1|Page

JOSE V. HERRERA and ESTER OCHANGCO HERRERA, petitioners, vs.

THE QUEZON CITY BOARD OF ASSESSMENT APPEALS, respondent.

Appeal, by petitioners Jose V. Herrera and Ester Ochangco Herrera, from a decision of
the Court of Tax Appeals affirming that of the Board of Assessment Appeals of Quezon City,
which held that certain properties of said petitioners are subject to assessment for purposes of
real estate tax.

The facts and the issue are set forth in the aforementioned decision of the Court of Tax
Appeals, from which we quote:

On July 24, 1952, the Director of the Bureau of Hospitals authorized the petitioners to
establish and operate the "St. Catherine's Hospital", located at 58 D. Tuazon, Sta. Mesa
Heights, Quezon City (Exhibit "F-1", p. 7, BIR rec.). On or about January 3, 1953, the
petitioners sent a letter to the Quezon City Assessor requesting exemption from payment of
real estate tax on the lot, building and other improvements comprising the hospital stating
that the same was established for charitable and humanitarian purposes and not for
commercial gain (Exhibit "F-2", pp. 8-9, BIR rec.). After an inspection of the premises in
question and after a careful study of the case, the exemption from real property taxes was
granted effective the years 1953, 1954 and 1955.

Subsequently, however, in a letter dated August 10, 1955 (Exhibit "E", p. 65, CTA rec.)
the Quezon City Assessor notified the petitioners that the aforesaid properties were re-
classified from exempt to "taxable" and thus assessed for real property taxes effective 1956,
enclosing therewith copies of Tax Declarations Nos. 19321 to 19322 covering the said
properties. The petitioners appealed the assessment to the Quezon City Board of Assessment
Appeals, which, in a decision dated March 31, 1956 and received by the former on May 17,
1956, affirmed the decision of the City Assessor. A motion for reconsideration thereof was
denied on March 8, 1957. From this decision, the petitioners instituted the instant
appeal.1awphîl.nèt

The building involved in this case is principally used as a hospital. It is mainly a surgical
and orthopedic hospital with emphasis on obstetrical cases, the latter constituting 90% of
the total number of cases registered therein. The hospital has thirty-two (32) beds, of which
twenty (20) are for charity-patients and twelve (12) for pay-patients. From the evidence
presented by petitioners, it is made to appear that there are two kinds of charity patients —
(a) those who come for consultation only ("out-charity patients"); and (b) those who remain
in the hospital for treatment ("lying-in-patients"). The out-charity patients are given free
consultation and prescription, although sometimes they are furnished with free medicines
which are not costly like aspirin, sulfatiazole, etc. The charity lying-in-patients are given free
medical service and medicine although the food served to the pay-patients is very much
better than that given to the former. Although no condition is imposed by the hospital on the
admission of charity lying-in-patients, they however, usually give donations to the hospital.
On the other hand, the pay-patients are required to pay for hospital services ranging from
the minimum charge of P5.00 to the maximum of P40.00 for each day of stay in the hospital.
The income realized from pay-patients is spent for the improvement of the charity wards.
2|Page

The hospital personnel is composed of three nurses, two graduate midwives, a resident
physician receiving a salary of P170.00 a month and the petitioner, Dr. Ester Ochangco
Herrera, as directress. As such directress, the latter does not receive any salary.

Petitioners also operate within the premises of the hospital the "St. Catherine's
School of Midwifery" which was granted government recognition by the Secretary of
Education on February 1, 1955 (Exhibit "F-3", p. 10, BIR rec.) This school has an
enrollment of about two hundred students. The students are charged a matriculation
fee of P300.00 for 1-½ years, plus P50.00 a month for board and lodging, which
includes transportation to the St. Mary's Hospital. The students practice in the St.
Catherine's Hospital, as well as in the St. Mary's Hospital, which is also owned by the
petitioners. A separate set of accounting books is maintained by the school for
midwifery distinct from that kept by the hospital. The petitioners alleged that the
accounts of the school are not included in Exhibits "A", "A-1", "A-2", "B", "B-1", "B-2",
"C", "C-1" and "C-2" which relate to the hospital only. However, the petitioners have
refused to submit a separate statement of accounts of the school. A brief tabulation
indicating the amount of income of the hospital for the years 1954, 1955 and 1956, and
its operational expenses, is as follows:

1954

Income Expenses Deficit

P 5,280.04 P1,303.80
P10,803.26
Charity Ward
P14,779.50
Pay Ward

P16,083.30

(Exhibits "A", "A-1" and "A-2")

1955

Income Expenses Deficit

P 6,859.32
14,038.92
Charity Ward
P17,433.30 P3,464.94
Pay Ward

P20,898.24

(Exhibits "B", "B-1" and "B-2")

1956
3|Page

Income Expenses Deficit

P 5,559.89 P 341.53
16,249.04
Charity Ward
P21,467.40
Pay Ward

P21,809.93

(Exhibits "C", "C-1" and "C-2")

Aside from the St. Catherine and St. Mary hospitals, the petitioners declared that they also
own lands and coconut plantations in Quezon Province, and other real estate in the City of
Manila consisting of apartments for rent. The petitioner, Jose V. Herrera, is an architect,
actively engaged in the practice of his profession, with office at Tuason Building, Escolta,
Manila. He was formerly Chairman, Board of Examiners for Architects and Chairman, Board of
Architects connected with the United Nations. He was also connected with the Allied
Technologists which constructed the Veterans Hospital in Quezon City.

The only issue raised, is whether or not the lot, building and other improvements occupied by
the St. Catherine Hospital are exempt from the real property tax. The resolution of this
question boils down to the corollary issue as to whether or not the said properties are used
exclusively for charitable or educational purposes. (Petitioners' brief, pp. 24-29).

The Court of Tax Appeals decided the issue in the negative, upon the ground that the St.
Catherine's Hospital "has a pay ward for ... pay-patients, who are charged for the use of the
private rooms, operating room, laboratory room, delivery room, etc., like other hospitals
operated for profit" and that "petitioners and their family occupy a portion of the building for
their residence." With respect to petitioners' claim for exemption based upon the operation of
the school of midwifery, the Court conceded that "the proposition might be proper if the
property used for the school of midwifery were separate and distinct from the hospital." It
added, however, that, "in the instant case, the portions of the building used for classrooms of
the school of midwifery have not been shown to be exclusively for school purposes"; that said
portions "rather ... have a dual use, i.e., for classroom and for hospital use, the latter not
being a purpose that renders the property tax exempt;" that part of the building and lot in
question "is used as a hospital, part as residence of the petitioners, part as garage, part as
dormitory and part as school"; and that "the portion dedicated to educational and charitable
purposes can not be identified from those destined to other uses; and the building is itself an
indivisible unit of property."

It should be noted, however, that, according to the very statement of facts made in the
decision appealed from, of the thirty-two (32) beds in the hospital, twenty (20) are for charity-
patients; that "the income realized from pay-patients is spent for improvement of the charity
wards;" and that "petitioners, Dr. Ester Ochangco Herrera, as directress" of said hospital,
"does not receive any salary," although its resident physician gets a monthly salary of
4|Page

P170.00. It is well settled, in this connection, that the admission of pay-patients does not
detract from the charitable character of a hospital, if all its funds are devoted "exclusively to
the maintenance of the institution" as a "public charity" (84 C.J.S., 617; see, also, 51 Am. Jur.
607; Cooley on Taxation, Vol. 2, p. 1562; 144 A.L.R., 1489-1492). "In other words, where
rendering charity is its primary object, and the funds derived from payments made by patients
able to pay are devoted to the benevolent purposes of the institution, the mere fact that a
profit has been made will not deprive the hospital of its benevolent character" (Prairie Du
Chien Sanitarium Co. vs. City of Prairie Du Chien, 242 Wis. 262, 7 NW [2d] 832, 144 A.L.R.
1480).

Thus, we have held that the U.S.T. Hospital was not established for profit-making purposes,
although it had 140 paying beds maintained only to partly finance the expenses of the free
wards, containing 203 beds for charity patients (U.S.T. Hospital Employees Association vs. Sto.
Tomas University Hospital, L-6988, May 24, 1954), that St. Paul's Hospital of Iloilo, a
corporation organized for "charitable educational and religious purposes" can not be
considered as engaged in business merely because its pharmacy department charges paying
patients the cost of their medicine, plus 10% thereof, to partly offset the cost of medicines
supplied free of charge to charity patients (Collector of Internal Revenue vs. St. Paul's Hospital
of Iloilo, L-12127, May 25, 1959), and that the amendment of the original articles of
incorporation of the University of Visayas to convert it from a non-stock to a stock corporation
and the increase of its assets from P9,000 to P50,000, distributed among the members of the
original non-stock corporation in terms of shares of stock, as well as the subsequent move of
its board of trustees to double the stock dividends of the corporation, in view of a gain of
P200,000.00 in property, besides good-will, which was not carried out, does not justify the
inference that the corporation has become one for business and profit, none of its profits
having inured to the benefit of any stockholder or individual (Collector of Internal Revenue vs.
University of Visayas, L-13554, February 28, 1961).

Moreover, the exemption in favor of property used exclusively for charitable or

educational purposes is "not limited to property actually indispensable" therefor (Cooley on
Taxation, Vol. 2, p. 1430), but extends to facilities which are "incidental to and reasonably
necessary for" the accomplishment of said purposes, such as, in the case of hospitals, "a
school for training nurses, a nurses' home, property use to provide housing facilities for
interns, resident doctors, superintendents, and other members of the hospital staff, and
recreational facilities for student nurses, interns and residents" (84 C.J.S., 621), such as
"athletic fields," including "a farm used for the inmates of the institution" (Cooley on Taxation,
Vol. 2, p. 1430).

Within the purview of the Constitutional exemption from taxation, the St. Catherine's
Hospital is, therefore, a charitable institution, and the fact that it admits pay-patients does not
bar it from claiming that it is devoted exclusively to benevolent purposes, it being admitted
that the income derived from pay-patients is devoted to the improvement of the charity wards,
which represent almost two-thirds (2/3) of the bed capacity of the hospital, aside from "out-
charity patients" who come only for consultation.
5|Page

Again, the existence of "St. Catherine's School of Midwifery", with an enrollment of

about 200 students, who practice partly in St. Catherine's Hospital and partly in St. Mary's
Hospital, which, likewise, belongs to petitioners herein, does not, and cannot, affect the
exemption to which St. Catherine's Hospital is entitled under our fundamental law. On the
contrary, it furnishes another ground for exemption. Seemingly, the Court of Tax Appeals was
impressed by the fact that the size of said enrollment and the matriculation fee charged from
the students of midwifery, aside from the amount they paid for board and lodging, including
transportation to St. Mary's Hospital, warrants the belief that petitioners derive a substantial
profit from the operation of the school aforementioned. Such factor is, however, immaterial to
the issue in the case at bar, for "all lands, building and improvements used exclusively for
religious, charitable or educational purposes shall be exempt from taxation," pursuant to the
Constitution, regardless of whether or not material profits are derived from the operation of
the institutions in question. In other words, Congress may, if it deems fit to do so, impose
taxes upon such "profits", but said "lands, buildings and improvements" are beyond its taxing
power.

Similarly, the garage in the building above referred to — which was obviously essential to the
operation of the school of midwifery, for the students therein enrolled practiced, not only in St.
Catherine's Hospital, but, also, in St. Mary's Hospital, and were entitled to transportation
thereto — for Mrs. Herrera received no compensation as directress of St. Catherine's Hospital
— were incidental to the operation of the latter and of said school, and, accordingly, did not
affect the charitable character of said hospital and the educational nature of said school.

WHEREFORE, the decision of the Court of Tax Appeals, as well as that of the Assessment
Board of Appeals of Quezon City, are hereby reversed and set aside, and another one entered
declaring that the lot, building and improvements constituting the St. Catherine's Hospital are
exempt from taxation under the provisions of the Constitution, without special pronouncement
as to costs. It is so ordered.

G.R. No. L-49336 August 31, 1981

THE PROVINCE OF ABRA, represented by LADISLAO ANCHETA, Provincial

Assessor, petitioner,vs.HONORABLE HAROLD M. HERNANDO, in his capacity as
Presiding Judge of Branch I, Court of First Instance Abra; THE ROMAN CATHOLIC
BISHOP OF BANGUED, INC., represented by Bishop Odilo Etspueler and Reverend
Felipe Flores, respondents.

On the face of this certiorari and mandamus petition filed by the Province of Abra, 1 it
clearly appears that the actuation of respondent Judge Harold M. Hernando of the Court of
First Instance of Abra left much to be desired. First, there was a denial of a motion to
dismiss 2 an action for declaratory relief by private respondent Roman Catholic Bishop of
Bangued desirous of being exempted from a real estate tax followed by a summary
judgment 3 granting such exemption, without even hearing the side of petitioner. In the rather
vigorous language of the Acting Provincial Fiscal, as counsel for petitioner, respondent Judge
“virtually ignored the pertinent provisions of the Rules of Court; … wantonly violated the rights
of petitioner to due process, by giving due course to the petition of private respondent for
declaratory relief, and thereafter without allowing petitioner to answer and without any
6|Page

hearing, adjudged the case; all in total disregard of basic laws of procedure and basic
provisions of due process in the constitution, thereby indicating a failure to grasp and
understand the law, which goes into the competence of the Honorable Presiding Judge.” 4

It was the submission of counsel that an action for declaratory relief would be proper only
before a breach or violation of any statute, executive order or regulation. 5 Moreover, there
being a tax assessment made by the Provincial Assessor on the properties of respondent
Roman Catholic Bishop, petitioner failed to exhaust the administrative remedies available
under Presidential Decree No. 464 before filing such court action. Further, it was pointed out
to respondent Judge that he failed to abide by the pertinent provision of such Presidential
Decree which provides as follows: “No court shall entertain any suit assailing the validity of a
tax assessed under this Code until the taxpayer, shall have paid, under protest, the tax
assessed against him nor shall any court declare any tax invalid by reason of irregularities or
informalities in the proceedings of the officers charged with the assessment or collection of
taxes, or of failure to perform their duties within this time herein specified for their
performance unless such irregularities, informalities or failure shall have impaired the
substantial rights of the taxpayer; nor shall any court declare any portion of the tax assessed
under the provisions of this Code invalid except upon condition that the taxpayer shall pay the
just amount of the tax, as determined by the court in the pending proceeding.” 6

When asked to comment, respondent Judge began with the allegation that there “is no
question that the real properties sought to be taxed by the Province of Abra are properties of
the respondent Roman Catholic Bishop of Bangued, Inc.” 7 The very next sentence assumed
the very point it asked when he categorically stated: “Likewise, there is no dispute that the
properties including their procedure are actually, directly and exclusively used by the Roman
Catholic Bishop of Bangued, Inc. for religious or charitable purposes .” 8 For him then: “The
proper remedy of the petitioner is appeal and not this special civil action.” 9 A more exhaustive
comment was submitted by private respondent Roman Catholic Bishop of Bangued, Inc. It
was, however, unable to lessen the force of the objection raised by petitioner Province of
Abra, especially the due process aspect. it is to be admitted that his opposition to the petition,
pressed with vigor, ostensibly finds a semblance of support from the authorities cited. It is
thus impressed with a scholarly aspect. It suffers, however, from the grave infirmity of stating
that only a pure question of law is presented when a claim for exemption is made.

The petition must be granted.

1. Respondent Judge would not have erred so grievously had he merely compared the
provisions of the present Constitution with that appearing in the 1935 Charter on the tax
exemption of “lands, buildings, and improvements.” There is a marked difference. Under the
1935 Constitution: “Cemeteries, churches, and parsonages or convents appurtenant thereto,
and all lands, buildings, and improvements used exclusively for religious, charitable, or
educational purposes shall be exempt from taxation.” 10 The present Constitution added
“charitable institutions, mosques, and non-profit cemeteries” and required that for the
exemption of “:lands, buildings, and improvements,” they should not only be “exclusively” but
also “actually and “directly” used for religious or charitable purposes. 11 The Constitution is
worded differently. The change should not be ignored. It must be duly taken into
7|Page

consideration. Reliance on past decisions would have sufficed were the words “actually” as
well as “directly” not added. There must be proof therefore of the actual and direct use of the
lands, buildings, and improvements for religious or charitable purposes to be exempt from
taxation. According to Commissioner of Internal Revenue v. Guerrero: 12 “From 1906,
in Catholic Church v. Hastings to 1966, in Esso Standard Eastern, Inc. v. Acting Commissioner
of Customs, it has been the constant and uniform holding that exemption from taxation is not
favored and is never presumed, so that if granted it must be strictly construed against the
taxpayer. Affirmatively put, the law frowns on exemption from taxation, hence, an exempting
provision should be construed strictissimi juris.” 13 In Manila Electric Company v. Vera, 14 a
1975 decision, such principle was reiterated, reference being made to Republic Flour Mills, Inc.
v. Commissioner of Internal Revenue; 15 Commissioner of Customs v. Philippine Acetylene Co.
& CTA; 16 and Davao Light and Power Co., Inc. v. Commissioner of Customs. 17

2. Petitioner Province of Abra is therefore fully justified in invoking the protection of procedural
due process. If there is any case where proof is necessary to demonstrate that there is
compliance with the constitutional provision that allows an exemption, this is it. Instead,
respondent Judge accepted at its face the allegation of private respondent. All that was
alleged in the petition for declaratory relief filed by private respondents, after mentioning
certain parcels of land owned by it, are that they are used “actually, directly and exclusively”
as sources of support of the parish priest and his helpers and also of private respondent
Bishop. 18 In the motion to dismiss filed on behalf of petitioner Province of Abra, the objection
was based primarily on the lack of jurisdiction, as the validity of a tax assessment may be
questioned before the Local Board of Assessment Appeals and not with a court. There was
also mention of a lack of a cause of action, but only because, in its view, declaratory relief is
not proper, as there had been breach or violation of the right of government to assess and
collect taxes on such property. It clearly appears, therefore, that in failing to accord a hearing
to petitioner Province of Abra and deciding the case immediately in favor of private
respondent, respondent Judge failed to abide by the constitutional command of procedural
due process.

WHEREFORE, the petition is GRANTED and the resolution of June 19, 1978 is SET ASIDE.
Respondent Judge, or who ever is acting on his behalf, is ordered to hear the case on the
merit. No costs.

G.R. No. L-39086 June 15, 1988

ABRA VALLEY COLLEGE, INC., represented by PEDRO V. BORGONIA, petitioner, vs.

HON. JUAN P. AQUINO, Judge, Court of First Instance, Abra; ARMIN M. CARIAGA,
Provincial Treasurer, Abra; GASPAR V. BOSQUE, Municipal Treasurer, Bangued,
Abra; HEIRS OF PATERNO MILLARE, respondents.

This is a petition for review on certiorari of the decision * of the defunct Court of First
Instance of Abra, Branch I, dated June 14, 1974, rendered in Civil Case No. 656, entitled "Abra
Valley Junior College, Inc., represented by Pedro V. Borgonia, plaintiff vs. Armin M. Cariaga as
Provincial Treasurer of Abra, Gaspar V. Bosque as Municipal Treasurer of Bangued, Abra and
Paterno Millare, defendants," the decretal portion of which reads:

IN VIEW OF ALL THE FOREGOING, the Court hereby declares:

8|Page

That the distraint seizure and sale by the Municipal Treasurer of Bangued, Abra, the
Provincial Treasurer of said province against the lot and building of the Abra Valley Junior
College, Inc., represented by Director Pedro Borgonia located at Bangued, Abra, is valid;

That since the school is not exempt from paying taxes, it should therefore pay all back taxes
in the amount of P5,140.31 and back taxes and penalties from the promulgation of this
decision;

That the amount deposited by the plaintaff him the sum of P60,000.00 before the trial, be
confiscated to apply for the payment of the back taxes and for the redemption of the
property in question, if the amount is less than P6,000.00, the remainder must be returned
to the Director of Pedro Borgonia, who represents the plaintiff herein;

That the deposit of the Municipal Treasurer in the amount of P6,000.00 also before the trial
must be returned to said Municipal Treasurer of Bangued, Abra;

And finally the case is hereby ordered dismissed with costs against the
plaintiff.SO ORDERED. (Rollo, pp. 22-23)

Petitioner, an educational corporation and institution of higher learning duly incorporated with
the Securities and Exchange Commission in 1948, filed a complaint (Annex "1" of Answer by
the respondents Heirs of Paterno Millare; Rollo, pp. 95-97) on July 10, 1972 in the court a
quo to annul and declare void the "Notice of Seizure' and the "Notice of Sale" of its lot and
building located at Bangued, Abra, for non-payment of real estate taxes and penalties
amounting to P5,140.31. Said "Notice of Seizure" of the college lot and building covered by
Original Certificate of Title No. Q-83 duly registered in the name of petitioner, plaintiff below,
on July 6, 1972, by respondents Municipal Treasurer and Provincial Treasurer, defendants
below, was issued for the satisfaction of the said taxes thereon. The "Notice of Sale" was
caused to be served upon the petitioner by the respondent treasurers on July 8, 1972 for the
sale at public auction of said college lot and building, which sale was held on the same date.
Dr. Paterno Millare, then Municipal Mayor of Bangued, Abra, offered the highest bid of
P6,000.00 which was duly accepted. The certificate of sale was correspondingly issued to him.

On August 10, 1972, the respondent Paterno Millare (now deceased) filed through counstel a
motion to dismiss the complaint.

On August 23, 1972, the respondent Provincial Treasurer and Municipal Treasurer, through
then Provincial Fiscal Loreto C. Roldan, filed their answer (Annex "2" of Answer by the
respondents Heirs of Patemo Millare; Rollo, pp. 98-100) to the complaint. This was followed by
an amended answer (Annex "3," ibid, Rollo, pp. 101-103) on August 31, 1972.

On September 1, 1972 the respondent Paterno Millare filed his answer (Annex "5," ibid; Rollo,
pp. 106-108).

On October 12, 1972, with the aforesaid sale of the school premises at public auction, the
respondent Judge, Hon. Juan P. Aquino of the Court of First Instance of Abra, Branch I,
ordered (Annex "6," ibid; Rollo, pp. 109-110) the respondents provincial and municipal
treasurers to deliver to the Clerk of Court the proceeds of the auction sale. Hence, on
December 14, 1972, petitioner, through Director Borgonia, deposited with the trial court the
sum of P6,000.00 evidenced by PNB Check No. 904369.
9|Page

On April 12, 1973, the parties entered into a stipulation of facts adopted and embodied by the
trial court in its questioned decision. Said Stipulations reads:

STIPULATION OF FACTS

COME NOW the parties, assisted by counsels, and to this Honorable Court respectfully enter
into the following agreed stipulation of facts:

1. That the personal circumstances of the parties as stated in paragraph 1 of the complaint is
admitted; but the particular person of Mr. Armin M. Cariaga is to be substituted, however, by
anyone who is actually holding the position of Provincial Treasurer of the Province of Abra;

2. That the plaintiff Abra Valley Junior College, Inc. is the owner of the lot and buildings
thereon located in Bangued, Abra under Original Certificate of Title No. 0-83;

3. That the defendant Gaspar V. Bosque, as Municipal treasurer of Bangued, Abra caused to
be served upon the Abra Valley Junior College, Inc. a Notice of Seizure on the property of
said school under Original Certificate of Title No. 0-83 for the satisfaction of real property
taxes thereon, amounting to P5,140.31; the Notice of Seizure being the one attached to the
complaint as Exhibit A;

4. That on June 8, 1972 the above properties of the Abra Valley Junior College, Inc. was sold
at public auction for the satisfaction of the unpaid real property taxes thereon and the same
was sold to defendant Paterno Millare who offered the highest bid of P6,000.00 and a
Certificate of Sale in his favor was issued by the defendant Municipal Treasurer.

5. That all other matters not particularly and specially covered by this stipulation of facts will
be the subject of evidence by the parties.

WHEREFORE, it is respectfully prayed of the Honorable Court to consider and admit this
stipulation of facts on the point agreed upon by the parties.

Bangued, Abra, April 12, 1973.

Sgd. Agripino Brillantes -Typ AGRIPINO BRILLANTES -Attorney for Plaintiff

Sgd. Loreto Roldan - Typ LORETO ROLDAN - Provincial Fiscal -Counsel for Defendants
Provincial Treasurer of Abra and the Municipal ,Treasurer of Bangued, Abra

Sgd. Demetrio V. Pre - Typ. DEMETRIO V. PRE Attorney for Defendant

Paterno Millare (Rollo, pp. 17-18)

Aside from the Stipulation of Facts, the trial court among others, found the following:
(a) that the school is recognized by the government and is offering Primary, High School and
College Courses, and has a school population of more than one thousand students all in all;
(b) that it is located right in the heart of the town of Bangued, a few meters from the plaza
and about 120 meters from the Court of First Instance building; (c) that the elementary pupils
are housed in a two-storey building across the street; (d) that the high school and college
students are housed in the main building; (e) that the Director with his family is in the second
floor of the main building; and (f) that the annual gross income of the school reaches more
than one hundred thousand pesos.
10 | P a g e

From all the foregoing, the only issue left for the Court to determine and as agreed by
the parties, is whether or not the lot and building in question are used exclusively for
educational purposes. (Rollo, p. 20)

The succeeding Provincial Fiscal, Hon. Jose A. Solomon and his Assistant, Hon.
Eustaquio Z. Montero, filed a Memorandum for the Government on March 25, 1974, and a
Supplemental Memorandum on May 7, 1974, wherein they opined "that based on the
evidence, the laws applicable, court decisions and jurisprudence, the school building and
school lot used for educational purposes of the Abra Valley College, Inc., are exempted from
the payment of taxes." (Annexes "B," "B-1" of Petition; Rollo, pp. 24-49; 44 and 49).

Nonetheless, the trial court disagreed because of the use of the second floor by the
Director of petitioner school for residential purposes. He thus ruled for the government and
rendered the assailed decision.

After having been granted by the trial court ten (10) days from August 6, 1974 within
which to perfect its appeal (Per Order dated August 6, 1974; Annex "G" of Petition; Rollo, p.
57) petitioner instead availed of the instant petition for review on certiorari with prayer for
preliminary injunction before this Court, which petition was filed on August 17, 1974 (Rollo,
p.2).

In the resolution dated August 16, 1974, this Court resolved to give DUE COURSE to
the petition (Rollo, p. 58). Respondents were required to answer said petition (Rollo, p. 74).

Petitioner raised the following assignments of error:

I. THE COURT A QUO ERRED IN SUSTAINING AS VALID THE SEIZURE AND SALE OF THE
COLLEGE LOT AND BUILDING USED FOR EDUCATIONAL PURPOSES OF THE PETITIONER.

II. THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF
THE PETITIONER ARE NOT USED EXCLUSIVELY FOR EDUCATIONAL PURPOSES MERELY
BECAUSE THE COLLEGE PRESIDENT RESIDES IN ONE ROOM OF THE COLLEGE BUILDING.

III. THE COURT A QUO ERRED IN DECLARING THAT THE COLLEGE LOT AND BUILDING OF
THE PETITIONER ARE NOT EXEMPT FROM PROPERTY TAXES AND IN ORDERING PETITIONER
TO PAY P5,140.31 AS REALTY TAXES.

IV. THE COURT A QUO ERRED IN ORDERING THE CONFISCATION OF THE P6,000.00
DEPOSIT MADE IN THE COURT BY PETITIONER AS PAYMENT OF THE P5,140.31 REALTY
TAXES. (See Brief for the Petitioner, pp. 1-2)

The main issue in this case is the proper interpretation of the phrase "used exclusively for
educational purposes."

Petitioner contends that the primary use of the lot and building for educational purposes, and
not the incidental use thereof, determines and exemption from property taxes under Section
22 (3), Article VI of the 1935 Constitution. Hence, the seizure and sale of subject college lot
and building, which are contrary thereto as well as to the provision of Commonwealth Act No.
470, otherwise known as the Assessment Law, are without legal basis and therefore void.

On the other hand, private respondents maintain that the college lot and building in question
which were subjected to seizure and sale to answer for the unpaid tax are used: (1) for the
11 | P a g e

educational purposes of the college; (2) as the permanent residence of the President and
Director thereof, Mr. Pedro V. Borgonia, and his family including the in-laws and
grandchildren; and (3) for commercial purposes because the ground floor of the college
building is being used and rented by a commercial establishment, the Northern Marketing
Corporation (See photograph attached as Annex "8" (Comment; Rollo, p. 90]).

Due to its time frame, the constitutional provision which finds application in the case at bar is
Section 22, paragraph 3, Article VI, of the then 1935 Philippine Constitution, which expressly
grants exemption from realty taxes for "Cemeteries, churches and parsonages or convents
appurtenant thereto, and all lands, buildings, and improvements used exclusively for religious,
charitable or educational purposes ...

Relative thereto, Section 54, paragraph c, Commonwealth Act No. 470 as amended by
Republic Act No. 409, otherwise known as the Assessment Law, provides:

The following are exempted from real property tax under the Assessment Law:

(c) churches and parsonages or convents appurtenant thereto, and all lands, buildings, and
improvements used exclusively for religious, charitable, scientific or educational purposes.

In this regard petitioner argues that the primary use of the school lot and building is the basic
and controlling guide, norm and standard to determine tax exemption, and not the mere
incidental use thereof.

As early as 1916 in YMCA of Manila vs. Collector of lnternal Revenue, 33 Phil. 217 [1916], this
Court ruled that while it may be true that the YMCA keeps a lodging and a boarding house and
maintains a restaurant for its members, still these do not constitute business in the ordinary
acceptance of the word, but an institution used exclusively for religious, charitable and
educational purposes, and as such, it is entitled to be exempted from taxation.

In the case of Bishop of Nueva Segovia v. Provincial Board of Ilocos Norte, 51 Phil. 352
[1972], this Court included in the exemption a vegetable garden in an adjacent lot and
another lot formerly used as a cemetery. It was clarified that the term "used exclusively"
considers incidental use also. Thus, the exemption from payment of land tax in favor of the
convent includes, not only the land actually occupied by the building but also the adjacent
garden devoted to the incidental use of the parish priest. The lot which is not used for
commercial purposes but serves solely as a sort of lodging place, also qualifies for exemption
because this constitutes incidental use in religious functions.

The phrase "exclusively used for educational purposes" was further clarified by this Court in
the cases of Herrera vs. Quezon City Board of assessment Appeals, 3 SCRA 186 [1961]
and Commissioner of Internal Revenue vs. Bishop of the Missionary District, 14 SCRA 991
[1965], thus —

Moreover, the exemption in favor of property used exclusively for charitable or educational
purposes is 'not limited to property actually indispensable' therefor (Cooley on Taxation, Vol. 2,
p. 1430), but extends to facilities which are incidental to and reasonably necessary for the
accomplishment of said purposes, such as in the case of hospitals, "a school for training
nurses, a nurses' home, property use to provide housing facilities for interns, resident doctors,
superintendents, and other members of the hospital staff, and recreational facilities for student
nurses, interns, and residents' (84 CJS 6621), such as "Athletic fields" including "a firm used
for the inmates of the institution. (Cooley on Taxation, Vol. 2, p. 1430).
12 | P a g e

The test of exemption from taxation is the use of the property for purposes mentioned in the
Constitution (Apostolic Prefect v. City Treasurer of Baguio, 71 Phil, 547 [1941]).

It must be stressed however, that while this Court allows a more liberal and non-restrictive
interpretation of the phrase "exclusively used for educational purposes" as provided for in
Article VI, Section 22, paragraph 3 of the 1935 Philippine Constitution, reasonable emphasis
has always been made that exemption extends to facilities which are incidental to and
reasonably necessary for the accomplishment of the main purposes. Otherwise stated, the use
of the school building or lot for commercial purposes is neither contemplated by law, nor by
jurisprudence. Thus, while the use of the second floor of the main building in the case at bar
for residential purposes of the Director and his family, may find justification under the concept
of incidental use, which is complimentary to the main or primary purpose—educational, the
lease of the first floor thereof to the Northern Marketing Corporation cannot by any stretch of
the imagination be considered incidental to the purpose of education.

It will be noted however that the aforementioned lease appears to have been raised for the
first time in this Court. That the matter was not taken up in the to court is really apparent in
the decision of respondent Judge. No mention thereof was made in the stipulation of facts, not
even in the description of the school building by the trial judge, both embodied in the decision
nor as one of the issues to resolve in order to determine whether or not said properly may be
exempted from payment of real estate taxes (Rollo, pp. 17-23). On the other hand, it is
noteworthy that such fact was not disputed even after it was raised in this Court.

Indeed, it is axiomatic that facts not raised in the lower court cannot be taken up for the first
time on appeal. Nonetheless, as an exception to the rule, this Court has held that although a
factual issue is not squarely raised below, still in the interest of substantial justice, this Court is
not prevented from considering a pivotal factual matter. "The Supreme Court is clothed with
ample authority to review palpable errors not assigned as such if it finds that their
consideration is necessary in arriving at a just decision." (Perez vs. Court of Appeals, 127 SCRA
645 [1984]).

Under the 1935 Constitution, the trial court correctly arrived at the conclusion that the school
building as well as the lot where it is built, should be taxed, not because the second floor of
the same is being used by the Director and his family for residential purposes, but because the
first floor thereof is being used for commercial purposes. However, since only a portion is used
for purposes of commerce, it is only fair that half of the assessed tax be returned to the school
involved.

PREMISES CONSIDERED, the decision of the Court of First Instance of Abra, Branch I, is
hereby AFFIRMED subject to the modification that half of the assessed tax be returned to the
petitioner.SO ORDERED.

LUNG CENTER OF THE PHILIPPINES, petitioner, vs. QUEZON CITY and

CONSTANTINO P. ROSAS, in his capacity as City Assessor of Quezon
City, respondents.

This is a petition for review on certiorari under Rule 45 of the Rules of Court, as amended,
of the Decision[1] dated July 17, 2000 of the Court of Appeals in CA-G.R. SP No. 57014 which
affirmed the decision of the Central Board of Assessment Appeals holding that the lot owned
by the petitioner and its hospital building constructed thereon are subject to assessment for
purposes of real property tax.
13 | P a g e

The Antecedents

The petitioner Lung Center of the Philippines is a non-stock and non-profit entity
established on January 16, 1981 by virtue of Presidential Decree No. 1823.[2] It is the
registered owner of a parcel of land, particularly described as Lot No. RP-3-B-3A-1-B-1, SWO-
04-000495, located at Quezon Avenue corner Elliptical Road, Central District, Quezon City. The
lot has an area of 121,463 square meters and is covered by Transfer Certificate of Title (TCT)
No. 261320 of the Registry of Deeds of Quezon City. Erected in the middle of the aforesaid lot
is a hospital known as the LungCenter of the Philippines. A big space at the ground floor is
being leased to private parties, for canteen and small store spaces, and to medical or
professional practitioners who use the same as their private clinics for their patients whom
they charge for their professional services. Almost one-half of the entire area on the left side
of the building along Quezon Avenue is vacant and idle, while a big portion on the right side,
at the corner of Quezon Avenue and Elliptical Road, is being leased for commercial purposes to
a private enterprise known as the Elliptical Orchids and Garden Center.

The petitioner accepts paying and non-paying patients. It also renders medical services to
out-patients, both paying and non-paying. Aside from its income from paying patients, the
petitioner receives annual subsidies from the government.

On June 7, 1993, both the land and the hospital building of the petitioner were assessed
for real property taxes in the amount of P4,554,860 by the City Assessor of Quezon
City.[3] Accordingly, Tax Declaration Nos. C-021-01226 (16-2518) and C-021-01231 (15-2518-
A) were issued for the land and the hospital building, respectively.[4] On August 25, 1993, the
petitioner filed a Claim for Exemption[5] from real property taxes with the City Assessor,
predicated on its claim that it is a charitable institution. The petitioners request was denied,
and a petition was, thereafter, filed before the Local Board of Assessment Appeals of Quezon
City (QC-LBAA, for brevity) for the reversal of the resolution of the City Assessor. The
petitioner alleged that under Section 28, paragraph 3 of the 1987 Constitution, the property is
exempt from real property taxes. It averred that a minimum of 60% of its hospital beds are
exclusively used for charity patients and that the major thrust of its hospital operation is to
serve charity patients. The petitioner contends that it is a charitable institution and, as such, is
exempt from real property taxes. The QC-LBAA rendered judgment dismissing the petition and
holding the petitioner liable for real property taxes.[6]

The QC-LBAAs decision was, likewise, affirmed on appeal by the Central Board of
Assessment Appeals of Quezon City (CBAA, for brevity)[7] which ruled that the petitioner was
not a charitable institution and that its real properties were not actually, directly and
exclusively used for charitable purposes; hence, it was not entitled to real property tax
exemption under the constitution and the law. The petitioner sought relief from the Court of
Appeals, which rendered judgment affirming the decision of the CBAA.[8]

Undaunted, the petitioner filed its petition in this Court contending that:

A. THE COURT A QUO ERRED IN DECLARING PETITIONER AS NOT ENTITLED TO

REALTY TAX EXEMPTIONS ON THE GROUND THAT ITS LAND, BUILDING AND
14 | P a g e

IMPROVEMENTS, SUBJECT OF ASSESSMENT, ARE NOT ACTUALLY, DIRECTLY AND

EXCLUSIVELY DEVOTED FOR CHARITABLE PURPOSES.

B. WHILE PETITIONER IS NOT DECLARED AS REAL PROPERTY TAX EXEMPT UNDER

ITS CHARTER, PD 1823, SAID EXEMPTION MAY NEVERTHELESS BE EXTENDED
UPON PROPER APPLICATION.

The petitioner avers that it is a charitable institution within the context of Section 28(3),
Article VI of the 1987 Constitution. It asserts that its character as a charitable institution is not
altered by the fact that it admits paying patients and renders medical services to them, leases
portions of the land to private parties, and rents out portions of the hospital to private medical
practitioners from which it derives income to be used for operational expenses. The petitioner
points out that for the years 1995 to 1999, 100% of its out-patients were charity patients and
of the hospitals 282-bed capacity, 60% thereof, or 170 beds, is allotted to charity patients. It
asserts that the fact that it receives subsidies from the government attests to its character as a
charitable institution. It contends that the exclusivity required in the Constitution does not
necessarily mean solely. Hence, even if a portion of its real estate is leased out to private
individuals from whom it derives income, it does not lose its character as a charitable
institution, and its exemption from the payment of real estate taxes on its real property. The
petitioner cited our ruling in Herrera v. QC-BAA[9] to bolster its pose. The petitioner further
contends that even if P.D. No. 1823 does not exempt it from the payment of real estate taxes,
it is not precluded from seeking tax exemption under the 1987 Constitution.

In their comment on the petition, the respondents aver that the petitioner is not a
charitable entity. The petitioners real property is not exempt from the payment of real estate
taxes under P.D. No. 1823 and even under the 1987 Constitution because it failed to prove
that it is a charitable institution and that the said property is actually, directly and exclusively
used for charitable purposes. The respondents noted that in a newspaper report, it appears
that graft charges were filed with the Sandiganbayan against the director of the petitioner, its
administrative officer, and Zenaida Rivera, the proprietress of the Elliptical Orchids and Garden
Center, for entering into a lease contract over 7,663.13 square meters of the property in 1990
for only P20,000 a month, when the monthly rental should be P357,000 a month as
determined by the Commission on Audit; and that instead of complying with the directive of
the COA for the cancellation of the contract for being grossly prejudicial to the government,
the petitioner renewed the same on March 13, 1995 for a monthly rental of
only P24,000. They assert that the petitioner uses the subsidies granted by the government
for charity patients and uses the rest of its income from the property for the benefit of paying
patients, among other purposes. They aver that the petitioner failed to adduce substantial
evidence that 100% of its out-patients and 170 beds in the hospital are reserved for indigent
patients. The respondents further assert, thus:

13. That the claims/allegations of the Petitioner LCP do not speak well of its record of
service. That before a patient is admitted for treatment in the Center, first impression is that it
is pay-patient and required to pay a certain amount as deposit. That even if a patient is living
below the poverty line, he is charged with high hospital bills. And, without these bills being
first settled, the poor patient cannot be allowed to leave the hospital or be discharged without
15 | P a g e

first paying the hospital bills or issue a promissory note guaranteed and indorsed by an
influential agency or person known only to the Center; that even the remains of deceased
poor patients suffered the same fate. Moreover, before a patient is admitted for treatment as
free or charity patient, one must undergo a series of interviews and must submit all the
requirements needed by the Center, usually accompanied by endorsement by an influential
agency or person known only to the Center. These facts were heard and admitted by the
Petitioner LCP during the hearings before the Honorable QC-BAA and Honorable CBAA. These
are the reasons of indigent patients, instead of seeking treatment with the Center, they prefer
to be treated at the Quezon Institute. Can such practice by the Center be called charitable?[10]

The Issues

The issues for resolution are the following: (a) whether the petitioner is a charitable
institution within the context of Presidential Decree No. 1823 and the 1973 and 1987
Constitutions and Section 234(b) of Republic Act No. 7160; and (b) whether the real properties
of the petitioner are exempt from real property taxes.

The Courts Ruling

The petition is partially granted.

On the first issue, we hold that the petitioner is a charitable institution within the context
of the 1973 and 1987 Constitutions. To determine whether an enterprise is a charitable
institution/entity or not, the elements which should be considered include the statute creating
the enterprise, its corporate purposes, its constitution and by-laws, the methods of
administration, the nature of the actual work performed, the character of the services
rendered, the indefiniteness of the beneficiaries, and the use and occupation of the
properties.[11]

In the legal sense, a charity may be fully defined as a gift, to be applied consistently with
existing laws, for the benefit of an indefinite number of persons, either by bringing their minds
and hearts under the influence of education or religion, by assisting them to establish
themselves in life or otherwise lessening the burden of government.[12] It may be applied to
almost anything that tend to promote the well-doing and well-being of social man. It embraces
the improvement and promotion of the happiness of man.[13] The word charitable is not
restricted to relief of the poor or sick.[14] The test of a charity and a charitable organization are
in law the same. The test whether an enterprise is charitable or not is whether it exists to
carry out a purpose reorganized in law as charitable or whether it is maintained for gain,
profit, or private advantage.

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which,
subject to the provisions of the decree, is to be administered by the Office of the President of
the Philippineswith the Ministry of Health and the Ministry of Human Settlements. It was
organized for the welfare and benefit of the Filipino people principally to help combat the high
incidence of lung and pulmonary diseases in the Philippines. The raison detre for the creation
of the petitioner is stated in the decree, viz:
16 | P a g e

Whereas, for decades, respiratory diseases have been a priority concern, having been the
leading cause of illness and death in the Philippines, comprising more than 45% of the total
annual deaths from all causes, thus, exacting a tremendous toll on human resources, which
ailments are likely to increase and degenerate into serious lung diseases on account of
unabated pollution, industrialization and unchecked cigarette smoking in the country;

Whereas, the more common lung diseases are, to a great extent, preventable, and curable
with early and adequate medical care, immunization and through prompt and intensive
prevention and health education programs;

Whereas, there is an urgent need to consolidate and reinforce existing programs, strategies
and efforts at preventing, treating and rehabilitating people affected by lung diseases, and to
undertake research and training on the cure and prevention of lung diseases, through a Lung
Center which will house and nurture the above and related activities and provide tertiary-level
care for more difficult and problematical cases;

Whereas, to achieve this purpose, the Government intends to provide material and financial
support towards the establishment and maintenance of a Lung Center for the welfare and
benefit of the Filipino people.[15]

The purposes for which the petitioner was created are spelled out in its Articles of
Incorporation, thus:

SECOND: That the purposes for which such corporation is formed are as follows:

1. To construct, establish, equip, maintain, administer and conduct an integrated medical

institution which shall specialize in the treatment, care, rehabilitation and/or relief of lung and
allied diseases in line with the concern of the government to assist and provide material and
financial support in the establishment and maintenance of a lung center primarily to benefit
the people of the Philippines and in pursuance of the policy of the State to secure the well-
being of the people by providing them specialized health and medical services and by
minimizing the incidence of lung diseases in the country and elsewhere.

2. To promote the noble undertaking of scientific research related to the prevention of lung or
pulmonary ailments and the care of lung patients, including the holding of a series of relevant
congresses, conventions, seminars and conferences;

3. To stimulate and, whenever possible, underwrite scientific researches on the biological,

demographic, social, economic, eugenic and physiological aspects of lung or pulmonary
diseases and their control; and to collect and publish the findings of such research for public
consumption;

4. To facilitate the dissemination of ideas and public acceptance of information on lung

consciousness or awareness, and the development of fact-finding, information and reporting
facilities for and in aid of the general purposes or objects aforesaid, especially in human lung
requirements, general health and physical fitness, and other relevant or related fields;
17 | P a g e

5. To encourage the training of physicians, nurses, health officers, social workers and medical
and technical personnel in the practical and scientific implementation of services to lung
patients;

6. To assist universities and research institutions in their studies about lung diseases, to
encourage advanced training in matters of the lung and related fields and to support
educational programs of value to general health;

7. To encourage the formation of other organizations on the national, provincial and/or city
and local levels; and to coordinate their various efforts and activities for the purpose of
achieving a more effective programmatic approach on the common problems relative to the
objectives enumerated herein;

8. To seek and obtain assistance in any form from both international and local foundations and
organizations; and to administer grants and funds that may be given to the organization;

9. To extend, whenever possible and expedient, medical services to the public and, in general,
to promote and protect the health of the masses of our people, which has long been
recognized as an economic asset and a social blessing;

10. To help prevent, relieve and alleviate the lung or pulmonary afflictions and maladies of the
people in any and all walks of life, including those who are poor and needy, all without regard
to or discrimination, because of race, creed, color or political belief of the persons helped; and
to enable them to obtain treatment when such disorders occur;

11. To participate, as circumstances may warrant, in any activity designed and carried on to
promote the general health of the community;

12. To acquire and/or borrow funds and to own all funds or equipment, educational materials
and supplies by purchase, donation, or otherwise and to dispose of and distribute the same in
such manner, and, on such basis as the Center shall, from time to time, deem proper and
best, under the particular circumstances, to serve its general and non-profit purposes and
objectives;

13. To buy, purchase, acquire, own, lease, hold, sell, exchange, transfer and dispose of
properties, whether real or personal, for purposes herein mentioned; and

14. To do everything necessary, proper, advisable or convenient for the accomplishment of

any of the powers herein set forth and to do every other act and thing incidental thereto or
connected therewith.[16]

Hence, the medical services of the petitioner are to be rendered to the public in general in
any and all walks of life including those who are poor and the needy without
discrimination. After all, any person, the rich as well as the poor, may fall sick or be injured or
wounded and become a subject of charity.[17]

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether out-
18 | P a g e

patient, or confined in the hospital, or receives subsidies from the government, so long as the
money received is devoted or used altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the persons managing or operating the
institution.[18] In Congregational Sunday School, etc. v. Board of Review,[19] the State Supreme
Court of Illinois held, thus:

[A]n institution does not lose its charitable character, and consequent exemption from
taxation, by reason of the fact that those recipients of its benefits who are able to pay are
required to do so, where no profit is made by the institution and the amounts so received are
applied in furthering its charitable purposes, and those benefits are refused to none on
account of inability to pay therefor. The fundamental ground upon which all exemptions in
favor of charitable institutions are based is the benefit conferred upon the public by them, and
a consequent relief, to some extent, of the burden upon the state to care for and advance the
interests of its citizens.[20]

As aptly stated by the State Supreme Court of South Dakota in Lutheran Hospital
Association of South Dakota v. Baker:[21]

[T]he fact that paying patients are taken, the profits derived from attendance upon these
patients being exclusively devoted to the maintenance of the charity, seems rather to enhance
the usefulness of the institution to the poor; for it is a matter of common observation amongst
those who have gone about at all amongst the suffering classes, that the deserving poor can
with difficulty be persuaded to enter an asylum of any kind confined to the reception of
objects of charity; and that their honest pride is much less wounded by being placed in an
institution in which paying patients are also received. The fact of receiving money from some
of the patients does not, we think, at all impair the character of the charity, so long as the
money thus received is devoted altogether to the charitable object which the institution is
intended to further.[22]

The money received by the petitioner becomes a part of the trust fund and must be
devoted to public trust purposes and cannot be diverted to private profit or benefit.[23]

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does
not lose its character as a charitable institution simply because the gift or donation is in the
form of subsidies granted by the government. As held by the State Supreme Court of Utah
in Yorgason v. County Board of Equalization of Salt Lake County:[24]

Second, the government subsidy payments are provided to the project. Thus, those payments
are like a gift or donation of any other kind except they come from the government. In
both Intermountain Health Care and the present case, the crux is the presence or absence of
material reciprocity. It is entirely irrelevant to this analysis that the government, rather than a
private benefactor, chose to make up the deficit resulting from the exchange between St.
Marks Tower and the tenants by making a contribution to the landlord, just as it would have
been irrelevant in Intermountain Health Care if the patients income supplements had come
from private individuals rather than the government.
19 | P a g e

Therefore, the fact that subsidization of part of the cost of furnishing such housing is by the
government rather than private charitable contributions does not dictate the denial of a
charitable exemption if the facts otherwise support such an exemption, as they do here.[25]

In this case, the petitioner adduced substantial evidence that it spent its income, including
the subsidies from the government for 1991 and 1992 for its patients and for the operation of
the hospital. It even incurred a net loss in 1991 and 1992 from its operations.

Even as we find that the petitioner is a charitable institution, we hold, anent the second
issue, that those portions of its real property that are leased to private entities are not exempt
from real property taxes as these are not actually, directly and exclusively used for charitable
purposes.

The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in favor of the taxing
power. Taxation is the rule and exemption is the exception. The effect of an exemption is
equivalent to an appropriation. Hence, a claim for exemption from tax payments must be
clearly shown and based on language in the law too plain to be mistaken.[26] As held
in Salvation Army v. Hoehn:[27]

An intention on the part of the legislature to grant an exemption from the taxing power of the
state will never be implied from language which will admit of any other reasonable
construction. Such an intention must be expressed in clear and unmistakable terms, or must
appear by necessary implication from the language used, for it is a well settled principle that,
when a special privilege or exemption is claimed under a statute, charter or act of
incorporation, it is to be construed strictly against the property owner and in favor of the
public. This principle applies with peculiar force to a claim of exemption from taxation . [28]

Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically
provides that the petitioner shall enjoy the tax exemptions and privileges:

SEC. 2. TAX EXEMPTIONS AND PRIVILEGES. Being a non-profit, non-stock corporation

organized primarily to help combat the high incidence of lung and pulmonary diseases in the
Philippines, all donations, contributions, endowments and equipment and supplies to be
imported by authorized entities or persons and by the Board of Trustees of the Lung Center of
the Philippines, Inc., for the actual use and benefit of the Lung Center, shall be exempt from
income and gift taxes, the same further deductible in full for the purpose of determining the
maximum deductible amount under Section 30, paragraph (h), of the National Internal
Revenue Code, as amended.

The Lung Center of the Philippines shall be exempt from the payment of taxes, charges and
fees imposed by the Government or any political subdivision or instrumentality thereof with
respect to equipment purchases made by, or for the Lung Center.[29]

It is plain as day that under the decree, the petitioner does not enjoy any property tax
exemption privileges for its real properties as well as the building constructed thereon. If the
20 | P a g e

intentions were otherwise, the same should have been among the enumeration of tax exempt
privileges under Section 2:

It is a settled rule of statutory construction that the express mention of one person, thing, or
consequence implies the exclusion of all others. The rule is expressed in the familiar
maxim, expressio unius est exclusio alterius.

The rule of expressio unius est exclusio alterius is formulated in a number of ways. One
variation of the rule is principle that what is expressed puts an end to that which is
implied. Expressium facit cessare tacitum.Thus, where a statute, by its terms, is expressly
limited to certain matters, it may not, by interpretation or construction, be extended to other
matters.

...

The rule of expressio unius est exclusio alterius and its variations are canons of restrictive
interpretation. They are based on the rules of logic and the natural workings of the human
mind. They are predicated upon ones own voluntary act and not upon that of others. They
proceed from the premise that the legislature would not have made specified enumeration in a
statute had the intention been not to restrict its meaning and confine its terms to those
expressly mentioned.[30]

The exemption must not be so enlarged by construction since the reasonable presumption
is that the State has granted in express terms all it intended to grant at all, and that unless the
privilege is limited to the very terms of the statute the favor would be intended beyond what
was meant.[31]

Section 28(3), Article VI of the 1987 Philippine Constitution provides, thus:

(3) Charitable institutions, churches and parsonages or convents appurtenant thereto,

mosques, non-profit cemeteries, and all lands, buildings, and
improvements, actually, directly and exclusively used for religious, charitable or educational
purposes shall be exempt from taxation.[32]

The tax exemption under this constitutional provision covers property taxes only.[33] As
Chief Justice Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission,
explained: . . . 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.[34]

Consequently, the constitutional provision is implemented by Section 234(b) of Republic

Act No. 7160 (otherwise known as the Local Government Code of 1991) as follows:

SECTION 234. Exemptions from Real Property Tax. The following are exempted from payment
of the real property tax:

...
21 | P a g e

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques,

non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly,
and exclusively used for religious, charitable or educational purposes.[35]

We note that under the 1935 Constitution, ... all lands, buildings, and improvements used
exclusively for charitable purposes shall be exempt from taxation.[36] However, under the 1973
and the present Constitutions, for lands, buildings, and improvements of the charitable
institution to be considered exempt, the same should not only be exclusively used for
charitable purposes; it is required that such property be used actually and directly for such
purposes.[37]

In light of the foregoing substantial changes in the Constitution, the petitioner cannot rely
on our ruling in Herrera v. Quezon City Board of Assessment Appeals which was promulgated
on September 30, 1961 before the 1973 and 1987 Constitutions took effect.[38] As this Court
held in Province of Abra v. Hernando:[39]

Under the 1935 Constitution: Cemeteries, churches, and parsonages or convents appurtenant
thereto, and all lands, buildings, and improvements used exclusively for religious, charitable,
or educational purposes shall be exempt from taxation. The present Constitution added
charitable institutions, mosques, and non-profit cemeteries and required that for the
exemption of lands, buildings, and improvements, they should not only be exclusively but also
actually and directly used for religious or charitable purposes. The Constitution is worded
differently. The change should not be ignored. It must be duly taken into
consideration. Reliance on past decisions would have sufficed were the words actually as well
as directly not added. There must be proof therefore of the actual and direct use of the lands,
buildings, and improvements for religious or charitable purposes to be exempt from taxation.

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to
the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it
is a charitable institution; and (b) its real properties
are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. Exclusive is
defined as possessed and enjoyed to the exclusion of others; debarred from participation or
enjoyment; and exclusively is defined, in a manner to exclude; as enjoying a privilege
exclusively.[40] If real property is used for one or more commercial purposes, it is not
exclusively used for the exempted purposes but is subject to taxation. [41] The words dominant
use or principal use cannot be substituted for the words used exclusively without doing
violence to the Constitutions and the law.[42] Solely is synonymous with exclusively.[43]

What is meant by actual, direct and exclusive use of the property for charitable purposes
is the direct and immediate and actual application of the property itself to the purposes for
which the charitable institution is organized. It is not the use of the income from the real
property that is determinative of whether the property is used for tax-exempt purposes.[44]

The petitioner failed to discharge its burden to prove that the entirety of its real property
is actually, directly and exclusively used for charitable purposes. While portions of the hospital
are used for the treatment of patients and the dispensation of medical services to them,
whether paying or non-paying, other portions thereof are being leased to private individuals
22 | P a g e

for their clinics and a canteen.Further, a portion of the land is being leased to a private
individual for her business enterprise under the business name Elliptical Orchids
and Garden Center. Indeed, the petitioners evidence shows that it collected P1,136,483.45 as
rentals in 1991 and P1,679,999.28 for 1992 from the said lessees.

Accordingly, we hold that the portions of the land leased to private entities as well as
those parts of the hospital leased to private individuals are not exempt from such taxes. [45] On
the other hand, the portions of the land occupied by the hospital and portions of the hospital
used for its patients, whether paying or non-paying, are exempt from real property taxes.

IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The

respondent Quezon City Assessor is hereby DIRECTED to determine, after due hearing, the
precise portions of the land and the area thereof which are leased to private persons, and to
compute the real property taxes due thereon as provided for by law.SO ORDERED.

[G.R. No. 127105. June 25, 1999]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON AND SON,

INC., and COURT OF APPEALS, respondents.

This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set
aside the decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802
affirming the decision of the Court of Tax Appeals in CTA Case No. 5136.

The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit:

[Respondent], a domestic corporation organized and operating under the Philippine laws,
entered into a license agreement with SC Johnson and Son, United States of America (USA), a
non-resident foreign corporation based in the U.S.A. pursuant to which the [respondent] was
granted the right to use the trademark, patents and technology owned by the latter including
the right to manufacture, package and distribute the products covered by the Agreement and
secure assistance in management, marketing and production from SC Johnson and Son, U. S.
A.

The said License Agreement was duly registered with the Technology Transfer Board of the
Bureau of Patents, Trade Marks and Technology Transfer under Certificate of Registration No.
8064 (Exh. A).

For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson and
Son, USA royalties based on a percentage of net sales and subjected the same to 25%
withholding tax on royalty payments which [respondent] paid for the period covering July
1992 to May 1993 in the total amount of P1,603,443.00 (Exhs. B to L and submarkings).

On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD) of
the BIR a claim for refund of overpaid withholding tax on royalties arguing that, the
antecedent facts attending [respondents] case fall squarely within the same circumstances
under which said MacGeorge and Gillete rulings were issued. Since the agreement was
approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to
23 | P a g e

the [respondent]. We therefore submit that royalties paid by the [respondent] to SC Johnson
and Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation
clause of the RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West
Germany Tax Treaty [Article 12 (2) (b)] (Petition for Review [filed with the Court of Appeals],
par. 12). [Respondents] claim for the refund of P963,266.00 was computed as follows:

Gross 25% 10%

Month/ Royalty Withholding Withholding

Year Fee Tax Paid Tax Balance

______ _______ __________ __________

______

July 1992 559,878 139,970 55,988 83,982

August 567,935 141,984 56,794 85,190

September 595,956 148,989 59,596 89,393

October 634,405 158,601 63,441 95,161

November 620,885 155,221 62,089 93,133

December 383,276 95,819 36,328 57,491

Jan 1993 602,451 170,630 68,245 102,368

February 565,845 141,461 56,585 84,877

March 547,253 136,813 54,725 82,088

April 660,810 165,203 66,081 99,122

May 603,076 150,769 60,308 90,461

P6,421,770 P1,605,443 P642,177 P963,266[1]

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

The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson &
Son, Inc. (S.C. Johnson) then filed a petition for review before the Court of Tax Appeals (CTA)
where the case was docketed as CTA Case No. 5136, to claim a refund of the overpaid
withholding tax on royalty payments from July 1992 to May 1993.

On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson
and ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the
amount of P963,266.00 representing overpaid withholding tax on royalty payments beginning
July, 1992 to May, 1993.[2]
24 | P a g e

The Commissioner of Internal Revenue thus filed a petition for review with the Court of
Appeals which rendered the decision subject of this appeal on November 7, 1996 finding no
merit in the petition and affirming in toto the CTA ruling.[3]

This petition for review was filed by the Commissioner of Internal Revenue raising the
following issue:

THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS ENTITLED
TO THE MOST FAVORED NATION TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE
RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY.

Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is
known as the most favored nation clause, the lowest rate of the Philippine tax at 10% may be
imposed on royalties derived by a resident of the United States from sources within the
Philippines only if the circumstances of the resident of the United States are similar to those of
the resident of West Germany. Since the RP-US Tax Treaty contains no matching credit
provision as that provided under Article 24 of the RP-West Germany Tax Treaty, the tax on
royalties under the RP-US Tax Treaty is not paid under similar circumstances as those
obtaining in the RP-West Germany Tax Treaty. Even assuming that the phrase paid under
similar circumstances refers to the payment of royalties, and not taxes, as held by the Court of
Appeals, still, the most favored nation clause cannot be invoked for the reason that when a tax
treaty contemplates circumstances attendant to the payment of a tax, or royalty remittances
for that matter, these must necessarily refer to circumstances that are tax-related. Finally,
petitioner argues that since S.C. Johnsons invocation of the most favored nation clause is in
the nature of a claim for exemption from the application of the regular tax rate of 25% for
royalties, the provisions of the treaty must be construed strictly against it.

In its Comment, private respondent S.C. Johnson avers that the instant petition should be
denied (1) because it contains a defective certification against forum shopping as required
under SC Circular No. 28-91, that is, the certification was not executed by the petitioner
herself but by her counsel; and (2) that the most favored nation clause under the RP-US Tax
Treaty refers to royalties paid under similar circumstances as those royalties subject to tax in
other treaties; that the phrase paid under similar circumstances does not refer to payment of
the tax but to the subject matter of the tax, that is, royalties, because the most favored nation
clause is intended to allow the taxpayer in one state to avail of more liberal provisions
contained in another tax treaty wherein the country of residence of such taxpayer is also a
party thereto, subject to the basic condition that the subject matter of taxation in that other
tax treaty is the same as that in the original tax treaty under which the taxpayer is liable; thus,
the RP-US Tax Treaty speaks of royalties of the same kind paid under similar
circumstances. S.C. Johnson also contends that the Commissioner is estopped from insisting
on her interpretation that the phrase paid under similar circumstances refers to the manner in
which the tax is paid, for the reason that said interpretation is embodied in Revenue
Memorandum Circular (RMC) 39-92 which was already abandoned by the Commissioners
predecessor in 1993; and was expressly revoked in BIR Ruling No. 052-95 which stated that
royalties paid to an American licensor are subject only to 10% withholding tax pursuant to Art
13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. Said
25 | P a g e

ruling should be given retroactive effect except if such is prejudicial to the taxpayer pursuant
to Section 246 of the National Internal Revenue Code.

Petitioner filed Reply alleging that the fact that the certification against forum shopping
was signed by petitioners counsel is not a fatal defect as to warrant the dismissal of this
petition since Circular No. 28-91 applies only to original actions and not to appeals, as in the
instant case. Moreover, the requirement that the certification should be signed by petitioner
and not by counsel does not apply to petitioner who has only the Office of the Solicitor
General as statutory counsel. Petitioner reiterates that even if the phrase paid under similar
circumstances embodied in the most favored nation clause of the RP-US Tax Treaty refers to
the payment of royalties and not taxes, still the presence or absence of a matching credit
provision in the said RP-US Tax Treaty would constitute a material circumstance to such
payment and would be determinative of the said clauses application.

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

SC Circular No. 28-91 provides:

SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE SUPREME COURT AND
THE COURT OF APPEALS TO PREVENT FORUM SHOPPING OR MULTIPLE FILING OF
PETITIONS AND COMPLAINTS

TO : xxx xxx xxx

The attention of the Court has been called to the filing of multiple petitions and complaints
involving the same issues in the Supreme Court, the Court of Appeals or other tribunals or
agencies, with the result that said courts, tribunals or agencies have to resolve the same
issues.

(1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court of
Appeals, the petitioner aside from complying with pertinent provisions of the Rules of Court
and existing circulars, must certify under oath to all of the following facts or undertakings: (a)
he has not theretofore commenced any other action or proceeding involving the same issues
in the Supreme Court, the Court of Appeals, or any tribunal or agency; xxx

(2) Any violation of this revised Circular will entail the following sanctions: (a) it shall be a
cause for the summary dismissal of the multiple petitions or complaints; xxx

The circular expressly requires that a certificate of non-forum shopping should be attached
to petitions filed before this Court and the Court of Appeals. Petitioners allegation that Circular
No. 28-91 applies only to original actions and not to appeals as in the instant case is not
supported by the text nor by the obvious intent of the Circular which is to prevent multiple
petitions that will result in the same issue being resolved by different courts.

Anent the requirement that the party, not counsel, must certify under oath that he has not
commenced any other action involving the same issues in this Court or the Court of Appeals or
26 | P a g e

any other tribunal or agency, we are inclined to accept petitioners submission that since the
OSG is the only lawyer for the petitioner, which is a government agency mandated under
Section 35, Chapter 12, title III, Book IV of the 1987 Administrative Code [4] to be represented
only by the Solicitor General, the certification executed by the OSG in this case constitutes
substantial compliance with Circular No. 28-91.

With respect to the merits of this petition, the main point of contention in this appeal is
the interpretation of Article 13 (2) (b) (iii) of the RP-US Tax Treaty regarding the rate of tax to
be imposed by the Philippines upon royalties received by a non-resident foreign
corporation. The provision states insofar as pertinent that-

1) Royalties derived by a resident of one of the Contracting States from sources within
the other Contracting State may be taxed by both Contracting States.

2) However, the tax imposed by that Contracting State shall not exceed.

a) In the case of the United States, 15 percent of the gross amount of the royalties, and

b) In the case of the Philippines, the least of:

(i) 25 percent of the gross amount of the royalties;

(ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a
corporation registered with the Philippine Board of Investments and engaged in preferred
areas of activities; and

(iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid
under similar circumstances to a resident of a third State.

Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision,
it is entitled to the concessional tax rate of 10 percent on royalties based on Article 12 (2) (b)
of the RP-Germany Tax Treaty which provides:

(2) However, such royalties may also be taxed in the Contracting State in which they
arise, and according to the law of that State, but the tax so charged shall not
exceed:

xxx

b) 10 percent of the gross amount of royalties arising from the use of, or the right to
use, any patent, trademark, design or model, plan, secret formula or process, or
from the use of or the right to use, industrial, commercial, or scientific equipment,
or for information concerning industrial, commercial or scientific experience.

For as long as the transfer of technology, under Philippine law, is subject to approval, the
limitation of the tax rate mentioned under b) shall, in the case of royalties arising in the
Republic of the Philippines, only apply if the contract giving rise to such royalties has been
approved by the Philippine competent authorities.
27 | P a g e

Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent
of the gross amount of such royalties against German income and corporation tax for the
taxes payable in the Philippines on such royalties where the tax rate is reduced to 10 or 15
percent under such treaty. Article 24 of the RP-Germany Tax Treaty states-

1) Tax shall be determined in the case of a resident of the Federal Republic of

Germany as follows:

b) Subject to the provisions of German tax law regarding credit for foreign tax, there shall be
allowed as a credit against German income and corporation tax payable in respect of the
following items of income arising in the Republic of the Philippines, the tax paid under the laws
of the Philippines in accordance with this Agreement on:

dd) royalties, as defined in paragraph 3 of Article 12;

c) For the purpose of the credit referred in subparagraph b) the Philippine tax shall be deemed
to be

cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent according to
paragraph 2 of Article 12, 20 percent of the gross amount of such royalties.

According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid
under circumstances similar to those in the RP-West Germany Tax Treaty since there is no
provision for a 20 percent matching credit in the former convention and private respondent
cannot invoke the concessional tax rate on the strength of the most favored nation clause in
the RP-US Tax Treaty. Petitioners position is explained thus:

Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on
income from sources within the Philippines is allowed as a credit against German income and
corporation tax on the same income. In the case of royalties for which the tax is reduced to 10
or 15 percent according to paragraph 2 of Article 12 of the RP-West Germany Tax Treaty, the
credit shall be 20% of the gross amount of such royalty. To illustrate, the royalty income of a
German resident from sources within the Philippines arising from the use of, or the right to
use, any patent, trade mark, design or model, plan, secret formula or process, is taxed at 10%
of the gross amount of said royalty under certain conditions. The rate of 10% is imposed if
credit against the German income and corporation tax on said royalty is allowed in favor of the
German resident. That means the rate of 10% is granted to the German taxpayer if he is
similarly granted a credit against the income and corporation tax of West Germany. The clear
intent of the matching credit is to soften the impact of double taxation by different
jurisdictions.

The RP-US Tax Treaty contains no similar matching credit as that provided under the RP-West
Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is not paid under
similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Therefore, the
most favored nation clause in the RP-West Germany Tax Treaty cannot be availed of in
interpreting the provisions of the RP-US Tax Treaty.[5]

The petition is meritorious.

28 | P a g e

We are unable to sustain the position of the Court of Tax Appeals, which was upheld by
the Court of Appeals, that the phrase paid under similar circumstances in Article 13 (2) (b),
(iii) of the RP-US Tax Treaty should be interpreted to refer to payment of royalty, and not to
the payment of the tax, for the reason that the phrase paid under similar circumstances is
followed by the phrase to a resident of a third state. The respondent court held that Words are
to be understood in the context in which they are used, and since what is paid to a resident of
a third state is not a tax but a royalty logic instructs that the treaty provision in question
should refer to royalties of the same kind paid under similar circumstances.

The above construction is based principally on syntax or sentence structure but fails to
take into account the purpose animating the treaty provisions in point. To begin with, we are
not aware of any law or rule pertinent to the payment of royalties, and none has been brought
to our attention, which provides for the payment of royalties under dissimilar
circumstances. The tax rates on royalties and the circumstances of payment thereof are the
same for all the recipients of such royalties and there is no disparity based on nationality in the
circumstances of such payment.[6] On the other hand, a cursory reading of the various tax
treaties will show that there is no similarity in the provisions on relief from or avoidance of
double taxation[7] as this is a matter of negotiation between the contracting parties.[8] As will
be shown later, this dissimilarity is true particularly in the treaties between the Philippines and
the United States and between the Philippines and West Germany.

The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines
has entered into for the avoidance of double taxation.[9] The purpose of these international
agreements is to reconcile the national fiscal legislations of the contracting parties in order to
help the taxpayer avoid simultaneous taxation in two different jurisdictions.[10] More precisely,
the tax conventions are drafted with a view towards the elimination of international
juridical double taxation, which is defined as the imposition of comparable taxes in two or
more states on the same taxpayer in respect of the same subject matter and for identical
periods.[11], citing the Committee on Fiscal Affairs of the Organization for Economic Co-
operation and Development (OECD).11 The apparent rationale for doing away with double
taxation is to encourage the free flow of goods and services and the movement of capital,
technology and persons between countries, conditions deemed vital in creating robust and
dynamic economies.[12] Foreign investments will only thrive in a fairly predictable and
reasonable international investment climate and the protection against double taxation is
crucial in creating such a climate.[13]

Double taxation usually takes place when a person is resident of a contracting state and
derives income from, or owns capital in, the other contracting state and both states impose
tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to
several methods. First, it sets out the respective rights to tax of the state of source or situs
and of the state of residence with regard to certain classes of income or capital. In some
cases, an exclusive right to tax is conferred on one of the contracting states; however, for
other items of income or capital, both states are given the right to tax, although the amount of
tax that may be imposed by the state of source is limited.[14]
29 | P a g e

The second method for the elimination of double taxation applies whenever the state of
source is given a full or limited right to tax together with the state of residence. In this case,
the treaties make it incumbent upon the state of residence to allow relief in order to avoid
double taxation. There are two methods of relief- the exemption method and the credit
method. In the exemption method, the income or capital which is taxable in the state of
source or situs is exempted in the state of residence, although in some instances it may be
taken into account in determining the rate of tax applicable to the taxpayers remaining income
or capital. On the other hand, in the credit method, although the income or capital which is
taxed in the state of source is still taxable in the state of residence, the tax paid in the former
is credited against the tax levied in the latter. The basic difference between the two methods
is that in the exemption method, the focus is on the income or capital itself, whereas the
credit method focuses upon the tax.[15]

In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the
Philippines will give up a part of the tax in the expectation that the tax given up for this
particular investment is not taxed by the other country.[16] Thus the petitioner correctly opined
that the phrase royalties paid under similar circumstances in the most favored nation clause of
the US-RP Tax Treaty necessarily contemplated circumstances that are tax-related.

In the case at bar, the state of source is the Philippines because the royalties are paid for
the right to use property or rights, i.e. trademarks, patents and technology, located within the
Philippines.[17] The United States is the state of residence since the taxpayer, S. C. Johnson
and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the
state of source are both permitted to tax the royalties, with a restraint on the tax that may be
collected by the state of source.[18] Furthermore, the method employed to give relief from
double taxation is the allowance of a tax credit to citizens or residents of the United States (in
an appropriate amount based upon the taxes paid or accrued to the Philippines) against the
United States tax, but such amount shall not exceed the limitations provided by United States
law for the taxable year.[19] Under Article 13 thereof, the Philippines may impose one of three
rates- 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid
by a corporation registered with the Philippine Board of Investments and engaged in preferred
areas of activities; or the lowest rate of Philippine tax that may be imposed on royalties of the
same kind paid under similar circumstances to a resident of a third state.

Given the purpose underlying tax treaties and the rationale for the most favored nation
clause, the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty
should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RP-
Germany Tax Treaty are paid under similar circumstances. This would mean that private
respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the
United States in respect of the taxes imposable upon royalties earned from sources within the
Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty.

The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax
crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against
German income and corporation tax of 20% of the gross amount of royalties paid under the
law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the
30 | P a g e

counterpart provision with respect to relief for double taxation, does not provide for similar
crediting of 20% of the gross amount of royalties paid. Said Article 23 reads:

Article 23-Relief from double taxation

Double taxation of income shall be avoided in the following manner:

1) In accordance with the provisions and subject to the limitations of the law of the
United States (as it may be amended from time to time without changing the
general principle thereof), the United States shall allow to a citizen or resident of
the United States as a credit against the United States tax the appropriate amount
of taxes paid or accrued to the Philippines and, in the case of a United States
corporation owning at least 10 percent of the voting stock of a Philippine
corporation from which it receives dividends in any taxable year, shall allow credit
for the appropriate amount of taxes paid or accrued to the Philippines by the
Philippine corporation paying such dividends with respect to the profits out of which
such dividends are paid. Such appropriate amount shall be based upon the amount
of tax paid or accrued to the Philippines, but the credit shall not exceed the
limitations (for the purpose of limiting the credit to the United States tax on income
from sources within the Philippines or on income from sources outside the United
States) provided by United States law for the taxable year. xxx.

The reason for construing the phrase paid under similar circumstances as used in Article
13 (2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is anchored upon a logical reading
of the text in the light of the fundamental purpose of such treaty which is to grant an incentive
to the foreign investor by lowering the tax and at the same time crediting against the domestic
tax abroad a figure higher than what was collected in the Philippines.

In one case, the Supreme Court pointed out that laws are not just mere compositions, but
have ends to be achieved and that the general purpose is a more important aid to the
meaning of a law than any rule which grammar may lay down.[20] It is the duty of the courts
to look to the object to be accomplished, the evils to be remedied, or the purpose to be
subserved, and should give the law a reasonable or liberal construction which will best
effectuate its purpose.[21] The Vienna Convention on the Law of Treaties states that a treaty
shall be interpreted in good faith in accordance with the ordinary meaning to be given to the
terms of the treaty in their context and in the light of its object and purpose.[22]

As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign
investors to invest in the Philippines - a crucial economic goal for developing countries.[23] The
goal of double taxation conventions would be thwarted if such treaties did not provide for
effective measures to minimize, if not completely eliminate, the tax burden laid upon the
income or capital of the investor. Thus, if the rates of tax are lowered by the state of source,
in this case, by the Philippines, there should be a concomitant commitment on the part of the
state of residence to grant some form of tax relief, whether this be in the form of a tax credit
or exemption.[24] Otherwise, the tax which could have been collected by the Philippine
government will simply be collected by another state, defeating the object of the tax treaty
since the tax burden imposed upon the investor would remain unrelieved. If the state of
31 | P a g e

residence does not grant some form of tax relief to the investor, no benefit would redound to
the Philippines, i.e., increased investment resulting from a favorable tax regime, should it
impose a lower tax rate on the royalty earnings of the investor, and it would be better to
impose the regular rate rather than lose much-needed revenues to another country.

At the same time, the intention behind the adoption of the provision on relief from double
taxation in the two tax treaties in question should be considered in light of the purpose behind
the most favored nation clause.

The purpose of a most favored nation clause is to grant to the contracting party treatment
not less favorable than that which has been or may be granted to the most favored among
other countries.[25] The most favored nation clause is intended to establish the principle of
equality of international treatment by providing that the citizens or subjects of the contracting
nations may enjoy the privileges accorded by either party to those of the most favored
nation.[26] The essence of the principle is to allow the taxpayer in one state to avail of more
liberal provisions granted in another tax treaty to which the country of residence of such
taxpayer is also a party provided that the subject matter of taxation, in this case royalty
income, is the same as that in the tax treaty under which the taxpayer is liable. Both Article 13
of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax Treaty, above-
quoted, speaks of tax on royalties for the use of trademark, patent, and technology. The
entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for
royalties) would derogate from the design behind the most favored nation clause to grant
equality of international treatment since the tax burden laid upon the income of the investor is
not the same in the two countries. The similarity in the circumstances of payment of taxes is a
condition for the enjoyment of most favored nation treatment precisely to underscore the need
for equality of treatment.

We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a
matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed
under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the
10 percent rate granted under the latter treaty for the reason that there is no payment of
taxes on royalties under similar circumstances.

It bears stress that tax refunds are in the nature of tax exemptions. As such they are
regarded as in derogation of sovereign authority and to be construed strictissimi juris against
the person or entity claiming the exemption.[27] The burden of proof is upon him who claims
the exemption in his favor and he must be able to justify his claim by the clearest grant of
organic or statute law.[28] Private respondent is claiming for a refund of the alleged
overpayment of tax on royalties; however, there is nothing on record to support a claim that
the tax on royalties under the RP-US Tax Treaty is paid under similar circumstances as the tax
on royalties under the RP-West Germany Tax Treaty.

WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated
May 7, 1996 of the Court of Tax Appeals and the decision dated November 7, 1996 of the
Court of Appeals are hereby SET ASIDE.SO ORDERED.
32 | P a g e

GREPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs.

MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.

From the decision of the Court of First Instance of Manila (in Civil Case No. 34100)
ordering it to pay to plaintiff Republic of the Philippines the sum of P4,802.37 with 6% interest
thereon from the date of the filing of the complaint until fully paid, plus costs, defendant
Mambulao Lumber Company interposed the present appeal.1

The facts of the case are briefly stated in the decision of the trial court, to wit: .

The facts of this case are not contested and may be briefly summarized as follows: (a)
under the first cause of action, for forest charges covering the period from September 10,
1952 to May 24, 1953, defendants admitted that they have a liability of P587.37, which
liability is covered by a bond executed by defendant General Insurance & Surety Corporation
for Mambulao Lumber Company, jointly and severally in character, on July 29, 1953, in favor
of herein plaintiff; (b) under the second cause of action, both defendants admitted a joint
and several liability in favor of plaintiff in the sum of P296.70, also covered by a bond dated
November 27, 1953; and (c) under the third cause of action, both defendants admitted a
joint and several liability in favor of plaintiff for P3,928.30, also covered by a bond dated July
20, 1954. These three liabilities aggregate to P4,802.37. If the liability of defendants in favor
of plaintiff in the amount already mentioned is admitted, then what is the defense interposed
by the defendants? The defense presented by the defendants is quite unusual in more ways
than one. It appears from Exh. 3 that from July 31, 1948 to December 29, 1956, defendant
Mambulao Lumber Company paid to the Republic of the Philippines P8,200.52 for
'reforestation charges' and for the period commencing from April 30, 1947 to June 24, 1948,
said defendant paid P927.08 to the Republic of the Philippines for 'reforestation charges'.
These reforestation were paid to the plaintiff in pursuance of Section 1 of Republic Act 115
which provides that there shall be collected, in addition to the regular forest charges
provided under Section 264 of Commonwealth Act 466 known as the National Internal
Revenue Code, the amount of P0.50 on each cubic meter of timber... cut out and removed
from any public forest for commercial purposes. The amount collected shall be expended by
the director of forestry, with the approval of the secretary of agriculture and commerce, for
reforestation and afforestation of watersheds, denuded areas ... and other public forest
lands, which upon investigation, are found needing reforestation or afforestation .... The
total amount of the reforestation charges paid by Mambulao Lumber Company is P9,127.50,
and it is the contention of the defendant Mambulao Lumber Company that since the Republic
of the Philippines has not made use of those reforestation charges collected from it for
reforesting the denuded area of the land covered by its license, the Republic of the
Philippines should refund said amount, or, if it cannot be refunded, at least it should be
compensated with what Mambulao Lumber Company owed the Republic of the Philippines
for reforestation charges. In line with this thought, defendant Mambulao Lumber Company
wrote the director of forestry, on February 21, 1957 letter Exh. 1, in paragraph 4 of which
said defendant requested "that our account with your bureau be credited with all the
reforestation charges that you have imposed on us from July 1, 1947 to June 14, 1956,
amounting to around P2,988.62 ...". This letter of defendant Mambulao Lumber Company
was answered by the director of forestry on March 12, 1957, marked Exh. 2, in which the
33 | P a g e

director of forestry quoted an opinion of the secretary of justice, to the effect that he has no
discretion to extend the time for paying the reforestation charges and also explained why not
all denuded areas are being reforested.

The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by
defendant-appellant company to plaintiff-appellee as reforestation charges from 1947 to 1956
may be set off or applied to the payment of the sum of P4,802.37 as forest charges due and
owing from appellant to appellee. It is appellant's contention that said sum of P9,127.50, not
having been used in the reforestation of the area covered by its license, the same is
refundable to it or may be applied in compensation of said sum of P4,802.37 due from it as
forest charges.1äwphï1.ñët

We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides:

SECTION 1. There shall be collected, in addition to the regular forest charges provided
for under Section two hundred and sixty-four of Commonwealth Act Numbered Four
Hundred Sixty-six, known as the National Internal Revenue Code, the amount of fifty
centavos on each cubic meter of timber for the first and second groups and forty
centavos for the third and fourth groups cut out and removed from any public forest for
commercial purposes. The amount collected shall be expended by the Director of
Forestry, with the approval of the Secretary of Agriculture and Natural Resources
(commerce), for reforestation and afforestation of watersheds, denuded areas and
cogon and open lands within forest reserves, communal forest, national parks, timber
lands, sand dunes, and other public forest lands, which upon investigation, are found
needing reforestation or afforestation, or needing to be under forest cover for the
growing of economic trees for timber, tanning, oils, gums, and other minor forest
products or medicinal plants, or for watersheds protection, or for prevention of erosion
and floods and preparation of necessary plans and estimate of costs and for
reconnaisance survey of public forest lands and for such other expenses as may be
deemed necessary for the proper carrying out of the purposes of this Act.

All revenues collected by virtue of, and pursuant to, the provisions of the preceding
paragraph and from the sale of barks, medical plants and other products derived from
plantations as herein provided shall constitute a fund to be known as Reforestation
Fund, to be expended exclusively in carrying out the purposes provided for under this
Act. All provincial or city treasurers and their deputies shall act as agents of the Director
of Forestry for the collection of the revenues or incomes derived from the provisions of
this Act. (Emphasis supplied.)

Under this provision, it seems quite clear that the amount collected as reforestation charges
from a timber licenses or concessionaire shall constitute a fund to be known as the
Reforestation Fund, and that the same shall be expended by the Director of Forestry, with the
approval of the Secretary of Agriculture and Natural Resources for the reforestation or
afforestation, among others, of denuded areas which, upon investigation, are found to be
needing reforestation or afforestation. Note that there is nothing in the law which requires that
the amount collected as reforestation charges should be used exclusively for the reforestation
of the area covered by the license of a licensee or concessionaire, and that if not so used, the
34 | P a g e

same should be refunded to him. Observe too, that the licensee's area may or may not be
reforested at all, depending on whether the investigation thereof by the Director of Forestry
shows that said area needs reforestation. The conclusion seems to be that the amount paid by
a licensee as reforestation charges is in the nature of a tax which forms a part of the
Reforestation Fund, payable by him irrespective of whether the area covered by his license is
reforested or not. Said fund, as the law expressly provides, shall be expended in carrying out
the purposes provided for thereunder, namely, the reforestation or afforestation, among
others, of denuded areas needing reforestation or afforestation.

Appellant maintains that the principle of a compensation in Article 1278 of the new Civil
Code2 is applicable, such that the sum of P9,127.50 paid by it as reforestation charges may
compensate its indebtedness to appellee in the sum of P4,802.37 as forest charges. But in the
view we take of this case, appellant and appellee are not mutually creditors and debtors of
each other. Consequently, the law on compensation is inapplicable. On this point, the trial
court correctly observed: .

Under Article 1278, NCC, compensation should take place when two persons in their
own right are creditors and debtors of each other. With respect to the forest charges
which the defendant Mambulao Lumber Company has paid to the government, they are
in the coffers of the government as taxes collected, and the government does not owe
anything, crystal clear that the Republic of the Philippines and the Mambulao Lumber
Company are not creditors and debtors of each other, because compensation refers to
mutual debts. ..

And the weight of authority is to the effect that internal revenue taxes, such as the forest
charges in question, can be the subject of set-off or compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be
set-off under the statutes of set-off, which are construed uniformly, in the light of public
policy, to exclude the remedy in an action or any indebtedness of the state or
municipality to one who is liable to the state or municipality for taxes. Neither are they
a proper subject of recoupment since they do not arise out of the contract or
transaction sued on. ... (80 C.J.S. 73-74. ) .

The general rule, based on grounds of public policy is well-settled that no set-off is
admissible against demands for taxes levied for general or local governmental
purposes. The reason on which the general rule is based, is that taxes are not in the
nature of contracts between the party and party but grow out of a duty to, and are the
positive acts of the government, to the making and enforcing of which, the personal
consent of individual taxpayers is not required. ... If the taxpayer can properly refuse to
pay his tax when called upon by the Collector, because he has a claim against the
governmental body which is not included in the tax levy, it is plain that some legitimate
and necessary expenditure must be curtailed. If the taxpayer's claim is disputed, the
collection of the tax must await and abide the result of a lawsuit, and meanwhile the
financial affairs of the government will be thrown into great confusion. (47 Am. Jur.
766-767.)
35 | P a g e

WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all respects,
with costs against the defendant-appellant. So ordered.

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner, vs.

HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance
of Leyte, and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the
late Walter Scott Price, respondents.

This is a petition for certiorari and mandamus against the Judge of the Court of First Instance
of Leyte, Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and
for an order in this Court directing the respondent court below to execute the judgment in
favor of the Government against the estate of Walter Scott Price for internal revenue taxes.

It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674,
January 30, 1960, this Court declared as final and executory the order for the payment by the
estate of the estate and inheritance taxes, charges and penalties, amounting to P40,058.55,
issued by the Court of First Instance of Leyte in, special proceedings No. 14 entitled "In the
matter of the Intestate Estate of the Late Walter Scott Price." In order to enforce the claims
against the estate the fiscal presented a petition dated June 21, 1961, to the court below for
the execution of the judgment. The petition was, however, denied by the court which held
that the execution is not justifiable as the Government is indebted to the estate under
administration in the amount of P262,200. The orders of the court below dated August 20,
1960 and September 28, 1960, respectively, are as follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price,
Administratrix of the estate of her late husband Walter Scott Price and Director Zoilo Castrillo
of the Bureau of Lands dated September 19, 1956 and acknowledged before Notary Public
Salvador V. Esguerra, legal adviser in Malacañang to Executive Secretary De Leon dated
December 14, 1956, the note of His Excellency, Pres. Carlos P. Garcia, to Director Castrillo
dated August 2, 1958, directing the latter to pay to Mrs. Price the sum ofP368,140.00, and
an extract of page 765 of Republic Act No. 2700 appropriating the sum of P262.200.00 for
the payment to the Leyte Cadastral Survey, Inc., represented by the administratrix Simeona
K. Price, as directed in the above note of the President. Considering these facts, the Court
orders that the payment of inheritance taxes in the sum of P40,058.55 due the Collector of
Internal Revenue as ordered paid by this Court on July 5, 1960 in accordance with the order
of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674, be deducted from the
amount of P262,200.00 due and payable to the Administratrix Simeona K. Price, in this
estate, the balance to be paid by the Government to her without further delay. (Order of
August 20, 1960)

The Court has nothing further to add to its order dated August 20, 1960 and it orders
that the payment of the claim of the Collector of Internal Revenue be deferred until the
Government shall have paid its accounts to the administratrix herein amounting to
P262,200.00. It may not be amiss to repeat that it is only fair for the Government, as a
debtor, to its accounts to its citizens-creditors before it can insist in the prompt payment of
the latter's account to it, specially taking into consideration that the amount due to the
36 | P a g e

Government draws interests while the credit due to the present state does not accrue any
interest. (Order of September 28, 1960)

The petition to set aside the above orders of the court below and for the execution of the
claim of the Government against the estate must be denied for lack of merit. The ordinary
procedure by which to settle claims of indebtedness against the estate of a deceased person,
as an inheritance tax, is for the claimant to present a claim before the probate court so that
said court may order the administrator to pay the amount thereof. To such effect is the
decision of this Court in Aldamiz vs. Judge of the Court of First Instance of Mindoro, G.R. No.
L-2360, Dec. 29, 1949, thus:

. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the
payment of debts and expenses of administration. The proper procedure is for the court to
order the sale of personal estate or the sale or mortgage of real property of the deceased
and all debts or expenses of administrator and with the written notice to all the heirs
legatees and devisees residing in the Philippines, according to Rule 89, section 3, and Rule
90, section 2. And when sale or mortgage of real estate is to be made, the regulations
contained in Rule 90, section 7, should be complied with.1äwphï1.ñët

Execution may issue only where the devisees, legatees or heirs have entered into possession
of their respective portions in the estate prior to settlement and payment of the debts and
expenses of administration and it is later ascertained that there are such debts and expenses
to be paid, in which case "the court having jurisdiction of the estate may, by order for that
purpose, after hearing, settle the amount of their several liabilities, and order how much and
in what manner each person shall contribute, and may issue execution if circumstances
require" (Rule 89, section 6; see also Rule 74, Section 4; Emphasis supplied.) And this is not
the instant case.

The legal basis for such a procedure is the fact that in the testate or intestate
proceedings to settle the estate of a deceased person, the properties belonging to the estate
are under the jurisdiction of the court and such jurisdiction continues until said properties have
been distributed among the heirs entitled thereto. During the pendency of the proceedings all
the estate is in custodia legis and the proper procedure is not to allow the sheriff, in case of
the court judgment, to seize the properties but to ask the court for an order to require the
administrator to pay the amount due from the estate and required to be paid.

Another ground for denying the petition of the provincial fiscal is the fact that the court
having jurisdiction of the estate had found that the claim of the estate against the Government
has been recognized and an amount of P262,200 has already been appropriated for the
purpose by a corresponding law (Rep. Act No. 2700). Under the above circumstances, both
the claim of the Government for inheritance taxes and the claim of the intestate for services
rendered have already become overdue and demandable is well as fully liquidated.
Compensation, therefore, takes place by operation of law, in accordance with the provisions of
Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent
amount, thus:
37 | P a g e

ART. 1200. When all the requisites mentioned in article 1279 are present, compensation
takes effect by operation of law, and extinguished both debts to the concurrent
amount, eventhough the creditors and debtors are not aware of the compensation.

It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes
against the estate of the deceased Walter Scott Price. Furthermore, the petition
for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the remedy.

The petition is, therefore, dismissed, without costs.

G.R. No. L-67649 June 28, 1988

ENGRACIO FRANCIA, petitioner, vs.

INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

The petitioner invokes legal and equitable grounds to reverse the questioned decision of
the Intermediate Appellate Court, to set aside the auction sale of his property which took place
on December 5, 1977, and to allow him to recover a 203 square meter lot which was, sold at
public auction to Ho Fernandez and ordered titled in the latter's name.

The antecedent facts are as follows:

Engracio Francia is the registered owner of a residential lot and a two-story house built
upon it situated at Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The
lot, with an area of about 328 square meters, is described and covered by Transfer Certificate
of Title No. 4739 (37795) of the Registry of Deeds of Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was
expropriated by the Republic of the Philippines for the sum of P4,116.00 representing the
estimated amount equivalent to the assessed value of the aforesaid portion.

Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on
December 5, 1977, his property was sold at public auction by the City Treasurer of Pasay City
pursuant to Section 73 of Presidential Decree No. 464 known as the Real Property Tax Code in
order to satisfy a tax delinquency of P2,400.00. Ho Fernandez was the highest bidder for the
property.

Francia was not present during the auction sale since he was in Iligan City at that time helping
his uncle ship bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re:
Petition for Entry of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of
TCT No. 4739 (37795) and the issuance in his name of a new certificate of title. Upon
verification through his lawyer, Francia discovered that a Final Bill of Sale had been issued in
favor of Ho Fernandez by the City Treasurer on December 11, 1978. The auction sale and the
final bill of sale were both annotated at the back of TCT No. 4739 (37795) by the Register of
Deeds.
38 | P a g e

On March 20, 1979, Francia filed a complaint to annul the auction sale. He later
amended his complaint on January 24, 1980.

On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the amended
complaint and ordering:

(a) The Register of Deeds of Pasay City to issue a new Transfer Certificate of Title in favor of
the defendant Ho Fernandez over the parcel of land including the improvements thereon,
subject to whatever encumbrances appearing at the back of TCT No. 4739 (37795) and
ordering the same TCT No. 4739 (37795) cancelled.

(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00 as attorney's fees. (p.
30, Record on Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.

Hence, this petition for review.

Francia prefaced his arguments with the following assignments of grave errors of law:

I. RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW

IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX
DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS
INDEBTED TO THE FORMER.

II. RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS

ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED
THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977 TO
SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.

III. RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS

ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00
PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO SHOCK ONE'S
CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF PROPERTY WITHOUT DUE
PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp.
10, 17, 20-21, Rollo)

We gave due course to the petition for a more thorough inquiry into the petitioner's
allegations that his property was sold at public auction without notice to him and that the price
paid for the property was shockingly inadequate, amounting to fraud and deprivation without
due process of law.

A careful review of the case, however, discloses that Mr. Francia brought the problems
raised in his petition upon himself. While we commiserate with him at the loss of his property,
the law and the facts militate against the grant of his petition. We are constrained to dismiss
it.
39 | P a g e

Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land
was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation
of law as of October 15, 1977.

There is no legal basis for the contention. By legal compensation, obligations of

persons, who in their own right are reciprocally debtors and creditors of each other, are
extinguished (Art. 1278, Civil Code). The circumstances of the case do not satisfy the
requirements provided by Article 1279, to wit:

(1) that each one of the obligors be bound principally and that he be at the same time a
principal creditor of the other;

(3) that the two debts be due.

This principal contention of the petitioner has no merit. We have consistently ruled that
there can be no off-setting of taxes against the claims that the taxpayer may have against the
government. A person cannot refuse to pay a tax on the ground that the government owes
him an amount equal to or greater than the tax being collected. The collection of a tax cannot
await the results of a lawsuit against the government.

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that
Internal Revenue Taxes can not be the subject of set-off or compensation. We stated that:

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be
set-off under the statutes of set-off, which are construed uniformly, in the light of public
policy, to exclude the remedy in an action or any indebtedness of the state or municipality to
one who is liable to the state or municipality for taxes. Neither are they a proper subject of
recoupment since they do not arise out of the contract or transaction sued on. ... (80 C.J.S.,
7374). "The general rule based on grounds of public policy is well-settled that no set-off
admissible against demands for taxes levied for general or local governmental purposes. The
reason on which the general rule is based, is that taxes are not in the nature of contracts
between the party and party but grow out of duty to, and are the positive acts of the
government to the making and enforcing of which, the personal consent of individual
taxpayers is not required. ..."

We stated that a taxpayer cannot refuse to pay his tax when called upon by the
collector because he has a claim against the governmental body not included in the tax levy.

This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that:
"... internal revenue taxes can not be the subject of compensation: Reason: government and
taxpayer are not mutually creditors and debtors of each other' under Article 1278 of the Civil
Code and a "claim for taxes is not such a debt, demand, contract or judgment as is allowed to
be set-off."

There are other factors which compel us to rule against the petitioner. The tax was due
to the city government while the expropriation was effected by the national government.
Moreover, the amount of P4,116.00 paid by the national government for the 125 square meter
40 | P a g e

portion of his lot was deposited with the Philippine National Bank long before the sale at public
auction of his remaining property. Notice of the deposit dated September 28, 1977 was
received by the petitioner on September 30, 1977. The petitioner admitted in his testimony
that he knew about the P4,116.00 deposited with the bank but he did not withdraw it. It
would have been an easy matter to withdraw P2,400.00 from the deposit so that he could pay
the tax obligation thus aborting the sale at public auction.

Petitioner had one year within which to redeem his property although, as well be shown
later, he claimed that he pocketed the notice of the auction sale without reading it.

Petitioner contends that "the auction sale in question was made without complying with
the mandatory provisions of the statute governing tax sale. No evidence, oral or otherwise,
was presented that the procedure outlined by law on sales of property for tax delinquency was
followed. ... Since defendant Ho Fernandez has the affirmative of this issue, the burden of
proof therefore rests upon him to show that plaintiff was duly and properly notified ...
.(Petition for Review, Rollo p. 18; emphasis supplied)

We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has
the burden of proof to show that there was compliance with all the prescribed requisites for a
tax sale.

The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:

... [D]ue process of law to be followed in tax proceedings must be established by proof and
the general rule is that the purchaser of a tax title is bound to take upon himself the burden
of showing the regularity of all proceedings leading up to the sale. (emphasis supplied)

There is no presumption of the regularity of any administrative action which results in

depriving a taxpayer of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437);
Denoga v. Insular Government, 19 Phil. 261). This is actually an exception to the rule that
administrative proceedings are presumed to be regular.

But even if the burden of proof lies with the purchaser to show that all legal
prerequisites have been complied with, the petitioner can not, however, deny that he did
receive the notice for the auction sale. The records sustain the lower court's finding that:

[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not
properly notified of the auction sale. Surprisingly, however, he admitted in his testimony that
he received the letter dated November 21, 1977 (Exhibit "I") as shown by his signature
(Exhibit "I-A") thereof. He claimed further that he was not present on December 5, 1977 the
date of the auction sale because he went to Iligan City. As long as there was substantial
compliance with the requirements of the notice, the validity of the auction sale can not be
assailed ... .

We quote the following testimony of the petitioner on cross-examination, to wit:

Q. My question to you is this letter marked as Exhibit I for Ho Fernandez notified you that
the property in question shall be sold at public auction to the highest bidder on December 5,
41 | P a g e

1977 pursuant to Sec. 74 of PD 464. Will you tell the Court whether you received the original
of this letter?

A. I just signed it because I was not able to read the same. It was just sent by mail carrier.

Q. So you admit that you received the original of Exhibit I and you signed upon receipt
thereof but you did not read the contents of it?

A. Yes, sir, as I was in a hurry.

Q. After you received that original where did you place it?

A. I placed it in the usual place where I place my mails.

Petitioner, therefore, was notified about the auction sale. It was negligence on his part when
he ignored such notice. By his very own admission that he received the notice, his now coming
to court assailing the validity of the auction sale loses its force.

Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross
inadequacy of price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v.
Rehabilitation Finance Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.).
See also Barrozo Vda. de Gordon v. Court of Appeals (109 SCRA 388) we held that "alleged
gross inadequacy of price is not material when the law gives the owner the right to redeem as
when a sale is made at public auction, upon the theory that the lesser the price, the easier it is
for the owner to effect redemption." In Velasquez v. Coronel (5 SCRA 985), this Court held:

... [R]espondent treasurer now claims that the prices for which the lands were sold are
unconscionable considering the wide divergence between their assessed values and the
amounts for which they had been actually sold. However, while in ordinary sales for reasons
of equity a transaction may be invalidated on the ground of inadequacy of price, or when
such inadequacy shocks one's conscience as to justify the courts to interfere, such does not
follow when the law gives to the owner the right to redeem, as when a sale is made at public
auction, upon the theory that the lesser the price the easier it is for the owner to effect the
redemption. And so it was aptly said: "When there is the right to redeem, inadequacy of
price should not be material, because the judgment debtor may reacquire the property or
also sell his right to redeem and thus recover the loss he claims to have suffered by reason
of the price obtained at the auction sale."

The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De
Long, et al. (188 Wash. 162, 61 P. 2d, 1290):

If mere inadequacy of price is held to be a valid objection to a sale for taxes, the
collection of taxes in this manner would be greatly embarrassed, if not rendered altogether
impracticable. In Black on Tax Titles (2nd Ed.) 238, the correct rule is stated as follows:
"where land is sold for taxes, the inadequacy of the price given is not a valid objection to the
sale." This rule arises from necessity, for, if a fair price for the land were essential to the
sale, it would be useless to offer the property. Indeed, it is notorious that the prices
42 | P a g e

habitually paid by purchasers at tax sales are grossly out of proportion to the value of the
land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al.
(267 P. 555):

Like most cases of this character there is here a certain element of hardship from which
we would be glad to relieve, but do so would unsettle long-established rules and lead to
uncertainty and difficulty in the collection of taxes which are the life blood of the state. We
are convinced that the present rules are just, and that they bring hardship only to those who
have invited it by their own neglect.

We are inclined to believe the petitioner's claim that the value of the lot has greatly
appreciated in value. Precisely because of the widening of Buendia Avenue in Pasay City,
which necessitated the expropriation of adjoining areas, real estate values have gone up in the
area. However, the price quoted by the petitioner for a 203 square meter lot appears quite
exaggerated. At any rate, the foregoing reasons which answer the petitioner's claims lead us
to deny the petition.

And finally, even if we are inclined to give relief to the petitioner on equitable grounds,
there are no strong considerations of substantial justice in his favor. Mr. Francia failed to pay
his taxes for 14 years from 1963 up to the date of the auction sale. He claims to have
pocketed the notice of sale without reading it which, if true, is still an act of inexplicable
negligence. He did not withdraw from the expropriation payment deposited with the Philippine
National Bank an amount sufficient to pay for the back taxes. The petitioner did not pay
attention to another notice sent by the City Treasurer on November 3, 1978, during the period
of redemption, regarding his tax delinquency. There is furthermore no showing of bad faith or
collusion in the purchase of the property by Mr. Fernandez. The petitioner has no standing to
invoke equity in his attempt to regain the property by belatedly asking for the annulment of
the sale.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The
decision of the respondent court is affirmed.SO ORDERED.

CALTEX PHILIPPINES, INC., petitioner, vs.THE HONORABLE COMMISSION ON

AUDIT, HONORABLE COMMISSIONER BARTOLOME C. FERNANDEZ and
HONORABLE COMMISSIONER ALBERTO P. CRUZ, respondents.

This is a petition erroneously brought under Rule 44 of the Rules of Court 1 questioning
the authority of the Commission on Audit (COA) in disallowing petitioner's claims for
reimbursement from the Oil Price Stabilization Fund (OPSF) and seeking the reversal of said
Commission's decision denying its claims for recovery of financing charges from the Fund and
reimbursement of underrecovery arising from sales to the National Power Corporation, Atlas
Consolidated Mining and Development Corporation (ATLAS) and Marcopper Mining Corporation
(MAR-COPPER), preventing it from exercising the right to offset its remittances against its
reimbursement vis-a-vis the OPSF and disallowing its claims which are still pending resolution
before the Office of Energy Affairs (OEA) and the Department of Finance (DOF).
43 | P a g e

Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the Constitutional
Commissions 3 may be brought to this Court on certiorari by the aggrieved party within thirty
(30) days from receipt of a copy thereof. The certiorari referred to is the special civil action
for certiorari under Rule 65 of the Rules of Court. 4

Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the
findings and rulings of the administrator of the fund itself and in disallowing a claim which is
still pending resolution at the OEA level, and (b) "grave abuse of discretion and completely
without jurisdiction" 5 in declaring that petitioner cannot avail of the right to offset any amount
that it may be required under the law to remit to the OPSF against any amount that it may
receive by way of reimbursement therefrom are sufficient to bring this petition within Rule 65
of the Rules of Court, and, considering further the importance of the issues raised, the error in
the designation of the remedy pursued will, in this instance, be excused.

The issues raised revolve around the OPSF created under Section 8 of Presidential Decree
(P.D.) No. 1956, as amended by Executive Order (E.O.) No. 137. As amended, said Section 8
reads as follows:

Sec. 8 . There is hereby created a Trust Account in the books of accounts of the Ministry of
Energy to be designated as Oil Price Stabilization Fund (OPSF) for the purpose of minimizing
frequent price changes brought about by exchange rate adjustments and/or changes in
world market prices of crude oil and imported petroleum products. The Oil Price Stabilization
Fund may be sourced from any of the following:

a) Any increase in the tax collection from ad valorem tax or customs duty imposed on
petroleum products subject to tax under this Decree arising from exchange rate adjustment,
as may be determined by the Minister of Finance in consultation with the Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax exemptions of
government corporations, as may be determined by the Minister of Finance in consultation
with the Board of Energy;

c) Any additional amount to be imposed on petroleum products to augment the resources of

the Fund through an appropriate Order that may be issued by the Board of Energy requiring
payment by persons or companies engaged in the business of importing, manufacturing
and/or marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs paid by oil companies in
the importation of crude oil and petroleum products is less than the peso costs computed
using the reference foreign exchange rate as fixed by the Board of Energy.

The Fund herein created shall be used for the following:

1) To reimburse the oil companies for cost increases in crude oil and imported petroleum
products resulting from exchange rate adjustment and/or increase in world market prices of
crude oil;
44 | P a g e

2) To reimburse the oil companies for possible cost under-recovery incurred as a result of
the reduction of domestic prices of petroleum products. The magnitude of the
underrecovery, if any, shall be determined by the Ministry of Finance. "Cost underrecovery"
shall include the following:

i. Reduction in oil company take as directed by the Board of Energy without the
corresponding reduction in the landed cost of oil inventories in the possession of the oil
companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated

price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.

The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of Energy.

The material operative facts of this case, as gathered from the pleadings of the parties,
are not disputed.

On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter
referred to as Petitioner, directing the latter to remit to the OPSF its collection, excluding that
unremitted for the years 1986 and 1988, of the additional tax on petroleum products
authorized under the aforesaid Section 8 of P.D. No. 1956 which, as of 31 December 1987,
amounted to P335,037,649.00 and informing it that, pending such remittance, all of its claims
for reimbursement from the OPSF shall be held in abeyance. 6

On 9 March 1989, the COA sent another letter to petitioner informing it that partial
verification with the OEA showed that the grand total of its unremitted collections of the above
tax is P1,287,668,820.00, broken down as follows:

1986 — P233,190,916.00
1987 — 335,065,650.00
1988 — 719,412,254.00;

directing it to remit the same, with interest and surcharges thereon, within sixty (60) days
from receipt of the letter; advising it that the COA will hold in abeyance the audit of all its
claims for reimbursement from the OPSF; and directing it to desist from further offsetting the
taxes collected against outstanding claims in 1989 and subsequent periods. 7

In its letter of 3 May 1989, petitioner requested the COA for an early release of its
reimbursement certificates from the OPSF covering claims with the Office of Energy Affairs
since June 1987 up to March 1989, invoking in support thereof COA Circular No. 89-299 on the
lifting of pre-audit of government transactions of national government agencies and
government-owned or controlled corporations. 8

In its Answer dated 8 May 1989, the COA denied petitioner's request for the early
release of the reimbursement certificates from the OPSF and repeated its earlier
45 | P a g e

directive to petitioner to forward payment of the latter's unremitted collections to the

OPSF to facilitate COA's audit action on the reimbursement claims. 9

By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal
for the payment of the collections and the recovery of claims, since the outright payment of
the sum of P1.287 billion to the OEA as a prerequisite for the processing of said claims against
the OPSF will cause a very serious impairment of its cash position. 10 The proposal reads:

We, therefore, very respectfully propose the following:

(1) Any procedural arrangement acceptable to COA to facilitate monitoring of payments and
reimbursements will be administered by the ERB/Finance Dept./OEA, as agencies designated
by law to administer/regulate OPSF.

(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as payment to OPSF,
similarly OEA will deliver to Caltex the same amount in cash reimbursement from OPSF.

(3) The COA audit will commence immediately and will be conducted expeditiously.

(4) The review of current claims (1989) will be conducted expeditiously to preclude further
accumulation of reimbursement from OPSF.

On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921
accepting the above-stated proposal but prohibiting petitioner from further offsetting
remittances and reimbursements for the current and ensuing years. 11 Decision No. 921 reads:

This pertains to the within separate requests of Mr. Manuel A. Estrella, President,
Petron Corporation, and Mr. Francis Ablan, President and Managing Director, Caltex
(Philippines) Inc., for reconsideration of this Commission's adverse action embodied in its
letters dated February 2, 1989 and March 9, 1989, the former directing immediate
remittance to the Oil Price Stabilization Fund of collections made by the firms pursuant to
P.D. 1956, as amended by E.O. No. 137, S. 1987, and the latter reiterating the same
directive but further advising the firms to desist from offsetting collections against their
claims with the notice that "this Commission will hold in abeyance the audit of all . . . claims
for reimbursement from the OPSF."

It appears that under letters of authority issued by the Chairman, Energy Regulatory
Board, the aforenamed oil companies were allowed to offset the amounts due to the Oil Price
Stabilization Fund against their outstanding claims from the said Fund for the calendar years
1987 and 1988, pending with the then Ministry of Energy, the government entity charged
with administering the OPSF. This Commission, however, expressing serious doubts as to the
propriety of the offsetting of all types of reimbursements from the OPSF against all
categories of remittances, advised these oil companies that such offsetting was bereft of
legal basis. Aggrieved thereby, these companies now seek reconsideration and in support
thereof clearly manifest their intent to make arrangements for the remittance to the Office of
Energy Affairs of the amount of collections equivalent to what has been previously
offset, provided that this Commission authorizes the Office of Energy Affairs to prepare the
corresponding checks representing reimbursement from the OPSF. It is alleged that the
46 | P a g e

implementation of such an arrangement, whereby the remittance of collections due to the

OPSF and the reimbursement of claims from the Fund shall be made within a period of not
more than one week from each other, will benefit the Fund and not unduly jeopardize the
continuing daily cash requirements of these firms.

Upon a circumspect evaluation of the circumstances herein obtaining, this Commission

perceives no further objectionable feature in the proposed arrangement, provided that 15%
of whatever amount is due from the Fund is retained by the Office of Energy Affairs, the
same to be answerable for suspensions or disallowances, errors or discrepancies which may
be noted in the course of audit and surcharges for late remittances without prejudice to
similar future retentions to answer for any deficiency in such surcharges, and provided
further that no offsetting of remittances and reimbursements for the current and ensuing
years shall be allowed.

Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive
Director Wenceslao R. De la Paz of the Office of Energy Affairs: 12

Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and based
on our initial verification of documents submitted to us by your Office in support of Caltex
(Philippines), Inc. offsets (sic) for the year 1986 to May 31, 1989, as well as its outstanding
claims against the Oil Price Stabilization Fund (OPSF) as of May 31, 1989, we are pleased to
inform your Office that Caltex (Philippines), Inc. shall be required to remit to OPSF an
amount of P1,505,668,906, representing remittances to the OPSF which were offset against
its claims reimbursements (net of unsubmitted claims). In addition, the Commission hereby
authorize (sic) the Office of Energy Affairs (OEA) to cause payment of P1,959,182,612 to
Caltex, representing claims initially allowed in audit, the details of which are presented
hereunder: . . .

As presented in the foregoing computation the disallowances totalled P387,683,535,

which included P130,420,235 representing those claims disallowed by OEA, details of which
is (sic) shown in Schedule 1 as summarized as follows:

Disallowance of COA
ParticularsAmount

Recovery of financing charges P162,728,475 /a

Product sales 48,402,398 /b
Inventory losses
Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558
——————
P257,263,300
47 | P a g e

Disallowances of OEA 130,420,235

————————— ——————
Total P387,683,535

The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate that
recovery of financing charges by oil companies is not among the items for which the OPSF
may be utilized. Therefore, it is our view that recovery of financing charges has no legal
basis. The mechanism for such claims is provided in DOF Circular 1-87.

b. Product Sales –– Sales to International Vessels/Airlines

BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order No. 87-03-
095 indicating that (sic) February 7, 1987 as the effectivity date that (sic) oil companies
should pay OPSF impost on export sales of petroleum products. Effective February 7, 1987
sales to international vessels/airlines should not be included as part of its domestic sales.
Changing the effectivity date of the resolution from February 7, 1987 to October 20, 1987 as
covered by subsequent ERB Resolution No. 88-12 dated November 18, 1988 has allowed
Caltex to include in their domestic sales volumes to international vessels/airlines and claim
the corresponding reimbursements from OPSF during the period. It is our opinion that the
effectivity of the said resolution should be February 7, 1987.

c. Inventory losses –– Settlement of Ad Valorem

We reviewed the system of handling Borrow and Loan (BLA) transactions including the
related BLA agreement, as they affect the claims for reimbursements of ad valorem taxes.
We observed that oil companies immediately settle ad valorem taxes for BLA transaction
(sic). Loan balances therefore are not tax paid inventories of Caltex subject to
reimbursements but those of the borrower. Hence, we recommend reduction of the claim for
July, August, and November, 1987 amounting to P14,034,786.

d. Sales to Atlas/Marcopper

LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the suspension of
payment of all taxes, duties, fees, imposts and other charges whether direct or indirect due
and payable by the copper mining companies in distress to the national and local
governments." It is our opinion that LOI 1416 which implements the exemption from
payment of OPSF imposts as effected by OEA has no legal basis.

Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the amount
as herein authorized shall be subject to availability of funds of OPSF as of May 31, 1989 and
applicable auditing rules and regulations. With regard to the disallowances, it is further
informed that the aggrieved party has 30 days within which to appeal the decision of the
Commission in accordance with law.
48 | P a g e

On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the
decision based on the following grounds: 13

A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES, ORDERS,

RESOLUTIONS, CIRCULARS ISSUED BY THE DEPARTMENT OF FINANCE AND THE ENERGY
REGULATORY BOARD PURSUANT TO EXECUTIVE ORDER NO. 137.

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF EXECUTIVE

POWER BY DEPARTMENT OF FINANCE AND ENERGY REGULATORY BOARD ARE LEGAL AND
SHOULD BE RESPECTED AND APPLIED UNLESS DECLARED NULL AND VOID BY COURTS OR
REPEALED BY LEGISLATION.

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS AUTHORIZED BY THE

EXECUTIVE BRANCH OF GOVERNMENT, REMAINS VALID.

On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request
for Reconsideration. 14

On 16 February 1990, the COA, with Chairman Domingo taking no part and with
Commissioner Fernandez dissenting in part, handed down Decision No. 1171 affirming the
disallowance for recovery of financing charges, inventory losses, and sales to MARCOPPER and
ATLAS, while allowing the recovery of product sales or those arising from export
sales. 15 Decision No. 1171 reads as follows:

Anent the recovery of financing charges you contend that Caltex Phil. Inc. has the .authority
to recover financing charges from the OPSF on the basis of Department of Finance (DOF)
Circular 1-87, dated February 18, 1987, which allowed oil companies to "recover cost of
financing working capital associated with crude oil shipments," and provided a schedule of
reimbursement in terms of peso per barrel. It appears that on November 6, 1989, the DOF
issued a memorandum to the President of the Philippines explaining the nature of these
financing charges and justifying their reimbursement as follows:

As part of your program to promote economic recovery, . . . oil companies (were

authorized) to refinance their imports of crude oil and petroleum products from the normal
trade credit of 30 days up to 360 days from date of loading . . . Conformably . . ., the oil
companies deferred their foreign exchange remittances for purchases by refinancing their
import bills from the normal 30-day payment term up to the desired 360 days. This
refinancing of importations carried additional costs (financing charges) which then
became, due to government mandate, an inherent part of the cost of the purchases of our
country's oil requirement.

We beg to disagree with such contention. The justification that financing charges increased
oil costs and the schedule of reimbursement rate in peso per barrel (Exhibit 1) used to
support alleged increase (sic) were not validated in our independent inquiry. As manifested
in Exhibit 2, using the same formula which the DOF used in arriving at the reimbursement
rate but using comparable percentages instead of pesos, the ineluctable conclusion is that
the oil companies are actually gaining rather than losing from the extension of credit
49 | P a g e

because such extension enables them to invest the collections in marketable securities
which have much higher rates than those they incur due to the extension. The Data we
used were obtained from CPI (CALTEX) Management and can easily be verified from our
records.

With respect to product sales or those arising from sales to international vessels or
airlines, . . ., it is believed that export sales (product sales) are entitled to claim refund
from the OPSF.

As regard your claim for underrecovery arising from inventory losses, . . . It is the
considered view of this Commission that the OPSF is not liable to refund such surtax on
inventory losses because these are paid to BIR and not OPSF, in view of which CPI
(CALTEX) should seek refund from BIR. . . .

Finally, as regards the sales to Atlas and Marcopper, it is represented that you are
entitled to claim recovery from the OPSF pursuant to LOI 1416 issued on July 17, 1984,
since these copper mining companies did not pay CPI (CALTEX) and OPSF imposts which
were added to the selling price.

Upon a circumspect evaluation, this Commission believes and so holds that the CPI
(CALTEX) has no authority to claim reimbursement for this uncollected OPSF impost
because LOI 1416 dated July 17, 1984, which exempts distressed mining companies from
"all taxes, duties, import fees and other charges" was issued when OPSF was not yet in
existence and could not have contemplated OPSF imposts at the time of its formulation.
Moreover, it is evident that OPSF was not created to aid distressed mining companies but
rather to help the domestic oil industry by stabilizing oil prices.

Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it
imputes to the COA the commission of the following errors: 16

I.RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF FINANCING CHARGES

FROM THE OPSF.

II. RESPONDENT COMMISSION ERRED IN DISALLOWING

CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM SALES TO NPC.

III. RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR REIMBURSEMENT ON

SALES TO ATLAS AND MARCOPPER.

IV. RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING ITS LEGAL
RIGHT TO OFFSET ITS REMITTANCES AGAINST ITS REIMBURSEMENT VIS-A-VIS THE OPSF.

V. RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH ARE STILL

PENDING RESOLUTION BY (SIC) THE OEA AND THE DOF.

In the Resolution of 5 April 1990, this Court required the respondents to comment on the
petition within ten (10) days from notice. 18
50 | P a g e

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz,

assisted by the Office of the Solicitor General, filed their Comment. 19

This Court resolved to give due course to this petition on 30 May 1991 and required the
parties to file their respective Memoranda within twenty (20) days from notice. 20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the
Comment filed on 6 September 1990 be considered as the Memorandum for respondents. 21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.

I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:

(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which
added a second purpose, to wit:

2) To reimburse the oil companies for possible cost underrecovery incurred as a result of the
reduction of domestic prices of petroleum products. The magnitude of the underrecovery, if
any, shall be determined by the Ministry of Finance. "Cost underrecovery" shall include the
following:

i. Reduction in oil company take as directed by the Board of Energy without the
corresponding reduction in the landed cost of oil inventories in the possession of the oil
companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated

price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.

the "other factors" mentioned therein that may be determined by the Ministry (now
Department) of Finance may include financing charges for "in essence, financing charges
constitute unrecovered cost of acquisition of crude oil incurred by the oil companies," as
explained in the 6 November 1989 Memorandum to the President of the Department of
Finance; they "directly translate to cost underrecovery in cases where the money market
placement rates decline and at the same time the tax on interest income increases. The
relationship is such that the presence of underrecovery or overrecovery is directly dependent
on the amount and extent of financing charges."

(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on
the basis of Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of financing working capital associated with
crude oil shipments, the following guidelines on the utilization of the Oil Price Stabilization
Fund pertaining to the payment of the foregoing (sic) exchange risk premium and recovery
of financing charges will be implemented:
51 | P a g e

1. The OPSF foreign exchange premium shall be reduced to a flat rate of one (1) percent for
the first (6) months and 1/32 of one percent per month thereafter up to a maximum period
of one year, to be applied on crude oil' shipments from January 1, 1987. Shipments with
outstanding financing as of January 1, 1987 shall be charged on the basis of the fee
applicable to the remaining period of financing.

2. In addition, for shipments loaded after January 1987, oil companies shall be allowed to
recover financing charges directly from the OPSF per barrel of crude oil based on the
following schedule:

Financing Period

Reimbursement Rate
Pesos per Barrel

Less than 180 days None

180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28

The above rates shall be subject to review every sixty

days.

Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised
the Office of Energy Affairs as follows:

HON. VICENTE T. PATERNO

Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila

D ear Sir:

This refers to the letters of the Oil Industry dated December 4, 1986 and February 5, 1987
and subsequent discussions held by the Price Review committee on February 6, 1987.

On the basis of the representations made, the Department of Finance recognizes the
necessity to reduce the foreign exchange risk premium accruing to the Oil Price Stabilization
Fund (OPSF). Such a reduction would allow the industry to recover partly associated
financing charges on crude oil imports. Accordingly, the OPSF foreign exchange risk fee shall
be reduced to a flat charge of 1% for the first six (6) months plus 1/32% of 1% per month
thereafter up to a maximum period of one year, effective January 1, 1987. In addition, since
the prevailing company take would still leave unrecovered financing charges, reimbursement
52 | P a g e

may be secured from the OPSF in accordance with the provisions of the attached
Department of Finance circular. 23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the
guidelines for the computation of the foreign exchange risk fee and the recovery of financing
charges from the OPSF, to wit:

B. FINANCE CHARGES

1. Oil companies shall be allowed to recover financing charges directly from the OPSF for both
crude and product shipments loaded after January 1, 1987 based on the following rates:

Financing Period Reimbursement Rate

(PBbl.)

Less than 180 days None

180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28

2. The above rates shall be subject to review every sixty days. 24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing
further guidelines on the recoverability of financing charges, to wit:

Following are the supplemental rules to Department of Finance Circular No. 1-87 dated
February 18, 1987 which allowed the recovery of financing charges directly from the Oil Price
Stabilization Fund. (OPSF):

1. The Claim for reimbursement shall be on a per shipment basis.

2. The claim shall be filed with the Office of Energy Affairs together with the claim on peso
cost differential for a particular shipment and duly certified supporting documents
providedfor under Ministry of Finance No. 11-85.

3. The reimbursement shall be on the form of reimbursement certificate (Annex A) to be

issued by the Office of Energy Affairs. The said certificate may be used to offset against
amounts payable to the OPSF. The oil companies may also redeem said certificates in cash if
not utilized, subject to availability of funds. 25

The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-
12-017. 26

The COA can neither ignore these issuances nor formulate its own interpretation of the laws
in the light of the determination of executive agencies. The determination by the Department
of Finance and the OEA that financing charges are recoverable from the OPSF is entitled to
great weight and consideration. 27 The function of the COA, particularly in the matter of
allowing or disallowing certain expenditures, is limited to the promulgation of accounting and
53 | P a g e

auditing rules for, among others, the disallowance of irregular, unnecessary, excessive,
extravagant, or unconscionable expenditures, or uses of government funds and properties. 28

(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's
claim that petitioner is gaining, instead of losing, from the extension of credit, is belatedly
raised and not supported by expert analysis.

In impeaching the validity of petitioner's assertions, the respondents argue that:

1. The Constitution gives the COA discretionary power to disapprove irregular or unnecessary
government expenditures and as the monetary claims of petitioner are not allowed by law,
the COA acted within its jurisdiction in denying them;

2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges from
the OPSF;

3. Under the principle of ejusdem generis, the "other factors" mentioned in the second
purpose of the OPSF pursuant to E.O. No. 137 can only include "factors which are of the
same nature or analogous to those enumerated;"

4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of the
Department of Finance violates P.D. No. 1956 and E.O. No. 137; and

5. Department of Finance rules and regulations implementing P.D. No. 1956 do not likewise
allow reimbursement of financing
charges. 29

We find no merit in the first assigned error.

As to the power of the COA, which must first be resolved in view of its primacy, We find the
theory of petitioner –– that such does not extend to the disallowance of irregular,
unnecessary, excessive, extravagant, or unconscionable expenditures, or use of government
funds and properties, but only to the promulgation of accounting and auditing rules for,
among others, such disallowance –– to be untenable in the light of the provisions of the
1987 Constitution and related laws.

Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:

Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to examine,
audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or
uses of funds and property, owned or held in trust by, or pertaining to, the Government, or
any of its subdivisions, agencies, or instrumentalities, including government-owned and
controlled corporations with original charters, and on a post-audit basis: (a) constitutional
bodies, commissions and offices that have been granted fiscal autonomy under this
Constitution; (b) autonomous state colleges and universities; (c) other government-owned or
controlled corporations and their subsidiaries; and (d) such non-governmental entities
receiving subsidy or equity, directly or indirectly, from or through the government, which are
required by law or the granting institution to submit to such audit as a condition of subsidy
54 | P a g e

or equity. However, where the internal control system of the audited agencies is inadequate,
the Commission may adopt such measures, including temporary or special pre-audit, as are
necessary and appropriate to correct the deficiencies. It shall keep the general accounts, of
the Government and, for such period as may be provided by law, preserve the vouchers and
other supporting papers pertaining thereto.

(2) The Commission shall have exclusive authority, subject to the limitations in this Article, to
define the scope of its audit and examination, establish the techniques and methods required
therefor, and promulgate accounting and auditing rules and regulations, including those for
the prevention and disallowance of irregular, unnecessary, excessive, extravagant, or,
unconscionable expenditures, or uses of government funds and properties.

These present powers, consistent with the declared independence of the Commission, 30 are
broader and more extensive than that conferred by the 1973 Constitution. Under the latter,
the Commission was empowered to:

Examine, audit, and settle, in accordance with law and regulations, all accounts pertaining to
the revenues, and receipts of, and expenditures or uses of funds and property, owned or
held in trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or
instrumentalities including government-owned or controlled corporations, keep the general
accounts of the Government and, for such period as may be provided by law, preserve the
vouchers pertaining thereto; and promulgate accounting and auditing rules and regulations
including those for the prevention of irregular, unnecessary, excessive, or extravagant
expenditures or uses of funds and property. 31

Upon the other hand, under the 1935 Constitution, the power and authority of the COA's
precursor, the General Auditing Office, were, unfortunately, limited; its very role was
markedly passive. Section 2 of Article XI thereofprovided:

Sec. 2. The Auditor General shall examine, audit, and settle all accounts pertaining to the
revenues and receipts from whatever source, including trust funds derived from bond issues;
and audit, in accordance with law and administrative regulations, all expenditures of funds or
property pertaining to or held in trust by the Government or the provinces or municipalities
thereof. He shall keep the general accounts of the Government and the preserve the
vouchers pertaining thereto. It shall be the duty of the Auditor General to bring to the
attention of the proper administrative officer expenditures of funds or property which, in his
opinion, are irregular, unnecessary, excessive, or extravagant. He shall also perform such
other functions as may be prescribed by law.

As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant

expenditures or uses of funds, the 1935 Constitution did not grant the Auditor General the
power to issue rules and regulations to prevent the same. His was merely to bring that
matter to the attention of the proper administrative officer.

The ruling on this particular point, quoted by petitioner from the cases of Guevarra
vs. Gimenez 32 and Ramos vs.Aquino, 33 are no longer controlling as the two (2) were
decided in the light of the 1935 Constitution.
55 | P a g e

There can be no doubt, however, that the audit power of the Auditor General under the
1935 Constitution and the Commission on Audit under the 1973 Constitution authorized them
to disallow illegal expenditures of funds or uses of funds and property. Our present
Constitution retains that same power and authority, further strengthened by the definition of
the COA's general jurisdiction in Section 26 of the Government Auditing Code of the
Philippines 34 and Administrative Code of 1987. 35 Pursuant to its power to promulgate
accounting and auditing rules and regulations for the prevention of irregular, unnecessary,
excessive or extravagant expenditures or uses of funds, 36 the COA promulgated on 29
March 1977 COA Circular No. 77-55. Since the COA is responsible for the enforcement of the
rules and regulations, it goes without saying that failure to comply with them is a ground for
disapproving the payment of the proposed expenditure. As observed by one of the
Commissioners of the 1986 Constitutional Commission, Fr. Joaquin G. Bernas: 37

It should be noted, however, that whereas under Article XI, Section 2, of the 1935
Constitution the Auditor General could not correct "irregular, unnecessary, excessive or
extravagant" expenditures of public funds but could only "bring [the matter] to the attention
of the proper administrative officer," under the 1987 Constitution, as also under the 1973
Constitution, the Commission on Audit can "promulgate accounting and auditing rules and
regulations including those for the prevention and disallowance of irregular, unnecessary,
excessive, extravagant, or unconscionable expenditures or uses of government funds and
properties." Hence, since the Commission on Audit must ultimately be responsible for the
enforcement of these rules and regulations, the failure to comply with these regulations can
be a ground for disapproving the payment of a proposed expenditure.

Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more
active role and invested it with broader and more extensive powers, they did not intend
merely to make the COA a toothless tiger, but rather envisioned a dynamic, effective,
efficient and independent watchdog of the Government.

The issue of the financing charges boils down to the validity of Department of Finance
Circular No. 1-87, Department of Finance Circular No. 4-88 and the implementing circulars of
the OEA, issued pursuant to Section 8, P.D. No. 1956, as amended by E.O. No. 137,
authorizing it to determine "other factors" which may result in cost underrecovery and a
consequent reimbursement from the OPSF.

The Solicitor General maintains that, following the doctrine of ejusdem generis, financing
charges are not included in "cost underrecovery" and, therefore, cannot be considered as
one of the "other factors." Section 8 of P.D. No. 1956, as amended by E.O. No. 137, does
not explicitly define what "cost underrecovery" is. It merely states what it includes. Thus:

. . . "Cost underrecovery" shall include the following:

i. Reduction in oil company takes as directed by the Board of Energy without the
corresponding reduction in the landed cost of oil inventories in the possession of the oil
companies at the time of the price change;
56 | P a g e

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated

price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.

These "other factors" can include only those which are of the same class or nature as the
two specifically enumerated in subparagraphs (i) and (ii). A common characteristic of both is
that they are in the nature of government mandated price reductions. Hence, any other
factor which seeks to be a part of the enumeration, or which could qualify as a cost
underrecovery, must be of the same class or nature as those specifically enumerated.

Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance
broad and unrestricted authority to determine or define "other factors."

Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here general words follow an enumeration of
persons or things, by words of a particular and specific meaning, such general words are not
to be construed in their widest extent, but are held to be as applying only to persons or
things of the same kind or class as those specifically mentioned. 38 A reading of
subparagraphs (i) and (ii) easily discloses that they do not have a common characteristic.
The first relates to price reduction as directed by the Board of Energy while the second refers
to reduction in internal ad valoremtaxes. Therefore, subparagraph (iii) cannot be limited by
the enumeration in these subparagraphs. What should be considered for purposes of
determining the "other factors" in subparagraph (iii) is the first sentence of paragraph (2) of
the Section which explicitly allows cost underrecovery only if such were incurred as a result
of the reduction of domestic prices of petroleum products.

Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery
in the sense that such were incurred as a result of the inability to fully offset financing
expenses from yields in money market placements, they do not, however, fall under the
foregoing provision of P.D. No. 1956, as amended, because the same did not result from the
reduction of the domestic price of petroleum products. Until paragraph (2), Section 8 of the
decree, as amended, is further amended by Congress, this Court can do nothing. The duty of
this Court is not to legislate, but to apply or interpret the law. Be that as it may, this Court
wishes to emphasize that as the facts in this case have shown, it was at the behest of the
Government that petitioner refinanced its oil import payments from the normal 30-day trade
credit to a maximum of 360 days. Petitioner could be correct in its assertion that owing to
the extended period for payment, the financial institution which refinanced said payments
charged a higher interest, thereby resulting in higher financing expenses for the petitioner. It
would appear then that equity considerations dictate that petitioner should somehow be
allowed to recover its financing losses, if any, which may have been sustained because it
accommodated the request of the Government. Although under Section 29 of the National
Internal Revenue Code such losses may be deducted from gross income, the effect of that
loss would be merely to reduce its taxable income, but not to actually wipe out such losses.
The Government then may consider some positive measures to help petitioner and others
57 | P a g e

similarly situated to obtain substantial relief. An amendment, as aforestated, may then be in

order.

Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of
the Department of Finance to determine or define "other factors" is to uphold an undue
delegation of legislative power, it clearly appearing that the subject provision does not
provide any standard for the exercise of the authority. It is a fundamental rule that
delegation of legislative power may be sustained only upon the ground that some standard
for its exercise is provided and that the legislature, in making the delegation, has prescribed
the manner of the exercise of the delegated authority. 39

Finally, whether petitioner gained or lost by reason of the extensive credit is rendered
irrelevant by reason of the foregoing disquisitions. It may nevertheless be stated that
petitioner failed to disprove COA's claim that it had in fact gained in the process. Otherwise
stated, petitioner failed to sufficiently show that it incurred a loss. Such being the case, how
can petitioner claim for reimbursement? It cannot have its cake and eat it too.

II. Anent the claims arising from sales to the National Power Corporation, We find for the
petitioner. The respondents themselves admit in their Comment that underrecovery arising
from sales to NPC are reimbursable because NPC was granted full exemption from the
payment of taxes; to prove this, respondents trace the laws providing for such
exemption. 40 The last law cited is the Fiscal Incentives Regulatory Board's Resolution No.
17-87 of 24 June 1987 which provides, in part, "that the tax and duty exemption privileges
of the National Power Corporation, including those pertaining to its domestic purchases of
petroleum and petroleum products . . . are restored effective March 10, 1987." In a
Memorandum issued on 5 October 1987 by the Office of the President, NPC's tax exemption
was confirmed and approved.

Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum

products to the NPC is evident in the recently passed Republic Act No. 6952 establishing the
Petroleum Price Standby Fund to support the OPSF. 41 The pertinent part of Section 2,
Republic Act No. 6952 provides:

Sec. 2. Application of the Fund shall be subject to the following conditions:

(1) That the Fund shall be used to reimburse the oil companies for (a) cost increases of
imported crude oil and finished petroleum products resulting from foreign exchange rate
adjustments and/or increases in world market prices of crude oil; (b) cost underrecovery
incurred as a result of fuel oil sales to the National Power Corporation (NPC); and (c) other
cost underrecoveries incurred as may be finally decided by the Supreme
Court; . . .

Hence, petitioner can recover its claim arising from sales of petroleum products to the
National Power Corporation.

III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER,
petitioner relies on Letter of Instruction (LOI) 1416, dated 17 July 1984, which ordered the
58 | P a g e

suspension of payments of all taxes, duties, fees and other charges, whether direct or
indirect, due and payable by the copper mining companies in distress to the national
government. Pursuant to this LOI, then Minister of Energy, Hon. Geronimo Velasco, issued
Memorandum Circular No. 84-11-22 advising the oil companies that Atlas Consolidated
Mining Corporation and Marcopper Mining Corporation are among those declared to be in
distress.

In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18
August 1989 letter to Executive Director Wenceslao R. de la Paz, states that "it is our opinion
that LOI 1416 which implements the exemption from payment of OPSF imposts as effected
by OEA has no legal basis;" 42 in its Decision No. 1171, it ruled that "the CPI (CALTEX)
(Caltex) has no authority to claim reimbursement for this uncollected impost because LOI
1416 dated July 17, 1984, . . . was issued when OPSF was not yet in existence and could not
have contemplated OPSF imposts at the time of its formulation." 43 It is further stated that:
"Moreover, it is evident that OPSF was not created to aid distressed mining companies but
rather to help the domestic oil industry by stabilizing oil prices."

In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have
intended to exempt said distressed mining companies from the payment of OPSF dues for
the following reasons:

a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956 creating
the OPSF was promulgated on October 10, 1984, while E.O. 137, amending P.D. 1956, was
issued on February 25, 1987.

b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in line with the
government's effort to prevent the collapse of the copper industry. P.D No. 1956, as
amended, was issued for the purpose of minimizing frequent price changes brought about by
exchange rate adjustments and/or changes in world market prices of crude oil and imported
petroleum product's; and

c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other charges,
whether direct or indirect, due and payable by the copper mining companies in distress to
the Notional and Local Governments . . ." On the other hand, OPSF dues are not payable by
(sic) distressed copper companies but by oil companies. It is to be noted that the copper
mining companies do not pay OPSF dues. Rather, such imposts are built in or already
incorporated in the prices of oil products. 44

Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed
mining companies, it does not accord petitioner the same privilege with respect to its
obligation to pay OPSF dues.

We concur with the disquisitions of the respondents. Aside from such reasons, however, it is
apparent that LOI 1416 was never published in the Official Gazette 45 as required by Article 2
of the Civil Code, which reads:
59 | P a g e

Laws shall take effect after fifteen days following the completion of their publication in the
Official Gazette, unless it is otherwise provided. . . .

In applying said provision, this Court ruled in the case of Tañada vs. Tuvera: 46

WHEREFORE, the Court hereby orders respondents to publish in the Official Gazette all
unpublished presidential issuances which are of general application, and unless so published
they shall have no binding force and effect.

Resolving the motion for reconsideration of said decision, this Court, in its Resolution
promulgated on 29 December 1986, 47 ruled:

We hold therefore that all statutes, including those of local application and private laws, shall
be published as a condition for their effectivity, which shall begin fifteen days after
publication unless a different effectivity date is fixed by the legislature.

Covered by this rule are presidential decrees and executive orders promulgated by the
President in the exercise of legislative powers whenever the same are validly delegated by
the legislature or, at present, directly conferred by the Constitution. Administrative rules and
regulations must also be published if their purpose is to enforce or implement existing laws
pursuant also to a valid delegation.

xxx xxx xxx

WHEREFORE, it is hereby declared that all laws as above defined shall immediately upon
their approval, or as soon thereafter as possible, be published in full in the Official Gazette,
to become effective only after fifteen days from their publication, or on another date
specified by the legislature, in accordance with Article 2 of the Civil Code.

LOI 1416 has, therefore, no binding force or effect as it was never published in the Official
Gazette after its issuance or at any time after the decision in the abovementioned cases.

Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued
on 18 June 1987. As amended, the said provision now reads:

Laws shall take effect after fifteen days following the completion of their publication either in
the Official Gazette or in a newspaper of general circulation in the Philippines, unless it is
otherwise provided.

We are not aware of the publication of LOI 1416 in any newspaper of general circulation
pursuant to Executive Order No. 200.

Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim
must still fail. Tax exemptions as a general rule are construed strictly against the grantee
and liberally in favor of the taxing authority. 48The burden of proof rests upon the party
claiming exemption to prove that it is in fact covered by the exemption so claimed. The party
claiming exemption must therefore be expressly mentioned in the exempting law or at least
be within its purview by clear legislative intent.
60 | P a g e

In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales
to ATLAS and MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though
LOI 1416 may suspend the payment of taxes by copper mining companies, it does not give
petitioner the same privilege with respect to the payment of OPSF dues.

IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that

the Department of Finance has still to issue a final and definitive ruling thereon; accordingly,
it was premature for COA to disallow it. By doing so, the latter acted beyond its
jurisdiction. 49 Respondents, on the other hand, contend that said amount was already
disallowed by the OEA for failure to substantiate it. 50 In fact, when OEA submitted the
claims of petitioner for pre-audit, the abovementioned amount was already excluded.

An examination of the records of this case shows that petitioner failed to prove or
substantiate its contention that the amount of P130,420,235.00 is still pending before the
OEA and the DOF. Additionally, We find no reason to doubt the submission of respondents
that said amount has already been passed upon by the OEA. Hence, the ruling of respondent
COA disapproving said claim must be upheld.

V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF
from petitioner may be offset against petitioner's outstanding claims from said fund.
Petitioner contends that it should be allowed to offset its claims from the OPSF against its
contributions to the fund as this has been allowed in the past, particularly in the years 1987
and 1988. 51

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on
compensation and Section 21, Book V, Title I-B of the Revised Administrative Code which
provides for "Retention of Money for Satisfaction of Indebtedness to
52
Government." Petitioner also mentions communications from the Board of Energy and the
Department of Finance that supposedly authorize compensation.

Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that there
can be no offsetting of taxes against the claims that a taxpayer may have against the
government, as taxes do not arise from contracts or depend upon the will of the taxpayer,
but are imposed by law. Respondents also allege that petitioner's reliance on Section 21,
Book V, Title I-B of the Revised Administrative Code, is misplaced because "while this
provision empowers the COA to withhold payment of a government indebtedness to a person
who is also indebted to the government and apply the government indebtedness to the
satisfaction of the obligation of the person to the government, like authority or right to make
compensation is not given to the private person." 54 The reason for this, as stated
in Commissioner of Internal Revenue vs. Algue, Inc., 55 is that money due the government,
either in the form of taxes or other dues, is its lifeblood and should be collected without
hindrance. Thus, instead of giving petitioner a reason for compensation or set-off, the
Revised Administrative Code makes it the respondents' duty to collect petitioner's
indebtedness to the OPSF.

Refuting respondents' contention, petitioner claims that the amounts due from it do not arise
as a result of taxation because "P.D. 1956, amended, did not create a source of taxation; it
61 | P a g e

instead established a special fund . . .," 56 and that the OPSF contributions do not go to the
general fund of the state and are not used for public purpose, i.e., not for the support of the
government, the administration of law, or the payment of public expenses. This alleged lack
of a public purpose behind OPSF exactions distinguishes such from a tax. Hence, the ruling
in the Francia case is inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support
the OPSF; the said law provides in part that:

Sec. 2. Application of the fund shall be subject to the following conditions:

xxx xxx xxx

(3) That no amount of the Petroleum Price Standby Fund shall be used to pay any oil
company which has an outstanding obligation to the Government without said obligation
being offset first, subject to the requirements of compensation or offset under the Civil Code.

We find no merit in petitioner's contention that the OPSF contributions are not for a
public purpose because they go to a special fund of the government. Taxation is no longer
envisioned as a measure merely to raise revenue to support the existence of the
government; taxes may be levied with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry which is affected with public interest
as to be within the police power of the state. 57 There can be no doubt that the oil industry is
greatly imbued with public interest as it vitally affects the general welfare. Any unregulated
increase in oil prices could hurt the lives of a majority of the people and cause economic
crisis of untold proportions. It would have a chain reaction in terms of, among others,
demands for wage increases and upward spiralling of the cost of basic commodities. The
stabilization then of oil prices is of prime concern which the state, via its police power, may
properly address.

Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of
OPSF is taxation. No amount of semantical juggleries could dim this fact.

It is settled that a taxpayer may not offset taxes due from the claims that he may have
against the government. 58Taxes cannot be the subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other and a claim
for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. 59

We may even further state that technically, in respect to the taxes for the OPSF, the oil
companies merely act as agents for the Government in the latter's collection since the taxes
are, in reality, passed unto the end-users –– the consuming public. In that capacity, the
petitioner, as one of such companies, has the primary obligation to account for and remit the
taxes collected to the administrator of the OPSF. This duty stems from the fiduciary
relationship between the two; petitioner certainly cannot be considered merely as a debtor.
In respect, therefore, to its collection for the OPSF vis-a-vis its claims for reimbursement, no
compensation is likewise legally feasible. Firstly, the Government and the petitioner cannot
be said to be mutually debtors and creditors of each other. Secondly, there is no proof that
62 | P a g e

petitioner's claim is already due and liquidated. Under Article 1279 of the Civil Code, in order
that compensation may be proper, it is necessary that:

(1) each one of the obligors be bound principally, and that he be at the same time a
principal creditor of the other;

(2) both debts consist in a sum of :money, or if the things due are consumable, they be of
the same kind, and also of the same quality if the latter has been stated;

(3) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention or controversy, commenced by third persons
and communicated in due time to the debtor.

That compensation had been the practice in the past can set no valid precedent. Such a
practice has no legal basis. Lastly, R.A. No. 6952 does not authorize oil companies to offset
their claims against their OPSF contributions. Instead, it prohibits the government from
paying any amount from the Petroleum Price Standby Fund to oil companies which have
outstanding obligations with the government, without said obligation being offset first
subject to the rules on compensation in the Civil Code.

WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the

challenged decision of the Commission on Audit, except that portion thereof disallowing
petitioner's claim for reimbursement of underrecovery arising from sales to the National
Power Corporation, which is hereby allowed.With costs against petitioner.SO ORDERED.

PHILEX MINING CORPORATION vs COMMISSIONER OF INTERNAL REVENUE,

This is a petition for review on certiorari of the June 30, 2000 Decision[1] of the Court of
Appeals in CA-G.R. SP No. 49385, which affirmed the Decision[2] of the Court of Tax Appeals in
C.T.A. Case No. 5200. Also assailed is the April 3, 2001 Resolution[3] denying the motion for
reconsideration.

The facts of the case are as follows:

On April 16, 1971, petitioner Philex Mining Corporation (Philex Mining), entered into an
agreement[4] with Baguio Gold Mining Company (Baguio Gold) for the former to manage and
operate the latters mining claim, known as the Sto. Nino mine, located in Atok and
63 | P a g e

Tublay, Benguet Province. The parties agreement was denominated as Power of Attorney and
provided for the following terms:

4. Within three (3) years from date thereof, the PRINCIPAL (Baguio Gold) shall
make available to the MANAGERS (Philex Mining) up to ELEVEN MILLION PESOS
(P11,000,000.00), in such amounts as from time to time may be required by the
MANAGERS within the said 3-year period, for use in the MANAGEMENT of the
STO. NINO MINE. The said ELEVEN MILLION PESOS (P11,000,000.00) shall be
deemed, for internal audit purposes, as the owners account in the Sto. Nino
PROJECT. Any part of any income of the PRINCIPAL from the STO. NINO MINE,
which is left with the Sto. Nino PROJECT, shall be added to such owners account.

5. Whenever the MANAGERS shall deem it necessary and convenient in

connection with the MANAGEMENT of the STO. NINO MINE, they may transfer
their own funds or property to the Sto. Nino PROJECT, in accordance with the
following arrangements:

(a) The properties shall be appraised and, together with the cash, shall be
carried by the Sto. Nino PROJECT as a special fund to be known as the
MANAGERS account.

(b) The total of the MANAGERS account shall not exceed P11,000,000.00, except
with prior approval of the PRINCIPAL; provided, however, that if the
compensation of the MANAGERS as herein provided cannot be paid in cash from
the Sto. Nino PROJECT, the amount not so paid in cash shall be added to the
MANAGERS account.

(c) The cash and property shall not thereafter be withdrawn from the Sto. Nino
PROJECT until termination of this Agency.

(d) The MANAGERS account shall not accrue interest. Since it is the desire of the
PRINCIPAL to extend to the MANAGERS the benefit of subsequent appreciation
of property, upon a projected termination of this Agency, the ratio which the
MANAGERS account has to the owners account will be determined, and the
corresponding proportion of the entire assets of the STO. NINO MINE, excluding
the claims, shall be transferred to the MANAGERS, except that such transferred
assets shall not include mine development, roads, buildings, and similar property
64 | P a g e

which will be valueless, or of slight value, to the MANAGERS. The MANAGERS

can, on the other hand, require at their option that property originally transferred
by them to the Sto. Nino PROJECT be re-transferred to them. Until such assets
are transferred to the MANAGERS, this Agency shall remain subsisting.

12. The compensation of the MANAGER shall be fifty per cent (50%) of the net
profit of the Sto. Nino PROJECT before income tax. It is understood that the
MANAGERS shall pay income tax on their compensation, while the PRINCIPAL
shall pay income tax on the net profit of the Sto. Nino PROJECT after deduction
therefrom of the MANAGERS compensation.

16. The PRINCIPAL has current pecuniary obligation in favor of the MANAGERS
and, in the future, may incur other obligations in favor of the MANAGERS. This
Power of Attorney has been executed as security for the payment and
satisfaction of all such obligations of the PRINCIPAL in favor of the MANAGERS
and as a means to fulfill the same. Therefore, this Agency shall be irrevocable
while any obligation of the PRINCIPAL in favor of the MANAGERS is outstanding,
inclusive of the MANAGERS account. After all obligations of the PRINCIPAL in
favor of the MANAGERS have been paid and satisfied in full, this Agency shall be
revocable by the PRINCIPAL upon 36-month notice to the MANAGERS.

17. Notwithstanding any agreement or understanding between the PRINCIPAL

and the MANAGERS to the contrary, the MANAGERS may withdraw from this
Agency by giving 6-month notice to the PRINCIPAL. The MANAGERS shall not in
any manner be held liable to the PRINCIPAL by reason alone of such withdrawal.
Paragraph 5(d) hereof shall be operative in case of the MANAGERS withdrawal.

In the course of managing and operating the project, Philex Mining made advances of cash
and property in accordance with paragraph 5 of the agreement. However, the mine suffered
continuing losses over the years which resulted to petitioners withdrawal as manager of the
mine on January 28, 1982 and in the eventual cessation of mine operations on February 20,
1982.[6]

Thereafter, on September 27, 1982, the parties executed a Compromise with Dation in
Payment[7] wherein Baguio Gold admitted an indebtedness to petitioner in the amount of
P179,394,000.00 and agreed to pay the same in three segments by first assigning Baguio
Golds tangible assets to petitioner, transferring to the latter Baguio Golds equitable title in its
65 | P a g e

Philodrill assets and finally settling the remaining liability through properties that Baguio Gold
may acquire in the future.

On December 31, 1982, the parties executed an Amendment to Compromise with Dation in
Payment[8] where the parties determined that Baguio Golds indebtedness to petitioner actually
amounted to P259,137,245.00, which sum included liabilities of Baguio Gold to other creditors
that petitioner had assumed as guarantor. These liabilities pertained to long-term loans
amounting to US$11,000,000.00 contracted by Baguio Gold from the Bank of America NT & SA
and Citibank N.A. This time, Baguio Gold undertook to pay petitioner in two segments by first
assigning its tangible assets for P127,838,051.00 and then transferring its equitable title in its
Philodrill assets for P16,302,426.00. The parties then ascertained that Baguio Gold had a
remaining outstanding indebtedness to petitioner in the amount of P114,996,768.00.

Subsequently, petitioner wrote off in its 1982 books of account the remaining outstanding
indebtedness of Baguio Gold by charging P112,136,000.00 to allowances and reserves that
were set up in 1981 and P2,860,768.00 to the 1982 operations.

In its 1982 annual income tax return, petitioner deducted from its gross income the amount of
P112,136,000.00 as loss on settlement of receivables from Baguio Gold against reserves and
allowances.[9] However, the Bureau of Internal Revenue (BIR) disallowed the amount as
deduction for bad debt and assessed petitioner a deficiency income tax of P62,811,161.39.

Petitioner protested before the BIR arguing that the deduction must be allowed since all
requisites for a bad debt deduction were satisfied, to wit: (a) there was a valid and existing
debt; (b) the debt was ascertained to be worthless; and (c) it was charged off within the
taxable year when it was determined to be worthless.

Petitioner emphasized that the debt arose out of a valid management contract it entered into
with Baguio Gold. The bad debt deduction represented advances made by petitioner which,
pursuant to the management contract, formed part of Baguio Golds pecuniary obligations to
petitioner. It also included payments made by petitioner as guarantor of Baguio Golds long-
term loans which legally entitled petitioner to be subrogated to the rights of the original
creditor.

Petitioner also asserted that due to Baguio Golds irreversible losses, it became evident
that it would not be able to recover the advances and payments it had made in behalf of
Baguio Gold. For a debt to be considered worthless, petitioner claimed that it was neither
66 | P a g e

required to institute a judicial action for collection against the debtor nor to sell or dispose of
collateral assets in satisfaction of the debt. It is enough that a taxpayer exerted diligent efforts
to enforce collection and exhausted all reasonable means to collect.

On October 28, 1994, the BIR denied petitioners protest for lack of legal and factual
basis. It held that the alleged debt was not ascertained to be worthless since Baguio Gold
remained existing and had not filed a petition for bankruptcy; and that the deduction did not
consist of a valid and subsisting debt considering that, under the management contract,
petitioner was to be paid fifty percent (50%) of the projects net profit.[10]

Petitioner appealed before the Court of Tax Appeals (CTA) which rendered judgment,
as follows:

WHEREFORE, in view of the foregoing, the instant Petition for Review is hereby
DENIED for lack of merit. The assessment in question, viz: FAS-1-82-88-003067 for
deficiency income tax in the amount of P62,811,161.39 is hereby AFFIRMED.

ACCORDINGLY, petitioner Philex Mining Corporation is hereby ORDERED to

PAY respondent Commissioner of Internal Revenue the amount of P62,811,161.39,
plus, 20% delinquency interest due computed from February 10, 1995, which is the
date after the 20-day grace period given by the respondent within which petitioner
has to pay the deficiency amount x x x up to actual date of payment.SO ORDERED.[11]

The CTA rejected petitioners assertion that the advances it made for the Sto. Nino mine
were in the nature of a loan. It instead characterized the advances as petitioners investment in
a partnership with Baguio Gold for the development and exploitation of the Sto. Nino
mine. The CTA held that the Power of Attorney executed by petitioner and Baguio Gold was
actually a partnership agreement. Since the advanced amount partook of the nature of an
investment, it could not be deducted as a bad debt from petitioners gross income.

The CTA likewise held that the amount paid by petitioner for the long-term loan
obligations of Baguio Gold could not be allowed as a bad debt deduction. At the time the
payments were made, Baguio Gold was not in default since its loans were not yet due and
demandable. What petitioner did was to pre-pay the loans as evidenced by the notice sent by
Bank of America showing that it was merely demanding payment of the installment and
interests due. Moreover, Citibank imposed and collected a pre-termination penalty for the pre-
payment.
67 | P a g e

The Court of Appeals affirmed the decision of the CTA.[12] Hence, upon denial of its
motion for reconsideration,[13] petitioner took this recourse under Rule 45 of the Rules of
Court, alleging that:

I. The Court of Appeals erred in construing that the advances made by Philex in the
management of the Sto. Nino Mine pursuant to the Power of Attorney partook of the
nature of an investment rather than a loan.

II. The Court of Appeals erred in ruling that the 50%-50% sharing in the net profits of
the Sto. Nino Mine indicates that Philex is a partner of Baguio Gold in the development
of the Sto. Nino Mine notwithstanding the clear absence of any intent on the part of
Philex and Baguio Gold to form a partnership.

III. The Court of Appeals erred in relying only on the Power of Attorney and in
completely disregarding the Compromise Agreement and the Amended Compromise
Agreement when it construed the nature of the advances made by Philex.

IV. The Court of Appeals erred in refusing to delve upon the issue of the propriety of
the bad debts write-off.[14]

Petitioner insists that in determining the nature of its business relationship with Baguio
Gold, we should not only rely on the Power of Attorney, but also on the subsequent
Compromise with Dation in Payment and Amended Compromise with Dation in Payment that
the parties executed in 1982. These documents, allegedly evinced the parties intent to treat
the advances and payments as a loan and establish a creditor-debtor relationship between
them.

The petition lacks merit.

The lower courts correctly held that the Power of Attorney is the instrument that is
material in determining the true nature of the business relationship between petitioner and
Baguio Gold. Before resort may be had to the two compromise agreements, the parties
contractual intent must first be discovered from the expressed language of the primary
contract under which the parties business relations were founded. It should be noted that the
compromise agreements were mere collateral documents executed by the parties pursuant to
the termination of their business relationship created under the Power of Attorney. On the
other hand, it is the latter which established the juridical relation of the parties and defined the
parameters of their dealings with one another.

The execution of the two compromise agreements can hardly be considered as a

subsequent or contemporaneous act that is reflective of the parties true intent. The
compromise agreements were executed eleven years after the Power of Attorney and merely
68 | P a g e

laid out a plan or procedure by which petitioner could recover the advances and payments it
made under the Power of Attorney. The parties entered into the compromise agreements as a
consequence of the dissolution of their business relationship. It did not define that relationship
or indicate its real character.

An examination of the Power of Attorney reveals that a partnership or joint venture was
indeed intended by the parties. Under a contract of partnership, two or more persons bind
themselves to contribute money, property, or industry to a common fund, with the intention of
dividing the profits among themselves.[15] While a corporation, like petitioner, cannot generally
enter into a contract of partnership unless authorized by law or its charter, it has been held
that it may enter into a joint venture which is akin to a particular partnership:

The legal concept of a joint venture is of common law origin. It has no precise
legal definition, but it has been generally understood to mean an organization formed
for some temporary purpose. x x x It is in fact hardly distinguishable from the
partnership, since their elements are similar community of interest in the business,
sharing of profits and losses, and a mutual right of control. x x x The main distinction
cited by most opinions in common law jurisdictions is that the partnership
contemplates a general business with some degree of continuity, while the joint
venture is formed for the execution of a single transaction, and is thus of a temporary
nature. x x x This observation is not entirely accurate in this jurisdiction, since under
the Civil Code, a partnership may be particular or universal, and a particular
partnership may have for its object a specific undertaking. x x x It would seem
therefore that under Philippine law, a joint venture is a form of partnership and should
be governed by the law of partnerships. The Supreme Court has however recognized
a distinction between these two business forms, and has held that although a
corporation cannot enter into a partnership contract, it may however engage in a joint
venture with others. x x x (Citations omitted) [16]

Perusal of the agreement denominated as the Power of Attorney indicates that the
parties had intended to create a partnership and establish a common fund for the
purpose. They also had a joint interest in the profits of the business as shown by a 50-50
sharing in the income of the mine.

Under the Power of Attorney, petitioner and Baguio Gold undertook to contribute
money, property and industry to the common fund known as the Sto. Nio mine. [17] In this
regard, we note that there is a substantive equivalence in the respective contributions of the
parties to the development and operation of the mine. Pursuant to paragraphs 4 and 5 of the
agreement, petitioner and Baguio Gold were to contribute equally to the joint venture assets
69 | P a g e

under their respective accounts. Baguio Gold would contribute P11M under its owners
account plus any of its income that is left in the project, in addition to its actual mining
claim. Meanwhile, petitioners contribution would consist of its expertise in the management
and operation of mines, as well as the managers account which is comprised of P11M in
funds and property and petitioners compensation as manager that cannot be paid in cash.

However, petitioner asserts that it could not have entered into a partnership agreement
with Baguio Gold because it did not bind itself to contribute money or property to the project;
that under paragraph 5 of the agreement, it was only optional for petitioner to transfer funds
or property to the Sto. Nio project (w)henever the MANAGERS shall deem it necessary and
convenient in connection with the MANAGEMENT of the STO. NIO MINE.[18]

The wording of the parties agreement as to petitioners contribution to the common

fund does not detract from the fact that petitioner transferred its funds and property to the
project as specified in paragraph 5, thus rendering effective the other stipulations of the
contract, particularly paragraph 5(c) which prohibits petitioner from withdrawing the advances
until termination of the parties business relations. As can be seen, petitioner became bound by
its contributions once the transfers were made. The contributions acquired an obligatory
nature as soon as petitioner had chosen to exercise its option under paragraph 5.

There is no merit to petitioners claim that the prohibition in paragraph 5(c) against
withdrawal of advances should not be taken as an indication that it had entered into a
partnership with Baguio Gold; that the stipulation only showed that what the parties entered
into was actually a contract of agency coupled with an interest which is not revocable at will
and not a partnership.

In an agency coupled with interest, it is the agency that cannot be revoked or

withdrawn by the principal due to an interest of a third party that depends upon it, or the
mutual interest of both principal and agent.[19] In this case, the non-revocation or non-
withdrawal under paragraph 5(c) applies to the advances made by petitioner who is
supposedly the agentand not the principal under the contract. Thus, it cannot be inferred
from the stipulation that the parties relation under the agreement is one of agency coupled
with an interest and not a partnership.

Neither can paragraph 16 of the agreement be taken as an indication that the

relationship of the parties was one of agency and not a partnership. Although the said
provision states that this Agency shall be irrevocable while any obligation of the PRINCIPAL in
favor of the MANAGERS is outstanding, inclusive of the MANAGERS account, it does not
necessarily follow that the parties entered into an agency contract coupled with an interest
that cannot be withdrawn by Baguio Gold.

It should be stressed that the main object of the Power of Attorney was not to confer a
power in favor of petitioner to contract with third persons on behalf of Baguio Gold but to
create a business relationship between petitioner and Baguio Gold, in which the former was to
manage and operate the latters mine through the parties mutual contribution of material
resources and industry. The essence of an agency, even one that is coupled with interest, is
the agents ability to represent his principal and bring about business relations between the
70 | P a g e

latter and third persons.[20] Where representation for and in behalf of the principal is merely
incidental or necessary for the proper discharge of ones paramount undertaking under a
contract, the latter may not necessarily be a contract of agency, but some other agreement
depending on the ultimate undertaking of the parties.[21]

In this case, the totality of the circumstances and the stipulations in the parties
agreement indubitably lead to the conclusion that a partnership was formed between
petitioner and Baguio Gold.

First, it does not appear that Baguio Gold was unconditionally obligated to return the
advances made by petitioner under the agreement. Paragraph 5 (d) thereof provides that
upon termination of the parties business relations, the ratio which the MANAGERS account has
to the owners account will be determined, and the corresponding proportion of the entire
assets of the STO. NINO MINE, excluding the claims shall be transferred to petitioner.[22] As
pointed out by the Court of Tax Appeals, petitioner was merely entitled to a proportionate
return of the mines assets upon dissolution of the parties business relations. There was
nothing in the agreement that would require Baguio Gold to make payments of the advances
to petitioner as would be recognized as an item of obligation or accounts payable for Baguio
Gold.

Thus, the tax court correctly concluded that the agreement provided for a distribution
of assets of the Sto. Nio mine upon termination, a provision that is more consistent with a
partnership than a creditor-debtor relationship. It should be pointed out that in a contract of
loan, a person who receives a loan or money or any fungible thing acquires ownership thereof
and is bound to pay the creditor an equal amount of the same kind and quality.[23] In this
case, however, there was no stipulation for Baguio Gold to actually repay petitioner the cash
and property that it had advanced, but only the return of an amount pegged at a ratio which
the managers account had to the owners account.

In this connection, we find no contractual basis for the execution of the two
compromise agreements in which Baguio Gold recognized a debt in favor of petitioner, which
supposedly arose from the termination of their business relations over the Sto. Nino mine. The
Power of Attorney clearly provides that petitioner would only be entitled to the return of a
proportionate share of the mine assets to be computed at a ratio that the managers account
had to the owners account. Except to provide a basis for claiming the advances as a bad debt
deduction, there is no reason for Baguio Gold to hold itself liable to petitioner under the
compromise agreements, for any amount over and above the proportion agreed upon in the
Power of Attorney.
71 | P a g e

Next, the tax court correctly observed that it was unlikely for a business corporation to
lend hundreds of millions of pesos to another corporation with neither security, or collateral,
nor a specific deed evidencing the terms and conditions of such loans. The parties also did not
provide a specific maturity date for the advances to become due and demandable, and the
manner of payment was unclear. All these point to the inevitable conclusion that the advances
were not loans but capital contributions to a partnership.

The strongest indication that petitioner was a partner in the Sto Nio mine is the fact
that it would receive 50% of the net profits as compensation under paragraph 12 of the
agreement. The entirety of the parties contractual stipulations simply leads to no other
conclusion than that petitioners compensation is actually its share in the income of the joint
venture.

Article 1769 (4) of the Civil Code explicitly provides that the receipt by a person of a
share in the profits of a business is prima facie evidence that he is a partner in the
business. Petitioner asserts, however, that no such inference can be drawn against it since its
share in the profits of the Sto Nio project was in the nature of compensation or wages of an
employee, under the exception provided in Article 1769 (4) (b).[24]

On this score, the tax court correctly noted that petitioner was not an employee of
Baguio Gold who will be paid wages pursuant to an employer-employee relationship. To begin
with, petitioner was the manager of the project and had put substantial sums into the venture
in order to ensure its viability and profitability. By pegging its compensation to profits,
petitioner also stood not to be remunerated in case the mine had no income. It is hard to
believe that petitioner would take the risk of not being paid at all for its services, if it were
truly just an ordinary employee.

Consequently, we find that petitioners compensation under paragraph 12 of the

agreement actually constitutes its share in the net profits of the partnership. Indeed, petitioner
would not be entitled to an equal share in the income of the mine if it were just an employee
of Baguio Gold.[25] It is not surprising that petitioner was to receive a 50% share in the net
profits, considering that the Power of Attorney also provided for an almost equal contribution
of the parties to the St. Nino mine. The compensation agreed upon only serves to reinforce
the notion that the parties relations were indeed of partners and not employer-employee.

All told, the lower courts did not err in treating petitioners advances as investments in a
partnership known as the Sto. Nino mine. The advances were not debts of Baguio Gold to
petitioner inasmuch as the latter was under no unconditional obligation to return the same to
the former under the Power of Attorney. As for the amounts that petitioner paid as guarantor
to Baguio Golds creditors, we find no reason to depart from the tax courts factual finding that
Baguio Golds debts were not yet due and demandable at the time that petitioner paid the
same. Verily, petitioner pre-paid Baguio Golds outstanding loans to its bank creditors and this
conclusion is supported by the evidence on record.[26]
72 | P a g e

In sum, petitioner cannot claim the advances as a bad debt deduction from its gross
income. Deductions for income tax purposes partake of the nature of tax exemptions and are
strictly construed against the taxpayer, who must prove by convincing evidence that he is
entitled to the deduction claimed.[27] In this case, petitioner failed to substantiate its assertion
that the advances were subsisting debts of Baguio Gold that could be deducted from its gross
income. Consequently, it could not claim the advances as a valid bad debt deduction.

WHEREFORE, the petition is DENIED. The decision of the Court of Appeals in CA-G.R. SP
No. 49385 dated June 30, 2000, which affirmed the decision of the Court of Tax Appeals in
C.T.A. Case No. 5200 is AFFIRMED. Petitioner Philex Mining Corporation is ORDERED to
PAY the deficiency tax on its 1982 income in the amount of P62,811,161.31, with 20%
delinquency interest computed from February 10, 1995, which is the due date given for the
payment of the deficiency income tax, up to the actual date of payment. SO ORDERED.