A-F-000455-41B as certified and confirmed by our Tax
Amnesty Implementation Office on October 6, 1987.
In reply thereto, I have the honor to inform you that the availment of
the tax amnesty under Executive Order No. 41, as amended is
sufficient basis, in appropriate cases, for the cancellation of the
assessment issued after August 21, 1986. (Revenue Memorandum
Order No. 4-87) Said availment does not, therefore, result in
cancellation of assessments issued before August 21, 1986, as in the
instant case. In other words, the assessments in this case issued on
January 30, 1985 despite your clients availment of the tax amnesty
under Executive Order No. 41, as amended still subsist.
Such being the case, you are therefore, requested to urge your client
to pay this Office the aforementioned deficiency income tax and
surtax on undue accumulation of surplus in the respective amounts
of P119,817.00 and P3,774,867.50 inclusive of interest thereon for
the year 1981, within thirty (30) days from receipt hereof, otherwise
this office will be constrained to enforce collection thereof thru
summary remedies prescribed by law.
This constitutes the final decision of this Office on this matter."[5]
Petitioner appealed to the Court of Tax Appeals. During the pendency
of the case, however, both parties agreed to compromise the 1981
deficiency income tax assessment of P119,817.00. Petitioner paid a
14,575,210.00
reduced amount --twenty-six thousand, five hundred seventy-seven
pesos (P26,577.00) -- as compromise settlement. However, the
surtax on improperly accumulated profits remained unresolved.
Petitioner claimed that CIRs assessment representing the 25% surtax
262,877.00
on its accumulated earnings for the year 1981 had no legal basis for
110,399.37
the following reasons: (a) petitioner accumulated its earnings and
profits for reasonable business requirements to meet working capital
152,477.00
needs and retirement of indebtedness; (b) petitioner is a wholly
owned subsidiary of American Cyanamid Company, a corporation
14,727,687.00
organized under the laws of the State of Maine, in the United States of
America, whose shares of stock are listed and traded in New York
___________
Stock Exchange. This being the case, no individual shareholder of
petitioner could have evaded or prevented the imposition of
14,727,687.00
individual income taxes by petitioners accumulation of earnings and
profits, instead of distribution of the same. Scl-aw
3,237,495.00
In denying the petition, the Court of Tax Appeals made the following
pronouncements:
5,161,788.00
"Petitioner contends that it did not declare dividends for the year
1981 in order to use the accumulated earnings as working capital
75,709.00
reserve to meet its "reasonable business needs". The law permits a
stock corporation to set aside a portion of its retained earnings for
44,108.00
specified purposes (citing Section 43, paragraph 2 of the Corporation
Code of the Philippines). In the case at bar, however, petitioners
____________
purpose for accumulating its earnings does not fall within the ambit
of any of these specified purposes.
___________
More compelling is the finding that there was no need for petitioner
to set aside a portion of its retained earnings as working capital
119,817.00"[3]
reserve as it claims since it had considerable liquid funds. A thorough
review of petitioners financial statement (particularly the Balance
Sheet, p. 127, BIR Records) reveals that the corporation had
considerable liquid funds consisting of cash accounts receivable,
inventory and even its sales for the period is adequate to meet the
normal needs of the business. This can be determined by computing
the current asset to liability ratio of the company:
current ratio = current assets / current l
Page 4 of 31

= P 47,052,535.00 / P21,275,544.00
= 2.21: 1
The significance of this ratio is to serve as a primary test of a
companys solvency to meet current obligations from current assets
as a going concern or a measure of adequacy of working capital.
xxx
We further reject petitioners argument that "the accumulated
earnings tax does not apply to a publicly-held corporation" citing
American jurisprudence to support its position. The reference finds
no application in the case at bar because under Section 25 of the
NIRC as amended by Section 5 of P.D. No. 1379 [1739] (dated
September 17, 1980), the exceptions to the accumulated earnings tax
are expressly enumerated, to wit: Bank, non-bank financial
intermediaries, corporations organized primarily, and authorized by
the Central Bank of the Philippines to hold shares of stock of banks,
insurance companies, or personal holding companies, whether
domestic or foreign. The law on the matter is clear and specific.
Hence, there is no need to resort to applicable cases decided by the
American Federal Courts for guidance and enlightenment as to
whether the provision of Section 25 of the NIRC should apply to
petitioner. Rtc-spped
Equally clear and specific are the provisions of E.O. 41 particularly
with respect to its effectivity and coverage...
... Said availment does not result in cancellation of assessments
issued before August 21, 1986 as petitioner seeks to do in the case at
bar. Therefore, the assessments in this case, issued on January 30,
1985 despite petitioners availment of the tax amnesty under E.O. 41
as amended, still subsist."
xxx
WHEREFORE, petitioner Cyanamid Philippines, Inc., is ordered to pay
respondent Commissioner of Internal Revenue the sum of
P3,774,867.50 representing 25% surtax on improper accumulation
of profits for 1981, plus 10% surcharge and 20% annual interest
from January 30, 1985 to January 30, 1987."[6]
Petitioner appealed the Court of Tax Appeals decision to the Court of
Appeals. Affirming the CTA decision, the appellate court said:
"In reviewing the instant petition and the arguments raised herein,
We find no compelling reason to reverse the findings of the
respondent Court. The respondent Courts decision is supported by
evidence, such as petitioner corporations financial statement and
balance sheets (p. 127, BIR Records). On the other hand the
petitioner corporation could only come up with an alternative
formula lifted from a decision rendered by a foreign court (Bardahl
Mfg. Corp. vs. Commissioner, 24 T.C.M. [CCH] 1030). Applying said
formula to its particular financial position, the petitioner corporation
attempts to justify its accumulated surplus earnings. To Our mind,
the petitioner corporations alternative formula cannot overturn the
persuasive findings and conclusion of the respondent Court based, as
it is, on the applicable laws and jurisprudence, as well as standards in
the computation of taxes and penalties practiced in this jurisdiction.
WHEREFORE, in view of the foregoing, the instant petition is hereby
DISMISSED and the decision of the Court of Tax Appeals dated
August 6, 1992 in C.T.A. Case No. 4250 is AFFIRMED in toto."[7]
Hence, petitioner now comes before us and assigns as sole issue:
WHETHER THE RESPONDENT COURT ERRED IN HOLDING THAT
THE PETITIONER IS LIABLE FOR THE ACCUMULATED EARNINGS
TAX FOR THE YEAR 1981.[8]
Section 25[9] of the old National Internal Revenue Code of 1977
states: Sd-aad-sc
"Sec. 25. Additional tax on corporation improperly accumulating
profits or surplus -
"(a) Imposition of tax. -- If any corporation is formed or availed of for
the purpose of preventing the imposition of the tax upon its
shareholders or members or the shareholders or members of
another corporation, through the medium of permitting its gains and
profits to accumulate instead of being divided or distributed, there is
levied and assessed against such corporation, for each taxable year, a
tax equal to twenty-five per-centum of the undistributed portion of
its accumulated profits or surplus which shall be in addition to the
tax imposed by section twenty-four, and shall be computed, collected
and paid in the same manner and subject to the same provisions of
law, including penalties, as that tax.
"(b) Prima facie evidence. -- The fact that any corporation is mere
holding company shall be prima facie evidence of a purpose to avoid
the tax upon its shareholders or members. Similar presumption will
lie in the case of an investment company where at any time during
the taxable year more than fifty per centum in value of its outstanding
stock is owned, directly or indirectly, by one person.
"(c) Evidence determinative of purpose. -- The fact that the earnings or
profits of a corporation are permitted to accumulate beyond the
reasonable needs of the business shall be determinative of the
purpose to avoid the tax upon its shareholders or members unless
the corporation, by clear preponderance of evidence, shall prove the
contrary. M-issdaa
"(d) Exception -- The provisions of this sections shall not apply to
banks, non-bank financial intermediaries, corporation organized
primarily, and authorized by the Central Bank of the Philippines to
hold shares of stock of banks, insurance companies, whether
domestic or foreign.
The provision discouraged tax avoidance through corporate surplus
accumulation. When corporations do not declare dividends, income
taxes are not paid on the undeclared dividends received by the
shareholders. The tax on improper accumulation of surplus is
essentially a penalty tax designed to compel corporations to
distribute earnings so that the said earnings by shareholders could,
in turn, be taxed.
Relying on decisions of the American Federal Courts, petitioner
stresses that the accumulated earnings tax does not apply to
Cyanamid, a wholly owned subsidiary of a publicly owned
company.[10]Specifically, petitioner cites Golconda Mining Corp. vs.
Commissioner, 507 F.2d 594, whereby the U.S. Ninth Circuit Court of
Appeals had taken the position that the accumulated earnings tax
could only apply to a closely held corporation.
A review of American taxation history on accumulated earnings tax
will show that the application of the accumulated earnings tax to
publicly held corporations has been problematic. Initially, the Tax
Court and the Court of Claims held that the accumulated earnings tax
applies to publicly held corporations. Then, the Ninth Circuit Court of
Appeals ruled in Golconda that the accumulated earnings tax could
only apply to closely held corporations. Despite Golconda, the
Internal Revenue Service asserted that the tax could be imposed on
widely held corporations including those not controlled by a few
shareholders or groups of shareholders. The Service indicated it
would not follow the Ninth Circuit regarding publicly held
corporations.[11] In 1984, American legislation nullified the Ninth
Circuits Golconda ruling and made it clear that the accumulated
earnings tax is not limited to closely held
corporations.[12] Clearly, Golconda is no longer a reliable
precedent. Sl-xm-is
The amendatory provision of Section 25 of the 1977 NIRC, which was
PD 1739, enumerated the corporations exempt from the imposition
of improperly accumulated tax: (a) banks; (b) non-bank financial
intermediaries; (c) insurance companies; and (d) corporations
organized primarily and authorized by the Central Bank of the
Philippines to hold shares of stocks of banks. Petitioner does not fall
among those exempt classes. Besides, the rule on enumeration is that
the express mention of one person, thing, act, or consequence is
construed to exclude all others.[13] Laws granting exemption from tax
are construed strictissimi juris against the taxpayer and liberally in
favor of the taxing power.[14] Taxation is the rule and exemption is
the exception.[15] The burden of proof rests upon the party claiming
Page 5 of 31
exemption to prove that it is, in fact, covered by the exemption so
claimed,[16] a burden which petitioner here has failed to discharge.
Another point raised by the petitioner in objecting to the assessment,
is that increase of working capital by a corporation justifies
accumulating income. Petitioner asserts that respondent court erred
in concluding that Cyanamid need not infuse additional working
capital reserve because it had considerable liquid funds based on the
2.21:1 ratio of current assets to current liabilities. Petitioner relies on
the so-called "Bardahl" formula, which allowed retention, as working
capital reserve, sufficient amounts of liquid assets to carry the
company through one operating cycle. The "Bardahl"[17] formula was
developed to measure corporate liquidity. The formula requires an
examination of whether the taxpayer has sufficient liquid assets to
pay all of its current liabilities and any extraordinary
expenses reasonably anticipated, plus enough to operate the
business during one operating cycle. Operating cycle is the period of
time it takes to convert cash into raw materials, raw materials into
inventory, and inventory into sales, including the time it takes to
collect payment for the sales.[18]
Using this formula, petitioner contends, Cyanamid needed at least
P33,763,624.00 pesos as working capital. As of 1981, its liquid asset
was only P25,776,991.00. Thus, petitioner asserts that Cyanamid had
a working capital deficit of P7,986,633.00.[19] Therefore, the
P9,540,926.00 accumulated income as of 1981 may be validly
accumulated to increase the petitioners working capital for the
succeeding year.
We note, however, that the companies where the "Bardahl" formula
was applied, had operating cycles much shorter than that of
petitioner. In Atlas Tool Co., Inc. vs. CIR,[20] the companys operating
cycle was only 3.33 months or 27.75% of the year. In Cataphote Corp.
of Mississippi vs. United States,[21] the corporations operating cycle
was only 56.87 days, or 15.58% of the year. In the case of Cyanamid,
the operating cycle was 288.35 days, or 78.55% of a year, reflecting
that petitioner will need sufficient liquid funds, of at least three
quarters of the year, to cover the operating costs of the business.
There are variations in the application of the "Bardahl" formula, such
as average operating cycle or peak operating cycle. In times when
there is no recurrence of a business cycle, the working capital needs
cannot be predicted with accuracy. As stressed by American
authorities, although the "Bardahl" formula is well-established and
routinely applied by the courts, it is not a precise rule. It is used only
for administrative convenience.[22] Petitioners application of the
"Bardahl" formula merely creates a false illusion of exactitude. Sl-xsc
Other formulas are also used, e.g. the ratio of current assets to
current liabilities and the adoption of the industry standard.[23] The
ratio of current assets to current liabilities is used to determine the
sufficiency of working capital. Ideally, the working capital should
equal the current liabilities and there must be 2 units of current
assets for every unit of current liability, hence the so-called "2 to 1"
rule.[24]
As of 1981 the working capital of Cyanamid was P25,776,991.00, or
more than twice its current liabilities. That current ratio of
Cyanamid, therefore, projects adequacy in working capital. Said
working capital was expected to increase further when more funds
were generated from the succeeding years sales. Available income
covered expenses or indebtedness for that year, and there appeared
no reason to expect an impending working capital deficit which could
have necessitated an increase in working capital, as rationalized by
petitioner.
In Basilan Estates, Inc. vs. Commissioner of Internal Revenue,[25] we
held that:
"...[T]here is no need to have such a large amount at the beginning of
the following year because during the year, current assets are
converted into cash and with the income realized from the business
as the year goes, these expenses may well be taken care of. [citation
omitted]. Thus, it is erroneous to say that the taxpayer is entitled to
retain enough liquid net assets in amounts approximately equal to
current operating needs for the year to cover cost of goods sold and
operating expenses: for it excludes proper consideration of funds
generated by the collection of notes receivable as trade accounts
during the course of the year."[26]
If the CIR determined that the corporation avoided the tax on
shareholders by permitting earnings or profits to accumulate, and
the taxpayer contested such a determination, the burden of proving
the determination wrong, together with the corresponding burden of
first going forward with evidence, is on the taxpayer. This applies
even if the corporation is not a mere holding or investment company
and does not have an unreasonable accumulation of earnings or
profits.[27]
In order to determine whether profits are accumulated for the
reasonable needs of the business to avoid the surtax upon
shareholders, it must be shown that the controlling intention of the
taxpayer is manifested at the time of accumulation, not intentions
declared subsequently, which are mere
afterthoughts.[28] Furthermore, the accumulated profits must be used
within a reasonable time after the close of the taxable year. In the
instant case, petitioner did not establish, by clear and convincing
evidence, that such accumulation of profit was for the immediate
needs of the business.
In Manila Wine Merchants, Inc. vs. Commissioner of Internal
Revenue,[29] we ruled: xl-aw
"To determine the reasonable needs of the business in order to
justify an accumulation of earnings, the Courts of the United States
have invented the so-called Immediacy Test which construed the
words reasonable needs of the business to mean the immediate
needs of the business, and it was generally held that if the
corporation did not prove an immediate need for the accumulation of
the earnings and profits, the accumulation was not for the reasonable
needs of the business, and the penalty tax would apply.
(Mertens, Law of Federal Income Taxation, Vol. 7, Chapter 39, p.
103).[30]
In the present case, the Tax Court opted to determine the working
capital sufficiency by using the ratio between current assets to
current liabilities. The working capital needs of a business depend
upon the nature of the business, its credit policies, the amount of
inventories, the rate of turnover, the amount of accounts receivable,
the collection rate, the availability of credit to the business, and
similar factors. Petitioner, by adhering to the "Bardahl" formula,
failed to impress the tax court with the required definiteness
envisioned by the statute. We agree with the tax court that the
burden of proof to establish that the profits accumulated were not
beyond the reasonable needs of the company, remained on the
taxpayer. This Court will not set aside lightly the conclusion reached
by the Court of Tax Appeals which, by the very nature of its function,
is dedicated exclusively to the consideration of tax problems and has
necessarily developed an expertise on the subject, unless there has
been an abuse or improvident exercise of authority.[31] Unless
rebutted, all presumptions generally are indulged in favor of the
correctness of the CIRs assessment against the taxpayer. With
petitioners failure to prove the CIR incorrect, clearly and
conclusively, this Court is constrained to uphold the correctness of
tax courts ruling as affirmed by the Court of Appeals.
WHEREFORE, the instant petition is DENIED, and the decision of the
Court of Appeals, sustaining that of the Court of Tax Appeals, is
hereby AFFIRMED. Costs against petitioner.
G.R. No. 118794. May 8, 1996] PHILIPPINE REFINING COMPANY
(now known as UNILEVER PHILIPPINES [PRC], INC.), petitioner,
vs. COURT OF APPEALS, COURT OF TAX APPEALS, and THE
COMMISSIONER OF INTERNAL REVENUE, respondents.
REGALADO, J.:
This is an appeal by certiorari from the decision of respondent Court
of Appeals1 affirming the decision of the Court of Tax Appeals which
disallowed petitioners claim for deduction as bad debts of several
accounts in the total sum of P395,324.27, and imposing a 25%
Page 6 of 31
surcharge and 20% annual delinquency interest on the alleged
deficiency income tax liability of petitioner.
Petitioner Philippine Refining Company (PRC) was assessed by
respondent Commissioner of Internal Revenue (Commissioner) to
pay a deficiency tax for the year 1985 in the amount of
P1,892,584.00, computed as follows:
Deficiency Income Tax
Net Income per investigation P197,502,568.00
Add: Disallowances
Bad Debts P 713,070.93
Interest Expense P2.666.545.49 P3.379.616.00
Net Taxable Income P200.882.184.00
Tax Due Thereon P 70,298,764.00
Less: Tax Paid P 69,115,899.00
Deficiency Income Tax P 1,182,865.00
Add: 20% Interest (60% max.) P 709.719.00
Total Amount Due and Collectible P 1.892.584.002
The assessment was timely protested by petitioner on April 26, 1989,
on the ground that it was based on the erroneous disallowances of
bad debts and interest expense although the same are both allowable
and legal deductions. Respondent Commissioner, however, issued a
warrant of garnishment against the deposits of petitioner at a branch
of City Trust Bank, in Makati, Metro Manila, which action the latter
considered as a denial of its protest.
Petitioner accordingly filed a petition for review with the Court of
Tax Appeals (CTA) on the same assignment of error, that is, that the
bad debts and interest expense are legal and allowable deductions. In
its decision3 of February 3, 1993 in C.T.A. Case No. 4408, the CTA
modified the findings of
the Commissioner by reducing the deficiency income tax assessment
to P237,381.26, with surcharge and interest incident to delinquency.
In said decision, the Tax Court reversed and set aside the
Commissioners disallowance of the supposed interest expense of
P2,666,545.19 but maintained the disallowance of the bad debts of
thirteen (13) debtors in the total sum of P395,324.27.
Petitioner then elevated the case to respondent Court of Appeals
which, as earlier stated, denied due course to the petition for review
and dismissed the same on August 24, 1994 in CA-G.R. S.P. No.
31190,4 on the following ratiocination:
We agree with respondent Court of Tax Appeals:
Out of the sixteen (16) accounts alleged as bad debts, We find that
only three (3) accounts have met the requirements of the
worthlessness of the accounts, hence were properly written off as
bad debts, namely:
1. Petronila Catap P29,098.30
(Pet Mini Grocery)
2. Esther Guinto 254,375.54
(Esther Sari-sari Store)
3. Manuel Orea 34,272.82
(Elman Gen. Mdsg.)
TOTAL P317,746.66
xxx xxx xxx
With regard to the other accounts, namely:
1. Remoblas Store P 11,961.00
2. Tomas Store 16,842.79
3. AFPCES 13,833.62
4. CM Variety Store 10,895.82
5. URen Mart Enterprise 10,487.08
6. Aboitiz Shipping Corp. 89,483.40
7. J. Ruiz Trucking 69,640.34
8. Renato Alejandro 13,550.00
9. Craig, Mostyn Pty. Ltd. 23,738.00
10. C. Itoh 19,272.22
11. Crocklaan B. V. 77,690.00
12. Enriched Food Corp. 24,158.00
13. Lucito Sta. Maria 13,772.00
TOTAL P395,324.27
We find that said accounts have not satisfied the requirements of the
worthlessness of a debt. Mere testimony of the Financial Accountant
of the Petitioner explaining the worthlessness of said debts is seen by
this Court as nothing more than a self-serving exercise which lacks
probative value. There was no iota of documentary evidence (e. g.,
collection letters sent, report from investigating fieldmen, letter of
referral to their legal department, police report/affidavit that the
owners were bankrupt due to fire that engulfed their stores or that
the owner has been murdered, etc.), to give support to the testimony
of an employee of the Petitioner. Mere allegations cannot prove the
worthlessness of such debts in 1985. Hence, the claim for deduction
of these thirteen (13) debts should be rejected.5
1. This pronouncement of respondent Court of Appeals relied on the
ruling of this Court in Collector vs. Goodrich International
Rubber Co.,6 which established the rule in determining the
worthlessness of a debt. In said case, we held that for debts to be
considered as worthless, and thereby qualify as bad debts making
them deductible, the taxpayer should show that (1) there is a valid
and subsisting debt; (2) the debt must be actually ascertained to be
worthless and uncollectible during the taxable year; (3) the debt
must be charged off during the taxable year; and (4) the debt must
arise from the business or trade of the taxpayer. Additionally, before
a debt can be considered worthless, the taxpayer must also show that
it is indeed uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by the
taxpayer to prove that he exerted diligent efforts to collect the
debts, viz: (1) sending of statement of accounts; (2) sending of
collection letters; (3) giving the account to a lawyer for collection;
and (4) filing a collection case in court.
On the foregoing considerations, respondent Court of Appeals held
that petitioner did not satisfy the requirements of worthlessness of a
debt as to the thirteen (13) accounts disallowed as deductions.
It appears that the only evidentiary support given by PRC for its
aforesaid claimed deductions was the explanation or justification
posited by its financial adviser or accountant. Guia D. Masagana. Her
allegations were not supported by any documentary evidence, hence,
both the Court of Appeals and the CTA ruled that said contentions per
se cannot prove that the debts were indeed uncollectible and can be
considered as bad debts as to make them deductible. That both lower
courts are correct is shown by petitioners own submission and the
discussion thereof which we have taken time and patience to cull
from the antecedent proceedings in this case, albeit bordering on
factual settings.
The accounts of Remoblas Store in the amount of P11,961.00 and CM
Variety Store in the amount of P10,895.82 are uncollectible,
according to petitioner, since the stores were burned in November,
1984 and in early 1985, respectively, and there are no assets
belonging to the debtors that can be garnished by PRC.7 However,
PRC failed to show any documentary evidence for said allegations.
Not a single document was offered to show that the stores were
burned, even just a police report or an affidavit attesting to such loss
by fire. In fact, petitioner did not send even a single demand letter to
the owners of said stores.
The account of Tomas Store in the amount of P16,842.79 is
uncollectible, claims petitioner PRC, since the owner thereof was
murdered and left no visible assets which could satisfy the debt.
Withal, just like the accounts of the two other stores just mentioned,
petitioner again failed to present proof of the efforts exerted to
collect the debt, other than the aforestated asseverations of its
financial adviser.
The accounts of Aboitiz Shipping Corporation and J. Ruiz Trucking in
the amounts of P89,483.40 and P69,640.34, respectively, both of
which allegedly arose from the hijacking of their cargo and for which
they were given 30% rebates by PRC, are claimed to be uncollectible.
Again, petitioner failed to present an iota of proof, not even a copy of
the supposed policy regulation of PRC that it gives rebates to clients
Page 7 of 31
in case of loss arising from fortuitous events or force majeure, which
rebates it now passes off as uncollectible debts.
As to the account of P13,550.00 representing the balance collectible
from Renato Alejandro, a former employee who failed to pay the
judgment against him, it is petitioners theory that the same can no
longer be collected since his whereabouts are unknown and he has
no known property which can be garnished or levied upon. Once
again, petitioner failed to prove the existence of the said case against
that debtor or to submit any documentation to show that Alejandro
was indeed bound to pay any judgment obligation.
The amount of P13,772.00 corresponding to the debt of Lucito Sta.
Maria is allegedly due to the loss of his stocks through robbery and
the account is uncollectible due to his insolvency. Petitioner likewise
failed to submit documentary evidence, not even the written reports
of the alleged investigation conducted by its agents as testified to by
its aforenamed financial adviser. Regarding the accounts of C. Itoh in
the amount of P19,272.22, Crocklaan B.V. in the sum of P77,690.00,
and Craig, Mostyn Pty. Ltd. with a balance of P23,738.00, petitioner
contends that these debtors being foreign corporations, it can sue
them only in their country of incorporation; and since this will entail
expenses more than the amounts of the debts to be collected,
petitioner did not file any collection suit but opted to write them off
as bad debts. Petitioner was unable to show proof of its efforts to
collect the debts, even by a single demand letter therefor. While it is
not required to file suit, it is at least expected by the law to produce
reasonable proof that the debts are uncollectible although diligent
efforts were exerted to collect the same.
The account of Enriched Food Corporation in the amount of
P24,158.00 remains unpaid, although petitioner claims that it sent
several letters. This is not sufficient to sustain its position, even if
true, but even smacks of insouciance on its part. On top of that, it was
unable to show a single copy of the alleged demand letters sent to the
said corporation or any of its corporate officers.
With regard to the account of AFPCES for unpaid supplies in the
amount of P13,833.62, petitioner asserts that since the debtor is an
agency of the government, PRC did not file a collection suit therefor.
Yet, the mere fact that AFPCES is a government agency does not
preclude PRC from filing suit since said agency, while discharging
proprietary functions, does not enjoy immunity from suit. Such
pretension of petitioner cannot pass judicial muster.
No explanation is offered by petitioner as to why the unpaid account
of URen Mart Enterprise in the amount of P10,487.08 was written off
as a bad debt. However, the decision of the CTA includes this debtor
in its findings on the lack of documentary evidence to justify the
deductions claimed, since the worthlessness of the debts involved
are sought to be established by the mere self-serving testimony of its
financial consultant.
The contentions of PRC that nobody is in a better position to
determine when an obligation becomes a bad debt than the creditor
itself, and that its judgment should not be substituted by that of
respondent court as it is PRC which has the facilities in ascertaining
the collectibility or uncollectibility of these debts, are presumptuous
and uncalled for. The Court of Tax Appeals is a highly specialized
body specifically created for the purpose of reviewing tax cases.
Through its expertise, it is undeniably competent to determine the
issue of whether or not the debt is deductible through the evidence
presented before it.8
Because of this recognized expertise, the findings of the CTA will not
ordinarily be reviewed absent a showing of gross error or abuse on
its part.9 The findings of fact of the CTA are binding on this Court and
in the absence of strong reasons for this Court to delve into facts,
only questions of law are open for determination.10 Were it not,
therefore, due to the desire of this Court to satisfy petitioners calls
for clarification and to use this case as a vehicle for exemplification,
this appeal could very well have been summarily dismissed.
The Court vehemently rejects the absurd thesis of petitioner that
despite the supervening delay in the tax payment, nothing is lost on
the part of the Government because in the event that these debts are
collected, the same will be returned as taxes to it in the year of the
recovery. This is an irresponsible statement which deliberately
ignores the fact that while the Government may eventually recover
revenues under that hypothesis, the delay caused by the non-
payment of taxes under such a contingency will obviously have a
disastrous effect on the revenue collections necessary for
governmental operations during the period concerned.
2. We need not tarry at length on the second issue raised by
petitioner. It argues that the imposition of the 25% surcharge and the
20% delinquency interest due to delay in its payment of the tax
assessed is improper and unwarranted, considering that the
assessment of the Commissioner was modified by the CTA and the
decision of said court has not yet become final and executory.
Regarding the 25% surcharge penalty, Section 248 of the Tax Code
provides:
SEC 248. Civil Penalties. (a) There shall be imposed, in addition to the
tax required to be paid, a penalty equivalent to twenty-five percent
(25%) of the amount due, in the following cases:
xxx xxx xxx
(3) Failure to pay the tax within the time prescribed for its payment.
With respect to the penalty of 20% interest, the relevant provision is
found in Section 249 of the same Code, as follows:
SEC. 249. Interest. (a) In general. There shall be assessed and
collected on any unpaid amount of tax, interest at the rate of twenty
percent (20%) per annum, or such higher rate as may be prescribed
by regulations, from the date prescribed for payment until the
amount is fully paid.
xxx xxx xxx
(c) Delinquency interest. In case of failure to pay:
(1) The amount of the tax due on any return required to be filed, or
(2) The amount of the tax due for which no return is required, or
3) A deficiency tax, or any surcharge or interest thereon, on the due
date appearing in the notice and demand of the Commissioner,
there shall be assessed and collected, on the unpaid amount, interest
at the rate prescribed in paragraph (a) hereof until the amount is
fully paid, which interest shall form part of the tax. (Italics supplied)
xxx xxx xxx
As correctly pointed out by the Solicitor General, the deficiency tax
assessment in this case, which was the subject of the demand letter
of respondent Commissioner dated April 11, 1989, should have been
paid within thirty (30) days from receipt thereof. By reason of
petitioners default thereon, the delinquency penalties of 25%
surcharge and interest of 20% accrued from April 11, 1989. The fact
that petitioner appealed the assessment to the CTA and that the same
was modified does not relieve petitioner of the penalties incident to
delinquency. The reduced amount of P237,381.25 is but a part of the
original assessment of P1,892,584.00.
Our attention has also been called to two of our previous rulings and
these we set out here for the benefit of petitioner and whosoever
may be minded to take the same stance it has adopted in this case.
Tax laws imposing penalties for delinquencies, so we have long held,
are intended to hasten tax payments by punishing evasions or
neglect of duty in respect thereof. If penalties could be condoned for
flimsy reasons, the law imposing penalties for delinquencies would
be rendered nugatory, and the maintenance of the Government and
its multifarious activities will be adversely affected.11
We have likewise explained that it is mandatory to collect penalty
and interest at the stated rate in case of delinquency. The intention of
the law is to discourage delay in the payment of taxes due the
Government and, in this sense, the penalty and interest are not penal
but compensatory for the concomitant use of the funds by the
taxpayer beyond the date when he is supposed to have paid them to
the Government.12 Unquestionably, petitioner chose to turn a deaf
ear to these injunctions.
Page 8 of 31
ACCORDINGLY, the petition at bar is DENIED and the judgment of
respondent Court of Appeals is hereby AFFIRMED, with treble costs
against petitioner.
SO ORDERED.
G.R. No. 124043 October 14, 1998
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and YOUNG MEN'S
CHRISTIAN ASSOCIATION OF THE PHILIPPINES, INC., respondents.
PANGANIBAN, J.:
Is the income derived from rentals of real property owned by the
Young Men's Christian Association of the Philippines, Inc. (YMCA)
established as "a welfare, educational and charitable non-profit
corporation" subject to income tax under the National Internal
Revenue Code (NIRC) and the Constitution?
The Case
This is the main question raised before us in this petition for review
on certiorari challenging two Resolutions issued by the Court of
Appeals 1 on September 28, 1995 2 and February 29, 1996 3 in CA-GR
SP No. 32007. Both Resolutions affirmed the Decision of the Court of
Tax Appeals (CTA) allowing the YMCA to claim tax exemption on the
latter's income from the lease of its real property.
The Facts
The facts are undisputed. 4 Private Respondent YMCA is a non-stock,
non-profit institution, which conducts various programs and
activities that are beneficial to the public, especially the young
people, pursuant to its religious, educational and charitable
objectives.
In 1980, private respondent earned, among others, an income of
P676,829.80 from leasing out a portion of its premises to small shop
owners, like restaurants and canteen operators, and P44,259.00 from
parking fees collected from non-members. On July 2, 1984, the
commissioner of internal revenue (CIR) issued an assessment to
private respondent, in the total amount of P415,615.01 including
surcharge and interest, for deficiency income tax, deficiency
expanded withholding taxes on rentals and professional fees and
deficiency withholding tax on wages. Private respondent formally
protested the assessment and, as a supplement to its basic protest,
filed a letter dated October 8, 1985. In reply, the CIR denied the
claims of YMCA.
Contesting the denial of its protest, the YMCA filed a petition for
review at the Court of Tax Appeals (CTA) on March 14, 1989. In due
course, the CTA issued this ruling in favor of the YMCA:
. . . [T]he leasing of [private respondent's] facilities to small shop
owners, to restaurant and canteen operators and the operation of the
parking lot are reasonably incidental to and reasonably necessary for
the accomplishment of the objectives of the [private respondents]. It
appears from the testimonies of the witnesses for the [private
respondent] particularly Mr. James C. Delote, former accountant of
YMCA, that these facilities were leased to members and that they
have to service the needs of its members and their guests. The
rentals were minimal as for example, the barbershop was only
charged P300 per month. He also testified that there was actually no
lot devoted for parking space but the parking was done at the sides of
the building. The parking was primarily for members with stickers
on the windshields of their cars and they charged P.50 for non-
members. The rentals and parking fees were just enough to cover the
costs of operation and maintenance only. The earning[s] from these
rentals and parking charges including those from lodging and other
charges for the use of the recreational facilities constitute [the] bulk
of its income which [is] channeled to support its many activities and
attainment of its objectives. As pointed out earlier, the membership
dues are very insufficient to support its program. We find it
reasonably necessary therefore for [private respondent] to make
[the] most out [of] its existing facilities to earn some income. It would
have been different if under the circumstances, [private respondent]
will purchase a lot and convert it to a parking lot to cater to the needs
of the general public for a fee, or construct a building and lease it out
to the highest bidder or at the market rate for commercial purposes,
or should it invest its funds in the buy and sell of properties, real or
personal. Under these circumstances, we could conclude that the
activities are already profit oriented, not incidental and reasonably
necessary to the pursuit of the objectives of the association and
therefore, will fall under the last paragraph of Section 27 of the Tax
Code and any income derived therefrom shall be taxable.
Considering our findings that [private respondent] was not engaged
in the business of operating or contracting [a] parking lot, we find no
legal basis also for the imposition of [a] deficiency fixed tax and [a]
contractor's tax in the amount[s] of P353.15 and P3,129.73,
respectively.
xxx xxx xxx
WHEREFORE, in view of all the foregoing, the following assessments
are hereby dismissed for lack of merit:
1980 Deficiency Fixed Tax P353,15;
1980 Deficiency Contractor's Tax P3,129.23;
1980 Deficiency Income Tax P372,578.20.
While the following assessments are hereby sustained:
1980 Deficiency Expanded Withholding Tax P1,798.93;
1980 Deficiency Withholding Tax on Wages P33,058.82
plus 10% surcharge and 20% interest per annum from July 2, 1984
until fully paid but not to exceed three (3) years pursuant to Section
51(e)(2) & (3) of the National Internal Revenue Code effective as of
1984. 5
Dissatisfied with the CTA ruling, the CIR elevated the case to the
Court of Appeals (CA). In its Decision of February 16, 1994, the
CA 6 initially decided in favor of the CIR and disposed of the appeal in
the following manner:
Following the ruling in the afore-cited cases of Province of Abra vs.
Hernando and Abra Valley College Inc. vs. Aquino, the ruling of the
respondent Court of Tax Appeals that "the leasing of petitioner's
(herein respondent's) facilities to small shop owners, to restaurant
and canteen operators and the operation of the parking lot are
reasonably incidental to and reasonably necessary for the
accomplishment of the objectives of the petitioners, and the income
derived therefrom are tax exempt, must be reversed.
WHEREFORE, the appealed decision is hereby REVERSED in so far as
it dismissed the assessment for:
1980 Deficiency Income Tax P 353.15
1980 Deficiency Contractor's Tax P 3,129.23, &
1980 Deficiency Income Tax P 372,578.20
but the same is AFFIRMED in all other respect. 7
Aggrieved, the YMCA asked for reconsideration based on the
following grounds:
I
The findings of facts of the Public Respondent Court of Tax Appeals
being supported by substantial evidence [are] final and conclusive.
II
The conclusions of law of [p]ublic [r]espondent exempting [p]rivate
[r]espondent from the income on rentals of small shops and parking
fees [are] in accord with the applicable law and jurisprudence. 8
Finding merit in the Motion for Reconsideration filed by the YMCA,
the CA reversed itself and promulgated on September 28, 1995 its
first assailed Resolution which, in part, reads:
The Court cannot depart from the CTA's findings of fact, as they are
supported by evidence beyond what is considered as substantial.
xxx xxx xxx
The second ground raised is that the respondent CTA did not err in
saying that the rental from small shops and parking fees do not result
in the loss of the exemption. Not even the petitioner would hazard
the suggestion that YMCA is designed for profit. Consequently, the
little income from small shops and parking fees help[s] to keep its
head above the water, so to speak, and allow it to continue with its
laudable work.
Page 9 of 31
The Court, therefore, finds the second ground of the motion to be
meritorious and in accord with law and jurisprudence.
WHEREFORE, the motion for reconsideration is GRANTED; the
respondent CTA's decision is AFFIRMED in toto. 9
The internal revenue commissioner's own Motion for
Reconsideration was denied by Respondent Court in its second
assailed Resolution of February 29, 1996. Hence, this petition for
review under Rule 45 of the Rules of Court. 10
The Issues
Before us, petitioner imputes to the Court of Appeals the following
errors:
I under this Code. (as amended by Pres. Decree No. 1457)
In holding that it had departed from the findings of fact of
Respondent Court of Tax Appeals when it rendered its Decision
dated February 16, 1994; and
II
In affirming the conclusion of Respondent Court of Tax Appeals that
the income of private respondent from rentals of small shops and
parking fees [is] exempt from taxation. 11
This Court's Ruling
The petition is meritorious.
First Issue:
Factual Findings of the CTA
Private respondent contends that the February 16, 1994 CA Decision
reversed the factual findings of the CTA. On the other hand,
petitioner argues that the CA merely reversed the "ruling of the CTA
that the leasing of private respondent's facilities to small shop
owners, to restaurant and canteen operators and the operation of
parking lots are reasonably incidental to and reasonably necessary
for the accomplishment of the objectives of the private respondent
and that the income derived therefrom are tax exempt." 12 Petitioner
insists that what the appellate court reversed was the legal
conclusion, not the factual finding, of the CTA. 13 The commissioner
has a point.
Indeed, it is a basic rule in taxation that the factual findings of the
CTA, when supported by substantial evidence, will be disturbed on
appeal unless it is shown that the said court committed gross error in
the appreciation of facts. 14 In the present case, this Court finds that
the February 16, 1994 Decision of the CA did not deviate from this
rule. The latter merely applied the law to the facts as found by the
CTA and ruled on the issue raised by the CIR: "Whether or not the
collection or earnings of rental income from the lease of certain
premises and income earned from parking fees shall fall under the
last paragraph of Section 27 of the National Internal Revenue Code of
1977, as amended." 15
Clearly, the CA did not alter any fact or evidence. It merely resolved
the aforementioned issue, as indeed it was expected to. That it did so
in a manner different from that of the CTA did not necessarily imply a
reversal of factual findings.
The distinction between a question of law and a question of fact is
clear-cut. It has been held that "[t]here is a question of law in a given
case when the doubt or difference arises as to what the law is on a
certain state of facts; there is a question of fact when the doubt or
difference arises as to the truth or falsehood of alleged facts." 16 In
the present case, the CA did not doubt, much less change, the facts
narrated by the CTA. It merely applied the law to the facts. That its
interpretation or conclusion is different from that of the CTA is not
irregular or abnormal.
Second Issue:
Is the Rental Income of the YMCA Taxable?
We now come to the crucial issue: Is the rental income of the YMCA
from its real estate subject to tax? At the outset, we set forth the
relevant provision of the NIRC:
Sec. 27. Exemptions from tax on corporations. The following
organizations shall not be taxed under this Title in respect to income
received by them as such
xxx xxx xxx
(g) Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare;
(h) Club organized and operated exclusively for pleasure, recreation,
and other non-profitable purposes, no part of the net income of
which inures to the benefit of any private stockholder or member;
xxx xxx xxx
Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or from
any of their activities conducted for profit, regardless of the
disposition made of such income, shall be subject to the tax imposed
Petitioner argues that while the income received by the
organizations enumerated in Section 27 (now Section 26) of the NIRC
is, as a rule, exempted from the payment of tax "in respect to income
received by them as such," the exemption does not apply to income
derived ". . . from any of their properties, real or personal, or from
any of their activities conducted for profit, regardless of the
disposition made of such income . . . ."
Petitioner adds that "rental income derived by a tax-exempt
organization from the lease of its properties, real or personal, [is]
not, therefore, exempt from income taxation, even if such income [is]
exclusively used for the accomplishment of its objectives." 17 We
agree with the commissioner.
Because taxes are the lifeblood of the nation, the Court has always
applied the doctrine of strict in interpretation in construing tax
exemptions. 18 Furthermore, a claim of statutory exemption from
taxation should be manifest. and unmistakable from the language of
the law on which it is based. Thus, the claimed exemption "must
expressly be granted in a statute stated in a language too clear to be
mistaken." 19
In the instant case, the exemption claimed by the YMCA is expressly
disallowed by the very wording of the last paragraph of then Section
27 of the NIRC which mandates that the income of exempt
organizations (such as the YMCA) from any of their properties, real
or personal, be subject to the tax imposed by the same Code. Because
the last paragraph of said section unequivocally subjects to tax the
rent income of the YMCA from its real property, 20the Court is duty-
bound to abide strictly by its literal meaning and to refrain from
resorting to any convoluted attempt at construction.
It is axiomatic that where the language of the law is clear and
unambiguous, its express terms must be applied. 21Parenthetically, a
consideration of the question of construction must not even begin,
particularly when such question is on whether to apply a strict
construction or a liberal one on statutes that grant tax exemptions to
"religious, charitable and educational propert[ies] or institutions." 22
The last paragraph of Section 27, the YMCA argues, should be
"subject to the qualification that the income from the properties must
arise from activities 'conducted for profit' before it may be
considered taxable." 23 This argument is erroneous. As previously
stated, a reading of said paragraph ineludibly shows that the income
from any property of exempt organizations, as well as that arising
from any activity it conducts for profit, is taxable. The phrase "any of
their activities conducted for profit" does not qualify the word
"properties." This makes from the property of the organization
taxable, regardless of how that income is used whether for profit
or for lofty non-profit purposes.
Verba legis non est recedendum. Hence, Respondent Court of Appeals
committed reversible error when it allowed, on reconsideration, the
tax exemption claimed by YMCA on income it derived from renting
out its real property, on the solitary but unconvincing ground that
the said income is not collected for profit but is merely incidental to
its operation. The law does not make a distinction. The rental income
is taxable regardless of whence such income is derived and how it is
used or disposed of. Where the law does not distinguish, neither
should we.
Constitutional Provisions
Page 10 of 31
On Taxation
Invoking not only the NIRC but also the fundamental law, private
respondent submits that Article VI, Section 28 of par. 3 of the 1987
Constitution, 24 exempts "charitable institutions" from the payment
not only of property taxes but also of income tax from any
source. 25 In support of its novel theory, it compares the use of the
words "charitable institutions," "actually" and "directly" in the 1973
and the 1987 Constitutions, on the one hand; and in Article VI,
Section 22, par. 3 of the 1935 Constitution, on the other hand. 26
Private respondent enunciates three points. First, the present
provision is divisible into two categories: (1) "[c]haritable
institutions, churches and parsonages or convents appurtenant
thereto, mosques and non-profit cemeteries," the incomes of which
are, from whatever source, all tax-exempt; 27 and (2) "[a]ll lands,
buildings and improvements actually and directly used for religious,
charitable or educational purposes," which are exempt only from
property taxes. 28 Second, Lladoc v. Commissioner of Internal
Revenue, 29 which limited the exemption only to the payment of
property taxes, referred to the provision of the 1935 Constitution
and not to its counterparts in the 1973 and the 1987
Constitutions. 30 Third, the phrase "actually, directly and exclusively
used for religious, charitable or educational purposes" refers not
only to "all lands, buildings and improvements," but also to the
above-quoted first category which includes charitable institutions
like the private respondent. 31
The Court is not persuaded. The debates, interpellations and
expressions of opinion of the framers of the Constitution reveal their
intent which, in turn, may have guided the people in ratifying the
Charter. 32 Such intent must be effectuated.
Accordingly, Justice Hilario G. Davide, Jr., a former constitutional
commissioner, who is now a member of this Court, stressed during
the Concom debates that ". . . what is exempted is not the institution
itself . . .; those exempted from real estate taxes are lands, buildings
and improvements actually, directly and exclusively used for
religious, charitable or educational
purposes." 33 Father Joaquin G. Bernas, an eminent authority on the
Constitution and also a member of the Concom, adhered to the same
view that the exemption created by said provision pertained only to
property taxes. 34
In his treatise on taxation, Mr. Justice Jose C. Vitug concurs, stating
that "[t]he tax exemption covers property taxes only." 35 Indeed, the
income tax exemption claimed by private respondent finds no basis
in Article VI, Section 26, par. 3 of the Constitution.
Private respondent also invokes Article XIV, Section 4, par. 3 of the
Character, 36 claiming that the YMCA "is a non-stock, non-profit
educational institution whose revenues and assets are used actually,
directly and exclusively for educational purposes so it is exempt from
taxes on its properties and income." 37 We reiterate that private
respondent is exempt from the payment of property tax, but not
income tax on the rentals from its property. The bare allegation alone
that it is a non-stock, non-profit educational institution is insufficient
to justify its exemption from the payment of income tax.
As previously discussed, laws allowing tax exemption are
construed strictissimi juris. Hence, for the YMCA to be granted the
exemption it claims under the aforecited provision, it must prove
with substantial evidence that (1) it falls under the classification non-
stock, non-profit educational institution; and (2) the income it seeks
to be exempted from taxation is used actually, directly, and exclusively
for educational purposes. However, the Court notes that not a scintilla
of evidence was submitted by private respondent to prove that it met
the said requisites.
Is the YMCA an educational institution within the purview of Article
XIV, Section 4, par. 3 of the Constitution? We rule that it is not. The
term "educational institution" or "institution of learning" has
acquired a well-known technical meaning, of which the members of
the Constitutional Commission are deemed cognizant. 38 Under the
Education Act of 1982, such term refers to schools. 39 The school
system is synonymous with formal education, 40 which "refers to the
hierarchically structured and chronologically graded learnings
organized and provided by the formal school system and for which
certification is required in order for the learner to progress through
the grades or move to the higher levels." 41 The Court has examined
the "Amended Articles of Incorporation" and "By-Laws" 43 of the
YMCA, but found nothing in them that even hints that it is a school or
an educational institution. 44
Furthermore, under the Education Act of 1982, even non-formal
education is understood to be school-based and "private auspices
such as foundations and civic-spirited organizations" are ruled
out. 45 It is settled that the term "educational institution," when used
in laws granting tax exemptions, refers to a ". . . school seminary,
college or educational establishment . . . ." 46 Therefore, the private
respondent cannot be deemed one of the educational institutions
covered by the constitutional provision under consideration.
. . . Words used in the Constitution are to be taken in their ordinary
acceptation. While in its broadest and best sense education embraces
all forms and phases of instruction, improvement and development
of mind and body, and as well of religious and moral sentiments, yet
in the common understanding and application it means a place
where systematic instruction in any or all of the useful branches of
learning is given by methods common to schools and institutions of
learning. That we conceive to be the true intent and scope of the term
[educational institutions,] as used in the
Constitution. 47
Moreover, without conceding that Private Respondent YMCA is an
educational institution, the Court also notes that the former did not
submit proof of the proportionate amount of the subject income that
was actually, directly and exclusively used for educational purposes.
Article XIII, Section 5 of the YMCA by-laws, which formed part of the
evidence submitted, is patently insufficient, since the same merely
signified that "[t]he net income derived from the rentals of the
commercial buildings shall be apportioned to the Federation and
Member Associations as the National Board may decide." 48 In sum,
we find no basis for granting the YMCA exemption from income tax
under the constitutional provision invoked.
Cases Cited by Private
Respondent Inapplicable
The cases 49 relied on by private respondent do not support its
cause. YMCA of Manila v. Collector of Internal Revenue 50and Abra
Valley College, Inc. v. Aquino 51 are not applicable, because the
controversy in both cases involved exemption from the payment of
property tax, not income tax. Hospital de San Juan de Dios, Inc. v.
Pasay City 52 is not in point either, because it involves a claim for
exemption from the payment of regulatory fees, specifically electrical
inspection fees, imposed by an ordinance of Pasay City an issue
not at all related to that involved in a claimed exemption from the
payment of income taxes imposed on property leases. In Jesus Sacred
Heart College v. Com. of Internal Revenue, 53 the party therein, which
claimed an exemption from the payment of income tax, was an
educational institution which submitted substantial evidence that the
income subject of the controversy had been devoted or used solely
for educational purposes. On the other hand, the private respondent
in the present case has not given any proof that it is an educational
institution, or that part of its rent income is actually, directly and
exclusively used for educational purposes.
Epilogue
In deliberating on this petition, the Court expresses its sympathy
with private respondent. It appreciates the nobility of its cause.
However, the Court's power and function are limited merely to
applying the law fairly and objectively. It cannot change the law or
bend it to suit its sympathies and appreciations. Otherwise, it would
be overspilling its role and invading the realm of legislation.
We concede that private respondent deserves the help and the
encouragement of the government. It needs laws that can facilitate,
and not frustrate, its humanitarian tasks. But the Court regrets that,
Page 11 of 31
given its limited constitutional authority, it cannot rule on the
wisdom or propriety of legislation. That prerogative belongs to the
political departments of government. Indeed, some of the members
of the Court may even believe in the wisdom and prudence of
granting more tax exemptions to private respondent. But such belief,
however well-meaning and sincere, cannot bestow upon the Court
the power to change or amend the law.
WHEREFORE, the petition is GRANTED. The Resolutions of the Court
of Appeals dated September 28, 1995 and February 29, 1996 are
hereby REVERSED and SET ASIDE. The Decision of the Court of
Appeals dated February 16, 1995 is REINSTATED, insofar as it ruled
that the income derived by petitioner from rentals of its real
property is subject to income tax. No pronouncement as to costs.
G.R. No. 166786 May 3, 2006
MICHEL J. LHUILLER Pawnshop, Inc. Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
YNARES-SANTIAGO, J.:
Assailed in this petition for review on certiorari is the June 29, 2004
Decision1 of the Court of Appeals in CA-G.R. SP No. 67667, which
reversed the October 24, 2001 Decision2 of the Court Tax Appeals
and ordered petitioner Michel J. Lhuillier Pawnshop, Inc., to pay (1)
P19,961,636.09 as deficiency Value Added Tax (VAT); and (2)
P3,142,986.02 as deficiency Documentary Stamp Tax (DST), for the
year 1997.
The facts show that petitioner, a corporation engaged in the
pawnshop business, received Assessment Notice Nos. 81-VAT-13-97-
99-12-118 and 81-DST-13-97-99-12-119, issued by the Chief
Assessment Division, Revenue Region No. 13, Cebu City, for
deficiency VAT in the amount of P19,961,636.09 and deficiency DST
in the amount of P13,142,986.02, for the year 1997. Petitioner filed a
motion for reconsideration of said assessment notices but was
denied by respondent Commissioner of Internal Revenue (CIR).
On petition for review with the Court of Tax Appeals, the latter
rendered decision in favor of petitioner setting aside the assessment
notices issued by the CIR. It ruled, inter alia, that the subject of a DST
under Section 195 of the National Internal Revenue Code (NIRC) is
the document evidencing the covered transaction. Holding that a
pawn ticket is neither a security nor a printed evidence of
indebtedness, the tax court concluded that such pawn ticket cannot
be the subject of a DST. The dispositive portion thereof, states:
WHEREFORE, in view of all the foregoing, the instant Petition for
Review is hereby GRANTED. Accordingly, Assessment Notices Nos.
81-VAT-13-97-99-12-118 and 81-DST-13-97-99-11-119 are hereby
CANCELLED and SET ASIDE.
SO ORDERED.3
Respondent filed a petition for review with the Court of Appeals
which reversed the CTA decision and sustained the assessments
against petitioner. It ratiocinated, among others, that a pawn
ticket, per se, is not subject to DST; rather, it is the transaction
involved, which in this case is pledge, that is being taxed. Hence,
petitioner was properly assessed to pay DST. The decretal portion
thereof, provides:
WHEREFORE, the instant petition is hereby GRANTED. The decision
of the Court of Tax Appeals dated October 24, 2001 is REVERSED and
SET ASIDE. In lieu thereof, respondent Michel J. Lhuillier Pawnshop,
Inc., is ORDERED TO PAY: (1) P19,961636.09, as deficiency Value-
Added Tax, inclusive of surcharge and interest; and (2)
P3,142,986.02, as deficiency Documentary Stamp Tax, inclusive of
surcharge and interest, for the year 1997. No pronouncement as to
cost.
SO ORDERED.4
Respondent filed a motion for partial reconsideration praying that
petitioner be ordered to pay deficiency interest of 20% per annum
for failure to pay the same on January 2, 2000, as indicated in the
notices. On December 29, 2004, the Court of Appeals granted the
motion and modified the June 29, 2004 decision as follows:
WHEREFORE, the instant petition is hereby GRANTED. The decision
of the Court of Tax Appeals dated October 24, 2001 is REVERSED and
SET ASIDE. In lieu thereof, respondent Michel J. Lhuillier Pawnshop,
Inc., is ORDERED TO PAY: (1) 19,961,636.09, as deficiency Value-
Added Tax, inclusive of surcharge and interest; (2) P3,142,986.02, as
deficiency Documentary Stamp Tax, inclusive of surcharge and
interest, for the year 1997; and (3) Delinquency Interest at the rate of
20% per annum from January 2, 2000, until the deficiency
assessment are fully paid, pursuant to Section 249 of the National
Internal Revenue Code. No pronouncement as to costs.
SO ORDERED.5
On January 25, 2005, petitioner elevated the case to this Court.
Subsequently, it filed a motion to withdraw the petition with respect
to the issue of VAT.6 Petitioner manifested that the Chamber of
Pawnbrokers of the Philippines, where it is a member, entered into a
Memorandum of Agreement7 with the Bureau of Internal Revenue
(BIR) allowing the pawnshop industry to compromise the issue of
VAT on pawnshops. Considering that petitioner already paid the
agreed amount of settlement, it prayed that the case be decided
solely on the issue of DST.
On September 28, 2005, the Court granted petitioners partial
withdrawal of the petition.8 Hence, the lone question to be resolved
in the present petition is whether petitioners pawnshop transactions
are subject to DST.
The Court rules in the affirmative.
Sections 173 and 195 of the NIRC, state:
SEC. 173. Stamp Taxes Upon Documents, Loan Agreements,
Instruments, and Papers. Upon documents, instruments, loan
agreements and papers, and upon acceptances, assignments, sales
and transfers of the obligation, right or property incident thereto,
there shall be levied, collected and paid for, and in respect of the
transaction so had or accomplished, the corresponding documentary
stamp taxes x x x. (Emphasis supplied)
SEC. 195. Stamp Tax on Mortgages, Pledges, and Deeds of Trust. On
every mortgage or pledge of lands, estate, or property, real or
personal, heritable or movable, whatsoever, where the same shall be
made as security for the payment of any definite and certain sum of
money lent at the time or previously due and owing or forborne to be
paid, being payable and on any conveyance of land, estate, or
property whatsoever, in trust or to be sold, or otherwise converted
into money which shall be and intended only as security, either by
express stipulation or otherwise, there shall be collected a
documentary stamp tax at the following rates:
"(a) When the amount secured does not exceed Five thousand pesos
(P5,000), Twenty pesos (P20).1avvphil.net
(b) On each Five thousand pesos (P5,000), or fractional part thereof
in excess of Five thousand pesos (P5,000), an additional tax of Ten
pesos (10.00).
x x x x. (Emphasis supplied)
It is clear from the foregoing provisions that the subject of a DST is
not limited to the document embodying the enumerated
transactions. A DST is an excise tax on the exercise of a right or
privilege to transfer obligations, rights or properties incident thereto.
In Philippine Home Assurance Corporation v. Court of Appeals,9 it was
held that:
In general, documentary stamp taxes are levied on the exercise by
persons of certain privileges conferred by law for the creation,
revision, or termination of specific legal relationships through the
execution of specific instruments. Examples of such privileges, the
exercise of which, as effected through the issuance of particular
documents, are subject to the payment of documentary stamp taxes
are leases of lands, mortgages, pledges and trusts, and conveyances
of real property. (Emphasis added)
Pledge is among the privileges, the exercise of which is subject to
DST. A pledge may be defined as an accessory, real and unilateral
contract by virtue of which the debtor or a third person delivers to
the creditor or to a third person movable property as security for the
Page 12 of 31
performance of the principal obligation, upon the fulfillment of which
the thing pledged, with all its accessions and accessories, shall be
returned to the debtor or to the third person.10 This is essentially the
business of pawnshops which are defined under Section 3 of
Presidential Decree No. 114, or the Pawnshop Regulation Act, as
persons or entities engaged in lending money on personal property
delivered as security for loans.
Section 12 of the Pawnshop Regulation Act and Section 21 of the
Rules and Regulations For Pawnshops11 issued by the Central
Bank12 to implement the Act, require every pawnshop or
pawnbroker to issue, at the time of every such loan or pledge, a
memorandum or ticket signed by the pawnbroker and containing the
following details: (1) name and residence of the pawner; (2) date the
loan is granted; (3) amount of principal loan; (4) interest rate in
percent; (5) period of maturity; (6) description of pawn; (7)
signature of pawnbroker or his authorized agent; (8) signature or
thumb mark of pawner or his authorized agent; and (9) such other
terms and conditions as may be agreed upon between the
pawnbroker and the pawner. In addition, Central Bank Circular No.
445,13 prescribed a standard form of pawn tickets with entries for
the required details on its face and the mandated terms and
conditions of the pledge at the dorsal portion thereof.
Section 3 of the Pawnshop Regulation Act defines a pawn ticket as
follows:
"Pawn ticket" is the pawnbrokers receipt for a pawn. It is neither a
security nor a printed evidence of indebtedness."
True, the law does not consider said ticket as an evidence of security
or indebtedness. However, for purposes of taxation, the same pawn
ticket is proof of an exercise of a taxable privilege of concluding a
contract of pledge. At any rate, it is not said ticket that creates the
pawnshops obligation to pay DST but the exercise of the privilege to
enter into a contract of pledge. There is therefore no basis in
petitioners assertion that a DST is literally a tax on a document and
that no tax may be imposed on a pawn ticket.
The settled rule is that tax laws must be construed in favor of the
taxpayer and strictly against the government; and that a tax cannot
be imposed without clear and express words for that
purpose.14 Taking our bearing from the foregoing doctrines, we
scrutinized Section 195 of the NIRC, but there is no way that said
provision may be interpreted in favor of petitioner. Section
195 unqualifiedly subjects all pledges to DST. It states that "[o]n
every x x x pledge x x x there shall be collected a documentary stamp
tax x x x." It is clear, categorical, and needs no further interpretation
or construction. The explicit tenor thereof requires hardly anything
than a simple application.15
The onus of proving that pawnshops are not subject to DST is thus
shifted to petitioner. In establishing tax exemptions, it should be
borne in mind that taxation is the rule, exemption is the exception.
Accordingly, statutes granting tax exemptions must be construed in
strictissimi juris against the taxpayer and liberally in favor of the
taxing authority. One who claims an exemption from tax payments
rests the burden of justifying the exemption by words too plain to be
mistaken and too categorical to be misinterpreted.16
In the instant case, there is no law specifically and expressly
exempting pledges entered into by pawnshops from the payment of
DST. Section 19917 of the NIRC enumerated certain documents which
are not subject to stamp tax; but a pawnshop ticket is not one of
them. Hence, petitioners nebulous claim that it is not subject to DST
is without merit. It cannot be over-emphasized that tax exemption
represents a loss of revenue to the government and must, therefore,
not rest on vague inference.18 Exemption from taxation is never
presumed. For tax exemption to be recognized, the grant must be
clear and express; it cannot be made to rest on doubtful
implications.19
The Court notes that BIR Ruling No. 305-87,20 and BIR Ruling No.
018-88,21 which held that a pawn ticket is subject to DST because it is
an evidence of a pledge transaction, had been revoked by BIR Ruling
No. 325-88.22 In the latter ruling, the BIR held that DST is a tax on the
document; and since a pawn ticket is not an evidence of
indebtedness, it cannot be subject to DST. Nevertheless, this
interpretation is not consistent with the provisions of Section 195 of
the NIRC which categorically taxes the privilege to enter into a
contract of pledge. Indeed, administrative issuances must not
override, supplant or modify the law but must be consistent with the
law they intend to carry out.23
Finally, petitioner invokes the declaration of nullity of Revenue
Memorandum Circular (RMC) No. 43-91 in Commissioner of Internal
Revenue v. Michel J. Lhuillier Pawnshop, Inc.24 Said case, however, is
not applicable to the present controversy. RMC No. 43-91 is actually
a clarification of Revenue Memorandum Order No. 15-91 which
classified pawnshops as "lending investors" and imposed upon them
a 5% lending investors tax. While RMC No. 43-91 declared in
addition that pawnshops are subject to DST, such was never an issue
in Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop,
Inc., because nowhere was it mentioned therein that the pawnshop
involved was directed to pay DST. Otherwise stated, the declaration
of nullity of RMC No. 43-91 was the Courts finding, among others,
that pawnshops cannot be classified as lending investors; and
certainly not because pawnshops are not subject to DST. The
invocation of said ruling is therefore misplaced.
WHEREFORE, the petition is DENIED and the June 29, 2004 Decision
of the Court of Appeals, as modified on December 29, 2004, in CA-
G.R. SP No. 67667, is AFFIRMED.
COMPAGNIE FINANCIERESUCRES ET G.R. No. 133834
DENREES,
Petitioner,
Present:
PUNO, J., Chairperson,
SANDOVAL-GUTIERREZ,
- versus - *CORONA,
AZCUNA, and
GARCIA, JJ.
COMMISSIONER OF INTERNAL Promulgated:
REVENUE,
Respondent. August 28, 2006
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari
assailing the Decision[1] of the Court of Appeals dated October 27,
1997 in CA-G.R. SP No. 39501.
Compagnie Financiere Sucres et Denrees, petitioner, is a non-
resident private corporation duly organized and existing under the
laws of the Republic of France.
On October 21, 1991, petitioner transferred its eight percent (8%)
equity interest in the Makati Shangri-La Hotel and Resort,
Incorporated to Kerry Holdings Ltd. (formerly SligoHoldings Ltd), as
shown by a Deed of Sale and Assignment of Subscription and Right of
Subscription of the same date. Transferred were (a) 107,929 issued
shares of stock valued at P100.00 per share with a total par value
of P10,792,900.00; (b) 152,031 with a par value of P100.00 per share
with a total par value of P15,203,100.00; (c) deposits on stock
subscriptions amounting to P43,147,630.28; and (d) petitioners right
of subscription.
On November 29, 1991, petitioner paid the documentary stamps tax
and capital gains tax on the transfer under protest.
Page 13 of 31
On October 21, 1993, petitioner filed with the Commissioner of
Internal Revenue, herein respondent, a claim for refund of overpaid
capital gains tax in the amount of P107,869.00 and overpaid
documentary stamps taxes in the sum of P951,830.00 or a total
of P1,059,699.00. Petitioner alleged that the transfer of deposits on
stock subscriptions is not a sale/assignment of shares of stock
subject to documentary stamps tax and capital gains tax.
However, respondent did not act on petitioners claim for
refund. Thus, on November 19, 1993, petitioner filed with the Court
of Tax Appeals (CTA) a petition for review, docketed as CTA Case No.
5042.
In its Decision[2] dated October 6, 1995, the CTA denied petitioners
claim for refund. The CTA held that it is clear from Section 176 of the
Tax Code that sales to secure the future payment of money or for the
future transfer of any bond, due-bill, certificates of obligation or
stock are taxable. Furthermore, petitioner admitted that it profited
from the sale of shares of stocks. Such profit is subject to capital gains
tax.
Petitioner filed a motion for reconsideration, but in a Resolution
dated December 26, 1995, the CTA denied the same. This prompted
petitioner to file with the Court of Appeals a petition for review,
docketed as CA-G.R. SP No. 39501.
On October 27, 1997, the Court of Appeals denied the petition and
affirmed the Decision of the CTA. The appellate court ruled that a
taxpayer has the onus probandi of proving entitlement to a refund or
deduction, following the rule that tax exemptions are strictly
construed against the taxpayer and liberally in favor of the State.
Petitioner failed to meet the requisite burden of proof to support its
claim.
Hence, petitioners recourse to this Court by way of a Petition for
Review on Certiorari.
The sole issue for our resolution is whether the Court of Appeals
erred in holding that the assignment of deposits on stock
subscriptions is subject to documentary stamps tax and capital gains
tax.
Along with police power and eminent domain, taxation is one of the
three basic and necessary attributes of sovereignty. Thus, the State
cannot be deprived of this most essential power and attribute of
sovereignty by vague implications of law. Rather, being derogatory of
sovereignty, the governing principle is that tax exemptions are to be
construed in strictissimi juris against the taxpayer and liberally in
favor of the taxing authority; and he who claims an exemption must
be able to justify his claim by the clearest grant of statute.[3]
In the instant case, petitioner seeks a refund. Tax refunds are a
derogation of the States taxing power. Hence, like tax exemptions,
they are construed strictly against the taxpayer and liberally in favor
of the State.[4] Consequently, he who claims a refund or exemption
from taxes has the burden of justifying the exemption by words too
plain to be mistaken and too categorical to be
misinterpreted.[5] Significantly, petitioner cannot point to any
specific provision of the National Internal Revenue Code authorizing
its claim for an exemption or refund. Rather, Section 176 of the
National Internal Revenue Code applicable to the issue provides that
the future transfer of shares of stocks is subject to documentary
stamp tax, thus:
SEC. 176. Stamp tax on sales, agreements to sell, memoranda of sales,
deliveries or transfer of due-bills, certificates of obligation, or shares or
certificates of stock. On all sales, or agreements to sell, or memoranda
of sales, or deliveries, or transfer of due-bills, certificates of
obligation, or shares or certificates of stock in any association,
company, or corporation, or transfer of such securities by assignment
in blank, or by delivery, or by any paper or agreement, or
memorandum or other evidences of transfer or sale whether
entitling the holder in any manner to the benefit of such due bills,
certificates of obligation or stock, or to secure the future payment of
money, or for the future transfer of any due-bill, certificates of
obligation or stock, there shall be collected a documentary stamp tax
of fifty centavos (P1.50) on each two hundred pesos(P200.00), or
fractional part thereof, of the par value of such due-bill, certificates of
obligation or stock: Provided, That only one tax shall be collected on
each sale or transfer of stock or securities from one person to
another, regardless of whether or not a certificate of stock or
obligation is issued, indorsed, or delivered in pursuance of such sale
or transfer; and Provided, further, That in case of stock without par
value the amount of the documentary stamp tax herein prescribed
shall be equivalent to twenty-five percentum (25%) of the
documentary stamp tax paid upon the original issue of the said stock.
(Emphasis supplied).
Clearly, under the above provision, sales to secure the future transfer
of due-bills, certificates of obligation or certificates of stock are liable
for documentary stamp tax. No exemption from such payment of
documentary stamp tax is specified therein.
Petitioner contends that the assignment of its deposits on stock
subscription is not subject to capital gains tax because there is no
gain to speak of. In the Capital Gains Tax Return on Stock
Transaction, which petitioner filed with the Bureau of Internal
Revenue, the acquisition cost of the shares it sold, including the stock
subscription is P69,143,630.28. The transfer price to Kerry Holdings,
Ltd. is P70,332,869.92. Obviously, petitioner has a net gain in the
amount of P1,189,239.64. As the CTA aptly ruled, a tax on the profit
of sale on net capital gain is the very essence of the net capital gains
tax law. To hold otherwise will ineluctably deprive the government
of its due and unduly set free from tax liability persons who profited
from said transactions.
Verily, the Court of Appeals committed no error in affirming the CTA
Decision.
We reiterate the well-established doctrine that as a matter of
practice and principle, this Court will not set aside the conclusion
reached by an agency, like the CTA, especially if affirmed by the Court
of Appeals. By the very nature of its function, it has dedicated itself to
the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an
abuse or improvident exercise of authority on its part, which is not
present here.
WHEREFORE, we DENY the petition. The Decision of the Court of
Appeals in CA-G.R. SP No. 39501 is AFFIRMED IN TOTO. Costs against
petitioner.
G.R. No. 153793 August 29, 2006
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
JULIANE BAIER-NICKEL, as represented by Marina Q. Guzman
(Attorney-in-fact) Respondent.
YNARES-SANTIAGO, J.:
Petitioner Commissioner of Internal Revenue (CIR) appeals from the
January 18, 2002 Decision1 of the Court of Appeals in CA-G.R. SP No.
59794, which granted the tax refund of respondent Juliane Baier-
Nickel and reversed the June 28, 2000 Decision2 of the Court of Tax
Appeals (CTA) in C.T.A. Case No. 5633. Petitioner also assails the May
8, 2002 Resolution3 of the Court of Appeals denying its motion for
reconsideration.
Page 14 of 31
The facts show that respondent Juliane Baier-Nickel, a non-resident
German citizen, is the President of JUBANITEX, Inc., a domestic
corporation engaged in "[m]anufacturing, marketing on wholesale
only, buying or otherwise acquiring, holding, importing and
exporting, selling and disposing embroidered textile
products."4 Through JUBANITEXs General Manager, Marina Q.
Guzman, the corporation appointed and engaged the services of
respondent as commission agent. It was agreed that respondent will
receive 10% sales commission on all sales actually concluded and
collected through her efforts.5
In 1995, respondent received the amount of P1,707,772.64,
representing her sales commission income from which JUBANITEX
withheld the corresponding 10% withholding tax amounting to
P170,777.26, and remitted the same to the Bureau of Internal
Revenue (BIR). On October 17, 1997, respondent filed her 1995
income tax return reporting a taxable income of P1,707,772.64 and a
tax due of P170,777.26.6
On April 14, 1998, respondent filed a claim to refund the amount of
P170,777.26 alleged to have been mistakenly withheld and remitted
by JUBANITEX to the BIR. Respondent contended that her sales
commission income is not taxable in the Philippines because the
same was a compensation for her services rendered in Germany and
therefore considered as income from sources outside the Philippines.
The next day, April 15, 1998, she filed a petition for review with the
CTA contending that no action was taken by the BIR on her claim for
refund.7 On June 28, 2000, the CTA rendered a decision denying her
claim. It held that the commissions received by respondent were
actually her remuneration in the performance of her duties as
President of JUBANITEX and not as a mere sales agent thereof. The
income derived by respondent is therefore an income taxable in the
Philippines because JUBANITEX is a domestic corporation.
On petition with the Court of Appeals, the latter reversed the
Decision of the CTA, holding that respondent received the
commissions as sales agent of JUBANITEX and not as President
thereof. And since the "source" of income means the activity or
service that produce the income, the sales commission received by
respondent is not taxable in the Philippines because it arose from the
marketing activities performed by respondent in Germany. The
dispositive portion of the appellate courts Decision, reads:
WHEREFORE, premises considered, the assailed decision of the Court
of Tax Appeals dated June 28, 2000 is hereby REVERSED and SET
ASIDE and the respondent court is hereby directed to grant
petitioner a tax refund in the amount of Php 170,777.26.
SO ORDERED.8
Petitioner filed a motion for reconsideration but was denied.9 Hence,
the instant recourse.
Petitioner maintains that the income earned by respondent is taxable
in the Philippines because the source thereof is JUBANITEX, a
domestic corporation located in the City of Makati. It thus implied
that source of income means the physical source where the income
came from. It further argued that since respondent is the President of
JUBANITEX, any remuneration she received from said corporation
should be construed as payment of her overall managerial services to
the company and should not be interpreted as a compensation for a
distinct and separate service as a sales commission agent.
Respondent, on the other hand, claims that the income she received
was payment for her marketing services. She contended that income
of nonresident aliens like her is subject to tax only if the source of the
income is within the Philippines. Source, according to respondent is
the situs of the activity which produced the income. And since the
source of her income were her marketing activities in Germany, the
income she derived from said activities is not subject to Philippine
income taxation.
The issue here is whether respondents sales commission income is
taxable in the Philippines.
Pertinent portion of the National Internal Revenue Code (NIRC),
states:
SEC. 25. Tax on Nonresident Alien Individual.
(A) Nonresident Alien Engaged in Trade or Business Within the
Philippines.
(1) In General. A nonresident alien individual engaged in trade or
business in the Philippines shall be subject to an income tax in the
same manner as an individual citizen and a resident alien individual,
on taxable income received from all sources within the Philippines. A
nonresident alien individual who shall come to the Philippines and
stay therein for an aggregate period of more than one hundred eighty
(180) days during any calendar year shall be deemed a nonresident
alien doing business in the Philippines, Section 22(G) of this Code
notwithstanding.
xxxx
(B) Nonresident Alien Individual Not Engaged in Trade or Business
Within the Philippines. There shall be levied, collected and paid for
each taxable year upon the entire income received from all sources
within the Philippines by every nonresident alien individual not
engaged in trade or business within the Philippines x x x a tax equal
to twenty-five percent (25%) of such income. x x x
Pursuant to the foregoing provisions of the NIRC, non-resident aliens,
whether or not engaged in trade or business, are subject to
Philippine income taxation on their income received from all sources
within the Philippines. Thus, the keyword in determining the
taxability of non-resident aliens is the incomes "source." In
construing the meaning of "source" in Section 25 of the NIRC, resort
must be had on the origin of the provision.
The first Philippine income tax law enacted by the Philippine
Legislature was Act No. 2833,10 which took effect on January 1,
1920.11 Under Section 1 thereof, nonresident aliens are likewise
subject to tax on income "from all sources within the Philippine
Islands," thus
SECTION 1. (a) There shall be levied, assessed, collected, and paid
annually upon the entire net income received in the preceding
calendar year from all sources by every individual, a citizen or
resident of the Philippine Islands, a tax of two per centum upon such
income; and a like tax shall be levied, assessed, collected, and paid
annually upon the entire net income received in the preceding
calendar year from all sources within the Philippine Islands by every
individual, a nonresident alien, including interest on bonds, notes, or
other interest-bearing obligations of residents, corporate or
otherwise.
Act No. 2833 substantially reproduced the United States (U.S.)
Revenue Law of 1916 as amended by U.S. Revenue Law of
1917.12 Being a law of American origin, the authoritative decisions of
the official charged with enforcing it in the U.S. have peculiar
persuasive force in the Philippines.13
The Internal Revenue Code of the U.S. enumerates specific types of
income to be treated as from sources within the U.S. and specifies
when similar types of income are to be treated as from sources
outside the U.S.14 Under the said Code, compensation for labor and
personal services performed in the U.S., is generally treated as
income from U.S. sources; while compensation for said services
performed outside the U.S., is treated as income from sources outside
the U.S.15 A similar provision is found in Section 42 of our NIRC, thus:
SEC. 42. x x x
(A) Gross Income From Sources Within the Philippines. x x x
xxxx
(3) Services. Compensation for labor or personal services
performed in the Philippines;
xxxx
(C) Gross Income From Sources Without the Philippines. x x x
xxxx
(3) Compensation for labor or personal services performed without
the Philippines;
The following discussions on sourcing of income under the Internal
Revenue Code of the U.S., are instructive:
Page 15 of 31
The Supreme Court has said, in a definition much quoted but often
debated, that income may be derived from three possible sources
only: (1) capital and/or (2) labor; and/or (3) the sale of capital
assets. While the three elements of this attempt at definition need
not be accepted as all-inclusive, they serve as useful guides in any
inquiry into whether a particular item is from "sources within the
United States" and suggest an investigation into the nature and
location of the activities or property which produce the income.
If the income is from labor the place where the labor is done should
be decisive; if it is done in this country, the income should be from
"sources within the United States." If the income is from capital, the
place where the capital is employed should be decisive; if it is
employed in this country, the income should be from "sources within
the United States." If the income is from the sale of capital assets, the
place where the sale is made should be likewise decisive.
Much confusion will be avoided by regarding the term "source" in
this fundamental light. It is not a place, it is an activity or property. As
such, it has a situs or location, and if that situs or location is within
the United States the resulting income is taxable to nonresident
aliens and foreign corporations.
The intention of Congress in the 1916 and subsequent statutes was
to discard the 1909 and 1913 basis of taxing nonresident aliens and
foreign corporations and to make the test of taxability the "source,"
or situs of the activities or property which produce the income. The
result is that, on the one hand, nonresident aliens and nonresident
foreign corporations are prevented from deriving income from the
United States free from tax, and, on the other hand, there is no undue
imposition of a tax when the activities do not take place in, and the
property producing income is not employed in, this country. Thus, if
income is to be taxed, the recipient thereof must be resident within
the jurisdiction, or the property or activities out of which the income
issues or is derived must be situated within the jurisdiction so that
the source of the income may be said to have a situs in this country.
The underlying theory is that the consideration for taxation is
protection of life and property and that the income rightly to be
levied upon to defray the burdens of the United States Government is
that income which is created by activities and property protected by
this Government or obtained by persons enjoying that protection. 16
The important factor therefore which determines the source of
income of personal services is not the residence of the payor, or the
place where the contract for service is entered into, or the place of
payment, but the place where the services were actually rendered.17
In Alexander Howden & Co., Ltd. v. Collector of Internal
Revenue,18 the Court addressed the issue on the applicable source
rule relating to reinsurance premiums paid by a local insurance
company to a foreign insurance company in respect of risks located
in the Philippines. It was held therein that the undertaking of the
foreign insurance company to indemnify the local insurance
company is the activity that produced the income. Since the activity
took place in the Philippines, the income derived therefrom is taxable
in our jurisdiction. Citing Mertens, The Law of Federal Income
Taxation, the Court emphasized that the technical meaning of source
of income is the property, activity or service that produced the same.
Thus:
The source of an income is the property, activity or service that
produced the income. The reinsurance premiums remitted to
appellants by virtue of the reinsurance contracts, accordingly, had for
their source the undertaking to indemnify Commonwealth Insurance
Co. against liability. Said undertaking is the activity that produced the
reinsurance premiums, and the same took place in the Philippines. x
x x the reinsured, the liabilities insured and the risk originally
underwritten by Commonwealth Insurance Co., upon which the
reinsurance premiums and indemnity were based, were all situated
in the Philippines. x x x19
In Commissioner of Internal Revenue v. British Overseas Airways
Corporation (BOAC),20 the issue was whether BOAC, a foreign airline
company which does not maintain any flight to and from the
Philippines is liable for Philippine income taxation in respect of sales
of air tickets in the Philippines, through a general sales agent relating
to the carriage of passengers and cargo between two points both
outside the Philippines. Ruling in the affirmative, the Court applied
the case of Alexander Howden & Co., Ltd. v. Collector of Internal
Revenue, and reiterated the rule that the source of income is that
"activity" which produced the income. It was held that the "sale of
tickets" in the Philippines is the "activity" that produced the income
and therefore BOAC should pay income tax in the Philippines
because it undertook an income producing activity in the country.
Both the petitioner and respondent cited the case of Commissioner of
Internal Revenue v. British Overseas Airways Corporation in support of
their arguments, but the correct interpretation of the said case favors
the theory of respondent that it is the situs of the activity that
determines whether such income is taxable in the Philippines. The
conflict between the majority and the dissenting opinion in the said
case has nothing to do with the underlying principle of the law on
sourcing of income. In fact, both applied the case of Alexander
Howden & Co., Ltd. v. Collector of Internal Revenue. The divergence
in opinion centered on whether the sale of tickets in the Philippines
is to be construed as the "activity" that produced the income, as
viewed by the majority, or merely the physical source of the income,
as ratiocinated by Justice Florentino P. Feliciano in his dissent. The
majority, through Justice Ameurfina Melencio-Herrera, as ponente,
interpreted the sale of tickets as a business activity that gave rise to
the income of BOAC. Petitioner cannot therefore invoke said case to
support its view that source of income is the physical source of the
money earned. If such was the interpretation of the majority, the
Court would have simply stated that source of income is not the
business activity of BOAC but the place where the person or entity
disbursing the income is located or where BOAC physically received
the same. But such was not the import of the ruling of the Court. It
even explained in detail the business activity undertaken by BOAC in
the Philippines to pinpoint the taxable activity and to justify its
conclusion that BOAC is subject to Philippine income taxation. Thus
BOAC, during the periods covered by the subject assessments,
maintained a general sales agent in the Philippines. That general
sales agent, from 1959 to 1971, "was engaged in (1) selling and
issuing tickets; (2) breaking down the whole trip into series of trips
each trip in the series corresponding to a different airline
company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the basis
of their participation in the services rendered through the mode of
interline settlement as prescribed by Article VI of the Resolution No.
850 of the IATA Agreement." Those activities were in exercise of the
functions which are normally incident to, and are in progressive
pursuit of, the purpose and object of its organization as an
international air carrier. In fact, the regular sale of tickets, its main
activity, is the very lifeblood of the airline business, the generation of
sales being the paramount objective. There should be no doubt then
that BOAC was "engaged in" business in the Philippines through a
local agent during the period covered by the assessments. x x x21
xxxx
The source of an income is the property, activity or service that
produced the income. For the source of income to be considered as
coming from the Philippines, it is sufficient that the income is derived
from activity within the Philippines. In BOAC's case, the sale of
tickets in the Philippines is the activity that produces the income. The
tickets exchanged hands here and payments for fares were also made
here in Philippine currency. The situs of the source of payments is
the Philippines. The flow of wealth proceeded from, and occurred
within, Philippine territory, enjoying the protection accorded by the
Philippine government. In consideration of such protection, the flow
of wealth should share the burden of supporting the government.
A transportation ticket is not a mere piece of paper. When issued by a
common carrier, it constitutes the contract between the ticket-holder
and the carrier. It gives rise to the obligation of the purchaser of the
Page 16 of 31
ticket to pay the fare and the corresponding obligation of the carrier
to transport the passenger upon the terms and conditions set forth
thereon. The ordinary ticket issued to members of the traveling
public in general embraces within its terms all the elements to
constitute it a valid contract, binding upon the parties entering into
the relationship.22
The Court reiterates the rule that "source of income" relates to the
property, activity or service that produced the income. With respect
to rendition of labor or personal service, as in the instant case, it is
the place where the labor or service was performed that determines
the source of the income. There is therefore no merit in petitioners
interpretation which equates source of income in labor or personal
service with the residence of the payor or the place of payment of the
income.
Having disposed of the doctrine applicable in this case, we will now
determine whether respondent was able to establish the factual
circumstances showing that her income is exempt from Philippine
income taxation.
The decisive factual consideration here is not the capacity in which
respondent received the income, but the sufficiency of evidence to
prove that the services she rendered were performed in Germany.
Though not raised as an issue, the Court is clothed with authority to
address the same because the resolution thereof will settle the vital
question posed in this controversy.23
The settled rule is that tax refunds are in the nature of tax
exemptions and are to be construed strictissimi jurisagainst the
taxpayer.24 To those therefore, who claim a refund rest the burden of
proving that the transaction subjected to tax is actually exempt from
taxation.
In the instant case, the appointment letter of respondent as agent of
JUBANITEX stipulated that the activity or the service which would
entitle her to 10% commission income, are "sales actually concluded
and collected through [her] efforts."25 What she presented as
evidence to prove that she performed income producing activities
abroad, were copies of documents she allegedly faxed to JUBANITEX
and bearing instructions as to the sizes of, or designs and fabrics to
be used in the finished products as well as samples of sales orders
purportedly relayed to her by clients. However, these documents do
not show whether the instructions or orders faxed ripened into
concluded or collected sales in Germany. At the very least, these
pieces of evidence show that while respondent was in Germany, she
sent instructions/orders to JUBANITEX. As to whether these
instructions/orders gave rise to consummated sales and whether
these sales were truly concluded in Germany, respondent presented
no such evidence. Neither did she establish reasonable connection
between the orders/instructions faxed and the reported monthly
sales purported to have transpired in Germany.
The paucity of respondents evidence was even noted by Atty.
Minerva Pacheco, petitioners counsel at the hearing before the Court
of Tax Appeals. She pointed out that respondent presented no
contracts or orders signed by the customers in Germany to prove the
sale transactions therein.26 Likewise, in her Comment to the Formal
Offer of respondents evidence, she objected to the admission of the
faxed documents bearing instruction/orders marked as Exhibits
"R,"27 "V," "W", and "X,"28 for being self serving.29 The concern raised
by petitioners counsel as to the absence of substantial evidence that
would constitute proof that the sale transactions for which
respondent was paid commission actually transpired outside the
Philippines, is relevant because respondent stayed in the Philippines
for 89 days in 1995. Except for the months of July and September
1995, respondent was in the Philippines in the months of March,
May, June, and August 1995,30 the same months when she earned
commission income for services allegedly performed abroad.
Furthermore, respondent presented no evidence to prove that
JUBANITEX does not sell embroidered products in the Philippines
and that her appointment as commission agent is exclusivelyfor
Germany and other European markets.
In sum, we find that the faxed documents presented by respondent
did not constitute substantial evidence, or that relevant evidence that
a reasonable mind might accept as adequate to support the
conclusion31 that it was in Germany where she performed the income
producing service which gave rise to the reported monthly sales in
the months of March and May to September of 1995. She thus failed
to discharge the burden of proving that her income was from sources
outside the Philippines and exempt from the application of our
income tax law. Hence, the claim for tax refund should be denied.
The Court notes that in Commissioner of Internal Revenue v. Baier-
Nickel,32 a previous case for refund of income withheld from
respondents remunerations for services rendered abroad, the Court
in a Minute Resolution dated February 17, 2003,33 sustained the
ruling of the Court of Appeals that respondent is entitled to refund
the sum withheld from her sales commission income for the
year 1994. This ruling has no bearing in the instant controversy
because the subject matter thereof is the income of respondent for
the year 1994 while, the instant case deals with her income in 1995.
Otherwise, stated, res judicata has no application here. Its elements
are: (1) there must be a final judgment or order; (2) the court that
rendered the judgment must have jurisdiction over the subject
matter and the parties; (3) it must be a judgment on the merits; (4)
there must be between the two cases identity of parties, of subject
matter, and of causes of action. 34 The instant case, however, did not
satisfy the fourth requisite because there is no identity as to the
subject matter of the previous and present case of respondent which
deals with income earned and activities performed for different
taxable years.
WHEREFORE, the petition is GRANTED and the January 18, 2002
Decision and May 8, 2002 Resolution of the Court of Appeals in CA-
G.R. SP No. 59794, are REVERSED and SET ASIDE. The June 28, 2000
Decision of the Court of Tax Appeals in C.T.A. Case No. 5633, which
denied respondents claim for refund of income tax paid for the year
1995 is REINSTATED.
THE MANILA BANKING G.R. No. 168118
CORPORATION,
Petitioner, Present:
PUNO, J., Chairperson,
SANDOVAL-GUTIERREZ,
- versus - CORONA,
AZCUNA, and
GARCIA, JJ.
COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondent. August 28, 2006
SANDOVAL-GUTIERREZ, J.
Before us is a Petition for Review on Certiorari[1] assailing the
Decision[2] of the Court of Appeals dated May 11, 2005 in CA-G.R.
SP No. 77177, entitled The Manila Banking Corporation, petitioner,
versus Commissioner of Internal Revenue, respondent.
The Manila Banking Corporation, petitioner, was incorporated in
1961 and since then had engaged in the commercial banking
industry until 1987. On May 22, 1987, the Monetary Board of
the Bangko Sentral ng Pilipinas (BSP) issued Resolution No. 505,
pursuant to Section 29 of Republic Act (R.A.) No. 265 (the Central
Bank Act),[3]prohibiting petitioner from engaging in business by
reason of insolvency. Thus, petitioner ceased operations that year
and its assets and liabilities were placed under the charge of a
government-appointed receiver.
Page 17 of 31
Meanwhile, R.A. No. 8424,[4] otherwise known as the Comprehensive
Tax Reform Act of 1997, became effective on January 1, 1998. One of
the changes introduced by this law is the imposition of the minimum
corporate income tax on domestic and resident foreign
corporations. Implementing this law is Revenue Regulations No. 9-98
stating that the law allows a four (4) year period from the time the
corporations were registered with the Bureau of Internal Revenue
(BIR) during which the minimum corporate income tax should not be
imposed.
On June 23, 1999, after 12 years since petitioner stopped its business
operations, the BSP authorized it to operate as a thrift bank. The
following year, specifically on April 7, 2000, it filed with the BIR its
annual corporate income tax return and paid P33,816,164.00 for
taxable year 1999.
Prior to the filing of its income tax return, or on December 28, 1999,
petitioner sent a letter to the BIR requesting a ruling on whether it is
entitled to the four (4)-year grace period reckoned from 1999. In
other words, petitioners position is that since it resumed operations
in 1999, it will pay its minimum corporate income tax only after four
(4) years thereafter.
On February 22, 2001, the BIR issued BIR Ruling No. 007-
2001[5] stating that petitioner is entitled to the four (4)-year grace
period. Since it reopened in 1999, the minimum corporate income
tax may be imposed not earlier than 2002, i.e. the fourth taxable year
beginning 1999. The relevant portions of the BIR Ruling state:
In reply, we hereby confirm that the law and regulations allow new
corporations as well as existing corporations a leeway or adjustment
period of four years counted from the year of commencement of
business operations (reckoned at the time of registration by the
corporation with the BIR) during which the MCIT (minimum
corporate income tax) does not apply. If new corporations, as well as
existing corporations such as those registered with the BIR in 1994
or earlier, are granted a 4-year grace period, we see no reason why
TMBC, a corporation that has ceased business activities due to
involuntary closure for more than a decade and is now only starting
again to place its business back in order, may not be given the same
opportunity. It should be stressed that although TMBC had been
registered with the BIR before 1994, yet it did not have any business
from 1987 to June 1999 due to its involuntary closure. This Office is
therefore of an opinion, that for purposes of justice, equity and
consistent with the intent of the law, TMBC's reopening last July
1999 is akin to the commencement of business operations of a new
corporation, in consideration of which the law allows a 4-year period
during which MCIT is not to be applied. Hence, MCIT may be imposed
upon TMBC not earlier than 2002, i.e., the fourth taxable year
beginning 1999 which is the year when TMBC reopened.
Likewise, we find merit in your position that for having just come out
of receivership proceedings, which not only resulted in substantial
losses but actually brought about a complete cessation of all
businesses, TMBC may be qualified to ask for suspension of the
MCIT. The law provides that the Secretary of Finance, upon the
recommendation of the Commissioner, may suspend the imposition
of the MCIT on any corporation which suffers losses on account of
prolonged labor dispute, or because of force majeure, or because
of legitimate business reverses. [NIRC, Sec. 27(E)(3)] Revenue
Regulations 9-98 defines the term legitimate business reverses to
include substantial losses sustained due to fire, robbery, theft or
embezzlement, or for other economic reasons as determined by the
Secretary of Finance. Cessation of business activities as a result of
being placed under involuntary receivership may be one such
economic reason. But to be a basis for the recognition of the
suspension of MCIT, such a situation should be properly defined and
included in the regulations, which this Office intends to do. Pending
such inclusion, the same cannot yet be invoked. Nevertheless, it is the
position of this Office that the counting of the fourth taxable year,
insofar as TMBC is concerned, begins in the year 1999 when TMBC
reopened such that it will be only subject to MCIT beginning the year
2002.
Pursuant to the above Ruling, petitioner filed with the BIR a claim for
refund of the sum of P33,816,164.00 erroneously paid as minimum
corporate income tax for taxable year 1999.
Due to the inaction of the BIR on its claim, petitioner filed with the
Court of Tax Appeals (CTA) a petition for review.
On April 21, 2003, the CTA denied the petition, finding that
petitioners payment of the amount of P33,816,164.00 corresponding
to its minimum corporate income tax for taxable year 1999 is in
order. The CTA held that petitioner is not entitled to the four (4)-year
grace period because it is not a new corporation. It has continued to
be the same corporation, registered with the Securities and Exchange
Commission (SEC) and the BIR, despite being placed under
receivership, thus:
Moreover, it must be emphasized that when herein petitioner was
placed under receivership, there was merely an interruption of its
business operations. However, its corporate existence was never
affected. The general rule is that the appointment of the receiver
does not terminate the charter or work a dissolution of the
corporation, even though the receivership is a permanent one. In
other words, the corporation continues to exist as a legal entity,
clothed with its franchises (65 Am. Jur. 2d, pp. 973-974). Petitioner,
for all intents and purposes, remained to be the same corporation,
registered with the SEC and with the BIR. While it may continue to
perform its corporate functions, all its properties and assets were
under the control and custody of a receiver, and its dealings with the
public is somehow limited, if not momentarily suspended. x x x
On June 11, 2003, petitioner filed with the Court of Appeals a petition
for review. On May 11, 2005, the appellate court rendered a Decision
affirming the assailed judgment of the CTA.
Thus, this petition for review on certiorari.
The main issue for our resolution is whether petitioner is entitled to
a refund of its minimum corporate income tax paid to the BIR for
taxable year 1999.
Petitioner contends that the Court of Tax Appeals erred in holding
that it is not entitled to the four (4)-year grace period provided by
law suspending the payment of its minimum corporate income tax
since it is not a newly created corporation, having been registered as
early as 1961.
For his part, the Commissioner of Internal Revenue (CIR),
respondent, maintains that pursuant to R.A. No. 8424, petitioner
should pay its minimum corporate income tax beginning January 1,
1998 as it did not close its business operations in 1987 but merely
suspended the same. Even if placed under receivership, its corporate
existence was never affected. Thus, it falls under the category of an
existing corporation recommencing its banking business operations.
Section 27(E) of the Tax Code provides:
Sec. 27. Rates of Income Tax on Domestic Corporations. x x x
(E) Minimum Corporate Income Tax on Domestic Corporations. -
(1) Imposition of Tax. - A minimum corporate income tax of two
percent (2%) of the gross income as of the end of the taxable year, as
defined herein, is hereby imposed on a corporation taxable under
this Title, beginning on the fourth taxable year immediately following
the year in which such corporation commenced its business
operations, when the minimum corporate income tax is greater than
Page 18 of 31
the tax computed under Subsection (A) of this Section for the taxable
year.
(2) Carry Forward of Excess Minimum Tax. - Any excess of the
minimum corporate income tax over the normal income tax as
computed under Subsection (A) of this Section shall be carried
forward and credited against the normal income tax for the three (3)
immediately succeeding taxable years.
xxx
Upon the other hand, Revenue Regulation No. 9-98 specifies the
period when a corporation becomes subject to the minimum
corporate income tax, thus:
(5) Specific Rules for Determining the Period When a Corporation
Becomes Subject to the MCIT (minimum corporate income tax) -
For purposes of the MCIT, the taxable year in which business
operations commenced shall be the year in which the domestic
corporation registered with the Bureau of Internal Revenue (BIR).
Firms which were registered with BIR in 1994 and earlier years shall
be covered by the MCIT beginning January 1, 1998.
xxx
The intent of Congress relative to the minimum corporate income tax
is to grant a four (4)-year suspension of tax payment to newly
formed corporations. Corporations still starting their business
operations have to stabilize their venture in order to obtain a
stronghold in the industry. It does not come as a surprise then when
many companies reported losses in their initial years of
operations. The following are excerpts from the Senate deliberations:
Senator Romulo: x x x Let me go now to the minimum corporate
income tax, which is on page 45 of the Journal, which is to minimize
tax evasion on those corporations which have been declaring losses
year in and year out. Here, the tax rate is three-fourths, three quarter
of a percent or .75% applied to corporations that do not report any
taxable income on the fourth year of their business
operation. Therefore, those that do not report income on the first,
second and third year are not included here.
Senator Enrile: We assume that this is the period of stabilization of
new company that is starting in business.
Senator Romulo: That is right.
Thus, in order to allow new corporations to grow and develop at the
initial stages of their operations, the lawmaking body saw the need to
provide a grace period of four years from their registration before
they pay their minimum corporate income tax.
Significantly, on February 23, 1995, Congress enacted R.A. No. 7906,
otherwise known as the Thrift Banks Act of 1995. It took effect
on March 18, 1995. This law provides for the regulation of the
organization and operations of thrift banks. Under Section 3, thrift
banks include savings and mortgage banks, private development
banks, and stock savings and loans associations organized under
existing laws.
On June 15, 1999, the BIR issued Revenue Regulation No. 4-95
implementing certain provisions of the said R.A. No. 7906. Section 6
provides:
Sec. 6. Period of exemption. All thrift banks created and organized
under the provisions of the Act shall be exempt from the payment of
all taxes, fees, and charges of whatever nature and
description, except the corporate income tax imposed under Title II
of the NIRC and as specified in Section 2(A) of these regulations, for a
period of five (5) years from the date of commencement of
operations; while for thrift banks which are already existing and
operating as of the date of effectivity of the Act (March 18, 1995), the
tax exemption shall be for a period of five (5) years reckoned from
the date of such effectivity
For purposes of these regulations, date of commencement of
operations shall be understood to mean the date when the thrift
bank was registered with the Securities and Exchange Commission or
the date when the Certificate of Authority to Operate was issued by
the Monetary Board of the Bangko Sentral ng Pilipinas, whichever
comes later.
xxx
As mentioned earlier, petitioner bank was registered with the BIR in
1961. However, in 1987, it was found insolvent by the Monetary
Board of the BSP and was placed under receivership. After twelve
(12) years, or on June 23, 1999, the BSP issued to it a Certificate of
Authority to Operate as a thrift bank. Earlier, or on January 21, 1999,
it registered with the BIR. Then it filed with the SEC its Articles of
Incorporation which was approved on June 22, 1999.
It is clear from the above-quoted provision of Revenue Regulations
No. 4-95 that the date of commencement of operations of a thrift
bank is the date it was registered with the SEC or the date when the
Certificate of Authority to Operate was issued to it by the Monetary
Board of the BSP, whichever comes later.
Let it be stressed that Revenue Regulations No. 9-98, implementing
R.A. No. 8424 imposing the minimum corporate income tax on
corporations, provides that for purposes of this tax, the date when
business operations commence is the year in which the domestic
corporation registered with the BIR. However, under Revenue
Regulations No. 4-95, the date of commencement of operations
of thrift banks, such as herein petitioner, is the date the particular
thrift bank was registered with the SEC or the date when the
Certificate of Authority to Operate was issued to it by the Monetary
Board of the BSP, whichever comes later.
Clearly then, Revenue Regulations No. 4-95, not Revenue Regulations
No. 9-98, applies to petitioner, being a thrift bank. It is, therefore,
entitled to a grace period of four (4) years counted from June 23,
1999 when it was authorized by the BSP to operate as a thrift
bank. Consequently, it should only pay its minimum corporate
income tax after four (4) years from 1999.
WHEREFORE, we GRANT the petition. The assailed Decision of the
Court of Appeals in CA-G.R. SP No. 77177 is
hereby REVERSED. Respondent Commissioner of Internal Revenue is
directed to refund to petitioner bank the sum of P33,816,164.00
prematurely paid as minimum corporate income tax.
RAFAEL ARSENIO S. DIZON, in his G.R. No. 140944
capacity as the Judicial Administrator of
the Estate of the deceased JOSE P. Present:
FERNANDEZ,
Petitioner, YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
- versus - CHICO-NAZARIO,
NACHURA, and
REYES, JJ.
COURT OF TAX APPEALS
and COMMISSIONER OF INTERNAL Promulgated:
REVENUE,
Respondents. April 30, 2008
Page 19 of 31
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari[1] under Rule
45 of the Rules of Civil Procedure seeking the reversal of the Court of
Appeals (CA) Decision[2] dated April 30, 1999 which affirmed the
Decision[3] of the Court of Tax Appeals (CTA) dated June 17, 1997.[4]
However, on November 26, 1991, the Assistant Commissioner for
Collection of the BIR, Themistocles Montalban, issued Estate Tax
Assessment Notice No. FAS-E-87-91-003269,[17] demanding the
payment of P66,973,985.40 as deficiency estate tax, itemized as
follows:

The Facts Deficiency Estate Tax- 1987

Estate tax P31,868,414.48

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a 25% surcharge- late filing 7,967,103.62
petition for the probate of his will[5] was filed with Branch 51 of the late payment 7,967,103.62
Regional Trial Court (RTC) of Manila(probate court).[6] The probate Interest 19,121,048.68
court then appointed retired Supreme Court Justice Arsenio P. Dizon Compromise-non filing 25,000.00
(Justice Dizon) and petitioner, Atty. Rafael Arsenio P. Dizon non payment 25,000.00
(petitioner) as Special and Assistant Special Administrator, no notice of death 15.00
respectively, of the Estate of Jose (Estate). In a letter[7] dated October no CPA Certificate 300.00
13, 1988, Justice Dizon informed respondent Commissioner of the
Bureau of Internal Revenue (BIR) of the special proceedings for the Total amount due & collectible P66,973,985.40[18]
Estate.

Petitioner alleged that several requests for extension of the period to In his letter[19] dated December 12, 1991, Atty. Gonzales moved for
file the required estate tax return were granted by the BIR since the the reconsideration of the said estate tax assessment. However, in
assets of the estate, as well as the claims against it, had yet to be her letter[20] dated April 12, 1994, the BIR Commissioner denied the
collated, determined and identified. Thus, in a letter[8] dated March request and reiterated that the estate is liable for the payment
14, 1990, Justice Dizon authorized Atty. Jesus M. Gonzales (Atty. of P66,973,985.40 as deficiency estate tax. On May 3, 1994, petitioner
Gonzales) to sign and file on behalf of the Estate the required estate received the letter of denial. On June 2, 1994, petitioner filed a
tax return and to represent the same in securing a Certificate of Tax petition for review[21] before respondent CTA. Trial on the merits
Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a ensued.
letter[9] addressed to the BIR Regional Director for San Pablo City and
filed the estate tax return[10] with the same BIR Regional Office,
showing therein a NIL estate tax liability, computed as follows: As found by the CTA, the respective parties presented the following
pieces of evidence, to wit:
COMPUTATION OF TAX
In the hearings conducted, petitioner did not present testimonial
Conjugal Real Property (Sch. 1) P10,855,020.00 evidence but merely documentary evidence consisting of the
Conjugal Personal Property (Sch.2) 3,460,591.34 following:
Taxable Transfer (Sch. 3)
Gross Conjugal Estate 14,315,611.34 Nature of Document (sic) Exhibits
Less: Deductions (Sch. 4) 187,822,576.06
Net Conjugal Estate NIL 1. Letter dated October 13, 1988
Less: Share of Surviving Spouse NIL . from Arsenio P. Dizon addressed
Net Share in Conjugal Estate NIL to the Commissioner of Internal
xxx Revenue informing the latter of
Net Taxable Estate NIL . the special proceedings for the
Estate Tax Due NIL .[11] settlement of the estate (p. 126,
BIR records); "A"

On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo 2. Petition for the probate of the
G. Umali issued Certification Nos. 2052[12] and 2053[13] stating that will and issuance of letter of
the taxes due on the transfer of real and personal properties[14] of administration filed with the
Jose had been fully paid and said properties may be transferred to his Regional Trial Court (RTC) of
heirs. Sometime in August 1990, Justice Dizon passed away. Thus, Manila, docketed as Sp. Proc.
on October 22, 1990, the probate court appointed petitioner as the No. 87-42980 (pp. 107-108, BIR
administrator of the Estate.[15] records); "B" & "B-1

Petitioner requested the probate court's authority to sell several 3. Pleading entitled "Compliance"
properties forming part of the Estate, for the purpose of paying its filed with the probate Court
creditors, namely: Equitable Banking Corporation (P19,756,428.31), submitting the final inventory
Banque de L'Indochine et. de Suez (US$4,828,905.90 as of January of all the properties of the
31, 1988), Manila Banking Corporation (P84,199,160.46 as of deceased (p. 106, BIR records); "C"
February 28, 1989) and State Investment House, Inc.
(P6,280,006.21). Petitioner manifested that Manila Bank, a major 4. Attachment to Exh. "C" which
creditor of the Estate was not included, as it did not file a claim with is the detailed and complete
the probate court since it had security over several real estate listing of the properties of
properties forming part of the Estate.[16] the deceased (pp. 89-105, BIR rec.); "C-1" to "C-17"

Page 20 of 31
5. Claims against the estate filed
by Equitable Banking Corp. with
the probate Court in the amount
of P19,756,428.31 as of March 31,
1988, together with the Annexes
to the claim (pp. 64-88, BIR records); "D" to "D-24"
51, in Sp. Proc. No. 87-42980
appointing Atty. Rafael S.
Dizon as Judicial Administrator
of the estate of Jose P.
Fernandez; (p. 102, CTA records)
and "L"

6. Claim filed by Banque de L' 14. Certification of Payment of

Indochine et de Suez with the
probate Court in the amount of
US $4,828,905.90 as of January 31,
1988 (pp. 262-265, BIR records); "E" to "E-3"
7. Claim of the Manila Banking
Corporation (MBC) which as of
November 7, 1987 amounts to
P65,158,023.54, but recomputed
as of February 28, 1989 at a
total amount of P84,199,160.46;
together with the demand letter
from MBC's lawyer (pp. 194-197,
BIR records); "F" to "F-3"
8. Demand letter of Manila Banking
Corporation prepared by Asedillo,
Ramos and Associates Law Offices
addressed to Fernandez Hermanos,
Inc., represented by Jose P.
Fernandez, as mortgagors, in the
total amount of P240,479,693.17
as of February 28, 1989
(pp. 186-187, BIR records); "G" & "G-1"
estate taxes Nos. 2052 and
2053, both dated April 27, 1990,
issued by the Office of the
Regional Director, Revenue
Region No. 4-C, San Pablo
City, with attachments
(pp. 103-104, CTA records.). "M" to "M-5"
Respondent's [BIR] counsel presented on June 26, 1995 one witness
in the person of Alberto Enriquez, who was one of the revenue
examiners who conducted the investigation on the estate tax case of
the late Jose P. Fernandez. In the course of the direct examination of
the witness, he identified the following:
Documents/
Signatures BIR Record
1. Estate Tax Return prepared by
the BIR; p. 138
2. Signatures of Ma. Anabella
Abuloc and Alberto Enriquez,
Jr. appearing at the lower
Portion of Exh. "1"; -do-

9. Claim of State Investment 3. Memorandum for the Commissioner,

House, Inc. filed with the dated July 19, 1991, prepared by
RTC, Branch VII of Manila, revenue examiners, Ma. Anabella A.
docketed as Civil Case No. Abuloc, Alberto S. Enriquez and
86-38599 entitled "State Raymund S. Gallardo; Reviewed by
Investment House, Inc., Maximino V. Tagle pp. 143-144
Plaintiff, versus Maritime
Company Overseas, Inc. and/or 4. Signature of Alberto S.
Jose P. Fernandez, Defendants," Enriquez appearing at the
(pp. 200-215, BIR records); "H" to "H-16" lower portion on p. 2 of Exh. "2"; -do-

10. Letter dated March 14, 1990 5. Signature of Ma. Anabella A.

of Arsenio P. Dizon addressed Abuloc appearing at the
to Atty. Jesus M. Gonzales, lower portion on p. 2 of Exh. "2"; -do-
(p. 184, BIR records); "I"
6. Signature of Raymund S.
11. Letter dated April 17, 1990 Gallardo appearing at the
from J.M. Gonzales addressed Lower portion on p. 2 of Exh. "2"; -do-
to the Regional Director of
BIR in San Pablo City 7. Signature of Maximino V.
(p. 183, BIR records); "J" Tagle also appearing on
p. 2 of Exh. "2"; -do-
12. Estate Tax Return filed by
the estate of the late Jose P. 8. Summary of revenue
Fernandez through its authorized Enforcement Officers Audit
representative, Atty. Jesus M. Report, dated July 19, 1991; p. 139
Gonzales, for Arsenio P. Dizon,
with attachments (pp. 177-182, 9. Signature of Alberto
BIR records); "K" to "K-5" Enriquez at the lower
portion of Exh. "3"; -do-

13. Certified true copy of the 10. Signature of Ma. Anabella A.

Letter of Administration Abuloc at the lower
issued by RTC Manila, Branch portion of Exh. "3"; -do-
Page 21 of 31
11. Signature of Raymond S.
Gallardo at the lower WHEREFORE, viewed from all the foregoing, the Court finds the
portion of Exh. "3"; -do- petition unmeritorious and denies the same. Petitioner and/or the
heirs of Jose P. Fernandez are hereby ordered to pay to respondent
12. Signature of Maximino the amount of P37,419,493.71 plus 20% interest from the due date of
V. Tagle at the lower its payment until full payment thereof as estate tax liability of the
portion of Exh. "3"; -do- estate of Jose P. Fernandez who died on November 7, 1987.

13. Demand letter (FAS-E-87-91-00), SO ORDERED.[26]

signed by the Asst. Commissioner
for Collection for the Commissioner Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition
of Internal Revenue, demanding for review.[27]
payment of the amount of
P66,973,985.40; and p. 169 The CA's Ruling

14. Assessment Notice FAS-E-87-91-00 pp. 169-170[22]
The CTA's Ruling
On June 17, 1997, the CTA denied the said petition for review. Citing
this Court's ruling in Vda. de Oate v. Court of Appeals,[23] the CTA
opined that the aforementioned pieces of evidence introduced by the
BIR were admissible in evidence. The CTA ratiocinated:
Although the above-mentioned documents were not formally offered
as evidence for respondent, considering that respondent has been
declared to have waived the presentation thereof during the hearing
on March 20, 1996, still they could be considered as evidence for
respondent since they were properly identified during the
presentation of respondent's witness, whose testimony was duly
recorded as part of the records of this case. Besides, the documents
marked as respondent's exhibits formed part of the BIR records of
the case.[24]
Nevertheless, the CTA did not fully adopt the assessment made by
the BIR and it came up with its own computation of the deficiency
estate tax, to wit:
Conjugal Real Property P 5,062,016.00
Conjugal Personal Prop. 33,021,999.93
Gross Conjugal Estate 38,084,015.93
Less: Deductions 26,250,000.00
Net Conjugal Estate P 11,834,015.93
Less: Share of Surviving Spouse 5,917,007.96
Net Share in Conjugal Estate P 5,917,007.96
Add: Capital/Paraphernal
Properties P44,652,813.66
Less: Capital/Paraphernal
Deductions 44,652,813.66
Net Taxable Estate P 50,569,821.62
============
Estate Tax Due P 29,935,342.97
Add: 25% Surcharge for Late Filing 7,483,835.74
Add: Penalties for-No notice of death 15.00
No CPA certificate 300.00
Total deficiency estate tax P 37,419,493.71
=============
exclusive of 20% interest from due date of its payment until full
payment thereof
[Sec. 283 (b), Tax Code of 1987].[25]
Thus, the CTA disposed of the case in this wise:
On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full
the CTA's findings, the CA ruled that the petitioner's act of filing an
estate tax return with the BIR and the issuance of BIR Certification
Nos. 2052 and 2053 did not deprive the BIR Commissioner of her
authority to re-examine or re-assess the said return filed on behalf of
the Estate.[28]
On May 31, 1999, petitioner filed a Motion for
Reconsideration[29] which the CA denied in its Resolution[30] dated
November 3, 1999.
Hence, the instant Petition raising the following issues:
1. Whether or not the admission of evidence which were not
formally offered by the respondent BIR by the Court of Tax Appeals
which was subsequently upheld by the Court of Appeals is contrary
to the Rules of Court and rulings of this Honorable Court;
2. Whether or not the Court of Tax Appeals and the Court of Appeals
erred in recognizing/considering the estate tax return prepared and
filed by respondent BIR knowing that the probate court appointed
administrator of the estate of Jose P. Fernandez had previously filed
one as in fact, BIR Certification Clearance Nos. 2052 and 2053 had
been issued in the estate's favor;
3. Whether or not the Court of Tax Appeals and the Court of Appeals
erred in disallowing the valid and enforceable claims of creditors
against the estate, as lawful deductions despite clear and convincing
evidence thereof; and
4. Whether or not the Court of Tax Appeals and the Court of Appeals
erred in validating erroneous double imputation of values on the
very same estate properties in the estate tax return it prepared and
filed which effectively bloated the estate's assets.[31]
The petitioner claims that in as much as the valid claims of creditors
against the Estate are in excess of the gross estate, no estate tax was
due; that the lack of a formal offer of evidence is fatal to BIR's cause;
that the doctrine laid down in Vda. de Oate has already been
abandoned in a long line of cases in which the Court held that
evidence not formally offered is without any weight or value; that
Section 34 of Rule 132 of the Rules on Evidence requiring a formal
offer of evidence is mandatory in character; that, while BIR's witness
Alberto Enriquez (Alberto) in his testimony before the CTA identified
the pieces of evidence aforementioned such that the same were
marked, BIR's failure to formally offer said pieces of evidence and
depriving petitioner the opportunity to cross-examine Alberto,
render the same inadmissible in evidence; that
assuming arguendo that the ruling in Vda. de Oate is still applicable,
BIR failed to comply with the doctrine's requisites because the
documents herein remained simply part of the BIR records and were
Page 22 of 31
not duly incorporated in the court records; that the BIR failed to
consider that although the actual payments made to the Estate
creditors were lower than their respective claims, such were
compromise agreements reached long after the Estate's liability had
been settled by the filing of its estate tax return and the issuance of
BIR Certification Nos. 2052 and 2053; and that the reckoning date of
the claims against the Estate and the settlement of the estate tax due
should be at the time the estate tax return was filed by the judicial
administrator and the issuance of said BIR Certifications and not at
the time the aforementioned Compromise Agreements were entered
into with the Estate's creditors.[32]
On the other hand, respondent counters that the documents, being
part of the records of the case and duly identified in a duly recorded
testimony are considered evidence even if the same were not
formally offered; that the filing of the estate tax return by the Estate
and the issuance of BIR Certification Nos. 2052 and 2053 did not
deprive the BIR of its authority to examine the return and assess the
estate tax; and that the factual findings of the CTA as affirmed by the
CA may no longer be reviewed by this Court via a petition for
review.[33]
The Issues
There are two ultimate issues which require resolution in this case:
First. Whether or not the CTA and the CA gravely erred in allowing
the admission of the pieces of evidence which were not formally
offered by the BIR; and
Second. Whether or not the CA erred in affirming the CTA in the
latter's determination of the deficiency estate tax imposed against
the Estate.
The Courts Ruling
The Petition is impressed with merit.
Under Section 8 of RA 1125, the CTA is categorically described as a
court of record. As cases filed before it are litigated de novo, party-
litigants shall prove every minute aspect of their cases. Indubitably,
no evidentiary value can be given the pieces of evidence submitted
by the BIR, as the rules on documentary evidence require that these
documents must be formally offered before the CTA.[34] Pertinent is
Section 34, Rule 132 of the Revised Rules on Evidence which reads:
SEC. 34. Offer of evidence. The court shall consider no evidence which
has not been formally offered. The purpose for which the evidence is
offered must be specified.
The CTA and the CA rely solely on the case of Vda. de Oate, which
reiterated this Court's previous rulings in People v. Napat-
a[35] and People v. Mate[36] on the admission and consideration of
exhibits which were not formally offered during the trial. Although in
a long line of cases many of which were decided after Vda. de Oate,
we held that courts cannot consider evidence which has not been
formally offered,[37] nevertheless, petitioner cannot validly assume
that the doctrine laid down in Vda. de Oate has already been
abandoned. Recently, in Ramos v. Dizon,[38] this Court, applying the
said doctrine, ruled that the trial court judge therein committed no
error when he admitted and considered the respondents' exhibits in
the resolution of the case, notwithstanding the fact that the same
were not formally offered. Likewise, in Far East Bank & Trust
Company v. Commissioner of Internal Revenue,[39] the Court made
reference to said doctrine in resolving the issues therein. Indubitably,
the doctrine laid down in Vda. De Oate still subsists in this
jurisdiction. In Vda. de Oate, we held that:
From the foregoing provision, it is clear that for evidence to be
considered, the same must be formally offered. Corollarily, the mere
fact that a particular document is identified and marked as an exhibit
does not mean that it has already been offered as part of the evidence
of a party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385], we had
the occasion to make a distinction between identification of
documentary evidence and its formal offer as an exhibit. We said that
the first is done in the course of the trial and is accompanied by the
marking of the evidence as an exhibit while the second is done only
when the party rests its case and not before. A party, therefore, may
opt to formally offer his evidence if he believes that it will advance
his cause or not to do so at all. In the event he chooses to do the
latter, the trial court is not authorized by the Rules to consider the
same.
However, in People v. Napat-a [179 SCRA 403] citing People v.
Mate [103 SCRA 484], we relaxed the foregoing rule and allowed
evidence not formally offered to be admitted and considered by the
trial court provided the following requirements are present, viz.:
first, the same must have been duly identified by testimony duly
recorded and, second, the same must have been incorporated in the
records of the case.[40]
From the foregoing declaration, however, it is clear that Vda. de
Oate is merely an exception to the general rule. Being an exception, it
may be applied only when there is strict compliance with the
requisites mentioned therein; otherwise, the general rule in Section
34 of Rule 132 of the Rules of Court should prevail.
In this case, we find that these requirements have not been satisfied.
The assailed pieces of evidence were presented and marked during
the trial particularly when Alberto took the witness stand. Alberto
identified these pieces of evidence in his direct testimony.[41] He was
also subjected to cross-examination and re-cross examination by
petitioner.[42]But Albertos account and the exchanges between
Alberto and petitioner did not sufficiently describe the contents of
the said pieces of evidence presented by the BIR. In fact, petitioner
sought that the lead examiner, one Ma. Anabella A. Abuloc, be
summoned to testify, inasmuch as Alberto was incompetent to
answer questions relative to the working papers.[43] The lead
examiner never testified. Moreover, while Alberto's testimony
identifying the BIR's evidence was duly recorded, the BIR documents
themselves were not incorporated in the records of the case.
A common fact threads through Vda. de Oate and Ramos that does not
exist at all in the instant case. In the aforementioned cases, the
exhibits were marked at the pre-trial proceedings to warrant the
pronouncement that the same were duly incorporated in the records
of the case. Thus, we held in Ramos:
In this case, we find and so rule that these requirements have been
satisfied. The exhibits in question were presented and marked during
the pre-trial of the case thus, they have been incorporated into the
records. Further, Elpidio himself explained the contents of these
exhibits when he was interrogated by respondents' counsel...
xxxx
But what further defeats petitioner's cause on this issue is that
respondents' exhibits were marked and admitted during the pre-trial
stage as shown by the Pre-Trial Order quoted earlier.[44]
Page 23 of 31
While the CTA is not governed strictly by technical rules of
evidence,[45] as rules of procedure are not ends in themselves and are
primarily intended as tools in the administration of justice, the
presentation of the BIR's evidence is not a mere procedural
technicality which may be disregarded considering that it is the only
means by which the CTA may ascertain and verify the truth of BIR's
claims against the Estate.[46] The BIR's failure to formally offer these
pieces of evidence, despite CTA's directives, is fatal to its
cause.[47] Such failure is aggravated by the fact that not even a single
reason was advanced by the BIR to justify such fatal omission. This,
we take against the BIR.
Per the records of this case, the BIR was directed to present its
evidence[48] in the hearing of February 21, 1996, but BIR's counsel
failed to appear.[49] The CTA denied petitioner's motion to consider
BIR's presentation of evidence as waived, with a warning to BIR that
such presentation would be considered waived if BIR's evidence
would not be presented at the next hearing. Again, in the hearing of
March 20, 1996, BIR's counsel failed to appear.[50] Thus, in its
Resolution[51] dated March 21, 1996, the CTA considered the BIR to
have waived presentation of its evidence. In the same Resolution, the
parties were directed to file their respective memorandum.
Petitioner complied but BIR failed to do so.[52] In all of these
proceedings, BIR was duly notified. Hence, in this case, we are
constrained to apply our ruling in Heirs of Pedro Pasag v. Parocha:[53]
A formal offer is necessary because judges are mandated to rest their
findings of facts and their judgment only and strictly upon the
evidence offered by the parties at the trial. Its function is to enable
the trial judge to know the purpose or purposes for which the
proponent is presenting the evidence. On the other hand, this allows
opposing parties to examine the evidence and object to its
admissibility. Moreover, it facilitates review as the appellate court
will not be required to review documents not previously scrutinized
by the trial court.
Strict adherence to the said rule is not a trivial matter. The Court
in Constantino v. Court of Appeals ruled that the formal offer of one's
evidence is deemed waived after failing to submit it within a
considerable period of time. It explained that the court cannot admit
an offer of evidence made after a lapse of three (3) months because
to do so would "condone an inexcusable laxity if not non-compliance
with a court order which, in effect, would encourage needless delays
and derail the speedy administration of justice."
Applying the aforementioned principle in this case, we find that the
trial court had reasonable ground to consider that petitioners had
waived their right to make a formal offer of documentary or object
evidence. Despite several extensions of time to make their formal
offer, petitioners failed to comply with their commitment and
allowed almost five months to lapse before finally submitting
it. Petitioners' failure to comply with the rule on admissibility of
evidence is anathema to the efficient, effective, and expeditious
dispensation of justice.
Having disposed of the foregoing procedural issue, we proceed to
discuss the merits of the case.
Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to
the highest respect and will not be disturbed on appeal unless it is
shown that the lower courts committed gross error in the
appreciation of facts.[54] In this case, however, we find the decision of
the CA affirming that of the CTA tainted with palpable error.
It is admitted that the claims of the Estate's aforementioned creditors
have been condoned. As a mode of extinguishing an
obligation,[55] condonation or remission of debt[56] is defined as:
an act of liberality, by virtue of which, without receiving any
equivalent, the creditor renounces the enforcement of the obligation,
which is extinguished in its entirety or in that part or aspect of the
same to which the remission refers. It is an essential characteristic of
remission that it be gratuitous, that there is no equivalent received
for the benefit given; once such equivalent exists, the nature of the
act changes. It may become dation in payment when the creditor
receives a thing different from that stipulated; or novation, when the
object or principal conditions of the obligation should be changed; or
compromise, when the matter renounced is in litigation or dispute
and in exchange of some concession which the creditor receives.[57]
Verily, the second issue in this case involves the construction of
Section 79[58] of the National Internal Revenue Code[59] (Tax Code)
which provides for the allowable deductions from the gross estate of
the decedent. The specific question is whether the actual claims of
the aforementioned creditors may be fully allowed as deductions
from the gross estate of Jose despite the fact that the said claims
were reduced or condoned through compromise agreements entered
into by the Estate with its creditors.
Claims against the estate, as allowable deductions from the gross
estate under Section 79 of the Tax Code, are basically a reproduction
of the deductions allowed under Section 89 (a) (1) (C) and (E) of
Commonwealth Act No. 466 (CA 466), otherwise known as the
National Internal Revenue Code of 1939, and which was the first
codification of Philippine tax laws. Philippine tax laws were, in turn,
based on the federal tax laws of the United States. Thus, pursuant to
established rules of statutory construction, the decisions of American
courts construing the federal tax code are entitled to great weight in
the interpretation of our own tax laws.[60]
It is noteworthy that even in the United States, there is some dispute
as to whether the deductible amount for a claim against the estate is
fixed as of the decedent's death which is the general rule, or the same
should be adjusted to reflect post-death developments, such as
where a settlement between the parties results in the reduction of
the amount actually paid.[61] On one hand, the U.S. court ruled that
the appropriate deduction is the value that the claim had at the date
of the decedent's death.[62] Also, as held in Propstra v. U.S.,[63] where a
lien claimed against the estate was certain and enforceable on the
date of the decedent's death, the fact that the claimant subsequently
settled for lesser amount did not preclude the estate from deducting
the entire amount of the claim for estate tax purposes. These
pronouncements essentially confirm the general principle that post-
death developments are not material in determining the amount of
the deduction.
On the other hand, the Internal Revenue Service (Service) opines that
post-death settlement should be taken into consideration and the
claim should be allowed as a deduction only to the extent of the
amount actually paid.[64] Recognizing the dispute, the Service
released Proposed Regulations in 2007 mandating that the deduction
would be limited to the actual amount paid.[65]
In announcing its agreement with Propstra,[66] the U.S. 5th Circuit
Court of Appeals held:
We are persuaded that the Ninth Circuit's
decision...in Propstra correctly apply the Ithaca Trust date-of-death
valuation principle to enforceable claims against the estate. As we
interpret Ithaca Trust, when the Supreme Court announced the date-
of-death valuation principle, it was making a judgment about the
nature of the federal estate tax specifically, that it is a tax imposed on
the act of transferring property by will or intestacy and, because the
act on which the tax is levied occurs at a discrete time, i.e., the
instance of death, the net value of the property transferred should be
Page 24 of 31
ascertained, as nearly as possible, as of that time. This analysis
supports broad application of the date-of-death valuation rule.[67]
We express our agreement with the date-of-death valuation rule,
made pursuant to the ruling of the U.S. Supreme Court in Ithaca Trust
Co. v. United States.[68] First. There is no law, nor do we discern any
legislative intent in our tax laws, which disregards the date-of-death
valuation principle and particularly provides that post-death
developments must be considered in determining the net value of the
estate. It bears emphasis that tax burdens are not to be imposed, nor
presumed to be imposed, beyond what the statute expressly and
clearly imports, tax statutes being construed strictissimi juris against
the government.[69] Any doubt on whether a person, article or activity
is taxable is generally resolved against taxation.[70] Second. Such
construction finds relevance and consistency in our Rules on Special
Proceedings wherein the term "claims" required to be presented
against a decedent's estate is generally construed to mean debts or
demands of a pecuniary nature which could have been enforced
against the deceased in his lifetime, or liability contracted by the
deceased before his death.[71] Therefore, the claims existing at the
time of death are significant to, and should be made the basis of, the
determination of allowable deductions.
WHEREFORE, the instant Petition is GRANTED. Accordingly, the
assailed Decision dated April 30, 1999 and the Resolution dated
November 3, 1999 of the Court of Appeals in CA-G.R. S.P. No. 46947
are REVERSED and SET ASIDE. The Bureau of Internal Revenue's
deficiency estate tax assessment against the Estate of Jose P.
Fernandez is hereby NULLIFIED. No costs.
COMMISSIONER OF INTERNAL G.R. No. 175124
REVENUE,
Petitioner, Present:
CARPIO, J., Chairperson,
PERALTA,
ABAD,
PEREZ,* and
- versus - MENDOZA, JJ.
THE PHILIPPINE AMERICAN LIFE
AND GENERAL INSURANCE
COMPANY, Promulgated:
Respondent.
September 29, 2010
CARPIO, J.:
The Case
This petition for review[1] assails the 26 June 2006
Decision[2] and the 12 October 2006 Resolution[3] of the Court of
Appeals in CA-G.R. SP No. 73427. The Court of Appeals reversed the 4
June 2002 Decision[4] and 2 October 2002 Resolution[5] of the Court
of Tax Appeals (CTA) in CTA Case No. 5978.
The Facts
On 15 April 1998, The Philippine American Life and General
Insurance Company (respondent) filed with the Bureau of Internal
Revenue (BIR) its Annual Income Tax Return (ITR) for the taxable
year 1997,[6] declaring a net loss of P165,701,508.
On 16 December 1999, respondent filed with the BIR-Appellate
Division a claim for refund in the amount of P9,326,979.35,
representing a portion of its accumulated creditable withholding tax.
The amount of P9,326,979.35 allegedly represents the creditable
taxes withheld and remitted to the BIR by respondents withholding
agents from rentals and real property and dividend income during
the calendar year 1997.
When the BIR-Appellate Division failed to act on respondents claim,
respondent filed with the CTA a petition for review on 23 December
1999. Respondent sought a refund in the amount of P9,326,979.35,
which allegedly represented a portion of its overpaid and unapplied
creditable taxes for the calendar year 1997. Respondent attached its
1998 ITR[7] to its Memorandum dated 7 January 2002.
In its Decision dated 4 June 2002, the CTA denied respondents claim
for refund for lack of merit due to respondents failure to present its
1998 ITR.
Respondent filed a motion for reconsideration, which the CTA denied
in its Resolution dated 2 October 2002. In denying the motion, the
CTA stated:
But even assuming for the sake of argument that we consider the
1998 Annual ITR which petitioner [The Philippine American Life and
General Insurance Company] attached to its memorandum, the same
would likewise not render support to petitioners claim. Petitioner
could not deny the fact that the alleged 1997 overpaid tax was indeed
carried forward to the succeeding taxable year. From the face of the
1998 ITR, the amount P19,522,305 to which the 1997 tax refund
claim of P9,326,979.35 formed part is indicated as Prior years excess
credit. Considering that petitioner had a tax due of P8,025,705 for the
year 1998, petitioners allegation of non-use deserves scant
consideration. Equally noteworthy is the fact that the excess portion
of the 1997 tax credit after charging the 1998 tax due now forms part
of the 1998 total overpaid tax which petitioner opted again to carry
over to the next taxable year 1999. This further refutes its claim that
the 1997 claimed amount was unutilized.
As a recapitulation, the 1998 Income Tax Return attached to the
Memorandum for petitioner is inadmissible in evidence. It was not
presented and identified during the trial nor formally offered as
evidence. And as the amount being claimed had been charged against
its tax liabilities for 1998 and 1999, the claim for refund cannot
be granted.[8]
Respondent appealed to the Court of Appeals which rendered its
Decision dated 26 June 2006, reversing the CTA Decision and
Resolution. The dispositive portion of the Court of Appeals Decision
reads:
WHEREFORE, the petition is hereby GRANTED. The assailed Decision
and Resolution of the Court of Tax Appeals in CTA Case No. 5978
dated 4 June 2002 and 2 October 2002 respectively are REVERSED
and SET ASIDE and a new one rendered in favor of the petitioner
[The Philippine American Life and General Insurance Company]
ordering the refund of the sum ofP9,326,979.35 representing
petitioners overpayment and unapplied creditable withholding tax
for the taxable year 1997 to petitioner.
SO ORDERED.[9]
The Commissioner of Internal Revenue (petitioner) filed a motion for
reconsideration, which the Court of Appeals denied in its Resolution
dated 12 October 2006. Hence, this petition for review.
The Ruling of the Court of Appeals
The Court of Appeals ruled that the CTA is not governed strictly by
technical rules of evidence. Although respondent may have failed to
Page 25 of 31
strictly comply with the rules of procedure, the Court of Appeals held
that respondent has established its claim for refund. The Court of
Appeals stated that the 1998 ITR which respondent attached to its
Memorandum filed with the CTA showed that respondent suffered a
net loss in the amount of P165,701,508 and that respondent is
entitled to a refund of P9,326,979.35.Furthermore, the 1998 ITR
showed that the amount of P9,326,979.35 was not utilized nor used
as income tax payment for that taxable year. Thus, the Court of
Appeals concluded that respondent is entitled to a refund of the
unused creditable withholding tax.
The Issue
The sole issue in this case is whether respondent is entitled to a
refund of its excess income tax credit in the taxable year 1997 even if
it had already opted to carry-over the excess income tax credit
against the tax due in the succeeding taxable years.
The Ruling of the Court
We find the petition meritorious.
The resolution of the case involves the application of Section 76 of
the National Internal Revenue Code (NIRC) of 1997, which reads:
SEC. 76. Final Adjustment Return. Every corporation liable to tax
under Section 27 shall file a final adjustment return covering the
total taxable income for the preceding calendar or fiscal year. If the
sum of the quarterly tax payments made during the said taxable year
is not equal to the total tax due on the entire taxable income of that
year, the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid,
as the case may be.
In case the corporation is entitled to a tax credit or refund of the
excess estimated quarterly income taxes paid, the excess amount
shown on its final adjustment return may be carried over and
credited against the estimated quarterly income tax liabilities for the
taxable quarters of the succeeding taxable years. Once the option to
carry-over and apply the excess quarterly income tax against income
tax due for the taxable quarters of the succeeding taxable years has
been made, such option shall be considered irrevocable for that
taxable period and no application for cash refund or issuance of a tax
credit certificate shall be allowed therefore. (Emphasis supplied)
Petitioner maintains that Section 76 of the NIRC of 1997 clearly
states that once a corporate taxpayer opts to carry-over the excess
income tax and apply it as tax credits against the income tax due for
the succeeding taxable years, such option is irrevocable and the
corporate taxpayer can no longer apply for either a tax refund or an
issuance of a tax credit certificate.[10]
On the other hand, respondent argues that the choice of the taxpayer
to carry-over its excess tax credits to the succeeding taxable year
does not necessarily preclude the taxpayer from requesting a tax
refund when there was no actual carry-over of the tax credits due to
a net loss suffered by the taxpayer in the succeeding year.
Respondent alleges that there was no actual carry-over of its 1997
excess tax credits because its tax credits accumulated over the years
were much more than the ensuing tax liabilities.[11]
The issue presented in this case is identical to the issue already
resolved by the Court in the recent case of Asiaworld Properties
Philippine Corporation v. Commissioner of Internal
Revenue.[12] In Asiaworld, the issue was whether the exercise of the
option to carry-over the excess income tax credit, which shall be
applied against the tax due in the succeeding taxable years, prohibits
the claim for a refund in the subsequent taxable years for the unused
portion of the excess tax credits. Ruling that the exercise of the
option to carry-over precludes a claim for a refund, the Court
explained:
Section 76 of the NIRC of 1997 clearly states: Once the option to
carry-over and apply the excess quarterly income tax against income
tax due for the taxable quarters of the succeeding taxable years has
been made, such option shall be considered irrevocable for that
taxable period and no application for cash refund or issuance of a tax
credit certificate shall be allowed therefore.Section 76 expressly
states that the option shall be considered irrevocable for that taxable
period referring to the period comprising the succeeding taxable
years. Section 76 further states that no application for cash refund or
issuance of a tax credit certificate shall be allowed therefore referring
to that taxable period comprising the succeeding taxable years.
Section 76 of the NIRC of 1997 is different from the old
provision, Section 69 of the 1977 NIRC, which reads:
SEC. 69. Final Adjustment Return. Every corporation liable to tax
under Section 24 shall file a final adjustment return covering the
total net income for the preceding calendar or fiscal year. If the sum
of the quarterly tax payments made during the said taxable year is
not equal to the total tax due on the entire taxable net income of that
year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated
quarterly income taxes paid, the refundable amount shown on its
final adjustment return may be credited against the estimated
quarterly income tax liabilities for the taxable quarters of the
succeeding taxable year.
Under this old provision, the option to carry-over the excess or
overpaid income tax for a given taxable year is limited to the
immediately succeeding taxable year only. In contrast, under Section
76 of the NIRC of 1997, the application of the option to carry-over the
excess creditable tax is not limited only to the immediately following
taxable year but extends to the next succeeding taxable years. The
clear intent in the amendment under Section 76 is to make the
option, once exercised, irrevocable for the succeeding taxable years.
Once the taxpayer opts to carry-over the excess income tax against
the taxes due for the succeeding taxable years, such option is
irrevocable for the whole amount of the excess income tax, thus,
prohibiting the taxpayer from applying for a refund for that same
excess income tax in the next succeeding taxable years. The
unutilized excess tax credits will remain in the taxpayers account and
will be carried over and applied against the taxpayers income tax
liabilities in the succeeding taxable years until fully
utilized. (Emphasis supplied)
In this case, it is undisputed that respondent indicated in its 1997
ITR its option to carry-over as tax credit for the next year its tax
overpayment. In its 1998 ITR, respondent again indicated its
preference to carry-over the excess income tax credit against the tax
liabilities for the succeeding taxable years. Clearly, respondent chose
to carry-over and apply the overpaid tax against the income tax due
in the succeeding taxable years. Under Section 76 of the NIRC of
1997, once the taxpayer exercises the option to carry-over and apply
Page 26 of 31
the excess creditable tax against the income tax due for the
succeeding taxable years, such option is irrevocable.[13] Thus,
respondent can no longer claim a refund of its excess income tax
credit in the taxable year 1997 because it has already opted to carry-
over the excess income tax credit against the tax due in the
succeeding taxable years.
WHEREFORE, we GRANT the petition. We SET ASIDE the 26 June
2006 Decision and the 12 October 2006 Resolution of the Court of
Appeals in CA-G.R. SP No. 73427. We REINSTATE the 4 June 2002
Decision and 2 October 2002 Resolution of the Court of Tax Appeals
in CTA Case No. 5978.
EXXONMOBIL PETROLEUM G.R. No. 180909
AND CHEMICAL HOLDINGS,
INC. PHILIPPINE BRANCH, Present:
Petitioner,
CARPIO, J., Chairperson,
NACHURA,
PERALTA,
- versus - ABAD, and
MENDOZA, JJ.
COMMISSIONER OF
INTERNAL REVENUE, Promulgated:
Respondent.
January 19, 2011
MENDOZA, J.:
This is a petition for review on certiorari under Rule 45 filed by
petitioner Exxonmobil Petroleum and Chemical Holdings, Inc. -
Philippine Branch (Exxon) to set aside the September 7, 2007
Decision[1] of the Court of Tax Appeals En Banc (CTA-En Banc) in CTA
E.B. No. 204, and its November 27, 2007 Resolution[2] denying
petitioners motion for reconsideration.
THE FACTS
Petitioner Exxon is a foreign corporation duly organized and existing
under the laws of the State of Delaware, United States of America.[3] It
is authorized to do business in the Philippines through its Philippine
Branch, with principal office address at the 17/F The Orient
Square, Emerald Avenue, Ortigas Center, Pasig City.[4]
Exxon is engaged in the business of selling petroleum products to
domestic and international carriers.[5] In pursuit of its business,
Exxon purchased from Caltex Philippines, Inc. (Caltex) and Petron
Corporation (Petron) Jet A-1 fuel and other petroleum products, the
excise taxes on which were paid for and remitted by both Caltex and
Petron.[6] Said taxes, however, were passed on to Exxon which
ultimately shouldered the excise taxes on the fuel and petroleum
products.[7]
From November 2001 to June 2002, Exxon sold a total of 28,635,841
liters of Jet A-1 fuel to international carriers, free of excise taxes
amounting to Php105,093,536.47.[8] On various dates, it filed
administrative claims for refund with the Bureau of Internal Revenue
(BIR) amounting to Php105,093,536.47.[9]
On October 30, 2003, Exxon filed a petition for review with the
CTA[10] claiming a refund or tax credit in the amount of
Php105,093,536.47, representing the amount of excise taxes paid on
Jet A-1 fuel and other petroleum products it sold to international
carriers from November 2001 to June 2002.[11]
Exxon and the Commissioner of Internal Revenue (CIR) filed their
Joint Stipulation of Facts and Issues on June 24, 2004, presenting a
total of fourteen (14) issues for resolution.[12]
During Exxons preparation of evidence, the CIR filed a motion
dated January 28, 2005 to first resolve the issue of whether or not
Exxon was the proper party to ask for a refund.[13] Exxon filed its
opposition to the motion on March 15, 2005.
On July 27, 2005, the CTA First Division issued a
resolution[14] sustaining the CIRs position and dismissing Exxons
claim for refund. Exxon filed a motion for reconsideration, but this
was denied on July 27, 2006.[15]
Exxon filed a petition for review[16] with the CTA En Banc assailing
the July 27, 2005 Resolution of the CTA First Division which
dismissed the petition for review, and the July 27,
2006 Resolution[17] which affirmed the said ruling.
RULING OF THE COURT OF TAX APPEALS EN BANC
In its Decision dated September 7, 2007, the CTA En Banc dismissed
the petition for review and affirmed the two resolutions of the First
Division dated July 27, 2005 and July 27, 2006. Exxon filed a motion
for reconsideration, but it was denied on November 27, 2007.
Citing Sections 130 (A)(2)[18] and 204 (C) in relation to Section 135
(a)[19] of the National Internal Revenue Code of 1997 (NIRC), the
CTA ruled that in consonance with its ruling in several cases,[20] only
the taxpayer or the manufacturer of the petroleum products sold has
the legal personality to claim the refund of excise taxes paid on
petroleum products sold to international carriers.[21]
The CTA stated that Section 130(A)(2) makes the manufacturer or
producer of the petroleum products directly liable for the payment of
excise taxes.[22] Therefore, it follows that the manufacturer or
producer is the taxpayer.[23]
This determination of the identity of the taxpayer designated by law
is pivotal as the NIRC provides that it is only the taxpayer who has
the legal personality to ask for a refund in case of erroneous payment
of taxes.[24]
Further, the excise tax imposed on manufacturers upon the removal
of petroleum products by oil companies is an indirect tax, or a tax
which is primarily paid by persons who can shift the burden upon
someone else.[25] The CTA cited the cases of Philippine Acetylene Co.,
Inc. v. Commissioner of Internal Revenue,[26] Contex Corporation v.
Commissioner of Internal Revenue,[27] and Commissioner of Internal
Revenue v. Philippine Long Distance Telephone Company,[28] and
explained that with indirect taxes, although the burden of an indirect
tax can be shifted or passed on to the purchaser of the goods, the
liability for the indirect tax remains with the
manufacturer.[29] Moreover, the manufacturer has the option
whether or not to shift the burden of the tax to the purchaser. When
shifted, the amount added by the manufacturer becomes a part of the
price, therefore, the purchaser does not really pay the tax per se but
only the price of the commodity.[30]
Going by such logic, the CTA concluded that a refund of erroneously
paid or illegally received tax can only be made in favor of the
Page 27 of 31
taxpayer, pursuant to Section 204(C) of the NIRC.[31] As categorically
ruled in the Cebu Portland Cement[32] and Contex[33] cases, in the case
of indirect taxes, it is the manufacturer of the goods who is entitled to
claim any refund thereof.[34] Therefore, it follows that the indirect
taxes paid by the manufacturers or producers of the goods cannot be
refunded to the purchasers of the goods because the purchasers are
not the taxpayers.[35]
The CTA also emphasized that tax refunds are in the nature of tax
exemptions and are, thus, regarded as in derogation of sovereign
authority and construed strictissimi jurisagainst the person or entity
claiming the exemption.[36]
Finally, the CTA disregarded Exxons argument that in effectively
holding that only petroleum products purchased directly from the
manufacturers or producers are exempt from excise taxes, the First
Division of [the CTA] sanctioned a universal amendment of existing
bilateral agreements which the Philippines have with other
countries, in violation of the basic principle of pacta sunt
servanda.[37] The CTA explained that the findings of fact of the First
Division (that when Exxon sold the Jet A-1 fuel to international
carriers, it did so free of tax) negated any violation of the exemption
from excise tax of the petroleum products sold to international
carriers. Second, the right of international carriers to invoke the
exemption granted under Section 135(a) of the NIRC was neither
affected nor restricted in any way by the ruling of the First Division.
At the point of sale, the international carriers were free to invoke the
exemption from excise taxes of the petroleum products sold to them.
Lastly, the lawmaking body was presumed to have enacted a later
law with the knowledge of all other laws involving the same subject
matter.[38]
THE ISSUES
Petitioner now raises the following issues in its petition for review:
I.
WHETHER THE ASSAILED DECISION AND RESOLUTION
ERRONEOUSLY PROHIBITED PETITIONER, AS THE DISTRIBUTOR
AND VENDOR OF PETROLEUM PRODUCTS TO INTERNATIONAL
CARRIERS REGISTERED IN FOREIGN COUNTRIES WHICH HAVE
EXISTING BILATERAL AGREEMENTS WITH THE PHILIPPINES, FROM
CLAIMING A REFUND OF THE EXCISE TAXES PAID THEREON; AND
II.
WHETHER THE ASSAILED DECISIONS ERRED IN AFFIRMING THE
DISMISSAL OF PETITIONERS CLAIM FOR REFUND BASED ON
RESPONDENTS MOTION TO RESOLVE FIRST THE ISSUE OF
WHETHER OR NOT THE PETITIONER IS THE PROPER PARTY THAT
MAY ASK FOR A REFUND, SINCE SAID MOTION IS ESSENTIALLY A
MOTION TO DISMISS, WHICH SHOULD HAVE BEEN DENIED
OUTRIGHT BY THE COURT OF TAX APPEALS FOR HAVING BEEN
FILED OUT OF TIME.
RULING OF THE COURT
I. On respondents motion to resolve first the issue of whether or not the
petitioner is the proper party that may ask for a refund.
For a logical resolution of the issues, the court will tackle first the
issue of whether or not the CTA erred in granting
respondents Motion to Resolve First the Issue of Whether or Not the
Petitioner is the Proper Party that may Ask for a Refund.[39] In said
motion, the CIR prayed that the CTA First Division resolve ahead of
the other stipulated issues the sole issue of whether petitioner was
the proper party to ask for a refund.[40]
Exxon opines that the CIRs motion is essentially a motion to dismiss
filed out of time,[41] as it was filed after petitioner began presenting
evidence[42] more than a year after the filing of the Answer.[43] By
praying that Exxon be declared as not the proper party to ask for a
refund, the CIR asked for the dismissal of the petition, as the grant of
the Motion to Resolve would bring trial to a close.[44]
Moreover, Exxon states that the motion should have also complied
with the three-day notice and ten-day hearing rules provided in Rule
15 of the Rules of Court.[45] Since the CIR failed to set its motion for
any hearing before the filing of the Answer, the motion should have
been considered a mere scrap of paper.[46]
Finally, citing Maruhom v. Commission on Elections and
Dimaporo,[47] Exxon argues that a defendant who desires a
preliminary hearing on special and affirmative defenses must file a
motion to that effect at the time of filing of his answer.[48]
The CIR, on the other hand, counters that it did not file a motion to
dismiss.[49] Instead, the grounds for dismissal of the case were
pleaded as special and affirmative defenses in its Answer filed
on December 15, 2003.[50] Therefore, the issue of whether or not
petitioner is the proper party to claim for a tax refund of the excise
taxes allegedly passed on by Caltex and Petron was included as one
of the issues in the Joint Stipulation of Facts and Issues dated June 24,
2004 signed by petitioner and respondent.[51]
The CIR now argues that nothing in the Rules requires the
preliminary hearing to be held before the filing of an
Answer.[52] However, a preliminary hearing cannot be held before the
filing of the Answer precisely because any ground raised as an
affirmative defense is pleaded in the Answer itself.[53]
Further, the CIR contends that the case cited by petitioner, Maruhom
v. Comelec,[54] does not apply here. In the said case, a motion to
dismiss was filed after the filing of the answer.[55] And, the said
motion to dismiss was
found to be a frivolous motion designed to prevent the early
termination of the proceedings in the election case therein.[56] Here,
the Motion to Resolve was filed not to delay the disposition of the
case, but rather, to expedite proceedings.[57]
Rule 16, Section 6 of the 1997 Rules of Civil Procedure provides:
SEC. 6. Pleading grounds as affirmative defenses. - If no motion to
dismiss has been filed, any of the grounds for dismissal provided for
in this Rule may be pleaded as an affirmative defense in the answer,
and in the discretion of the court, a preliminary hearing may be had
thereon as if a motion to dismiss had been filed.
The dismissal of the complaint under this section shall be without
prejudice to the prosecution in the same or separate action of a
counterclaim pleaded in the answer. (Underscoring supplied.)
This case is a clear cut application of the above provision. The CIR did
not file a motion to dismiss. Thus, he pleaded the grounds for
dismissal as affirmative defenses in its Answer and thereafter prayed
for the conduct of a preliminary hearing to determine whether
petitioner was the proper party to apply for the refund of excise
taxes paid.
The determination of this question was the keystone on which the
entire case was leaning. If Exxon was not the proper party to apply
for the refund of excise taxes paid, then it would be useless to
proceed with the case. It would not make any sense to proceed to try
a case when petitioner had no standing to pursue it.
Page 28 of 31

In the case of California and Hawaiian Sugar Company v. Pioneer
Insurance and Surety Corporation,[58] the Court held that:
Considering that there was only one question, which may even be
deemed to be the very touchstone of the whole case, the trial court
had no cogent reason to deny the Motion for Preliminary
Hearing. Indeed, it committed grave abuse of discretion when it
denied a preliminary hearing on a simple issue of fact that could have
possibly settled the entire case. Verily, where a preliminary hearing
appears to suffice, there is no reason to go on to trial. One reason
why dockets of trial courts are clogged is the unreasonable refusal to
use a process or procedure, like a motion to dismiss, which is
designed to abbreviate the resolution of a case.[59] (Underscoring
supplied.)
II. On whether petitioner, as the distributor and vendor of petroleum
products to international carriers registered in foreign countries which
have existing bilateral agreements with the Philippines, can claim a
refund of the excise taxes paid thereon
This brings us now to the substantive issue of whether Exxon, as the
distributor and vendor of petroleum products to international
carriers registered in foreign countries which have existing bilateral
agreements with the Philippines, is the proper party to claim a tax
refund for the excise taxes paid by the manufacturers, Caltex and
Petron, and passed on to it as part of the purchase price.
Exxon argues that having paid the excise taxes on the petroleum
products sold to international carriers, it is a real party in interest
consistent with the rules and jurisprudence.[60]
It reasons out that the subject of the exemption is neither the seller
nor the buyer of the petroleum products, but the products
themselves, so long as they are sold to international carriers for use
in international flight operations, or to exempt entities covered by
tax treaties, conventions and other international agreements for their
use or consumption, among other conditions.[61]
Thus, as the exemption granted under Section 135 attaches to the
petroleum products and not to the seller, the exemption will apply
regardless of whether the same were sold by its manufacturer or its
distributor for two reasons.[62] First, Section 135 does not require
that to be exempt from excise tax, the products should be sold by the
manufacturer or producer.[63] Second, the legislative intent was
precisely to make Section 135 independent from Sections 129 and
130 of the NIRC,[64] stemming from the fact that unlike other
products subject to excise tax, petroleum products of this nature
have become subject to preferential tax treatment by virtue of either
specific international agreements or simply of international
reciprocity.[65]
Respondent CIR, on the other hand, posits that Exxon is not the
proper party to seek a refund of excise taxes paid on the petroleum
products.[66] In so arguing, the CIR states that excise taxes are
indirect taxes, the liability for payment of which falls on one person,
but the burden of payment may be shifted to another.[67] Here, the
sellers of the petroleum products or Jet A-1 fuel subject to excise tax
are Petron and Caltex, while Exxon was the buyer to whom the
burden of paying excise tax was shifted.[68] While the impact or
burden of taxation falls on Exxon, as the tax is shifted to it as part of
the purchase price, the persons statutorily liable to pay the tax are
Petron and Caltex.[69] As Exxon is not the taxpayer primarily liable to
pay, and not exempted from paying, excise tax, it is not the proper
party to claim for the refund of excise taxes paid.[70]
The excise tax, when passed on to the purchaser, becomes part of the
purchase price.
Excise taxes are imposed under Title VI of the NIRC. They apply to
specific goods manufactured or produced in the Philippines for
domestic sale or consumption or for any other disposition, and to
those that are imported.[71] In effect, these taxes are imposed when
two conditions concur: first, that the articles subject to tax belong to
any of the categories of goods enumerated in Title VI of the NIRC;
and second, that said articles are for domestic sale or consumption,
excluding those that are actually exported.[72]
There are, however, certain exemptions to the coverage of excise
taxes, such as petroleum products sold to international carriers and
exempt entities or agencies. Section 135 of the NIRC provides:
SEC. 135. Petroleum Products Sold to International Carriers and
Exempt Entities or Agencies. - Petroleum products sold to the
following are exempt from excise tax:
(a) International carriers of Philippine or foreign registry on their
use or consumption outside the Philippines: Provided, That the
petroleum products sold to these international carriers shall be
stored in a bonded storage tank and may be disposed of only in
accordance with the rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of the Commissioner;
(b) Exempt entities or agencies covered by tax treaties, conventions
and other international agreements for their use of consumption:
Provided, however, That the country of said foreign international
carrier or exempt entities or agencies exempts from similar taxes
petroleum products sold to Philippine carriers, entities or agencies;
and
(c) Entities which are by law exempt from direct and indirect taxes.
(Underscoring supplied.)
Thus, under Section 135, petroleum products sold to international
carriers of foreign registry on their use or consumption outside the
Philippines are exempt from excise tax, provided that the petroleum
products sold to such international carriers shall be stored in a
bonded storage tank and may be disposed of only in accordance with
the rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.[73]
The confusion here stems from the fact that excise taxes are of the
nature of indirect taxes, the liability for payment of which may fall on
a person other than he who actually bears the burden of the tax.
In Commissioner of Internal Revenue v. Philippine Long Distance
Telephone Company,[74] the Court discussed the nature of indirect
taxes as follows:
[I]ndirect taxes are those that are demanded, in the first instance,
from, or are paid by, one person to someone else. Stated elsewise,
indirect taxes are taxes wherein the liability for the payment of the
tax falls on one person but the burden thereof can be shifted or
passed on to another person, such as when the tax is imposed upon
goods before reaching the consumer who ultimately pays for it.
When the seller passes on the tax to his buyer, he, in effect, shifts the
tax burden, not the liability to pay it, to the purchaser, as part of the
goods sold or services rendered.
Accordingly, the party liable for the tax can shift the burden to
another, as part of the purchase price of the goods or services.
Although the manufacturer/seller is the one who is statutorily liable
for the tax, it is the buyer who actually shoulders or bears the burden
Page 29 of 31
of the tax, albeit not in the nature of a tax, but part of the purchase
price or the cost of the goods or services sold.
As petitioner is not the statutory taxpayer, it is not entitled to claim a
refund of excise taxes paid.
The question we are faced with now is, if the party statutorily liable
for the tax is different from the party who bears the burden of such
tax, who is entitled to claim a refund of the tax paid?
Sections 129 and 130 of the NIRC provide:
SEC. 129. Goods subject to Excise Taxes. - Excise taxes apply to goods
manufactured or produced in the Philippines for domestic sales or
consumption or for any other disposition and to things imported. The
excise tax imposed herein shall be in addition to the value-added tax
imposed under Title IV.
For purposes of this Title, excise taxes herein imposed and based on
weight or volume capacity or any other physical unit of measurement
shall be referred to as 'specific tax' and an excise tax herein imposed
and based on selling price or other specified value of the good shall
be referred to as 'ad valorem tax.'
SEC. 130. Filing of Return and Payment of Excise Tax on Domestic
Products. -
(A) Persons Liable to File a Return, Filing of Return on Removal and
Payment of Tax. -
(1) Persons Liable to File a Return. - Every person liable to pay excise
tax imposed under this Title shall file a separate return for each place
of production setting forth, among others the description and
quantity or volume of products to be removed, the applicable tax
base and the amount of tax due thereon: Provided, however, That in
the case of indigenous petroleum, natural gas or liquefied natural
gas, the excise tax shall be paid by the first buyer, purchaser or
transferee for local sale, barter or transfer, while the excise tax on
exported products shall be paid by the owner, lessee, concessionaire
or operator of the mining claim.
Should domestic products be removed from the place of production
without the payment of the tax, the owner or person having
possession thereof shall be liable for the tax due thereon.
(2) Time for Filing of Return and Payment of the Tax. - Unless
otherwise specifically allowed, the return shall be filed and the excise
tax paid by the manufacturer or producer before removal of domestic
products from place of production: Provided, That the tax excise on
locally manufactured petroleum products and indigenous
petroleum/levied under Sections 148 and 151(A)(4), respectively, of
this Title shall be paid within ten (10) days from the date of removal
of such products for the period from January 1, 1998 to June 30,
1998; within five (5) days from the date of removal of such products
for the period from July 1, 1998 to December 31, 1998; and, before
removal from the place of production of such products from January
1, 1999 and thereafter: Provided, further, That the excise tax on
nonmetallic mineral or mineral products, or quarry resources shall
be due and payable upon removal of such products from the locality
where mined or extracted, but with respect to the excise tax on
locally produced or extracted metallic mineral or mineral products,
the person liable shall file a return and pay the tax within fifteen (15)
days after the end of the calendar quarter when such products were
removed subject to such conditions as may be prescribed by rules
and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner. For this purpose, the
taxpayer shall file a bond in an amount which approximates the
amount of excise tax due on the removals for the said quarter. The
foregoing rules notwithstanding, for imported mineral or mineral
products, whether metallic or nonmetallic, the excise tax due thereon
shall be paid before their removal from customs custody.
xxx
(Italics and underscoring supplied.)
As early as the 1960s, this Court has ruled that the proper party to
question, or to seek a refund of, an indirect tax, is the statutory
taxpayer, or the person on whom the tax is imposed by law and who
paid the same, even if he shifts the burden thereof to another.[75]
In Philippine Acetylene Co., Inc. v. Commissioner of Internal
Revenue,[76] the Court held that the sales tax is imposed on the
manufacturer or producer and not on the purchaser, except probably
in a very remote and inconsequential sense.[77] Discussing the
passing on of the sales tax to the purchaser, the Court therein cited
Justice Oliver Wendell Holmes opinion in Lashs Products v. United
States[78] wherein 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 sellers obligation, but that is all. x x x 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 x x x.[79]
Proceeding from this discussion, the Court went on to state:
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. x x x 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 sellers obligation, but
that is all and the amount added because of the tax is paid to get the
goods and for nothing else.
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. Then it can no longer be contended that a sales tax is a
tax on the purchaser.[80]
The above case was cited in the later case of Cebu Portland Cement
Company v. Collector (now Commissioner) of Internal
Revenue,[81] where the Court ruled that as the sales tax is imposed
upon the manufacturer or producer and not on the purchaser, it is
petitioner and not its customers, who may ask for a refund of
whatever amount it is entitled for the percentage or sales taxes it
paid before the amendment of section 246 of the Tax Code.[82]
The Philippine Acetylene case was also cited in the first Silkair
(Singapore) Pte, Ltd. v. Commissioner of Internal Revenue[83] case,
where the Court held that the proper party to question, or to seek a
refund of, an indirect tax is the statutory taxpayer, the person on
whom the tax is imposed by law and who paid the same even if he
shifts the burden thereof to another.[84]
In the Silkair cases,[85] petitioner Silkair (Singapore) Pte, Ltd.
(Silkair), filed with the BIR a written application for the refund of
excise taxes it claimed to have paid on its purchase of jet fuel from
Petron. As the BIR did not act on the application, Silkair filed a
Petition for Review before the CTA.
In both cases, the CIR argued that the excise tax on petroleum
products is the direct liability of the manufacturer/producer, and
when added to the cost of the goods sold to the buyer, it is no longer
a tax but part of the price which the buyer has to pay to obtain the
article.
In the first Silkair case, the Court ruled:
Page 30 of 31
The proper party to question, or seek a refund of, an indirect tax is
the statutory taxpayer, the person on whom the tax is imposed by
law and who paid the same even if he shifts the burden thereof to
another. Section 130 (A) (2) of the NIRC provides that "[u]nless
otherwise specifically allowed, the return shall be filed and the excise
tax paid by the manufacturer or producer before removal of
domestic products from place of production." Thus, Petron
Corporation, not Silkair, is the statutory taxpayer which is entitled to
claim a refund based on Section 135 of the NIRC of 1997 and Article
4(2) of the Air Transport Agreement between RP and Singapore.
Even if Petron Corporation passed on to Silkair the burden of the tax,
the additional amount billed to Silkair for jet fuel is not a tax but part
of the price which Silkair had to pay as a purchaser.[86] (Emphasis
and underscoring supplied.)
Citing the above case, the second Silkair case was promulgated a few
months after the first, and stated:
The issue presented is not novel. In a similar case involving the same
parties, this Court has categorically ruled that "the proper party to
question, or seek a refund of an indirect tax is the statutory taxpayer,
the person on whom the tax is imposed by law and who paid the
same even if he shifts the burden thereof to another." The Court
added that "even if Petron Corporation passed on to Silkair the
burden of the tax, the additional amount billed to Silkair for jet fuel
is not a tax but part of the price which Silkair had to pay as a
purchaser."[87]
The CTA En Banc, thus, held that:
Exxon also argues that in effectively holding that only petroleum
products purchased directly from the manufacturers or producers
are exempt from excise taxes, the CTA En Banc sanctioned a
unilateral amendment of existing bilateral agreements which the
Philippines has with other countries, in violation of the basic
international law principle of pacta sunt servanda.[89] The Court does
not agree.
As correctly held by the CTA En Banc:
One final point, petitioners argument that in effectively holding that
only petroleum products purchased directly from the manufacturers
or producers are exempt from excise taxes, the First Division of this
Court sanctioned a unilateral amendment of existing bilateral
agreements which the Philippines have (sic) with other countries, in
violation of the basic international principle of pacta sunt servanda is
misplaced. First, the findings of fact of the First Division of this Court
that when petitioner sold the Jet A-1 fuel to international carriers, it
did so free of tax negates any violation of the exemption from excise
tax of the petroleum products sold to international carriers insofar as
this case is concerned. Secondly, the right of international carriers to
invoke the exemption granted under Section 135 (a) of the 1997
NIRC has neither been affected nor restricted in any way by the
ruling of the First Division of this Court. At the point of sale, the
international carriers are free to invoke the exemption from excise
taxes of the petroleum products sold to them. Lastly, the law-making
body is presumed to have enacted a later law with the knowledge of
all other laws involving the same subject matter.[90] (Underscoring
supplied.)

The determination of who is the taxpayer plays a pivotal role in WHEREFORE, the petition is DENIED.
claims for refund because the same law provides that it is only the
taxpayer who has the legal personality to ask for a refund in case of
erroneous payment of taxes. Section 204 (C) of the 1997 NIRC,
[provides] in part, as follows:

SEC. 204. Authority of the Commissioner to Compromise, Abate, and

Refund or Credit Taxes. The Commissioner may

xxx xxx xxx

(C) Credit or refund taxes erroneously or illegally received or

penalties imposed without authority, refund the value of internal
revenue stamps when they are returned in good condition by the
purchaser, and, in his discretion, redeem or change unused stamps
that have been rendered unfit for use and refund their value upon
proof of destruction. No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with the Commissioner a
claim for credit or refund within two (2) years after the payment of
the tax or penalty: Provided, however, That a return showing an
overpayment shall be considered as a written claim for credit or
refund.

xxx xxx xxx

(Emphasis shown supplied by the CTA.)[88]

Therefore, as Exxon is not the party statutorily liable for payment of

excise taxes under Section 130, in relation to Section 129 of the NIRC,
it is not the proper party to claim a refund of any taxes erroneously
paid.

There is no unilateral amendment of existing bilateral agreements of

the Philippines with other countries.

Page 31 of 31