Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-43082 June 18, 1937

PABLO LORENZO, as trustee of the estate of Thomas Hanley, deceased, plaintiff-appellant,

vs.
JUAN POSADAS, JR., Collector of Internal Revenue, defendant-appellant.

Pablo Lorenzo and Delfin Joven for plaintiff-appellant.

Office of the Solicitor-General Hilado for defendant-appellant.

LAUREL, J.:

On October 4, 1932, the plaintiff Pablo Lorenzo, in his capacity as trustee of the estate of Thomas Hanley, deceased, brought this
action in the Court of First Instance of Zamboanga against the defendant, Juan Posadas, Jr., then the Collector of Internal
Revenue, for the refund of the amount of P2,052.74, paid by the plaintiff as inheritance tax on the estate of the deceased, and for
the collection of interst thereon at the rate of 6 per cent per annum, computed from September 15, 1932, the date when the
aforesaid tax was [paid under protest. The defendant set up a counterclaim for P1,191.27 alleged to be interest due on the tax in
question and which was not included in the original assessment. From the decision of the Court of First Instance of Zamboanga
dismissing both the plaintiff's complaint and the defendant's counterclaim, both parties appealed to this court.

It appears that on May 27, 1922, one Thomas Hanley died in Zamboanga, Zamboanga, leaving a will (Exhibit 5) and considerable
amount of real and personal properties. On june 14, 1922, proceedings for the probate of his will and the settlement and distribution
of his estate were begun in the Court of First Instance of Zamboanga. The will was admitted to probate. Said will provides, among
other things, as follows:

4. I direct that any money left by me be given to my nephew Matthew Hanley.

5. I direct that all real estate owned by me at the time of my death be not sold or otherwise disposed of for a period of ten
(10) years after my death, and that the same be handled and managed by the executors, and proceeds thereof to be given
to my nephew, Matthew Hanley, at Castlemore, Ballaghaderine, County of Rosecommon, Ireland, and that he be directed
that the same be used only for the education of my brother's children and their descendants.

6. I direct that ten (10) years after my death my property be given to the above mentioned Matthew Hanley to be disposed
of in the way he thinks most advantageous.

xxx xxx xxx

8. I state at this time I have one brother living, named Malachi Hanley, and that my nephew, Matthew Hanley, is a son of
my said brother, Malachi Hanley.

The Court of First Instance of Zamboanga considered it proper for the best interests of ther estate to appoint a trustee to administer
the real properties which, under the will, were to pass to Matthew Hanley ten years after the two executors named in the will, was,
on March 8, 1924, appointed trustee. Moore took his oath of office and gave bond on March 10, 1924. He acted as trustee until
February 29, 1932, when he resigned and the plaintiff herein was appointed in his stead.

During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue, alleging that the estate left by the
deceased at the time of his death consisted of realty valued at P27,920 and personalty valued at P1,465, and allowing a deduction
of P480.81, assessed against the estate an inheritance tax in the amount of P1,434.24 which, together with the penalties for
deliquency in payment consisting of a 1 per cent monthly interest from July 1, 1931 to the date of payment and a surcharge of 25
per cent on the tax, amounted to P2,052.74. On March 15, 1932, the defendant filed a motion in the testamentary proceedings
pending before the Court of First Instance of Zamboanga (Special proceedings No. 302) praying that the trustee, plaintiff herein, be
ordered to pay to the Government the said sum of P2,052.74. The motion was granted. On September 15, 1932, the plaintiff paid
said amount under protest, notifying the defendant at the same time that unless the amount was promptly refunded suit would be
brought for its recovery. The defendant overruled the plaintiff's protest and refused to refund the said amount hausted, plaintiff went
to court with the result herein above indicated.

In his appeal, plaintiff contends that the lower court erred:

I. In holding that the real property of Thomas Hanley, deceased, passed to his instituted heir, Matthew Hanley, from the
moment of the death of the former, and that from the time, the latter became the owner thereof.

II. In holding, in effect, that there was deliquency in the payment of inheritance tax due on the estate of said deceased.
 III. In holding that the inheritance tax in question be based upon the value of the estate upon the death of the testator, and
not, as it should have been held, upon the value thereof at the expiration of the period of ten years after which, according
to the testator's will, the property could be and was to be delivered to the instituted heir.

IV. In not allowing as lawful deductions, in the determination of the net amount of the estate subject to said tax, the
amounts allowed by the court as compensation to the "trustees" and paid to them from the decedent's estate.

V. In not rendering judgment in favor of the plaintiff and in denying his motion for new trial.

The defendant-appellant contradicts the theories of the plaintiff and assigns the following error besides:

The lower court erred in not ordering the plaintiff to pay to the defendant the sum of P1,191.27, representing part of the
interest at the rate of 1 per cent per month from April 10, 1924, to June 30, 1931, which the plaintiff had failed to pay on
the inheritance tax assessed by the defendant against the estate of Thomas Hanley.

The following are the principal questions to be decided by this court in this appeal: (a) When does the inheritance tax accrue and
when must it be satisfied? (b) Should the inheritance tax be computed on the basis of the value of the estate at the time of the
testator's death, or on its value ten years later? (c) In determining the net value of the estate subject to tax, is it proper to deduct the
compensation due to trustees? (d) What law governs the case at bar? Should the provisions of Act No. 3606 favorable to the tax-
payer be given retroactive effect? (e) Has there been deliquency in the payment of the inheritance tax? If so, should the additional
interest claimed by the defendant in his appeal be paid by the estate? Other points of incidental importance, raised by the parties in
their briefs, will be touched upon in the course of this opinion.

(a) The accrual of the inheritance tax is distinct from the obligation to pay the same. Section 1536 as amended, of the
Administrative Code, imposes the tax upon "every transmission by virtue of inheritance, devise, bequest, gift mortis causa, or
advance in anticipation of inheritance,devise, or bequest." The tax therefore is upon transmission or the transfer or devolution of
property of a decedent, made effective by his death. (61 C. J., p. 1592.) It is in reality an excise or privilege tax imposed on the right
to succeed to, receive, or take property by or under a will or the intestacy law, or deed, grant, or gift to become operative at or after
death. Acording to article 657 of the Civil Code, "the rights to the succession of a person are transmitted from the moment of his
death." "In other words", said Arellano, C. J., ". . . the heirs succeed immediately to all of the property of the deceased ancestor.
The property belongs to the heirs at the moment of the death of the ancestor as completely as if the ancestor had executed and
delivered to them a deed for the same before his death." (Bondad vs. Bondad, 34 Phil., 232. See also, Mijares vs. Nery, 3 Phil.,
195; Suilong & Co., vs. Chio-Taysan, 12 Phil., 13; Lubrico vs. Arbado, 12 Phil., 391; Innocencio vs. Gat-Pandan, 14 Phil., 491;
Aliasas vs.Alcantara, 16 Phil., 489; Ilustre vs. Alaras Frondosa, 17 Phil., 321; Malahacan vs. Ignacio, 19 Phil., 434; Bowa vs.
Briones, 38 Phil., 27; Osario vs. Osario & Yuchausti Steamship Co., 41 Phil., 531; Fule vs. Fule, 46 Phil., 317; Dais vs. Court of
First Instance of Capiz, 51 Phil., 396; Baun vs. Heirs of Baun, 53 Phil., 654.) Plaintiff, however, asserts that while article 657 of the
Civil Code is applicable to testate as well as intestate succession, it operates only in so far as forced heirs are concerned. But the
language of article 657 of the Civil Code is broad and makes no distinction between different classes of heirs. That article does not
speak of forced heirs; it does not even use the word "heir". It speaks of the rights of succession and the transmission thereof from
the moment of death. The provision of section 625 of the Code of Civil Procedure regarding the authentication and probate of a will
as a necessary condition to effect transmission of property does not affect the general rule laid down in article 657 of the Civil
Code. The authentication of a will implies its due execution but once probated and allowed the transmission is effective as of the
death of the testator in accordance with article 657 of the Civil Code. Whatever may be the time when actual transmission of the
inheritance takes place, succession takes place in any event at the moment of the decedent's death. The time when the heirs
legally succeed to the inheritance may differ from the time when the heirs actually receive such inheritance. "Poco importa", says
Manresa commenting on article 657 of the Civil Code, "que desde el falleimiento del causante, hasta que el heredero o legatario
entre en posesion de los bienes de la herencia o del legado, transcurra mucho o poco tiempo, pues la adquisicion ha de
retrotraerse al momento de la muerte, y asi lo ordena el articulo 989, que debe considerarse como complemento del presente." (5
Manresa, 305; see also, art. 440, par. 1, Civil Code.) Thomas Hanley having died on May 27, 1922, the inheritance tax accrued as
of the date.

From the fact, however, that Thomas Hanley died on May 27, 1922, it does not follow that the obligation to pay the tax arose as of
the date. The time for the payment on inheritance tax is clearly fixed by section 1544 of the Revised Administrative Code as
amended by Act No. 3031, in relation to section 1543 of the same Code. The two sections follow:

SEC. 1543. Exemption of certain acquisitions and transmissions. — The following shall not be taxed:

(a) The merger of the usufruct in the owner of the naked title.

(b) The transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the trustees.

(c) The transmission from the first heir, legatee, or donee in favor of another beneficiary, in accordance with the
desire of the predecessor.

In the last two cases, if the scale of taxation appropriate to the new beneficiary is greater than that paid by the first, the
former must pay the difference.

SEC. 1544. When tax to be paid. — The tax fixed in this article shall be paid:
 (a) In the second and third cases of the next preceding section, before entrance into possession of the property.

(b) In other cases, within the six months subsequent to the death of the predecessor; but if judicial testamentary
or intestate proceedings shall be instituted prior to the expiration of said period, the payment shall be made by
the executor or administrator before delivering to each beneficiary his share.

If the tax is not paid within the time hereinbefore prescribed, interest at the rate of twelve per centum per annum shall be
added as part of the tax; and to the tax and interest due and unpaid within ten days after the date of notice and demand
thereof by the collector, there shall be further added a surcharge of twenty-five per centum.

A certified of all letters testamentary or of admisitration shall be furnished the Collector of Internal Revenue by the Clerk of
Court within thirty days after their issuance.

It should be observed in passing that the word "trustee", appearing in subsection (b) of section 1543, should read "fideicommissary"
or "cestui que trust". There was an obvious mistake in translation from the Spanish to the English version.

The instant case does fall under subsection (a), but under subsection (b), of section 1544 above-quoted, as there is here no
fiduciary heirs, first heirs, legatee or donee. Under the subsection, the tax should have been paid before the delivery of the
properties in question to P. J. M. Moore as trustee on March 10, 1924.

(b) The plaintiff contends that the estate of Thomas Hanley, in so far as the real properties are concerned, did not and could not
legally pass to the instituted heir, Matthew Hanley, until after the expiration of ten years from the death of the testator on May 27,
1922 and, that the inheritance tax should be based on the value of the estate in 1932, or ten years after the testator's death. The
plaintiff introduced evidence tending to show that in 1932 the real properties in question had a reasonable value of only P5,787.
This amount added to the value of the personal property left by the deceased, which the plaintiff admits is P1,465, would generate
an inheritance tax which, excluding deductions, interest and surcharge, would amount only to about P169.52.

If death is the generating source from which the power of the estate to impose inheritance taxes takes its being and if, upon the
death of the decedent, succession takes place and the right of the estate to tax vests instantly, the tax should be measured by the
vlaue of the estate as it stood at the time of the decedent's death, regardless of any subsequent contingency value of any
subsequent increase or decrease in value. (61 C. J., pp. 1692, 1693; 26 R. C. L., p. 232; Blakemore and Bancroft, Inheritance
Taxes, p. 137. See also Knowlton vs. Moore, 178 U.S., 41; 20 Sup. Ct. Rep., 747; 44 Law. ed., 969.) "The right of the state to an
inheritance tax accrues at the moment of death, and hence is ordinarily measured as to any beneficiary by the value at that time of
such property as passes to him. Subsequent appreciation or depriciation is immaterial." (Ross, Inheritance Taxation, p. 72.)

Our attention is directed to the statement of the rule in Cyclopedia of Law of and Procedure (vol. 37, pp. 1574, 1575) that, in the
case of contingent remainders, taxation is postponed until the estate vests in possession or the contingency is settled. This rule
was formerly followed in New York and has been adopted in Illinois, Minnesota, Massachusetts, Ohio, Pennsylvania and
Wisconsin. This rule, horever, is by no means entirely satisfactory either to the estate or to those interested in the property (26 R.
C. L., p. 231.). Realizing, perhaps, the defects of its anterior system, we find upon examination of cases and authorities that New
York has varied and now requires the immediate appraisal of the postponed estate at its clear market value and the payment
forthwith of the tax on its out of the corpus of the estate transferred. (In re Vanderbilt, 172 N. Y., 69; 69 N. E., 782; In re Huber, 86
N. Y. App. Div., 458; 83 N. Y. Supp., 769; Estate of Tracy, 179 N. Y., 501; 72 N. Y., 519; Estate of Brez, 172 N. Y., 609; 64 N. E.,
958; Estate of Post, 85 App. Div., 611; 82 N. Y. Supp., 1079. Vide also, Saltoun vs. Lord Advocate, 1 Peter. Sc. App., 970; 3 Macq.
H. L., 659; 23 Eng. Rul. Cas., 888.) California adheres to this new rule (Stats. 1905, sec. 5, p. 343).

But whatever may be the rule in other jurisdictions, we hold that a transmission by inheritance is taxable at the time of the
predecessor's death, notwithstanding the postponement of the actual possession or enjoyment of the estate by the beneficiary, and
the tax measured by the value of the property transmitted at that time regardless of its appreciation or depreciation.

(c) Certain items are required by law to be deducted from the appraised gross in arriving at the net value of the estate on which the
inheritance tax is to be computed (sec. 1539, Revised Administrative Code). In the case at bar, the defendant and the trial court
allowed a deduction of only P480.81. This sum represents the expenses and disbursements of the executors until March 10, 1924,
among which were their fees and the proven debts of the deceased. The plaintiff contends that the compensation and fees of the
trustees, which aggregate P1,187.28 (Exhibits C, AA, EE, PP, HH, JJ, LL, NN, OO), should also be deducted under section 1539 of
the Revised Administrative Code which provides, in part, as follows: "In order to determine the net sum which must bear the tax,
when an inheritance is concerned, there shall be deducted, in case of a resident, . . . the judicial expenses of the testamentary or
intestate proceedings, . . . ."

A trustee, no doubt, is entitled to receive a fair compensation for his services (Barney vs. Saunders, 16 How., 535; 14 Law. ed.,
1047). But from this it does not follow that the compensation due him may lawfully be deducted in arriving at the net value of the
estate subject to tax. There is no statute in the Philippines which requires trustees' commissions to be deducted in determining the
net value of the estate subject to inheritance tax (61 C. J., p. 1705). Furthermore, though a testamentary trust has been created, it
does not appear that the testator intended that the duties of his executors and trustees should be separated. (Ibid.; In re Vanneck's
Estate, 161 N. Y. Supp., 893; 175 App. Div., 363; In re Collard's Estate, 161 N. Y. Supp., 455.) On the contrary, in paragraph 5 of
his will, the testator expressed the desire that his real estate be handled and managed by his executors until the expiration of the
period of ten years therein provided. Judicial expenses are expenses of administration (61 C. J., p. 1705) but, in State vs. Hennepin
County Probate Court (112 N. W., 878; 101 Minn., 485), it was said: ". . . The compensation of a trustee, earned, not in the
administration of the estate, but in the management thereof for the benefit of the legatees or devises, does not come properly within
the class or reason for exempting administration expenses. . . . Service rendered in that behalf have no reference to closing the
estate for the purpose of a distribution thereof to those entitled to it, and are not required or essential to the perfection of the rights
of the heirs or legatees. . . . Trusts . . . of the character of that here before the court, are created for the the benefit of those to
whom the property ultimately passes, are of voluntary creation, and intended for the preservation of the estate. No sound reason is
given to support the contention that such expenses should be taken into consideration in fixing the value of the estate for the
purpose of this tax."

(d) The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley under the provisions of section
1544 of the Revised Administrative Code, as amended by section 3 of Act No. 3606. But Act No. 3606 went into effect on January
1, 1930. It, therefore, was not the law in force when the testator died on May 27, 1922. The law at the time was section 1544
above-mentioned, as amended by Act No. 3031, which took effect on March 9, 1922.

It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of the decedent (26 R. C. L., p.
206; 4 Cooley on Taxation, 4th ed., p. 3461). The taxpayer can not foresee and ought not to be required to guess the outcome of
pending measures. Of course, a tax statute may be made retroactive in its operation. Liability for taxes under retroactive legislation
has been "one of the incidents of social life." (Seattle vs. Kelleher, 195 U. S., 360; 49 Law. ed., 232 Sup. Ct. Rep., 44.) But
legislative intent that a tax statute should operate retroactively should be perfectly clear. (Scwab vs. Doyle, 42 Sup. Ct. Rep., 491;
Smietanka vs. First Trust & Savings Bank, 257 U. S., 602; Stockdale vs. Insurance Co., 20 Wall., 323; Lunch vs. Turrish, 247 U. S.,
221.) "A statute should be considered as prospective in its operation, whether it enacts, amends, or repeals an inheritance tax,
unless the language of the statute clearly demands or expresses that it shall have a retroactive effect, . . . ." (61 C. J., P. 1602.)
Though the last paragraph of section 5 of Regulations No. 65 of the Department of Finance makes section 3 of Act No. 3606,
amending section 1544 of the Revised Administrative Code, applicable to all estates the inheritance taxes due from which have not
been paid, Act No. 3606 itself contains no provisions indicating legislative intent to give it retroactive effect. No such effect can
begiven the statute by this court.

The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No. 3606 are more favorable to the
taxpayer than those of Act No. 3031, that said provisions are penal in nature and, therefore, should operate retroactively in
conformity with the provisions of article 22 of the Revised Penal Code. This is the reason why he applied Act No. 3606 instead of
Act No. 3031. Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax only, instead of on both the tax and
the interest, as provided for in Act No. 3031, and (2) the taxpayer is allowed twenty days from notice and demand by rthe Collector
of Internal Revenue within which to pay the tax, instead of ten days only as required by the old law.

Properly speaking, a statute is penal when it imposes punishment for an offense committed against the state which, under the
Constitution, the Executive has the power to pardon. In common use, however, this sense has been enlarged to include within the
term "penal statutes" all status which command or prohibit certain acts, and establish penalties for their violation, and even those
which, without expressly prohibiting certain acts, impose a penalty upon their commission (59 C. J., p. 1110). Revenue laws,
generally, which impose taxes collected by the means ordinarily resorted to for the collection of taxes are not classed as penal
laws, although there are authorities to the contrary. (See Sutherland, Statutory Construction, 361; Twine Co. vs. Worthington, 141
U. S., 468; 12 Sup. Ct., 55; Rice vs. U. S., 4 C. C. A., 104; 53 Fed., 910; Com. vs. Standard Oil Co., 101 Pa. St., 150; State vs.
Wheeler, 44 P., 430; 25 Nev. 143.) Article 22 of the Revised Penal Code is not applicable to the case at bar, and in the absence of
clear legislative intent, we cannot give Act No. 3606 a retroactive effect.

(e) The plaintiff correctly states that the liability to pay a tax may arise at a certain time and the tax may be paid within another given
time. As stated by this court, "the mere failure to pay one's tax does not render one delinqent until and unless the entire period has
eplased within which the taxpayer is authorized by law to make such payment without being subjected to the payment of penalties
for fasilure to pay his taxes within the prescribed period." (U. S. vs. Labadan, 26 Phil., 239.)

The defendant maintains that it was the duty of the executor to pay the inheritance tax before the delivery of the decedent's
property to the trustee. Stated otherwise, the defendant contends that delivery to the trustee was delivery to the cestui que trust, the
beneficiery in this case, within the meaning of the first paragraph of subsection (b) of section 1544 of the Revised Administrative
Code. This contention is well taken and is sustained. The appointment of P. J. M. Moore as trustee was made by the trial court in
conformity with the wishes of the testator as expressed in his will. It is true that the word "trust" is not mentioned or used in the will
but the intention to create one is clear. No particular or technical words are required to create a testamentary trust (69 C. J., p.
711). The words "trust" and "trustee", though apt for the purpose, are not necessary. In fact, the use of these two words is not
conclusive on the question that a trust is created (69 C. J., p. 714). "To create a trust by will the testator must indicate in the will his
intention so to do by using language sufficient to separate the legal from the equitable estate, and with sufficient certainty designate
the beneficiaries, their interest in the ttrust, the purpose or object of the trust, and the property or subject matter thereof. Stated
otherwise, to constitute a valid testamentary trust there must be a concurrence of three circumstances: (1) Sufficient words to raise
a trust; (2) a definite subject; (3) a certain or ascertain object; statutes in some jurisdictions expressly or in effect so providing." (69
C. J., pp. 705,706.) There is no doubt that the testator intended to create a trust. He ordered in his will that certain of his properties
be kept together undisposed during a fixed period, for a stated purpose. The probate court certainly exercised sound judgment in
appointment a trustee to carry into effect the provisions of the will (see sec. 582, Code of Civil Procedure).

P. J. M. Moore became trustee on March 10, 1924. On that date trust estate vested in him (sec. 582 in relation to sec. 590, Code of
Civil Procedure). The mere fact that the estate of the deceased was placed in trust did not remove it from the operation of our
inheritance tax laws or exempt it from the payment of the inheritance tax. The corresponding inheritance tax should have been paid
on or before March 10, 1924, to escape the penalties of the laws. This is so for the reason already stated that the delivery of the
estate to the trustee was in esse delivery of the same estate to the cestui que trust, the beneficiary in this case. A trustee is but an
instrument or agent for the cestui que trust (Shelton vs. King, 299 U. S., 90; 33 Sup. Ct. Rep., 689; 57 Law. ed., 1086). When
Moore accepted the trust and took possesson of the trust estate he thereby admitted that the estate belonged not to him but to
his cestui que trust (Tolentino vs. Vitug, 39 Phil.,126, cited in 65 C. J., p. 692, n. 63). He did not acquire any beneficial interest in
the estate. He took such legal estate only as the proper execution of the trust required (65 C. J., p. 528) and, his estate ceased
upon the fulfillment of the testator's wishes. The estate then vested absolutely in the beneficiary (65 C. J., p. 542).

The highest considerations of public policy also justify the conclusion we have reached. Were we to hold that the payment of the
tax could be postponed or delayed by the creation of a trust of the type at hand, the result would be plainly disastrous. Testators
may provide, as Thomas Hanley has provided, that their estates be not delivered to their beneficiaries until after the lapse of a
certain period of time. In the case at bar, the period is ten years. In other cases, the trust may last for fifty years, or for a longer
period which does not offend the rule against petuities. The collection of the tax would then be left to the will of a private individual.
The mere suggestion of this result is a sufficient warning against the accpetance of the essential to the very exeistence of
government. (Dobbins vs. Erie Country, 16 Pet., 435; 10 Law. ed., 1022; Kirkland vs. Hotchkiss, 100 U. S., 491; 25 Law. ed., 558;
Lane County vs. Oregon, 7 Wall., 71; 19 Law. ed., 101; Union Refrigerator Transit Co. vs. Kentucky, 199 U. S., 194; 26 Sup. Ct.
Rep., 36; 50 Law. ed., 150; Charles River Bridge vs. Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.) The obligation to pay taxes
rests not upon the privileges enjoyed by, or the protection afforded to, a citizen by the government but upon the necessity of money
for the support of the state (Dobbins vs. Erie Country, supra). For this reason, no one is allowed to object to or resist the payment of
taxes solely because no personal benefit to him can be pointed out. (Thomas vs. Gay, 169 U. S., 264; 18 Sup. Ct. Rep., 340; 43
Law. ed., 740.) While courts will not enlarge, by construction, the government's power of taxation (Bromley vs. McCaughn, 280 U.
S., 124; 74 Law. ed., 226; 50 Sup. Ct. Rep., 46) they also will not place upon tax laws so loose a construction as to permit evasions
on merely fanciful and insubstantial distictions. (U. S. vs. Watts, 1 Bond., 580; Fed. Cas. No. 16,653; U. S. vs. Wigglesirth, 2 Story,
369; Fed. Cas. No. 16,690, followed in Froelich & Kuttner vs. Collector of Customs, 18 Phil., 461, 481; Castle Bros., Wolf & Sons
vs. McCoy, 21 Phil., 300; Muñoz & Co. vs. Hord, 12 Phil., 624; Hongkong & Shanghai Banking Corporation vs. Rafferty, 39 Phil.,
145; Luzon Stevedoring Co. vs. Trinidad, 43 Phil., 803.) When proper, a tax statute should be construed to avoid the possibilities of
tax evasion. Construed this way, the statute, without resulting in injustice to the taxpayer, becomes fair to the government.

That taxes must be collected promptly is a policy deeply intrenched in our tax system. Thus, no court is allowed to grant injunction
to restrain the collection of any internal revenue tax ( sec. 1578, Revised Administrative Code; Sarasola vs. Trinidad, 40 Phil., 252).
In the case of Lim Co Chui vs. Posadas (47 Phil., 461), this court had occassion to demonstrate trenchment adherence to this
policy of the law. It held that "the fact that on account of riots directed against the Chinese on October 18, 19, and 20, 1924, they
were prevented from praying their internal revenue taxes on time and by mutual agreement closed their homes and stores and
remained therein, does not authorize the Collector of Internal Revenue to extend the time prescribed for the payment of the taxes
or to accept them without the additional penalty of twenty five per cent." (Syllabus, No. 3.)

". . . It is of the utmost importance," said the Supreme Court of the United States, ". . . that the modes adopted to enforce the taxes
levied should be interfered with as little as possible. Any delay in the proceedings of the officers, upon whom the duty is developed
of collecting the taxes, may derange the operations of government, and thereby, cause serious detriment to the public." (Dows vs.
Chicago, 11 Wall., 108; 20 Law. ed., 65, 66; Churchill and Tait vs. Rafferty, 32 Phil., 580.)

It results that the estate which plaintiff represents has been delinquent in the payment of inheritance tax and, therefore, liable for
the payment of interest and surcharge provided by law in such cases.

The delinquency in payment occurred on March 10, 1924, the date when Moore became trustee. The interest due should be
computed from that date and it is error on the part of the defendant to compute it one month later. The provisions cases is
mandatory (see and cf. Lim Co Chui vs. Posadas, supra), and neither the Collector of Internal Revenuen or this court may remit or
decrease such interest, no matter how heavily it may burden the taxpayer.

To the tax and interest due and unpaid within ten days after the date of notice and demand thereof by the Collector of Internal
Revenue, a surcharge of twenty-five per centum should be added (sec. 1544, subsec. (b), par. 2, Revised Administrative Code).
Demand was made by the Deputy Collector of Internal Revenue upon Moore in a communiction dated October 16, 1931 (Exhibit
29). The date fixed for the payment of the tax and interest was November 30, 1931. November 30 being an official holiday, the
tenth day fell on December 1, 1931. As the tax and interest due were not paid on that date, the estate became liable for the
payment of the surcharge.

In view of the foregoing, it becomes unnecessary for us to discuss the fifth error assigned by the plaintiff in his brief.

We shall now compute the tax, together with the interest and surcharge due from the estate of Thomas Hanley inaccordance with
the conclusions we have reached.

At the time of his death, the deceased left real properties valued at P27,920 and personal properties worth P1,465, or a total of
P29,385. Deducting from this amount the sum of P480.81, representing allowable deductions under secftion 1539 of the Revised
Administrative Code, we have P28,904.19 as the net value of the estate subject to inheritance tax.

The primary tax, according to section 1536, subsection (c), of the Revised Administrative Code, should be imposed at the rate of
one per centum upon the first ten thousand pesos and two per centum upon the amount by which the share exceed thirty thousand
pesos, plus an additional two hundred per centum. One per centum of ten thousand pesos is P100. Two per centum of P18,904.19
is P378.08. Adding to these two sums an additional two hundred per centum, or P965.16, we have as primary tax, correctly
computed by the defendant, the sum of P1,434.24.

To the primary tax thus computed should be added the sums collectible under section 1544 of the Revised Administrative Code.
First should be added P1,465.31 which stands for interest at the rate of twelve per centum per annum from March 10, 1924, the
date of delinquency, to September 15, 1932, the date of payment under protest, a period covering 8 years, 6 months and 5 days.
To the tax and interest thus computed should be added the sum of P724.88, representing a surhcarge of 25 per cent on both the
tax and interest, and also P10, the compromise sum fixed by the defendant (Exh. 29), giving a grand total of P3,634.43.

As the plaintiff has already paid the sum of P2,052.74, only the sums of P1,581.69 is legally due from the estate. This last sum is
P390.42 more than the amount demanded by the defendant in his counterclaim. But, as we cannot give the defendant more than
what he claims, we must hold that the plaintiff is liable only in the sum of P1,191.27 the amount stated in the counterclaim.

The judgment of the lower court is accordingly modified, with costs against the plaintiff in both instances. So ordered.

Avanceña, C.J., Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
Villa-Real, J., concurs.

===

SECOND DIVISION

[G.R. No. 120880. June 5, 1997]

FERDINAND R. MARCOS II, petitioner, vs. COURT OF APPEALS, THE COMMISSIONER OF THE BUREAU OF INTERNAL
REVENUE and HERMINIA D. DE GUZMAN, respondents.

DECISION
TORRES, JR., J.:

In this Petition for Review on Certiorari, Government action is once again assailed as precipitate and unfair, suffering the
basic and oftly implored requisites of due process of law. Specifically, the petition assails the Decision [1] of the Court of Appeals
dated November 29, 1994 in CA-G.R. SP No. 31363, where the said court held:

"In view of all the foregoing, we rule that the deficiency income tax assessments and estate tax assessment, are already final and (u)nappealable -
and- the subsequent levy of real properties is a tax remedy resorted to by the government, sanctioned by Section 213 and 218 of the National
Internal Revenue Code. This summary tax remedy is distinct and separate from the other tax remedies (such as Judicial Civil actions and
Criminal actions), and is not affected or precluded by the pendency of any other tax remedies instituted by the government.

WHEREFORE, premises considered, judgment is hereby rendered DISMISSING the petition for certiorari with prayer for Restraining Order and
Injunction.

No pronouncements as to costs.

SO ORDERED."

More than seven years since the demise of the late Ferdinand E. Marcos, the former President of the Republic of the
Philippines, the matter of the settlement of his estate, and its dues to the government in estate taxes, are still unresolved, the latter
issue being now before this Court for resolution. Specifically, petitioner Ferdinand R. Marcos II, the eldest son of the decedent,
questions the actuations of the respondent Commissioner of Internal Revenue in assessing, and collecting through the summary
remedy of Levy on Real Properties, estate and income tax delinquencies upon the estate and properties of his father, despite the
pendency of the proceedings on probate of the will of the late president, which is docketed as Sp. Proc. No. 10279 in the Regional
Trial Court of Pasig, Branch 156.
Petitioner had filed with the respondent Court of Appeals a Petition for Certiorari and Prohibition with an application for writ of
preliminary injunction and/or temporary restraining order on June 28, 1993, seeking to -

I. Annul and set aside the Notices of Levy on real property dated February 22, 1993 and May 20, 1993, issued by respondent Commissioner of
Internal Revenue;

II. Annul and set aside the Notices of Sale dated May 26, 1993;

III. Enjoin the Head Revenue Executive Assistant Director II (Collection Service), from proceeding with the Auction of the real properties
covered by Notices of Sale.

After the parties had pleaded their case, the Court of Appeals rendered its Decision [2] on November 29, 1994, ruling that the
deficiency assessments for estate and income tax made upon the petitioner and the estate of the deceased President Marcos have
already become final and unappealable, and may thus be enforced by the summary remedy of levying upon the properties of the
late President, as was done by the respondent Commissioner of Internal Revenue.
"WHEREFORE, premises considered judgment is hereby rendered DISMISSING the petition for Certiorari with prayer for Restraining Order
and Injunction.

No pronouncements as to cost.

SO ORDERED."

Unperturbed, petitioner is now before us assailing the validity of the appellate court's decision, assigning the following as
errors:
A. RESPONDENT COURT MANIFESTLY ERRED IN RULING THAT THE SUMMARY TAX REMEDIES RESORTED TO BY
THE GOVERNMENT ARE NOT AFFECTED AND PRECLUDED BY THE PENDENCY OF THE SPECIAL PROCEEDING FOR
THE ALLOWANCE OF THE LATE PRESIDENT'S ALLEGED WILL. TO THE CONTRARY, THIS PROBATE PROCEEDING
PRECISELY PLACED ALL PROPERTIES WHICH FORM PART OF THE LATE PRESIDENT'S ESTATE IN CUSTODIA LEGIS OF
THE PROBATE COURT TO THE EXCLUSION OF ALL OTHER COURTS AND ADMINISTRATIVE AGENCIES.
B. RESPONDENT COURT ARBITRARILY ERRED IN SWEEPINGLY DECIDING THAT SINCE THE TAX ASSESSMENTS
OF PETITIONER AND HIS PARENTS HAD ALREADY BECOME FINAL AND UNAPPEALABLE, THERE WAS NO NEED TO GO
INTO THE MERITS OF THE GROUNDS CITED IN THE PETITION. INDEPENDENT OF WHETHER THE TAX ASSESSMENTS
HAD ALREADY BECOME FINAL, HOWEVER, PETITIONER HAS THE RIGHT TO QUESTION THE UNLAWFUL MANNER AND
METHOD IN WHICH TAX COLLECTION IS SOUGHT TO BE ENFORCED BY RESPONDENTS COMMISSIONER AND DE
GUZMAN. THUS, RESPONDENT COURT SHOULD HAVE FAVORABLY CONSIDERED THE MERITS OF THE FOLLOWING
GROUNDS IN THE PETITION:

(1) The Notices of Levy on Real Property were issued beyond the period provided in the Revenue Memorandum Circular No. 38-68.

(2) [a] The numerous pending court cases questioning the late President's ownership or interests in several properties (both personal and
real) make the total value of his estate, and the consequent estate tax due, incapable of exact pecuniary determination at this time. Thus,
respondents assessment of the estate tax and their issuance of the Notices of Levy and Sale are premature, confiscatory and oppressive.

[b] Petitioner, as one of the late President's compulsory heirs, was never notified, much less served with copies of the Notices of Levy,
contrary to the mandate of Section 213 of the NIRC. As such, petitioner was never given an opportunity to contest the Notices in violation
of his right to due process of law.

C. ON ACCOUNT OF THE CLEAR MERIT OF THE PETITION, RESPONDENT COURT MANIFESTLY ERRED IN RULING
THAT IT HAD NO POWER TO GRANT INJUNCTIVE RELIEF TO PETITIONER. SECTION 219 OF THE NIRC
NOTWITHSTANDING, COURTS POSSESS THE POWER TO ISSUE A WRIT OF PRELIMINARY INJUNCTION TO RESTRAIN
RESPONDENTS COMMISSIONER'S AND DE GUZMAN'S ARBITRARY METHOD OF COLLECTING THE ALLEGED
DEFICIENCY ESTATE AND INCOME TAXES BY MEANS OF LEVY.
The facts as found by the appellate court are undisputed, and are hereby adopted:

"On September 29, 1989, former President Ferdinand Marcos died in Honolulu, Hawaii, USA.

On June 27, 1990, a Special Tax Audit Team was created to conduct investigations and examinations of the tax liabilities and obligations of the
late president, as well as that of his family, associates and "cronies". Said audit team concluded its investigation with a Memorandum dated July
26, 1991. The investigation disclosed that the Marcoses failed to file a written notice of the death of the decedent, an estate tax returns [sic], as
well as several income tax returns covering the years 1982 to 1986, -all in violation of the National Internal Revenue Code (NIRC).

Subsequently, criminal charges were filed against Mrs. Imelda R. Marcos before the Regional Trial of Quezon City for violations of Sections 82,
83 and 84 (has penalized under Sections 253 and 254 in relation to Section 252- a & b) of the National Internal Revenue Code (NIRC).

The Commissioner of Internal Revenue thereby caused the preparation and filing of the Estate Tax Return for the estate of the late president, the
Income Tax Returns of the Spouses Marcos for the years 1985 to 1986, and the Income Tax Returns of petitioner Ferdinand 'Bongbong' Marcos
II for the years 1982 to 1985.

On July 26, 1991, the BIR issued the following: (1) Deficiency estate tax assessment no. FAC-2-89-91-002464 (against the estate of the late
president Ferdinand Marcos in the amount of P23,293,607,638.00 Pesos); (2) Deficiency income tax assessment no. FAC-1-85-91-002452 and
Deficiency income tax assessment no. FAC-1-86-91-002451 (against the Spouses Ferdinand and Imelda Marcos in the amounts of P149,551.70
and P184,009,737.40 representing deficiency income tax for the years 1985 and 1986); (3) Deficiency income tax assessment nos. FAC-1-82-91-
002460 to FAC-1-85-91-002463 (against petitioner Ferdinand 'Bongbong' Marcos II in the amounts of P258.70 pesos; P9,386.40
Pesos; P4,388.30 Pesos; and P6,376.60 Pesos representing his deficiency income taxes for the years 1982 to 1985).

The Commissioner of Internal Revenue avers that copies of the deficiency estate and income tax assessments were all personally and
constructively served on August 26, 1991 and September 12, 1991 upon Mrs. Imelda Marcos (through her caretaker Mr. Martinez) at her last
known address at No. 204 Ortega St., San Juan, M.M. (Annexes 'D' and 'E' of the Petition). Likewise, copies of the deficiency tax assessments
issued against petitioner Ferdinand 'Bongbong' Marcos II were also personally and constructively served upon him (through his caretaker) on
September 12, 1991, at his last known address at Don Mariano Marcos St. corner P. Guevarra St., San Juan, M.M. (Annexes 'J' and 'J-1' of the
Petition). Thereafter, Formal Assessment notices were served on October 20, 1992, upon Mrs. Marcos c/o petitioner, at his office, House of
Representatives, Batasan Pambansa, Quezon City. Moreover, a notice to Taxpayer inviting Mrs. Marcos (or her duly authorized representative or
counsel), to a conference, was furnished the counsel of Mrs. Marcos, Dean Antonio Coronel - but to no avail.

The deficiency tax assessments were not protested administratively, by Mrs. Marcos and the other heirs of the late president, within 30 days
from service of said assessments.

On February 22, 1993, the BIR Commissioner issued twenty-two notices of levy on real property against certain parcels of land owned by the
Marcoses - to satisfy the alleged estate tax and deficiency income taxes of Spouses Marcos.

On May 20, 1993, four more Notices of Levy on real property were issued for the purpose of satisfying the deficiency income taxes.

On May 26, 1993, additional four (4) notices of Levy on real property were again issued. The foregoing tax remedies were resorted to pursuant
to Sections 205 and 213 of the National Internal Revenue Code (NIRC).

In response to a letter dated March 12, 1993 sent by Atty. Loreto Ata (counsel of herein petitioner) calling the attention of the BIR and
requesting that they be duly notified of any action taken by the BIR affecting the interest of their client Ferdinand 'Bongbong Marcos II, as well
as the interest of the late president - copies of the aforesaid notices were served on April 7, 1993 and on June 10, 1993, upon Mrs. Imelda
Marcos, the petitioner, and their counsel of record, 'De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office'.

Notices of sale at public auction were posted on May 26, 1993, at the lobby of the City Hall of Tacloban City. The public auction for the sale of
the eleven (11) parcels of land took place on July 5, 1993. There being no bidder, the lots were declared forfeited in favor of the government.

On June 25, 1993, petitioner Ferdinand 'Bongbong' Marcos II filed the instant petition for certiorari and prohibition under Rule 65 of the Rules
of Court, with prayer for temporary restraining order and/or writ of preliminary injunction."

It has been repeatedly observed, and not without merit, that the enforcement of tax laws and the collection of taxes, is of
paramount importance for the sustenance of government. Taxes are the lifeblood of the government and should be collected
without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate
the very reason for government itself.It is therefore necessary to reconcile the apparently conflicting interests of the authorities and
the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved." [3]
Whether or not the proper avenues of assessment and collection of the said tax obligations were taken by the respondent
Bureau is now the subject of the Court's inquiry.
Petitioner posits that notices of levy, notices of sale, and subsequent sale of properties of the late President Marcos effected
by the BIR are null and void for disregarding the established procedure for the enforcement of taxes due upon the estate of the
deceased. The case of Domingo vs. Garlitos[4] is specifically cited to bolster the argument that "the ordinary procedure by which to
settle claims of indebtedness against the estate of a deceased, person, as in an inheritance (estate) 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 therefor." This remedy is
allegedly, exclusive, and cannot be effected through any other means.
Petitioner goes further, submitting that the probate court is not precluded from denying a request by the government for the
immediate payment of taxes, and should order the payment of the same only within the period fixed by the probate court for the
payment of all the debts of the decedent. In this regard, petitioner cites the case of Collector of Internal Revenue vs. The
Administratrix of the Estate of Echarri (67 Phil 502), where it was held that:

"The case of Pineda vs. Court of First Instance of Tayabas and Collector of Internal Revenue (52 Phil 803), relied upon by the petitioner-
appellant is good authority on the proposition that the court having control over the administration proceedings has jurisdiction to entertain the
claim presented by the government for taxes due and to order the administrator to pay the tax should it find that the assessment was proper, and
that the tax was legal, due and collectible. And the rule laid down in that case must be understood in relation to the case of Collector of Customs
vs. Haygood, supra., as to the procedure to be followed in a given case by the government to effectuate the collection of the tax. Categorically
stated, where during the pendency of judicial administration over the estate of a deceased person a claim for taxes is presented by the
government, the court has the authority to order payment by the administrator; but, in the same way that it has authority to order payment or
satisfaction, it also has the negative authority to deny the same. While there are cases where courts are required to perform certain duties
mandatory and ministerial in character, the function of the court in a case of the present character is not one of them; and here, the court cannot
be an organism endowed with latitude of judgment in one direction, and converted into a mere mechanical contrivance in another direction."

On the other hand, it is argued by the BIR, that the state's authority to collect internal revenue taxes is paramount. Thus, the
pendency of probate proceedings over the estate of the deceased does not preclude the assessment and collection, through
summary remedies, of estate taxes over the same. According to the respondent, claims for payment of estate and income taxes
due and assessed after the death of the decedent need not be presented in the form of a claim against the estate. These can and
should be paid immediately. The probate court is not the government agency to decide whether an estate is liable for payment of
estate of income taxes. Well-settled is the rule that the probate court is a court with special and limited jurisdiction.
Concededly, the authority of the Regional Trial Court, sitting, albeit with limited jurisdiction, as a probate court over estate of
deceased individual, is not a trifling thing. The court's jurisdiction, once invoked, and made effective, cannot be treated with
indifference nor should it be ignored with impunity by the very parties invoking its authority.
In testament to this, it has been held that it is within the jurisdiction of the probate court to approve the sale of properties of a
deceased person by his prospective heirs before final adjudication; [5] to determine who are the heirs of the decedent;[6] the
recognition of a natural child;[7] the status of a woman claiming to be the legal wife of the decedent; [8] the legality of disinheritance of
an heir by the testator;[9]and to pass upon the validity of a waiver of hereditary rights. [10]
 The pivotal question the court is tasked to resolve refers to the authority of the Bureau of Internal Revenue to collect by t he
summary remedy of levying upon, and sale of real properties of the decedent, estate tax deficiencies, without the cognition and
authority of the court sitting in probate over the supposed will of the deceased.
The nature of the process of estate tax collection has been described as follows:

"Strictly speaking, the assessment of an inheritance tax does not directly involve the administration of a decedent's estate, although it may be
viewed as an incident to the complete settlement of an estate, and, under some statutes, it is made the duty of the probate court to make the
amount of the inheritance tax a part of the final decree of distribution of the estate. It is not against the property of decedent, nor is it a claim
against the estate as such, but it is against the interest or property right which the heir, legatee, devisee, etc., has in the property formerly held by
decedent. Further, under some statutes, it has been held that it is not a suit or controversy between the parties, nor is it an adversary proceeding
between the state and the person who owes the tax on the inheritance. However, under other statutes it has been held that the hearing and
determination of the cash value of the assets and the determination of the tax are adversary proceedings. The proceeding has been held to be
necessarily a proceeding in rem.[11]

In the Philippine experience, the enforcement and collection of estate tax, is executive in character, as the legislature has
seen it fit to ascribe this task to the Bureau of Internal Revenue. Section 3 of the National Internal Revenue Code attests to this:

"Sec. 3. Powers and duties of the Bureau.-The powers and duties of the Bureau of Internal Revenue shall comprehend the assessment and
collection of all national internal revenue taxes, fees, and charges, and the enforcement of all forfeitures, penalties, and fines connected
therewith, including the execution of judgments in all cases decided in its favor by the Court of Tax Appeals and the ordinary courts. Said
Bureau shall also give effect to and administer the supervisory and police power conferred to it by this Code or other laws."

Thus, it was in Vera vs. Fernandez[12] that the court recognized the liberal treatment of claims for taxes charged against the
estate of the decedent. Such taxes, we said, were exempted from the application of the statute of non-claims, and this is justified by
the necessity of government funding, immortalized in the maxim that taxes are the lifeblood of the
government. Vectigalia nervi sunt rei publicae - taxes are the sinews of the state.

"Taxes assessed against the estate of a deceased person, after administration is opened, need not be submitted to the committee on claims in the
ordinary course of administration. In the exercise of its control over the administrator, the court may direct the payment of such taxes upon
motion showing that the taxes have been assessed against the estate."

Such liberal treatment of internal revenue taxes in the probate proceedings extends so far, even to allowing the enforcement
of tax obligations against the heirs of the decedent, even after distribution of the estate's properties.

"Claims for taxes, whether assessed before or after the death of the deceased, can be collected from the heirs even after the distribution of the
properties of the decedent. They are exempted from the application of the statute of non-claims. The heirs shall be liable therefor, in proportion
to their share in the inheritance."[13]

"Thus, the Government has two ways of collecting the taxes in question. One, by going after all the heirs and collecting from each one of them
the amount of the tax proportionate to the inheritance received. Another remedy,pursuant to the lien created by Section 315 of the Tax Code
upon all property and rights to property belong to the taxpayer for unpaid income tax, is by subjecting said property of the estate which is in the
hands of an heir or transferee to the payment of the tax due the estate. (Commissioner of Internal Revenue vs. Pineda, 21 SCRA 105, September
15, 1967.)

From the foregoing, it is discernible that the approval of the court, sitting in probate, or as a settlement tribunal over the
deceased is not a mandatory requirement in the collection of estate taxes. It cannot therefore be argued that the Tax Bureau erred
in proceeding with the levying and sale of the properties allegedly owned by the late President, on the ground that it was required to
seek first the probate court's sanction. There is nothing in the Tax Code, and in the pertinent remedial laws that implies the
necessity of the probate or estate settlement court's approval of the state's claim for estate taxes, before the same can be enforced
and collected.
On the contrary, under Section 87 of the NIRC, it is the probate or settlement court which is bidden not to authorize the
executor or judicial administrator of the decedent's estate to deliver any distributive share to any party interested in the estate,
unless it is shown a Certification by the Commissioner of Internal Revenue that the estate taxes have been paid. This provision
disproves the petitioner's contention that it is the probate court which approves the assessment and collection of the estate tax.
If there is any issue as to the validity of the BIR's decision to assess the estate taxes, this should have been pursued through
the proper administrative and judicial avenues provided for by law.
Section 229 of the NIRC tells us how:

"Sec. 229. Protesting of assessment.-When the Commissioner of Internal Revenue or his duly authorized representative finds that proper taxes
should be assessed, he shall first notify the taxpayer of his findings. Within a period to be prescribed by implementing regulations, the taxpayer
shall be required to respond to said notice. If the taxpayer fails to respond, the Commissioner shall issue an assessment based on his findings.

Such assessment may be protested administratively by filing a request for reconsideration or reinvestigation in such form and manner as may be
prescribed by implementing regulations within (30) days from receipt of the assessment; otherwise, the assessment shall become final and
unappealable.
If the protest is denied in whole or in part, the individual, association or corporation adversely affected by the decision on the protest may appeal
to the Court of Tax Appeals within thirty (30) days from receipt of said decision; otherwise, the decision shall become final, executory and
demandable. (As inserted by P.D. 1773)"

Apart from failing to file the required estate tax return within the time required for the filing of the same, petitioner, and the
other heirs never questioned the assessments served upon them, allowing the same to lapse into finality, and prompting the BIR to
collect the said taxes by levying upon the properties left by President Marcos.
Petitioner submits, however, that "while the assessment of taxes may have been validly undertaken by the Government,
collection thereof may have been done in violation of the law. Thus, the manner and method in which the latter is enforced may be
questioned separately, and irrespective of the finality of the former, because the Government does not have the unbridled
discretion to enforce collection without regard to the clear provision of law." [14]
Petitioner specifically points out that applying Memorandum Circular No. 38-68, implementing Sections 318 and 324 of the old
tax code (Republic Act 5203), the BIR's Notices of Levy on the Marcos properties, were issued beyond the allowed period, and are
therefore null and void:

"...the Notices of Levy on Real Property (Annexes 0 to NN of Annex C of this Petition) in satisfaction of said assessments were still issued by
respondents well beyond the period mandated in Revenue Memorandum Circular No. 38-68. These Notices of Levy were issued only on 22
February 1993 and 20 May 1993 when at least seventeen (17) months had already lapsed from the last service of tax assessment on 12
September 1991. As no notices of distraint of personal property were first issued by respondents, the latter should have complied with Revenue
Memorandum Circular No. 38-68 and issued these Notices of Levy not earlier than three (3) months nor later than six (6) months from 12
September 1991. In accordance with the Circular, respondents only had until 12 March 1992 (the last day of the sixth month) within which to
issue these Notices of Levy. The Notices of Levy, having been issued beyond the period allowed by law, are thus void and of no effect." [15]

We hold otherwise. The Notices of Levy upon real property were issued within the prescriptive period and in accordance with
the provisions of the present Tax Code. The deficiency tax assessment, having already become final, executory, and demandable,
the same can now be collected through the summary remedy of distraint or levy pursuant to Section 205 of the NIRC.
The applicable provision in regard to the prescriptive period for the assessment and collection of tax deficiency in this instance
is Article 223 of the NIRC, which pertinently provides:

"Sec. 223. Exceptions as to a period of limitation of assessment and collection of taxes.- (a) In the case of a false or fraudulent return with intent
to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without
assessment, at any time within ten (10) years after the discovery of the falsity, fraud, or omission: Provided, That, in a fraud assessment which
has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for the collection thereof.

xxx

(c) Any internal revenue tax which has been assessed within the period of limitation above prescribed, may be collected by distraint or levy or by
a proceeding in court within three years following the assessment of the tax.

xxx
The omission to file an estate tax return, and the subsequent failure to contest or appeal the assessment made by the BIR is
fatal to the petitioner's cause, as under the above-cited provision, in case of failure to file a return, the tax may be assessed at any
time within ten years after the omission, and any tax so assessed may be collected by levy upon real property within three years
following the assessment of the tax. Since the estate tax assessment had become final and unappealable by the petitioner's default
as regards protesting the validity of the said assessment, there is now no reason why the BIR cannot continue with the collection of
the said tax. Any objection against the assessment should have been pursued following the avenue paved in Section 229 of the
NIRC on protests on assessments of internal revenue taxes.
Petitioner further argues that "the numerous pending court cases questioning the late president's ownership or interests in
several properties (both real and personal) make the total value of his estate, and the consequent estate tax due, incapable of
exact pecuniary determination at this time. Thus, respondents' assessment of the estate tax and their issuance of the Notices of
Levy and sale are premature and oppressive." He points out the pendency of Sandiganbayan Civil Case Nos. 0001-0034 and 0141,
which were filed by the government to question the ownership and interests of the late President in real and personal properties
located within and outside the Philippines. Petitioner, however, omits to allege whether the properties levied upon by the BIR in the
collection of estate taxes upon the decedent's estate were among those involved in the said cases pending in the
Sandiganbayan. Indeed, the court is at a loss as to how these cases are relevant to the matter at issue. The mere fact that the
decedent has pending cases involving ill-gotten wealth does not affect the enforcement of tax assessments over the properties
indubitably included in his estate.
Petitioner also expresses his reservation as to the propriety of the BIR's total assessment of P23,292,607,638.00, stating that
this amount deviates from the findings of the Department of Justice's Panel of Prosecutors as per its resolution of 20 September
1991. Allegedly, this is clear evidence of the uncertainty on the part of the Government as to the total value of the estate of the late
President.
This is, to our mind, the petitioner's last ditch effort to assail the assessment of estate tax which had already become final and
unappealable.
It is not the Department of Justice which is the government agency tasked to determine the amount of taxes due upon the
subject estate, but the Bureau of Internal Revenue[16] whose determinations and assessments are presumed correct and made in
good faith.[17] The taxpayer has the duty of proving otherwise. In the absence of proof of any irregularities in the performance of
official duties, an assessment will not be disturbed. Even an assessment based on estimates is prima facie valid and lawful where it
does not appear to have been arrived at arbitrarily or capriciously. The burden of proof is upon the complaining party to show
clearly that the assessment is erroneous. Failure to present proof of error in the assessment will justify the judicial affirmance of
said assessment.[18] In this instance, petitioner has not pointed out one single provision in the Memorandum of the Special Audit
Team which gave rise to the questioned assessment, which bears a trace of falsity. Indeed, the petitioner's attack on the
assessment bears mainly on the alleged improbable and unconscionable amount of the taxes charged. But mere rhetoric cannot
supply the basis for the charge of impropriety of the assessments made.
Moreover, these objections to the assessments should have been raised, considering the ample remedies afforded the
taxpayer by the Tax Code, with the Bureau of Internal Revenue and the Court of Tax Appeals, as described earlier, and cannot be
raised now via Petition for Certiorari, under the pretext of grave abuse of discretion. The course of action taken by the petitioner
reflects his disregard or even repugnance of the established institutions for governance in the scheme of a well-ordered
society. The subject tax assessments having become final, executory and enforceable, the same can no longer be contested by
means of a disguised protest. In the main, Certiorari may not be used as a substitute for a lost appeal or remedy. [19] This judicial
policy becomes more pronounced in view of the absence of sufficient attack against the actuations of government.
On the matter of sufficiency of service of Notices of Assessment to the petitioner, we find the respondent appellate court's
pronouncements sound and resilient to petitioner's attacks.

"Anent grounds 3(b) and (B) - both alleging/claiming lack of notice - We find, after considering the facts and circumstances, as well as
evidences, that there was sufficient, constructive and/or actual notice of assessments, levy and sale, sent to herein petitioner Ferdinand
"Bongbong" Marcos as well as to his mother Mrs. Imelda Marcos.

Even if we are to rule out the notices of assessments personally given to the caretaker of Mrs. Marcos at the latter's last known address, on
August 26, 1991 and September 12, 1991, as well as the notices of assessment personally given to the caretaker of petitioner also at his last
known address on September 12, 1991 - the subsequent notices given thereafter could no longer be ignored as they were sent at a time when
petitioner was already here in the Philippines, and at a place where said notices would surely be called to petitioner's attention, and received by
responsible persons of sufficient age and discretion.

Thus, on October 20, 1992, formal assessment notices were served upon Mrs. Marcos c/o the petitioner, at his office, House of Representatives,
Batasan Pambansa, Q.C. (Annexes "A", "A-1", "A-2", "A-3"; pp. 207-210, Comment/Memorandum of OSG). Moreover, a notice to taxpayer
dated October 8, 1992 inviting Mrs. Marcos to a conference relative to her tax liabilities, was furnished the counsel of Mrs. Marcos - Dean
Antonio Coronel (Annex "B", p. 211, ibid). Thereafter, copies of Notices were also served upon Mrs. Imelda Marcos, the petitioner and their
counsel "De Borja, Medialdea, Ata, Bello, Guevarra and Serapio Law Office", on April 7, 1993 and June 10, 1993.Despite all of these Notices,
petitioner never lifted a finger to protest the assessments, (upon which the Levy and sale of properties were based), nor appealed the same to the
Court of Tax Appeals.

There being sufficient service of Notices to herein petitioner (and his mother) and it appearing that petitioner continuously ignored said Notices
despite several opportunities given him to file a protest and to thereafter appeal to the Court of Tax Appeals, - the tax assessments subject of this
case, upon which the levy and sale of properties were based, could no longer be contested (directly or indirectly) via this instant petition for
certiorari."[20]

Petitioner argues that all the questioned Notices of Levy, however, must be nullified for having been issued without validly
serving copies thereof to the petitioner. As a mandatory heir of the decedent, petitioner avers that he has an interest in the subject
estate, and notices of levy upon its properties should have been served upon him.
We do not agree. In the case of notices of levy issued to satisfy the delinquent estate tax, the delinquent taxpayer is the
Estate of the decedent, and not necessarily, and exclusively, the petitioner as heir of the deceased. In the same vein, in the matter
of income tax delinquency of the late president and his spouse, petitioner is not the taxpayer liable. Thus, it follows that service of
notices of levy in satisfaction of these tax delinquencies upon the petitioner is not required by law, as under Section 213 of the
NIRC, which pertinently states:
"xxx

...Levy shall be effected by writing upon said certificate a description of the property upon which levy is made. At the same time, written notice
of the levy shall be mailed to or served upon the Register of Deeds of the province or city where the property is located and upon the delinquent
taxpayer, or if he be absent from the Philippines, to his agent or the manager of the business in respect to which the liability arose, or if there be
none, to the occupant of the property in question.

xxx"
The foregoing notwithstanding, the record shows that notices of warrants of distraint and levy of sale were furnished the
counsel of petitioner on April 7, 1993, and June 10, 1993, and the petitioner himself on April 12, 1993 at his office at the Batasang
Pambansa.[21] We cannot therefore, countenance petitioner's insistence that he was denied due process. Where there was an
opportunity to raise objections to government action, and such opportunity was disregarded, for no justifiable reason, the party
claiming oppression then becomes the oppressor of the orderly functions of government. He who comes to court must come with
clean hands. Otherwise, he not only taints his name, but ridicules the very structure of established authority.
IN VIEW WHEREOF, the Court RESOLVED to DENY the present petition. The Decision of the Court of Appeals dated
November 29, 1994 is hereby AFFIRMED in all respects.
SO ORDERED.
Regalado, (Chairman), Romero, Puno, and Mendoza, JJ., concur.
[1] Penned by Associate Justice Asaali S. Isnani, Chairman; Justices Corona Ibay Somera and Celia Lipana Reyes, concurring.
[2] Annex "A", Petition, p. 80, Rollo.
[3]
Commissioner of Internal Revenue vs. Algue, Inc., et. al., G.R. No. L-28896, February 17, 1988, 158 SCRA 9.
[4] G.R. No. L-18994, June 29, 8 SCRA 443.
[5] Acebedo vs Abesamis, G.R. No. 102380, 18 January 1993, 217 SCRA 186.
[6] Reyes vs. Ysip, G.R. No. 7516, May 12, 1955, 97 Phil 11.
[7] Gaas vs. Fortich, G.R. No. 3154, Dec. 28, 1929, 54 Phil. 196.,
[8] Torres vs. Javier, May 24, 1916 34 Phil 382.
[9] Pecson vs. Mediavillo, G.R. No. 7890, September 29, 1914, 28 Phil 81
[10]
Borromeo-Herrera vs. Borromeo, et. al., L-41171, July 23, 1982.
[11] 85 C.J.S. # 1191, pp. 1056-1057.
[12] No. L-31364, March 30, 1979, 89 SCRA 199.
[13] Pineda vs. Court of First Instance of Tayabas, G.R. No. 30921, February 16, 1929, 52 Phil 805; Government vs. Pamintuan, G.R. No. 33139, October 11, 1930,

55 Phil 13.
[14] Petition, p. 50, Rollo.
[15] Ibid., pp. 57-58.
[16] Section 16, National Internal Revenue Code.
[17] Interprovincial Autobus Co., Inc. vs. Collector of Internal Revenue, G.R. No. 6741, January 31, 1956, 98 Phil 290; CIR vs. Construction Resources Asia, Inc., G.R.

No. 98230, November 25, 1986, 145 SCRA 671; Sy Po vs. Court of Tax Appeals, et. al., G.R. No. L-81446, August 18, 1988, 164 SCRA 524; CIR vs. Bohol Land
Transportation Co., 58 O.G. 2407 (1960).
[18] Gutierrez vs. Villegas, G.R. No. L-17117, July 31, 1963, 8 SCRA 527.
[19] De la Paz vs. Panis, G.R. No. 57023, June 22, 1995, 245 SCRA 242.
[20] Court of Appeals Decision, pp. 12-13, Rollo.
[21]
Affidavit of Service by the Revenue Officer of the Collection and Enforcement Division of the BIR, Annex "D", Comment/Memorandum of the Commissioner of
Internal Revenue in the Court of Appeals.

===

THIRD DIVISION

RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial G.R. No. 140944
Administrator of the Estate of the deceased JOSE P.
FERNANDEZ, Present:
Petitioner,
YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
COURT OF TAX APPEALS and COMMISSIONER OF REYES, JJ.
INTERNAL REVENUE,
Respondents. Promulgated:

April 30, 2008

x------------------------------------------------------------------------------------x

DECISION

NACHURA, J.:

Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Civil Procedure seeking the reversal of the Court of

Appeals (CA) Decision[2] dated April 30, 1999 which affirmed the Decision[3] of the Court of Tax Appeals (CTA) dated June 17, 1997.[4]

The Facts

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will [5] was filed with Branch 51 of the Regional

Trial Court (RTC) of Manila (probate court).[6] The probate court then appointed retired Supreme Court Justice Arsenio P. Dizon (Justice Dizon)
and petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as Special and Assistant Special Administrator, respectively, of the Estate of Jose

(Estate). In a letter[7] dated October 13, 1988, Justice Dizon informed respondent Commissioner of the Bureau of Internal Revenue (BIR) of the

special proceedings for the Estate.

Petitioner alleged that several requests for extension of the period to file the required estate tax return were granted by the BIR since the assets of

the estate, as well as the claims against it, had yet to be collated, determined and identified. Thus, in a letter[8] dated March 14, 1990, Justice

Dizon authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and file on behalf of the Estate the required estate tax return and to represent

the same in securing a Certificate of Tax Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a letter[9] addressed to the BIR

Regional Director for San Pablo City and filed the estate tax return[10] with the same BIR Regional Office, showing therein a NIL estate tax

liability, computed as follows:

COMPUTATION OF TAX

Conjugal Real Property (Sch. 1) P10,855,020.00

Conjugal Personal Property (Sch.2) 3,460,591.34
Taxable Transfer (Sch. 3)
Gross Conjugal Estate 14,315,611.34
Less: Deductions (Sch. 4) 187,822,576.06
Net Conjugal Estate NIL
Less: Share of Surviving Spouse NIL .
Net Share in Conjugal Estate NIL
xxx
Net Taxable Estate NIL .
Estate Tax Due NIL .[11]

On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued Certification Nos. 2052 [12] and

2053[13] stating that the taxes due on the transfer of real and personal properties[14] of Jose had been fully paid and said properties may be

transferred to his heirs. Sometime in August 1990, Justice Dizon passed away. Thus, on October 22, 1990, the probate court appointed petitioner

as the administrator of the Estate.[15]

Petitioner requested the probate court's authority to sell several properties forming part of the Estate, for the purpose of paying its
creditors, namely: Equitable Banking Corporation (P19,756,428.31), Banque de L'Indochine et. de Suez (US$4,828,905.90 as of January 31,

1988), Manila Banking Corporation (P84,199,160.46 as of February 28, 1989) and State Investment House, Inc. (P6,280,006.21). Petitioner

manifested that Manila Bank, a major creditor of the Estate was not included, as it did not file a claim with the probate court since it had security

over several real estate properties forming part of the Estate.[16]

However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR, Themistocles Montalban, issued Estate Tax

Assessment Notice No. FAS-E-87-91-003269,[17]demanding the payment of P66,973,985.40 as deficiency estate tax, itemized as follows:

Deficiency Estate Tax- 1987

Estate tax P31,868,414.48

25% surcharge- late filing 7,967,103.62
late payment 7,967,103.62
Interest 19,121,048.68
Compromise-non filing 25,000.00
non payment 25,000.00
no notice of death 15.00
no CPA Certificate 300.00

Total amount due & collectible P66,973,985.40[18]

In his letter[19] dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said estate tax assessment. However, in her

letter[20] dated April 12, 1994, the BIR Commissioner denied the request and reiterated that the estate is liable for the payment of P66,973,985.40

as deficiency estate tax. On May 3, 1994, petitioner received the letter of denial. On June 2, 1994, petitioner filed a petition for review[21] before

respondent CTA. Trial on the merits ensued.

As found by the CTA, the respective parties presented the following pieces of evidence, to wit:

In the hearings conducted, petitioner did not present testimonial evidence but merely documentary evidence consisting of the
following:

Nature of Document (sic) Exhibits

1. Letter dated October 13, 1988 from Arsenio P. Dizon addressed to the Commissioner of Internal Revenue informing the
latter of the special proceedings for the settlement of the estate (p. 126, BIR records); "A"

2. Petition for the probate of the will and issuance of letter of administration filed with the Regional Trial Court (RTC) of
Manila, docketed as Sp. Proc. No. 87-42980 (pp. 107-108, BIR records); "B" & "B-1

3. Pleading entitled "Compliance" filed with the probate Court submitting the final inventory of all the properties of the
deceased (p. 106, BIR records); "C"

4. Attachment to Exh. "C" which is the detailed and complete listing of the properties of the deceased (pp. 89-105, BIR
rec.); "C-1" to "C-17"

5. Claims against the estate filed by Equitable Banking Corp. with the probate Court in the amount of P19,756,428.31 as of
March 31, 1988, together with the Annexes to the claim (pp. 64-88, BIR records); "D" to "D-24"

6. Claim filed by Banque de L' Indochine et de Suez with the probate Court in the amount of US $4,828,905.90 as of January
31, 1988 (pp. 262-265, BIR records); "E" to "E-3"

7. Claim of the Manila Banking Corporation (MBC) which as of November 7, 1987 amounts to P65,158,023.54, but
recomputed as of February 28, 1989 at a total amount of P84,199,160.46; together with the demand letter from MBC's
lawyer (pp. 194-197, BIR records); "F" to "F-3"

8. Demand letter of Manila Banking Corporation prepared by Asedillo, Ramos and Associates Law Offices
addressed to Fernandez Hermanos, Inc., represented by Jose P. Fernandez, as mortgagors, in the total amount
of P240,479,693.17 as of February 28, 1989 (pp. 186-187, BIR records); "G" & "G-1"

9. Claim of State Investment House, Inc. filed with the RTC, Branch VII of Manila, docketed as Civil Case No.
86-38599 entitled "State Investment House, Inc., Plaintiff, versus Maritime Company Overseas, Inc. and/or Jose P.
Fernandez, Defendants," (pp. 200-215, BIR records); "H" to "H-16"

10. Letter dated March 14, 1990 of Arsenio P. Dizon addressed to Atty. Jesus M. Gonzales, (p. 184, BIR records); "I"

11. Letter dated April 17, 1990 from J.M. Gonzales addressed to the Regional Director of BIR in San Pablo City
(p. 183, BIR records); "J"

12. Estate Tax Return filed by the estate of the late Jose P. Fernandez through its authorized representative, Atty. Jesus M.
Gonzales, for Arsenio P. Dizon, with attachments (pp. 177-182, BIR records); "K" to "K-5"

13. Certified true copy of the Letter of Administration issued by RTC Manila, Branch 51, in Sp. Proc. No. 87-42980
appointing Atty. Rafael S. Dizon as Judicial Administrator of the estate of Jose P. Fernandez; (p. 102, CTA records) and "L"

14. Certification of Payment of estate taxes Nos. 2052 and 2053, both dated April 27, 1990, issued by the Office of the
Regional Director, Revenue Region No. 4-C, San Pablo City, with attachments (pp. 103-104, CTA records.). "M" to "M-5"

Respondent's [BIR] counsel presented on June 26, 1995 one witness in the person of Alberto Enriquez, who was one
of the revenue examiners who conducted the investigation on the estate tax case of the late Jose P. Fernandez. In the
course of the direct examination of the witness, he identified the following:

Documents/
Signatures BIR Record

1. Estate Tax Return prepared by the BIR; p. 138

2. Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr. appearing at the lower Portion of Exh. "1"; -do-
 3. Memorandum for the Commissioner, dated July 19, 1991, prepared by revenue examiners, Ma. Anabella A. Abuloc,
Alberto S. Enriquez and Raymund S. Gallardo; Reviewed by Maximino V. Tagle pp. 143-144

4. Signature of Alberto S. Enriquez appearing at the lower portion on p. 2 of Exh. "2"; -do-

5. Signature of Ma. Anabella A. Abuloc appearing at the lower portion on p. 2 of Exh. "2"; -do-

6. Signature of Raymund S. Gallardo appearing at the Lower portion on p. 2 of Exh. "2"; -do-

7. Signature of Maximino V. Tagle also appearing on p. 2 of Exh. "2"; -do-

8. Summary of revenue Enforcement Officers Audit Report, dated July 19, 1991; p. 139

9. Signature of Alberto Enriquez at the lower portion of Exh. "3"; -do-

10. Signature of Ma. Anabella A. Abuloc at the lower portion of Exh. "3"; -do-

11. Signature of Raymond S. Gallardo at the lower portion of Exh. "3"; -do-

12. Signature of Maximino V. Tagle at the lower portion of Exh. "3"; -do-

13. Demand letter (FAS-E-87-91-00), signed by the Asst. Commissioner for Collection for the Commissioner
of Internal Revenue, demanding payment of the amount of P66,973,985.40; and p. 169

14. Assessment Notice FAS-E-87-91-00 pp. 169-170[22]

The CTA's Ruling

On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de Oate v. Court of Appeals,[23] the CTA opined

that the aforementioned pieces of evidence introduced by the BIR were admissible in evidence. The CTA ratiocinated:
Although the above-mentioned documents were not formally offered as evidence for respondent, considering that respondent
has been declared to have waived the presentation thereof during the hearing on March 20, 1996, still they could be
considered as evidence for respondent since they were properly identified during the presentation of respondent's witness,
whose testimony was duly recorded as part of the records of this case. Besides, the documents marked as respondent's
exhibits formed part of the BIR records of the case.[24]

Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up with its own computation of the deficiency estate tax,

to wit:

Conjugal Real Property P 5,062,016.00

Conjugal Personal Prop. 33,021,999.93
Gross Conjugal Estate 38,084,015.93
Less: Deductions 26,250,000.00
Net Conjugal Estate P 11,834,015.93
Less: Share of Surviving Spouse 5,917,007.96
Net Share in Conjugal Estate P 5,917,007.96
Add: Capital/Paraphernal
Properties P44,652,813.66
Less: Capital/Paraphernal
Deductions 44,652,813.66
Net Taxable Estate P 50,569,821.62
============

Estate Tax Due P 29,935,342.97

Add: 25% Surcharge for Late Filing 7,483,835.74
Add: Penalties for-No notice of death 15.00
No CPA certificate 300.00
Total deficiency estate tax P 37,419,493.71
=============

exclusive of 20% interest from due date of its payment until full payment thereof
[Sec. 283 (b), Tax Code of 1987].[25]

Thus, the CTA disposed of the case in this wise:

 WHEREFORE, viewed from all the foregoing, the Court finds the petition unmeritorious and denies the same. Petitioner
and/or the heirs of Jose P. Fernandez are hereby ordered to pay to respondent the amount of P37,419,493.71 plus 20%
interest from the due date of its payment until full payment thereof as estate tax liability of the estate of Jose P. Fernandez
who died on November 7, 1987.

SO ORDERED.[26]

Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review. [27]

The CA's Ruling

On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's findings, the CA ruled that the petitioner's act of filing an

estate tax return with the BIR and the issuance of BIR Certification Nos. 2052 and 2053 did not deprive the BIR Commissioner of her authority

to re-examine or re-assess the said return filed on behalf of the Estate.[28]

On May 31, 1999, petitioner filed a Motion for Reconsideration [29] which the CA denied in its Resolution[30] dated November 3, 1999.

Hence, the instant Petition raising the following issues:

1. Whether or not the admission of evidence which were not formally offered by the respondent BIR by the Court of Tax
Appeals which was subsequently upheld by the Court of Appeals is contrary to the Rules of Court and rulings of this
Honorable Court;

2. Whether or not the Court of Tax Appeals and the Court of Appeals erred in recognizing/considering the estate tax return
prepared and filed by respondent BIR knowing that the probate court appointed administrator of the estate of Jose P.
Fernandez had previously filed one as in fact, BIR Certification Clearance Nos. 2052 and 2053 had been issued in the
estate's favor;

3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in disallowing the valid and enforceable claims
of creditors against the estate, as lawful deductions despite clear and convincing evidence thereof; and

4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating erroneous double imputation of
values on the very same estate properties in the estate tax return it prepared and filed which effectively bloated the
estate's assets.[31]

The petitioner claims that in as much as the valid claims of creditors against the Estate are in excess of the gross estate, no estate tax was due;

that the lack of a formal offer of evidence is fatal to BIR's cause; that the doctrine laid down in Vda. de Oate has already been abandoned in a

long line of cases in which the Court held that evidence not formally offered is without any weight or value; that Section 34 of Rule 132 of the

Rules on Evidence requiring a formal offer of evidence is mandatory in character; that, while BIR's witness Alberto Enriquez (Alberto) in his

testimony before the CTA identified the pieces of evidence aforementioned such that the same were marked, BIR's failure to formally offer said

pieces of evidence and depriving petitioner the opportunity to cross-examine Alberto, render the same inadmissible in evidence; that

assuming arguendo that the ruling in Vda. de Oate is still applicable, BIR failed to comply with the doctrine's requisites because the documents

herein remained simply part of the BIR records and were not duly incorporated in the court records; that the BIR failed to consider that although

the actual payments made to the Estate creditors were lower than their respective claims, such were compromise agreements reached long after

the Estate's liability had been settled by the filing of its estate tax return and the issuance of BIR Certification Nos. 2052 and 2053; and that the

reckoning date of the claims against the Estate and the settlement of the estate tax due should be at the time the estate tax return was filed by the

judicial administrator and the issuance of said BIR Certifications and not at the time the aforementioned Compromise Agreements were entered

into with the Estate's creditors.[32]

On the other hand, respondent counters that the documents, being part of the records of the case and duly identified in a duly recorded testimony

are considered evidence even if the same were not formally offered; that the filing of the estate tax return by the Estate and the issuance of

BIR Certification Nos. 2052 and 2053 did not deprive the BIR of its authority to examine the return and assess the estate tax; and that the factual

findings of the CTA as affirmed by the CA may no longer be reviewed by this Court via a petition for review.[33]

The Issues

There are two ultimate issues which require resolution in this case:

First. Whether or not the CTA and the CA gravely erred in allowing the admission of the pieces of evidence which were not formally offered by

the BIR; and

Second. Whether or not the CA erred in affirming the CTA in the latter's determination of the deficiency estate tax imposed against the Estate.

The Courts Ruling

The Petition is impressed with merit.

Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases filed before it are litigated de novo, party-litigants

shall prove every minute aspect of their cases. Indubitably, no evidentiary value can be given the pieces of evidence submitted by the BIR, as the

rules on documentary evidence require that these documents must be formally offered before the CTA. [34] Pertinent is Section 34, Rule 132 of

the Revised Rules on Evidence which reads:

SEC. 34. Offer of evidence. The court shall consider no evidence which has not been formally offered. The purpose for
which the evidence is offered must be specified.

The CTA and the CA rely solely on the case of Vda. de Oate, which reiterated this Court's previous rulings in People v. Napat-

a[35] and People v. Mate[36] on the admission and consideration of exhibits which were not formally offered during the trial. Although in a long

line of cases many of which were decided after Vda. de Oate, we held that courts cannot consider evidence which has not been formally

offered,[37] nevertheless, petitioner cannot validly assume that the doctrine laid down in Vda. de Oate has already been abandoned. Recently,

in Ramos v. Dizon,[38] this Court, applying the said doctrine, ruled that the trial court judge therein committed no error when he admitted and

considered the respondents' exhibits in the resolution of the case, notwithstanding the fact that the same

were not formally offered. Likewise, in Far East Bank & Trust Company v. Commissioner of Internal Revenue,[39] the Court made reference to

said doctrine in resolving the issues therein. Indubitably, the doctrine laid down in Vda. De Oate still subsists in this jurisdiction. In Vda. de

Oate, we held that:

From the foregoing provision, it is clear that for evidence to be considered, the same must be formally offered. Corollarily,
the mere fact that a particular document is identified and marked as an exhibit does not mean that it has already been offered
as part of the evidence of a party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385], we had the occasion to make a
distinction between identification of documentary evidence and its formal offer as an exhibit. We said that the first is done in
the course of the trial and is accompanied by the marking of the evidence as an exhibit while the second is done only when
the party rests its case and not before. A party, therefore, may opt to formally offer his evidence if he believes that it will
advance his cause or not to do so at all. In the event he chooses to do the latter, the trial court is not authorized by the Rules
to consider the same.

However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we relaxed the foregoing rule and
allowed evidence not formally offered to be admitted and considered by the trial court provided the following
 requirements are present, viz.: first, the same must have been duly identified by testimony duly recorded and, second,
the same must have been incorporated in the records of the case.[40]

From the foregoing declaration, however, it is clear that Vda. de Oate is merely an exception to the general rule. Being an exception, it

may be applied only when there is strict compliance with the requisites mentioned therein; otherwise, the general rule in Section 34 of Rule 132

of the Rules of Court should prevail.

In this case, we find that these requirements have not been satisfied. The assailed pieces of evidence were presented and marked during the trial

particularly when Alberto took the witness stand. Alberto identified these pieces of evidence in his direct testimony. [41] He was also subjected to

cross-examination and re-cross examination by petitioner.[42] But Albertos account and the exchanges between Alberto and petitioner did not

sufficiently describe the contents of the said pieces of evidence presented by the BIR. In fact, petitioner sought that the lead examiner, one Ma.

Anabella A. Abuloc, be summoned to testify, inasmuch as Alberto was incompetent to answer questions relative to the working papers. [43] The

lead examiner never testified. Moreover, while Alberto's testimony identifying the BIR's evidence was duly recorded, the BIR documents

themselves were not incorporated in the records of the case.

A common fact threads through Vda. de Oate and Ramos that does not exist at all in the instant case. In the aforementioned cases, the exhibits

were marked at the pre-trial proceedings to warrant the pronouncement that the same were duly incorporated in the records of the case. Thus, we

held in Ramos:

In this case, we find and so rule that these requirements have been satisfied. The exhibits in question were presented and
marked during the pre-trial of the case thus, they have been incorporated into the records. Further, Elpidio himself
explained the contents of these exhibits when he was interrogated by respondents' counsel...

xxxx

But what further defeats petitioner's cause on this issue is that respondents' exhibits were marked and admitted during the
pre-trial stage as shown by the Pre-Trial Order quoted earlier.[44]

While the CTA is not governed strictly by technical rules of evidence,[45] as rules of procedure are not ends in themselves and are primarily

intended as tools in the administration of justice, the presentation of the BIR's evidence is not a mere procedural technicality which may be

disregarded considering that it is the only means by which the CTA may ascertain and verify the truth of BIR's claims against the Estate.[46] The

BIR's failure to formally offer these pieces of evidence, despite CTA's directives, is fatal to its cause. [47] Such failure is aggravated by the fact

that not even a single reason was advanced by the BIR to justify such fatal omission. This, we take against the BIR.

Per the records of this case, the BIR was directed to present its evidence[48] in the hearing of February 21, 1996, but BIR's counsel failed to

appear.[49] The CTA denied petitioner's motion to consider BIR's presentation of evidence as waived, with a warning to BIR that such

presentation would be considered waived if BIR's evidence would not be presented at the next hearing. Again, in the hearing of March 20, 1996,

BIR's counsel failed to appear.[50] Thus, in its Resolution[51] dated March 21, 1996, the CTA considered the BIR to have waived presentation of

its evidence. In the same Resolution, the parties were directed to file their respective memorandum. Petitioner complied but BIR failed to do

so.[52] In all of these proceedings, BIR was duly notified. Hence, in this case, we are constrained to apply our ruling in Heirs of Pedro Pasag v.

Parocha:[53]
A formal offer is necessary because judges are mandated to rest their findings of facts and their judgment only and
strictly upon the evidence offered by the parties at the trial. Its function is to enable the trial judge to know the purpose or
purposes for which the proponent is presenting the evidence. On the other hand, this allows opposing parties to examine the
evidence and object to its admissibility. Moreover, it facilitates review as the appellate court will not be required to review
documents not previously scrutinized by the trial court.

Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court of Appeals ruled that the formal
offer of one's evidence is deemed waived after failing to submit it within a considerable period of time. It explained
 that the court cannot admit an offer of evidence made after a lapse of three (3) months because to do so would
"condone an inexcusable laxity if not non-compliance with a court order which, in effect, would encourage needless
delays and derail the speedy administration of justice."
Applying the aforementioned principle in this case, we find that the trial court had reasonable ground to consider that
petitioners had waived their right to make a formal offer of documentary or object evidence. Despite several extensions of
time to make their formal offer, petitioners failed to comply with their commitment and allowed almost five months to lapse
before finally submitting it. Petitioners' failure to comply with the rule on admissibility of evidence is anathema to the
efficient, effective, and expeditious dispensation of justice.

Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the case.

Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect and will not be disturbed on appeal unless it is

shown that the lower courts committed gross error in the appreciation of facts.[54] In this case, however, we find the decision of the CA affirming

that of the CTA tainted with palpable error.

It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As a mode of extinguishing an

obligation,[55] condonation or remission of debt[56] is defined as:

an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces the enforcement of the
obligation, which is extinguished in its entirety or in that part or aspect of the same to which the remission refers. It is an
essential characteristic of remission that it be gratuitous, that there is no equivalent received for the benefit given; once such
equivalent exists, the nature of the act changes. It may become dation in payment when the creditor receives a thing different
from that stipulated; or novation, when the object or principal conditions of the obligation should be changed; or
compromise, when the matter renounced is in litigation or dispute and in exchange of some concession which the creditor
receives.[57]

Verily, the second issue in this case involves the construction of Section 79[58] of the National Internal Revenue Code[59] (Tax Code) which

provides for the allowable deductions from the gross estate of the decedent. The specific question is whether the actual claims of the

aforementioned creditors may be fully allowed as deductions from the gross estate of Jose despite the fact that the said claims were reduced or

condoned through compromise agreements entered into by the Estate with its creditors.

Claims against the estate, as allowable deductions from the gross estate under Section 79 of the Tax Code, are basically a reproduction of the

deductions allowed under Section 89 (a) (1) (C) and (E) of Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal

Revenue Code of 1939, and which was the first codification of Philippine tax laws. Philippine tax laws were, in turn, based on the federal tax

laws of the United States. Thus, pursuant to established rules of statutory construction, the decisions of American courts construing the federal

tax code are entitled to great weight in the interpretation of our own tax laws. [60]

It is noteworthy that even in the United States, there is some dispute as to whether the deductible amount for a claim against the estate is fixed as

of the decedent's death which is the general rule, or the same should be adjusted to reflect post-death developments, such as where a settlement

between the parties results in the reduction of the amount actually paid.[61] On one hand, the U.S. court ruled that the appropriate deduction is the

value that the claim had at the date of the decedent's death.[62] Also, as held in Propstra v. U.S., [63] where a lien claimed against the estate was

certain and enforceable on the date of the decedent's death, the fact that the claimant subsequently settled for lesser amount did not preclude the

estate from deducting the entire amount of the claim for estate tax purposes. These pronouncements essentially confirm the general principle that

post-death developments are not material in determining the amount of the deduction.

On the other hand, the Internal Revenue Service (Service) opines that post-death settlement should be taken into consideration and the

claim should be allowed as a deduction only to the extent of the amount actually paid. [64] Recognizing the dispute, the Service released Proposed

Regulations in 2007 mandating that the deduction would be limited to the actual amount paid. [65]
 In announcing its agreement with Propstra,[66] the U.S. 5th Circuit Court of Appeals held:

We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the Ithaca Trust date-of-death valuation
principle to enforceable claims against the estate. As we interpret Ithaca Trust, when the Supreme Court announced the date-
of-death valuation principle, it was making a judgment about the nature of the federal estate tax specifically, that it is a tax
imposed on the act of transferring property by will or intestacy and, because the act on which the tax is levied occurs at a
discrete time, i.e., the instance of death, the net value of the property transferred should be ascertained, as nearly as possible,
as of that time. This analysis supports broad application of the date-of-death valuation rule.[67]

We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of the U.S. Supreme Court in Ithaca Trust Co. v.

United States.[68] First. There is no law, nor do we discern any legislative intent in our tax laws, which disregards the date-of-death valuation

principle and particularly provides that post-death developments must be considered in determining the net value of the estate. It bears emphasis

that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being

construed strictissimi juris against the government.[69] Any doubt on whether a person, article or activity is taxable is generally resolved against

taxation.[70] Second. Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term "claims" required

to be presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could have been

enforced against the deceased in his lifetime, or liability contracted by the deceased before his death.[71] Therefore, the claims existing at the time

of death are significant to, and should be made the basis of, the determination of allowable deductions.

WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision dated April 30, 1999 and the Resolution dated

November 3, 1999 of the Court of Appeals in CA-G.R. S.P. No. 46947 are REVERSED and SET ASIDE. The Bureau of Internal Revenue's

deficiency estate tax assessment against the Estate of Jose P. Fernandez is hereby NULLIFIED. No costs.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ MINITA V. CHICO-NAZARIO

Associate Justice Associate Justice
RUBEN T. REYES
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the
Courts Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

CERTIFICATION
Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

[1]
Dated January 20, 2000, rollo, pp. 8-20.
[2]
Particularly docketed as CA-G.R. SP No. 46947; penned by Associate Justice Marina L. Buzon, with Presiding Justice Jesus M. Elbinias (now retired) and
Associate Justice Eugenio S. Labitoria (now retired), concurring; id. at 22-31.
[3]
Particularly docketed as CTA Case No. 5116; penned by Associate Judge Ramon O. De Veyra and concurred in by Presiding Judge Ernesto D. Acosta and
Associate Judge Amancio Q. Saga; id. at 33-61.
[4]
This case was decided before the CTA was elevated by law to the same level as the CA by virtue of Republic Act (RA) No. 9282 otherwise known as "An Act
Expanding the Jurisdiction of the Court of Tax Appeals (CTA), Elevating its Rank to the Level of a Collegiate Court with Special Jurisdiction and Enlarging its
Membership, Amending for the Purpose Certain Sections of Republic Act No. 1125, as amended, otherwise known as The Law Creating the Court of Tax Appeals,
and for other purposes," which was approved on March 30, 2004. Hence, upon its effectivity, decisions of the CTA are now appealable directly to the Supreme
Court.
[5]
BIR Records, pp. 1-88.
[6]
The said petition is entitled: In the Matter of the Petition to Approve the Will of Jose P. Fernandez, Carlos P. Fernandez, Petitioner, particularly docketed as
Special Proceedings No. 87-42980; BIR Record, pp. 107-108.
[7]
Id. at 126.
[8]
Id. at 184.
[9]
Id. at 183.
[10]
Id. at 182.
[11]
Id.
[12]
Rollo, p. 68.
[13]
Id. at 69.
[14]
Lists of Personal and Real Properties of Jose; id. at 70-73.
[15]
CTA Record, p. 102.
[16]
Rollo, p. 10.
[17]
BIR Records, p. 169.
[18]
Id.
[19]
Id. at 171.
[20]
By then BIR Commissioner Liwayway Vinzons-Chato; id. at 277-278.
[21]
CTA Records, pp. 1-7.
[22]
Rollo, pp. 37-40 (Emphasis supplied).
[23]
G.R. No. 116149, November 23, 1995, 250 SCRA 283, 287, citing People v. Napat-a, 179 SCRA 403 (1989) and People v. Mate, 103 SCRA 484 (1981).
[24]
CTA Records, p. 148.
[25]
Id. at 166-167.
[26]
Id. at 167.
[27]
CA rollo, pp. 3-17.
[28]
Citing Section 16 of the 1993 National Internal Revenue Code.
[29]
Rollo, pp. 22-31.
[30]
Id. at 32.
[31]
Id. at 114-115.
[32]
Id.
[33]
Respondent BIR's Memorandum dated October 16, 2000; id. at 140-144.
[34]
Commissioner of Internal Revenue v. Manila Mining Corporation, G.R. No. 153204, August 31, 2005, 468 SCRA 571, 588-589.
[35]
Supra note 23.
[36]
Supra note 23.
[37]
Far East Bank & Trust Company v. Commissioner of Internal Revenue, G.R. No. 149589, September 15, 2006, 502 SCRA 87; Ala-Martin v. Sultan, G.R. No.
117512, October 2, 2001, 366 SCRA 316, citing Ong v. Court of Appeals, 301 SCRA 391 (1999), which further cited Candido v. Court of Appeals, 253 SCRA 78,
82-83 (1996); Republic v. Sandiganbayan, 255 SCRA 438, 456 (1996); People v. Peralta, 237 SCRA 218, 226 (1994); Vda. De Alvarez vs. Court of Appeals, 231
SCRA 309, 317-318 (1994); and People v. Cario, et al., 165 SCRA 664, 671 (1988); See also De los Reyes v. Intermediate Appellate Court, G.R. No.74768,
August 11, 1989, 176 SCRA 394, 401-402 (1989) and People v. Mate, supra note 23, at 493.
[38]
G.R. No. 137247, August 7, 2006, 498 SCRA 17, 30-31.
[39]
Supra note 29, at 91.
[40]
Underscoring supplied.
[41]
TSN, June 26, 1995.
[42]
TSN, July 12, 1995.
[43]
Id. at 42-49.
[44]
Supra note 29, at 31 and 34, citing Marmont Resort Hotel Enterprises v. Guiang, 168 SCRA 373, 379-380 (1988).
[45]
Calamba Steel Center, Inc. (formerly JS Steel Corporation) v. Commissioner of Internal Revenue, G.R. No. 151857, April 28, 2005, 457 SCRA 482, 494.
[46]
Commissioner of Internal Revenue v. Manila Mining Corporation, supra note 28, at 593-594.
[47]
Far East Bank & Trust Company v. Commissioner of Internal Revenue, supra note 29, at 90.
[48]
CTA Resolution dated January 19, 1996; CTA Records, p. 113-114.
[49]
CTA Records, p. 117.
[50]
Id. at 119.
[51]
Id. at 120.
[52]
CTA Order dated June 17, 1996, CTA Records, p. 138.
[53]
G.R. No. 155483, April 27, 2007, 522 SCRA 410, 416, citing Constantino v. Court of Appeals, G.R. No. 116018, November 13, 1996, 264 SCRA 59 (Other
citations omitted; Emphasis supplied ).
[54]
Filinvest Development Corporation v. Commissioner of Internal Revenue and Court of Tax Appeals, G.R. No. 146941, August 9, 2007, 529 SCRA 605, 609-
610, citing Carrara Marble Philippines, Inc. v. Commissioner of Customs, 372 Phil. 322, 333-334 (1999) and Commissioner of Internal Revenue v. Court of
Appeals, 358 Phil. 562, 584 (1998).
[55]
Article 1231 of the Civil Code of the Philippines provides:
Art. 1231. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation. (Emphasis ours.)
[56]
Article 1270 of the Civil Code of the Philippines provides:
Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly.
One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of
donation.
[57]
Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV, 1991 ed., p. 353, citing 8 Manresa 365.
[58]
SEC. 79. Computation of net estate and estate tax. For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined:
(a) In the case of a citizen or resident of the Philippines, by deducting from the value of the gross estate
(1) Expenses, losses, indebtedness, and taxes. Such amounts
(A) For funeral expenses in an amount equal to five per centum of the gross estate but in no case to exceed P50,000.00;
(B) For judicial expenses of the testamentary or intestate proceedings;
(C) For claims against the estate; Provided, That at the time the indebtedness was incurred the debt instrument was duly notarized and, if the loan was contracted
within three years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan. (As
amended by PD No. 1994)
(D) For claims of the deceased against insolvent persons where the value of decedent's interest therein is included in the value of the gross estate; and
(E) For unpaid mortgages upon, or any indebtedness in respect to property, where the value of decedent's interest therein, undiminished by such mortgage or
indebtedness, is included in the value of the gross estate, but not including any income taxes upon income received after the death of the decedent, or property
taxes not accrued before his death, or any estate tax. The deduction herein allowed in the case of claims against the estate, unpaid mortgages, or any indebtedness,
shall when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full reconsideration in
money or money's worth. There shall also be deducted losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties,
or from robbery, theft, or embezzlement, when such losses are not compensated for by insurance or otherwise, and if at the time of the filing of the return such
losses have not been claimed as a deduction for income tax purposes in an income tax return, and provided that such losses were incurred not later than last day for
the payment of the estate tax as prescribed in subsection (a) of Section 84.
[59]
This refers to the 1977 National Internal Revenue Code, as amended which was effective at the time of Jose's death on November 7, 1987.
[60]
Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 123206, March 22, 2000, 328 SCRA 666, 676-677 (citations omitted).
[61]
47B Corpus Juris Secundum, Internal Revenue 533.
[62]
Smith v. C.I.R., 82 T.C.M. (CCH) 909 (2001), aff'd 54 Fed. Appx. 413.
[63]
680 F.2d 1248.
[64]
47B Corpus Juris Secundum, Internal Revenue 524.
[65]
Prop. Treas. Reg. . 20.2053-1 (b) (1), published as REG-143316-03.
[66]
Supra note 63.
[67]
`Smith's Est. v. CIR, 198 F3d 515, 525 (5th Cir. 1999). See also O'Neal's Est. v. US, 228 F. Supp. 2d 1290 (ND Ala. 2002).
[68]
279 U.S. 151, 49 S. Ct. 291, 73 L.Ed. 647 (1929).
[69]
Commissioner of Internal Revenue v. The Court of Appeals, Central Vegetable Manufacturing Co., Inc., and the Court of Tax Appeals, G.R. No. 107135,
February 23, 1999, 303 SCRA 508, 516-517, citing Province of Bulacan v. Court of Appeals, 299 SCRA 442 (1998); Republic v. IAC, 196 SCRA 335 (1991); CIR
v. Firemen's Fund Ins. Co., 148 SCRA 315 (1987); and CIR v. CA, 204 SCRA 182 (1991).
[70]
Manila International Airport Authority v. Court of Appeals, G.R. No. 155650, July 20, 2006, 495 SCRA 591, 619.
[71]
Quirino v. Grospe, G.R. No. 58797, January 31, 1989, 169 SCRA 702, 704-705, citing Gabin v. Melliza, 84 Phil. 794, 796 (1949).

===

THIRD DIVISION

[G.R. No. 123206. March 22, 2000]

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS, COURT OF TAX APPEALS and JOSEFINA
P. PAJONAR, as Administratrix of the Estate of Pedro P. Pajonar, respondents.

RESOLUTION

GONZAGA-REYES, J.: Supr-ema

Assailed in this petition for review on certiorari is the December 21, 1995 Decision[1] of the Court of Appeals[2] in CA-G.R. Sp. No.
34399 affirming the June 7, 1994 Resolution of the Court of Tax Appeals in CTA Case No. 4381 granting private respondent
Josefina P. Pajonar, as administratrix of the estate of Pedro P. Pajonar, a tax refund in the amount of P76,502.42, representing
erroneously paid estate taxes for the year 1988.

Pedro Pajonar, a member of the Philippine Scout, Bataan Contingent, during the second World War, was a part of the infamous
Death March by reason of which he suffered shock and became insane. His sister Josefina Pajonar became the guardian over his
person, while his property was placed under the guardianship of the Philippine National Bank (PNB) by the Regional Trial Court of
Dumaguete City, Branch 31, in Special Proceedings No. 1254. He died on January 10, 1988. He was survived by his two brothers
Isidro P. Pajonar and Gregorio Pajonar, his sister Josefina Pajonar, nephews Concordio Jandog and Mario Jandog and niece
Conchita Jandog.

On May 11, 1988, the PNB filed an accounting of the decedent's property under guardianship valued at P3,037,672.09 in Special
Proceedings No. 1254. However, the PNB did not file an estate tax return, instead it advised Pedro Pajonar's heirs to execute an
extrajudicial settlement and to pay the taxes on his estate. On April 5, 1988, pursuant to the assessment by the Bureau of Internal
Revenue (BIR), the estate of Pedro Pajonar paid taxes in the amount of P2,557.

On May 19, 1988, Josefina Pajonar filed a petition with the Regional Trial Court of Dumaguete City for the issuance in her favor of
letters of administration of the estate of her brother. The case was docketed as Special Proceedings No. 2399. On July 18, 1988,
the trial court appointed Josefina Pajonar as the regular administratrix of Pedro Pajonar's estate.
On December 19, 1988, pursuant to a second assessment by the BIR for deficiency estate tax, the estate of Pedro Pajonar paid
estate tax in the amount of P1,527,790.98. Josefina Pajonar, in her capacity as administratrix and heir of Pedro Pajonar's estate,
filed a protest on January 11, 1989 with the BIR praying that the estate tax payment in the amount of P1,527,790.98, or at least
some portion of it, be returned to the heirs.[3] Jur-is

However, on August 15, 1989, without waiting for her protest to be resolved by the BIR, Josefina Pajonar filed a petition for review
with the Court of Tax Appeals (CTA), praying for the refund of P1,527,790.98, or in the alternative, P840,202.06, as erroneously
paid estate tax.[4] The case was docketed as CTA Case No. 4381.

On May 6, 1993, the CTA ordered the Commissioner of Internal Revenue to refund Josefina Pajonar the amount of P252,585.59,
representing erroneously paid estate tax for the year 1988. [5]

Among the deductions from the gross estate allowed by the CTA were the amounts of P60,753 representing the notarial fee for the
Extrajudicial Settlement and the amount of P50,000 as the attorney's fees in Special Proceedings No. 1254 for guardianship. [6]Juri-
ssc

On June 15, 1993, the Commissioner of Internal Revenue filed a motion for reconsideration [7] of the CTA's May 6, 1993 decision
asserting, among others, that the notarial fee for the Extrajudicial Settlement and the attorney's fees in the guardianship
proceedings are not deductible expenses.

On June 7, 1994, the CTA issued the assailed Resolution[8] ordering the Commissioner of Internal Revenue to refund Josefina
Pajonar, as administratrix of the estate of Pedro Pajonar, the amount of P76,502.42 representing erroneously paid estate tax for the
year 1988. Also, the CTA upheld the validity of the deduction of the notarial fee for the Extrajudicial Settlement and the attorney's
fees in the guardianship proceedings.

On July 5, 1994, the Commissioner of Internal Revenue filed with the Court of Appeals a petition for review of the CTA's May 6,
1993 Decision and its June 7, 1994 Resolution, questioning the validity of the abovementioned deductions. On December 21, 1995,
the Court of Appeals denied the Commissioner's petition.[9]

Hence, the present appeal by the Commissioner of Internal Revenue.

The sole issue in this case involves the construction of section 79 [10] of the National Internal Revenue Code[11] (Tax Code) which
provides for the allowable deductions from the gross estate of the decedent. More particularly, the question is whether the notarial
fee paid for the extrajudicial settlement in the amount of P60,753 and the attorney's fees in the guardianship proceedings in the
amount of P50,000 may be allowed as deductions from the gross estate of decedent in order to arrive at the value of the net estate.

We answer this question in the affirmative, thereby upholding the decisions of the appellate courts. J-jlex

In its May 6, 1993 Decision, the Court of Tax Appeals ruled thus:

Respondent maintains that only judicial expenses of the testamentary or intestate proceedings are allowed as a
deduction to the gross estate. The amount of P60,753.00 is quite extraordinary for a mere notarial fee.

This Court adopts the view under American jurisprudence that expenses incurred in the extrajudicial settlement of
the estate should be allowed as a deduction from the gross estate. "There is no requirement of formal
administration. It is sufficient that the expense be a necessary contribution toward the settlement of the case." [
34 Am. Jur. 2d, p. 765; Nolledo, Bar Reviewer in Taxation, 10thEd. (1990), p. 481 ]

xxx.....xxx.....xxx

The attorney's fees of P50,000.00, which were already incurred but not yet paid, refers to the guardianship
proceeding filed by PNB, as guardian over the ward of Pedro Pajonar, docketed as Special Proceeding No. 1254
in the RTC (Branch XXXI) of Dumaguete City. x x x

xxx.....xxx.....xxx

The guardianship proceeding had been terminated upon delivery of the residuary estate to the heirs entitled
thereto. Thereafter, PNB was discharged of any further responsibility.

Attorney's fees in order to be deductible from the gross estate must be essential to the collection of assets,
payment of debts or the distribution of the property to the persons entitled to it. The services for which the fees
are charged must relate to the proper settlement of the estate. [ 34 Am. Jur. 2d 767. ] In this case, the
guardianship proceeding was necessary for the distribution of the property of the late Pedro Pajonar to his rightful
heirs. Sc-juris

xxx.....xxx.....xxx
 PNB was appointed as guardian over the assets of the late Pedro Pajonar, who, even at the time of his death,
was incompetent by reason of insanity. The expenses incurred in the guardianship proceeding was but a
necessary expense in the settlement of the decedent's estate. Therefore, the attorney's fee incurred in the
guardianship proceedings amounting to P50,000.00 is a reasonable and necessary business expense deductible
from the gross estate of the decedent.[12]

Upon a motion for reconsideration filed by the Commissioner of Internal Revenue, the Court of Tax Appeals modified its previous
ruling by reducing the refundable amount to P76,502.43 since it found that a deficiency interest should be imposed and the
compromise penalty excluded.[13] However, the tax court upheld its previous ruling regarding the legality of the deductions -

It is significant to note that the inclusion of the estate tax law in the codification of all our national internal revenue
laws with the enactment of the National Internal Revenue Code in 1939 were copied from the Federal Law of the
United States. [UMALI, Reviewer in Taxation (1985), p. 285 ] The 1977 Tax Code, promulgated by Presidential
Decree No. 1158, effective June 3, 1977, reenacted substantially all the provisions of the old law on estate and
gift taxes, except the sections relating to the meaning of gross estate and gift. [ Ibid, p. 286. ] Nc-mmis

In the United States, [a]dministrative expenses, executor's commissions and attorney's fees are considered
allowable deductions from the Gross Estate. Administrative expenses are limited to such expenses as are
actually and necessarily incurred in the administration of a decedent's estate. [PRENTICE-HALL, Federal Taxes
Estate and Gift Taxes (1936), p. 120, 533. ] Necessary expenses of administration are such expenses as are
entailed for the preservation and productivity of the estate and for its management for purposes of liquidation,
payment of debts and distribution of the residue among the persons entitled thereto. [Lizarraga Hermanos vs.
Abada, 40 Phil. 124. ] They must be incurred for the settlement of the estate as a whole. [34 Am. Jur. 2d, p. 765. ]
Thus, where there were no substantial community debts and it was unnecessary to convert community property
to cash, the only practical purpose of administration being the payment of estate taxes, full deduction was
allowed for attorney's fees and miscellaneous expenses charged wholly to decedent's estate. [ Ibid., citing Estate
of Helis, 26 T .C. 143 (A). ]

Petitioner stated in her protest filed with the BIR that "upon the death of the ward, the PNB, which was still the
guardian of the estate, (Annex 'Z' ), did not file an estate tax return; however, it advised the heirs to execute an
extrajudicial settlement, to pay taxes and to post a bond equal to the value of the estate, for which the estate paid
P59,341.40 for the premiums. (See Annex 'K')." [p. 17, CTA record. ] Therefore, it would appear from the records
of the case that the only practical purpose of settling the estate by means of an extrajudicial settlement pursuant
to Section 1 of Rule 74 of the Rules of Court was for the payment of taxes and the distribution of the estate to the
heirs. A fortiori, since our estate tax laws are of American origin, the interpretation adopted by American Courts
has some persuasive effect on the interpretation of our own estate tax laws on the subject.

Anent the contention of respondent that the attorney's fees of P50,000.00 incurred in the guardianship
proceeding should not be deducted from the Gross Estate, We consider the same unmeritorious. Attorneys' and
guardians' fees incurred in a trustee's accounting of a taxable inter vivos trust attributable to the usual issues
involved in such an accounting was held to be proper deductions because these are expenses incurred in
terminating an inter vivos trust that was includible in the decedent's estate. (Prentice Hall, Federal Taxes on
Estate and Gift, p.120, 861] Attorney's fees are allowable deductions if incurred for the settlement of the estate. It
is noteworthy to point that PNB was appointed the guardian over the assets of the deceased. Necessarily the
assets of the deceased formed part of his gross estate. Accordingly, all expenses incurred in relation to the
estate of the deceased will be deductible for estate tax purposes provided these are necessary and ordinary
expenses for administration of the settlement of the estate. [14]

In upholding the June 7, 1994 Resolution of the Court of Tax Appeals, the Court of Appeals held that: Newmiso

2. Although the Tax Code specifies "judicial expenses of the testamentary or intestate proceedings," there is no
reason why expenses incurred in the administration and settlement of an estate in extrajudicial proceedings
should not be allowed. However, deduction is limited to such administration expenses as are actually and
necessarily incurred in the collection of the assets of the estate, payment of the debts, and distribution of the
remainder among those entitled thereto. Such expenses may include executor's or administrator's fees,
attorney's fees, court fees and charges, appraiser's fees, clerk hire, costs of preserving and distributing the estate
and storing or maintaining it, brokerage fees or commissions for selling or disposing of the estate, and the like.
Deductible attorney's fees are those incurred by the executor or administrator in the settlement of the estate or in
defending or prosecuting claims against or due the estate. (Estate and Gift Taxation in the Philippines, T. P.
Matic, Jr., 1981 Edition, p. 176 ).

xxx.....xxx.....xxx

It is clear then that the extrajudicial settlement was for the purpose of payment of taxes and the distribution of the
estate to the heirs. The execution of the extrajudicial settlement necessitated the notarization of the same. Hence
the Contract of Legal Services of March 28, 1988 entered into between respondent Josefina Pajonar and counsel
was presented in evidence for the purpose of showing that the amount of P60,753.00 was for the notarization of
the Extrajudicial Settlement. It follows then that the notarial fee of P60,753.00 was incurred primarily to settle the
estate of the deceased Pedro Pajonar. Said amount should then be considered an administration expenses
actually and necessarily incurred in the collection of the assets of the estate, payment of debts and distribution of
 the remainder among those entitled thereto. Thus, the notarial fee of P60,753 incurred for the Extrajudicial
Settlement should be allowed as a deduction from the gross estate.

3. Attorney's fees, on the other hand, in order to be deductible from the gross estate must be essential to the
settlement of the estate. Acctmis

The amount of P50,000.00 was incurred as attorney's fees in the guardianship proceedings in Spec. Proc. No.
1254. Petitioner contends that said amount are not expenses of the testamentary or intestate proceedings as the
guardianship proceeding was instituted during the lifetime of the decedent when there was yet no estate to be
settled.

Again , this contention must fail.

The guardianship proceeding in this case was necessary for the distribution of the property of the deceased
Pedro Pajonar. As correctly pointed out by respondent CTA, the PNB was appointed guardian over the assets of
the deceased, and that necessarily the assets of the deceased formed part of his gross estate. x x x

xxx.....xxx.....xxx

It is clear therefore that the attorney's fees incurred in the guardianship proceeding in Spec. Proc. No. 1254 were
essential to the distribution of the property to the persons entitled thereto. Hence, the attorney's fees incurred in
the guardianship proceedings in the amount of P50,000.00 should be allowed as a deduction from the gross
estate of the decedent.[15]

The deductions from the gross estate permitted under section 79 of the Tax Code basically reproduced the deductions allowed
under Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal Revenue Code of 1939, [16] and which was
the first codification of Philippine tax laws. Section 89 (a) (1) (B) of CA 466 also provided for the deduction of the "judicial expenses
of the testamentary or intestate proceedings" for purposes of determining the value of the net estate. Philippine tax laws were, in
turn, based on the federal tax laws of the United States.[17] In accord with established rules of statutory construction, the decisions
of American courts construing the federal tax code are entitled to great weight in the interpretation of our own tax laws. [18] Scc-alr

Judicial expenses are expenses of administration. [19] Administration expenses, as an allowable deduction from the gross estate of
the decedent for purposes of arriving at the value of the net estate, have been construed by the federal and state courts of the
United States to include all expenses "essential to the collection of the assets, payment of debts or the distribution of the property
to the persons entitled to it."[20]In other words, the expenses must be essential to the proper settlement of the estate. Expenditures
incurred for the individual benefit of the heirs, devisees or legatees are not deductible. [21] This distinction has been carried over to
our jurisdiction. Thus, in Lorenzo v. Posadas[22] the Court construed the phrase "judicial expenses of the testamentary or intestate
proceedings" as not including the compensation paid to a trustee of the decedent's estate when it appeared that such trustee was
appointed for the purpose of managing the decedent's real estate for the benefit of the testamentary heir. In another case, the
Court disallowed the premiums paid on the bond filed by the administrator as an expense of administration since the giving of a
bond is in the nature of a qualification for the office, and not necessary in the settlement of the estate. [23] Neither may attorney's
fees incident to litigation incurred by the heirs in asserting their respective rights be claimed as a deduction from the gross estate.[24]

Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is clearly a deductible expense since such settlement
effected a distribution of Pedro Pajonar's estate to his lawful heirs. Similarly, the attorney's fees paid to PNB for acting as the
guardian of Pedro Pajonar's property during his lifetime should also be considered as a deductible administration expense. PNB
provided a detailed accounting of decedent's property and gave advice as to the proper settlement of the latter's estate, acts which
contributed towards the collection of decedent's assets and the subsequent settlement of the estate.

We find that the Court of Appeals did not commit reversible error in affirming the questioned resolution of the Court of Tax Appeals.

WHEREFORE, the December 21, 1995 Decision of the Court of Appeals is AFFIRMED. The notarial fee for the extrajudicial
settlement and the attorney's fees in the guardianship proceedings are allowable deductions from the gross estate of Pedro
Pajonar.

SO ORDERED.

Melo, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur. Calrs-pped

[1]
Entitled "Commissioner of Internal Revenue v. Josefina P. Pajonar, as Administratrix of the Estate of Pedro P. Pajonar, and Court of Tax Appeals." Rollo, 35-
46.
[2]
Eighth Division composed of J. Jaime M. Lantin, ponente; and JJ Eduardo G. Montenegro and Jose C. De la Rama, concurring.
[3]
CA Records, 45-53.
[4]
Ibid., 37-44.
[5]
The CTA made the following computations
Estate of Pedro P. Pajonar
Lagtangon, Siaton, Negros Oriental
Died January 10, 1998
I. Real Properties P102,966.59

II. Personal Properties

a. Refrigerator P7,500.00

b. Wall Clock, Esso Gasul Tables and Chairs 3,090.00

c.Beddings, Stereo Cassette, TV, Betamax 15,700.00

d. Karaoke, Electric Iron, Fan,Transformer and

Corner Set 7,400.00

e. Toyota Tamaraw 27,500.00 61,190.00

Additional Personal Properties:

f. Time Deposit-PNB P200,000.00

g. Stocks and Bonds-PNB 201,232.37

h. Money Market 2,300,000.00

i. Cash Deposit 114,101.83 2,815,334.20

GROSS ESTATE P 2,979,490.79

Less: Deductions:

A a. Funeral expenses P50,000.00

b. Commission to Trustee (PNB) 18,335.93

B c. Notarial Fee for the Extra-judicial Settlement 60,753.00

d. Attorneys Fees in Special Proceeding No.

1254 for guardianship 50,000.00

e.Filing Fees in Special Proceeding No. 2399 6,374.88

f.Publication of Notice to Creditors September

7, 14 and 21, 1988 issues of the Dumaguete
Star Informer 600.00

g.Certification fee for Publication on the

Bulletin Board of the Municipal Building of
Siaton, Negros Oriental 2.00

h.Certification fee for Publication in the Capitol 5.00

i.Certification fee for publication of Notice to

Creditors 5.00 186,075.81

NET ESTATE 2,793,414.98

Estate Tax Due P1,277,762.39

Less: Estate Tax Paid:

CB Confirmation Receipt Nos.

.....B 14268064 P2,557.00

.....B 15517625 1,527,790.98 1,530,347.98

AMOUNT REFUNDABLE P252,585.59

Rollo, 86-88.

[6]
Ibid., 78-79, 81-83.
[7]
CA Records, 118-130.
[8]
Rollo, 47-56.
[9]
Ibid., 35-46.

[10]
SEC. 79 Computation of net estate and estate tax. For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined:

(a).....In the case of a citizen or resident of the Philippines, by deducting from the value of the gross estate-

(1)..... Expenses, losses, indebtedness, and taxes. Such amounts-

(A).....For funeral expenses in an amount equal to five per centum of the gross estate but in no case to exceed P50,000.00;

(B).....For judicial expenses of the testamentary or intestate proceedings;

xxx.....xxx.....xxx
[11]
This refers to the 1977 National Internal Revenue Code, as amended. On the date of decedents death (January 10, 1988), the latest amendment to the Tax Code
was introduced by Executive Order No. 273, which became effective on January 1, 1988.
[12]
Rollo, 78-79, 81-83.
[13]

Estate tax Due P1,277,762.39

Less : estate tax paid 04.05.88

........ [CBCR No. 14268054] 2,557.00

Deficiency estate tax P1,275,205.39

Add: Additions to tax

........Interest on deficiency [Sec. 249 (b)]
........04.12.88 to 12.19.88
........(1,275,205.39 x 20% x 252/365) 176,083.16

Total deficiency tax P1,451,288.55

Less: estate tax paid 12.19.88

........ (CBCR No. 15517625) 1,527,790.98

Amount Refundable P76,502.43

Ibid., 54.
[14]
Ibid., 49-51.
[15]
Ibid., 43-45.
[16]
Approved on June 15, 1939.
[17]
Wise & Co. v. Meer, 78 Phil 655 (1947)
[18]
Carolina Industries, Inc. v. CMS Stock Brokerage, Inc., 97 SCRA 734 (1980)
[19]
Lorenzo v. Posada, 64 Phil 353 (1937)
[20]
34A Am Jur 2d, Federal Taxation (1995), sec. 144, 288, citing Union Commerce Bank, trans, (1963) 39 TC 973, affd & revd on other issues (1964, CA6) 339
F2d 163, 65-1 USTC p 12279, 15 AFTR 2d 1281.
[21]
Ibid., sec. 144,272, citing Bretzfelder, Charles, exr v. Com., (1936, CA2) 86 F2d 713, 36-2 USTC sec. 9548, 18 AFTR 653.
[22]
Lorenzo v. Posada, supra.
[23]
Sison vs. Teodoro, 100 Phil. 1055 (1957)
[24]
Johannes v. Imperial, 43 Phil 597 (1922)

===

THIRD DIVISION

RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial G.R. No. 140944
Administrator of the Estate of the deceased JOSE P.
FERNANDEZ, Present:
Petitioner,
YNARES-SANTIAGO, J.,
Chairperson,
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
COURT OF TAX APPEALS and COMMISSIONER OF REYES, JJ.
INTERNAL REVENUE,
Respondents. Promulgated:

April 30, 2008

x------------------------------------------------------------------------------------x

DECISION
NACHURA, J.:

Before this Court is a Petition for Review on Certiorari[1] under Rule 45 of the Rules of Civil Procedure seeking the reversal of the Court of

Appeals (CA) Decision[2] dated April 30, 1999 which affirmed the Decision[3] of the Court of Tax Appeals (CTA) dated June 17, 1997.[4]

The Facts

On November 7, 1987, Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will [5] was filed with Branch 51 of the Regional

Trial Court (RTC) of Manila (probate court).[6] The probate court then appointed retired Supreme Court Justice Arsenio P. Dizon (Justice Dizon)

and petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as Special and Assistant Special Administrator, respectively, of the Estate of Jose

(Estate). In a letter[7] dated October 13, 1988, Justice Dizon informed respondent Commissioner of the Bureau of Internal Revenue (BIR) of the

special proceedings for the Estate.

Petitioner alleged that several requests for extension of the period to file the required estate tax return were granted by the BIR since the assets of

the estate, as well as the claims against it, had yet to be collated, determined and identified. Thus, in a letter[8] dated March 14, 1990, Justice

Dizon authorized Atty. Jesus M. Gonzales (Atty. Gonzales) to sign and file on behalf of the Estate the required estate tax return and to represent

the same in securing a Certificate of Tax Clearance. Eventually, on April 17, 1990, Atty. Gonzales wrote a letter[9] addressed to the BIR
Regional Director for San Pablo City and filed the estate tax return[10] with the same BIR Regional Office, showing therein a NIL estate tax

liability, computed as follows:

COMPUTATION OF TAX

Conjugal Real Property (Sch. 1) P10,855,020.00

Conjugal Personal Property (Sch.2) 3,460,591.34
Taxable Transfer (Sch. 3)
Gross Conjugal Estate 14,315,611.34
Less: Deductions (Sch. 4) 187,822,576.06
Net Conjugal Estate NIL
Less: Share of Surviving Spouse NIL .
Net Share in Conjugal Estate NIL
xxx
Net Taxable Estate NIL .
Estate Tax Due NIL .[11]

On April 27, 1990, BIR Regional Director for San Pablo City, Osmundo G. Umali issued Certification Nos. 2052 [12] and

2053[13] stating that the taxes due on the transfer of real and personal properties[14] of Jose had been fully paid and said properties may be

transferred to his heirs. Sometime in August 1990, Justice Dizon passed away. Thus, on October 22, 1990, the probate court appointed petitioner

as the administrator of the Estate.[15]

Petitioner requested the probate court's authority to sell several properties forming part of the Estate, for the purpose of paying its

creditors, namely: Equitable Banking Corporation (P19,756,428.31), Banque de L'Indochine et. de Suez (US$4,828,905.90 as of January 31,

1988), Manila Banking Corporation (P84,199,160.46 as of February 28, 1989) and State Investment House, Inc. (P6,280,006.21). Petitioner

manifested that Manila Bank, a major creditor of the Estate was not included, as it did not file a claim with the probate court since it had security

over several real estate properties forming part of the Estate.[16]

However, on November 26, 1991, the Assistant Commissioner for Collection of the BIR, Themistocles Montalban, issued Estate Tax

Assessment Notice No. FAS-E-87-91-003269,[17]demanding the payment of P66,973,985.40 as deficiency estate tax, itemized as follows:
 Deficiency Estate Tax- 1987

Estate tax P31,868,414.48

25% surcharge- late filing 7,967,103.62
late payment 7,967,103.62
Interest 19,121,048.68
Compromise-non filing 25,000.00
non payment 25,000.00
no notice of death 15.00
no CPA Certificate 300.00

Total amount due & collectible P66,973,985.40[18]

In his letter[19] dated December 12, 1991, Atty. Gonzales moved for the reconsideration of the said estate tax assessment. However, in her

letter[20] dated April 12, 1994, the BIR Commissioner denied the request and reiterated that the estate is liable for the payment of P66,973,985.40

as deficiency estate tax. On May 3, 1994, petitioner received the letter of denial. On June 2, 1994, petitioner filed a petition for review[21] before

respondent CTA. Trial on the merits ensued.

As found by the CTA, the respective parties presented the following pieces of evidence, to wit:

In the hearings conducted, petitioner did not present testimonial evidence but merely documentary evidence consisting of the
following:

Nature of Document (sic) Exhibits

1. Letter dated October 13, 1988 from Arsenio P. Dizon addressed to the Commissioner of Internal Revenue informing the
latter of the special proceedings for the settlement of the estate (p. 126, BIR records); "A"

2. Petition for the probate of the will and issuance of letter of administration filed with the Regional Trial Court (RTC) of
Manila, docketed as Sp. Proc. No. 87-42980 (pp. 107-108, BIR records); "B" & "B-1

3. Pleading entitled "Compliance" filed with the probate Court submitting the final inventory of all the properties of the
deceased (p. 106, BIR records); "C"

4. Attachment to Exh. "C" which is the detailed and complete listing of the properties of the deceased (pp. 89-105, BIR
rec.); "C-1" to "C-17"

5. Claims against the estate filed by Equitable Banking Corp. with the probate Court in the amount of P19,756,428.31 as of
March 31, 1988, together with the Annexes to the claim (pp. 64-88, BIR records); "D" to "D-24"

6. Claim filed by Banque de L' Indochine et de Suez with the probate Court in the amount of US $4,828,905.90 as of January
31, 1988 (pp. 262-265, BIR records); "E" to "E-3"

7. Claim of the Manila Banking Corporation (MBC) which as of November 7, 1987 amounts to P65,158,023.54, but
recomputed as of February 28, 1989 at a total amount of P84,199,160.46; together with the demand letter from MBC's
lawyer (pp. 194-197, BIR records); "F" to "F-3"

8. Demand letter of Manila Banking Corporation prepared by Asedillo, Ramos and Associates Law Offices
addressed to Fernandez Hermanos, Inc., represented by Jose P. Fernandez, as mortgagors, in the total amount
of P240,479,693.17 as of February 28, 1989 (pp. 186-187, BIR records); "G" & "G-1"

9. Claim of State Investment House, Inc. filed with the RTC, Branch VII of Manila, docketed as Civil Case No. 86-38599
entitled "State Investment House, Inc., Plaintiff, versus Maritime Company Overseas, Inc. and/or Jose P. Fernandez,
Defendants," (pp. 200-215, BIR records); "H" to "H-16"

10. Letter dated March 14, 1990 of Arsenio P. Dizon addressed to Atty. Jesus M. Gonzales, (p. 184, BIR records); "I"

11. Letter dated April 17, 1990 from J.M. Gonzales addressed to the Regional Director of
BIR in San Pablo City (p. 183, BIR records); "J"

12. Estate Tax Return filed by the estate of the late Jose P. Fernandez through its authorized representative, Atty. Jesus M.
Gonzales, for Arsenio P. Dizon, with attachments (pp. 177-182, BIR records); "K" to "K-5"

13. Certified true copy of the Letter of Administration issued by RTC Manila, Branch 51, in Sp. Proc. No. 87-42980
appointing Atty. Rafael S. Dizon as Judicial Administrator of the estate of Jose P. Fernandez; (p. 102, CTA records)
and "L"
 14. Certification of Payment of estate taxes Nos. 2052 and 2053, both dated April 27, 1990, issued by the Office of the
Regional Director, Revenue Region No. 4-C, San Pablo City, with attachments (pp. 103-104, CTA records.). "M" to "M-5"

Respondent's [BIR] counsel presented on June 26, 1995 one witness in the person of Alberto Enriquez, who was one
of the revenue examiners who conducted the investigation on the estate tax case of the late Jose P. Fernandez. In the
course of the direct examination of the witness, he identified the following:

Documents/
Signatures BIR Record

1. Estate Tax Return prepared by the BIR; p. 138

2. Signatures of Ma. Anabella Abuloc and Alberto Enriquez, Jr. appearing at the lower Portion of Exh. "1"; -do-

3. Memorandum for the Commissioner, dated July 19, 1991, prepared by revenue examiners, Ma. Anabella A.
Abuloc, Alberto S. Enriquez and Raymund S. Gallardo; Reviewed by Maximino V. Tagle pp. 143-144

4. Signature of Alberto S. Enriquez appearing at the lower portion on p. 2 of Exh. "2"; -do-

5. Signature of Ma. Anabella A. Abuloc appearing at the lower portion on p. 2 of Exh. "2"; -do-

6. Signature of Raymund S. Gallardo appearing at the Lower portion on p. 2 of Exh. "2"; -do-

7. Signature of Maximino V. Tagle also appearing on p. 2 of Exh. "2"; -do-

8. Summary of revenue Enforcement Officers Audit Report, dated July 19, 1991; p. 139

9. Signature of Alberto Enriquez at the lower portion of Exh. "3"; -do-

10. Signature of Ma. Anabella A. Abuloc at the lower portion of Exh. "3"; -do-

11. Signature of Raymond S. Gallardo at the lower portion of Exh. "3"; -do-

12. Signature of Maximino V. Tagle at the lower portion of Exh. "3"; -do-

13. Demand letter (FAS-E-87-91-00), signed by the Asst. Commissioner for Collection for the Commissioner of Internal
Revenue, demanding payment of the amount of P66,973,985.40; and p. 169

14. Assessment Notice FAS-E-87-91-00 pp. 169-170[22]

The CTA's Ruling

On June 17, 1997, the CTA denied the said petition for review. Citing this Court's ruling in Vda. de Oate v. Court of Appeals,[23] the CTA opined

that the aforementioned pieces of evidence introduced by the BIR were admissible in evidence. The CTA ratiocinated:
Although the above-mentioned documents were not formally offered as evidence for respondent, considering that respondent
has been declared to have waived the presentation thereof during the hearing on March 20, 1996, still they could be
considered as evidence for respondent since they were properly identified during the presentation of respondent's witness,
whose testimony was duly recorded as part of the records of this case. Besides, the documents marked as respondent's
exhibits formed part of the BIR records of the case.[24]

Nevertheless, the CTA did not fully adopt the assessment made by the BIR and it came up with its own computation of the deficiency estate tax,

to wit:

Conjugal Real Property P 5,062,016.00

Conjugal Personal Prop. 33,021,999.93
Gross Conjugal Estate 38,084,015.93
Less: Deductions 26,250,000.00
Net Conjugal Estate P 11,834,015.93
Less: Share of Surviving Spouse 5,917,007.96
Net Share in Conjugal Estate P 5,917,007.96
Add: Capital/Paraphernal
Properties P44,652,813.66
Less: Capital/Paraphernal
Deductions 44,652,813.66
Net Taxable Estate P 50,569,821.62
============
 Estate Tax Due P 29,935,342.97
Add: 25% Surcharge for Late Filing 7,483,835.74
Add: Penalties for-No notice of death 15.00
No CPA certificate 300.00
Total deficiency estate tax P 37,419,493.71
=============

exclusive of 20% interest from due date of its payment until full payment thereof
[Sec. 283 (b), Tax Code of 1987].[25]

Thus, the CTA disposed of the case in this wise:

WHEREFORE, viewed from all the foregoing, the Court finds the petition unmeritorious and denies the same. Petitioner
and/or the heirs of Jose P. Fernandez are hereby ordered to pay to respondent the amount of P37,419,493.71 plus 20%
interest from the due date of its payment until full payment thereof as estate tax liability of the estate of Jose P. Fernandez
who died on November 7, 1987.

SO ORDERED.[26]

Aggrieved, petitioner, on March 2, 1998, went to the CA via a petition for review. [27]

The CA's Ruling

On April 30, 1999, the CA affirmed the CTA's ruling. Adopting in full the CTA's findings, the CA ruled that the petitioner's act of filing an

estate tax return with the BIR and the issuance of BIR Certification Nos. 2052 and 2053 did not deprive the BIR Commissioner of her authority

to re-examine or re-assess the said return filed on behalf of the Estate.[28]

On May 31, 1999, petitioner filed a Motion for Reconsideration [29] which the CA denied in its Resolution[30] dated November 3, 1999.

Hence, the instant Petition raising the following issues:

1. Whether or not the admission of evidence which were not formally offered by the respondent BIR by the Court of Tax
Appeals which was subsequently upheld by the Court of Appeals is contrary to the Rules of Court and rulings of this
Honorable Court;

2. Whether or not the Court of Tax Appeals and the Court of Appeals erred in recognizing/considering the estate tax return
prepared and filed by respondent BIR knowing that the probate court appointed administrator of the estate of Jose P.
Fernandez had previously filed one as in fact, BIR Certification Clearance Nos. 2052 and 2053 had been issued in the
estate's favor;

3. Whether or not the Court of Tax Appeals and the Court of Appeals erred in disallowing the valid and enforceable claims
of creditors against the estate, as lawful deductions despite clear and convincing evidence thereof; and

4. Whether or not the Court of Tax Appeals and the Court of Appeals erred in validating erroneous double imputation of
values on the very same estate properties in the estate tax return it prepared and filed which effectively bloated the
estate's assets.[31]

The petitioner claims that in as much as the valid claims of creditors against the Estate are in excess of the gross estate, no estate tax was due;

that the lack of a formal offer of evidence is fatal to BIR's cause; that the doctrine laid down in Vda. de Oate has already been abandoned in a

long line of cases in which the Court held that evidence not formally offered is without any weight or value; that Section 34 of Rule 132 of the

Rules on Evidence requiring a formal offer of evidence is mandatory in character; that, while BIR's witness Alberto Enriquez (Alberto) in his

testimony before the CTA identified the pieces of evidence aforementioned such that the same were marked, BIR's failure to formally offer said

pieces of evidence and depriving petitioner the opportunity to cross-examine Alberto, render the same inadmissible in evidence; that

assuming arguendo that the ruling in Vda. de Oate is still applicable, BIR failed to comply with the doctrine's requisites because the documents

herein remained simply part of the BIR records and were not duly incorporated in the court records; that the BIR failed to consider that although
the actual payments made to the Estate creditors were lower than their respective claims, such were compromise agreements reached long after

the Estate's liability had been settled by the filing of its estate tax return and the issuance of BIR Certification Nos. 2052 and 2053; and that the

reckoning date of the claims against the Estate and the settlement of the estate tax due should be at the time the estate tax return was filed by the

judicial administrator and the issuance of said BIR Certifications and not at the time the aforementioned Compromise Agreements were entered

into with the Estate's creditors.[32]

On the other hand, respondent counters that the documents, being part of the records of the case and duly identified in a duly recorded testimony

are considered evidence even if the same were not formally offered; that the filing of the estate tax return by the Estate and the issuance of

BIR Certification Nos. 2052 and 2053 did not deprive the BIR of its authority to examine the return and assess the estate tax; and that the factual

findings of the CTA as affirmed by the CA may no longer be reviewed by this Court via a petition for review. [33]

The Issues

There are two ultimate issues which require resolution in this case:

First. Whether or not the CTA and the CA gravely erred in allowing the admission of the pieces of evidence which were not formally offered by
the BIR; and

Second. Whether or not the CA erred in affirming the CTA in the latter's determination of the deficiency estate tax imposed against the Estate.

The Courts Ruling

The Petition is impressed with merit.

Under Section 8 of RA 1125, the CTA is categorically described as a court of record. As cases filed before it are litigated de novo, party-litigants

shall prove every minute aspect of their cases. Indubitably, no evidentiary value can be given the pieces of evidence submitted by the BIR, as the

rules on documentary evidence require that these documents must be formally offered before the CTA. [34] Pertinent is Section 34, Rule 132 of

the Revised Rules on Evidence which reads:

SEC. 34. Offer of evidence. The court shall consider no evidence which has not been formally offered. The purpose for
which the evidence is offered must be specified.

The CTA and the CA rely solely on the case of Vda. de Oate, which reiterated this Court's previous rulings in People v. Napat-

a[35] and People v. Mate[36] on the admission and consideration of exhibits which were not formally offered during the trial. Although in a long

line of cases many of which were decided after Vda. de Oate, we held that courts cannot consider evidence which has not been formally

offered,[37] nevertheless, petitioner cannot validly assume that the doctrine laid down in Vda. de Oate has already been abandoned. Recently,

in Ramos v. Dizon,[38] this Court, applying the said doctrine, ruled that the trial court judge therein committed no error when he admitted and

considered the respondents' exhibits in the resolution of the case, notwithstanding the fact that the same

were not formally offered. Likewise, in Far East Bank & Trust Company v. Commissioner of Internal Revenue,[39] the Court made reference to

said doctrine in resolving the issues therein. Indubitably, the doctrine laid down in Vda. De Oate still subsists in this jurisdiction. In Vda. de

Oate, we held that:

 From the foregoing provision, it is clear that for evidence to be considered, the same must be formally offered. Corollarily,
the mere fact that a particular document is identified and marked as an exhibit does not mean that it has already been offered
as part of the evidence of a party. In Interpacific Transit, Inc. v. Aviles [186 SCRA 385], we had the occasion to make a
distinction between identification of documentary evidence and its formal offer as an exhibit. We said that the first is done in
the course of the trial and is accompanied by the marking of the evidence as an exhibit while the second is done only when
the party rests its case and not before. A party, therefore, may opt to formally offer his evidence if he believes that it will
advance his cause or not to do so at all. In the event he chooses to do the latter, the trial court is not authorized by the Rules
to consider the same.

However, in People v. Napat-a [179 SCRA 403] citing People v. Mate [103 SCRA 484], we relaxed the foregoing rule and
allowed evidence not formally offered to be admitted and considered by the trial court provided the following
requirements are present, viz.: first, the same must have been duly identified by testimony duly recorded and, second,
the same must have been incorporated in the records of the case.[40]

From the foregoing declaration, however, it is clear that Vda. de Oate is merely an exception to the general rule. Being an exception, it

may be applied only when there is strict compliance with the requisites mentioned therein; otherwise, the general rule in Section 34 of Rule 132

of the Rules of Court should prevail.

In this case, we find that these requirements have not been satisfied. The assailed pieces of evidence were presented and marked during the trial

particularly when Alberto took the witness stand. Alberto identified these pieces of evidence in his direct testimony.[41] He was also subjected to

cross-examination and re-cross examination by petitioner.[42] But Albertos account and the exchanges between Alberto and petitioner did not

sufficiently describe the contents of the said pieces of evidence presented by the BIR. In fact, petitioner sought that the lead examiner, one Ma.
Anabella A. Abuloc, be summoned to testify, inasmuch as Alberto was incompetent to answer questions relative to the working papers. [43] The

lead examiner never testified. Moreover, while Alberto's testimony identifying the BIR's evidence was duly recorded, the BIR documents

themselves were not incorporated in the records of the case.

A common fact threads through Vda. de Oate and Ramos that does not exist at all in the instant case. In the aforementioned cases, the exhibits

were marked at the pre-trial proceedings to warrant the pronouncement that the same were duly incorporated in the records of the case. Thus, we

held in Ramos:

In this case, we find and so rule that these requirements have been satisfied. The exhibits in question were presented and
marked during the pre-trial of the case thus, they have been incorporated into the records. Further, Elpidio himself
explained the contents of these exhibits when he was interrogated by respondents' counsel...

xxxx

But what further defeats petitioner's cause on this issue is that respondents' exhibits were marked and admitted during the
pre-trial stage as shown by the Pre-Trial Order quoted earlier.[44]

While the CTA is not governed strictly by technical rules of evidence, [45] as rules of procedure are not ends in themselves and are primarily

intended as tools in the administration of justice, the presentation of the BIR's evidence is not a mere procedural technicality which may be

disregarded considering that it is the only means by which the CTA may ascertain and verify the truth of BIR's claims against the Estate.[46] The

BIR's failure to formally offer these pieces of evidence, despite CTA's directives, is fatal to its cause. [47] Such failure is aggravated by the fact

that not even a single reason was advanced by the BIR to justify such fatal omission. This, we take against the BIR.

Per the records of this case, the BIR was directed to present its evidence[48] in the hearing of February 21, 1996, but BIR's counsel failed to

appear.[49] The CTA denied petitioner's motion to consider BIR's presentation of evidence as waived, with a warning to BIR that such

presentation would be considered waived if BIR's evidence would not be presented at the next hearing. Again, in the hearing of March 20, 1996,

BIR's counsel failed to appear.[50] Thus, in its Resolution[51] dated March 21, 1996, the CTA considered the BIR to have waived presentation of

its evidence. In the same Resolution, the parties were directed to file their respective memorandum. Petitioner complied but BIR failed to do
so.[52] In all of these proceedings, BIR was duly notified. Hence, in this case, we are constrained to apply our ruling in Heirs of Pedro Pasag v.

Parocha:[53]
A formal offer is necessary because judges are mandated to rest their findings of facts and their judgment only and
strictly upon the evidence offered by the parties at the trial. Its function is to enable the trial judge to know the purpose or
purposes for which the proponent is presenting the evidence. On the other hand, this allows opposing parties to examine the
evidence and object to its admissibility. Moreover, it facilitates review as the appellate court will not be required to review
documents not previously scrutinized by the trial court.

Strict adherence to the said rule is not a trivial matter. The Court in Constantino v. Court of Appeals ruled that the formal
offer of one's evidence is deemed waived after failing to submit it within a considerable period of time. It explained
that the court cannot admit an offer of evidence made after a lapse of three (3) months because to do so would
"condone an inexcusable laxity if not non-compliance with a court order which, in effect, would encourage needless
delays and derail the speedy administration of justice."
Applying the aforementioned principle in this case, we find that the trial court had reasonable ground to consider that
petitioners had waived their right to make a formal offer of documentary or object evidence. Despite several extensions of
time to make their formal offer, petitioners failed to comply with their commitment and allowed almost five months to lapse
before finally submitting it. Petitioners' failure to comply with the rule on admissibility of evidence is anathema to the
efficient, effective, and expeditious dispensation of justice.

Having disposed of the foregoing procedural issue, we proceed to discuss the merits of the case.

Ordinarily, the CTA's findings, as affirmed by the CA, are entitled to the highest respect and will not be disturbed on appeal unless it is

shown that the lower courts committed gross error in the appreciation of facts. [54] In this case, however, we find the decision of the CA affirming

that of the CTA tainted with palpable error.

It is admitted that the claims of the Estate's aforementioned creditors have been condoned. As a mode of extinguishing an

obligation,[55] condonation or remission of debt[56] is defined as:

an act of liberality, by virtue of which, without receiving any equivalent, the creditor renounces the enforcement of the
obligation, which is extinguished in its entirety or in that part or aspect of the same to which the remission refers. It is an
essential characteristic of remission that it be gratuitous, that there is no equivalent received for the benefit given; once such
equivalent exists, the nature of the act changes. It may become dation in payment when the creditor receives a thing different
from that stipulated; or novation, when the object or principal conditions of the obligation should be changed; or
compromise, when the matter renounced is in litigation or dispute and in exchange of some concession which the creditor
receives.[57]

Verily, the second issue in this case involves the construction of Section 79[58] of the National Internal Revenue Code[59] (Tax Code) which

provides for the allowable deductions from the gross estate of the decedent. The specific question is whether the actual claims of the

aforementioned creditors may be fully allowed as deductions from the gross estate of Jose despite the fact that the said claims were reduced or

condoned through compromise agreements entered into by the Estate with its creditors.

Claims against the estate, as allowable deductions from the gross estate under Section 79 of the Tax Code, are basically a reproduction of the

deductions allowed under Section 89 (a) (1) (C) and (E) of Commonwealth Act No. 466 (CA 466), otherwise known as the National Internal

Revenue Code of 1939, and which was the first codification of Philippine tax laws. Philippine tax laws were, in turn, based on the federal tax

laws of the United States. Thus, pursuant to established rules of statutory construction, the decisions of American courts construing the federal

tax code are entitled to great weight in the interpretation of our own tax laws. [60]

It is noteworthy that even in the United States, there is some dispute as to whether the deductible amount for a claim against the estate is fixed as

of the decedent's death which is the general rule, or the same should be adjusted to reflect post-death developments, such as where a settlement

between the parties results in the reduction of the amount actually paid. [61] On one hand, the U.S. court ruled that the appropriate deduction is the

value that the claim had at the date of the decedent's death.[62] Also, as held in Propstra v. U.S., [63] where a lien claimed against the estate was
certain and enforceable on the date of the decedent's death, the fact that the claimant subsequently settled for lesser amount did not preclude the

estate from deducting the entire amount of the claim for estate tax purposes. These pronouncements essentially confirm the general principle that

post-death developments are not material in determining the amount of the deduction.

On the other hand, the Internal Revenue Service (Service) opines that post-death settlement should be taken into consideration and the

claim should be allowed as a deduction only to the extent of the amount actually paid.[64] Recognizing the dispute, the Service released Proposed

Regulations in 2007 mandating that the deduction would be limited to the actual amount paid.[65]

In announcing its agreement with Propstra,[66] the U.S. 5th Circuit Court of Appeals held:

We are persuaded that the Ninth Circuit's decision...in Propstra correctly apply the Ithaca Trust date-of-death valuation
principle to enforceable claims against the estate. As we interpret Ithaca Trust, when the Supreme Court announced the date-
of-death valuation principle, it was making a judgment about the nature of the federal estate tax specifically, that it is a tax
imposed on the act of transferring property by will or intestacy and, because the act on which the tax is levied occurs at a
discrete time, i.e., the instance of death, the net value of the property transferred should be ascertained, as nearly as possible,
as of that time. This analysis supports broad application of the date-of-death valuation rule.[67]

We express our agreement with the date-of-death valuation rule, made pursuant to the ruling of the U.S. Supreme Court in Ithaca Trust Co. v.
United States.[68] First. There is no law, nor do we discern any legislative intent in our tax laws, which disregards the date-of-death valuation

principle and particularly provides that post-death developments must be considered in determining the net value of the estate. It bears emphasis

that tax burdens are not to be imposed, nor presumed to be imposed, beyond what the statute expressly and clearly imports, tax statutes being

construed strictissimi juris against the government.[69] Any doubt on whether a person, article or activity is taxable is generally resolved against

taxation.[70] Second. Such construction finds relevance and consistency in our Rules on Special Proceedings wherein the term "claims" required

to be presented against a decedent's estate is generally construed to mean debts or demands of a pecuniary nature which could have been

enforced against the deceased in his lifetime, or liability contracted by the deceased before his death.[71] Therefore, the claims existing at the time

of death are significant to, and should be made the basis of, the determination of allowable deductions.

WHEREFORE, the instant Petition is GRANTED. Accordingly, the assailed Decision dated April 30, 1999 and the Resolution dated

November 3, 1999 of the Court of Appeals in CA-G.R. S.P. No. 46947 are REVERSED and SET ASIDE. The Bureau of Internal Revenue's

deficiency estate tax assessment against the Estate of Jose P. Fernandez is hereby NULLIFIED. No costs.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MA. ALICIA AUSTRIA-MARTINEZ MINITA V. CHICO-NAZARIO

Associate Justice Associate Justice
 RUBEN T. REYES
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the
Courts Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I certify that the conclusions in the above
Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO
Chief Justice

[1]
Dated January 20, 2000, rollo, pp. 8-20.
[2]
Particularly docketed as CA-G.R. SP No. 46947; penned by Associate Justice Marina L. Buzon, with Presiding Justice Jesus M. Elbinias (now retired) and
Associate Justice Eugenio S. Labitoria (now retired), concurring; id. at 22-31.
[3]
Particularly docketed as CTA Case No. 5116; penned by Associate Judge Ramon O. De Veyra and concurred in by Presiding Judge Ernesto D. Acosta and
Associate Judge Amancio Q. Saga; id. at 33-61.
[4]
This case was decided before the CTA was elevated by law to the same level as the CA by virtue of Republic Act (RA) No. 9282 otherwise known as "An Act
Expanding the Jurisdiction of the Court of Tax Appeals (CTA), Elevating its Rank to the Level of a Collegiate Court with Special Jurisdiction and Enlarging its
Membership, Amending for the Purpose Certain Sections of Republic Act No. 1125, as amended, otherwise known as The Law Creating the Court of Tax Appeals,
and for other purposes," which was approved on March 30, 2004. Hence, upon its effectivity, decisions of the CTA are now appealable directly to the Supreme
Court.
[5]
BIR Records, pp. 1-88.
[6]
The said petition is entitled: In the Matter of the Petition to Approve the Will of Jose P. Fernandez, Carlos P. Fernandez, Petitioner, particularly docketed as
Special Proceedings No. 87-42980; BIR Record, pp. 107-108.
[7]
Id. at 126.
[8]
Id. at 184.
[9]
Id. at 183.
[10]
Id. at 182.
[11]
Id.
[12]
Rollo, p. 68.
[13]
Id. at 69.
[14]
Lists of Personal and Real Properties of Jose; id. at 70-73.
[15]
CTA Record, p. 102.
[16]
Rollo, p. 10.
[17]
BIR Records, p. 169.
[18]
Id.
[19]
Id. at 171.
[20]
By then BIR Commissioner Liwayway Vinzons-Chato; id. at 277-278.
[21]
CTA Records, pp. 1-7.
[22]
Rollo, pp. 37-40 (Emphasis supplied).
[23]
G.R. No. 116149, November 23, 1995, 250 SCRA 283, 287, citing People v. Napat-a, 179 SCRA 403 (1989) and People v. Mate, 103 SCRA 484 (1981).
[24]
CTA Records, p. 148.
[25]
Id. at 166-167.
[26]
Id. at 167.
[27]
CA rollo, pp. 3-17.
[28]
Citing Section 16 of the 1993 National Internal Revenue Code.
[29]
Rollo, pp. 22-31.
[30]
Id. at 32.
[31]
Id. at 114-115.
[32]
Id.
[33]
Respondent BIR's Memorandum dated October 16, 2000; id. at 140-144.
[34]
Commissioner of Internal Revenue v. Manila Mining Corporation, G.R. No. 153204, August 31, 2005, 468 SCRA 571, 588-589.
[35]
Supra note 23.
[36]
Supra note 23.
[37]
Far East Bank & Trust Company v. Commissioner of Internal Revenue, G.R. No. 149589, September 15, 2006, 502 SCRA 87; Ala-Martin v. Sultan, G.R. No.
117512, October 2, 2001, 366 SCRA 316, citing Ong v. Court of Appeals, 301 SCRA 391 (1999), which further cited Candido v. Court of Appeals, 253 SCRA 78,
82-83 (1996); Republic v. Sandiganbayan, 255 SCRA 438, 456 (1996); People v. Peralta, 237 SCRA 218, 226 (1994); Vda. De Alvarez vs. Court of Appeals, 231
SCRA 309, 317-318 (1994); and People v. Cario, et al., 165 SCRA 664, 671 (1988); See also De los Reyes v. Intermediate Appellate Court, G.R. No.74768,
August 11, 1989, 176 SCRA 394, 401-402 (1989) and People v. Mate, supra note 23, at 493.
[38]
G.R. No. 137247, August 7, 2006, 498 SCRA 17, 30-31.
[39]
Supra note 29, at 91.
[40]
Underscoring supplied.
[41]
TSN, June 26, 1995.
[42]
TSN, July 12, 1995.
[43]
Id. at 42-49.
[44]
Supra note 29, at 31 and 34, citing Marmont Resort Hotel Enterprises v. Guiang, 168 SCRA 373, 379-380 (1988).
[45]
Calamba Steel Center, Inc. (formerly JS Steel Corporation) v. Commissioner of Internal Revenue, G.R. No. 151857, April 28, 2005, 457 SCRA 482, 494.
[46]
Commissioner of Internal Revenue v. Manila Mining Corporation, supra note 28, at 593-594.
[47]
Far East Bank & Trust Company v. Commissioner of Internal Revenue, supra note 29, at 90.
[48]
CTA Resolution dated January 19, 1996; CTA Records, p. 113-114.
[49]
CTA Records, p. 117.
[50]
Id. at 119.
[51]
Id. at 120.
[52]
CTA Order dated June 17, 1996, CTA Records, p. 138.
[53]
G.R. No. 155483, April 27, 2007, 522 SCRA 410, 416, citing Constantino v. Court of Appeals, G.R. No. 116018, November 13, 1996, 264 SCRA 59 (Other
citations omitted; Emphasis supplied ).
[54]
Filinvest Development Corporation v. Commissioner of Internal Revenue and Court of Tax Appeals, G.R. No. 146941, August 9, 2007, 529 SCRA 605, 609-
610, citing Carrara Marble Philippines, Inc. v. Commissioner of Customs, 372 Phil. 322, 333-334 (1999) and Commissioner of Internal Revenue v. Court of
Appeals, 358 Phil. 562, 584 (1998).
[55]
Article 1231 of the Civil Code of the Philippines provides:
Art. 1231. Obligations are extinguished:
(1) By payment or performance;
(2) By the loss of the thing due;
(3) By the condonation or remission of the debt;
(4) By the confusion or merger of the rights of creditor and debtor;
(5) By compensation;
(6) By novation. (Emphasis ours.)
[56]
Article 1270 of the Civil Code of the Philippines provides:
Art. 1270. Condonation or remission is essentially gratuitous, and requires the acceptance by the obligor. It may be made expressly or impliedly.
One and the other kind shall be subject to the rules which govern inofficious donations. Express condonation shall, furthermore, comply with the forms of
donation.
[57]
Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. IV, 1991 ed., p. 353, citing 8 Manresa 365.
[58]
SEC. 79. Computation of net estate and estate tax. For the purpose of the tax imposed in this Chapter, the value of the net estate shall be determined:
(a) In the case of a citizen or resident of the Philippines, by deducting from the value of the gross estate
(1) Expenses, losses, indebtedness, and taxes. Such amounts
(A) For funeral expenses in an amount equal to five per centum of the gross estate but in no case to exceed P50,000.00;
(B) For judicial expenses of the testamentary or intestate proceedings;
(C) For claims against the estate; Provided, That at the time the indebtedness was incurred the debt instrument was duly notarized and, if the loan was contracted
within three years before the death of the decedent, the administrator or executor shall submit a statement showing the disposition of the proceeds of the loan. (As
amended by PD No. 1994)
(D) For claims of the deceased against insolvent persons where the value of decedent's interest therein is included in the value of the gross estate; and
(E) For unpaid mortgages upon, or any indebtedness in respect to property, where the value of decedent's interest therein, undiminished by such mortgage or
indebtedness, is included in the value of the gross estate, but not including any income taxes upon income received after the death of the decedent, or property
taxes not accrued before his death, or any estate tax. The deduction herein allowed in the case of claims against the estate, unpaid mortgages, or any indebtedness,
shall when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full reconsideration in
money or money's worth. There shall also be deducted losses incurred during the settlement of the estate arising from fires, storms, shipwreck, or other casualties,
or from robbery, theft, or embezzlement, when such losses are not compensated for by insurance or otherwise, and if at the time of the filing of the return such
losses have not been claimed as a deduction for income tax purposes in an income tax return, and provided that such losses were incurred not later than last day for
the payment of the estate tax as prescribed in subsection (a) of Section 84.
[59]
This refers to the 1977 National Internal Revenue Code, as amended which was effective at the time of Jose's death on November 7, 1987.
[60]
Commissioner of Internal Revenue v. Court of Appeals, G.R. No. 123206, March 22, 2000, 328 SCRA 666, 676-677 (citations omitted).
[61]
47B Corpus Juris Secundum, Internal Revenue 533.
[62]
Smith v. C.I.R., 82 T.C.M. (CCH) 909 (2001), aff'd 54 Fed. Appx. 413.
[63]
680 F.2d 1248.
[64]
47B Corpus Juris Secundum, Internal Revenue 524.
[65]
Prop. Treas. Reg. . 20.2053-1 (b) (1), published as REG-143316-03.
[66]
Supra note 63.
[67]
`Smith's Est. v. CIR, 198 F3d 515, 525 (5th Cir. 1999). See also O'Neal's Est. v. US, 228 F. Supp. 2d 1290 (ND Ala. 2002).
[68]
279 U.S. 151, 49 S. Ct. 291, 73 L.Ed. 647 (1929).
[69]
Commissioner of Internal Revenue v. The Court of Appeals, Central Vegetable Manufacturing Co., Inc., and the Court of Tax Appeals, G.R. No. 107135,
February 23, 1999, 303 SCRA 508, 516-517, citing Province of Bulacan v. Court of Appeals, 299 SCRA 442 (1998); Republic v. IAC, 196 SCRA 335 (1991); CIR
v. Firemen's Fund Ins. Co., 148 SCRA 315 (1987); and CIR v. CA, 204 SCRA 182 (1991).
[70]
Manila International Airport Authority v. Court of Appeals, G.R. No. 155650, July 20, 2006, 495 SCRA 591, 619.
[71]
Quirino v. Grospe, G.R. No. 58797, January 31, 1989, 169 SCRA 702, 704-705, citing Gabin v. Melliza, 84 Phil. 794, 796 (1949).
 EN BANC

[G.R. No. L-81311. June 30, 1988.]

KAPATIRAN NG MGA NAGLILINGKOD SA PAMAHALAAN NG PILIPINAS, INC., HERMINIGILDO C.

DUMLAO, GERONIMO Q. QUADRA, and MARIO C. VILLANUEVA, Petitioners, v. HON. BIENVENIDO TAN,
as Commissioner of Internal Revenue, Respondent.

[G.R. No. L-81820.]

KILUSANG MAYO UNO LABOR CENTER (KMU), its officers and affiliated labor federations and
alliances, Petitioners, v. THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE, THE COMMISSIONER
OF INTERNAL REVENUE, and SECRETARY OF BUDGET, Respondents.

[G.R. No. L-81921.]

INTEGRATED CUSTOMS BROKERS ASSOCIATION OF THE PHILIPPINES and JESUS B.

BANAL, Petitioners, v. The HON. COMMISSIONER, BUREAU OF INTERNAL REVENUE, Respondent.

[G.R. No. L-82152.]

RICARDO C. VALMONTE, Petitioner, v. THE EXECUTIVE SECRETARY, SECRETARY OF FINANCE,

COMMISSIONER OF INTERNAL REVENUE and SECRETARY OF BUDGET, Respondents.

Franklin S. Farolan for petitioner Kapatiran in G.R. No. 81311.

Jaime C. Opinion for individual petitioner in G.R. No. 81311.

Banzuela Flores, Miralles, Rañeses, Sy, Taquio and Associates for petitioners in G.R. No. 81820.

Union of Lawyers and Advocates for Peoples Right collaborating counsel for petitioners in G.R. No.
81820.

Jose C. Leabres and Joselito R. Enriquez for petitioners in G.R. No. 81921.

DECISION

PADILLA, J.:

These four (4) petitions which have been consolidated because of the similarity of the main issues involved
therein, seek to nullify Executive Order No. 273 (EO 273, for short), issued by the President of the Philippines on
25 July 1987, to take effect on 1 January 1988, and which amended certain sections of the National Internal
Revenue Code and adopted the value-added tax (VAT, for short), for being unconstitutional in that its enactment
is not allegedly within the powers of the President; that the VAT is oppressive, discriminatory, regressive, and
violates the due process and equal protection clauses and other provisions of the 1987 Constitution.

The Solicitor General prays for the dismissal of the petitions on the ground that the petitioners have failed to show
justification for the exercise of its judicial powers, viz. (1) the existence of an appropriate case; (2) an interest,
personal and substantial, of the party raising the constitutional questions; (3) the constitutional question should
be raised at the earliest opportunity; and (4) the question of constitutionality is directly and necessarily involved in
a justiciable controversy and its resolution is essential to the protection of the rights of the parties. According to
the Solicitor General, only the third requisite — that the constitutional question should be raised at the earliest
opportunity — has been complied with. He also questions the legal standing of the petitioners who, he contends,
are merely asking for an advisory opinion from the Court, there being no justiciable controversy for resolution.

Objections to taxpayer’s suit for lack of sufficient personality standing, or interest are, however, in the main
procedural matters. Considering the importance to the public of the cases at bar, and in keeping with the Court’s
duty, under the 1987 Constitution, to determine whether or not the other branches of government have kept
themselves within the limits of the Constitution and the laws and that they have not abused the discretion given to
them, the Court has brushed aside technicalities of procedure and has taken cognizance of these
petitions.chanrobles.com.ph : virtual law library

But, before resolving the issues raised, a brief look into the tax law in question is in order.

The VAT is a tax levied on a wide range of goods and services. It is a tax on the value, added by every seller, with
aggregate gross annual sales of articles and/or services, exceeding P200,000.00, to his purchase of goods and
services, unless exempt. VAT is computed at the rate of 0% or 10% of the gross selling price of goods or gross
receipts realized from the sale of services.

The VAT is said to have eliminated privilege taxes, multiple rated sales tax on manufacturers and producers,
advance sales tax, and compensating tax on importations. The framers of EO 273 claim that it is principally aimed
to rationalize the system of taxing goods and services; simplify tax administration; and make the tax system more
equitable, to enable the country to attain economic recovery.

The VAT is not entirely new. It was already in force, in a modified form, before EO 273 was issued. As pointed out
by the Solicitor General, the Philippine sales tax system, prior to the issuance of EO 273, was essentially a single
stage value added tax system computed under the "cost subtraction method" or "cost deduction method" and was
imposed only on original sale, barter or exchange of articles by manufacturers, producers, or importers.
Subsequent sales of such articles were not subject to sales tax. However, with the issuance of PD 1991 on 31
October 1985, a 3% tax was imposed on a second sale, which was reduced to 1.5% upon the issuance of PD 2006
on 31 December 1985, to take effect 1 January 1986. Reduced sales taxes were imposed not only on the second
sale, but on every subsequent sale, as well. EO 273 merely increased the VAT on every sale to 10%, unless zero-
rated or exempt.

Petitioners first contend that EO 273 is unconstitutional on the ground that the President had no authority to issue
EO 273 on 25 July 1987.

The contention is without merit.

It should be recalled that under Proclamation No. 3, which decreed a Provisional Constitution, sole legislative
authority was vested upon the President. Art. II, sec. 1 of the Provisional Constitution
states:jgc:chanrobles.com.ph

"Sec. 1. Until a legislature is elected and convened under a new Constitution, the President shall continue to
exercise legislative powers."cralaw virtua1aw library

On 15 October 1986, the Constitutional Commission of 1986 adopted a new Constitution for the Republic of the
Philippines which was ratified in a plebiscite conducted on 2 February 1987. Article XVIII, sec. 6 of said
Constitution, hereafter referred to as the 1987 Constitution, provides:jgc:chanrobles.com.ph

"Sec. 6. The incumbent President shall continue to exercise legislative powers until the first Congress is
convened."cralaw virtua1aw library

It should be noted that, under both the Provisional and the 1987 Constitutions, the President is vested with
legislative powers until a legislature under a new Constitution is convened. The first Congress, created and elected
under the 1987 Constitution, was convened on 27 July 1987. Hence, the enactment of EO 273 on 25 July 1987,
two (2) days before Congress convened on 27 July 1987, was within the President’s constitutional power and
authority to legislate.

Petitioner Valmonte claims, additionally, that Congress was really convened on 30 June 1987 (not 27 July 1987).
He contends that the word "convene" is synonymous with "the date when the elected members of Congress
assumed office."cralaw virtua1aw library

The contention is without merit. The word "convene" which has been interpreted to mean "to call together, cause
to assemble, or convoke," 1 is clearly different from assumption of office by the individual members of Congress or
their taking the oath of office. As an example, we call to mind the interim National Assembly created under the
1973 Constitution, which had not been "convened" but some members of the body, more particularly the
delegates to the 1971 Constitutional Convention who had opted to serve therein by voting affirmatively for the
approval of said Constitution, had taken their oath of office.chanrobles.com.ph : virtual law library

To uphold the submission of petitioner Valmonte would stretch the definition of the word "convene" a bit too far. It
would also defeat the purpose of the framers of the 1987 Constitution and render meaningless some other
provisions of said Constitution. For example, the provisions of Art. VI, sec. 15, requiring Congress to convene once
every year on the fourth Monday of July for its regular session would be a contrariety, since Congress would
already be deemed to be in session after the individual members have taken their oath of office. A portion of the
provisions of Art. VII, sec. 10, requiring Congress to convene for the purpose of enacting a law calling for a special
election to elect a President and Vice-President in case a vacancy occurs in said offices, would also be a
surplusage. The portion of Art. VII, sec. 11, third paragraph, requiring Congress to convene, if not in session, to
decide a conflict between the President and the Cabinet as to whether or not the President can re-assume the
powers and duties of his office, would also be redundant. The same is true with that portion of Art. VII, sec. 18,
which requires Congress to convene within twenty-four (24) hours following the declaration of martial law or the
suspension of the privilege of the writ of habeas corpus.

The 1987 Constitution mentions a specific date when the President loses her power to legislate. If the framers of
said Constitution had intended to terminate the exercise of legislative powers by the President at the beginning of
the term of office of the members of Congress, they should have so stated (but did not) in clear and unequivocal
terms. The Court has no power to re-write the Constitution and give it a meaning different from that intended.
The Court also finds no merit in the petitioners’ claim that EO 273 was issued by the President in grave abuse of
discretion amounting to lack or excess of jurisdiction. "Grave abuse of discretion" has been defined, as
follows:jgc:chanrobles.com.ph

"‘Grave abuse of discretion’ implies such capricious and whimsical exercise of judgment as is equivalent to lack of
jurisdiction (Abad Santos v. Province of Tarlac, 38 Off Gaz. 834), or, in other words, where the power is exercised
in an arbitrary or despotic manner by reason of passion or personal hostility, and it must be so patent and gross
as to amount to an evasion of positive duty or to a virtual refusal to perform the duty enjoined or to act at all in
contemplation of law. (Tavera-Luna, Inc. v. Nable, 38 Off. Gaz. 62)." 2

Petitioners have failed to show that EO 273 was issued capriciously and whimsically or in an arbitrary or despotic
manner by reason of passion or personal hostility. It appears that a comprehensive study of the VAT was made
before EO 273 was issued. In fact, the merits of the VAT had been extensively discussed by its framers and other
government agencies involved in its implementation, even under the past administration. As the Solicitor General
correctly stated. "The signing of E.O. 273 was merely the last stage in the exercise of her legislative powers. The
legislative process started long before the signing when the data were gathered, proposals were weighed and the
final wordings of the measure were drafted, revised and finalized. Certainly, it cannot be said that the President
made a jump, so to speak, on the Congress, two days before it convened." 3

Next, the petitioners claim that EO 273 is oppressive, discriminatory, unjust and regressive, in violation of the
provisions of Art. VI, sec. 28(1) of the 1987 Constitution, which states:jgc:chanrobles.com.ph

"Sec. 28. (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system
of taxation."cralaw virtua1aw library

The petitioners’ assertions in this regard are not supported by facts and circumstances to warrant their
conclusions. They have failed to adequately show that the VAT is oppressive, discriminatory or unjust. Petitioners
merely rely upon newspaper articles which are actually hearsay and have no evidentiary value. To justify the
nullification of a law, there must be a clear and unequivocal breach of the Constitution, not a doubtful and
argumentative implication. 4

As the Court sees it, EO 273 satisfies all the requirements of a valid tax. It is uniform. The Court, in City of Baguio
v. De Leon, 5 said:jgc:chanrobles.com.ph

". . . In Philippine Trust Company v. Yatco (69 Phil. 420), Justice Laurel, speaking for the Court, stated: ‘A tax is
considered uniform when it operates with the same force and effect in every place where the subject may be
found.’

"There was no occasion in that case to consider the possible effect on such a constitutional requirement where
there is a classification. The opportunity came in Eastern Theatrical Co. v. Alfonso (83 Phil. 852, 862). Thus:
‘Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be
taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for
purposes of taxation; . . .’ About two years later, Justice Tuason, speaking for this Court in Manila Race Horses
Trainers Assn. v. de la Fuente (88 Phil. 60, 65) incorporated the above excerpt in his opinion and continued;
‘Taking everything into account, the differentiation against which the plaintiffs complain conforms to the practical
dictates of justice and equity and is not discriminatory within the meaning of the Constitution.’

"To satisfy this requirement then, all that is needed as held in another case decided two years later, (Uy Matias v.
City of Cebu, 93 Phil. 300) is that the statute or ordinance in question ‘applies equally to all persons, firms and
corporations placed in similar situation.’ This Court is on record as accepting the view in a leading American case
(Carmichael v. Southern Coal and Coke Co., 301 US 495) that ‘inequalities which result from a singling out of one
particular class for taxation or exemption infringe no constitutional limitation.’ (Lutz v. Araneta, 98 Phil. 148,
153)."cralaw virtua1aw library

The sales tax adopted in EO 273 is applied similarly on all goods and services sold to the public, which are not
exempt, at the constant rate of 0% or 10%.chanrobles virtual lawlibrary

The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engage in
business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-sari stores are
consequently exempt from its application. Likewise exempt from the tax are sales of farm and marine products, so
that the costs of basic food and other necessities, spared as they are from the incidence of the VAT, are expected
to be relatively lower and within the reach of the general public. 6

The Court likewise finds no merit in the contention of the petitioner Integrated Customs Brokers Association of the
Philippines that EO 273, more particularly the new Sec. 103(r) of the National Internal Revenue Code, unduly
discriminates against customs brokers. The contested provision states:jgc:chanrobles.com.ph

"Sec. 103. Exempt transactions. — The following shall be exempt from the value-added tax:chanrob1es virtual
1aw library
 x x x

"(r) Service performed in the exercise of profession or calling (except customs brokers) subject to the occupation
tax under the Local Tax Code, and professional services performed by registered general professional
partnerships;"

The phrase "except customs brokers" is not meant to discriminate against customs brokers. It was inserted in Sec.
103(r) to complement the provisions of Sec. 102 of the Code which makes the services of customs brokers subject
to the payment of the VAT and to distinguish customs brokers from other professionals who are subject to the
payment of an occupation tax under the Local Tax Code. Pertinent provisions of Sec. 102
read:jgc:chanrobles.com.ph

"Sec. 102. Value-added tax on sale of services. — There shall be levied, assessed and collected, a value-added tax
equivalent to 10% percent of gross receipts derived by any person engaged in the sale of services. The phrase
sale of services’ means the performance of all kinds of services for others for a fee, remuneration or consideration,
including those performed or rendered by construction and service contractors; stock, real estate, commercial,
customs and immigration brokers; lessors of personal property; lessors or distributors of cinematographic films;
persons engaged in milling, processing, manufacturing or repacking goods for others; and similar services
regardless of whether or not the performance thereof calls for the exercise or use of the physical or mental
faculties: . . ."cralaw virtua1aw library

With the insertion of the clarificatory phrase "except customs brokers" in Sec. 103(r), a potential conflict between
the two sections, (Secs. 102 and 103), insofar as customs brokers are concerned, is averted.

At any rate, the distinction of the customs brokers from the other professionals who are subject to occupation tax
under the Local Tax Code is based upon material differences, in that the activities of customs brokers (like those
of stock, real estate and immigration brokers) partake more of a business, rather than a profession and were thus
subjected to the percentage tax under Sec. 174 of the National Internal Revenue Code prior to its amendment by
EO 273. EO 273 abolished the percentage tax and replaced it with the VAT. If the petitioner Association did not
protest the classification of customs brokers then, the Court sees no reason why it should protest now.

The Court takes note that EO 273 has been in effect for more than five (5) months now, so that the fears
expressed by the petitioners that the adoption of the VAT will trigger skyrocketing of prices of basic commodities
and services, as well as mass actions and demonstrations against the VAT should by now be evident. The fact that
nothing of the sort has happened shows that the fears and apprehensions of the petitioners appear to be more
imagined than real. It would seem that the VAT is not as bad as we are made to
believe.chanrobles.com:cralaw:red

In any event, if petitioners seriously believe that the adoption and continued application of the VAT are prejudicial
to the general welfare or the interests of the majority of the people, they should seek recourse and relief from the
political branches of the government. The Court, following the time-honored doctrine of separation of powers,
cannot substitute its judgment for that of the President as to the wisdom, justice and advisability of the adoption
of the VAT. The Court can only look into and determine whether or not EO 273 was enacted and made effective as
law, in the manner required by, and consistent with, the Constitution, and to make sure that it was not issued in
grave abuse of discretion amounting to lack or excess of jurisdiction; and, in this regard, the Court finds no reason
to impede its application or continued implementation.

WHEREFORE, the petitions are DISMISSED. Without pronouncement as to costs.

SO ORDERED.

Yap,C .J ., Fernan, Narvasa, Melencio-Herrera, Cruz, Paras, Feliciano, Gancayco, Bidin, Sarmiento, Cortes and
Griño-Aquino, JJ., concur.

Gutierrez, Jr . and Medialdea, JJ., on leave.

Endnotes:

1. Application of Lamb, 169 A2d 822, 830, 67 N.J. Super. 29, affd. 170 A2d 34, 34 n.J. 448, citing 18 C.J.S. Convene p. 37.
2. Alafriz v. Nable, 72 Phil. 278, 280.

3. Comment on petition, G.R. No. 82152, p. 18.

4. Peralta v. Comelec, L-47771 and others, March 11, 1978, 82 SCRA 30, 55.

5. 134 Phil. 912, 919-920.

6. EO 273 enumerates in its sec. 102 zero-rated sales and in its sec. 103 transactions exempt from the VAT.
 EN BANC

ABAKADA GURO PARTY LIST (Formerly AASJAS) G.R. No. 168056

OFFICERS SAMSON S. ALCANTARA and ED
VINCENT S. ALBANO,
Petitioners, Present:

DAVIDE, JR., C.J.,

PUNO,
PANGANIBAN,
QUISUMBING,
YNARES-SANTIAGO,
SANDOVAL-GUTIERREZ,
- versus - CARPIO,
AUSTRIA-MARTINEZ,
CORONA,
CARPIO-MORALES,
CALLEJO, SR.,
AZCUNA,
TINGA,
CHICO-NAZARIO, and
GARCIA, JJ.
THE HONORABLE EXECUTIVE SECRETARY
EDUARDO ERMITA; HONORABLE SECRETARY OF
THE DEPARTMENT OF FINANCE CESAR PURISIMA;
and HONORABLE COMMISSIONER OF INTERNAL
REVENUE GUILLERMO PARAYNO, JR.,
Respondents.

x-------------------------x

AQUILINO Q. PIMENTEL, JR., LUISA P. EJERCITO- G.R. No. 168207

ESTRADA, JINGGOY E. ESTRADA, PANFILO M.
LACSON, ALFREDO S. LIM, JAMBY A.S. MADRIGAL,
AND SERGIO R. OSMEA III,
Petitioners,

- versus -

EXECUTIVE SECRETARY EDUARDO R. ERMITA,

CESAR V. PURISIMA, SECRETARY OF FINANCE,
GUILLERMO L. PARAYNO, JR., COMMISSIONER OF
THE BUREAU OF INTERNAL REVENUE,
Respondents.

x-------------------------x

ASSOCIATION OF PILIPINAS SHELL DEALERS, INC. G.R. No. 168461

represented by its President, ROSARIO ANTONIO;
PETRON DEALERS ASSOCIATION represented by its
President, RUTH E. BARBIBI; ASSOCIATION OF
CALTEX DEALERS OF THE PHILIPPINES represented
by its President, MERCEDITAS A. GARCIA; ROSARIO
ANTONIO doing business under the name and style of
ANB NORTH SHELL SERVICE STATION; LOURDES
MARTINEZ doing business under the name and style of
SHELL GATE N. DOMINGO; BETHZAIDA TAN doing
business under the name and style of ADVANCE SHELL
STATION; REYNALDO P. MONTOYA doing business
under the name and style of NEW LAMUAN SHELL
SERVICE STATION; EFREN SOTTO doing business
under the name and style of RED FIELD SHELL
SERVICE STATION; DONICA CORPORATION
represented by its President, DESI TOMACRUZ; RUTH
E. MARBIBI doing business under the name and style of
R&R PETRON STATION; PETER M. UNGSON doing
business under the name and style of CLASSIC STAR
GASOLINE SERVICE STATION; MARIAN SHEILA A.
LEE doing business under the name and style of NTE
GASOLINE & SERVICE STATION; JULIAN CESAR P.
POSADAS doing business under the name and style of
STARCARGA ENTERPRISES; ADORACION MAEBO
doing business under the name and style of CMA
MOTORISTS CENTER; SUSAN M. ENTRATA doing
business under the name and style of LEONAS
GASOLINE STATION and SERVICE CENTER;
CARMELITA BALDONADO doing business under the
name and style of FIRST CHOICE SERVICE CENTER;
MERCEDITAS A. GARCIA doing business under the
name and style of LORPED SERVICE CENTER;
RHEAMAR A. RAMOS doing business under the name
and style of RJRAM PTT GAS STATION; MA. ISABEL
VIOLAGO doing business under the name and style of
VIOLAGO-PTT SERVICE CENTER; MOTORISTS
HEART CORPORATION represented by its Vice-
President for Operations, JOSELITO F. FLORDELIZA;
MOTORISTS HARVARD CORPORATION represented
by its Vice-President for Operations, JOSELITO F.
FLORDELIZA; MOTORISTS HERITAGE
CORPORATION represented by its Vice-President for
Operations, JOSELITO F. FLORDELIZA; PHILIPPINE
STANDARD OIL CORPORATION represented by its
Vice-President for Operations, JOSELITO F.
FLORDELIZA; ROMEO MANUEL doing business under
the name and style of ROMMAN GASOLINE STATION;
ANTHONY ALBERT CRUZ III doing business under the
name and style of TRUE SERVICE STATION,
Petitioners,

- versus -

CESAR V. PURISIMA, in his capacity as Secretary of the

Department of Finance and GUILLERMO L. PARAYNO,
JR., in his capacity as Commissioner of Internal Revenue,
Respondents.

x-------------------------x

FRANCIS JOSEPH G. ESCUDERO, VINCENT G.R. No. 168463

CRISOLOGO, EMMANUEL JOEL J. VILLANUEVA,
RODOLFO G. PLAZA, DARLENE ANTONINO-
CUSTODIO, OSCAR G. MALAPITAN, BENJAMIN C.
AGARAO, JR. JUAN EDGARDO M. ANGARA, JUSTIN
MARC SB. CHIPECO, FLORENCIO G. NOEL, MUJIV
S. HATAMAN, RENATO B. MAGTUBO, JOSEPH A.
SANTIAGO, TEOFISTO DL. GUINGONA III, RUY
ELIAS C. LOPEZ, RODOLFO Q. AGBAYANI and
TEODORO A. CASIO,
Petitioners,

- versus -

CESAR V. PURISIMA, in his capacity as Secretary of

Finance, GUILLERMO L. PARAYNO, JR., in his capacity
as Commissioner of Internal Revenue, and EDUARDO R.
ERMITA, in his capacity as Executive Secretary,

Respondents.

x-------------------------x

BATAAN GOVERNOR ENRIQUE T. GARCIA, JR. G.R. No. 168730

Petitioner,

- versus -

HON. EDUARDO R. ERMITA, in his capacity as the

Executive Secretary; HON. MARGARITO TEVES, in his
capacity as Secretary of Finance; HON. JOSE MARIO
BUNAG, in his capacity as the OIC Commissioner of the
Bureau of Internal Revenue; and HON. ALEXANDER
AREVALO, in his capacity as the OIC Commissioner of
the Bureau of Customs,

Promulgated:
Respondents. September 1, 2005
x-----------------------------------------------------------x

DECISION

AUSTRIA-MARTINEZ, J.:

The expenses of government, having for their object the interest of all, should be borne by everyone, and the more
man enjoys the advantages of society, the more he ought to hold himself honored in contributing to those expenses.
-Anne Robert Jacques Turgot (1727-1781)
French statesman and economist

Mounting budget deficit, revenue generation, inadequate fiscal allocation for education, increased emoluments for health workers, and

wider coverage for full value-added tax benefits these are the reasons why Republic Act No. 9337 (R.A. No. 9337) [1] was enacted. Reasons, the

wisdom of which, the Court even with its extensive constitutional power of review, cannot probe. The petitioners in these cases, however,

question not only the wisdom of the law, but also perceived constitutional infirmities in its passage.

Every law enjoys in its favor the presumption of constitutionality. Their arguments notwithstanding, petitioners failed to justify their

call for the invalidity of the law. Hence, R.A. No. 9337 is not unconstitutional.

LEGISLATIVE HISTORY

R.A. No. 9337 is a consolidation of three legislative bills namely, House Bill Nos. 3555 and 3705, and Senate Bill No. 1950.

House Bill No. 3555[2] was introduced on first reading on January 7, 2005. The House Committee on Ways and Means approved the

bill, in substitution of House Bill No. 1468, which Representative (Rep.) Eric D. Singson introduced on August 8, 2004. The President certified

the bill on January 7, 2005 for immediate enactment. On January 27, 2005, the House of Representatives approved the bill on second and third

reading.

House Bill No. 3705[3] on the other hand, substituted House Bill No. 3105 introduced by Rep. Salacnib F. Baterina, and House Bill

No. 3381 introduced by Rep. Jacinto V. Paras. Its mother bill is House Bill No. 3555. The House Committee on Ways and Means approved the

bill on February 2, 2005. The President also certified it as urgent on February 8, 2005. The House of Representatives approved the bill on second

and third reading on February 28, 2005.

Meanwhile, the Senate Committee on Ways and Means approved Senate Bill No. 1950[4] on March 7, 2005, in substitution of Senate

Bill Nos. 1337, 1838 and 1873, taking into consideration House Bill Nos. 3555 and 3705. Senator Ralph G. Recto sponsored Senate Bill No.

1337, while Senate Bill Nos. 1838 and 1873 were both sponsored by Sens. Franklin M. Drilon, Juan M. Flavier and Francis N. Pangilinan. The

President certified the bill on March 11, 2005, and was approved by the Senate on second and third reading on April 13, 2005.

On the same date, April 13, 2005, the Senate agreed to the request of the House of Representatives for a committee conference on the

disagreeing provisions of the proposed bills.

Before long, the Conference Committee on the Disagreeing Provisions of House Bill No. 3555, House Bill No. 3705, and Senate Bill

No. 1950, after having met and discussed in full free and conference, recommended the approval of its report, which the Senate did on May 10,

2005, and with the House of Representatives agreeing thereto the next day, May 11, 2005.
 On May 23, 2005, the enrolled copy of the consolidated House and Senate version was transmitted to the President, who signed the

same into law on May 24, 2005. Thus, came R.A. No. 9337.

July 1, 2005 is the effectivity date of R.A. No. 9337.[5] When said date came, the Court issued a temporary restraining order, effective

immediately and continuing until further orders, enjoining respondents from enforcing and implementing the law.

Oral arguments were held on July 14, 2005. Significantly, during the hearing, the Court speaking through Mr. Justice Artemio V.

Panganiban, voiced the rationale for its issuance of the temporary restraining order on July 1, 2005, to wit:
J. PANGANIBAN : . . . But before I go into the details of your presentation, let me just tell you a little background. You
know when the law took effect on July 1, 2005, the Court issued a TRO at about 5 oclock in
the afternoon. But before that, there was a lot of complaints aired on television and on radio.
Some people in a gas station were complaining that the gas prices went up by 10%. Some
people were complaining that their electric bill will go up by 10%. Other times people riding in
domestic air carrier were complaining that the prices that theyll have to pay would have to go
up by 10%. While all that was being aired, per your presentation and per our own
understanding of the law, thats not true. Its not true that the e-vat law necessarily increased
prices by 10% uniformly isnt it?

ATTY. BANIQUED : No, Your Honor.

J. PANGANIBAN : It is not?

ATTY. BANIQUED : Its not, because, Your Honor, there is an Executive Order that granted the Petroleum companies some
subsidy . . . interrupted

J. PANGANIBAN : Thats correct . . .

ATTY. BANIQUED : . . . and therefore that was meant to temper the impact . . . interrupted

J. PANGANIBAN : . . . mitigating measures . . .

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : As a matter of fact a part of the mitigating measures would be the elimination of the Excise Tax and the
import duties. That is why, it is not correct to say that the VAT as to petroleum dealers
increased prices by 10%.

ATTY. BANIQUED : Yes, Your Honor.

J. PANGANIBAN : And therefore, there is no justification for increasing the retail price by 10% to cover the E-Vat tax. If
you consider the excise tax and the import duties, the Net Tax would probably be in the
neighborhood of 7%? We are not going into exact figures I am just trying to deliver a point
that different industries, different products, different services are hit differently. So its not
correct to say that all prices must go up by 10%.
ATTY. BANIQUED : Youre right, Your Honor.

J. PANGANIBAN : Now. For instance, Domestic Airline companies, Mr. Counsel, are at present imposed a Sales Tax of
3%. When this E-Vat law took effect the Sales Tax was also removed as a mitigating measure.
So, therefore, there is no justification to increase the fares by 10% at best 7%, correct?

ATTY. BANIQUED : I guess so, Your Honor, yes.

J. PANGANIBAN : There are other products that the people were complaining on that first day, were being increased
arbitrarily by 10%. And thats one reason among many others this Court had to issue TRO
because of the confusion in the implementation. Thats why we added as an issue in this case,
even if its tangentially taken up by the pleadings of the parties, the confusion in the
implementation of the E-vat. Our people were subjected to the mercy of that confusion of an
across the board increase of 10%, which you yourself now admit and I think even the
Government will admit is incorrect. In some cases, it should be 3% only, in some cases it
should be 6% depending on these mitigating measures and the location and situation of each
product, of each service, of each company, isnt it?

ATTY. BANIQUED : Yes, Your Honor.

 J. PANGANIBAN : Alright. So thats one reason why we had to issue a TRO pending the clarification of all these and we
wish the government will take time to clarify all these by means of a more detailed
implementing rules, in case the law is upheld by this Court. . . .[6]

The Court also directed the parties to file their respective Memoranda.

G.R. No. 168056

Before R.A. No. 9337 took effect, petitioners ABAKADA GURO Party List, et al., filed a petition for prohibition on May 27, 2005.

They question the constitutionality of Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the National

Internal Revenue Code (NIRC). Section 4 imposes a 10% VAT on sale of goods and properties, Section 5 imposes a 10% VAT on importation

of goods, and Section 6 imposes a 10% VAT on sale of services and use or lease of properties. These questioned provisions contain a

uniform proviso authorizing the President, upon recommendation of the Secretary of Finance, to raise the VAT rate to 12%, effective January 1,

2006, after any of the following conditions have been satisfied, to wit:

. . . That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two
and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1
%).

Petitioners argue that the law is unconstitutional, as it constitutes abandonment by Congress of its exclusive authority to fix the rate of

taxes under Article VI, Section 28(2) of the 1987 Philippine Constitution.

G.R. No. 168207

On June 9, 2005, Sen. Aquilino Q. Pimentel, Jr., et al., filed a petition for certiorari likewise assailing the constitutionality of Sections

4, 5 and 6 of R.A. No. 9337.

Aside from questioning the so-called stand-by authority of the President to increase the VAT rate to 12%, on the ground that it

amounts to an undue delegation of legislative power, petitioners also contend that the increase in the VAT rate to 12% contingent on any of the

two conditions being satisfied violates the due process clause embodied in Article III, Section 1 of the Constitution, as it imposes an unfair and

additional tax burden on the people, in that: (1) the 12% increase is ambiguous because it does not state if the rate would be returned to the

original 10% if the conditions are no longer satisfied; (2) the rate is unfair and unreasonable, as the people are unsure of the applicable VAT rate

from year to year; and (3) the increase in the VAT rate, which is supposed to be an incentive to the President to raise the VAT collection to at

least 2 4/5 of the GDP of the previous year, should only be based on fiscal adequacy.

Petitioners further claim that the inclusion of a stand-by authority granted to the President by the Bicameral Conference Committee is

a violation of the no-amendment rule upon last reading of a bill laid down in Article VI, Section 26(2) of the Constitution.

G.R. No. 168461

Thereafter, a petition for prohibition was filed on June 29, 2005, by the Association of Pilipinas Shell Dealers, Inc., et al., assailing the

following provisions of R.A. No. 9337:

 1) Section 8, amending Section 110 (A)(2) of the NIRC, requiring that the input tax on depreciable goods shall be amortized
over a 60-month period, if the acquisition, excluding the VAT components, exceeds One Million Pesos (P1,
000,000.00);

2) Section 8, amending Section 110 (B) of the NIRC, imposing a 70% limit on the amount of input tax to be credited against
the output tax; and

3) Section 12, amending Section 114 (c) of the NIRC, authorizing the Government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs, to deduct a 5% final withholding tax on gross payments of goods
and services, which are subject to 10% VAT under Sections 106 (sale of goods and properties) and 108 (sale of
services and use or lease of properties) of the NIRC.

Petitioners contend that these provisions are unconstitutional for being arbitrary, oppressive, excessive, and confiscatory.

Petitioners argument is premised on the constitutional right of non-deprivation of life, liberty or property without due process of law

under Article III, Section 1 of the Constitution. According to petitioners, the contested sections impose limitations on the amount of input tax

that may be claimed. Petitioners also argue that the input tax partakes the nature of a property that may not be confiscated, appropriated, or

limited without due process of law. Petitioners further contend that like any other property or property right, the input tax credit may be

transferred or disposed of, and that by limiting the same, the government gets to tax a profit or value-added even if there is no profit or value-

added.

Petitioners also believe that these provisions violate the constitutional guarantee of equal protection of the law under Article III,

Section 1 of the Constitution, as the limitation on the creditable input tax if: (1) the entity has a high ratio of input tax; or (2) invests in capital

equipment; or (3) has several transactions with the government, is not based on real and substantial differences to meet a valid classification.

Lastly, petitioners contend that the 70% limit is anything but progressive, violative of Article VI, Section 28(1) of the Constitution, and

that it is the smaller businesses with higher input tax to output tax ratio that will suffer the consequences thereof for it wipes out whatever

meager margins the petitioners make.

G.R. No. 168463

Several members of the House of Representatives led by Rep. Francis Joseph G. Escudero filed this petition for certiorari on June 30,

2005. They question the constitutionality of R.A. No. 9337 on the following grounds:

1) Sections 4, 5, and 6 of R.A. No. 9337 constitute an undue delegation of legislative power, in violation of Article VI,
Section 28(2) of the Constitution;

2) The Bicameral Conference Committee acted without jurisdiction in deleting the no pass on provisions present in Senate
Bill No. 1950 and House Bill No. 3705; and

3) Insertion by the Bicameral Conference Committee of Sections 27, 28, 34, 116, 117, 119, 121, 125, [7] 148, 151, 236, 237
and 288, which were present in Senate Bill No. 1950, violates Article VI, Section 24(1) of the Constitution, which
provides that all appropriation, revenue or tariff bills shall originate exclusively in the House of Representatives

G.R. No. 168730

On the eleventh hour, Governor Enrique T. Garcia filed a petition for certiorari and prohibition on July 20, 2005, alleging

unconstitutionality of the law on the ground that the limitation on the creditable input tax in effect allows VAT-registered establishments to

retain a portion of the taxes they collect, thus violating the principle that tax collection and revenue should be solely allocated for public

purposes and expenditures. Petitioner Garcia further claims that allowing these establishments to pass on the tax to the consumers is inequitable,

in violation of Article VI, Section 28(1) of the Constitution.

 RESPONDENTS COMMENT

The Office of the Solicitor General (OSG) filed a Comment in behalf of respondents. Preliminarily, respondents contend that R.A. No.

9337 enjoys the presumption of constitutionality and petitioners failed to cast doubt on its validity.

Relying on the case of Tolentino vs. Secretary of Finance, 235 SCRA

630 (1994), respondents argue that the procedural issues raised by petitioners, i.e., legality of the bicameral proceedings, exclusive origination of

revenue measures and the power of the Senate concomitant thereto, have already been settled. With regard to the issue of undue delegation of

legislative power to the President, respondents contend that the law is complete and leaves no discretion to the President but to increase the rate

to 12% once any of the two conditions provided therein arise.

Respondents also refute petitioners argument that the increase to 12%, as well as the 70% limitation on the creditable input tax, the 60-

month amortization on the purchase or importation of capital goods exceeding P1,000,000.00, and the 5% final withholding tax by government

agencies, is arbitrary, oppressive, and confiscatory, and that it violates the constitutional principle on progressive taxation, among others.

Finally, respondents manifest that R.A. No. 9337 is the anchor of the governments fiscal reform agenda. A reform in the value-added

system of taxation is the core revenue measure that will tilt the balance towards a sustainable macroeconomic environment necessary for

economic growth.

ISSUES

The Court defined the issues, as follows:

PROCEDURAL ISSUE

Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

SUBSTANTIVE ISSUES

1. Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following
provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)

2. Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No.
9337, amending Section 114(C) of the NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

RULING OF THE COURT

As a prelude, the Court deems it apt to restate the general principles and concepts of value-added tax (VAT), as the confusion and

inevitably, litigation, breeds from a fallacious notion of its nature.

The VAT is a tax on spending or consumption. It is levied on the sale, barter, exchange or lease of goods or properties and

services.[8] Being an indirect tax on expenditure, the seller of goods or services may pass on the amount of tax paid to the buyer, [9] with the seller

acting merely as a tax collector.[10] The burden of VAT is intended to fall on the immediate buyers and ultimately, the end-consumers.
 In contrast, a direct tax is a tax for which a taxpayer is directly liable on the transaction or business it engages in, without transferring

the burden to someone else.[11] Examples are individual and corporate income taxes, transfer taxes, and residence taxes. [12]

In the Philippines, the value-added system of sales taxation has long been in existence, albeit in a different mode. Prior to 1978, the

system was a single-stage tax computed under the cost deduction method and was payable only by the original sellers. The single-stage system

was subsequently modified, and a mixture of the cost deduction method and tax credit method was used to determine the value-added tax

payable.[13] Under the tax credit method, an entity can credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its

purchases, inputs and imports.[14]

It was only in 1987, when President Corazon C. Aquino issued Executive Order No. 273, that the VAT system was rationalized by

imposing a multi-stage tax rate of 0% or 10% on all sales using the tax credit method.[15]

E.O. No. 273 was followed by R.A. No. 7716 or the Expanded VAT Law, [16] R.A. No. 8241 or the Improved VAT Law,[17] R.A. No.

8424 or the Tax Reform Act of 1997,[18] and finally, the presently beleaguered R.A. No. 9337, also referred to by respondents as the VAT

Reform Act.

The Court will now discuss the issues in logical sequence.

PROCEDURAL ISSUE

I.
Whether R.A. No. 9337 violates the following provisions of the Constitution:

a. Article VI, Section 24, and

b. Article VI, Section 26(2)

A. The Bicameral Conference Committee

Petitioners Escudero, et al., and Pimentel, et al., allege that the Bicameral Conference Committee exceeded its authority by:

1) Inserting the stand-by authority in favor of the President in Sections 4, 5, and 6 of R.A. No. 9337;

2) Deleting entirely the no pass-on provisions found in both the House and Senate bills;

3) Inserting the provision imposing a 70% limit on the amount of input tax to be credited against the output tax; and

4) Including the amendments introduced only by Senate Bill No. 1950 regarding other kinds of taxes in addition to the value-
added tax.

Petitioners now beseech the Court to define the powers of the Bicameral Conference Committee.

It should be borne in mind that the power of internal regulation and discipline are intrinsic in any legislative body for, as unerringly

elucidated by Justice Story, [i]f the power did not exist, it would be utterly impracticable to transact the business of the nation, either at

all, or at least with decency, deliberation, and order.[19] Thus, Article VI, Section 16 (3) of the Constitution provides that each House may

determine the rules of its proceedings. Pursuant to this inherent constitutional power to promulgate and implement its own rules of procedure,

the respective rules of each house of Congress provided for the creation of a Bicameral Conference Committee.

Thus, Rule XIV, Sections 88 and 89 of the Rules of House of Representatives provides as follows:
 Sec. 88. Conference Committee. In the event that the House does not agree with the Senate on the amendment to
any bill or joint resolution, the differences may be settled by the conference committees of both chambers.

In resolving the differences with the Senate, the House panel shall, as much as possible, adhere to and support the
House Bill. If the differences with the Senate are so substantial that they materially impair the House Bill, the panel shall
report such fact to the House for the latters appropriate action.

Sec. 89. Conference Committee Reports. . . . Each report shall contain a detailed, sufficiently explicit statement of
the changes in or amendments to the subject measure.

...

The Chairman of the House panel may be interpellated on the Conference Committee Report prior to the voting
thereon. The House shall vote on the Conference Committee Report in the same manner and procedure as it votes on a bill
on third and final reading.

Rule XII, Section 35 of the Rules of the Senate states:

Sec. 35. In the event that the Senate does not agree with the House of Representatives on the provision of any bill
or joint resolution, the differences shall be settled by a conference committee of both Houses which shall meet within ten
(10) days after their composition. The President shall designate the members of the Senate Panel in the conference
committee with the approval of the Senate.

Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the changes in,
or amendments to the subject measure, and shall be signed by a majority of the members of each House panel, voting
separately.

A comparative presentation of the conflicting House and Senate provisions and a reconciled version thereof with
the explanatory statement of the conference committee shall be attached to the report.

...

The creation of such conference committee was apparently in response to a problem, not addressed by any constitutional provision,

where the two houses of Congress find themselves in disagreement over changes or amendments introduced by the other house in a legislative

bill. Given that one of the most basic powers of the legislative branch is to formulate and implement its own rules of proceedings and to

discipline its members, may the Court then delve into the details of how Congress complies with its internal rules or how it conducts its business

of passing legislation? Note that in the present petitions, the issue is not whether provisions of the rules of both houses creating the bicameral

conference committee are unconstitutional, but whether the bicameral conference committee has strictly complied with the rules of both

houses, thereby remaining within the jurisdiction conferred upon it by Congress.

In the recent case of Farias vs. The Executive Secretary,[20] the Court En Banc, unanimously reiterated and emphasized its adherence

to the enrolled bill doctrine, thus, declining therein petitioners plea for the Court to go behind the enrolled copy of the bill. Assailed in said case

was Congresss creation of two sets of bicameral conference committees, the lack of records of said committees proceedings, the alleged

violation of said committees of the rules of both houses, and the disappearance or deletion of one of the provisions in the compromise bill

submitted by the bicameral conference committee. It was argued that such irregularities in the passage of the law nullified R.A. No. 9006, or the

Fair Election Act.

Striking down such argument, the Court held thus:

Under the enrolled bill doctrine, the signing of a bill by the Speaker of the House and the Senate President and the
certification of the Secretaries of both Houses of Congress that it was passed are conclusive of its due enactment. A review
of cases reveals the Courts consistent adherence to the rule. The Court finds no reason to deviate from the salutary rule
in this case where the irregularities alleged by the petitioners mostly involved the internal rules of Congress, e.g.,
creation of the 2nd or 3rd Bicameral Conference Committee by the House. This Court is not the proper forum for the
enforcement of these internal rules of Congress, whether House or Senate. Parliamentary rules are merely
procedural and with their observance the courts have no concern. Whatever doubts there may be as to the formal
validity of Rep. Act No. 9006 must be resolved in its favor. The Court reiterates its ruling in Arroyo vs. De Venecia, viz.:
 But the cases, both here and abroad, in varying forms of expression, all deny to the courts
the power to inquire into allegations that, in enacting a law, a House of Congress failed to comply
with its own rules, in the absence of showing that there was a violation of a constitutional provision
or the rights of private individuals. In Osmea v. Pendatun, it was held: At any rate, courts have
declared that the rules adopted by deliberative bodies are subject to revocation, modification or waiver at
the pleasure of the body adopting them. And it has been said that Parliamentary rules are merely
procedural, and with their observance, the courts have no concern. They may be waived or
disregarded by the legislative body. Consequently, mere failure to conform to parliamentary usage
will not invalidate the action (taken by a deliberative body) when the requisite number of members
have agreed to a particular measure.[21] (Emphasis supplied)

The foregoing declaration is exactly in point with the present cases, where petitioners allege irregularities committed by the conference

committee in introducing changes or deleting provisions in the House and Senate bills. Akin to the Farias case,[22] the present petitions also raise

an issue regarding the actions taken by the conference committee on matters regarding Congress compliance with its own internal rules. As

stated earlier, one of the most basic and inherent power of the legislature is the power to formulate rules for its proceedings and the discipline of

its members. Congress is the best judge of how it should conduct its own business expeditiously and in the most orderly manner. It is also the

sole

concern of Congress to instill discipline among the members of its conference committee if it believes that said members violated any of its rules

of proceedings. Even the expanded jurisdiction of this Court cannot apply to questions regarding only the internal operation of Congress, thus,

the Court is wont to deny a review of the internal proceedings of a co-equal branch of government.

Moreover, as far back as 1994 or more than ten years ago, in the case of Tolentino vs. Secretary of Finance,[23] the Court already made

the pronouncement that [i]f a change is desired in the practice [of the Bicameral Conference Committee] it must be sought in Congress
[24]
since this question is not covered by any constitutional provision but is only an internal rule of each house. To date, Congress has not

seen it fit to make such changes adverted to by the Court. It seems, therefore, that Congress finds the practices of the bicameral conference

committee to be very useful for purposes of prompt and efficient legislative action.

Nevertheless, just to put minds at ease that no blatant irregularities tainted the proceedings of the bicameral conference committees, the

Court deems it necessary to dwell on the issue. The Court observes that there was a necessity for a conference committee because a comparison

of the provisions of House Bill Nos. 3555 and 3705 on one hand, and Senate Bill No. 1950 on the other, reveals that there were indeed

disagreements. As pointed out in the petitions, said disagreements were as follows:

House Bill No. 3555 House Bill No.3705 Senate Bill No. 1950

With regard to Stand-By Authority in favor of President

Provides for 12% VAT on every sale
of goods or properties (amending Sec.
106 of NIRC); 12% VAT on
importation of goods (amending Sec.
107 of NIRC); and 12% VAT on sale
of services and use or lease of
properties (amending Sec. 108 of
NIRC)
Provides for 12% VAT in general on sales of Provides for a single rate of 10% VAT on sale
goods or properties and reduced rates for sale of goods or properties (amending Sec. 106 of
of certain locally manufactured goods and NIRC), 10% VAT on sale of services
petroleum products and raw materials to be including sale of electricity by generation
used in the manufacture thereof (amending companies, transmission and distribution
Sec. 106 of NIRC); 12% VAT on companies, and use or lease of properties
importation of goods and reduced rates for (amending Sec. 108 of NIRC)
certain imported products including
petroleum products (amending Sec. 107 of
NIRC); and 12% VAT on sale of services
and use or lease of properties and a reduced
rate for certain services including power
generation (amending Sec. 108 of NIRC)
 With regard to the no pass-on provision

No similar provision Provides that the VAT imposed on power
generation and on the sale of petroleum
products shall be absorbed by generation
companies or sellers, respectively, and shall
not be passed on to consumers
With regard to 70% limit on input tax credit
Provides that the VAT imposed on sales of
electricity by generation companies and
services of transmission companies and
distribution companies, as well as those of
franchise grantees of electric utilities shall not
apply to residential
end-users. VAT shall be absorbed by
generation, transmission, and distribution
companies.

Provides that the input tax credit for No similar provision Provides that the input tax credit for capital
capital goods on which a VAT has goods on which a VAT has been paid shall be
been paid shall be equally distributed equally distributed over 5 years or the
over 5 years or the depreciable life of depreciable life of such capital goods; the
such capital goods; the input tax credit input tax credit for goods and services other
for goods and services other than than capital goods shall not exceed 90% of the
capital goods shall not exceed 5% of output VAT.
the total amount of such goods and
services; and for persons engaged in
retail trading of goods, the allowable
input tax credit shall not exceed 11%
of the total amount of goods
purchased.

With regard to amendments to be made to NIRC provisions regarding income and excise taxes

No similar provision No similar provision Provided for amendments to several NIRC

provisions regarding corporate income,
percentage, franchise and excise taxes

The disagreements between the provisions in the House bills and the Senate bill were with regard to (1) what rate of VAT is to be

imposed; (2) whether only the VAT imposed on electricity generation, transmission and distribution companies should not be passed on to

consumers, as proposed in the Senate bill, or both the VAT imposed on electricity generation, transmission and distribution companies and the

VAT imposed on sale of petroleum products should not be passed on to consumers, as proposed in the House bill; (3) in what manner input tax

credits should be limited; (4) and whether the NIRC provisions on corporate income taxes, percentage, franchise and excise taxes should be

amended.

There being differences and/or disagreements on the foregoing provisions of the House and Senate bills, the Bicameral Conference

Committee was mandated by the rules of both houses of Congress to act on the same by settling said differences and/or disagreements. The

Bicameral Conference Committee acted on the disagreeing provisions by making the following changes:

1. With regard to the disagreement on the rate of VAT to be imposed, it would appear from the Conference Committee Report that the

Bicameral Conference Committee tried to bridge the gap in the difference between the 10% VAT rate proposed by the Senate, and the various

rates with 12% as the highest VAT rate proposed by the House, by striking a compromise whereby the present 10% VAT rate would be retained

until certain conditions arise, i.e., the value-added tax collection as a percentage of gross domestic product (GDP) of the previous year exceeds 2
4/5%, or National Government deficit as a percentage of GDP of the previous year exceeds 1%, when the President, upon recommendation of

the Secretary of Finance shall raise the rate of VAT to 12% effective January 1, 2006.

2. With regard to the disagreement on whether only the VAT imposed on electricity generation, transmission and distribution

companies should not be passed on to consumers or whether both the VAT imposed on electricity generation, transmission and distribution

companies and the VAT imposed on sale of petroleum products may be passed on to consumers, the Bicameral Conference Committee chose to

settle such disagreement by altogether deleting from its Report any no pass-on provision.

3. With regard to the disagreement on whether input tax credits should be limited or not, the Bicameral Conference Committee decided

to adopt the position of the House by putting a limitation on the amount of input tax that may be credited against the output tax, although it

crafted its own language as to the amount of the limitation on input tax credits and the manner of computing the same by providing thus:

(A) Creditable Input Tax. . . .

...

Provided, The input tax on goods purchased or imported in a calendar month for use in trade or business
for which deduction for depreciation is allowed under this Code, shall be spread evenly over the month
of acquisition and the fifty-nine (59) succeeding months if the aggregate acquisition cost for such goods,
excluding the VAT component thereof, exceeds one million Pesos (P1,000,000.00): PROVIDED,
however, that if the estimated useful life of the capital good is less than five (5) years, as used for
depreciation purposes, then the input VAT shall be spread over such shorter period: . . .

(B) Excess Output or Input Tax. If at the end of any taxable quarter the output tax exceeds the input tax,
the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the excess
shall be carried over to the succeeding quarter or quarters: PROVIDED that the input tax inclusive of
input VAT carried over from the previous quarter that may be credited in every quarter shall not exceed
seventy percent (70%) of the output VAT: PROVIDED, HOWEVER, THAT any input tax attributable
to zero-rated sales by a VAT-registered person may at his option be refunded or credited against other
internal revenue taxes, . . .

4. With regard to the amendments to other provisions of the NIRC on corporate income tax, franchise, percentage and excise taxes, the

conference committee decided to include such amendments and basically adopted the provisions found in Senate Bill No. 1950, with some

changes as to the rate of the tax to be imposed.

Under the provisions of both the Rules of the House of Representatives and Senate Rules, the Bicameral Conference Committee is

mandated to settle the differences between the disagreeing provisions in the House bill and the Senate bill. The term settle is synonymous to

reconcile and harmonize.[25] To reconcile or harmonize disagreeing provisions, the Bicameral Conference Committee may then (a) adopt the

specific provisions of either the House bill or Senate bill, (b) decide that neither provisions in the House bill or the provisions in the Senate bill

would

be carried into the final form of the bill, and/or (c) try to arrive at a compromise between the disagreeing provisions.

In the present case, the changes introduced by the Bicameral Conference Committee on disagreeing provisions were meant only to

reconcile and harmonize the disagreeing provisions for it did not inject any idea or intent that is wholly foreign to the subject embraced by the

original provisions.
 The so-called stand-by authority in favor of the President, whereby the rate of 10% VAT wanted by the Senate is retained until such

time that certain conditions arise when the 12% VAT wanted by the House shall be imposed, appears to be a compromise to try to bridge the

difference in the rate of VAT proposed by the two houses of Congress. Nevertheless, such compromise is still totally within the subject of what

rate of VAT should be imposed on taxpayers.

The no pass-on provision was deleted altogether. In the transcripts of the proceedings of the Bicameral Conference Committee held

on May 10, 2005, Sen. Ralph Recto, Chairman of the Senate Panel, explained the reason for deleting the no pass-on provision in this wise:

. . . the thinking was just to keep the VAT law or the VAT bill simple. And we were thinking that no sector should
be a beneficiary of legislative grace, neither should any sector be discriminated on. The VAT is an indirect tax. It is a pass
on-tax. And lets keep it plain and simple. Lets not confuse the bill and put a no pass-on provision. Two-thirds of the world
have a VAT system and in this two-thirds of the globe, I have yet to see a VAT with a no pass-though provision. So, the
thinking of the Senate is basically simple, lets keep the VAT simple.[26] (Emphasis supplied)

Rep. Teodoro Locsin further made the manifestation that the no pass-on provision never really enjoyed the support of either House.[27]

With regard to the amount of input tax to be credited against output tax, the Bicameral Conference Committee came to a compromise

on the percentage rate of the limitation or cap on such input tax credit, but again, the change introduced by the Bicameral Conference Committee

was totally within the intent of both houses to put a cap on input tax that may be

credited against the output tax. From the inception of the subject revenue bill in the House of Representatives, one of the major objectives was to

plug a glaring loophole in the tax policy and administration by creating vital restrictions on the claiming of input VAT tax credits . . . and [b]y

introducing limitations on the claiming of tax credit, we are capping a major leakage that has placed our collection efforts at an apparent

disadvantage.[28]

As to the amendments to NIRC provisions on taxes other than the value-added tax proposed in Senate Bill No. 1950, since said

provisions were among those referred to it, the conference committee had to act on the same and it basically adopted the version of the Senate.

Thus, all the changes or modifications made by the Bicameral Conference Committee were germane to subjects of the provisions

referred

to it for reconciliation. Such being the case, the Court does not see any grave abuse of discretion amounting to lack or excess of jurisdiction

committed by the Bicameral Conference Committee. In the earlier cases of Philippine Judges Association vs. Prado[29] and Tolentino vs.

Secretary of Finance,[30] the Court recognized the long-standing legislative practice of giving said conference committee ample latitude for

compromising differences between the Senate and the House. Thus, in the Tolentino case, it was held that:

. . . it is within the power of a conference committee to include in its report an entirely new provision that is not
found either in the House bill or in the Senate bill. If the committee can propose an amendment consisting of one or two
provisions, there is no reason why it cannot propose several provisions, collectively considered as an amendment in the
nature of a substitute, so long as such amendment is germane to the subject of the bills before the committee. After all, its
report was not final but needed the approval of both houses of Congress to become valid as an act of the legislative
department. The charge that in this case the Conference Committee acted as a third legislative chamber is thus
without any basis.[31] (Emphasis supplied)

B. R.A. No. 9337 Does Not Violate Article VI, Section 26(2) of the Constitution on the No-Amendment
Rule

Article VI, Sec. 26 (2) of the Constitution, states:

No bill passed by either House shall become a law unless it has passed three readings on separate days, and printed
copies thereof in its final form have been distributed to its Members three days before its passage, except when the President
certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill,
 no amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays
entered in the Journal.

Petitioners argument that the practice where a bicameral conference committee is allowed to add or delete provisions in the House bill

and the Senate bill after these had passed three readings is in effect a circumvention of the no amendment rule (Sec. 26 (2), Art. VI of the 1987

Constitution), fails to convince the Court to deviate from its ruling in the Tolentino case that:

Nor is there any reason for requiring that the Committees Report in these cases must have undergone three
readings in each of the two houses. If that be the case, there would be no end to negotiation since each house may seek
modification of the compromise bill. . . .

Art. VI. 26 (2) must, therefore, be construed as referring only to bills introduced for the first time in either
house of Congress, not to the conference committee report.[32] (Emphasis supplied)

The Court reiterates here that the no-amendment rule refers only to the procedure to be followed by each house of Congress with

regard to bills initiated in each of said respective houses, before said bill is transmitted to the other house for its concurrence or

amendment. Verily, to construe said provision in a way as to proscribe any further changes to a bill after one house has voted on it would lead

to absurdity as this would mean that the other house of Congress would be deprived of its constitutional power to amend or introduce changes to

said bill. Thus, Art. VI, Sec. 26 (2) of the Constitution cannot be taken to mean that the introduction by the Bicameral Conference Committee of

amendments and modifications to disagreeing provisions in bills that have been acted upon by both houses of Congress is prohibited.

C. R.A. No. 9337 Does Not Violate Article VI, Section 24 of the Constitution on Exclusive Origination of
Revenue Bills

Coming to the issue of the validity of the amendments made regarding the NIRC provisions on corporate income taxes and percentage,

excise taxes. Petitioners refer to the following provisions, to wit:

Section 27
Rates of Income Tax on Domestic Corporation
28(A)(1) Tax on Resident Foreign Corporation
28(B)(1) Inter-corporate Dividends
34(B)(1) Inter-corporate Dividends
116 Tax on Persons Exempt from VAT
117 Percentage Tax on domestic carriers and keepers of Garage
119 Tax on franchises
121 Tax on banks and Non-Bank Financial Intermediaries
148 Excise Tax on manufactured oils and other fuels
151 Excise Tax on mineral products
236 Registration requirements
237 Issuance of receipts or sales or commercial invoices
288 Disposition of Incremental Revenue

Petitioners claim that the amendments to these provisions of the NIRC did not at all originate from the House. They aver that House

Bill No. 3555 proposed amendments only regarding Sections 106, 107, 108, 110 and 114 of the NIRC, while House Bill No. 3705 proposed

amendments only to Sections 106, 107,108, 109, 110 and 111 of the NIRC; thus, the other sections of the NIRC which the Senate amended but

which amendments were not found in the House bills are not intended to be amended by the House of Representatives. Hence, they argue that

since the proposed amendments did not originate from the House, such amendments are a violation of Article VI, Section 24 of the Constitution.
 The argument does not hold water.

Article VI, Section 24 of the Constitution reads:

Sec. 24. All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local
application, and private bills shall originate exclusively in the House of Representatives but the Senate may propose or
concur with amendments.

In the present cases, petitioners admit that it was indeed House Bill Nos. 3555 and 3705 that initiated the move for amending

provisions of the NIRC dealing mainly with the value-added tax. Upon transmittal of said House bills to the Senate, the Senate came out with

Senate Bill No. 1950 proposing amendments not only to NIRC provisions on the value-added tax but also amendments to NIRC provisions on

other kinds of taxes. Is the introduction by the Senate of provisions not dealing directly with the value- added tax, which is the only kind of tax

being amended in the House bills, still within the purview of the constitutional provision authorizing the Senate to propose or concur with

amendments to a revenue bill that originated from the House?

The foregoing question had been squarely answered in the Tolentino case, wherein the Court held, thus:

. . . To begin with, it is not the law but the revenue bill which is required by the Constitution to originate
exclusively in the House of Representatives. It is important to emphasize this, because a bill originating in the House may
undergo such extensive changes in the Senate that the result may be a rewriting of the whole. . . . At this point, what is
important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue statute
and not only the bill which initiated the legislative process culminating in the enactment of the law must substantially
be the same as the House bill would be to deny the Senates power not only to concur with amendments but also
to propose amendments. It would be to violate the coequality of legislative power of the two houses of Congress and in fact
make the House superior to the Senate.

Given, then, the power of the Senate to propose amendments, the Senate can propose its own version even
with respect to bills which are required by the Constitution to originate in the House.
...

Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff or tax bills, bills
authorizing an increase of the public debt, private bills and bills of local application must come from the House of
Representatives on the theory that, elected as they are from the districts, the members of the House can be expected to be
more sensitive to the local needs and problems. On the other hand, the senators, who are elected at large, are
expected to approach the same problems from the national perspective. Both views are thereby made to bear on the
enactment of such laws.[33] (Emphasis supplied)

Since there is no question that the revenue bill exclusively originated in the House of Representatives, the Senate was acting within its

constitutional power to introduce amendments to the House bill when it included provisions in Senate Bill No. 1950 amending corporate income

taxes, percentage, excise and franchise taxes. Verily, Article VI, Section 24 of the Constitution does not contain any prohibition or limitation on

the extent of the amendments that may be introduced by the Senate to the House revenue bill.

Furthermore, the amendments introduced by the Senate to the NIRC provisions that had not been touched in the House bills are still in

furtherance of the intent of the House in initiating the subject revenue bills. The Explanatory Note of House Bill No. 1468, the very first House

bill introduced on the floor, which was later substituted by House Bill No. 3555, stated:

One of the challenges faced by the present administration is the urgent and daunting task of solving the countrys
serious financial problems. To do this, government expenditures must be strictly monitored and controlled and revenues
must be significantly increased. This may be easier said than done, but our fiscal authorities are still optimistic the
government will be operating on a balanced budget by the year 2009. In fact, several measures that will result to significant
expenditure savings have been identified by the administration. It is supported with a credible package of revenue
measures that include measures to improve tax administration and control the leakages in revenues from income
taxes and the value-added tax (VAT). (Emphasis supplied)
 Rep. Eric D. Singson, in his sponsorship speech for House Bill No. 3555, declared that:

In the budget message of our President in the year 2005, she reiterated that we all acknowledged that on top of our
agenda must be the restoration of the health of our fiscal system.

In order to considerably lower the consolidated public sector deficit and eventually achieve a balanced budget by
the year 2009, we need to seize windows of opportunities which might seem poignant in the beginning, but in the long
run prove effective and beneficial to the overall status of our economy. One such opportunity is a review of existing
tax rates, evaluating the relevance given our present conditions.[34] (Emphasis supplied)

Notably therefore, the main purpose of the bills emanating from the House of Representatives is to bring in sizeable revenues for the

government

to supplement our countrys serious financial problems, and improve tax administration and control of the leakages in revenues from income

taxes and value-added taxes. As these house bills were transmitted to the Senate, the latter, approaching the measures from the point of national

perspective, can introduce amendments within the purposes of those bills. It can provide for ways that would soften the impact of the VAT

measure on the consumer, i.e., by distributing the burden across all sectors instead of putting it entirely on the shoulders of the consumers. The

sponsorship speech of Sen. Ralph Recto on why the provisions on income tax on corporation were included is worth quoting:

All in all, the proposal of the Senate Committee on Ways and Means will raise P64.3 billion in additional revenues
annually even while by mitigating prices of power, services and petroleum products.

However, not all of this will be wrung out of VAT. In fact, only P48.7 billion amount is from the VAT on twelve
goods and services. The rest of the tab P10.5 billion- will be picked by corporations.

What we therefore prescribe is a burden sharing between corporate Philippines and the consumer. Why should the
latter bear all the pain? Why should the fiscal salvation be only on the burden of the consumer?

The corporate worlds equity is in form of the increase in the corporate income tax from 32 to 35 percent, but up to
2008 only. This will raise P10.5 billion a year. After that, the rate will slide back, not to its old rate of 32 percent, but two
notches lower, to 30 percent.

Clearly, we are telling those with the capacity to pay, corporations, to bear with this emergency provision that will
be in effect for 1,200 days, while we put our fiscal house in order. This fiscal medicine will have an expiry date.

For their assistance, a reward of tax reduction awaits them. We intend to keep the length of their sacrifice brief.
We would like to assure them that not because there is a light at the end of the tunnel, this government will keep on making
the tunnel long.

The responsibility will not rest solely on the weary shoulders of the small man. Big business will be there to share
the burden.[35]

As the Court has said, the Senate can propose amendments and in fact, the amendments made on provisions in the tax on income of

corporations are germane to the purpose of the house bills which is to raise revenues for the government.

Likewise, the Court finds the sections referring to other percentage and excise taxes germane to the reforms to the VAT system, as

these sections would cushion the effects of VAT on consumers. Considering that certain goods and services which were subject to percentage tax

and excise tax would no longer be VAT-exempt, the consumer would be burdened more as they would be paying the VAT in addition to these

taxes. Thus, there is a need to amend these sections to soften the impact of VAT. Again, in his sponsorship speech, Sen. Recto said:

However, for power plants that run on oil, we will reduce to zero the present excise tax on bunker fuel, to lessen
the effect of a VAT on this product.

For electric utilities like Meralco, we will wipe out the franchise tax in exchange for a VAT.

And in the case of petroleum, while we will levy the VAT on oil products, so as not to destroy the VAT chain, we
will however bring down the excise tax on socially sensitive products such as diesel, bunker, fuel and kerosene.
 ...

What do all these exercises point to? These are not contortions of giving to the left hand what was taken from the
right. Rather, these sprang from our concern of softening the impact of VAT, so that the people can cushion the blow of
higher prices they will have to pay as a result of VAT.[36]

The other sections amended by the Senate pertained to matters of tax administration which are necessary for the implementation of the

changes in the VAT system.

To reiterate, the sections introduced by the Senate are germane to the subject matter and purposes of the house bills, which is to

supplement our countrys fiscal deficit, among others. Thus, the Senate acted within its power to propose those amendments.

SUBSTANTIVE ISSUES

I.
Whether Sections 4, 5 and 6 of R.A. No. 9337, amending Sections 106, 107 and 108 of the NIRC, violate the following provisions of the
Constitution:

a. Article VI, Section 28(1), and

b. Article VI, Section 28(2)
A. No Undue Delegation of Legislative Power

Petitioners ABAKADA GURO Party List, et al., Pimentel, Jr., et al., and Escudero, et al. contend in common that Sections 4, 5 and 6 of

R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC giving the President the stand-by authority to raise the VAT rate

from 10% to 12% when a certain condition is met, constitutes undue delegation of the legislative power to tax.

The assailed provisions read as follows:

SEC. 4. Sec. 106 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 106. Value-Added Tax on Sale of Goods or Properties.

(A) Rate and Base of Tax. There shall be levied, assessed and collected on every sale, barter or exchange
of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or
gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the
seller or transferor: provided, that the President, upon the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%),
after any of the following conditions has been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%) or

(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 %).

SEC. 5. Section 107 of the same Code, as amended, is hereby further amended to read as follows:

SEC. 107. Value-Added Tax on Importation of Goods.

(A) In General. There shall be levied, assessed and collected on every importation of goods a value-
added tax equivalent to ten percent (10%) based on the total value used by the Bureau of Customs in
determining tariff and customs duties, plus customs duties, excise taxes, if any, and other charges, such
tax to be paid by the importer prior to the release of such goods from customs custody: Provided, That
where the customs duties are determined on the basis of the quantity or volume of the goods, the value-
added tax shall be based on the landed cost plus excise taxes, if any: provided, further, that the
President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%) after any of the following conditions has
been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 %).

SEC. 6. Section 108 of the same Code, as amended, is hereby further amended to read as follows:
 SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties

(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added tax equivalent to
ten percent (10%) of gross receipts derived from the sale or exchange of services: provided, that the
President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006,
raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has
been satisfied.

(i) value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous
year exceeds two and four-fifth percent (2 4/5%) or
(ii) national government deficit as a percentage of GDP of the previous year exceeds one and one-
half percent (1 %). (Emphasis supplied)

Petitioners allege that the grant of the stand-by authority to the President to increase the VAT rate is a virtual abdication by Congress

of its exclusive power to tax because such delegation is not within the purview of Section 28 (2), Article VI of the Constitution, which provides:

The Congress may, by law, authorize the President to fix within specified limits, and may impose, tariff rates,
import and export quotas, tonnage and wharfage dues, and other duties or imposts within the framework of the national
development program of the government.

They argue that the VAT is a tax levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of

services, which cannot be included within the purview of tariffs under the exempted delegation as the latter refers to customs duties, tolls or

tribute payable upon merchandise to the government and usually imposed on goods or merchandise imported or exported.

Petitioners ABAKADA GURO Party List, et al., further contend that delegating to the President the legislative power to tax is contrary

to republicanism. They insist that accountability, responsibility and transparency should dictate the actions of Congress and they should not pass

to the President the decision to impose taxes. They also argue that the law also effectively nullified the Presidents power of control, which

includes the authority to set aside and nullify the acts of her subordinates like the Secretary of Finance, by mandating the fixing of the tax rate by

the President upon the recommendation of the Secretary of Finance.

Petitioners Pimentel, et al. aver that the President has ample powers to cause, influence or create the conditions provided by the law to

bring about either or both the conditions precedent.

On the other hand, petitioners Escudero, et al. find bizarre and revolting the situation that the imposition of the 12% rate would be

subject to the whim of the Secretary of Finance, an unelected bureaucrat, contrary to the principle of no taxation without representation. They

submit that the Secretary of Finance is not mandated to give a favorable recommendation and he may not even give his recommendation.

Moreover, they allege that no guiding standards are provided in the law on what basis and as to how he will make his recommendation. They

claim, nonetheless, that any recommendation of the Secretary of Finance can easily be brushed aside by the President since the former is a mere

alter ego of the latter, such that, ultimately, it is the President who decides whether to impose the increased tax rate or not.

A brief discourse on the principle of non-delegation of powers is instructive.

The principle of separation of powers ordains that each of the three great branches of government has exclusive cognizance of and is

supreme in matters falling within its own constitutionally allocated sphere. [37] A logical

corollary to the doctrine of separation of powers is the principle of non-delegation of powers, as expressed in the Latin maxim: potestas delegata

non delegari potest which means what has been delegated, cannot be delegated.[38] This doctrine is based on the ethical principle that such as
delegated power constitutes not only a right but a duty to be performed by the delegate through the instrumentality of his own judgment and not

through the intervening mind of another.[39]

With respect to the Legislature, Section 1 of Article VI of the Constitution provides that the Legislative power shall be vested in the

Congress of the Philippines which shall consist of a Senate and a House of Representatives. The powers which Congress is prohibited from

delegating are those which are strictly, or inherently and exclusively, legislative. Purely legislative power, which can never be delegated, has

been described as the authority to make a complete law complete as to the time when it shall take effect and as to whom it shall be

applicable and to determine the expediency of its enactment.[40] Thus, the rule is that in order that a court may be justified in holding a statute

unconstitutional as a delegation of legislative power, it must appear that the power involved is purely legislative in nature that is, one

appertaining exclusively to the legislative department. It is the nature of the power, and not the liability of its use or the manner of its exercise,

which determines the validity of its delegation.

Nonetheless, the general rule barring delegation of legislative powers is subject to the following recognized limitations or exceptions:

(1) Delegation of tariff powers to the President under Section 28 (2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President under Section 23 (2) of Article VI of the Constitution;
(3) Delegation to the people at large;
(4) Delegation to local governments; and
(5) Delegation to administrative bodies.

In every case of permissible delegation, there must be a showing that the delegation itself is valid. It is valid only if the law (a) is

complete in itself, setting forth therein the policy to be executed, carried out, or implemented by the delegate; [41] and (b) fixes a standard the

limits of which are sufficiently determinate and determinable to which the delegate must conform in the performance of his functions.[42] A

sufficient standard is one which defines legislative policy, marks its limits, maps out its boundaries and specifies the public agency to apply it. It

indicates the circumstances under which the legislative command is to be effected. [43] Both tests are intended to prevent a total transference of

legislative authority to the delegate, who is not allowed to step into the shoes of the legislature and exercise a power essentially legislative.[44]

In People vs. Vera,[45] the Court, through eminent Justice Jose P. Laurel, expounded on the concept and extent of delegation of power

in this wise:

In testing whether a statute constitutes an undue delegation of legislative power or not, it is usual to inquire
whether the statute was complete in all its terms and provisions when it left the hands of the legislature so that nothing was
left to the judgment of any other appointee or delegate of the legislature.

...

The true distinction, says Judge Ranney, is between the delegation of power to make the law, which
necessarily involves a discretion as to what it shall be, and conferring an authority or discretion as to its execution, to
be exercised under and in pursuance of the law. The first cannot be done; to the latter no valid objection can be
made.

...

It is contended, however, that a legislative act may be made to the effect as law after it leaves the hands of the
legislature. It is true that laws may be made effective on certain contingencies, as by proclamation of the executive or the
adoption by the people of a particular community. In Wayman vs. Southard, the Supreme Court of the United States ruled
that the legislature may delegate a power not legislative which it may itself rightfully exercise. The power to ascertain facts
is such a power which may be delegated. There is nothing essentially legislative in ascertaining the existence of facts
or conditions as the basis of the taking into effect of a law. That is a mental process common to all branches of the
government. Notwithstanding the apparent tendency, however, to relax the rule prohibiting delegation of legislative
authority on account of the complexity arising from social and economic forces at work in this modern industrial age, the
orthodox pronouncement of Judge Cooley in his work on Constitutional Limitations finds restatement in Prof. Willoughby's
 treatise on the Constitution of the United States in the following language speaking of declaration of legislative power to
administrative agencies: The principle which permits the legislature to provide that the administrative agent may
determine when the circumstances are such as require the application of a law is defended upon the ground that at
the time this authority is granted, the rule of public policy, which is the essence of the legislative act, is determined by
the legislature. In other words, the legislature, as it is its duty to do, determines that, under given circumstances,
certain executive or administrative action is to be taken, and that, under other circumstances, different or no action
at all is to be taken. What is thus left to the administrative official is not the legislative determination of what public
policy demands, but simply the ascertainment of what the facts of the case require to be done according to the terms
of the law by which he is governed. The efficiency of an Act as a declaration of legislative will must, of course, come
from Congress, but the ascertainment of the contingency upon which the Act shall take effect may be left to such
agencies as it may designate. The legislature, then, may provide that a law shall take effect upon the happening of
future specified contingencies leaving to some other person or body the power to determine when the specified
contingency has arisen. (Emphasis supplied).[46]

In Edu vs. Ericta,[47] the Court reiterated:

What cannot be delegated is the authority under the Constitution to make laws and to alter and repeal them; the test
is the completeness of the statute in all its terms and provisions when it leaves the hands of the legislature. To determine
whether or not there is an undue delegation of legislative power, the inquiry must be directed to the scope and definiteness of
the measure enacted. The legislative does not abdicate its functions when it describes what job must be done, who is to
do it, and what is the scope of his authority. For a complex economy, that may be the only way in which the legislative
process can go forward. A distinction has rightfully been made between delegation of power to make the laws which
necessarily involves a discretion as to what it shall be, which constitutionally may not be done, and delegation of
authority or discretion as to its execution to be exercised under and in pursuance of the law, to which no valid
objection can be made. The Constitution is thus not to be regarded as denying the legislature the necessary resources of
flexibility and practicability. (Emphasis supplied).[48]

Clearly, the legislature may delegate to executive officers or bodies the power to determine certain facts or conditions, or the

happening of contingencies, on which the operation of a statute is, by its terms, made to depend, but the legislature must prescribe sufficient

standards, policies or limitations on their authority.[49] While the power to tax cannot be delegated to executive agencies, details as to the

enforcement and administration of an exercise of such power may be left to them, including the power to determine the existence of facts on

which its operation depends.[50]

The rationale for this is that the preliminary ascertainment of facts as basis for the enactment of legislation is not of itself a legislative

function, but is simply ancillary to legislation. Thus, the duty of correlating information and making recommendations is the kind of subsidiary

activity which the legislature may perform through its members, or which it may delegate to others to perform. Intelligent legislation on the

complicated problems of modern society is impossible in the absence of accurate information on the part of the legislators, and any reasonable

method of securing such information is proper.[51] The Constitution as a continuously operative charter of government does not require that

Congress find for itself

every fact upon which it desires to base legislative action or that it make for itself detailed determinations which it has declared to be prerequisite

to application of legislative policy to particular facts and circumstances impossible for Congress itself properly to investigate.[52]

In the present case, the challenged section of R.A. No. 9337 is the common proviso in Sections 4, 5 and 6 which reads as follows:

That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the
rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied:

(i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the
previous year exceeds two and four-fifth percent (2 4/5%); or

(ii) National government deficit as a percentage of GDP of the previous year exceeds one and
one-half percent (1 %).
 The case before the Court is not a delegation of legislative power. It is simply a delegation of ascertainment of facts upon which

enforcement and administration of the increase rate under the law is contingent. The legislature has made the operation of the 12% rate effective

January 1, 2006, contingent upon a specified fact or condition. It leaves the entire operation or non-operation of the 12% rate upon factual

matters outside of the control of the executive.

No discretion would be exercised by the President. Highlighting the absence of discretion is the fact that the word shall is used in the

common proviso. The use of the word shall connotes a mandatory order. Its use in a statute denotes an imperative obligation and is inconsistent

with the idea of discretion.[53] Where the law is clear and unambiguous, it must be taken to mean exactly what it says, and courts have no choice

but to see to it that the mandate is obeyed.[54]

Thus, it is the ministerial duty of the President to immediately impose the 12% rate upon the existence of any of the conditions

specified by Congress. This is a duty which cannot be evaded by the President. Inasmuch as the law specifically uses the word shall, the exercise

of discretion by the President does not come into play. It is a clear directive to impose the 12% VAT rate when the specified conditions are

present. The time of taking into effect of the 12% VAT rate is based on the happening of a certain specified contingency, or upon the

ascertainment of certain facts or conditions by a person or body other than the legislature itself.

The Court finds no merit to the contention of petitioners ABAKADA GURO Party List, et al. that the law effectively nullified the

Presidents power of control over the Secretary of Finance by mandating the fixing of the tax rate by the President upon the recommendation of

the Secretary of Finance. The Court cannot also subscribe to the position of petitioners

Pimentel, et al. that the word shall should be interpreted to mean may in view of the phrase upon the recommendation of the Secretary of

Finance. Neither does the Court find persuasive the submission of petitioners Escudero, et al. that any recommendation by the Secretary of

Finance can easily be brushed aside by the President since the former is a mere alter ego of the latter.

When one speaks of the Secretary of Finance as the alter ego of the President, it simply means that as head of the Department of

Finance he is the assistant and agent of the Chief Executive. The multifarious executive and administrative functions of the Chief Executive are

performed by and through the executive departments, and the acts of the secretaries of such departments, such as the Department of Finance,

performed and promulgated in the regular course of business, are, unless disapproved or reprobated by the Chief Executive, presumptively the

acts of the Chief Executive. The Secretary of Finance, as such, occupies a political position and holds office in an advisory capacity, and, in the

language of Thomas Jefferson, "should be of the President's bosom confidence" and, in the language of Attorney-General Cushing, is subject to

the direction of the President."[55]

In the present case, in making his recommendation to the President on the existence of either of the two conditions, the Secretary of

Finance is not acting as the alter ego of the President or even her subordinate. In such instance, he is not subject to the power of control and

direction of the President. He is acting as the agent of the legislative department, to determine and declare the event upon which its expressed

will is to take effect.[56] The Secretary of Finance becomes the means or tool by which legislative policy is determined and implemented,

considering that he possesses all the facilities to gather data and information and has a much broader perspective to properly evaluate them. His

function is to gather and collate statistical data and other pertinent information and verify if any of the two conditions laid out by Congress is

present. His personality in such instance is in reality but a projection of that of Congress. Thus, being the agent of Congress and not of the
President, the President cannot alter or modify or nullify, or set aside the findings of the Secretary of Finance and to substitute the judgment of

the former for that of the latter.

Congress simply granted the Secretary of Finance the authority to ascertain the existence of a fact, namely, whether by December 31,

2005, the value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent

(24/5%) or the national government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1%). If either of these

two instances has occurred, the Secretary of Finance, by legislative mandate, must submit such information to the President. Then the 12% VAT

rate must be imposed by the President effective January 1, 2006. There is no undue delegation of legislative power but only of the discretion

as to the execution of a law. This is constitutionally permissible.[57] Congress does not abdicate its functions or unduly delegate power when it

describes what job must be done, who must do it, and what is the scope of his authority; in our complex economy that is frequently the only way

in which the legislative process can go forward.[58]

As to the argument of petitioners ABAKADA GURO Party List, et al. that delegating to the President the legislative power to tax is

contrary to the principle of republicanism, the same deserves scant consideration. Congress did not delegate the power to tax but the mere

implementation of the law. The intent and will to increase the VAT rate to 12% came from Congress and the task of the President is to simply

execute the legislative policy. That Congress chose to do so in such a manner is not within the province of the Court to inquire into, its task

being to interpret the law.[59]

The insinuation by petitioners Pimentel, et al. that the President has ample powers to cause, influence or create the conditions to bring about

either or both the conditions precedent does not deserve any merit as this argument is highly speculative. The Court does not rule on allegations

which are manifestly conjectural, as these may not exist at all. The Court deals with facts, not fancies; on realities, not appearances. When the

Court acts on appearances instead of realities, justice and law will be short-lived.

B. The 12% Increase VAT Rate Does Not Impose an Unfair and Unnecessary Additional Tax Burden

Petitioners Pimentel, et al. argue that the 12% increase in the VAT rate imposes an unfair and additional tax burden on the people.

Petitioners also argue that the 12% increase, dependent on any of the 2 conditions set forth in the contested provisions, is ambiguous because it

does not state if the VAT rate would be returned to the original 10% if the rates are no longer satisfied. Petitioners also argue that such rate is

unfair and unreasonable, as the people are unsure of the applicable VAT rate from year to year.

Under the common provisos of Sections 4, 5 and 6 of R.A. No. 9337, if any of the two conditions set forth therein are satisfied, the

President shall increase the VAT rate to 12%. The provisions of the law are clear. It does not provide for a return to the 10% rate nor does it

empower the President to so revert if, after the rate is increased to 12%, the VAT collection goes below the 2 4/5 of the GDP of the previous year

or that the national government deficit as a percentage of GDP of the previous year does not exceed 1%.

Therefore, no statutory construction or interpretation is needed. Neither can conditions or limitations be introduced where none is

provided for. Rewriting the law is a forbidden ground that only Congress may tread upon.[60]

Thus, in the absence of any provision providing for a return to the 10% rate, which in this case the Court finds none, petitioners

argument is, at best, purely speculative. There is no basis for petitioners fear of a fluctuating VAT rate because the law itself does not provide
that the rate should go back to 10% if the conditions provided in Sections 4, 5 and 6 are no longer present. The rule is that where the provision of

the law is clear and unambiguous, so that there is no occasion for the court's seeking the legislative intent, the law must be taken as it is, devoid

of judicial addition or subtraction.[61]

Petitioners also contend that the increase in the VAT rate, which was allegedly an incentive to the President to raise the VAT

collection to at least 2 4/5 of the GDP of the previous year, should be based on fiscal adequacy.

Petitioners obviously overlooked that increase in VAT collection is not the only condition. There is another condition, i.e., the national

government deficit as a percentage of GDP of the previous year exceeds one and one-half percent (1 %).

Respondents explained the philosophy behind these alternative conditions:

1. VAT/GDP Ratio > 2.8%

The condition set for increasing VAT rate to 12% have economic or fiscal meaning. If VAT/GDP is less than
2.8%, it means that government has weak or no capability of implementing the VAT or that VAT is not effective in the
function of the tax collection. Therefore, there is no value to increase it to 12% because such action will also be ineffectual.

2. Natl Govt Deficit/GDP >1.5%

The condition set for increasing VAT when deficit/GDP is 1.5% or less means the fiscal condition of government
has reached a relatively sound position or is towards the direction of a balanced budget position. Therefore, there is no need
to increase the VAT rate since the fiscal house is in a relatively healthy position. Otherwise stated, if the ratio is more than
1.5%, there is indeed a need to increase the VAT rate.[62]

That the first condition amounts to an incentive to the President to increase the VAT collection does not render it unconstitutional so

long as there is a public purpose for which the law was passed, which in this case, is mainly to raise revenue. In fact, fiscal adequacy dictated the

need for a raise in revenue.

The principle of fiscal adequacy as a characteristic of a sound tax system was originally stated by Adam Smith in his Canons of

Taxation (1776), as:

IV. Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible
over and above what it brings into the public treasury of the state. [63]

It simply means that sources of revenues must be adequate to meet government expenditures and their variations. [64]

The dire need for revenue cannot be ignored. Our country is in a quagmire of financial woe. During the Bicameral Conference

Committee hearing, then Finance Secretary Purisima bluntly depicted the countrys gloomy state of economic affairs, thus:

First, let me explain the position that the Philippines finds itself in right now. We are in a position where 90
percent of our revenue is used for debt service. So, for every peso of revenue that we currently raise, 90 goes to debt service.
Thats interest plus amortization of our debt. So clearly, this is not a sustainable situation. Thats the first fact.

The second fact is that our debt to GDP level is way out of line compared to other peer countries that borrow
money from that international financial markets. Our debt to GDP is approximately equal to our GDP. Again, that shows you
that this is not a sustainable situation.

The third thing that Id like to point out is the environment that we are presently operating in is not as benign as
what it used to be the past five years.

What do I mean by that?

In the past five years, weve been lucky because we were operating in a period of basically global growth and low
interest rates. The past few months, we have seen an inching up, in fact, a rapid increase in the interest rates in the leading
economies of the world. And, therefore, our ability to borrow at reasonable prices is going to be challenged. In fact,
ultimately, the question is our ability to access the financial markets.
 When the President made her speech in July last year, the environment was not as bad as it is now, at least based
on the forecast of most financial institutions. So, we were assuming that raising 80 billion would put us in a position where
we can then convince them to improve our ability to borrow at lower rates. But conditions have changed on us because the
interest rates have gone up. In fact, just within this room, we tried to access the market for a billion dollars because for this
year alone, the Philippines will have to borrow 4 billion dollars. Of that amount, we have borrowed 1.5 billion. We issued
last January a 25-year bond at 9.7 percent cost. We were trying to access last week and the market was not as favorable and
up to now we have not accessed and we might pull back because the conditions are not very good.

So given this situation, we at the Department of Finance believe that we really need to front-end our deficit
reduction. Because it is deficit that is causing the increase of the debt and we are in what we call a debt spiral. The more debt
you have, the more deficit you have because interest and debt service eats and eats more of your revenue. We need to get out
of this debt spiral. And the only way, I think, we can get out of this debt spiral is really have a front-end adjustment in our
revenue base.[65]

The image portrayed is chilling. Congress passed the law hoping for rescue from an inevitable catastrophe. Whether the law is indeed

sufficient to answer the states economic dilemma is not for the Court to judge. In the Farias case, the Court refused to consider the various

arguments raised therein that dwelt on the wisdom of Section 14 of R.A. No. 9006 (The Fair Election Act), pronouncing that:

. . . policy matters are not the concern of the Court. Government policy is within the exclusive dominion of the
political branches of the government. It is not for this Court to look into the wisdom or propriety of legislative determination.
Indeed, whether an enactment is wise or unwise, whether it is based on sound economic theory, whether it is the best means
to achieve the desired results, whether, in short, the legislative discretion within its prescribed limits should be exercised in a
particular manner are matters for the judgment of the legislature, and the serious conflict of opinions does not suffice to
bring them within the range of judicial cognizance.[66]

In the same vein, the Court in this case will not dawdle on the purpose of Congress or the executive policy, given that it is not for the

judiciary to "pass upon questions of wisdom, justice or expediency of legislation. [67]

II.
Whether Section 8 of R.A. No. 9337, amending Sections 110(A)(2) and 110(B) of the NIRC; and Section 12 of R.A. No. 9337, amending
Section 114(C) of the NIRC, violate the following provisions of the Constitution:

a. Article VI, Section 28(1), and

b. Article III, Section 1

A. Due Process and Equal Protection Clauses

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. argue that Section 8 of R.A. No. 9337, amending Sections 110 (A)(2),

110 (B), and Section 12 of R.A. No. 9337, amending Section 114 (C) of the NIRC are arbitrary, oppressive, excessive and confiscatory. Their

argument is premised on the constitutional right against deprivation of life, liberty of property without due process of law, as embodied in Article

III, Section 1 of the Constitution.

Petitioners also contend that these provisions violate the constitutional guarantee of equal protection of the law.

The doctrine is that where the due process and equal protection clauses are invoked, considering that they are not fixed rules but rather

broad standards, there is a need for proof of such persuasive character as would lead to such a conclusion. Absent such a showing, the

presumption of validity must prevail.[68]

Section 8 of R.A. No. 9337, amending Section 110(B) of the NIRC imposes a limitation on the amount of input tax that may be

credited against the output tax. It states, in part: [P]rovided, that the input tax inclusive of the input VAT carried over from the previous quarter

that may be credited in every quarter shall not exceed seventy percent (70%) of the output VAT:
 Input Tax is defined under Section 110(A) of the NIRC, as amended, as the value-added tax due from or paid by a VAT-registered

person on the importation of goods or local purchase of good and services, including lease or use of property, in the course of trade or business,

from a VAT-registered person, and Output Tax is the value-added tax due on the sale or lease of taxable goods or properties or services by any

person registered or required to register under the law.

Petitioners claim that the contested sections impose limitations on the amount of input tax that may be claimed. In effect, a portion of

the input tax that has already been paid cannot now be credited against the output tax.

Petitioners argument is not absolute. It assumes that the input tax exceeds 70% of the output tax, and therefore, the input tax in excess

of 70% remains uncredited. However, to the extent that the input tax is less than 70% of the output tax, then 100% of such input tax is still

creditable.

More importantly, the excess input tax, if any, is retained in a businesss books of accounts and remains creditable in the succeeding

quarter/s. This is explicitly allowed by Section 110(B), which provides that if the input tax exceeds the output tax, the excess shall be carried

over to the succeeding quarter or quarters. In addition, Section 112(B) allows a VAT-registered person to apply for the issuance of a tax credit

certificate or refund for any unused input taxes, to the extent that such input taxes have not been applied against the output taxes. Such unused

input tax may be used in payment of his other internal revenue taxes.

The non-application of the unutilized input tax in a given quarter is not ad infinitum, as petitioners exaggeratedly contend. Their

analysis of the effect of the 70% limitation is incomplete and one-sided. It ends at the net effect that there will be unapplied/unutilized inputs

VAT for a given quarter. It does not proceed further to the fact that such unapplied/unutilized input tax may be credited in the subsequent

periods as allowed by the carry-over provision of Section 110(B) or that it may later on be refunded through a tax credit certificate under Section

112(B).

Therefore, petitioners argument must be rejected.

On the other hand, it appears that petitioner Garcia failed to comprehend the operation of the 70% limitation on the input tax.

According to petitioner, the limitation on the creditable input tax in effect allows VAT-registered establishments to retain a portion of the taxes

they collect, which violates the principle that tax collection and revenue should be for public purposes and expenditures

As earlier stated, the input tax is the tax paid by a person, passed on to him by the seller, when he buys goods. Output tax meanwhile is

the tax due to the person when he sells goods. In computing the VAT payable, three possible scenarios may arise:

First, if at the end of a taxable quarter the output taxes charged by the seller are equal to the input taxes that he paid and passed on by

the suppliers, then no payment is required;

Second, when the output taxes exceed the input taxes, the person shall be liable for the excess, which has to be paid to the Bureau of

Internal Revenue (BIR);[69] and

Third, if the input taxes exceed the output taxes, the excess shall be carried over to the succeeding quarter or quarters. Should the

input taxes result from zero-rated or effectively zero-rated transactions, any excess over the output taxes shall instead be refunded to the taxpayer

or credited against other internal revenue taxes, at the taxpayers option.[70]

 Section 8 of R.A. No. 9337 however, imposed a 70% limitation on the input tax. Thus, a person can credit his input tax only up to the

extent of 70% of the output tax. In laymans term, the value-added taxes that a person/taxpayer paid and passed on to him by a seller can only be

credited up to 70% of the value-added taxes that is due to him on a taxable transaction. There is no retention of any tax collection because the

person/taxpayer has already previously paid the input tax to a seller, and the seller will subsequently remit such input tax to the BIR. The party

directly liable for the payment of the tax is the seller.[71] What only needs to be done is for the person/taxpayer to apply or credit these input

taxes, as evidenced by receipts, against his output taxes.

Petitioners Association of Pilipinas Shell Dealers, Inc., et al. also argue that the input tax partakes the nature of a property that may not

be confiscated, appropriated, or limited without due process of law.

The input tax is not a property or a property right within the constitutional purview of the due process clause. A VAT-registered

persons entitlement to the creditable input tax is a mere statutory privilege.

The distinction between statutory privileges and vested rights must be borne in mind for persons have no vested rights in statutory

privileges. The state may change or take away rights, which were created by the law of the state, although it may not take away property, which

was vested by virtue of such rights.[72]

Under the previous system of single-stage taxation, taxes paid at every level of distribution are not recoverable from the taxes payable,

although it becomes part of the cost, which is deductible from the gross revenue. When Pres. Aquino issued E.O. No. 273 imposing a 10% multi-

stage tax on all sales, it was then that the crediting of the input tax paid on purchase or importation of goods and services by VAT-registered

persons against the output tax was introduced.[73] This was adopted by the Expanded VAT Law (R.A. No. 7716), [74] and The Tax Reform Act of

1997 (R.A. No. 8424).[75] The right to credit input tax as against the output tax is clearly a privilege created by law, a privilege that also the law

can remove, or in this case, limit.

Petitioners also contest as arbitrary, oppressive, excessive and confiscatory, Section 8 of R.A. No. 9337, amending Section 110(A) of

the NIRC, which provides:

SEC. 110. Tax Credits.

(A) Creditable Input Tax.

Provided, That the input tax on goods purchased or imported in a calendar month for use in trade or business for which
deduction for depreciation is allowed under this Code, shall be spread evenly over the month of acquisition and the fifty-nine
(59) succeeding months if the aggregate acquisition cost for such goods, excluding the VAT component thereof, exceeds
One million pesos (P1,000,000.00): Provided, however, That if the estimated useful life of the capital goods is less than five
(5) years, as used for depreciation purposes, then the input VAT shall be spread over such a shorter period: Provided, finally,
That in the case of purchase of services, lease or use of properties, the input tax shall be creditable to the purchaser, lessee or
license upon payment of the compensation, rental, royalty or fee.

The foregoing section imposes a 60-month period within which to amortize the creditable input tax on purchase or importation of

capital goods with acquisition cost of P1 Million pesos, exclusive of the VAT component. Such spread out only poses a delay in the crediting of

the input tax. Petitioners argument is without basis because the taxpayer is not permanently deprived of his privilege to credit the input tax.

It is worth mentioning that Congress admitted that the spread-out of the creditable input tax in this case amounts to a 4-year interest-

free loan to the government.[76] In the same breath, Congress also justified its move by saying that the provision was designed to raise an annual

revenue of 22.6 billion.[77] The legislature also dispelled the fear that the provision will fend off foreign investments, saying that foreign
investors have other tax incentives provided by law, and citing the case of China, where despite a 17.5% non-creditable VAT, foreign

investments were not deterred.[78] Again, for whatever is the purpose of the 60-month amortization, this involves executive economic policy and

legislative wisdom in which the Court cannot intervene.

With regard to the 5% creditable withholding tax imposed on payments made by the government for taxable transactions, Section 12

of R.A. No. 9337, which amended Section 114 of the NIRC, reads:

SEC. 114. Return and Payment of Value-added Tax.

(C) Withholding of Value-added Tax. The Government or any of its political subdivisions, instrumentalities or
agencies, including government-owned or controlled corporations (GOCCs) shall, before making payment on account of
each purchase of goods and services which are subject to the value-added tax imposed in Sections 106 and 108 of this Code,
deduct and withhold a final value-added tax at the rate of five percent (5%) of the gross payment thereof: Provided, That the
payment for lease or use of properties or property rights to nonresident owners shall be subject to ten percent (10%)
withholding tax at the time of payment. For purposes of this Section, the payor or person in control of the payment shall be
considered as the withholding agent.

The value-added tax withheld under this Section shall be remitted within ten (10) days following the end of the
month the withholding was made.

Section 114(C) merely provides a method of collection, or as stated by respondents, a more simplified VAT withholding system. The

government in this case is constituted as a withholding agent with respect to their payments for goods and services.

Prior to its amendment, Section 114(C) provided for different rates of value-added taxes to be withheld -- 3% on gross payments for

purchases of goods; 6% on gross payments for services supplied by contractors other than by public works contractors; 8.5% on gross payments

for services supplied by public work contractors; or 10% on payment for the lease or use of properties or property rights to nonresident owners.

Under the present Section 114(C), these different rates, except for the 10% on lease or property rights payment to nonresidents, were deleted,

and a uniform rate of 5% is applied.

The Court observes, however, that the law the used the word final. In tax usage, final, as opposed to creditable, means full. Thus, it is

provided in Section 114(C): final value-added tax at the rate of five percent (5%).

In Revenue Regulations No. 02-98, implementing R.A. No. 8424 (The Tax Reform Act of 1997), the concept of final withholding tax

on income was explained, to wit:

SECTION 2.57. Withholding of Tax at Source

(A) Final Withholding Tax. Under the final withholding tax system the amount of income tax withheld by the
withholding agent is constituted as full and final payment of the income tax due from the payee on the said income. The
liability for payment of the tax rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold
the tax or in case of underwithholding, the deficiency tax shall be collected from the payor/withholding agent.

(B) Creditable Withholding Tax. Under the creditable withholding tax system, taxes withheld on certain income
payments are intended to equal or at least approximate the tax due of the payee on said income. Taxes withheld on income
payments covered by the expanded withholding tax (referred to in Sec. 2.57.2 of these regulations) and compensation
income (referred to in Sec. 2.78 also of these regulations) are creditable in nature.

As applied to value-added tax, this means that taxable transactions with the government are subject to a 5% rate, which constitutes as

full payment of the tax payable on the transaction. This represents the net VAT payable of the seller. The other 5% effectively accounts for the

standard input VAT (deemed input VAT), in lieu of the actual input VAT directly or attributable to the taxable transaction. [79]
 The Court need not explore the rationale behind the provision. It is clear that Congress intended to treat differently taxable transactions

with the government.[80] This is supported by the fact that under the old provision, the 5% tax withheld by the government remains creditable

against the tax liability of the seller or contractor, to wit:

SEC. 114. Return and Payment of Value-added Tax.

(C) Withholding of Creditable Value-added Tax. The Government or any of its political subdivisions,
instrumentalities or agencies, including government-owned or controlled corporations (GOCCs) shall, before making
payment on account of each purchase of goods from sellers and services rendered by contractors which are subject to the
value-added tax imposed in Sections 106 and 108 of this Code, deduct and withhold the value-added tax due at the rate of
three percent (3%) of the gross payment for the purchase of goods and six percent (6%) on gross receipts for services
rendered by contractors on every sale or installment payment which shall be creditable against the value-added tax
liability of the seller or contractor: Provided, however, That in the case of government public works contractors, the
withholding rate shall be eight and one-half percent (8.5%): Provided, further, That the payment for lease or use of properties
or property rights to nonresident owners shall be subject to ten percent (10%) withholding tax at the time of payment. For
this purpose, the payor or person in control of the payment shall be considered as the withholding agent.

The valued-added tax withheld under this Section shall be remitted within ten (10) days following the end of the
month the withholding was made. (Emphasis supplied)

As amended, the use of the word final and the deletion of the word creditable exhibits Congresss intention to treat transactions with

the government differently. Since it has not been shown that the class subject to the 5% final withholding tax has been unreasonably narrowed,

there is no reason to invalidate the provision. Petitioners, as petroleum dealers, are not the only ones subjected to the 5% final withholding tax. It

applies to all those who deal with the government.

Moreover, the actual input tax is not totally lost or uncreditable, as petitioners believe. Revenue Regulations No. 14-2005 or the

Consolidated Value-Added Tax Regulations 2005 issued by the BIR, provides that should the actual input tax exceed 5% of gross payments, the

excess may form part of the cost. Equally, should the actual input tax be less than 5%, the difference is treated as income. [81]

Petitioners also argue that by imposing a limitation on the creditable input tax, the government gets to tax a profit or value-added even

if there is no profit or value-added.

Petitioners stance is purely hypothetical, argumentative, and again, one-sided. The Court will not engage in a legal joust where

premises are what ifs, arguments, theoretical and facts, uncertain. Any disquisition by the Court on this point will only be, as Shakespeare

describes life in Macbeth,[82] full of sound and fury, signifying nothing.

Whats more, petitioners contention assumes the proposition that there is no profit or value-added. It need not take an astute

businessman to know that it is a matter of exception that a business will sell goods or services without profit or value-added. It cannot be

overstressed that a business is created precisely for profit.

The equal protection clause under the Constitution means that no person or class of persons shall be deprived of the same protection of

laws which is enjoyed by other persons or other classes in the same place and in like circumstances. [83]

The power of the State to make reasonable and natural classifications for the purposes of taxation has long been established. Whether it

relates to the subject of taxation, the kind of property, the rates to be levied, or the amounts to be raised, the methods of assessment, valuation

and collection, the States power is entitled to presumption of validity. As a rule, the judiciary will not interfere with such power absent a clear

showing of unreasonableness, discrimination, or arbitrariness. [84]

 Petitioners point out that the limitation on the creditable input tax if the entity has a high ratio of input tax, or invests in capital

equipment, or has several transactions with the government, is not based on real and substantial differences to meet a valid classification.

The argument is pedantic, if not outright baseless. The law does not make any classification in the subject of taxation, the kind of

property, the rates to be levied or the amounts to be raised, the methods of assessment, valuation and collection. Petitioners alleged distinctions

are based on variables that bear different consequences. While the implementation of the law may yield varying end results depending on ones

profit margin and value-added, the Court cannot go beyond what the legislature has laid down and interfere with the affairs of business.

The equal protection clause does not require the universal application of the laws on all persons or things without distinction. This

might in fact sometimes result in unequal protection. What the clause requires is equality among equals as determined according to a valid

classification. By classification is meant the grouping of persons or things similar to each other in certain particulars and different from all others

in these same particulars.[85]

Petitioners brought to the Courts attention the introduction of Senate Bill No. 2038 by Sens. S.R. Osmea III and Ma. Ana Consuelo

A.S. Madrigal on June 6, 2005, and House Bill No. 4493 by Rep. Eric D. Singson. The proposed legislation seeks to amend the 70% limitation

by increasing the same to 90%. This, according to petitioners, supports their stance that the 70% limitation is arbitrary and confiscatory. On this

score, suffice it to say that these are still proposed legislations. Until Congress amends the law, and absent any unequivocal basis for its

unconstitutionality, the 70% limitation stays.

B. Uniformity and Equitability of Taxation

Article VI, Section 28(1) of the Constitution reads:

The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.

Uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. Different

articles may be taxed at different amounts provided that the rate is uniform on the same class everywhere with all people at all times.[86]

In this case, the tax law is uniform as it provides a standard rate of 0% or 10% (or 12%) on all goods and services. Sections 4, 5 and 6

of R.A. No. 9337, amending Sections 106, 107 and 108, respectively, of the NIRC, provide for a rate of 10% (or 12%) on sale of goods and

properties, importation of goods, and sale of services and use or lease of properties. These same sections also provide for a 0% rate on certain

sales and transaction.

Neither does the law make any distinction as to the type of industry or trade that will bear the 70% limitation on the creditable input

tax, 5-year amortization of input tax paid on purchase of capital goods or the 5% final withholding tax by the government. It must be stressed

that the rule of uniform taxation does not deprive Congress of the power to classify subjects of taxation, and only demands uniformity within the

particular class.[87]

R.A. No. 9337 is also equitable. The law is equipped with a threshold margin. The VAT rate of 0% or 10% (or 12%) does not apply to

sales of goods or services with gross annual sales or receipts not exceeding P1,500,000.00.[88] Also, basic marine and agricultural food products
in their original state are still not subject to the tax,[89] thus ensuring that prices at the grassroots level will remain accessible. As was stated

in Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan:[90]

The disputed sales tax is also equitable. It is imposed only on sales of goods or services by persons engaged in
business with an aggregate gross annual sales exceeding P200,000.00. Small corner sari-saristores are consequently exempt
from its application. Likewise exempt from the tax are sales of farm and marine products, so that the costs of basic food and
other necessities, spared as they are from the incidence of the VAT, are expected to be relatively lower and within the reach
of the general public.

It is admitted that R.A. No. 9337 puts a premium on businesses with low profit margins, and unduly favors those with high profit

margins. Congress was not oblivious to this. Thus, to equalize the weighty burden the law entails, the law, under Section 116, imposed a 3%

percentage tax on VAT-exempt persons under Section 109(v), i.e., transactions with gross annual sales and/or receipts not exceeding P1.5

Million. This acts as a equalizer because in effect, bigger businesses that qualify for VAT coverage and VAT-exempt taxpayers stand on equal-

footing.

Moreover, Congress provided mitigating measures to cushion the impact of the imposition of the tax on those previously exempt.

Excise taxes on petroleum products[91] and natural gas[92]were reduced. Percentage tax on domestic carriers was removed.[93] Power producers

are now exempt from paying franchise tax.[94]

Aside from these, Congress also increased the income tax rates of corporations, in order to distribute the burden of taxation. Domestic,

foreign, and non-resident corporations are now subject to a 35% income tax rate, from a previous 32%. [95] Intercorporate dividends of non-

resident foreign corporations are still subject to 15% final withholding tax but the tax credit allowed on the corporations domicile was increased

to 20%.[96] The Philippine Amusement and Gaming Corporation (PAGCOR) is not exempt from income taxes anymore. [97] Even the sale by an

artist of his works or services performed for the production of such works was not spared.

All these were designed to ease, as well as spread out, the burden of taxation, which would otherwise rest largely on the consumers. It

cannot therefore be gainsaid that R.A. No. 9337 is equitable.

C. Progressivity of Taxation

Lastly, petitioners contend that the limitation on the creditable input tax is anything but regressive. It is the smaller business with

higher input tax-output tax ratio that will suffer the consequences.

Progressive taxation is built on the principle of the taxpayers ability to pay. This principle was also lifted from Adam Smiths Canons

of Taxation, and it states:

I. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion
to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection
of the state.

Taxation is progressive when its rate goes up depending on the resources of the person affected. [98]

The VAT is an antithesis of progressive taxation. By its very nature, it is regressive. The principle of progressive taxation has no

relation with the VAT system inasmuch as the VAT paid by the consumer or business for every goods bought or services enjoyed is the same

regardless of income. In

other words, the VAT paid eats the same portion of an income, whether big or small. The disparity lies in the income earned by a person or profit

margin marked by a business, such that the higher the income or profit margin, the smaller the portion of the income or profit that is eaten by
VAT. A converso, the lower the income or profit margin, the bigger the part that the VAT eats away. At the end of the day, it is really the lower

income group or businesses with low-profit margins that is always hardest hit.

Nevertheless, the Constitution does not really prohibit the imposition of indirect taxes, like the VAT. What it simply provides is that

Congress shall "evolve a progressive system of taxation." The Court stated in the Tolentino case, thus:

The Constitution does not really prohibit the imposition of indirect taxes which, like the VAT, are regressive. What
it simply provides is that Congress shall evolve a progressive system of taxation. The constitutional provision has been
interpreted to mean simply that direct taxes are . . . to be preferred [and] as much as possible, indirect taxes should be
minimized. (E. FERNANDO, THE CONSTITUTION OF THE PHILIPPINES 221 (Second ed. 1977)) Indeed, the mandate
to Congress is not to prescribe, but to evolve, a progressive tax system. Otherwise, sales taxes, which perhaps are the oldest
form of indirect taxes, would have been prohibited with the proclamation of Art. VIII, 17 (1) of the 1973 Constitution from
which the present Art. VI, 28 (1) was taken. Sales taxes are also regressive.

Resort to indirect taxes should be minimized but not avoided entirely because it is difficult, if not impossible, to
avoid them by imposing such taxes according to the taxpayers' ability to pay. In the case of the VAT, the law minimizes the
regressive effects of this imposition by providing for zero rating of certain transactions (R.A. No. 7716, 3, amending 102 (b)
of the NIRC), while granting exemptions to other transactions. (R.A. No. 7716, 4 amending 103 of the NIRC) [99]

CONCLUSION

It has been said that taxes are the lifeblood of the government. In this case, it is just an enema, a first-aid measure to resuscitate an

economy in distress. The Court is neither blind nor is it turning a deaf ear on the plight of the masses. But it does not have the panacea for the

malady that the law seeks to remedy. As in other cases, the Court cannot strike down a law as unconstitutional simply because of its yokes.

Let us not be overly influenced by the plea that for every wrong there is a remedy, and that the judiciary should
stand ready to afford relief. There are undoubtedly many wrongs the judicature may not correct, for instance, those involving
political questions. . . .

Let us likewise disabuse our minds from the notion that the judiciary is the repository of remedies for all political
or social ills; We should not forget that the Constitution has judiciously allocated the powers of government to three distinct
and separate compartments; and that judicial interpretation has tended to the preservation of the independence of the three,
and a zealous regard of the prerogatives of each, knowing full well that one is not the guardian of the others and that, for
official wrong-doing, each may be brought to account, either by impeachment, trial or by the ballot box. [100]

The words of the Court in Vera vs. Avelino[101] holds true then, as it still holds true now. All things considered, there is no raison

d'tre for the unconstitutionality of R.A. No. 9337.

WHEREFORE, Republic Act No. 9337 not being unconstitutional, the petitions in G.R. Nos. 168056, 168207, 168461, 168463, and

168730, are hereby DISMISSED.

There being no constitutional impediment to the full enforcement and implementation of R.A. No. 9337, the temporary restraining

order issued by the Court on July 1, 2005 is LIFTED upon finality of herein decision.

SO ORDERED.

MA. ALICIA AUSTRIA-MARTINEZ

Associate Justice

WE CONCUR:
 HILARIO G. DAVIDE, JR.
Chief Justice

REYNATO S. PUNO ARTEMIO V. PANGANIBAN

Associate Justice Associate Justice

LEONARDO A. QUISUMBING CONSUELO YNARES-SANTIAGO

Associate Justice Associate Justice

ANGELINA SANDOVAL-GUTIERREZ ANTONIO T. CARPIO

Associate Justice Associate Justice

RENATO C. CORONA CONCHITA CARPIO-MORALES

Associate Justice Associate Justice

ROMEO J. CALLEJO, SR. ADOLFO S. AZCUNA

Associate Justice Associate Justice

DANTE O. TINGA MINITA V. CHICO-NAZARIO

Associate Justice Associate Justice

CANCIO C. GARCIA
Associate Justice

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, it is hereby certified that the conclusions in the above Decision were reached in
consultation before the case was assigned to the writer of the opinion of the Court.

HILARIO G. DAVIDE, JR.

Chief Justice

[1]
Entitled An Act Amending Sections 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148, 151, 236,
237, and 288 of the National Internal Revenue Code of 1997, As Amended and For Other Purposes.
[2]
Entitled, An Act Restructuring the Value-Added Tax, Amending for the Purpose Sections 106, 107, 108, 110 and 114 of the
National Internal Revenue Code of 1997, As Amended, and For Other Purposes.
[3]
Entitled, An Act Amending Sections 106, 107, 108, 109, 110 and 111 of the National Internal Revenue Code of 1997, As
Amended, and For Other Purposes.
[4]
Entitled, An Act Amending Sections 27, 28, 34, 106, 108, 109, 110, 112, 113, 114, 116, 117, 119, 121, 125, 148, 151, 236, 237
and 288 of the National Internal Revenue Code of 1997, As Amended, and For Other Purposes.
[5]
Section 26, R.A. No. 9337.
[6]
TSN, July 14, 2005.
[7]
Section 125 of the National Internal Revenue Code, as amended, was not amended by R.A. No. 9337, as can be gleaned from
the title and body of the law.
[8]
Section 105, National Internal Revenue of the Philippines, as amended.
[9]
Ibid.
[10]
Deoferio, Jr., V.A. and Mamalateo, V.C., The Value Added Tax in the Philippines (First Edition 2000).
[11]
Maceda vs. Macaraig, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771.
[12]
Maceda vs. Macaraig, Jr., G.R. No. 88291, June 8, 1993, 223 SCRA, 217.
[13]
Id., Deoferio, Jr., V.A. and Mamalateo, V.C., The Value Added Tax in the Philippines (First Edition 2000).
[14]
Commissioner of Internal Revenue vs. Seagate, G.R. No. 153866, February 11, 2005.
[15]
Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs. Tan, G.R. Nos. L-81311, L-81820, L-81921, L-82152,
June 30, 1988, 163 SCRA 371.
[16]
Entitled, An Act Restructuring the Value-Added Tax (VAT) System, Widening its Tax Base and Enhancing its Administration,
And for these Purposes Amending and Repealing the Relevant Provisions of the National Internal Revenue Code, as
amended, and for other Purposes.
[17]
Entitled, An Act Amending Republic Act No. 7716, otherwise known as the Value-Added Tax Law and Other Pertinent
Provisions of the National Internal Revenue Code, as Amended.
[18]
Entitled, An Act Amending the National Internal Revenue Code, as Amended, and for other Purposes.
[19]
Story, Commentaries 835 (1833).
[20]
G.R. No. 147387, December 10, 2003, 417 SCRA 503.
[21]
Id., pp. 529-530.
[22]
Supra., Note 20.
[23]
G.R. No. 115455, August 25, 1994, 235 SCRA 630.
[24]
Id., p. 670.
[25]
Westers Third New International Dictionary, p. 1897.
[26]
TSN, Bicameral Conference Committee on the Disagreeing Provisions of Senate Bill No. 1950 and House Bill Nos. 3705 and
3555, May 10, 2005, p. 4.
[27]
Id., p. 3.
[28]
Sponsorship Speech of Representative Teves, in behalf of Representative Jesli Lapus, TSN, January 7, 2005, pp. 34-35.
[29]
G.R. No. 105371, November 11, 1993, 227 SCRA 703.
[30]
Supra, Note 23.
[31]
Id., p. 668.
[32]
Id., p. 671.
[33]
Id., pp. 661-663.
[34]
Transcript of Session Proceedings, January 7, 2005, pp. 19-20.
[35]
Journal of the Senate, Session No. 67, March 7, 2005, pp. 727-728.
[36]
Id., p. 726.
[37]
See Angara vs. Electoral Commission, No. 45081, July 15, 1936, 63 Phil. 139, 156.
[38]
Defensor-Santiago vs. Commission on Elections, G.R. No. 127325, March 19, 1997, 270 SCRA 106, 153; People vs.
Rosenthal, Nos. 46076 & 46077, June 12, 1939, 68 Phil. 328; ISAGANI A. CRUZ, Philippine Political Law 86 (1996).
Judge Cooley enunciates the doctrine in the following oft-quoted language: "One of the settled maxims in constitutional
law is, that the power conferred upon the legislature to make laws cannot be delegated by that department to any other
body or authority. Where the sovereign power of the state has located the authority, there it must remain; and by the
constitutional agency alone the laws must be made until the Constitution itself is changed. The power to whose
judgment, wisdom, and patriotism this high prerogative has been intrusted cannot relieve itself of the
responsibility by choosing other agencies upon which the power shall be devolved, nor can it substitute the
judgment, wisdom, and patriotism of any other body for those to which alone the people have seen fit to confide
this sovereign trust." (Cooley on Constitutional Limitations, 8th ed., Vol. I, p. 224)
[39]
United States vs. Barrias, No. 4349, September 24, 1908, 11 Phil. 327, 330.
[40]
16 Am Jur 2d, Constitutional Law, 337.
[41]
Pelaez vs. Auditor General, No. L-23825, December 24, 1965, 122 Phil. 965, 974 citing Calalang vs. Williams, No. 47800,
December 2, 1940, 70 Phil. 726; Pangasinan Transp. Co. vs. Public Service Commission, No. 47065, June 26, 1940, 70
Phil. 221; Cruz vs. Youngberg, No. 34674, October 26, 1931, 56 Phil. 234; Alegre vs. Collector of Customs, No. 30783,
August 27, 1929, 53 Phil. 394 et seq.
[42]
Pelaez vs. Auditor General, supra, citing People vs. Lim Ho, No. L-12091-2, January 28, 1960, 106 Phil. 887; People vs.
Jolliffee, No. L-9553, May 13, 1959, 105 Phil 677; People vs. Vera, No. 45685, November 16, 1937, 65 Phil. 56; U.S. vs.
Nag Tang Ho, No. L-17122, February 27, 1922, 43 Phil. 1; Compaia General de Tabacos vs. Board of Public Utility, No.
11216, March 6, 1916, 34 Phil. 136 et seq.
[43]
Edu vs. Ericta, No. L-32096, October 24, 1970, 35 SCRA 481, 497.
[44]
Eastern Shipping Lines, Inc. vs. POEA, No. L-76633, October 18, 1988, 166 SCRA 533, 543-544.
[45]
No. 45685, November 16, 1937, 65 Phil. 56.
[46]
Id., pp. 115-120.
[47]
Supra, note 43.
[48]
Id., pp. 496-497.
[49]
16 C.J.S., Constitutional Law, 138.
[50]
Ibid.
[51]
16 Am Jur 2d, Constitutional Law 340.
[52]
Yajus vs. United States, 321 US 414, 88 L Ed 834, 64 S Ct. 660, 28 Ohio Ops 220.
[53]
Province of Batangas vs. Romulo, G.R. No. 152774, May 27, 2004; Enriquez vs. Court of Appeals, G.R. No. 140473, January
28, 2003, 396 SCRA 377; Codoy vs. Calugay, G.R. No. 123486, August 12, 1999, 312 SCRA 333.
[54]
Province of Batangas vs. Romulo, supra; Quisumbing vs. Meralco, G.R. No. 142943, April 3, 2002, 380 SCRA 195; Agpalo,
Statutory Construction, 1990 ed., p. 45.
[55]
Villena vs. Secretary of Interior, No. 46570, April 21, 1939, 67 Phil 451, 463-464.
[56]
Alunan vs. Mirasol, G.R. No. 108399, July 31, 1997, 276 SCRA 501, 513-514, citing Panama Refining Co. vs. Ryan, 293 U.S.
388, 79 L.Ed. 469 (1935).
[57]
Compaia General de Tabacos de Filipinas vs. The Board of Public Utility Commissioners, No. 11216, 34 Phil. 136; Cruz vs.
Youngberg, No. 34674, October 26, 1931, 56 Phil. 234; People vs. Vera, No. 45685, November 16, 1937, 65 Phil. 56,
113; Edu vs. Ericta, No. L-32096, October 24, 1970, 35 SCRA 481; Tatad vs. Secretary of the Department of Energy,
G.R. No. 124360, November 5, 1997, 281 SCRA 330; Alunan vs. Mirasol, supra.
[58]
Bowles vs. Willinghan, 321 US 503, 88 l Ed 892, 64 S Ct 641, 28 Ohio Ops 180.
[59]
United Residents of Dominican Hill, Inc. vs. Commission on the Settlement of Land Problems, G.R. No. 135945, March 7,
2001, 353 SCRA 782; Commissioner of Internal Revenue vs. Santos, G.R. No. 119252, August 18, 1997, 277 SCRA
617, 630.
[60]
Commission on Internal Revenue vs. American Express International, Inc. (Philippine Branch), G.R. No. 152609, June 29,
2005.
[61]
Acting Commissioner of Customs vs. MERALCO, No. L-23623, June 30, 1977, 77 SCRA 469, 473.
[62]
Respondents Memorandum, pp. 168-169.
[63]
The Wealth of Nations, Book V, Chapter II.
[64]
Chavez vs. Ongpin, G.R. No. 76778, June 6, 1990, 186 SCRA 331, 338.
[65]
TSN, Bicameral Conference Committee on the Disagreeing Provisions of Senate Bill No. 1950 and House Bill Nos. 3705 and
3555, April 25, 2005, pp. 5-6.
[66]
G.R. No. 147387, December 10, 2003, 417 SCRA 503, 524.
[67]
National Housing Authority vs. Reyes, G.R. No. L-49439, June 29, 1983, 123 SCRA 245, 249.
[68]
Sison vs. Ancheta, G.R. No. L-59431, July 25, 1984, 130 SCRA 654, 661.
[69]
Section 8, R.A. No. 9337, amending Section 110(A)(B),NIRC.
[70]
Ibid.
[71]
Commissioner of Internal Revenue vs. Benguet Corp., G.R. Nos. 134587 & 134588, July 8, 2005.
[72]
United Paracale Mining Co. vs. Dela Rosa, G.R. Nos. 63786-87, April 7, 1993, 221 SCRA 108, 115.
[73]
E.O. No. 273, Section 1.
[74]
Section 5.
[75]
Section 110(B).
[76]
Journal of the Senate, Session No. 71, March 15, 2005, p. 803.
[77]
Id., Session No. 67, March 7, 2005, p. 726.
[78]
Id., Session No. 71, March 15, 2005, p. 803.
[79]
Revenue Regulations No. 14-2005, 4.114-2(a).
[80]
Commissioner of Internal Revenue vs. Philam, G.R. No. 141658, March 18, 2005.
[81]
Revenue Regulations No. 14-2005, Sec. 4. 114-2.
[82]
Act V, Scene V.
[83]
Philippine Rural Electric Cooperatives Association, Inc. vs. DILG, G.R. No. 143076, June 10, 2003, 403 SCRA 558, 565.
[84]
Aban, Benjamin, Law of Basic Taxation in the Philippines (First Edition 1994).
[85]
Philippine Judges Association case, supra., note 29.
[86]
Commissioner of Internal Revenue vs. Court of Appeals, G.R. No. 119761, August 29, 1996, 261 SCRA 236, 249.
[87]
Kee vs. Court of Tax Appeals, No. L-18080, April 22, 1963, 117 Phil 682, 688.
[88]
Section 7, R.A. No. 9337.
[89]
Ibid.
[90]
No. L-81311, June 30, 1988, 163 SCRA 371, 383.
[91]
Section 17, R.A. No. 9337, amending Section 148, NIRC.
[92]
Section 18, amending Section 151, NIRC.
[93]
Section 14, amending Section 117, NIRC.
[94]
Section 15, amending Section 119, NIRC.
[95]
Sections 1 and 2, amending Sections 27 and 28, NIRC.
[96]
Section 2, amending Section 28, NIRC.
[97]
Section 1, amending Section 27(C), NIRC.
[98]
Reyes vs. Almanzor, G.R. Nos. 49839-46, April 26, 1991, 196 SCRA 322, 327.
[99]
Tolentino vs. Secretary of Finance, G.R. No. 115455, October 30, 1995, 249 SCRA 628, 659.
[100]
Vera vs. Avelino, G.R. No. L-543, August 31, 1946, 77 Phil. 365.
[101]
Ibid.
 THIRD DIVISION

COMMISSIONER OF G.R. No. 146984

INTERNAL REVENUE
Petitioner,
Present:
QUISUMBING,
- versus - Chairperson,
CARPIO,
CARPIO MORALES,
TINGA, and
MAGSAYSAY LINES, INC., VELASCO, JR., JJ.
BALIWAG NAVIGATION, INC.,
FIM LIMITED OF THE MARDEN
GROUP (HK) and NATIONAL
DEVELOPMENT COMPANY,
Respondents. Promulgated:

July 28, 2006

x---------------------------------------------------------------------------------x

DECISION

TINGA, J.:

The issue in this present petition is whether the sale by the National Development Company (NDC) of five (5) of its vessels to the private

respondents is subject to value-added tax (VAT) under the National Internal Revenue Code of 1986 (Tax Code) then prevailing at the time of the

sale. The Court of Tax Appeals (CTA) and the Court of Appeals commonly ruled that the sale is not subject to VAT. We affirm, though on a

more unequivocal rationale than that utilized by the rulings under review. The fact that the sale was not in the course of the trade or business of

NDC is sufficient in itself to declare the sale as outside the coverage of VAT.

The facts are culled primarily from the ruling of the CTA.

Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its shares in its wholly-owned

subsidiary the National Marine Corporation (NMC). The NDC decided to sell in one lot its NMC shares and five (5) of its ships, which are 3,700

DWT Tween-Decker, Kloeckner type vessels.[1] The vessels were constructed for the NDC between 1981 and 1984, then initially leased to

Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels were transferred and leased, on a bareboat basis, to

the NMC.[2]

The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and conditions for the public auction was that the

winning bidder was to pay a value added tax of 10% on the value of the vessels. [3] On 3 June 1988, private respondent Magsaysay Lines, Inc.

(Magsaysay Lines) offered to buy the shares and the vessels for P168,000,000.00. The bid was made by Magsaysay Lines, purportedly for a new

company still to be formed composed of itself, Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong

(collectively, private respondents).[4] The bid was approved by the Committee on Privatization, and a Notice of Award dated 1 July 1988 was

issued to Magsaysay Lines.

On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand, and Magsaysay Lines, Baliwag

Navigation, and FIM Limited, on the other. Paragraph 11.02 of the contract stipulated that [v]alue-added tax, if any, shall be for the account of

the PURCHASER.[5] Per arrangement, an irrevocable confirmed Letter of Credit previously filed as bidders bond was accepted by NDC as

security for the payment of VAT, if any. By this time, a formal request for a ruling on whether or not the sale of the vessels was subject to VAT

had already been filed with the Bureau of Internal Revenue (BIR) by the law firm of Sycip Salazar Hernandez & Gatmaitan, presumably in

behalf of private respondents. Thus, the parties agreed that should no favorable ruling be received from the BIR, NDC was authorized to draw on

the Letter of Credit upon written demand the amount needed for the payment of the VAT on the stipulated due date, 20 December 1988.[6]

In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14 December 1988 from the BIR, holding that

the sale of the vessels was subject to the 10% VAT. The ruling cited the fact that NDC was a VAT-registered enterprise, and thus its transactions

incident to its normal VAT registered activity of leasing out personal property including sale of its own assets that are movable, tangible objects

which are appropriable or transferable are subject to the 10% [VAT].[7]

Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT Ruling No. 395-88 (dated 18 August 1988),

which made a similar ruling on the sale of the same vessels in response to an inquiry from the Chairman of the Senate Blue Ribbon Committee.

Their motion was denied when the BIR issued VAT Ruling Nos. 007-89 dated 24 February 1989, reiterating the earlier VAT rulings. At this

point, NDC drew on the Letter of Credit to pay for the VAT, and the amount of P15,120,000.00 in taxes was paid on 16 March 1989.

On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed by a Supplemental Petition for Review

on 14 July 1989. They prayed for the reversal of VAT Rulings No. 395-88, 568-88 and 007-89, as well as the refund of the VAT payment made

amounting to P15,120,000.00.[8] The Commissioner of Internal Revenue (CIR) opposed the petition, first arguing that private respondents were

not the real parties in interest as they were not the transferors or sellers as contemplated in Sections 99 and 100 of the then Tax Code. The CIR

also squarely defended the VAT rulings holding the sale of the vessels liable for VAT, especially citing Section 3 of Revenue Regulation No. 5-

87 (R.R. No. 5-87), which provided that [VAT] is imposed on any sale or transactions deemed sale of taxable goods (including capital goods,

irrespective of the date of acquisition). The CIR argued that the sale of the vessels were among those transactions deemed sale, as enumerated in

Section 4 of R.R. No. 5-87. It seems that the CIR particularly emphasized Section 4(E)(i) of the Regulation, which classified change of

ownership of business as a circumstance that gave rise to a transaction deemed sale.

In a Decision dated 27 April 1992, the CTA rejected the CIRs arguments and granted the petition. [9] The CTA ruled that the sale of a vessel was

an isolated transaction, not done in the ordinary course of NDCs business, and was thus not subject to VAT, which under Section 99 of the Tax

Code, was applied only to sales in the course of trade or business. The CTA further held that the sale of the vessels could not be deemed sale,

and thus subject to VAT, as the transaction did not fall under the enumeration of transactions deemed sale as listed either in Section 100(b) of the

Tax Code, or Section 4 of R.R. No. 5-87. Finally, the CTA ruled that any case of doubt should be resolved in favor of private respondents since

Section 99 of the Tax Code which implemented VAT is not an exemption provision, but a classification provision which warranted the

resolution of doubts in favor of the taxpayer.

 The CIR appealed the CTA Decision to the Court of Appeals,[10] which on 11 March 1997, rendered a Decision reversing the

CTA.[11] While the appellate court agreed that the sale was an isolated transaction, not made in the course of NDCs regular trade or business, it

nonetheless found that the transaction fell within the classification of those deemed sale under R.R. No. 5-87, since the sale of the vessels

together with the NMC shares brought about a change of ownership in NMC. The Court of Appeals also applied the principle governing tax

exemptions that such should be strictly construed against the taxpayer, and liberally in favor of the government.[12]

However, the Court of Appeals reversed itself upon reconsidering the case, through a Resolution dated 5 February 2001.[13] This time, the

appellate court ruled that the change of ownership of business as contemplated in R.R. No. 5-87 must be a consequence of the retirement from or

cessation of business by the owner of the goods, as provided for in Section 100 of the Tax Code. The Court of Appeals also agreed with the CTA

that the classification of transactions deemed sale was a classification statute, and not an exemption statute, thus warranting the resolution of any

doubt in favor of the taxpayer.[14]

To the mind of the Court, the arguments raised in the present petition have already been adequately discussed and refuted in the rulings assailed

before us. Evidently, the petition should be denied. Yet the Court finds that Section 99 of the Tax Code is sufficient reason for upholding the

refund of VAT payments, and the subsequent disquisitions by the lower courts on the applicability of Section 100 of the Tax Code and Section 4

of R.R. No. 5-87 are ultimately irrelevant.

A brief reiteration of the basic principles governing VAT is in order. VAT is ultimately a tax on consumption, even though it is assessed on

many levels of transactions on the basis of a fixed percentage.[15] It is the end user of consumer goods or services which ultimately shoulders the

tax, as the liability therefrom is passed on to the end users by the providers of these goods or services [16] who in turn may credit their own VAT

liability (or input VAT) from the VAT payments they receive from the final consumer (or output VAT). [17] The final purchase by the end

consumer represents the final link in a production chain that itself involves several transactions and several acts of consumption. The VAT

system assures fiscal adequacy through the collection of taxes on every level of consumption, [18] yet assuages the manufacturers or providers of

goods and services by enabling them to pass on their respective VAT liabilities to the next link of the chain until finally the end consumer

shoulders the entire tax liability.

Yet VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance to the taxpayers role or link in the

production chain. Hence, as affirmed by Section 99 of the Tax Code and its subsequent incarnations, [19] the tax is levied only on the sale, barter

or exchange of goods or services by persons who engage in such activities, in the course of trade or business. These transactions outside the

course of trade or business may invariably contribute to the production chain, but they do so only as a matter of accident or incident. As the sales

of goods or services do not occur within the course of trade or business, the providers of such goods or services would hardly, if at all, have the

opportunity to appropriately credit any VAT liability as against their own accumulated VAT collections since the accumulation of output VAT

arises in the first place only through the ordinary course of trade or business.
That the sale of the vessels was not in the ordinary course of trade or business of NDC was appreciated by both the CTA and the Court of

Appeals, the latter doing so even in its first decision which it eventually reconsidered. [20] We cite with approval the CTAs explanation on this

point:

In Imperial v. Collector of Internal Revenue, G.R. No. L-7924, September 30, 1955 (97 Phil. 992), the
term carrying on business does not mean the performance of a single disconnected act, but means conducting, prosecuting
and continuing business by performing progressively all the acts normally incident thereof; while doing business conveys the
idea of business being done, not from time to time, but all the time. [J. Aranas, UPDATED NATIONAL INTERNAL
REVENUE CODE (WITH ANNOTATIONS), p. 608-9 (1988)]. Course of business is what is usually done in the
management of trade or business. [Idmi v. Weeks & Russel, 99 So. 761, 764, 135 Miss. 65, cited in Words & Phrases, Vol.
10, (1984)].

What is clear therefore, based on the aforecited jurisprudence, is that course of business or doing business connotes
regularity of activity. In the instant case, the sale was an isolated transaction. The sale which was involuntary and made
pursuant to the declared policy of Government for privatization could no longer be repeated or carried on with regularity. It
should be emphasized that the normal VAT-registered activity of NDC is leasing personal property.[21]

This finding is confirmed by the Revised Charter[22] of the NDC which bears no indication that the NDC was created for the primary

purpose of selling real property.[23]

The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute before this Court,[24] should

have definitively settled the matter. Any sale, barter or exchange of goods or services not in the course of trade or business is not subject to

VAT.

Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now relied upon by the CIR, is captioned Value-added

tax on sale of goods, and it expressly states that [t]here shall be levied, assessed and collected on every sale, barter or exchange of goods, a value

added tax x x x. Section 100 should be read in light of Section 99, which lays down the general rule on which persons are liable for VAT in the

first place and on what transaction if at all. It may even be noted that Section 99 is the very first provision in Title IV of the Tax Code, the Title

that covers VAT in the law. Before any portion of Section 100, or the rest of the law for that matter, may be applied in order to subject a

transaction to VAT, it must first be satisfied that the taxpayer and transaction involved is liable for VAT in the first place under Section 99.

It would have been a different matter if Section 100 purported to define the phrase in the course of trade or business as expressed in Section 99.

If that were so, reference to Section 100 would have been necessary as a means of ascertaining whether the sale of the

vessels was in the course of trade or business, and thus subject to

VAT. But that is not the case. What Section 100 and Section 4(E)(i) of R.R. No. 5-87 elaborate on is not the meaning of in the course of trade or

business, but instead the identification of the transactions which may be deemed as sale. It would become necessary to ascertain whether under

those two provisions the transaction may be deemed a sale, only if it is settled that the transaction occurred in the course of trade or business in

the first place. If the transaction transpired outside the course of trade or business, it would be irrelevant for the purpose of determining VAT

liability whether the transaction may be deemed sale, since it anyway is not subject to VAT.

Accordingly, the Court rules that given the undisputed finding that the transaction in question was not made in the course of trade or business of

the seller, NDC that is, the sale is not subject to VAT pursuant to Section 99 of the Tax Code, no matter how the said sale may hew to those

transactions deemed sale as defined under Section 100.

In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this case, the Court finds the discussions offered on

this point by the CTA and the Court of Appeals (in its subsequent Resolution) essentially correct. Section 4 (E)(i) of R.R. No. 5-87 does classify

as among the transactions deemed sale those involving change of ownership of business. However, Section 4(E) of R.R. No. 5-87, reflecting

Section 100 of the Tax Code, clarifies that such change of ownership is only an attending circumstance to retirement from or cessation of

business[, ] with respect to all goods on hand [as] of the date of such retirement or cessation. [25] Indeed, Section 4(E) of R.R. No. 5-87 expressly

characterizes the change of ownership of business as only a circumstance that attends those transactions deemed sale, which are otherwise stated

in the same section.[26]

WHEREFORE, the petition is DENIED. No costs.

SO ORDERED.

DANTE O. TINGA Associate Justice

WE CONCUR:

LEONARDO A. QUISUMBING
Associate Justice
Chairperson

ANTONIO T. CARPIO CONCHITA CARPIO MORALES

Associate Justice Associate Justice
PRESBITERO J. VELASCO, JR.
Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached in consultation before the case was assigned to the writer of the opinion of

the Courts Division.

LEONARDO A. QUISUMBING
Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the Division Chairmans Attestation, it is hereby certified that the conclusions in the

above Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Courts Division.

ARTEMIO V. PANGANIBAN
Chief Justice

[1]
Rollo, p. 58.
[2]
Id.
[3]
Id.
[4]
Id. at 59.
[5]
Id. at 60.
[6]
Id. at 61.
[7]
Id.
[8]
Private respondents also filed their claim for refund with the BIR on 13 July 1989. Id. at 63.
 [9]
Decision penned by Associate Judge Constante C. Roaquin, concurred in by Presiding Judge Ernesto D. Acosta and Acting Associate Judge Stella
Dadivas-Farrales.
[10]
The Court of Appeals initially dismissed the CIRs Petition for Review as it had been filed beyond the reglementary period of appeal, but such
dismissal was subsequently reconsidered. The allowance of the appeal was the subject of a special civil action for certiorari eventually denied by the Court
in Magsaysay Lines, et al. v. Court of Appeals, 329 Phil. 310 (1996), a decision limited solely to the propriety of the allowance of the CIRs appeal, without delving
on any of the issues now subject for resolution in the present petition.
[11]
Decision penned by then Associate Justice (now Supreme Court Associate Justice) Romeo J. Callejo, Sr., and concurred in by Associate Justices
Gloria C. Paras and Ruben T. Reyes.
[12]
See Rollo, pp. 53-54.
[13]
See id. at 31. Resolution also penned by then Associate Justice (now Supreme Court Associate Justice) Romeo J. Callejo, Sr., and concurred in by
Associate Justices Ramon Mabutas, Jr. and Ruben T. Reyes.

[14]
Id. at 33-35.
[15]
See Commissioner of Internal Revenue v. Benguet Corporation, G.R. Nos.134587 & 134588, 8 July 2005, 463 SCRA 28, 42.
[16]
[T]he amount of tax paid may be shifted or passed on by the seller to the buyer. What is transferred in such instances is not the liability for the tax,
but the tax burden. In adding or including the VAT due to the selling price, the seller remains the person primarily and legally liable for the payment of the tax.
What is shifted only to the intermediate buyer and ultimately to the final purchaser is the burden of the tax. Contex Corporation v. Commissioner of Internal
Revneue, G.R. No. 151135, 2 July 2004, 433 SCRA 376, 385, citing Deoferio, Jr. and Mamalateo, THE VALUE ADDED TAX IN THE PHILIPPINES 35-36 (1st
ed. 2000).
[17]
There is another key characteristic of the VAT that no matter the number of taxable transactions that precede the final purchase or sale, it is the end
user, or the consumer, that ultimately shoulders the tax. Despite its name, VAT is generally not intended to be a tax on value added, but rather as a tax on
consumption. Hence, there is a mechanism in the VAT system that enables firms to offset the tax they have paid on their own purchases of goods and services
against the tax they charge on their sales of goods and services. Abakada Guro Party List v. Ermita, G.R. Nos. 168056, 168207, 168461, 168463, 168730, 1
September 2005, 469 SCRA 1, 282, J. Tinga, Dissenting and Concurring Opinion.
[18]
The VAT system assures that the government shall reap income for every transaction that is had, and not just on the final sale or transfer. Ibid.
[19]
See, e.g., Section 105, Republic Act No. 8424 (National Internal Revenue Code of 1987). The said provision remained intact despite the passage of
Republic Act No. 9337, which expanded the coverage of the VAT, in 2005.

[20]
See rollo, p. 51.
[21]
Id. at 69-70, emphasis omitted. See also Commissioner of Internal Revenue v. Court of Appeals, 385 Phil. 875 (2000). VAT is a tax on transactions,
imposed at every stage of the distribution process on the sale, barter, exchange of goods or property, and on the performance of services, even in the absence of
profit attributable thereto. The term "in the course of trade or business" requires the regular conduct or pursuit of a commercial or an economic activity, regardless
of whether or not the entity is profit-oriented. Id. at 884.
[22]
Pres. Decree No. 1648, entitled Reorganizing the National Development Company and Establishing a Revised Charter Therefor, dated 25 October
1979.
[23]
See Pres. Decree No. 1648, Secs. 2 and 4.
[24]
Notably, the CIR even expressly submits that the earlier decision of the Court of Appeals, which did rule the sale as an isolated transaction, is
correct. See rollo, p. 27.
[25]
See Section 100(b)(3)(4), 1986 Tax Code, which reads: Retirement from or cessation of business, with respect to inventories of taxable goods
existing as of such retirement or cessation.
[26]
Section 4 of R.R. No. 5-87 states:

SEC. 4. Transactions deemed sale. The following transactions are deemed sale pursuant to Section 100 (b):

(a) Transfer, use or consumption, not in the course of business. Transfer of goods not in the course of business can take place when the VAT-
registered person withdraws goods from his business for his personal use;

(b) Distribution or transfer to shareholders or investors as share in the profits of the business;

(c) Transfer to creditors in payment of debt or obligation;

(d) Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned. Consigned goods returned by
the consignee within the 60 day period is not deemed sold; and

(e) Retirement from or cessation of business or death of an individual with respect to all goods on hand, whether capital goods, stock-in-trade,
supplies or materials as of the date of such retirement or cessation, whether or not the business is continued by the new owner or successor,
estate or heir. The following circumstances shall, among others, give rise to transactions deemed sale for the purposes of this Section:

i. Change of ownership of business or incorporation of the business in the case of a single proprietorship;

ii. Dissolution of a partnership and creation of a new partnership which takes over the business; and

iii. Death of an individual who is a VAT-registered person, even if the estate or heirs of the decedent shall
continue to operate the business.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-19707 August 17, 1967

PHILIPPINE ACETYLENE CO., INC., petitioner,

vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Ponce Enrile, Siguion Reyna, Montecillo and Belo, for petitioner.

Office of the Solicitor General for respondents.

CASTRO, J.:

The petitioner is a corporation engaged in the manufacture and sale of oxygen and acetylene gases. During the period from June 2,
1953 to June 30, 1958, it made various sales of its products to the National Power Corporation, an agency of the Philippine
Government, and to the Voice of America an agency of the United States Government. The sales to the NPC amounted to
P145,866.70, while those to the VOA amounted to P1,683, on account of which the respondent Commission of Internal Revenue
assessed against, and demanded from, the petitioner the payment of P12,910.60 as deficiency sales tax and surcharge, pursuant
to the following-provisions of the National Internal Revenue Code:

Sec. 186. Percentage tax on sales of other articles.—There shall be levied, assessed and collected once only on every
original sale, barter, exchange, and similar transaction either for nominal or valuable considerations, intended to transfer
ownership of, or title to, the articles not enumerated in sections one hundred and eighty-four and one hundred and eighty-
five a tax equivalent to seven per centum of the gross selling price or gross value in money of the articles so sold, bartered
exchanged, or transferred, such tax to be paid by the manufacturer or producer: . . . .

Sec. 183. Payment of percentage taxes.—(a) In general.—It shall be the duty of every person conducting business on
which a percentage tax is imposed under this Title, to make a true and complete return of the amount of his, her, or its
gross monthly sales, receipts or earnings, or gross value of output actually removed from the factory or mill warehouse
and within twenty days after the end of each month, pay the tax due thereon: Provided, That any person retiring from a
business subject to the percentage tax shall notify the nearest internal revenue officer thereof, file his return or declaration
and pay the tax due thereon within twenty days after closing his business.

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

The petitioner denied liability for the payment of the tax on the ground that both the NPC and the VOA are exempt from taxation. It
asked for a reconsideration of the assessment and, failing to secure one, appealed to the Court of Tax Appeals.

The court ruled that the tax on the sale of articles or goods in section 186 of the Code is a tax on the manufacturer and not on the
buyer with the result that the "petitioner Philippine Acetylene Company, the manufacturer or producer of oxygen and acetylene
gases sold to the National Power Corporation, cannot claim exemption from the payment of sales tax simply because its buyer —
the National Power Corporation — is exempt from the payment of all taxes." With respect to the sales made to the VOA, the court
held that goods purchased by the American Government or its agencies from manufacturers or producers are exempt from the
payment of the sales tax under the agreement between the Government of the Philippines and that of the United States, provided
the purchases are supported by certificates of exemption, and since purchases amounting to only P558, out of a total of P1,683,
were not covered by certificates of exemption, only the sales in the sum of P558 were subject to the payment of tax. Accordingly,
the assessment was revised and the petitioner's liability was reduced from P12,910.60, as assessed by the respondent
commission, to P12,812.16.1

The petitioner appealed to this Court. Its position is that it is not liable for the payment of tax on the sales it made to the NPC and
the VOA because both entities are exempt from taxation.

The NPC enjoys tax exemption by virtue of an act2 of Congress which provides as follows:

Sec. 2. To facilitate the payment of its indebtedness, the National Power Corporation shall be exempt from all taxes,
except real property tax, and from all duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its
provinces, cities and municipalities.

It is contended that the immunity thus given to the NPC would be impaired by the imposition of a tax on sales made to it because
while the tax is paid by the manufacturer or producer, the tax is ultimately shifted by the latter to the former. The petitioner invokes
in support of its position a 1954 opinion of the Secretary of Justice which ruled that the NPC is exempt from the payment of all
taxes "whether direct or indirect."

We begin with an analysis of the nature of the percentage (sales) tax imposed by section 186 of the Code. Is it a tax on the
producer or on the purchaser? Statutes of the type under consideration, which impose a tax on sales, have been described as
"act[s] with schizophrenic symptoms,"3 as they apparently have two faces — one that of a vendor tax, the other, a vendee tax.
Fortunately for us the provisions of the Code throw some light on the problem. The Code states that the sales tax "shall be paid by
the manufacturer or producer,"4 who must "make a true and complete return of the amount of his, her or its gross monthly sales,
receipts or earnings or gross value of output actually removed from the factory or mill warehouse and within twenty days after the
end of each month, pay the tax due thereon." 5

But it is argued that a sales tax is ultimately passed on to the purchaser, and that, so far as the purchaser is an entity like the NPC
which is exempt from the payment of "all taxes, except real property tax," the tax cannot be collected from sales.

Many years ago, Mr. Justice Oliver Wendell Holmes expressed dissatisfaction with the use of the phrase "pass the tax on." Writing
the opinion of the U.S. Supreme Court in Lash's Products v. United States,6 he said: "The phrase 'passed the tax on' is inaccurate,
as obviously the tax is laid and remains on the manufacturer and on him alone. The purchaser does not really pay the tax. He pays
or may pay the seller more for the goods because of the seller's obligation, but that is all. . . . The price is the sum total paid for the
goods. The amount added because of the tax is paid to get the goods and for nothing else. Therefore it is part of the price . . .".

It may indeed be that the incidence of the tax ultimately settles on the purchaser, but it is not for that reason alone that one may
validly argue that it is a tax on the purchaser. The exemption granted to the NPC may be likened to the immunity of the Federal
Government from state taxation and vice versa in the federal system of government of the United States. In the early case
of Panhandle Oil Co. v. Mississippi7 the doctrine of intergovernment mental tax immunity was held as prohibiting the imposition of a
tax on sales of gasoline made to the Federal Government. Said the Supreme court of the United States:

A charge at the prescribed. rate is made on account of every gallon acquired by the United States. It is immaterial that the
seller and not the purchaser is required to report and make payment to the state. Sale and purchase constitute a
transaction by which the tax is measured and on which the burden rests. . . . The necessary operation of these
enactments when so construed is directly to retard, impede and burden the exertion by the United States, of its
constitutional powers to operate the fleet and hospital. . . . To use the number of gallons sold the United States as a
measure of the privilege tax is in substance and legal effect to tax the sale. . . . And that is to tax the United States — to
exact tribute on its transactions and apply the same to the support of the state.1äwphï1.ñët

Justice Holmes did not agree. In a powerful dissent joined by Justices Brandeis and Stone, he said:

If the plaintiff in error had paid the tax and added it to the price the government would have nothing to say. It could take
the gasoline or leave it but it could not require the seller to abate his charge even if it had been arbitrarily increased in the
hope of getting more from the government than could be got from the public at large. . . . It does not appear that the
government would have refused to pay a price that included the tax if demanded, but if the government had refused it
would not have exonerated the seller. . . .

. . . I am not aware that the President, the Members of the Congress, the Judiciary or to come nearer to the case at hand,
the Coast Guard or the officials of the Veterans' Hospital [to which the sales were made], because they are
instrumentalities of government and cannot function naked and unfed, hitherto have been held entitled to have their bills
for food and clothing cut down so far as their butchers and tailors have been taxed on their sales; and I had not supposed
that the butchers and tailors could omit from their tax returns all receipts from the large class of customers to which I have
referred. The question of interference with Government, I repeat, is one of reasonableness and degree and it seems to me
that the interference in this case is too remote.

But time was not long in coming to confirm the soundness of Holmes' position. Soon it became obvious that to test the
constitutionality of a statute by determining the party on which the legal incidence of the tax fell was an unsatisfactory way of doing
things. The fall of the bastion was signalled by Chief Justice Hughes' statement in James v. Dravo Constructing Co.8 that "These
cases [referring to Panhandle and Indian Motorcycle Co. v. United States, 283 U.S. 570 (1931)] have been distinguished and must
be deemed to be limited to their particular facts."

In 1941, Alabama v. King & Boozer9 held that the constitutional immunity of the United States from state taxation was not infringed
by the imposition of a state sales tax with which the seller was chargeable but which he was required to collect from the buyer, in
respect of materials purchased by a contractor with the United States on a cost-plus basis for use in carrying out its contract,
despite the fact that the economic burden of the tax was borne by the United States.

The asserted right of the one to be free of taxation by the other does not spell immunity from paying the added costs,
attributable to the taxation of those who furnish supplies to the Government and who have been granted no tax immunity.
So far as a different view has prevailed, see Panhandle Oil Co. v. Mississippi and Graves v. Texas Co., supra, we think it
no longer tenable.

Further inroads into the doctrine of Panhandle were made in 1943 when the U.S. Supreme Court held that immunity from state
regulation in the performance of governmental functions by Federal officers and agencies did not extend to those who merely
contracted to furnish supplies or render services to the government even though as a result of an increase in the price of such
supplies or services attributable to the state regulation, its ultimate effect may be to impose an additional economic burden on the
Government.10

But if a complete turnabout from the rule announced in Panhandle was yet to be made, it was so made in 1952 in Esso Standard
Oil v. Evans11 which held that a contractor is not exempt from the payment of a state privilege tax on the business of storing
gasoline simply because the Federal Government with which it has a contract for the storage of gasoline is immune from state
taxation.

This tax was imposed because Esso stored gasoline. It is not . . . based on the worth of the government property. Instead,
the amount collected is graduated in accordance with the exercise of Esso's privilege to engage in such operations; so it is
not "on" the federal property. . . . Federal ownership of the fuel will not immunize such a private contractor from the tax on
storage. It may generally, as it did here, burden the United States financially. But since James vs. Dravo Contracting Co.,
302 U.S. 134, 151, 82 L. ed. 155, 167, 58 S. Ct. 208, 114 ALR 318, this has been no fatal flaw. . . . 12

We have determined the current status of the doctrine of intergovernmental tax immunity in the United States, by showing the drift
of the decisions following announcement of the original rule, to point up the that fact that even in those cases where exemption
from tax was sought on the ground of state immunity, the attempt has not met with success.

As Thomas Reed Powell noted in 1945 in reviewing the development of the doctrine:

Since the Dravo case settled that it does not matter that the economic burden of the gross receipts tax may be shifted to
the Government, it could hardly matter that the shift comes about by explicit agreement covering taxes rather than by
being absorbed in a higher contract price by bidders for a contract. The situation differed from that in the Panhandle and
similar cases in that they involved but two parties whereas here the transaction was tripartite. These cases are
condemned in so far as they rested on the economic ground of the ultimate incidence of the burden being on the
Government, but this condemnation still leaves open the question whether either the state or the United States when
acting in governmental matters may be made legally liable to the other for a tax imposed on it as vendee.

The carefully chosen language of the Chief Justice keeps these cases from foreclosing the issue. . . . Yet at the time it
would have been a rash man who would find in this a dictum that a sales tax clearly on the Government as purchaser is
invalid or a dictum that Congress may immunize its contractors. 13

If a claim of exemption from sales tax based on state immunity cannot command assent, much less can a claim resting on statutory
grant.

It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the tax becomes a part of the price
which the purchaser must pay. It does not matter that an additional amount is billed as tax to the purchaser. The method of listing
the price and the tax separately and defining taxable gross receipts as the amount received less the amount of the tax added,
merely avoids payment by the seller of a tax on the amount of the tax. The effect is still the same, namely, that the purchaser does
not pay the tax. He pays or may pay the seller more for the goods because of the seller's obligation, but that is all and the amount
added because of the tax is paid to get the goods and for nothing else. 14

But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden of the tax is largely a matter of
economics.15 Then it can no longer be contended that a sales tax is a tax on the purchaser.

We therefore hold that the tax imposed by section 186 of the National Internal Revenue Code is a tax on the manufacturer or
producer and not a tax on the purchaser except probably in a very remote and inconsequential sense. Accordingly its levy on the
sales made to tax-exempt entities like the NPC is permissible.

II

This conclusion should dispose of the same issue with respect to sales made to the VOA, except that a claim is here made that the
exemption of such sales from taxation rests on stronger grounds. Even the Court of Tax Appeals appears to share this view as is
evident from the following portion of its decision:

With regard to petitioner's sales to the Voice of America, it appears that the petitioner and the respondent are in
agreement that the Voice of America is an agency of the United States Government and as such, all goods purchased
locally by it directly from manufacturers or producers are exempt from the payment of the sales tax under the provisions of
the agreement between the Government of the Philippines and the Government of the United States, (See
Commonwealth Act No. 733) provided such purchases are supported by serially numbered Certificates of Tax Exemption
issued by the vendee-agency, as required by General Circular No. V-41, dated October 16, 1947. . . .

The circular referred to reads:

Goods purchased locally by U.S. civilian agencies directly from manufacturers, producers or importers shall be exempt
from the sales tax.
It was issued purportedly to implement the Agreement between the Republic of the Philippines and the United States of America
Concerning Military Bases,16 but we find nothing in the language of the Agreement to warrant the general exemption granted by
that circular.

The pertinent provisions of the Agreement read:

ARTICLE V. — Exemption from Customs and Other Duties

No import, excise, consumption or other tax, duty or impost shall be charged on material, equipment, supplies or goods,
including food stores and clothing, for exclusive use in the construction, maintenance, operation or defense of the bases,
consigned to, or destined for, the United States authorities and certified by them to be for such purposes.

ARTICLE XVIII.—Sales and Services Within the Bases

1. It is mutually agreed that the United States Shall have the right to establish on bases, free of all licenses; fees; sales,
excise or other taxes, or imposts; Government agencies, including concessions, such as sales commissaries and post
exchanges, messes and social clubs, for the exclusive use of the United States military forces and authorized civilian
personnel and their families. The merchandise or services sold or dispensed by such agencies shall be free of all taxes,
duties and inspection by the Philippine authorities. . . .

Thus only sales made "for exclusive use in the construction, maintenance, operation or defense of the bases," in a word, only sales
to the quartermaster, are exempt under article V from taxation. Sales of goods to any other party even if it be an agency of the
United States, such as the VOA, or even to the quartermaster but for a different purpose, are not free from the payment of the tax.

On the other hand, article XVIII exempts from the payment of the tax sales made within the base by (not sales to) commissaries
and the like in recognition of the principle that a sales tax is a tax on the seller and not on the purchaser.

It is a familiar learning in the American law of taxation that tax exemption must be strictly construed and that the exemption will not
be held to be conferred unless the terms under which it is granted clearly and distinctly show that such was the intention of the
parties.17 Hence, in so far as the circular of the Bureau of Internal Revenue would give the tax exemptions in the Agreement an
expansive construction it is void.

We hold, therefore, that sales to the VOA are subject to the payment of percentage taxes under section 186 of the Code. The
petitioner is thus liable for P12,910.60, computed as follows:

Sales to NPC P145,866.70

Sales to VOA P 1,683.00

Total sales subject to tax P147,549.70

7% sales tax due thereon P 10,328.48

Add: 25% surcharge P 2,582.12

Total amount due and collectible P 12,910.60

Accordingly, the decision a quo is modified by ordering the petitioner to pay to the respondent Commission the amount of
P12,910.60 as sales tax and surcharge, with costs against the petitioner.

Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Angeles and Fernando, JJ., concur.
Concepcion, C.J., and Dizon, J., took no part.

Footnotes
1
Petitioner's liability was computed as follows:

Sales to NPC P145,866.70

Sales to VOA P 558.00

Total sales subject to tax P146,424.70

7% sales tax due thereon P 10,249.73

 Add 25% surcharge P 2,562.41

Total amount due and collectible P 12,812.16

2
Rep Act No. 987, 9 Laws & Res. 45 (1954), amending Rep. Act No. 353, 4 Laws & Res. 14 (1949).

3
Oxford v. J. D. Jewell, Inc., 215 Ga. 616, 112 So. 2d 601 (1960).

4
Nat. Int. Rev. Code sec. 186.

5
Id. sec. 183.

6
278 U.S. 175 (1928).

7
277 U.S. 218 (1928). As a matter of legal history, it is pertinent to note here that the ruling in Panhandle was applied in Standard Oil Co.
v. Posadas, 55 Phil. 715 (1931).

8
302 U.S. 134 (1937).

9
314 U.S. 1 (1941).

10
Penn Dairies, Inc. v. Milk Control Comm'n, 318 U.S. 261 (1943).

11
347 U.S. 495 (1952).

12
Id., at 499-500.

"The case [Esso Standard Oil v. Evans] shows a further retreat from, if not a complete repudiation of the case of Panhandle Oil
Co. v. Mississippi . . . in which the doctrine of implied immunity was employed as the basis for holdings that a state excise or
privilege tax upon gasoline dealers, though non-discriminatory, was invalid in so far as it was sought to collect the tax with
respect to sales of gasoline directly to the United States. No tenable distinction seems to be possible between a state privilege
tax on sales of gasoline to the United States and such a tax on storage of gasoline owned by the United States." Annot., 97 L.
Ed. 1182 (1953).

13
Powell, The Waning of Intergovernmental Tax Immunity, 58 Harv. L. Rev. 683, 659-660 (1945).

14
Western Lithograh Co vs. State Bd. of Equal., 78 P. 2d 731 (1938); see also Philippine Acetylene Co. vs. Blaquera, G.R. No. L-13728,
Nov. 30, 1962.

15
"In the long run a sales tax is probably shifted to the consumer, but during the period when supply is being adjusted to changes in
demand it must be in part absorbed. In practice the businessman will treat the levy as an added cost of operation and distribute it over his
sales as he would any other cost, increasing by more than the amount of the tax prices of goods demand for which will be least affected
and leaving other prices unchanged." 47 Harv. Ld. Rev. 860, 869 (1934).

16
March 26, 1947, 1-2 DFA TS 144, 43 UNTS 271, 43 O.G. 1020 (1947).

17
E.g., Cherokee Brick & tile Co. vs. Redwine, 209 Ga. 691,75 S.E. 2d 550 (1953).

===

Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. L-19667 November 29, 1966

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
AMERICAN RUBBER COMPANY and COURT OF TAX APPEALS, respondents.

G.R. No. L-19801-03 November 29, 1966

AMERICAN RUBBER COMPANY, petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.

Nos. L-19667:
Office of the Solicitor General for petitioner.
Ozaeta, Gibbs and Ozaeta for respondents.

Nos. L-19801-03:
Ozaeta, Gibbs and Ozaeta for petitioner.
Office of the Solicitor General for respondents.

REYES, J.B.L., J.:

These cases are brought on appeal from the Court of Tax Appeals by the State (G.R. No. L-19667) as well as by the American
Rubber Company (G.R. Nos. L-19801, 19802, 19803).

The factual background is the same in all four cases, and is not in controversy, having been stipulated between the parties.

Petitioner, American Rubber Company, a domestic corporation, from January 1, 1955 to December 1, 1958, was engaged in
producing rubber from its approximately 900 hectare rubber tree plantation, which it owned and operated in Latuan, Isabela, City of
Basilan. Its products, known in the market as Preserved Latex, Pale Crepe No. 1, Pale Crepe No. 2, Ribbed Smoked Sheets Nos. 1
and 2, Flat Bark Rubber, 2X Brown Crepe and 3X Brown Crepe, are turned out in the following manner:

The initial step common to the production of all the foregoing rubber products is tapping, i.e., the collection of latex (rubber juice)
from rubber trees. This is done by the daily cutting, early in the morning, of a spiral incision in the bark of rubber trees and placing a
cup below the lower end of the incision to receive the flow of latex. The collecting cup is filled after two hours. The tapper then
collects the latex into buckets and carries them to the collecting shed. The tapper subsequently pours the latex collected into big
milk cans. The filled milk cans are then taken in motor vehicles to a coagulating shed, also within the premises of petitioner's
plantation, where the latex is strained into coagulating tanks to remove foreign matter such as leaves and dirt. After these initial
steps, the processes vary in the production of the various rubber products mentioned above. Said processes are described
hereunder.

Preserved Rubber Latex

Fresh latex is diluted with 5 to 5-1/4 ounces of ammonia per gallon of latex. The mixture is thoroughly stirred and then poured into
metal drums. The addition of ammonia preserves the latex in liquid form and prevents its deterioration or its acquisition of a
repulsive smell, and at the same time preserves its uniform color. Latex which has been thus artificially preserved in its liquid form
generally lasts for about a month without spoiling. On the other hand, fresh latex in its original state lasts for only about two hours,
after which it becomes spoiled.

Petitioner sells preserved latex only upon previous orders of customers who supply empty metal drum containers.

Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2

To produce Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2, the petitioner adds to the latex in the coagulating
tank about 15 or 16 ounces of glacial acetic acid per gallon of latex. The mixture is stirred thoroughly. Thereafter aluminum
partitions are placed crosswise inside the tank so that the latex will coagulate into uniform slabs. Acetic acid is added to the latex to
hasten coagulation which otherwise takes place naturally, and to preserve its fresh state and color. The similarity in the production
of Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2 ends at the point of removing the coagulum (coagulated
rubber sheets) from the coagulating tanks.

To produce Pale Crepe No. 1, the coagulum is passed through a series of rollers until the desired thickness is attained, whereupon
it is removed to the air-drying house situated inside petitioner's plantation and hung for a period of about twelve or thirteen days to
dry. There are no mechanical driers used; the air-drying is done naturally. As soon as the Pale Crepe is dried, the sheets are
sorted; those which are of uniform pale color are classified as Pale Crepe No. 2, whereupon they are baled and stored, ready for
market.

Ribbed & Smoked Sheets Nos. 1 and 2 are produced practically in the same manner as Pale Crepe, except that the coagulum is
passed only once through a roller provided with ribs after which the flattened and ribbed coagulum is removed to petitioner's
smoke-house where it is hung and cured by exposure to heat and smoke from wood fires for about six or seven days. The resulting
smoked sheets are sorted and classified dependent upon color and opaqueness into ribbed smoked sheets (RSS) No. 1 and No. 2,
baled, and stored ready for the market. No mechanical equipment is used in generating the smoke in the smoke-house.

The petitioner's rollers are powered by engines although they could be turned by hand as it is done in small rubber plantations. If
Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2 are not air-dried and smoked they deteriorate, get spoiled, and
the color varies.
Flat Bark Rubber

Each morning after a tapper makes a fresh incision in the bark of a rubber tree, he gathers the latex dripping from the ground
around the tree, called "ground rubber", as well as the dried latex from the incisions made the previous day, called "bark rubber".
Ground and bark rubber are not intentionally produced. No chemicals are added to the latex transformed into ground and bark
rubber. This kind of dried latex is spoiled and has a bad odor.

Ground and bark rubber when gathered in sufficient quantities are passed numerous times through the rollers or mills until they
form a uniform mass or sheet which, finally is called Flat Bark Rubber. No chemical is used to coagulate the dried ground and bark
rubber because they are already coagulated. They are formed into sheets by means only of pressure of the mills or rollers through
which they are passed. Flat Bark Rubber commands the lowest prices in the rubber market.

3X Brown Crepe

Every morning, before a fresh incision is made in the bark of the rubber trees, the tapper collects not only ground and bark rubber
but removes and collects the latex in the cups, known as "cup rubber". The cup rubber coagulates and dries through natural
processes and, when gathered in sufficient quantities, is milled and rolled through a series of rollers until by force of pressure it is
formed into a mass of the desired thickness called "3X Brown Crepe." Like ground and bark rubber, no chemicals are added to cup
rubber to produce 3X Brown Crepe. Cup rubber in its original form, like ground and bark rubber, is spoiled and has a bad odor.

2X Brown Crepe

2X Brown Crepe is obtained by milling or rolling the excess pieces of coagulated rubber latex which had been cut or trimmed from
the from the ribbed smoked sheets No. 2 into a uniform mass. 2X Brown Crepe is produced in the same manner as the other
sheets of crepe rubber, i.e., without the addition of any chemicals.

Petitioner during the said period sold its foregoing rubber products locally and as prescribed by the respondent's regulations
declared same for tax purposes which respondent accordingly assessed. Petitioner paid, under protest, the corresponding sales
taxes thereon claiming exemption therefrom under Section 188 (b) of the National Internal Revenue Code.

The following sales taxes on the aforementioned rubber products were paid under protest —

From Jan. 1, 1955 to Dec. 31, P83,193.48

1956

From Jan. 1, 1957 to June 30, P20,504.99

1957

From July 1, 1957 to Dec. 31, P52,378.90

1958

It is further stipulated that the sales tax collected from petitioner American Rubber Company on the local sales of its rubber
products, following Internal Revenue General Circulars Nos. 431 and 440, had been separately itemized and billed by petitioner
Company in the invoices issued to the customers, that paid both the value of the rubber articles and the separately itemized sales
tax, from January 1, 1955 to August 2, 1957.

After paying under protest, the petitioner claimed refund of the sales taxes paid by it on the ground that under section 188,
paragraph b, of the Internal Revenue Code, as amended, 1 its rubber products were agricultural products exempt from sales tax,
and upon refusal of the Commissioner of Internal Revenue, brought the case on appeal to the Court of Tax Appeals (C.T.A. Nos.
356, 440,, 632). The respondent Commissioner interposed defenses, denying that petitioner's products were agricultural ones
within the exemption; claiming that there had been no exhaustion of administrative remedies; and argued that the sales tax having
been passed to the buyers during the period that elapsed from January 1, 1955 to August 2, 1957, the petitioner did not have
personality to demand, sue for and recover the aforesaid sales taxes, plus interest.

In its decision, now under appeal, the Tax Court held Preserved Latex, Flat Bark Rubber, and 3X Brown Crepe to be agricultural
products, "because the labor employed in the processing thereof is agricultural labor", and hence, the sales of such products were
exempt from sales tax, but declared Pale Crepe No. 1, Ribbed Smoked Sheets Nos. 1 and 3, as well as 2X Brown Crepe (which is
obtained from rolling excess pieces of Smoked Sheets) to be manufactured products, sales of which were subject to the tax. It
overruled the defense of non-exhaustion of administrative remedies and upheld the Revenue Commissioner's stand that petitioner
Company was not entitled to recover the sales tax that had been separately billed to its customers, and paid by the latter. Hence, it
dismissed the appeal in C.T.A. Nos. 356 and 440 and ordered respondent Commissioner to refund only P3,916.49 without interest,
or costs.

Both parties then duly appealed to this.

The issues posed on these appeals are:

 (1) Whether the plaintiff's rubber products above described should be considered agricultural or manufactured for
purposes of their subjection to the sales tax;

(2) Whether plaintiff is or is not entitled to recover the sales tax paid by it, but passed on to and paid by the buyers of its
products; and

(3) Whether plaintiff is or is not entitled to interest on the sales tax paid by it under protest, in case recovery thereof is
allowed.

The first issue, in our opinion, is governed by the principles laid down by this Court in Philippine Packing Corporation vs. Collector
of Internal Revenue, 100 Phil. 545 et seq. We there ruled that the exemption from sales tax established in section 188 (b) of the
Internal Revenue Tax Code in favor of sales of agricultural products, whether in their original form or not, made by the producer or
owner of the land where produced is not taken away merely because the produce undergoes processing at the hand of said
producer or owner for the purpose of working his product into a more convenient and valuable form suited to meet the demand of
an expanded market; that the exemption was not designed in favor of the small agricultural producer, already exempted by the
subsequent paragraphs of the same section 188, but that said exemption is not incompatible with large scale agricultural production
that incidentally required resort to preservative processes designed to increase or prolong marketability of the product.

In the case before us, the parties have stipulated that fresh latex directly obtained from the rubber tree, which is clearly an
agricultural product, becomes spoiled after only two hours. It has, therefore, a severely limited marketability. The addition of
ammonia prevents its deterioration for about a month, and we see no reason why this preservative process should wrest away from
the preserved latex the protective mantle of the tax exemption.

Taking also into account the great distance that separates the plaintiff's plantation from the main rubber processing centers in
Japan, the United States and Europe, and the difficulty in handling products in liquid form, it can be discerned without difficulty that
preserved, latex, with its 30-day spoilage limit, is still severely handicapped for export and dollar earning purposes.

To overcome these shortcomings, and extend its useful life almost indefinitely, it becomes necessary to separate and solidify the
rubber granules diffused in the latex, and hence, according to the stipulation of facts and the evidence, acetic acid is added to
hasten coagulation. There is nothing on record to show that the acetic acid in way produces anything that was not originally in the
source, the liquid latex. The coagulum is then rolled and compacted and afterwards air dried to make Pale Crepe(1 and 2), or else
cured and smoked to produce rubber sheets. Once again we see nothing in this processing to alter the agricultural nature of the
result; what takes place is merely an accelerated coagulation and dessication that would naturally occur anyway, only within a
longer period of time, coupled with greater spoilage of the product.

Thus the operations carried out by plaintiff appear to be purely preservative in nature, made necessary, by its production of fresh
rubber latex in a large scale. they are purely incidental to the latter, just as the canning of skinned and cored pineapples in syrup
was held to be incidental to the large-scale cultivation of the fruit in the Philippine Packing Corporation case (ante). Being
necessary to suit the product to the demands of the market, the operations in both cases should lead to the same result, non-
taxability of the sales of the respective agricultural products. In not so holding, the Tax Court was in error.

Even less justifiable is the position taken by the Revenue Commissioner in his appeal against the finding of the Tax Court that Flat
Bark 3X Brown Crepe rubber are agricultural products. According to the record, these sheets result from the drippings and waste
rubber that have dried naturally, that are rolled and compacted into the desired thickness, without any other processing.

As to 2X Brown Crepe which is compacted out of the trimmings and waste left over from the production of ribbed smoked sheets,
no reason is seen why it should be treated differently from the ribbed smoked sheets themselves.

In his appeal, the Revenue Commissioner contends that all of plaintiff's products should be deemed manufactured articles, on the
strength of section 194 (n) of the Revenue Code defining a "manufacturer" as

every person who by physical or chemical process alters the exterior texture or form or inner substances of any raw
material or manufactured or partially manufactured product in such manner as to prepare it for a special use or uses to
which it could not have been put to in its original condition, or who . . . alters the quality of any such raw material . . . as to
reduce it to marketable shape . . . .

But, as pointed out in the Philippine Packing Corporation case, this definition is not applicable to the exemption of agricultural
products, "whether in their original form or not". The use of this last phrase in the statute clearly indicates that the agricultural
product may be altered in texture or form without being divested of the exemption (cas cit. 100 Phil., p. 548). The exception would
be sales of agricultural products while Republic Act No. 1612 was in effect because under this Act the freedom from sales tax
became restricted to agricultural products "in their original form" only. So that plaintiff's sales from August 24, 1956 (approval of
Republic Act 1612) to June 22, 1957 (when Republic Act 1856 became effective and restored the exemption to agricultural
products "whether in their original form or not") became properly taxable. Under paragraphs (A)2 and B(4) of the additional
stipulation of facts (CTA Rec. pp. 261-262, G.R. L-19801), the sales tax properly collected during this period of plaintiff's
transactions amounted to P18,187.19 from August 24 to December 31, 1956; and P18,888.28 from January 1 to June 21, 1957, or
a total of P37,075.47. This last amount is, therefore non-recoverable.2

The second issue in this appeal concerns the holding of the Court of Tax Appeals that the plaintiff Company is not entitled to
recover the sales tax paid by it from January, 1955 to August 2, 1957, because during that period the plaintiff had separately
invoiced and billed the corresponding sales tax to the buyers of its products. In so holding, the Tax Court relied on our decisions in
Medina vs. City of Baguio, 91 Phil. 854; Mendoza, Santos & Co. vs. Municipality of Meycawayan, L-6069-6070, April 30, 1954 (94
Phil. 1047); and Zosimo Rojas & Bros. vs. City of Cavite, L-10730, May 27, 1958.

The basic ruling is that of Medina vs. City of Baguio, supra, where this Court affirmed the ruling of the court of First Instance to the
effect that —

"The amount collected from the theatergoers as additional price of admission tickets is not the property of plaintiffs or any
of them. It is paid by the public. If anybody has the right to claim it, it is those who paid it. Only owners of property has the
right to claim said property. The cine owner acted as mere agents of the city in collecting additional price charged in the
sale of admission tickets." (Medina vs. City of Baguio, 91 Phil. 854) (Emphasis supplied)

We agree with the plaintiff-appellant that the Medina ruling is not applicable to the present case, since the municipal taxes therein
imposed were taxes on the admission tickets sold, so that, in effect, they were levies upon the theatergoers who bought them; so
much so that (as the decision expressly ruled) the tax was collected by the theater owners as agents of the respective municipal
treasurers. This does not obtain in the case at bar. The Medina ruling was merely followed in Rojas & Bros. vs. Cavite, supra; and
in Mendoza, Santos & Co. vs. Municipality of Meycawayan, 94 Phil. 1047.

By contrast with the municipal taxes involved in the preceding cases, the sales tax is by law imposed directly, not on the thing sold,
but on the act (sale) of the manufacturer, producer or importer (Op. of the Secretary of Justice, June 15, 1946; 47 C.J.S., p. 1141),
who is exclusively made liable for its timely payment. There is no proof that the tax paid by plaintiff is the very money paid by its
customers. Where the tax money paid by the plaintiff came from is really no concern of the Government, but solely a matter
between the plaintiff and its customers. Anyway, once recovered, the plaintiff must hold the refund taxes in trust for the individual
purchasers who advanced payment thereof, and whose names must appear in plaintiff's records.

Moreover, the separate billing of the sales tax in appellant's invoices was a direct result of the respondent Commissioner's General
Circular No. 440, providing that —

if a manufacturer, producer, or importer, in fixing the gross selling price of an article sold by him, has included an amount
intended to cover the sales tax in the gross selling price of the article, the sales tax shall be based on the gross selling
price less the amount intended to cover the tax, if the same is billed to the purchaser as a separate item in the invoice. . . .
(Emphasis supplied)

In other words, the separate itemization of the sales tax in the invoices was permitted to avoid the taxpayer being compelled to pay
a sales tax on the tax itself. It does not seem either just or proper that a step suggested by the Internal Revenue authorities
themselves to protect the taxpayer from paying a double tax should now be used to block his action to recover taxes collected
without legal sanction.

Finally, a more important reason that militates against extensive and indiscriminate application of the Medina vs. City of Baguio
ruling is that it would tend to perpetuate illegal taxation; for the individual customers to whom the tax is ultimately shifted will
ordinarily not care to sue for its recovery, in view of the small amount paid by each and the high cost of litigation for the reclaiming
of an illegal tax. In so far, therefore, as it favors the imposition, collection and retention of illegal taxes, and encourages a multiplicity
of suits, the Tax Court's ruling under appeal violates morals and public policy.

The plaintiff Company also urges that the refund of the taxes should include interest thereon. While this Court has allowed recovery
of interest in some cases, it has done so only in cases of patent arbitrariness on the part of the Revenue authorities; and in this
instance we agree with the Tax Court that no such patent arbitrariness has been shown.

IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals is affirmed in Case G.R. No. L-19667 and modified in
cases G.R. Nos. L-19801, L-19802 and L-19803, by declaring the sales taxes therein involved to have been improperly denied
levied and collected and ordering respondent Commissioner of Internal Revenue to refund the same, except the taxes
corresponding to the period from August 24, 1956 to June 22, 1957, during which Republic Act No. 1612 was in force. The amount
of P37,075.47 paid by the taxpayer for this period is hereby declared properly collected and not refundable. Without special
pronouncement as to costs.

Concepcion, C.J., Barrera, Dizon, Regala, Makalintal, Bengzon, J.P., Zaldivar and Sanchez, JJ., concur.

Footnotes

1
"SEC. 188. Transactions and persons not subject to percentage tax.—In computing the tax impose in section one hundred eighty-four, one hundred eighty-
five, and one hundred eighty-six, transactions in the following commodities shall be excluded:

(a) Articles subject to tax under Title IV of this Code.

(b) Agricultural products and the ordinary salt whether in their original form or not when sold, bartered, or exchanged in this country by the
producer or owner of the land where produced, as well as all kinds of fish and its by-products when sold, bartered, or exchanged by the fisherman
or fishing operator whether in their original state or not.

2
Collector of Internal Revenue vs. American Rubber Co., L-10963, April 30, 1963; Tan Kim Tee vs. Court of Tax Appeals, L-18080, April 22, 1963.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-31092 February 27, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
JOHN GOTAMCO & SONS, INC. and THE COURT OF TAX APPEALS, respondents.

YAP, J.:

The question involved in this petition is whether respondent John Gotamco & Sons, Inc. should pay the 3% contractor's tax under
Section 191 of the National Internal Revenue Code on the gross receipts it realized from the construction of the World Health
Organization office building in Manila.

The World Health Organization (WHO for short) is an international organization which has a regional office in Manila. As an
international organization, it enjoys privileges and immunities which are defined more specifically in the Host Agreement entered
into between the Republic of the Philippines and the said Organization on July 22, 1951. Section 11 of that Agreement
provides, inter alia, that "the Organization, its assets, income and other properties shall be: (a) exempt from all direct and indirect
taxes. It is understood, however, that the Organization will not claim exemption from taxes which are, in fact, no more than charges
for public utility services; . . .

When the WHO decided to construct a building to house its own offices, as well as the other United Nations offices stationed in
Manila, it entered into a further agreement with the Govermment of the Republic of the Philippines on November 26, 1957. This
agreement contained the following provision (Article III, paragraph 2):

The Organization may import into the country materials and fixtures required for the construction free from all
duties and taxes and agrees not to utilize any portion of the international reserves of the Government.

Article VIII of the above-mentioned agreement referred to the Host Agreement concluded on July 22, 1951 which granted the
Organization exemption from all direct and indirect taxes.

In inviting bids for the construction of the building, the WHO informed the bidders that the building to be constructed belonged to an
international organization with diplomatic status and thus exempt from the payment of all fees, licenses, and taxes, and that
therefore their bids "must take this into account and should not include items for such taxes, licenses and other payments to
Government agencies."

The construction contract was awarded to respondent John Gotamco & Sons, Inc. (Gotamco for short) on February 10, 1958 for the
stipulated price of P370,000.00, but when the building was completed the price reached a total of P452,544.00.

Sometime in May 1958, the WHO received an opinion from the Commissioner of the Bureau of Internal Revenue stating that "as
the 3% contractor's tax is an indirect tax on the assets and income of the Organization, the gross receipts derived by contractors
from their contracts with the WHO for the construction of its new building, are exempt from tax in accordance with . . . the Host
Agreement." Subsequently, however, on June 3, 1958, the Commissioner of Internal Revenue reversed his opinion and stated that
"as the 3% contractor's tax is not a direct nor an indirect tax on the WHO, but a tax that is primarily due from the contractor, the
same is not covered by . . . the Host Agreement."

On January 2, 1960, the WHO issued a certification state 91 inter alia,:

When the request for bids for the construction of the World Health Organization office building was called for,
contractors were informed that there would be no taxes or fees levied upon them for their work in connection with
the construction of the building as this will be considered an indirect tax to the Organization caused by the
increase of the contractor's bid in order to cover these taxes. This was upheld by the Bureau of Internal Revenue
and it can be stated that the contractors submitted their bids in good faith with the exemption in mind.

The undersigned, therefore, certifies that the bid of John Gotamco & Sons, made under the condition stated
above, should be exempted from any taxes in connection with the construction of the World Health Organization
office building.

On January 17, 1961, the Commissioner of Internal Revenue sent a letter of demand to Gotamco demanding payment of P
16,970.40, representing the 3% contractor's tax plus surcharges on the gross receipts it received from the WHO in the construction
of the latter's building.
Respondent Gotamco appealed the Commissioner's decision to the Court of Tax Appeals, which after trial rendered a decision, in
favor of Gotamco and reversed the Commissioner's decision. The Court of Tax Appeal's decision is now before us for review on
certiorari.

In his first assignment of error, petitioner questions the entitlement of the WHO to tax exemption, contending that the Host
Agreement is null and void, not having been ratified by the Philippine Senate as required by the Constitution. We find no merit in
this contention. While treaties are required to be ratified by the Senate under the Constitution, less formal types of international
agreements may be entered into by the Chief Executive and become binding without the concurrence of the legislative body. 1 The
Host Agreement comes within the latter category; it is a valid and binding international agreement even without the concurrence of
the Philippine Senate.

The privileges and immunities granted to the WHO under the Host Agreement have been recognized by this Court as legally
binding on Philippine authorities. 2

Petitioner maintains that even assuming that the Host Agreement granting tax exemption to the WHO is valid and enforceable, the
3% contractor's tax assessed on Gotamco is not an "indirect tax" within its purview. Petitioner's position is that the contractor's tax
"is in the nature of an excise tax which is a charge imposed upon the performance of an act, the enjoyment of a privilege or the
engaging in an occupation. . . It is a tax due primarily and directly on the contractor, not on the owner of the building. Since this tax
has no bearing upon the WHO, it cannot be deemed an indirect taxation upon it."

We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. Said the respondent court:

In context, direct taxes are those that are demanded from the very person who, it is intended or desired, should
pay them; while indirect taxes are those that are demanded in the first instance from one person in the
expectation and intention that he can shift the burden to someone else. (Pollock vs. Farmers, L & T Co., 1957 US
429, 15 S. Ct. 673, 39 Law. Ed. 759.) The contractor's tax is of course payable by the contractor but in the last
analysis it is the owner of the building that shoulders the burden of the tax because the same is shifted by the
contractor to the owner as a matter of self-preservation. Thus, it is an indirect tax. And it is an indirect tax on the
WHO because, although it is payable by the petitioner, the latter can shift its burden on the WHO. In the last
analysis it is the WHO that will pay the tax indirectly through the contractor and it certainly cannot be said that
'this tax has no bearing upon the World Health Organization.

Petitioner claims that under the authority of the Philippine Acetylene Company versus Commissioner of Internal Revenue, et
al., 3 the 3% contractor's tax fans directly on Gotamco and cannot be shifted to the WHO. The Court of Tax Appeals, however, held
that the said case is not controlling in this case, since the Host Agreement specifically exempts the WHO from "indirect taxes." We
agree. The Philippine Acetylene case involved a tax on sales of goods which under the law had to be paid by the manufacturer or
producer; the fact that the manufacturer or producer might have added the amount of the tax to the price of the goods did not make
the sales tax "a tax on the purchaser." The Court held that the sales tax must be paid by the manufacturer or producer even if the
sale is made to tax-exempt entities like the National Power Corporation, an agency of the Philippine Government, and to the Voice
of America, an agency of the United States Government.

The Host Agreement, in specifically exempting the WHO from "indirect taxes," contemplates taxes which, although not imposed
upon or paid by the Organization directly, form part of the price paid or to be paid by it. This is made clear in Section 12 of the Host
Agreement which provides:

While the Organization will not, as a general rule, in the case of minor purchases, claim exemption from excise
duties, and from taxes on the sale of movable and immovable property which form part of the price to be paid,
nevertheless, when the Organization is making important purchases for official use of property on which such
duties and taxes have been charged or are chargeable the Government of the Republic of the Philippines shall
make appropriate administrative arrangements for the remission or return of the amount of duty or tax. (Emphasis
supplied).

The above-quoted provision, although referring only to purchases made by the WHO, elucidates the clear intention of the
Agreement to exempt the WHO from "indirect" taxation.

The certification issued by the WHO, dated January 20, 1960, sought exemption of the contractor, Gotamco, from any taxes in
connection with the construction of the WHO office building. The 3% contractor's tax would be within this category and should be
viewed as a form of an "indirect tax" On the Organization, as the payment thereof or its inclusion in the bid price would have meant
an increase in the construction cost of the building.

Accordingly, finding no reversible error committed by the respondent Court of Tax Appeals, the appealed decision is hereby
affirmed.

SO ORDERED.

Narvasa, Melencio-Herrera, Cruz, Feliciano, Gancayco and Sarmiento, JJ., concur.

Footnotes
1 Usaffe Veterans Association, Inc. vs. Treasurer of the Philippines, et. al., 105 Phil. 1030.
2 World Health Organization and Dr. Leonce Verstuyft v. Hon. Benjamin Aquino, etc., et al., 48 SCRA 242.
3 127 Phil. 461.

===

EN BANC

G.R. No. 198146, August 08, 2017

POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT CORPORATION, Petitioner, v.COMMISSIONER OF

INTERNAL, Respondent.

DECISION

CARPIO, J.:

The Case

This petition for review1 assails the 27 September 2010 Decision2 and the 3 August 2011 Resolution3 of the Court of
Appeals in CA-G.R. SP No. 108156. The Court of Appeals nullified the Decisions dated 13 March 2008 and 14 January
2009 of the Secretary of Justice in OSJ Case No. 2007-3 for lack of jurisdiction.

The Facts

Petitioner Power Sector Assets and Liabilities Management Corporation (PSALM) is a government-owned and controlled
corporation created under Republic Act No. 9136 (RA 9136), also known as the Electric Power Industry Reform Act of
2001 (EPIRA).4 Section 50 of RA 9136 states that the principal purpose of PSALM is to manage the orderly sale,
disposition, and privatization of the National Power Corporation (NPC) generation assets, real estate and other disposable
assets, and Independent Power Producer (IPP) contracts with the objective of liquidating all NPC financial obligations and
stranded contract costs in an optimal manner.

PSALM conducted public biddings for the privatization of the Pantabangan-Masiway Hydroelectric Power Plant
(Pantabangan-Masiway Plant) and Magat Hydroelectric Power Plant (Magat Plant) on 8 September 2006 and 14
December 2006, respectively. First Gen Hydropower Corporation with its $129 Million bid and SN Aboitiz Power
Corporation with its $530 Million bid were the winning bidders for the Pantabangan-Masiway Plant and Magat Plant,
respectively.

On 28 August 2007, the NPC received a letter5 dated 14 August 2007 from the Bureau of Internal Revenue (BIR)
demanding immediate payment of P3,813,080,4726 deficiency value-added tax (VAT) for the sale of the Pantabangan-
Masiway Plant and Magat Plant. The NPC indorsed BIR's demand letter to PSALM.

On 30 August 2007, the BIR, NPC, and PSALM executed a Memorandum of Agreement (MOA),7 wherein they agreed that:

A) NPC/PSALM shall remit under protest to the BIR the amount of Php 3,813,080,472.00, representing basic VAT as
shown in the BIR letter dated August 14, 2007, upon execution of this Memorandum of Agreement (MOA).

B) This remittance shall be without prejudice to the outcome of the resolution of the Issues before the appropriate courts
or body.

C) NPC/PSALM and BIR mutually undertake to seek final resolution of the Issues by the appropriate courts or body.

D) BIR shall waive any and all interests and surcharges on the aforesaid BIR letter, except when the case is elevated by
the BIR before an appellate court.

E) Nothing contained in this MOA shall be claimed or construed to be an admission against interest as to any party or
evidence of any liability or wrongdoing whatsoever nor an abandonment of any position taken by NPC/PSALM in
connection with the Issues.

F) Each Party to this MOA hereto expressly represents that the authorized signatory hereto has the legal authority to bind
[the] party to all the terms of this MOA.

G) Any resolution by the appropriate courts or body in favor of the BIR, other than a decision by the Supreme Court,
shall not constitute as precedent and sufficient legal basis as to the taxability of NPC/PSALM's transactions pursuant to
the privatization of NPC's assets as mandated by the EPIRA Law.
H) Any resolution in favor of NPC/PSALM by any appropriate court or body shall be immediately executory without
necessity of notice or demand from NPC/PSALM. A ruling from the Department of Justice (DOJ) that is favorable to
NPC/PSALM shall be tantamount to the filing of an application for refund (in cash)/tax credit certificate (TCC), at the
option of NPC/PSALM. BIR undertakes to immediately process and approve the application, and release the tax
refund/TCC within fifteen (15) working days from issuance of the DOJ ruling that is favorable to NPC/PSALM.

I) Either party has the right to appeal any adverse decision against it before any appropriate court or body.

J) In the event of failure by the BIR to fulfill the undertaking referred to in (H) above, NPC/PSALM shall assign to DOF its
right to the refund of the subject remittance, and the DOF shall offset such amount against any liability of NPC/PSALM to
the National Government pursuant to the objectives of the EPIRA on the application of the privatization proceeds.8 In
compliance with the MOA, PSALM remitted under protest to the BIR the amount of P3,813,080,472, representing the
total basic VAT due.

On 21 September 2007, PSALM filed with the Department of Justice (DOJ) a petition for the adjudication of the dispute
with the BIR to resolve the issue of whether the sale of the power plants should be subject to VAT. The case was
docketed as OSJ Case No. 2007-3.

On 13 March 2008, the DOJ ruled in favor of PSALM, thus:

In cases involving purely question[s] of law, such as in the instant case, between and among the government-owned and
controlled corporation and government bureau, the issue is best settled in this Department. In the final analysis, there is
but one party in interest, the Government itself in this litigation.

xxxx

The instant petition is an original petition involving only [a] question of law on whether or not the sale of the
Pantabangan-Masiway and Magat Power Plants to private entities under the mandate of the EPIRA is subject to VAT. It is
to be stressed that this is not an appeal from the decision of the Commissioner of Internal Revenue involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, or other matters arising under the National
Internal Revenue Code or other law.

xxxx

Moreover, it must be noted that respondent already invoked this Office's jurisdiction over it by praying in respondent's
Motion for Extension of Time to File Comment (On Petitioner's Petition dated 21 September 2007) and later, Omnibus
Motion To Lift Order dated 22 October 2007 and To Admit Attached Comment. The Court has held that the filing of
motions seeking affirmative relief, such as, to admit answer, for additional time to answer, for reconsideration of a
default judgment, and to lift order of default with motion for reconsideration, are considered voluntary submission to the
jurisdiction of the court. Having sought this Office to grant extension of time to file answer or comment to the instant
petition, thereby submitting to the jurisdiction of this Court [sic], respondent cannot now repudiate the very same
authority it sought.

xxxx

When petitioner was created under Section 49 of R.A. No. 9136, for the principal purpose to manage the orderly sale,
disposition, and privatization of NPC generation assets, real estate and other disposable assets, IPP contracts with the
objective of liquidating all NPC financial obligations and stranded contract costs in an optimal manner, there was, by
operation of law, the transfer of ownership of NPC assets. Such transfer of ownership was not carried out in the ordinary
course of transfer which must be accorded with the required elements present for a valid transfer, but in this case, in
accordance with the mandate of the law, that is, EPIRA. Thus, respondent cannot assert that it was NPC who was the
actual seller of the Pantabangan-Masiway and Magat Power Plants, because at the time of selling the aforesaid power
plants, the owner then was already the petitioner and not the NPC. Consequently, petitioner cannot also be considered a
successor-in-interest of NPC.

Since it was petitioner who sold the Pantabangan-Masiway and Magat Power Plants and not the NPC, through a
competitive and public bidding to the private entities, Section 24(A) of R.A. No. 9337 cannot be applied to the instant
case. Neither the grant of exemption and revocation of the tax exemption accorded to the NPC, be also affected to
petitioner.

xxxx

Clearly, the disposition of Pantabangan-Masiway and Magat Power Plants was not in the regular conduct or pursuit of a
commercial or an economic activity, but was effected by the mandate of the EPIRA upon petitioner to direct the orderly
sale, disposition, and privatization of NPC generation assets, real estate and other disposable assets, and IPP contracts,
and afterward, to liquidate the outstanding obligations of the NPC.

xxxx
Verily, to subject the sale of generation assets in accordance with a privatization plan submitted to and approved by the
President, which is a one time sale, to VAT would run counter to the purpose of obtaining optimal proceeds since
potential bidders would necessarily have to take into account such extra cost of VAT.

WHEREFORE, premises considered, the imposition by respondent Bureau of Internal Revenue of deficiency Value-Added
Tax in the amount of P3,813,080,472.00 on the privatization sale of the Pantabangan-Masiway and Magat Power Plants,
done in accordance with the mandate of the Electric Power Industry Reform Act of 2001, is hereby declared NULL and
VOID. Respondent is directed to refund the amount of P3,813,080,472.00 remitted under protest by petitioner to
respondent.9

The BIR moved for reconsideration, alleging that the DOJ had no jurisdiction since the dispute involved tax laws
administered by the BIR and therefore within the jurisdiction of the Court of Tax Appeals (CTA). Furthermore, the BIR
stated that the sale of the subject power plants by PSALM to private entities is in the course of trade or business, as
contemplated under Section 105 of the National Internal Revenue Code (NIRC) of 1997, which covers incidental
transactions. Thus, the sale is subject to VAT. On 14 January 2009, the DOJ denied BIR's Motion for Reconsideration.10

On 7 April 2009,11 the BIR Commissioner (Commissioner of Internal Revenue) filed with the Court of Appeals a petition
for certiorari, seeking to set aside the DOJ's decision for lack of jurisdiction. In a Resolution dated 23 April 2009, the
Court of Appeals dismissed the petition for failure to attach the relevant pleadings and documents.12 Upon motion for
reconsideration, the Court of Appeals reinstated the petition in its Resolution dated 10 July 2009.13

The Ruling of the Court of Appeals

The Court of Appeals held that the petition filed by PSALM with the DOJ was really a protest against the assessment of
deficiency VAT, which under Section 20414 of the NIRC of 1997 is within the authority of the Commissioner of Internal
Revenue (CIR) to resolve. In fact, PSALM's objective in filing the petition was to recover the P3,813,080,472 VAT which
was allegedly assessed erroneously and which PSALM paid under protest to the BIR.

Quoting paragraph H15 of the MOA among the BIR, NPC, and PSALM, the Court of Appeals stated that the parties in effect
agreed to consider a DOJ ruling favorable to PSALM as the latter's application for refund.

Citing Section 416 of the NIRC of 1997, as amended by Section 3 of Republic Act No. 8424 (RA 8424)17and Section 718 of
Republic Act No. 9282 (RA 9282),19 the Court of Appeals ruled that the CIR is the proper body to resolve cases involving
disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or
other matters arising under the NIRC or other laws administered by the BIR. The Court of Appeals stressed that
jurisdiction is conferred by law or by the Constitution; the parties, such as in this case, cannot agree or stipulate on it by
conferring jurisdiction in a body that has none. Jurisdiction over the person can be waived but not the jurisdiction over
the subject matter which is neither subject to agreement nor conferred by consent of the parties. The Court of Appeals
held that the DOJ Secretary erred in ruling that the CIR is estopped from assailing the jurisdiction of the DOJ after having
agreed to submit to its jurisdiction. As a general rule, estoppel does not confer jurisdiction over a cause of action to a
tribunal where none, by law, exists.

In conclusion, the Court of Appeals found that the DOJ Secretary gravely abused his discretion amounting to lack of
jurisdiction when he assumed jurisdiction over OSJ Case No. 2007-3. The dispositive portion of the Court of Appeals' 27
September 2010 Decision reads:

WHEREFORE, premises considered, we hereby GRANT the petition. Accordingly: (1) the [D]ecision dated March 13, 2008,
and the Decision dated January 14, 2009 both issued by the public respondent Secretary of Justice in [OSJ Case No.]
2007-3 are declared NULL and VOID for having been issued without jurisdiction.

No costs.

SO ORDERED.20

PSALM moved for reconsideration, which the Court of Appeals denied in its 3 August 2011 Resolution. Hence, this
petition.

The Issues

Petitioner PSALM raises the following issues:

I. DID THE COURT OF APPEALS MISAPPLY THE LAW IN GIVING DUE COURSE TO THE PETITION FOR CERTIORARI IN CA-
G.R. SP NO. 108156?

II. DID THE SECRETARY OF JUSTICE ACT IN ACCORDANCE WITH THE LAW IN ASSUMING JURISDICTION AND SETTLING
THE DISPUTE BY AND BETWEEN THE BIR AND PSALM?
III. DID THE SECRETARY OF JUSTICE ACT IN ACCORDANCE WITH THE LAW AND JURISPRUDENCE IN RENDERING
JUDGMENT THAT THERE SHOULD BE NO VAT ON THE PRIVATIZATION, SALE OR DISPOSAL OF GENERATION ASSETS?

IV. DOES PUBLIC RESPONDENT DESERVE THE RELIEF OF CERTIORARI?21

The Ruling of the Court

We find the petition meritorious.

I. Whether the Secretary of Justice has jurisdiction over the case.

The primary issue in this case is whether the DOJ Secretary has jurisdiction over OSJ Case No. 2007-3 which involves the
resolution of whether the sale of the Pantabangan-Masiway Plant and Magat Plant is subject to VAT.

We agree with the Court of Appeals that jurisdiction over the subject matter is vested by the Constitution or by law, and
not by the parties to an action.22 Jurisdiction cannot be conferred by consent or acquiescence of the parties23 or by
erroneous belief of the court, quasi-judicial office or government agency that it exists.

However, contrary to the ruling of the Court of Appeals, we find that the DOJ is vested by law with jurisdiction over this
case. This case involves a dispute between PSALM and NPC, which are both wholly government- owned
corporations, and the BIR, a government office, over the imposition of VAT on the sale of the two power
plants. There is no question that originaljurisdiction is with the CIR, who issues the preliminary and the final tax
assessments. However, if the government entity disputes the tax assessment, the dispute is already between the BIR
(represented by the CIR) and another government entity, in this case, the petitioner PSALM. Under Presidential
Decree No. 24224(PD 242), all disputes and claims solely between government agencies and offices,
including government-owned or controlled corporations, shall be administratively settled or adjudicated by
the Secretary of Justice, the Solicitor General, or the Government Corporate Counsel, depending on the
issues and government agencies involved. As regards cases involving only questions of law, it is the Secretary of
Justice who has jurisdiction. Sections 1, 2, and 3 of PD 242 read:

Section 1. Provisions of law to the contrary notwithstanding, all disputes, claims and controversies
solely between or among the departments, bureaus, offices, agencies and instrumentalities of the National
Government, including constitutional offices or agencies, arising from the interpretation and application of
statutes, contracts or agreements, shall henceforth be administratively settled or adjudicated as provided
hereinafter: Provided, That, this shall not apply to cases already pending in court at the time of the effectivity of this
decree.

Section 2. In all cases involving only questions of law, the same shall be submitted to and settled or
adjudicated by the Secretary of Justice, as Attorney General and ex officio adviser of all government owned or
controlled corporations and entities, in consonance with Section 83 of the Revised Administrative Code. His ruling or
determination of the question in each case shall be conclusive and binding upon all the parties concerned.

Section 3. Cases involving mixed questions of law and of fact or only factual issues shall be submitted to and settled or
adjudicated by:

(a) The Solicitor General, with respect to disputes or claims [or] controversies between or among the departments,
bureaus, offices and other agencies of the National Government;

(b) The Government Corporate Counsel, with respect to disputes or claims or controversies between or among the
government-owned or controlled corporations or entities being served by the Office of the Government Corporate
Counsel; and

(c) The Secretary of Justice, with respect to all other disputes or claims or controversies which do not fall under the
categories mentioned in paragraphs (a) and (b). (Emphasis supplied)

The use of the word "shall" in a statute connotes a mandatory order or an imperative obligation.25 Its use rendered the
provisions mandatory and not merely permissive, and unless PD 242 is declared unconstitutional, its provisions must be
followed. The use of the word "shall" means that administrative settlement or adjudication of disputes and claims
between government agencies and offices, including government-owned or controlled corporations, is not merely
permissive but mandatory and imperative. Thus, under PD 242, it is mandatory that disputes and claims "solely"
between government agencies and offices, including government-owned or controlled corporations, involving only
questions of law, be submitted to and settled or adjudicated by the Secretary of Justice.

The law is clear and covers "all disputes, claims and controversies solely between or among the departments,
bureaus, offices, agencies and instrumentalities of the National Government, including constitutional offices
or agencies arising from the interpretation and application of statutes, contracts or agreements." When the
law says "all disputes, claims and controversies solely" among government agencies, the law means all, without
exception. Only those cases already pending in court at the time of the effectivity of PD 242 are not covered by the law.
The purpose of PD 242 is to provide for a speedy and efficient administrative settlement or adjudication of
disputes between government offices or agencies under the Executive branch, as well as to filter cases to
lessen the clogged dockets of the courts. As explained by the Court in Philippine Veterans Investment Development
Corp. (PHIVIDEC) v. Judge Velez:26

Contrary to the opinion of the lower court, P.D. No. 242 is not unconstitutional. It does not diminish the jurisdiction of
[the] courts but only prescribes an administrative procedure for the settlement of certain types of disputes between or
among departments, bureaus, offices, agencies, and instrumentalities of the National Government, including
government-owned or controlled corporations, so that they need not always repair to the courts for the settlement of
controversies arising from the interpretation and application of statutes, contracts or agreements. The procedure is not
much different, and no less desirable, than the arbitration procedures provided in Republic Act No. 876 (Arbitration Law)
and in Section 26, R.A. 6715 (The Labor Code). It is an alternative to, or a substitute for, traditional litigation in court
with the added advantage of avoiding the delays, vexations and expense of court proceedings. Or, as P.D. No. 242 itself
explains, its purpose is "the elimination of needless clogging of court dockets to prevent the waste of time and energies
not only of the government lawyers but also of the courts, and eliminates expenses incurred in the filing and prosecution
of judicial actions.27

PD 242 is only applicable to disputes, claims, and controversiessolely between or among the departments, bureaus,
offices, agencies and instrumentalities of the National Government, including government-owned or controlled
corporations, and where no private party is involved. In other words, PD 242 will only apply when all the parties
involved are purely government offices and government-owned or controlled corporations.28 Since this case is
a dispute between PSALM and NPC, both government-owned and controlled corporations, and the BIR, a National
Government office, PD 242 clearly applies and the Secretary of Justice has jurisdiction over this case. In fact, the MOA
executed by the BIR, NPC, and PSALM explicitly provides that "[a] ruling from the Department of Justice (DOJ) that is
favorable to NPC/PSALM shall be tantamount to the filing of an application for refund (in cash)/tax credit certificate
(TCC), at the option of NPC/PSALM."29 Such provision indicates that the BIR and petitioner PSALM and the NPC
acknowledged that the Secretary of Justice indeed has jurisdiction to resolve their dispute.

This case is different from the case of Philippine National Oil Company v. Court of Appeals,30 (PNOC v. CA) which involves
not only the BIR (a government bureau) and the PNOC and PNB (both government owned or controlled corporations), but
also respondent Tirso Savellano, a private citizen. Clearly, PD 242 is not applicable to the case of PNOC v. CA. Even
the ponencia in PNOC v. CA stated that the dispute in that case is not covered by PD 242, thus:

Even if, for the sake of argument, that P.D. No. 242 should prevail over Rep. Act No. 1125, the present dispute would
still not be covered by P.D. No. .242. Section 1 of P.D. No. 242 explicitly provides that only disputes, claims and
controversies solely between or among departments, bureaus, offices, agencies, and instrumentalities of the National
Government, including constitutional offices or agencies, as well as government-owned and controlled corporations, shall
be administratively settled or adjudicated. While the BIR is obviously a government bureau, and both PNOC and
PNB are government-owned and controlled corporations, respondent Savellano is a private citizen. His
standing in the controversy could not be lightly brushed aside. It was private respondent Savellano who gave the BIR the
information that resulted in the investigation of PNOC and PNB; who requested the BIR Commissioner to reconsider the
compromise agreement in question; and who initiated the CTA Case No. 4249 by filing a Petition for Review.31 (Emphasis
supplied)

In contrast, since this case is a disputesolely between PSALM and NPC, both government-owned and controlled
corporations, and the BIR, a National Government office, PD 242 clearly applies and the Secretary of Justice has
jurisdiction over this case.

It is only proper that intra-governmental disputes be settled administratively since the opposing government offices,
agencies and instrumentalities are all under the President's executive control and supervision. Section 17,
Article VII of the Constitution states unequivocally that: "The President shall have control of all the executive
departments, bureaus and offices. He shall ensure that the laws be faithfully executed." In Carpio v. Executive
Secretary,32 the Court expounded on the President's control over all the executive departments, bureaus and offices,
thus:

This presidential power of control over the executive branch of government extends over all executive officers from
Cabinet Secretary to the lowliest clerk and has been held by us, in the landmark case of Mondano vs. Silvosa, to mean
"the power of [the President] to alter or modify or nullify or set aside what a subordinate officer had done in the
performance of his duties and to substitute the judgment of the former with that of the latter." It is said to be at the very
"heart of the meaning of Chief Executive."

Equally well accepted, as a corollary rule to the control powers of the President, is the "Doctrine of Qualified Political
Agency." As the President cannot be expected to exercise his control powers all at the same time and in person, he will
have to delegate some of them to his Cabinet members.

Under this doctrine, which recognizes the establishment of a single executive, "all executive and administrative
organizations are adjuncts of the Executive Department, the heads of the various executive departments are assistants
and agents of the Chief Executive, and, except in cases where the Chief Executive is required by the Constitution or law
to act in person on the exigencies of the situation demand that he act personally, the multifarious executive and
administrative functions of the Chief Executive are performed by and through the executive departments, and the acts of
the Secretaries of such departments, performed and promulgated in the regular course of business, are, unless
disapproved or reprobated by the Chief Executive presumptively the acts of the Chief Executive."

Thus, and in short, "the President's power of control is directly exercised by him over the members of the Cabinet who, in
turn, and by his authority, control the bureaus and other offices under their respective jurisdictions in the executive
department."33

This power of control vested by the Constitution in the President cannot be diminished by law. As held in Rufino v.
Endriga,34 Congress cannot by law deprive the President of his power of control, thus:

The Legislature cannot validly enact a law that puts a government office in the Executive branch outside the control of
the President in the guise of insulating that office from politics or making it independent.If the office is part of the
Executive branch, it must remain subject to the control of the President. Otherwise, the Legislature can
deprive the President of his constitutional power of control over "all the executive x x x offices." If the
Legislature can do this with the Executive branch, then the Legislature can also deal a similar blow to the
Judicial branch by enacting a law putting decisions of certain lower courts beyond the review power of the
Supreme Court. This will destroy the system of checks and balances finely structured in the 1987 Constitution among
the Executive, Legislative, and Judicial branches.35(Emphasis supplied)

Clearly, the President's constitutional power of control over all the executive departments, bureaus and offices cannot be
curtailed or diminished by law. "Since the Constitution has given the President the power of control, with all its awesome
implications, it is the Constitution alone which can curtail such power."36This constitutional power of control of the
President cannot be diminished by the CTA. Thus, if two executive offices or agencies cannot agree, it is only
proper and logical that the President, as the sole Executive who under the Constitution has control over both
offices or agencies in dispute, should resolve the dispute instead of the courts. The judiciary should not
intrude in this executive function of determining which is correct between the opposing government offices
or agencies, which are both under the sole control of the President. Under his constitutional power of
control, the President decides the dispute between the two executive offices. The judiciary cannot substitute
its decision over that of the President. Only after the President has decided or settled the dispute can the courts'
jurisdiction be invoked. Until such time, the judiciary should not interfere since the issue is not yet ripe for judicial
adjudication. Otherwise, the judiciary would infringe on the President's exercise of his constitutional power of control over
all the executive departments, bureaus, and offices.

Furthermore, under the doctrine of exhaustion of administrative remedies, it is mandated that where a
remedy before an administrative body is provided by statute, relief must be sought by exhausting this
remedy prior to bringing an action in court in order to give the administrative body every opportunity to
decide a matter that comes within its jurisdiction.37 A litigant cannot go to court without first pursuing his
administrative remedies; otherwise, his action is premature and his case is not ripe for judicial determination.38 PD 242
(now Chapter 14, Book IV of Executive Order No. 292), provides for such administrative remedy. Thus, only after the
President has decided the dispute between government offices and agencies can the losing party resort to the courts, if it
so desires. Otherwise, a resort to the courts would be premature for failure to exhaust administrative remedies. Non-
observance of the doctrine of exhaustion of administrative remedies would result in lack of cause of action,39 which is one
of the grounds for the dismissal of a complaint.

The rationale of the doctrine of exhaustion. of administrative remedies was aptly explained by the Court in Universal
Robina Corp. (Corn Division) v. Laguna Lake Development Authority:40

The doctrine of exhaustion of administrative remedies is a cornerstone of our judicial system. The thrust of the rule is
that courts must allow administrative agencies to carry out their functions and discharge their responsibilities within the
specialized areas of their respective competence. The rationale for this doctrine is obvious. It entails lesser expenses and
provides for the speedier resolution of the controversies. Comity and convenience also impel courts of justice to shy away
from a dispute until the system of administrative redress has been completed.41

In requiring parties to exhaust administrative remedies before pursuing action in a court, the doctrine prevents
overworked courts from considering issues when remedies are available through administrative channels.42 Furthermore,
the doctrine endorses a more economical and less formal means of resolving disputes,43 and promotes efficiency since
disputes and claims are generally resolved more quickly and economically through administrative proceedings rather than
through court litigations.44

The Court of Appeals ruled that under the 1997 NIRC, the dispute between the parties is within the authority of the CIR
to resolve. Section 4 of the 1997 NIRC reads:

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

The power to decide disputed assessments, refunds in internal revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under this Code or other laws or portions thereof administered by the Bureau of
Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax
Appeals. (Emphasis supplied)
The first paragraph of Section 4 of the 1997 NIRC provides that the power of the CIR to interpret the NIRC provisions and
other tax laws issubject to review by the Secretary of Finance, who is the alter ego of the President. Thus, the
constitutional power of control of the President over all the executive departments, bureaus, and offices45 is still
preserved. The President's power of control, which cannot be limited or withdrawn by Congress, means the power of the
President to alter, modify, nullify, or set aside the judgment or action of a subordinate in the performance of his duties.46

The second paragraph of Section 4 of the 1997 NIRC, providing for the exclusive appellate jurisdiction of the CTA as
regards the CIR's decisions on matters involving disputed assessments, refunds in internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising under NIRC, is in conflict with PD 242. Under PD
242,all disputes and claims solely between government agencies and offices, including government-owned or controlled
corporations, shall be administratively settled or adjudicated by the Secretary of Justice, the Solicitor General, or the
Government Corporate Counsel, depending on the issues and government agencies involved.

To harmonize Section 4 of the 1997 NIRC with PD 242, the following interpretation should be adopted: (1) As
regards private entities and the BIR, the power to decide disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relation thereto, or other matters arising under the NIRC or other laws administered
by the BIR is vested in the CIR subject to the exclusive appellate jurisdiction of the CTA, in accordance with Section 4 of
the NIRC; and (2) Where the disputing parties areall public entities (covers disputes between the BIR and other
government entities), the case shall be governed y PD 242.

Furthermore, it should be noted that the 1997 NIRC is a general law governing the imposition of national internal
revenue taxes, fees, and charges.47On the other hand, PD 242 is a special law that applies only to disputes
involving solely government offices, agencies, or instrumentalities. The difference between a special law and a
general law was clarified in Vinzons-Chato v. Fortune Tobacco Corporation:48

A general statute is one which embraces a class of subjects or places and does not omit any subject or place naturally
belonging to such class. A special statute, as the term is generally understood, is one which relates to particular persons
or things of a class or to a particular portion or section of the state only.

A general law and a special law on the same subject are statutes in pari materia and should, accordingly, be read
together and harmonized, if possible, with a view to giving effect to both. The rule is that where there are two acts, one
of which is special and particular and the other general which, if standing alone, would include the same matter and thus
conflict with the special act, the special law must prevail since it evinces the legislative intent more clearly than that of a
general statute and must not be taken as intended to affect the more particular and specific provisions of the earlier act,
unless it is absolutely necessary so to construe it in order to give its words any meaning at all.

The circumstance that the special law is passed before or after the general act does not change the principle. Where the
special law is later, it will be regarded as an exception to, or a qualification of, the prior general act; and where the
general act is later, the special statute will be construed as remaining an exception to its terms, unless repealed
expressly or by necessary implication.49

Thus, even if the 1997 NIRC, a general statute, is a later act, PD 242, which is a special law, will still prevail
and is treated as an exception to the terms of the 1997 NIRC with regard solely to intra-governmental
disputes. PD 242 is a special law while the 1997 NIRC is a general law, insofar as disputes solely between or among
government agencies are concerned. Necessarily, such disputes must be resolved under PD 242 and not under the NIRC,
precisely because PD 242 specifically mandates the settlement of such disputes in accordance with PD 242. PD 242 is a
valid law prescribing the procedure for administrative settlement or adjudication of disputes among government offices,
agencies, and instrumentalities under the executive control and supervision of the President.50

Even the BIR, through its authorized representative, then OIC Commissioner of Internal Revenue Lilian B. Hefti,
acknowledged in the MOA executed by the BIR, NPC, and PSALM, that the Secretary of Justice has jurisdiction to resolve
its dispute with petitioner PSALM and the NPC. This is clear from the provision in the MOA which states:

H) Any resolution in favor of NPC/PSALM by any appropriate court or body shall be immediately executory without
necessity of notice or demand from NPC/PSALM. A ruling from the Department of Justice (DOJ) that is favorable
to NPC/PSALM shall be tantamount to the filing of an application for refund (in cash)/tax credit certificate
(TCC), at the option of NPC/PSALM. BIR undertakes to immediately process and approve the application, and
release the tax refund/TCC within fifteen (15) working days from issuance of the DOJ ruling that is favorable
to NPC/PSALM. (Emphasis supplied)

PD 242 is now embodied in Chapter 14, Book IV of Executive Order No. 292 (EO 292), otherwise known as the
Administrative Code of 1987, which took effect on 24 November 1989.51 The pertinent provisions read:

Chapter 14- Controversies Among Government

Offices and Corporations

SEC. 66. How Settled. - All disputes, claims and controversies, solely between or among the departments, bureaus,
offices, agencies and instrumentalities of the National Government, including government owned or controlled
corporations, such as those arising from the interpretation and application of statutes, contracts or agreements, shall be
administratively settled or adjudicated in the manner provided in this Chapter. This Chapter shall, however, not apply to
disputes involving the Congress, the Supreme Court, the Constitutional Commissions, and local governments.

SEC. 67. Disputes Involving Questions of Law. - All cases involving only questions of law shall be submitted to and
settled or adjudicated by the Secretary of Justice as Attorney-General of the National Government and as ex officio legal
adviser of all government-owned or controlled corporations. His ruling or decision thereon shall be conclusive and binding
on all the parties concerned.

SEC. 68. Disputes Involving Questions of Fact and Law.- Cases involving mixed questions of law and of fact or only
factual issues shall be submitted to and settled or adjudicated by:

(1) The Solicitor General, if the dispute, claim or controversy involves only departments, bureaus, offices and other
agencies of the National Government as well as government-owned or controlled corporations or entities of whom he is
the principal law officer or general counsel; and

(2) The Secretary of Justice, in all other cases not falling under paragraph (1).

SEC. 69. Arbitration. - The determination of factual issues may be referred to an arbitration panel composed of one
representative each of the parties involved and presided over by a representative of the Secretary of Justice or the
Solicitor General, as the case may be.

SEC. 70. Appeals. - The decision of the Secretary of Justice as well as that of the Solicitor General, when approved by the
Secretary of Justice, shall be final and binding upon the parties involved. Appeals may, however, be taken to the
President where the amount of the claim or the value of the property exceeds one million pesos. The decision of the
President shall be final.

SEC. 71. Rules and Regulations. - The Secretary of Justice shall promulgate the rules and regulations necessary to carry
out the provisions of this Chapter.

Since the amount involved in this case is more than one million pesos, the DOJ Secretary's decision may be appealed to
the Office of the President in accordance with Section 70, Chapter 14, Book IV of EO 292 and Section 552 of PD 242. If
the appeal to the Office of the President is denied, the aggrieved party can still appeal to the Court of Appeals under
Section 1, Rule 43 of the 1997 Rules of Civil Procedure.53However, in order not to further delay the disposition of this
case, the Court resolves to decide the substantive issue raised in the petition.54

II. Whether the sale of the power plants is subject to VAT.

To resolve the issue of whether the sale of the Pantabangan-Masiway and Magat Power Plants by petitioner PSALM to
private entities is subject to VAT, the Court must determine whether the sale is "in the course of trade or business" as
contemplated under Section 105 of the NIRC, which reads:

SEC 105. Persons Liable. - Any person who, in the course of trade or business, sells, barters, exchanges, leases
goods or properties, renders services, and any person who imports goods shall be subject to the value-added
tax (VAT) imposed in Sections 106 to 108 of this Code.

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services. This rule shall likewise apply to existing contracts of sale or lease of goods,
properties or services at the time of the effectivity of Republic Act 7716.

The phrase 'in the course of trade or business' means the regular conduct or pursuit of a commercial or an
economic activity, including transactions incidental thereto, by any person regardless of whether or not the
person engaged therein is a nonstock, nonprofit private organization (irrespective of the disposition of its
net income and whether or not it sells exclusively to members or their guests), or government entity.

The rule of regularity, to the contrary notwithstanding, services as defined in this Code rendered in the Philippines by
nonresident foreign persons shall be considered as being rendered in the course of trade or business. (Emphasis
supplied)

Under Section 50 of the EPIRA law, PSALM's principal purpose is to manage the orderly sale, disposition, and privatization
of the NPC generation assets, real estate and other disposable assets, and IPP contracts with the objective of liquidating
all NPC financial obligations and stranded contract costs in an optimal manner.

PSALM asserts that the privatization of NPC assets, such as the sale of the Pantabangan-Masiway and Magat Power
Plants, is pursuant to PSALM's mandate under the EPIRA law and is not conducted in the course of trade or business.
PSALM cited the 13 May 2002 BIR Ruling No. 020-02, that PSALM's sale of assets is not conducted in pursuit of any
commercial or profitable activity as to fall within the ambit of a VAT-able transaction under Sections 105 and 106 of the
NIRC. The pertinent portion of the ruling adverted to states:
2. Privatization of assets by PSALM is not subject to VAT

Pursuant to Section 105 in relation to Section 106, both of the Tax Code of 1997, a value-added tax equivalent to ten
percent (10%) of the gross selling price or gross value in money of the goods, is collected from any person, who, in the
course of trade or business, sells, barters, exchanges, leases goods or properties, which tax shall be paid by the seller or
transferor.

The phrase "in the course of trade or business" means the regular conduct or pursuit of a commercial activity, including
transactions incidental thereto.

Since the disposition or sale of the assets is a consequence of PSALM's mandate to ensure the orderly sale or disposition
of the property and thereafter to liquidate the outstanding loans and obligations of NPC, utilizing the proceeds from sales
and other property contributed to it, including the proceeds from the Universal Charge, and not conducted in pursuit of
any commercial or profitable activity, including transactions incidental thereto, the same will be considered an
isolated transaction, which will therefore not be subject to VAT. (BIR Ruling No. 113-98 dated July 23,
1998)55 (Emphasis supplied)

On the other hand, the CIR argues that the previous exemption of NPC from VAT under Section 13 of Republic Act No.
639556 (RA 6395) was expressly repealed by Section 24 of Republic Act No. 933757 (RA 9337), which reads:

SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby repealed and the persons and/or
transactions affected herein are made subject to the value-added tax subject to the provisions of Title IV of the National
Internal Revenue Code of 1997, as amended:

(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of National Power Corporation (NPC);

(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sale of generated power by
generation companies; and

(C) All other laws, acts, decrees, executive orders, issuances and rules and regulations or parts thereof which are
contrary to and inconsistent with any provisions of this Act are hereby repealed, amended or modified accordingly.

As a consequence, the CIR posits that the VAT exemption accorded to PSALM under BIR Ruling No. 020-02 is also
deemed revoked since PSALM is a successor-in-interest of NPC. Furthermore, the CIR avers that prior to the sale, NPC
still owned the power plants and not PSALM, which is just considered as the trustee of the NPC properties. Thus, the sale
made by NPC or its successors-in-interest of its power plants should be subject to the 10% VAT beginning 1 November
2005 and 12% VAT beginning 1 February 2007.

We do not agree with the CIR's position, which is anchored on the wrong premise that PSALM is a successor-in-interest of
NPC. PSALM is not a successor-in-interest of NPC. Under its charter, NPC is mandated to "undertake the development of
hydroelectric generation of power and the production of electricity from nuclear, geothermal and other sources, as well as
the transmission of electric power on a nationwide basis."58 With the passage of the EPIRA law which restructured the
electric power industry into generation, transmission, distribution, and supply sectors, the NPC is now primarily
mandated to perform missionary electrification function through the Small Power Utilities Group (SPUG) and is
responsible for providing power generation and associated power delivery systems in areas that are not connected to the
transmission system.59 On the other hand, PSALM, a government-owned and controlled corporation, was created under
the EPIRA law to manage the orderly sale and privatization of NPC assets with the objective of liquidating all of NPC's
financial obligations in an optimal manner. Clearly, NPC and PSALM have different functions.Since PSALM is not a
successor-in-interest of NPC, the repeal by RA 9337 of NPC's VAT exemption does not affect PSALM.

In any event, even if PSALM is deemed a successor-in-interest of NPC, still the sale of the power plants is not "in the
course of trade or business" as contemplated under Section 105 of the NIRC, and thus, not subject to VAT.The sale of
the power plants is not in pursuit of a commercial or economic activity but a governmental function
mandated by law to privatize NPC generation assets.PSALM was created primarily to liquidate all NPC financial
obligations and stranded contract costs in an optimal manner. The purpose and objective of PSALM are explicitly stated in
Section 50 of the EPIRA law, thus:

SEC. 50. Purpose and Objective, Domicile and Term of Existence. - The principal purpose of the PSALM Corp. is to
manage the orderly sale, disposition, and privatization of NPC generation assets, real estate and other
disposable assets, and IPP contracts with the objective of liquidating all NPC financial obligations and
stranded contract costs in an optimal manner.

The PSALM Corp. shall have its principal office and place of business within Metro Manila.

The PSALM Corp. shall exist for a period of twenty-five (25) years from the effectivity of this Act, unless otherwise
provided by law, and all assets held by it, all moneys and properties belonging to it, and all its liabilities outstanding upon
the expiration of its term of existence shall revert to and be assumed by the National Government. (Emphasis supplied)
PSALM is limited to selling only NPC assets and IPP contracts of NPC. The sale of NPC assets by PSALM is not "in the
course of trade or business" but purely for the specific purpose of privatizing NPC assets in order to liquidate all NPC
financial obligations. PSALM is tasked to sell and privatize the NPC assets within the term of its existence.60 The EPIRA
law even requires PSALM to submit a plan for the endorsement by the Joint Congressional Power Commission and the
approval of the President of the total privatization of the NPC assets and IPP contracts. Section 47 of the EPIRA law
provides:

SEC 47. NPC Privatization. - Except for the assets of SPUG, the generation assets, real estate, and other disposable
assets as well as IPP contracts of NPC shall be privatized in accordance with this Act. Within six (6) months from the
effectivity of this Act, the PSALM Corp. shall submit a plan for the endorsement by the Joint Congressional Power
Commission and the approval of the President of the Philippines, on the total privatization of the generation assets, real
estate, other disposable assets as well as existing IPP contracts of NPC and thereafter, implement the same, in
accordance with the following guidelines, except as provided for in Paragraph (f) herein:

(a) The privatization value to the National Government of the NPC generation assets, real estate, other disposable assets
as well as IPP contracts shall be optimized;

(b) The participation by Filipino citizens and corporations in the purchase of NPC assets shall be encouraged.

In the case of foreign investors, at least seventy-five percent (75%) of the funds used to acquire NPC-generation assets
and IPP contracts shall be inwardly remitted and registered with the Bangko Sentral ng Pilipinas;

(c) The NPC plants and/or its IPP contracts assigned to IPP Administrators, its related assets and assigned liabilities, if
any, shall be grouped in a manner which shall promote the viability of the resulting generation companies (gencos),
ensure economic efficiency, encourage competition, foster reasonable electricity rates and create market appeal to
optimize returns to the government from the sale and disposition of such assets in a manner consistent with the
objectives of this Act. In the grouping of the generation assets and IPP contracts of NPC, the following criteria shall be
considered:

(1) A sufficient scale of operations and balance sheet strength to promote the financial viability of the restructured units;
(2) Broad geographical groupings to ensure efficiency of operations but without the formation of regional companies or
consolidation of market power;
(3) Portfolio of plants and IPP contracts to achieve management and operational synergy without dominating any part of
the market or the load curve; and
(4) Such other factors as may be deemed beneficial to the best interest of the National Government while ensuring
attractiveness to potential investors.

(d) All assets of NPC shall be sold in open and transparent manner through public bidding, and the same shall apply to
the disposition of IPP contracts;

(e) In cases of transfer of possession, control, operation or privatization of multi-purpose hydro facilities, safeguards shall
be prescribed to ensure that the national government may direct water usage in cases of shortage to protect potable
water, irrigation, and all other requirements imbued with public interest;

(f) The Agus and Pulangi complexes in Mindanao shall be excluded from an1ong the generation companies that will be
initially privatized. Their ownership shall be transferred to the PSALM Corp. and both shall continue to be operated by the
NPC. Said complexes may be privatized not earlier than ten (10) years from the effectivity of this Act, and, except for
Agus III, shall not be subject to Build-Operate-Transfer (B-O-T), Build-Rehabilitate-Operate-Transfer (B-R-O-T) and other
variations thereof pursuant to Republic Act No. 6957, as amended by Republic Act No. 7718. The privatization of Agus
and Pulangi complexes shall be left to the discretion of PSALM Corp. in consultation with Congress;

(g) The steamfield assets and generating plants of each geothermal complex shall not be sold separately. They shall be
combined and each geothermal complex shall be sold as one package through public bidding. The geothermal complexes
covered by this requirement include, but are not limited to, Tiwi-Makban, Leyte A and B (Tongonan), Palinpinon, and Mt.
Apo;

(h) The ownership of the Caliraya-Botokan-Kalayaan (CBK) pump storage complex shall be transferred to the PSALM
Corporation;

(i) Not later than three (3) years from the effectivity of this Act, and in no case later than the initial implementation of
open access, at least seventy percent (70%) of the total capacity of generating assets of NPC and of the total capacity of
the power plants under contract with NPC located in Luzon and Visayas shall have been privatized: Provided, That any
unsold capacity shall be privatized not later than eight (8) years from the effectivity of this Act; and

(j) NPC may generate and sell electricity only from the undisposed generating assets and IPP contracts of PSALM Corp.
and shall not incur any new obligations to purchase power through bilateral contracts with generation companies or other
suppliers.
Thus, it is very clear that the sale of the power plants was an exercise of a governmental function mandated
by law for the primary purpose of privatizing NPC assets in accordance with the guidelines imposed by the
EPIRA law.

In the 2006 case of Commissioner of Internal Revenue v. Magsaysay Lines, Inc. (Magsaysay),61 the Court ruled that the
sale of the vessels of the National Development Company (NDC) to Magsaysay Lines, Inc. is not subject to VAT since it
was not in the course of trade or business, as it was involuntary and made pursuant to the government's policy of
privatization. The Court cited the CTA ruling that the phrase "course of business" or "doing business" connotes regularity
of activity. Thus, since the sale of the vessels was an isolated transaction, made pursuant to the government's
privatization policy, and which transaction could no longer be repeated or carried on with regularity, such sale was not in
the course of trade or business and was not subject to VAT.

Similarly, the sale of the power plants in this case is not subject to VAT since the sale was made pursuant to PSALM's
mandate to privatize NPC assets, and was not undertaken in the course of trade or business. In selling the power plants,
PSALM was merely exercising a governmental function for which it was created under the EPIRA law.

The CIR argues that the Magsaysay case, which involved the sale in 1988 of NDC vessels, is not applicable in this case
since it was decided under the 1986 NIRC. The CIR maintains that under Section 105 of the 1997 NIRC, which amended
Section 9962 of the 1986 NIRC, the phrase "in the course of trade or business" was expanded, and now covers incidental
transactions. Since NPC still owns the power plants and PSALM may only be considered as trustee of the NPC assets, the
sale of the power plants is considered an incidental transaction which is subject to VAT.

We disagree with the CIR's position. PSALM owned the power plants which were sold. PSALM's ownership of the NPC
assets is clearly stated under Sections 49, 51, and 55 of the EPIRA law. The pertinent provisions read:

SEC. 49. Creation of Power Sector Assets and Liabilities Management Corporation. - There is hereby created a
government-owned and -controlled corporation to be known as the "Power Sector Assets and Liabilities
Management Corporation," hereinafter referred to as "PSALM Corp.," which shall take ownership of all
existing NPC generation assets, liabilities, IPP contracts, real estate and all other disposable assets. All
outstanding obligations of the NPC arising from loans, issuances of bonds, securities and other instruments of
indebtedness shall be transferred to and assumed by the PSALM Corp. within one hundred eighty (180) days from the
approval of this Act.

SEC 51. Powers. - The Corporation shall, in the performance of its functions and for the attainment of its objectives, have
the following powers:

(a) To formulate and implement a program for the sale and privatization of the NPC assets and IPP contracts and the
liquidation of the NPC debts and stranded costs, such liquidation to be completed within the term of existence of the
PSALM Corp.;

(b) To take title to and possession of, administer and conserve the assets transferred to it; to sell or dispose of
the same at such price and under such terms and conditions as it may deem necessary or proper, subject to applicable
laws, rules and regulations;

xxxx

SEC. 55. Property of PSALM Corp.-The following funds, assets, contributions and other property shall constitute
the property of PSALM Corp.:

(a) The generation assets, real estate, IPP contracts, other disposable assets of NPC, proceeds from the sale or
disposition of such assets and residual assets from B-O-T, R-O-T, and other variations thereof;

(b) Transfers from the National Government;

(c) Proceeds from loans incurred to restructure or refinance NPC's transferred liabilities: Provided, however, That all
borrowings shall be fully paid for by the end of the life of the PSALM Corp.;

(d) Proceeds from the universal charge allocated for stranded contract costs and the stranded debts of the NPC;

(e) Net profit of NPC;

(f) Net profit of TRANSCO;

(g) Official assistance, grants, and donations from external sources; and

(h) Other sources of funds as may be determined by PSALM Corp. necessary for the above-mentioned purposes.
(Emphasis supplied)
Under the EPIRA law, the ownership of the generation assets, real estate, IPP contracts, and other disposable assets of
the NPC was transferred to PSALM. Clearly, PSALM is not a mere trustee of the NPC assets but is the owner thereof.
Precisely, PSALM, as the owner of the NPC assets, is the government entity tasked under the EPIRA law to privatize such
NPC assets.

In the more recent case of Mindanao II Geothermal Partnership v. Commissioner of Internal Revenue (Mindanao
11)63 which was decided under the 1997 NIRC, the Court held that the sale of a fully depreciated vehicle that had been
used in Mindanao II's business was subject to VAT, even if such sale may be considered isolated. The Court ruled that it
does not follow that an isolated transaction cannot be an incidental transaction for VAT purposes. The Court then cited
Section 105 of the 1997 NIRC which shows that a transaction "in the course of trade or business" includes "transactions
incidental thereto." Thus, the Court held that the sale of the vehicle is an incidental transaction made in the course of
Mindanao II's business which should be subject to VAT.

The CIR alleges that the sale made by NPC and/or its successors-in interest of the power plants is an incidental
transaction which should be subject to VAT. This is erroneous. As previously discussed, the power plants are already
owned by PSALM, not NPC. Under the EPIRA law, the ownership of these power plants was transferred to PSALM for sale,
disposition, and privatization in order to liquidate all NPC financial obligations. Unlike the Mindanao II case, the power
plants in this case were not previously used in PSALM's business. The power plants, which were previously owned by NPC
were transferred to PSALM for the specific purpose of privatizing such assets. The sale of the power plants cannot be
considered as an incidental transaction made in the course of NPC's or PSALM's business. Therefore, the sale of the
power plants should not be subject to VAT.

Hence, we agree with the Decisions dated 13 March 2008 and 14 January 2009 of the Secretary of Justice in OSJ Case
No. 2007-3 that it was erroneous for the BIR to hold PSALM liable for deficiency VAT in the amount of P3,813,080,472 for
the sale of the Pantabangan-Masiway and Magat Power Plants. The P3,813,080,472 deficiency VAT remitted by PSALM
under protest should therefore be refunded to PSALM.

However, to give effect to Section 70, Chapter 14, Book IV of the Administrative Code of 1987 on appeals from decisions
of the Secretary of Justice, the BIR is given an opportunity to appeal the Decisions dated 13 March 2008 and 14 January
2009 of the Secretary of Justice to the Office of the President within 10 days from finality of this Decision.64

WHEREFORE, we GRANT the petition. We SET ASIDE the 27 September 2010 Decision and the 3 August 2011
Resolution of the Court of Appeals in CA-G.R. SP No. 108156. The Decisions dated 13 March 2008 and 14 January 2009
of the Secretary of Justice in OSJ Case No. 2007-3 are REINSTATED. No costs.

SO ORDERED.

Sereno, C.J., Leonardo-De Castro, Peralta, Mendoza, Leonen, Jardeleza, Caguioa, Martires, Tijam, and Reyes, Jr.,
concur.
Velasco, Jr., J., see concurring opinion.
Bersamin, J., join the dissent of J. Del Castillo.
Del Castillo, J., see dissenting opinion.
Perlas-Bernabe, J., no part.

Endnotes:

1
Under Rule 45 of the 1997 Rules of Civil Procedure.

2
Rollo (Vol. I), pp. 37 54. Penned by Associate Justice Bienvenido L. Reyes (a retired member of this Court), with
Associate Justices Estela M. Perlas-Bernabe (now a member of this Court) and Elihu A. Ybañez concurring.

3
Id. at 55-57

4
Section 49 of RA 9136 reads:

SEC. 49. Creation of Power Sector Assets and Liabilities Management Corporation. - There is hereby created a
government-owned and -controlled corporation to be known as the "Power Sector Assets and Liabilities Management
Corporation," hereinafter referred to as the "PSALM Corp.," which shall take ownership of all existing NPC generation
assets, liabilities, IPP contracts, real estate and all other disposable assets. All outstanding obligations of the NPC arising
from loans, issuances of bonds, securities and other instruments of indebtedness shall be transferred to and assumed by
the PSALM Corp. within one hundred eighty (180) days from the approval of this Act.

5
Rollo (Vol. 1), pp. 96-99. The letter, signed by the OIC-Commissioner of Internal Revenue, informed NPC that it is liable
for deficiency VAT and documentary stamp tax in the total amount of P5,819,110,335.81, inclusive of interests and
penalties, for the sale of the Pantabangan-Masiway and Magat power plants.

The amount represents only the total basic VAT due, excluding the 25% surcharge and interest.
6
Rollo (Vol. I), pp. 100-103.
7

8
Id. at 101-102.

9
Id. at 203-209.

10
Id. at 237-239.

11
The Court of Appeals' Decision erroneously stated the date as "April 9, 2007," but the petition registered mail, as
evidenced by Registry Receipt Nos. 397-L and 398-L. Id. at 285.

12
Rollo (Vol. 1), p. 42.

13
Id.

14
Sec. 204. Authority of the Commissioner to Compromise, Abale and Refund or Credit Taxes. - The Commissioner may -

xxxx

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

xxxx

15
H) x x x. A ruling from the Department of Justice (DOJ) that is favorable to NPC/PSALM shall be tantamount to the
filing of an application for refund (in cash)/tax credit certificate (TCC), at the option of NPC/PSALM. BIR undertakes to
immediately process and approve the application, and release the tax refund/TCC within fifteen (15) working days from
issuance of the DOJ ruling that is favorable to NPC/PSALM.

16
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The power to interpret the
provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner,
subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under this Code or other laws or portions thereof administered by the Bureau of
Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax
Appeals.

17
An Act Amending the National Internal Revenue Code, as Amended, and for Other Purposes.

18
SEC. 7. Section 7 of the same Act [Republic Act No. 1125, as amended] is hereby amended to read as follows:

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

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

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

xxxx

19
An Act Expanding the Jurisdiction of the Court of Tax Appeals (CTA), Elevating its Rank to the Level of a Collegiate
Court with Special Jurisdiction and Enlarging its Membership, Amending for the Purpose Certain Sections of Republic Act
No. 1125, as Amended, Otherwise Known as the Law Creating the Court of Tax Appeals, and for Other Purposes.

20
Rollo (Vol. 1), p. 54.

21
Id. at 13

22
Magno v. People, 662 Phil. 726 (2011); Republic of the Philippines v. Sandiganbayan, 454 Phil. 504 (2003).
 Nippon Express (Philippines) Corporation v. Commissioner of Internal Revenue, 706 Phil. 442 (2013); Cojuangco. Jr. v.
23

Republic of the Philippines, 699 Phil. 443 (2012).

24
PRESCRIBING THE PROCEDURE FOR ADMINISTRATIVE SETTLEMENT OR ADJUDICATION OF DISPUTES, CLAIMS AND
CONTROVERSIES BETWEEN OR AMONG GOVERNMENT OFFICES, AGENCIES AND INSTRUMENTALITIES, INCLUDING
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS, AND FOR OTHER PURPOSES. Issued on 9 July 1973.

25
Abakada Guro Party List v. Hon. Exec. Sec. Ermita, 506 Phil. 1 (2005); Enriquez v. Enriquez, 505 Phil. 193 (2005);
Province of Batangas v. Hon. Romulo, 473 Phil. 806 (2004).

26
276 Phil. 439 (1991).

27
Id. at 443.

28
Under Section 66, Chapter 14, Book IV of the Administrative Code of 1987, which incorporated PD 242, not covered in
the administrative settlement or adjudication are disputes involving the Congress, the Supreme Court, the Constitutional
Commissions, and local governments.

29
The pertinent provision in the MOA reads:

H) Any resolution in favor of NPC/PSALM by any appropriate court or body shall be immediately executory without
necessity of notice or demand from NPC/PSALM. A ruling from the Department of Justice (DOJ) that is favorable
to NPC/PSALM shall be tantamount to the filing of an application for refund (in cash)/tax credit certificate
(TCC), at the option of NPC/PSALM. BIR undertakes to immediately process and approve the application, and
release the tax refund/TCC within fifteen (15) working days from issuance of the DOJ ruling that is favorable
to NPC/PSALM. (Emphasis supplied)

30
496 Phil. 506 (2005).

31
Id. at 558.

32
283 Phil. 196 (1992).

33
Id. at 204-205.

34
528 Phil. 473 (2006).

35
Id. at 506.

36
J. Bernas, S.J., THE 1987 CONSTITUTION OF THE REPUBLIC OF THE PHILIPPINES: A COMMENTARY 859 (2003).

37
Smart Communications, Inc. v. Aldecoa, 717 Phil. 577 (2013); Special People, Inc. Foundation v. Canda, 701 Phil. 365
(2013); Addition Hills Mandaluyong Civic & Social Organization, Inc. v. Megaworld Properties & Holdings, Inc., 686 Phil.
76 (2012); Laguna CATV Network, Inc. v. Hon. Maraan, 440 Phil. 734 (2002).

Gov. Joson III v. Court of Appeals, 517 Phil. 555 (2006).

38

39
Ejera v. Merto, 725 Phil. 180 (2014).

40
664 Phil. 754 (2011).

41
Id. at 759-760.

Jimmy Swaggart Ministries v. Board of Equalization of California, 493 U.S. 378, 110 S. Ct. 688, 107 L. Ed. 2D 796 (
42

1990).

Rojo v. Kliger, 52 Cal. 3D 65,276 Cal Rptr. 130, 801 P.2d 373 (1990).
43

Woodford v. Ngo, 126 S. Ct. 2378, 165 L. Ed. 2D 368 (2006).

44

45
Section 17, Article VII of the Constitution unequivocally states that: "The President shall have control of all the
executive departments, bureaus, and offices. He shall ensure that the laws be faithfully executed."

Orosa v. Roa, 527 Phil. 347 (2006).

46
 Commissioner of Internal Revenue v. Philippine Airlines, Inc., 609 Phil. 695 (2009).
47

48
552 Phil. 101 (2007).

49
Id. at 110-111.

Philippine Veterans Investment Development Corp. (PHIVIDEC) v. Judge Velez, supra note 26.
50

51
Dr. Pandi v. Court of Appeals, 430 Phil. 239 (2002). Republic Act No. 6682 amended the effectivity clause of EO 292,
directing that ''[T]his Code shall take effect two years after its publication in the Official Gazette.''

52
Section 5. The decisions of the Secretary of Justice, as well as those of the Solicitor General or the Government
Corporate Counsel, when approved by the Secretary of Justice, shall be final and binding upon the parties involved.
Appeals may be taken to and entertained by the Office of the President only in cases wherein the amount of the claim or
value of the property exceeds P1 million. The decisions of the Office of the President on appeal cases shall be final.

53
Section 1, Rule 43 of the 1997 Rules of Civil Procedure reads:

RULE 43
APPEALS FROM THE COURT OF TAX APPEALS AND QUASI-JUDICIAL
AGENCIES TO THE COURT OF APPEALS

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

Traveño v. Bobongon Banana Growers Multi-Purpose Cooperative, 614 Phil. 222 (2009).
54

Rollo (Vol. II), p. 624.

55

56
AN ACT REVISING THE CHARTER OF THE NATIONAL POWER CORPORATION.

57
AN ACT AMENDING SECTIONS 27, 28, 34, 106, 107, 108, 109, 110, 111, 112, 113, 114, 116, 117, 119, 121, 148,
151, 236, 237 AND 288 OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, AND FOR OTHER
PURPOSES.

58
Section 1, RA 6395.

59
Section 70 of the EPIRA law states:

SEC. 70. Missionary Electrification. - Notwithstanding the divestment and/or privatization of NPC assets, IPP contracts
and spun-off corporations, NPC shall remain as a National Government-owned and -controlled corporation to perform the
missionary electrification function through the Small Power Utilities Group (SPUG) and shall be responsible for providing
power generation and its associated power delivery systems in areas that are not connected to the transmission system.
The missionary electrification function shall be funded from the revenues from sales in missionary areas and from the
universal charge to be collected from all electricity end-users as determined by the ERC.

60
Section 51 of the EPIRA law enumerates the powers of PSALM:

SEC. 51. Powers. - The Corporation shall, in the performance of its functions and for the attainment of its objectives,
have the following powers:

(a)To formulate and implement a program for the sale and privatization of the NPC assets and IPP contracts
and the liquidation of NPC debts and stranded contract costs, such liquidation to be completed within the
term of existence of the PSALM Corp.
(b) To take title to and possession of, administer and conserve the assets transferred to it; to sell or dispose
of the same at such price and under such terms and conditions as it may deem necessary or proper, subject
to applicable laws, rules and regulations;
(c) To take title to and possession of the NPC IPP contracts and to appoint, after public bidding in transparent and open
manner, qualified independent entities who shall act as the IPP Administrators in accordance with this Act;
(d) To calculate the amount of the stranded debts and stranded contract costs of NPC which shall form the basis for ERC
in the determination of the universal charge;
(e) To liquidate the NPC stranded contract costs, utilizing the proceeds from sales and other property
contributed to it, including the proceeds from the universal charge;
(f) To adopt rules and regulations as may be necessary or proper for the orderly conduct of its business or operations;
(g) To sue and be sued in its name;
(h) To appoint or hire, transfer, remove and fix the compensation of its personnel: Provided, however, That the
Corporation shall hire its own personnel only if absolutely necessary, and as far as practicable, shall avail itself of the
services of personnel detailed from other government agencies;
(i) To own, hold, acquire, or lease real and personal properties as may be necessary or required in the discharge of its
functions;
(j) To borrow money and incur such liabilities, including the issuance of bonds, securities or other evidences of
indebtedness utilizing its assets as collateral and/or through the guarantees of the National Government: Provided,
however, That all such debts or borrowings shall have been paid off before the end of its corporate life;
(k) To restructure existing loans of the NPC;
(l) To collect, administer, and apply NPC's portion of the universal charge; and
(m) To structure the sale, privatization or disposition of NPC assets and IPP contracts and/or their energy
output based on such terms and conditions which shall optimize the value and sale of said assets. (Emphasis
supplied)

61
529 Phil. 64 (2006).

62
Section 99 of the 1986 NIRC, as amended by Executive Order No. 273 (issued on 25 July 1987), reads:

Sec. 99. Persons liable. - Any person who, in the course of trade or business, sells, barters or exchanges goods, renders
services, or engages in similar transactions and any person who imports goods shall be subject to the value-added tax
(VAT) imposed in sections 100 to 102 of this Code.

63
706 Phil. 48 (2013).

64
Section 10 of the DOJ Administrative Order No. 121 (RULES IMPLEMENTING PRESIDENTIAL DECREE NO. 242
"PRESCRIBING THE PROCEDURE FOR ADMINISTRATIVE SETTLEMENT OR ADJUDICATION OF DISPUTES, CLAIMS AND
CONTROVERSIES BETWEEN OR AMONG GOVERNMENT OFFICES, AGENCIES AND INSTRUMENTALITIES, INCLUDING
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS, AND FOR OTHER PURPOSES") issued on 25 July 1973 reads:

SEC. 10. In cases where the movant of the claim or the value of the property involved exceeds one million pesos, an
appeal may be taken to the Office of the President by filing a notice of appeal and serving the same upon all parties
within a period of ten (10) days from receipt of a copy of the final action taken by the Secretary of Justice. In such event,
the decision shall become final and executory only upon affirmation by the Office of the President. If no appeal is taken
within the said period, the final decision taken in the case shall become immediately executory upon the expiration of the
said period.

CONCURRING OPINION

VELASCO, JR., J.:

I concur in the ruling of the ponencia, but would like to underscore the procedural considerations underlying my
concurrence. Specifically, the focal point of this elucidation is on how parties similarly situated to the ones herein are to
proceed had the Court not opted to resolve the petition on the merits.

Having ruled that the DOJ properly exercised jurisdiction over the controversy pursuant to Presidential Decree No. (PD)
242 and Executive Order No. (EO) 292, it behooves the Court to require similarly situated agencies adversely affected by
latter rulings of the DOJ in intra governmental disputes to observe the procedural steps for appeal as prescribed by the
very same statutes that conferred jurisdiction to it.

Moving forward, it is as Senior Associate Justice Antonio T. Carpio (Justice Carpio) proffered - rulings of the Secretary of
Justice (SOJ) in the exercise of his jurisdiction over controversies solely involving government agencies ought to be
appealed to the Office of the President. As per Section 70, Chapter 14, Title I, Book IV of EO 292:

Section 70. Appeals. - The decision of the Secretary of Justice as well as that of the Solicitor General, when approved by
the Secretary of Justice, shall be final and binding upon the parties involved. Appeals may, however, be taken to the
President where the amount of the claim or the value of the property exceeds one million pesos. The decision of the
President shall be final.

The authority of the President to review the ruling of the DOJ is part and parcel of his extensive power of control over the
executive department and its officers, from Cabinet Secretary to the lowliest clerk,1 that is preserved in Article VII,
Section 17 of the Philippine Constitution, to wit:
Section 17. The President shall have control of all the executive departments, bureaus, and offices. He shall ensure that
the laws be faithfully executed.

"Control," in this context, is defined in jurisprudence as "the power of [the President] to alter or modify or nullify or set
aside what a subordinate officer had done in the performance of his duties and to substitute the judgment of the former
for that of the latter."2 With this definition in mind, it becomes apparent that Section 70, Chapter 14, Title I, Book IV of
EO 292 had been crafted to enable the President to exercise this power of control over his alter-egos by allowing him to
substitute their judgment with his own, which in this case permits the President to reverse the finding of the DOJ acting
as a quasi-judicial body on appeal.

Appeal to the Office of the President likewise finds support in the doctrine on exhaustion of administrative remedies. The
rule calls for a party to first avail of all the means afforded him by administrative processes before seeking intervention of
the court, so as not to deprive these agencies of their authority and opportunity to deliberate on the issues of the
case.3 In the same vein, the doctrine allows the President to correct the actions of his subordinates, including those of
the SOJ, before these can be questioned in a court of law.

Judicial recourse from the exercise of administrative agencies of quasi-judicial powers is to the Court of Appeals
(CA), save for those directly appealable to this Court. This finds basis under Section 9 ofBatas Pambansa Blg.
129,4 as amended by RA 7902,5 which grants the CA with general appellate jurisdiction over judgments of quasi-judicial
bodies, viz:

Sec. 9. Jurisdiction. — The Court of Appeals shall exercise:

xxxx

(3) Exclusive appellate jurisdiction over all final judgments, decisions, resolutions, orders or awards of Regional Trial
Courts and quasi-judicial agencies, instrumentalities, boards or commissions, including the Securities and
Exchange Commission, the Social Security Commission, the Employees Compensation Commission and the Civil Service
Commission, except those falling within the appellate jurisdiction of the Supreme Court in accordance with
the Constitution, the Labor Code of the Philippines under Presidential Decree No. 442, as amended, the provisions of
this Act, and of subparagraph (1) of the third paragraph and subparagraph (4) of the fourth paragraph of Section 17 of
the Judiciary Act of 1948.

As identified in Section 1, Rule 43 of the Rules of Court,6 the Office of the President is among the governmental bodies
whose rulings fall under the CA's appellate jurisdiction. Be that as it may and with all due respect to Justice Carpio, it is
humbly submitted that, by way of exception, direct recourse to this Court is justified insofar as tax controversies solely
between government institutions that have been resolved by the Office of the President are concerned.

A review of recent jurisprudence reveals that the thrust of the Court has been to divest the CA of jurisdiction over tax-
related controversies. To illustrate, the Court En Banc in the recent case of City of Manila v. GreciaCuerdo ruled that it is
not the CA, but the CTA, that is the proper forum for challenging interlocutory orders issued by the RTC in cases that
would fall within the jurisdiction of the CTA on appeal.7 In devolving from the CA the exercise of certiorari powers in favor
of the CTA, the Court held that:

x x x x [W]hile there is no express grant of such power, with respect to the CTA, Section 1, Article VIII of the 1987
Constitution provides, nonetheless, that judicial power shall be vested in one Supreme Court and in such lower courts as
may be established by law and that judicial power includes the duty of the courts of justice to settle actual controversies
involving rights which are legally demandable and enforceable, and to determine whether or not there has been a grave
abuse of discretion amounting to lack or excess of jurisdiction on the part of any branch or instrumentality of the
Government.8

And in Philippine American Life and General Insurance Company v. Secretary of Finance, We recognized that there was a
trend wherein both the CTA and the CA disclaim jurisdiction over tax cases: on the one hand, mere prayer for the
declaration of a tax measure's unconstitutionality or invalidity before the CTA resulted in a petition's outright dismissal,
and on the other hand, the CA would dismiss the same petition should it find that the primary issue is not the tax
measure's validity but the assessment or taxability of the transaction or subject involved.9 In punctuating the issue, We
held that, pursuant to the CTA's power of certiorari recognized in City of Manila v. Grecia-Cuerdo, appeals from the ruling
of the Secretary of Finance is to the CTA, not the CA, even though the case involved a challenge against the validity of a
revenue regulation, thus:

x x x x [I]t is now within the power of the CTA, through its power of certiorari, to rule on the validity of a particular
administrative rule or regulation so long as it is within its appellate jurisdiction. Hence, it can now rule not only on the
propriety of an assessment or tax treatment of a certain transaction, but also on the validity of the revenue regulation or
revenue memorandum circular on which the said assessment is based.10

The policy has therefore been clear - to transfer appellate jurisdiction over tax-related controversies from the CA to the
CTA. It would then be an act of regression for the Court to once again vest the CA with jurisdiction over cases concerning
the interpretation of tax statutes, similar to the subject matter of the case at bar, simply because it was appealed from
the Office of the President.
One may then be tempted to presume that judicial recourse from the ruling of the Office of the President over a tax-
related dispute is to the CTA. However, We have already categorically ruled herein that it is the DOJ, rather than the
CTA, that has jurisdiction over the controversy. To later on declare that the CTA may nevertheless exercise appellate
jurisdiction over the ruling of the Office of the President would run counter to this earlier pronouncement, and would also
unduly lengthen the proceedings by burdening the aggrieved party to appeal the case to two more bodies, the CTA
Division and CTA En Banc, before the case reaches this Court.

Moreover, the CTA does not have appellate jurisdiction over tax controversies resolved by the Office of the President. To
be sure, Republic Act No. (RA) 1125,11 as amended by RA 9282,12 delineates the jurisdiction of the CTA in the following
manner:

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

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

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

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

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

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

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

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

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

The CTA, as a specialized court, enjoys jurisdiction limited to those specifically mentioned in the law. Noteworthy is that
the exhaustive enumeration aforequoted does not include appeals from the Office of the President. Thus, the CTA could
not be deemed to have been bestowed with the authority to review the said rulings regardless of whether or not the
dispute involves the interpretation of tax laws.

With both the CA and the CTA unable to exercise appellate jurisdiction over rulings of the Office of the President in tax-
related controversies, it becomes evident that there is no plain, speedy, and adequate remedy available to the
government agency aggrieved. Direct recourse to this Court via certiorari should then be permissible under such
circumstances in fulfillment of Our role as the final arbiter and court of last resort, and of Our constitutional mandate and
bounden duty to settle justiciable controversies.

In view of the foregoing, I reiterate my concurrence with the holding of the ponencia that the DOJ properly exercised
jurisdiction over the controversy between the conflicting arms of the government, and that, for future reference, appeal
should be taken by the aggrieved agency to the Office of the President. It is humbly submitted, however, that appeals
from the Office of the President in inter-governmental tax disputes should be elevated to this Court, rather than the CA,
by way of certiorari.

Endnotes:

1
Carpio v. Executive Secretary, G.R. No. 96409 February 14, 1992, 206 SCRA 290, 295.

Mondano v. Silvosa, 97 Phil. 143 (1955).

2

Fua, Jr. v. Commission on Audit, G.R. No. 175803, December 4, 2009, 607 SCRA 347, 352.
3
4
AN ACT REORGANIZING THE JUDICIARY, APPROPRIATING FUNDS THEREFOR, AND FOR OTHER PURPOSES.

5
AN ACT EXPANDING THE JURISDICTION OF THE COURT OF APPEALS, AMENDING FOR THE PURPOSE SECTION NINE OF
BATAS PAMBANSA BLG. 129, AS AMENDED, KNOWN AS THE JUDICIARY REORGANIZATION ACT OF 1980.

6
Section 1. Scope. — This Rule shall apply to appeals from judgments or final orders of the Court of Tax Appeals
and from awards, judgments, final orders or resolutions of or authorized by any quasi-judicial agency in the exercise of
its quasi-judicial functions. Among these agencies are the Civil Service Commission, Central Board of Assessment
Appeals, Securities and Exchange Commission, Office of the President, Land Registration Authority, Social Security
Commission, Civil Aeronautics Board, Bureau of Patents, Trademarks and Technology Transfer, National Electrification
Administration, Energy Regulatory Board, National Telecommunications Commission, Department of Agrarian Reform
under Republic Act No. 6657, Government Service Insurance System, Employees Compensation Commission, Agricultural
Invention Board, Insurance Commission, Philippine Atomic Energy Commission, Board of Investments, Construction
Industry Arbitration Commission, and voluntary arbitrators authorized by law. (emphasis added)

7
G.R. No. 175723, February 4, 2014,715 SCRA 182, 202.

8
Id.

9
G.R. No. 210987, November 24, 2014, 741 SCRA 578, 597.

10
Id. at 600.

11
AN ACT CREATING THE COURT OF TAX APPEALS.

12
AN ACT EXPANDING THE JURISDICTION OF THE COURT OF TAX APPEALS (CTA), ELEVATING ITS RANK TO THE LEVEL
OF A COLLEGIATE COURT WITH SPECIAL JURISDICTION AND ENLARGING ITS MEMBERSHIP, AMENDING FOR THE
PURPOSE CERTAIN SECTIONS OF REPUBLIC ACT NO. 1125, AS AMENDED, OTHERWISE KNOWN AS THE LAW CREATING
THE COURT OF TAX APPEALS, AND FOR OTHER PURPOSES.

DISSENTING OPINION

DEL CASTILLO, J.:

The Majority Opinion opines that the Secretary of Justice has jurisdiction over the instant case pursuant to Sections 1, 2,
and 3 of Presidential Decree No. (PD) 242.

With much regret, I am unable to give my concurrence.

Disputed tax assessments solely involving government entities fall within the exclusive and original jurisdiction of the
Commissioner of Internal Revenue (CIR) and the exclusive appellate jurisdiction of the Court of Tax Appeals (CTA).

Section 41 of the 1997 National Internal Revenue Code (NIRC) states that the CIR has the exclusive and original
jurisdiction to interpret tax laws and to decide tax cases. Thus, the CIR has the power to decide disputed assessments,
refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the
1997 NIRC or other laws administered by the Bureau of Internal Revenue (BIR).

On the other hand, Section 72 of Republic Act No. (RA) 1125, as amended by RA 9282, provides that decisions or
inactions of the CIR in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties in relation thereto, or other matters arising under the 1997 NIRC or other laws administered by the BIR are
under the exclusive appellate jurisdiction of the Court of Tax Appeals (CTA).

In this case, since what is involved is petitioner's disputed Value-Added Tax (VAT) assessment, which it paid under
protest, it is the BIR and the CTA, not the Secretary of Justice, which have exclusive jurisdiction. In fact, the question of
whether petitioner's sale of the power plants is subject to VAT is a tax issue that should be resolved by the CIR, subject
to the review of the CTA. Unlike the Secretary of Justice, the BIR and the CTA have developed expertise on tax matters.
It is only but logical that they should have exclusive jurisdiction to decide on these matters. The authority of the
Secretary of Justice under PD 242 to settle and adjudicate all disputes, claims and controversies between or among
national government offices, agencies and instrumentalities, including government-owned or controlled corporations,
therefore, does not include tax disputes, which are clearly under the jurisdiction of the BIR and the CTA.
Worth mentioning at this point is the case of National Power Corporation v. Presiding Judge, RTC, 10thJudicial Region,
Br..xxv, Cagayan de Oro City,3 where the Court affirmed the trial court's jurisdiction over a complaint for the collection of
real property tax and special education fund tax filed under PD 464 (The Real Property Tax Code, enacted on July 1,
1974) by the Province of Misamis Oriental against National Power Corporation (NAPOCOR). In that case, NAPOCOR cited
PD 242 and argued that it is the Secretary of Justice, not the trial court, which had jurisdiction over the case. Applying
the rules on statutory construction, the Court, ruled that PD 242, a general law which deals with administrative
settlement or adjudication of disputes, claims and controversies between or among national government offices, agencies
and instrumentalities, including government-owned or controlled corporations, must yield to PD 464, a special law which
deals specifically with real property taxes.

The same ruling must be applied in this case. Thus, PD 242, which is a general law on the authority of the Secretary of
Justice to settle and adjudicate all disputes, claims and controversies between or among national government offices,
agencies and instrumentalities, including government-owned or controlled corporations, must yield to the specific
provisions of RA 1125, as amended by RA 9282, which is a specific law vesting exclusive and primary jurisdiction to the
CIR and the CTA on cases pertaining to disputed tax assessments, tax laws and refunds of internal revenue taxes.

Moreover, this Court has already made a pronouncement in the recent case of Commissioner of Internal Revenue v.
Secretary of Justice,4 to the effect that the Secretary of Justice has no jurisdiction over disputed assessments issued by
the BIR in light of the ruling of the Court in Philippine National Oil Company v. Court of Appeals.5 For reference, I quote
herein the ruling of the Court, viz.:

1. The Secretary of Justice has no jurisdiction to review the disputed assessments

The petitioner contends that it is the Court of Tax Appeals (CTA), not the Secretary of Justice, that has the exclusive
appellate jurisdiction in this case, pursuant to Section 7 (1) of Republic Act No. 1125. (R.A. No. 1125), which grants the
CTA the exclusive appellate jurisdiction to review, among others, the decisions of the Commissioner of Internal Revenue
"in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under the National Internal Revenue Code (NIRC) or other law or part of law
administered by the Bureau of Internal Revenue."

PAGCOR counters, however, that it is the Secretary of Justice who should adjudicate the dispute by virtue of Chapter 14
of the Revised Administrative Code of 1987, which provides:

CHAPTER 14. CONTROVERSIES AMONG GOVERNMENT OFFICES AND CORPORATIONS. SEC. 66. How settled. — All
disputes/claims and controversies, solely between or among the departments, bureaus, offices, agencies and
instrumentalities of the National Government, including government-owned and controlled corporations, such as those
arising from the interpretation and application of statutes, contracts or agreements shall be administratively settled or
adjudicated in the manner provided for in this Chapter. This Chapter shall, however, not apply to disputes involving the
Congress, the Supreme Court, the Constitutional Commission and local governments.

SEC. 67. Disputes Involving Questions of Law. — All cases involving only questions of law shall be submitted to and
settled or adjudicated by the Secretary of Justice as Attorney-General of the National Government and as ex officio legal
adviser of all government-owned or controlled corporations. His ruling or decision thereon shall be conclusive and binding
on all the parties concerned.

SEC. 68. Disputes Involving Questions of Fact and Law. — Cases involving mixed questions of law and of fact or only
factual issues shall be submitted to and settled or adjudicated by:

(1) The Solicitor General, if the dispute, claim or controversy involves only departments, bureaus, offices and other
agencies of the National Government as well as government-owned or controlled corporations or entities of whom he is
the principal law officer or general counsel; and

(2) The Secretary of Justice, in all other cases not falling under paragraph (1).

Although acknowledging the validity of the petitioner's contention, the Secretary of Justice still resolved the disputed
assessments on the basis that the prevailing doctrine at the time of the filing of the petitions in the Department of Justice
(DOJ) on January 5, 2004 was that enunciated in Development Bank of the Philippines v. Court of Appeals, whereby the
Court ruled that:

x x x (T)here is an "irreconcilable repugnancy x x between Section 7(2) of R.A. No. 1125 and P.D. No. 242," and hence,
that the latter enactment (P.D. No. 242), being the latest expression of the legislative will, should prevail over the earlier.

Later on, the Court reversed itself in Philippine National Oil Company v. Court of Appeals, and held as follows:

Following the rule on statutory construction involving a general and a special law previously discussed, then P.D. No. 242
should not affect R.A. No. 1125. R.A. No. 1125, specifically Section 7 thereof on the jurisdiction of the CTA, constitutes
an exception to P.D. No. 242. Disputes, claims and controversies, falling under Section 7 of R.A. No. 1125, even though
solely among government offices, agencies, and instrumentalities, including government-owned and controlled
corporations, remain in the exclusive appellate jurisdiction of the CTA. Such a construction resolves the alleged
inconsistency or conflict between the two statutes, x x x.

Despite the shift in the construction of P.D. No. 242 in relation to R.A. No. 1125, the Secretary of Justice still resolved
PAGCOR's petitions on the merits, stating that:

While this ruling (DBP) has been superseded by the ruling in Philippine National Oil Company vs. CA, in view of the
prospective application of the PNOC ruling, we (the DOJ) are of the view that this Office can continue to assume
jurisdiction over this case which was filed and has been pending with this Office since January 5, 2004 and rule on the
merits of the case.

We disagree with the action of the Secretary of Justice.

PAGCOR filed its appeals in the DOJ on January 5, 2004 and August 4, 2004. Philippine National Oil Company
v. Court of Appeals was promulgated on April 26, 2006. The Secretary of Justice resolved the petitions on
December 22, 2006. Under the circumstances, the Secretary of Justice had ample opportunity to abide by the
prevailing rule and should have referred the case to the CTA because judicial decisions applying or
interpreting the law formed part of the legal system of the country, and are for that reason to be held in
obedience by all, including the Secretary of Justice and his Department. Upon becoming aware of the new
proper construction of P.D. No. 242 in relation to RA. No. 1125 pronounced in Philippine National Oil
Company v. Court of Appeals, therefore, the Secretary of Justice should have desisted from dealing with the
petitions, and referred them to the CTA, instead of insisting on exercising jurisdiction thereon. Therein lay
the grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the Secretary of
Justice, for he thereby acted arbitrarily and capriciously in ignoring the pronouncement in Philippine
National Oil Company v. Court of Appeals. Indeed, the doctrine of stare decisis required him to adhere to the ruling
of the Court, which by tradition and conformably with our system of judicial administration speaks the last word on what
the law is, and stands as the final arbiter of any justiciable controversy. In other words, there is only one Supreme Court
from whose decisions all other courts and everyone else should take their bearings.

Nonetheless, the Secretary of Justice should not be taken to task for initially entertaining the petitions considering that
the prevailing interpretation of the law on jurisdiction at the time of their filing was that he had jurisdiction. Neither
should PAGCOR [be] blame[d] in bringing its appeal to the DOJ on January 5, 2004 and August 4, 2004 b use the
prevailing rule then was the interpretation in Development Bank of the Philippines v. Court of Appeals. The emergence of
the later ruling was beyond PAGCOR's control. Accordingly, the lapse of the period within which to appeal the disputed
assessments to the CTA could not be taken against PAGCOR. While a judicial interpretation becomes a part of the law as
of the date that the law was originally passed, the reversal of the interpretation cannot be given retroactive effect to the
prejudice of parties who may have relied on the first interpretation.

There is no reason to reverse or abandon the above ruling.

To adopt the view espoused in the Majority Opinion would carry adverse effects on the jurisdiction of the CTA and on the
CIR with regard to its available remedy. It must be pointed out that to allow the Secretary of Justice to have jurisdiction
over the instant case would not only deprive the CTA of its exclusive appellate jurisdiction but would also
deprive respondent CIR of any judicial remedy. The Majority Opinion recommends that "since the amount involved
in this case is more than one million pesos, respondent CIR may appeal the DOJ Secretary's Decision to the Office of the
President in accordance with Section 70, Chapter 14, Book IV of EO 292 and Section 5 of PD 242." However, if the
appeal to the Office of the President were denied, respondent CIR would have no judicial recourse.
Respondent CIR would not be able to appeal the decision of the Office of the President to the Court of
Appeals (CA) under Rule 43 of the Rules of Court because the CA has no jurisdiction to review tax cases.
Neither can respondent CIR file a Petition with the CTA because the CTA has no jurisdiction over decisions of
the Office of President or the Secretary of Justice. In his Reply, Justice Carpio states that "if the appeal to the Office
of the President is denied, the aggrieved party can still appeal to the Court of Appeals (CA) under Section I, Rule 43 of
the 1997 Rules of Civil Procedure."

With due respect, this is specious. An appeal to the CA is not a remedy available to the aggrieved party.

It must be stressed that what is involved in this case is a tax issue, that is, petitioner's disputed Value-Added Tax (VAT)
assessment, which it paid under protest. The aggrieved party could no longer resort to an appeal under Rule 43 of the
1997 Rules of Civil Procedure; this is not allowed simply because the CA no longer has jurisdiction over tax cases.

To recall, Republic Act No. 9282,6 enacted on April23, 2004, expanded the jurisdiction of the Court of Tax Appeals (CTA)
and elevated its rank to the level of a collegiate court with special jurisdiction. Thus, the CTA, a specialized court
dedicated exclusively to the study and resolution of tax issues, is no longer under the appellate jurisdiction
of the CA. Accordingly, the CA has no jurisdiction to review tax cases as these are under the exclusive
jurisdiction of the CTA, a co-equal court. In fact, the remedy of a party adversely affected by a decision or ruling of
the CTA en banc is to directly file with the Supreme Court, not with the CA, a verified petition for review on certiorari
under Rule 45 of the Rules of Court within fifteen days from receipt of the copy of the decision or resolution of the CTA.7
Furthermore, in The City of Manila v. Judge Grecia-Cuerdo,8 the Court ruled that it is the CTA, not the CA, which has
jurisdiction over a special civil action for certiorari assailing an interlocutory order issued by the RTC in a local tax case.
In that case, the Court explained that:

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

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

A grant of appellate jurisdiction implies that there is included in it the power necessary to exercise it effectively, to make
all orders that will preserve the subject of the action, and to give effect to the final determination of the appeal. It carries
with it the power to protect that jurisdiction and to make the decisions of the court thereunder effective. The court, in aid
of its appellate jurisdiction, has authority to control all auxiliary and incidental matters necessary to the efficient and
proper exercise of that jurisdiction. For this purpose, it may, when necessary, prohibit or restrain the performance of any
act which might interfere with the proper exercise of its rightful jurisdiction in cases pending before it.

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

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

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

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

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

xxxx

Using the reasoning in the above-cited case, it is clear that the CA should not be allowed to resolve tax issues, such as
the instant case, as this would deprive the CTA of its exclusive jurisdiction. It would create an absurd situation of a split
jurisdiction between the CTA and the CA. In addition, this might create conflicting decisions or interpretations of tax laws.

To prove this point, it is significant to mention that the ruling of the Secretary of Justice in this case that the sale of the
power plants is not subject to VAT conflicts with the ruling of the CTA in Power Sector Assets and Liabilities Management
Corporation v. Commissioner of Internal Revenue, CTA EB No. 1282, May 17, 2016, that the proceeds from sale of
generating assets is subject to VAT. The said case, docketed as G.R. No. 226556, is now pending before this Court.
All told, I vote to DENY the Petition and maintain my view that disputed tax assessments solely involving government
entities fall within the exclusive and original jurisdiction of the CIR and the exclusive appellate jurisdiction of the CTA.
Thus, to allow the Secretary of Justice to have jurisdiction over the instant case would not only deprive the CTA of its
exclusive appellate jurisdiction but would also deprive respondent CIR of any judicial remedy.

Endnotes:

1
SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. - The power to interpret the provisions of
this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the
Secretary of Finance. The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof administered by
the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax
Appeals.

2
SEC. 7. Jurisdiction.- The CTA shall exercise: (a) Exclusive appellate jurisdiction to review by appeal, as herein provided: (1)
Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes,
fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other
laws administered by the Bureau of Internal Revenue; (2) Inaction by the Commissioner of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters
arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, x x x

3
268 Phil. 507 (1990).

4
G.R. No. 177387, November 9, 2016.

5
496 Phil. 506 (2005).

6
AN ACT EXPANDING THE JURISDICTION OF THE COURT OF TAX APPEALS (CTA), ELEVATING ITS RANK TO THE LEVEL OF A
COLLEGIATE COURT WITH SPECIAL JURISDICTION AND ENLARGING ITS MEMBERSHIP, AMENDING FOR THE PURPOSE CERTAIN
SECTIONS OR REPUBLIC ACT NO. 1125, AS AMENDED, OTHERWISE KNOWN AS THE LAW CREATING THE COURT OF TAX
APPEALS, AND FOR OTHER PURPOSES

7
REPUBLIC ACT NO. 9282, Section 12.

8
726 Phil. 9 (2014).