Goncena, Marites F.

TAXATION
BSBAM IV Mr. Joharic Maligaya

Alvin Patrimonio
v. Napoleon Gutierez, et al., G.R. No. 187769, 4 June 2014

FACTS:

The petitioner and the respondent Gutierrez entered into a business venture under
the name of Slam Dunk Corporation, a production outfit that produced mini-concerts
and shows related to basketball. Patrimonio pre-signed several checks to answer for
the expenses of Slam Dunk. Although signed, these checks had no payee’s name,
date or amount. The blank checks were entrusted to Gutierrez with the specific
instruction not to fill them out without previous notification to and approval by the
petitioner. Without the petitioner’s knowledge and consent, Gutierrez went to
Marasigan to secure a loan in the amount of P200,000.00 on the excuse that the
petitioner needed the money for the construction of his house. In addition to the
payment of the principal, Gutierrez assured Marasigan that he would be paid an
interest of 5% per month. Marasigan acceded to Gutierrez’ request and gave him
P200,000.00. Gutierrez simultaneously delivered to Marasigan one of the blank
checks the petitioner pre-signed with Pilipinas Bank with the blank portions filled out
with the words “Cash” “Two Hundred Thousand Pesos Only”, and the amount of
“P200,000.00.” Marasigan deposited the check but it was dishonored for the reason
“ACCOUNT CLOSED.” It was later revealed that petitioner’s account with the bank
had been closed. Marasigan sought recovery from Gutierrez, to no avail. He
thereafter sent several demand letters to the petitioner asking for the payment of
P200,000.00, but his demands likewise went unheeded. Consequently, he filed a
criminal case for violation of B.P. 22 against the petitioner. RTC in favor of
Marasigan. It found that the petitioner, in issuing the pre-signed blank checks, had
the intention of issuing a negotiable instrument, albeit with specific instructions to
Gutierrez not to negotiate or issue the check without his approval. RTC declared
Marasigan as a holder in due course and accordingly dismissed the petitioner’s
complaint for declaration of nullity of the loan. It ordered the petitioner to pay
Marasigan the face value of the check with a right to claim reimbursement from
Gutierrez. CA affirmed the RTC ruling.

ISSUE:

Whether or not Marasigan is a holder in due course thus may hold Patrimonio liable.

HELD:

No. Section 14 of the Negotiable Instruments Law provides for when blanks may be
filled. This provision applies to an incomplete but delivered instrument. Under this
rule, if the maker or drawer delivers a pre-signed blank paper to another person for
the purpose of converting it into a negotiable instrument, that person is deemed to
have prima facie authority to fill it up. It merely requires that the instrument be in the
possession of a person other than the drawer or maker and from such possession,
together with the fact that the instrument is wanting in a material particular, the law
presumes agency to fill up the blanks. In order however that one who is not a holder
in due course can enforce the instrument against a party prior to the instrument’s
completion, two requisites must exist that the blank must be filled strictly in
accordance with the authority given; and it must be filled up within a reasonable time.
If it was proven that the instrument had not been filled up strictly in accordance with
the authority given and within a reasonable time, the maker can set this up as a
personal defense and avoid liability. Section 52 of the NIL states that a holder in due
course is one who takes the instrument “in good faith and for value.” It also provides
in Section 52 that in order that one may be a holder in due course, it is necessary
that at the time it was negotiated to him he had no notice of any infirmity in the
instrument or defect in the title of the person negotiating it. Acquisition in good faith
means taking without knowledge or notice of equities of any sort which could beset
up against a prior holder of the instrument. It means that he does not have any
knowledge of fact which would render it dishonest for him to take a negotiable paper.
The absence of the defense, when the instrument was taken, is the essential
element of good faith. In order to show that the defendant had “knowledge of such
facts that his action in taking the instrument amounted to bad faith,” it is not
necessary to prove that the defendant knew the exact fraud that was practiced upon
the plaintiff by the defendant’s assignor, it being sufficient to show that the defendant
had notice that there was something wrong about his assignor’s acquisition of title,
although he did not have notice of the particular wrong that was committed. In the
present case, Marasigan’s knowledge that the petitioner is not a party or a privy to
the contract of loan, and correspondingly had no obligation or liability to him, renders
him dishonest, hence, in bad faith. Yet, it does not follow that simply because he is
not a holder in due course, Marasigan is already totally barred from recovery.
Notably, Gutierrez was only authorized to use the check for business expenses; thus,
he exceeded the authority when he used the check to pay the loan he supposedly
contracted for the construction of petitioner’s house. This is a clear violation of the
petitioner’s instruction to use the checks for the expenses of Slam Dunk. It cannot
therefore be validly concluded that the check was completed strictly in accordance
with the authority given by the petitioner.

Metro Manila
Shopping Mecca Corp. v. Toledo and the City of Manila, G.R. No. 190818, 10
November 2014

FACTS:

The Court hereby resolves the Manifestation and Motion dated August 2, 2013 filed
by petitioners Metro Manila Shopping Mecca Corp., Shoemart, Inc., SM Prime
Holdings, Inc., Star Appliances Center, Super Value, Inc., Ace Hardware Philippines,
Inc., Health and Beauty, Inc., Jollimart Phils. Corp., and Surplus Marketing
Corporation (petitioners), seeking the approval of the terms and conditions of the
parties' Universal Compromise Agreement dated June 1, 2012 (UCA) in lieu of the
Court's Decision dated June 5, 2013 (subject Decision) which denied petitioners'
claim for tax refund/credit of their local business taxes paid to respondent City of
Manila. In their Manifestation and Motion, petitioners alleged that pursuant to the
UCA, the parties agreed to amicably settle all cases between them involving claims
for tax refund/credit, including the instant case. The pertinent portions of the UCA
provide it is further agreed that there shall be no refunds/tax credit certificates to
be given or issued by the City of Manila in the following cases:SC GR 190818
(CTA EB No. 480) entitled "Supervalue, Inc., Ace Hardware Philippines, Inc., H
and B Inc., Metro Manila Shopping Mecca Corp., SM Land, Inc. (formerly
Shoemart, Inc.), SM Prime Holdings, Inc., Star Appliance Center, Inc., Surplus
Marketing Corp. versus The City of Manila and the City Treasurer [of] Manila,"
which emanated from an Order in favour of the SM Group issued by Branch 47 of
the Regional Trial Court of Manila in Civil Case No. 03-108175 entitled "Ace
Hardware Phils., Inc., SM Prime Holdings, Inc., Star Appliance Center, Inc.,
Supervalue, Inc., Watsons Personal Care Stores (Phils.) Inc. versus The City of
Manila and the City Treasurer of Manila," and is currently pending before the
Supreme Court.In their Comment (with Manifestation of Earnest Apology to the
Supreme Court) dated June 4, 2014, respondent City of Manila and Liberty Toledo,
in her capacity as Treasurer of the City of Manila (respondents), confirmed the
authenticity and due execution of the UCA. They, however, submitted that the UCA
had no effect on the subject Decision since the taxes paid subject of the instant case
was not included in the agreement.

ISSUE:

The Court adopts the terms and conditions of the UCA pertinent to this case.

HELD:

A compromise agreement is a contract whereby the parties, by making reciprocal

concessions, avoid a litigation or put an end to one already commenced. It
contemplates mutual concessions and mutual gains to avoid the expenses of
litigation; or when litigation has already begun, to end it because of the uncertainty of
the result. Its validity is dependent upon the fulfillment of the requisites and principles
of contracts dictated by law; and its terms and conditions must not be contrary to law,
morals, good customs, public policy, and public order. When given judicial approval,
a compromise agreement becomes more than a contract binding upon the parties.
Having been sanctioned by the court, it is entered as a determination of a
controversy and has the force and effect of a judgment. It is immediately executory
and not appeal able, except for vices of consent or forgery. The non fulfillment of its
terms and conditions justifies the issuance of a writ of execution; in such an instance,
execution becomes a ministerial duty of the court. A review of the whereas
clauses of the UCA reveals the various court cases filed by petitioners, including this
case, for the refund and/or issuance of tax credit covering the local business taxes
payments they paid to respondent City of Manila pursuant to Section 21 of the
latter's Revenue Code. Thus, contrary to the submission of respondents, the local
business taxes subject of the instant case is clearly covered by the UCA since they
were also paid in accordance with the same provision of the Revenue Code of
Manila. In this relation, it is observed that the present case would have been
rendered moot and academic had the parties informed the Court of the UCA's
supervening execution. Be that as it may, and considering that the UCA appears to
have been executed in accordance with the requirements of a valid compromise
agreement; the UCA was executed more than a year prior to the promulgation of the
subject Decision; and the result of both the UCA and the subject Decision are
practically identical, that petitioners are not entitled to any tax refund/credit, the Court
herein resolves to approve and adopt the pertinent terms and conditions of the UCA
insofar as they govern the settlement of the present dispute. WHEREFORE, the
petitioners' Manifestation and Motion dated August 2, 2013 is GRANTED. The
Decision dated June 5, 2013 of the Court is hereby SET ASIDE. In lieu thereof, the
terms and conditions of the Universal Compromise Agreement between the parties
pertinent to the instant case are APPROVED and ADOPTED as the Decision of the
Court. The parties are ordered to faithfully comply with the terms and conditions of
the said agreement. This case is considered closed and terminated. No costs.

Honda Cars
Philippines, Inc. v. Honda Cars Technical Specialist and Supervisors
Union, G.R. No. 204142, 19 November 2014

FACTS:

On 2006, petitioner Honda Cars Philippines, Inc., (company) and respondent Honda
Cars Technical Specialists and Supervisory Union, entered into a collective
bargaining agreement. Prior to April 1, 2005, the union members were receiving a
transportation allowance of 3,300.00 a month. On September 3, 2005, the company
and the union entered into a Memorandum of Agreement5 (MOA) converting the
transportation allowance into a monthly gasoline allowance. It was provided, that in
the event the amount of gasoline is not fully consumed, the gasoline not used may
be converted into cash, subject to whatever tax may be applicable. Since the cash
conversion is paid in the monthly payroll as an excess gas allowance, the company
considers the amount as part of the managers’ and AVPs’ compensation that is
subject to income tax on compensation. The union, on the other hand, argued that
the gasoline allowance for its members is a "negotiated item" under their CBA on
fringe benefits. The disagreement between the company and the union on the matter
resulted in a grievance which they referred to the CBA grievance procedure for
resolution. As it remained unsettled there, they submitted the issue to a panel of
voluntary arbitrators as required by the CBA. The Panel of Voluntary Arbitrators
declared that the cash conversion of the unused gasoline allowance enjoyed by the
members of the union is a fringe benefit subject to the fringe benefit tax, not to
income tax.

ISSUE:

WON the Voluntary Arbitrator has jurisdiction to settle tax matters

HELD:

No. The Voluntary Arbitrator has no competence to rule on the taxability of the gas
allowance and on the propriety of the withholding of tax. These issues are clearly tax
matters, and do not involve labor disputes. To be exact, they involve tax issues
within a labor relations setting as they pertain to questions of law on the application
of Section 33 of the NIRC. They do not require the application of the Labor Code or
the interpretation of the MOA and/or company personnel policies. Furthermore, the
company and the union cannot agree or compromise on the taxability of the gas
allowance. Taxation is the State’s inherent power; its imposition cannot be subject to
the will of the parties. Under paragraph 1, Section 4 of the NIRC, the CIR shall have
the exclusive and original jurisdiction to interpret the provisions of the NIRC and
other tax laws, subject to review by the Secretary of Finance. Consequently, if the
company and/or the union desire/s to seek clarification of these issues, it/they should
have requested for a tax ruling from the Bureau of Internal Revenue (BIR). Any
revocation, modification or reversal of the CIR’s ruling shall not be given retroactive
application if the revocation, modification or reversal will be prejudicial to the
taxpayers, except in the following cases: Where the taxpayer deliberately misstates
or omits material facts from his return or any document required of him by the BIR;
Where the facts subsequently gathered by the BIR are materially different from the
facts on which the ruling is based; or Where the taxpayer acted in bad faith.18

BIR v. CA, G.R.

No. 197590, 24 November 2014

FACTS:

Respondent Antonio Villan Manly (Antonio) is a stockholder and the Executive Vice
President of Standard Realty Corporation, a family-owned corporation. He is also
engaged in rental business. His spouse, respondent Ruby Ong Manly, is a
housewife. On April 27, 2005, petitioner Bureau of Internal Revenue (BIR) issued
Letter of Authority No. 2001 00012387authorizing its revenue officers to investigate
respondent spouses’ internal revenue tax liabilities for taxable year 2003 and prior
years. BIR issued a letter to Manly spouses requiring them to submit documentary
evidence to substantiate the source of their cash purchase of a 256square meter log
cabin in Tagaytay City, a Toyota Rav 4 and a Toyota Prado. Since Spouses Manly
failed to comply with the letter, the revenue officers concluded that Manly’s Income
Tax Return (ITR) for taxable years 2000, 2001 and 2003 were under declared. And
since the under declaration exceeded 30% of the reported or declared income, it was
considered a prima facie evidence of fraud with intent to evade the payment of
proper tax due to the government. The BIR and the state prosecutor, thus,
recommended the filing of criminal cases against Spouses Manly for failing to supply
correct and accurate information in their ITRs. The Secretary of Justice reversed the
resolution of the state prosecutor. The CA likewise dismissed the Petition for
Certiorari by the petitioner BIR.

ISSUE:

Whether a deficiency assessment is necessary before one can be prosecuted for

tax evasion

HELD:

No. In Ungab v. Judge Cusi, Jr., we ruled that tax evasion is deemed complete when
the violator has knowingly and willfully filed a fraudulent return with intent to evade
and defeat a part or all of the tax. Corollarily, an assessment of the tax deficiency is
not required in a criminal prosecution for tax evasion. However, in Commissioner of
Internal Revenue v. Court of Appeals, we clarified that although a deficiency
assessment is not necessary, the fact that a tax is due must first be proved before
one can be prosecuted for tax evasion. In the case of income, for it to be taxable,
there must be a gain realized or received by the taxpayer, which is not excluded by
law or treaty from taxation. The government is allowed to resort to all evidence or
resources available to determine a taxpayer’s income and to use methods to
reconstruct his income. A method commonly used by the government is the
expenditure method, which is a method of reconstructing a taxpayer’s income by
deducting the aggregate yearly expenditures from the declared yearly income. In the
case at bar, petitioner used this method to determine respondent spouses’ tax
liability. Petitioner deducted respondent spouses’ major cash acquisitions from their
available funds. And since the under declaration is more than 30% of respondent
spouses’ reported or declared income, which under Section 248 of the NIRC
constitutes as prima facie evidence of false or fraudulent return, petitioner
recommended the filing of criminal cases against respondent spouses under
Sections 254 and 255, in relation to Section 248 of the NIRC.

CIR v. Team
[Philippines] Operations Corporation [formerly Mirant (Phils) Operations
Corporation], G.R. No. 179260, 2 April 2014

FACTS:

The factual antecedents of the case are undisputed:Petitioner is the duly appointed
Commissioner of Internal Revenue, charged with the duty of enforcing the provisions
of the National Internal Revenue Code (NIRC), including the power to decide and
approve administrative claims for refund. Respondent, on the other hand, is a
corporation duly organized and existing under and virtue of the laws of the Republic
of the Philippines, with its principal office at Bo. Ibabang Pulo, Pagbilao Grande
Island, Pagbilao, Quezon Province. It is primarily engaged in the business of
designing, constructing, erecting, assembling, commissioning, operating, maintaining,
rehabilitating and managing gas turbine and other power generating plants and
related facilities for the conversion into electricity of coal, distillate and other fuels
provided by and under contract with the Government of the Republic of the
Philippines, or any subdivision, instrumentality or agency thereof, or any government
owned or controlled corporations or other entity engaged in the development, supply
or distribution of energy. On 30 April 2001, respondent secured from the Securities
and Exchange Commission (SEC) its Certificate of Filing of Amended Articles of
Incorporation, reflecting its change of name from Southern Energy Asia-Pacific
Operations (Phils.), Inc. to Mirant (Philippines) Operations Corporation. Prior to its
use of the name Southern Energy Asia-Pacific Operations (Phils.), Inc., respondent
operated under the corporate names CEPA Operations (Philippines) Corporation,
CEPA Tileman Project Management Corporation and Hopewell Tileman Project
Management Corporation. The changes in respondent’s corporate name from CEPA
Operations (Philippines) Corp. to Southern Energy Asia-Pacific Operations (Phils.)
Inc., from CEPA Tileman Project Management Corporation to CEPA Operations
(Philippines) Corp. and from Hopewell Tileman Project Management Corporation to
CEPA Tileman Project Management Corp., were approved by the SEC on 24
November 2000, 21 November 1997 and 29 July 1994, respectively. Under its
original corporate name, Hopewell Tileman Project Management Corp., respondent
was registered with the Bureau of Internal Revenue (BIR) with Tax Identification No.
003-057-796 as shown by its original BIR Certificate of Registration issued on 29
March 1994. In line with its primary purpose, respondent entered into Operating and
Management Agreements with Mirant Pagbilao Corporation (MPC) [formerly
Southern Energy Quezon, Inc.] and Mirant Sual Corporation (MSC) [formerly
Southern Energy Pangasinan, Inc.] to provide MPC and MSC with operation and
maintenance services in connection with the operation, construction and
commissioning of the coal-fired thermal power stations situated in Pagbilao, Quezon
and Sual, Pangasinan, respectively. Payments received by respondent from MPC
and MSC relative to the said agreements were allegedly subjected to creditable
withholding taxes.

ISSUE:

The core issue for the Court’s resolution is whether or not respondent has
established its entitlement for the refund or issuance of a tax credit certificate in its
favor the entire amount of ₱69,562,412.00 representing its unutilized tax credits for
taxable year ended 31 December 2001, pursuant to the applicable provisions of the
NIRC of 1997, as amended.

HELD:

In order to be entitled to a refund claim or issuance of a tax credit certificate

representing any excess or unutilized creditable withholding tax, it must be shown
that the claimant has complied with the essential basic conditions set forth under
pertinent provisions of law and existing jurisprudential declarations. In Banco Filipino
Savings and Mortgage Bank v. Court of Appeals, this Court had previously
articulated that there are three essential conditions for the grant of a claim for refund
of creditable withholding income tax, to wit the claim is filed with the Commissioner
of Internal Revenue within the two-year period from the date of payment of the tax; it
is shown on the return of the recipient that the income payment received was
declared as part of the gross income; and the fact of withholding is established by a
copy of a statement duly issued by the payor to the payee showing the amount paid
and the amount of the tax withheld therefrom.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 years after the payment of the tax or penalty:
Provided, however, That a return filed showing an over payment shall be considered
as a written claim for credit or refund.SEC. 229. Recovery of Tax Erroneously or
Illegally Collected.No suit or proceeding shall be maintained in any court for the
recovery of any national internal revenue tax hereafter alleged to have been
erroneously or illegally assessed or collected, or of any penalty claimed to have been
collected without authority, or of any sum alleged to have been excessively or in any
manner wrongfully collected, until a claim for refund or credit has been duly filed with
the Commissioner; but such suit or proceeding may be maintained, whether or not
such tax, penalty, or sum has been paid under protest or duress. In any case, no
such suit or proceeding shall be filed after the expiration of two years from the date
of payment of the tax or penalty regardless of any supervening cause that may arise
after payment: Provided, however, That the Commissioner may, even without a
written claim therefor, refund or credit any tax, where on the face of the return upon
which payment was made, such payment appears clearly to have been erroneously
paid. Claims for tax credit or refund of any creditable income tax which was deducted
and withheld on income payments shall be given due course only when it is shown
that the income payment has been declared as part of the gross income and the fact
of withholding is established by a copy of the withholding tax statement duly issued
by the pay or to the payee showing the amount paid and the amount of tax withheld
there from In addition to the above mentioned requisites, the NIRC of 1997, as
amended, likewise provides for the strict observance of the concept of the
irrevocability rule, the focal provision of which is Section 76 thereof, quoted
hereunder for easy reference: SEC. 76. Final Adjustment Return. Every corporation
liable to tax under Section 27 shall file a final adjustment return covering the total
taxable income for the preceding calendar or fiscal year. If the sum of the quarterly
tax payments made during the said taxable year is not equal to the total tax due on
the entire taxable income of that year.

CIR v. United
Salvage and Towage (Phils.) Inc., G.R. No. 197515, 2 July 2014

FACTS:

Respondent (USTP) is engaged in the business of sub-contracting work for service

contractors engaged in petroleum operations in the Philippines. In the course of
respondent’s operations, petitioner found respondent liable for deficiency income tax,
withholding tax, value-added tax and documentary stamp tax (DST) for taxable years
1992,1994, 1997 and 1998. Petitioner, through BIR officials, issued demand letters
with attached assessment notices for withholding tax on compensation (WTC) and
expanded withholding tax (EWT) for taxable years 1992, 1994 and 1998. USTP filed
administrative protests against the 1994 and 1998 EWT assessments, respectively.
In 2003, the USTP appealed by way of Petition for Review before the CTA, but
moved to withdraw the same during the pendency of the proceedings because it
availed of the benefits of the Tax Amnesty Program. Having complied with all the
requirements therefor, the CTA-Special First Division partially granted the Motion to
Withdraw and declared the issues on income tax, VAT and DST deficiencies closed
and terminated The CTA-Special First Division held that the Preliminary Assessment
Notices (PANs) for deficiency EWT for taxable years 1994 and 1998 were not
formally offered; hence, pursuant to Section 34, Rule 132 of the Revised Rules of
Court, the Court shall neither consider the same as evidence nor rule on their validity.
As regards the Final Assessment Notices (FANs) for deficiency EWT for taxable
years 1994 and 1998, the CTA-Special First Division held that the same do not show
the law and the facts on which the assessments were based. Said assessments
were, therefore, declared void for failure to comply with Section 228 of the 1997 Tax
Code. From the foregoing, the only remaining valid assessment is for taxable year
1992. Nevertheless, the CTA-Special First Division declared that the right of
petitioner to collect the deficiency EWT and WTC, respectively, for taxable year 1992
had already lapsed pursuant to Section 203 of the Tax Code. Thus, in ruling for
USTP, the CTA-Special First Division cancelled Assessment Notices both dated
January 9, 1996 and covering the period of 1992. Petitioner moved to reconsider the
aforesaid ruling however it was denied the same for lack of merit. Upon appeal, the
CTA En Banc affirmed with modification the of the CTA-Special First Division. The
CTA En Banc upheld the 1998 EWT assessment. In addition to the basic EWT
deficiency of ₱14,496.79, USTP is ordered to pay surcharge, annual deficiency
interest, and annual delinquency interest from the date due until full payment
pursuant to Section 249 of the 1997 NIRC.

ISSUE:

Whether or not the EWT assessment issued against the respondent for taxable year
1994 were valid.

HELD:

NO. In order to determine whether the requirement for a valid assessment is duly
complied with, it is important to ascertain the governing law, rules and regulations
and jurisprudence at the time the assessment was issued. In the instant case, the
PANs and FANs pertaining to the deficiency EWT for taxable years 1994 and 1998,
respectively, were issued on January 19, 1998, when the Tax Code was already in
effect, as correctly found by the CTA En Banc. The date of issuance of the notice of
assessment determines which law applies- the 1997 NIRC or the old Tax Code. In
the instant case, the 1997 NIRC covers the 1994 and 1998 EWT FANs because
there were issued on January 19, 1998 and September 21, 2001, respectively, at the
time of the effectivity of the 1997 NIRC. Clearly, the assessments are governed by
the law. Indeed, Section 228 of the Tax Code provides that the taxpayer shall be
informed in writing of the law and the facts on which the assessment is made.
Otherwise, the assessment is void. To implement the aforesaid provision, Revenue
Regulation No. 12-99was enacted by the BIR, of which Section 3.1.4 thereof reads:
3.1.4. Formal Letter of Demand and Assessment Notice. –The formal letter of
demand and assessment notice shall be issued by the Commissioner or his duly
authorized representative. The letter of demand calling for payment of the taxpayer’s
deficiency tax or taxes shall state the facts, the law, rules and regulations, or
jurisprudence on which the assessment is based, otherwise, the formal letter of
demand and assessment notice shall be void. The same shall be sent to the
taxpayer only by registered mail or by personal delivery. The law requires that the
legal and factual bases of the assessment be stated in the formal letter of demand
and assessment and notice. Such cannot be assumed. The alleged “factual bases”
in the advice, preliminary letter and “audit working papers” did not suffice. There was
no going around the mandate of the law that the legal and factual bases of the
assessment be stated in writing in the formal letter of demand accompanying the
assessment notice.

Tolentino v.
Secretary of Finance, G.R. No. 115455, 30 October 1995
FACTS:

The present case involves motions seeking reconsideration of the Court’s decision
dismissing the petitions for the declaration of unconstitutionality of R.A. No. 7716,
otherwise known as the Expanded Value-Added Tax Law. The motions, of which
there are 10 in all, have been filed by the several petitioners. The Philippine Press
Institute, Inc. (PPI) contends that by removing the exemption of the press from the
VAT while maintaining those granted to others, the law discriminates against the
press. At any rate, it is averred, “even nondiscriminatory taxation of constitutionally
guaranteed freedom is unconstitutional”, citing in support of the case of Murdock v.
Pennsylvania. Chamber of Real Estate and Builders Associations, Invc., (CREBA),
on the other hand, asserts that R.A. No. 7716 impairs the obligations of contracts,
classifies transactions as covered or exempt without reasonable basis and violates
the rule that taxes should be uniform and equitable and that Congress shall “evolve a
progressive system of taxation”. Further, the Cooperative Union of the Philippines
(CUP), argues that legislature was to adopt a definite policy of granting tax
exemption to cooperatives that the present Constitution embodies provisions on
cooperatives. To subject cooperatives to the VAT would, therefore, be to infringe a
constitutional policy.

ISSUE:

Whether or not, based on the aforementioned grounds of the petitioners, the

Expanded Value-Added Tax Law should be declared unconstitutional.

HELD:

Anent the first contention of CREBA, it has been held in an early case that even
though such taxation may affect particular contracts, as it may increase the debt of
one person and lessen the security of another, or may impose additional burdens
upon one class and release the burdens of another, still the tax must be paid unless
prohibited by the Constitution, nor can it be said that it impairs the obligation of any
existing contract in its true legal sense. It is next pointed out that while Section 4 of
R.A. No. 7716 exempts such transactions as the sale of agricultural products, food
items, petroleum, and medical and veterinary services, it grants no exemption on the
sale of real property which is equally essential. The sale of food items, petroleum,
medical and veterinary services, etc., which are essential goods and services was
already exempt under Section 103, pars. of the NIRC before the enactment of R.A.
No. 7716. Petitioner is in error in claiming that R.A. No. 7716 granted exemption to
these transactions while subjecting those of petitioner to the payment of the VAT.
Finally, it is contended that R.A. No. 7716 also violates Art. VI, Section 28 which
provides that “The rule of taxation shall be uniform and equitable. The Congress
shall evolve a progressive system of taxation”. Nevertheless, equality and uniformity
of taxation mean that all taxable articles or kinds of property of the same class be
taxed at the same rate. The taxing power has the authority to make reasonable and
natural classifications for purposes of taxation. To satisfy this requirement it is
enough that the statute or ordinance applies equally to all persons, firms, and
corporations placed in similar situation. Furthermore, 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 as much as possible, indirect taxes should be minimized.” The
mandate to Congress is not to prescribe, but to evolve, a progressive tax system.

CIR v. AIR
India, G.R. No. 72443, 29 January 1988

FACTS:

The private respondent Air India is a foreign corporation organized under the laws of
India. It is not licensed to do business in the Philippines as an international carrier.
Air India's status in the Philippines is that of an off-line international carrier
not engaged in the business of air transportation in the Philippines.Commissioner of
Internal revenue held the private respondent liable for the payment of P142,471.68".
The amount represents the income tax on the private respondent's gross Philippine
billings for the said fiscal !ear pursuant to Section 24 of the National Internal revenue
Code, as amended, inclusive of the surcharge and interest for willful neglect to file
a return as provided under section 72 of the same code.
Respondents contention:
It cannot be held liable to pa! the said imposition because it did not derive an!
income from sources with the Philippines during the said fiscal year and that the
amount of P2,968,156.00, mentioned in the assessment made by the petitioner was
derived exclusively from sources outside the Philippines.
Petitioners contention:
It was realized in the Philippines and was, therefore, derived from sources within the
Philippines. Petitioner also stressed that in case of an! doubt, the presumption is
that the tax assessment is correct. Court of Tax Appeals ruled in favor of the private
respondent and set aside the decision of the petitioner.
The tax court likewise held that the surcharge and interest imposed upon the private
respondent are improper.

ISSUE:

whether or not the revenue derived b! an international air carrier from sales of tickets
in the Philippines for air transportation, while having no landing rights in the country,
constitutes income of the said international air carrier from Philippine sources and,
accordingly, taxable under section 24 of the national Internal revenue Code.

HELD:

The source of an income is the property, activity or service that produced the
income. 9 or the source of income to be considered as coming from the Philippines,
it is sufficient that the income is derived from activity within the Philippines.The
revenue derived b! the private respondent Air India from the sales of airplane tickets
through its agent Philippine Air 6ines, Inc., here in the Philippines, must
be considered taxable income. As correctly assessed by the petitioner, such income
is subject to a 2.5 % tax pursuant to Presidential decree no.1355, amending section
24 of the ta* code. The total Philippine billings of the private respondent for the
taxable !ear in question amounts to P2,968,156.00 2.5% of this amount or
P74,203.90 constitutes the income tax due from the private respondent.The 50%
surcharge or fraud penalty provided in section 72 of the national Internal revenue
Code is imposed on a delinquent tax payer who willfully neglects to file the required
tax return within the period prescribed b! the law, or who willfully files a false
or fraudulent tax return.

Corp. G.R. No. 137377, 18 December 2001

Madrigal v.

FACTS:

Marubeni Corporation is a foreign corporation organized and existing under the laws
of Japan. It is engaged in general import and export trading, financing and the
construction business. It is duly registered to engage in such business in the
Philippines and maintains a branch office in Manila. Sometime in November 1985,
petitioner Commissioner of Internal Revenue issued a letter of authority to examine
the books of accounts of the Manila branch office of MC for the fiscal year ending
March 1985. In the course of the examination, petitioner found respondent to have
undeclared income from two contracts in the Philippines, both of which were
completed in 1984. One of the contracts was with the National Development
Company in connection with the construction and installation of a port complex at the
Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte.
The other contract was with the Philippine Phosphate Fertilizer Corporation
(Philphos) for the construction of an ammonia storage complex also at the Leyte
Industrial Development Estate. Petitioner’s revenue examiners recommended an
assessment for deficiency taxes. Respondent questioned this assessment but it
received a letter from petitioner assessing its several deficiency taxes. The assessed
deficiency internal revenue taxes, inclusive of surcharge and interest, were as
follows: P290,583,972.40 for deficiency income tax; P83,036,965.16 for deficiency
branch profit remittance tax; P85,563,625.46 for deficiency contractor’s tax; and
P3,600,535.68 for deficiency commercial broker’s tax. Petitioner alleged that the
National Development Company and Philphos contracts were contracts for a piece
of work and since the projects called for the construction and installation of facilities
in the Philippines, the entire income therefrom constituted income from Philippine
sources, hence, subject to internal revenue taxes. However, upon issuance of E.O.
No. 41 declaring a onetime amnesty covering unpaid income taxes for the years
1981 to 1985, as extended by E.O. No. 64, respondent was able to apply for the
amnesty of its deficiency taxes. And almost ten years after filing of the case, CTA
rendered a decision in CTA Case No. 4109. The tax court found that respondent had
properly availed of the tax amnesty under E.O. Nos. 41 and 64 and declared the
deficiency taxes subject of said case as deemed can celled and withdrawn.
Petitioner appealed with the Court of Appeals, which dismissed the petition and
affirmed the decision of CTA. Respondent argued that assuming it did not validly
avail of the amnesty under the two Executive Orders, it is still not liable for the
deficiency contractor’s tax because the income from the projects came from the
“Offshore Portion”, not “Onshore Portion” of the contracts; that all materials and
equipment in the contract under the “Offshore Portion” were manufactured and
completed in Japan, not in the Philippines, and are therefore not subject to Philippine
taxes. And that under the Philippine Onshore Portion, which petitioner has not
denied, the income it derived from the said portion had been declared for tax
purposes and the taxes thereon already paid to the Philippine government.

ISSUE:

Whether or not respondent is liable to pay the income, branch profit remittance, and
contractor’s taxes assessed by petitioner.

HELD:

NO. Respondent is not liable to pay for income and branch profit remittance as it did
not fall under exception for the applicability of the tax amnesty in Section 4 of E.O.
No. 41 and is also not liable to pay for contractor’s tax as the materials used for the
contracts are produced in Japan, outside the jurisdiction of the taxing power of the
Philippines. A contractor’s tax is a tax imposed upon the privilege of engaging in
business. It is generally in the nature of an excise tax on the exercise of a privilege of
selling services or labor rather than a sale on products; and is directly collectible
from the person exercising the privilege. Being an excise tax, it can be levied by the
taxing authority only when the acts, privileges or business are done or performed
within the jurisdiction of said authority. Like property taxes, it cannot be imposed on
an occupation or privilege outside the taxing district. In the case at bar, it is
undisputed that respondent was an independent contractor under the terms of the
two subject contracts. Respondent, however, argues that the work therein were not
all performed in the Philippines because some of them were completed in Japan in
accordance with the provisions of the contracts. An examination of Annex III to the
two contracts reveals that the materials and equipment to be made and the works
and services to be performed by respondent are indeed made by sub-contractors
and manufacturers which are Japanese corporations and are based in Japan and all
engineering and design works were performed in that country. All the materials and
equipment transported to the Philippines were inspected and tested in Japan prior to
shipment in accordance with the terms of the contracts. The inspection was made by
representatives of respondent corporation, of NDC and Philphos. Clearly, the service
of “design and engineering, supply and delivery, construction, erection and
installation, supervision, direction and control of testing and commissioning,
coordination. “ of the two projects involved two taxing jurisdictions. These acts
occurred in two countries Japan and the Philippines. While the construction and
installation work were completed within the Philippines, the evidence is clear that
some pieces of equipment and supplies were completely designed and engineered
in Japan. These services were rendered outside the taxing jurisdiction of the
Philippines and are therefore not subject to contractor’s tax.

Madrigal v.
Rafferty, G.R. No. L-12287, 7 August 1918

FACTS:
Vicente Madrigal and Susana Paterno were legally married contracted under the
provisions of law concerning conjugal partnerships Vicente Madrigal filed a sworn
declaration on... the prescribed form with the Collector of Internal Revenue, showing,
as his total net income for the year 1914, the sum of P296,302.73 did not represent
his income for the year 1914, but was in fact the income of the conjugal partnership
existing between himself and his wife Susana Paterno the income declared by
Vicente Madrigal should be divided into two equal parts, one-half to be considered
the income of Vicente Madrigal and the other half the income of Susana Paterno
After payment under protest, and after the protest of Madrigal had been decided
adversely by the Collector of Internal Revenue, action was begun by Vicente
Madrigal and his wife Susana Paterno in the Court of First Instance of the city of
Manila against the Collector of Internal Revenue for the recovery of the sum of
P3,786.08, alleged to have been wrongfully and illegally assessed and collected The
income of Vicente Madrigal and his wife Susana Paterno for the year 1914 was
made up of... three items: P362,407.67, the profits made by Vicente Madrigal in his
coal and shipping business; P4,086.50, the profits made by Susana Paterno in her
embroidery business; P16,687.80, the profits made by Vicente Madrigal in a
pawnshop company. The sum of these three items is P383,181.97, the gross income
of Vicente Madrigal and Susana Paterno for the year 1914.
ISSUE:
with the additional income tax, is that it should be divided into two equal parts,
because of the conjugal partnership existing between them.
HELD
The Income Tax Law of the United States, extended to the Philippine Islands the
result of an effect on the part of legislators to put into statutory form this canon of
taxation and of social reform to mitigate the evils arising from inequalities of wealth
by a progressive scheme of taxation, Susana Paterno, wife of Vicente Madrigal, has
an inchoate right in the property of her husband Vicente Madrigal during the life of
the conjugal partnership. She has an interest in the ultimate property rights and in
the ultimate ownership of property acquired as income after such income has
become capital. Susana Paterno has no absolute right to one-half the income of the
conjugal partnership. Not being seized of a separate estate, Susana Paterno cannot
make a separate return in order to receive the benefit of the exemption which would
arise by reason of the additional tax. As she has no estate and income, actually and
legally vested in her and entirely distinct from her husband's property, the income
cannot properly be considered the separate income of the wife for the purposes of
the additional tax. The Income Tax Law does not look on the spouses as individual
partners in an ordinary partnership. Income as contrasted with capital or property is
to be the test. The essential difference between capital and income is that capital is a
fund; income is a flow. A fund of property existing at an instant of time is called
capital. A flow of services rendered by that capital by the payment of money from it
or any other benefit rendered by a fund of capital in relation to such fund through a
period of time is called income. Capital is wealth, while income is the service of
wealth. "The fact is that property is a tree, income is the fruit; labor is a tree, income
the fruit; capital is a tree, income the fruit." A tax on income is not a tax on property.
"Income," as here used, can be defined as "profits or gains."