Dumaual, Jeanne Pauline J.
2019-2020
G.R. Nos. L-28508-9 July 7, 1989
20. ESSO STANDARD EASTERN, INC., (formerly,
Standard-Vacuum Oil Company), petitioner, vs.
THE COMMISSIONER OF INTERNAL REVENUE,
respondent. Padilla Law Office for petitioner.
CRUZ, J.:
Facts: The CTA denied ESSO’s claims for refund of
overpaid income taxes of P102,246.00 for 1959 and
P434,234.93 for 1960 in CTA Cases No. 1251 and 1558
respectively.
In CTA Case No. 1251, petitioner ESSO deducted from its
gross income for 1959, as part of its ordinary and
necessary business expenses, the amount it had spent for
drilling and exploration of its petroleum concessions. This
claim was disallowed by the respondent Commissioner of
Internal Revenue on the ground that the expenses should
be capitalized and might be written off as a loss only
when a "dry hole" should result. ESSO then filed an
amended return where it asked for the refund of
P323,279.00 by reason of its abandonment as dry holes
of several of its oil wells and claimed as ordinary and
necessary expenses the margin fees paid to the Central
Bank on profit remittances to its New York head office.
Atty. Agnes Santos, Taxation 1
In CTA Case No. 1558, the CR assessed ESSO a
deficiency income tax for the year 1960 arising from the
disallowance of the margin fees paid by ESSO to the
Central Bank on its profit remittances to its New York
head office. ESSO settled the same by applying as tax
credit its overpayment on its income tax in 1959 and
paying under protest the remaining amount.
The CIR denied the claims for refund of the overpayment
of its 1959 and 1960 income taxes, holding that the
margin fees paid to the Central Bank could not be
considered taxes or allowed as deductible business
expenses. ESSO appealed to the CTA and sought the
refund, contending that the margin fees were deductible
from gross income either as a tax or as an ordinary and
necessary business expense, which was also denied.
Issue: WON the margin fees were deductible from gross
income as a tax or an ordinary and necessary business
expense
Held:
1. The margin fee was imposed by the State in the
exercise of its police power and not the power of taxation.
There are at least two cases where we have held that a
margin fee is not a tax but an exaction designed to curb
the excessive demands upon our international reserve. In
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Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the
Court stated through Justice Jose P. Bengzon:
“A margin levy on foreign exchange is a form of exchange
control or restriction designed to discourage imports and
encourage exports, and ultimately, 'curtail any excessive
demand upon the international reserve' in order to
stabilize the currency. By its nature, the margin levy is
part of the rate of exchange as fixed by the government.“
Moreover, it has been settled that a tax is levied to
provide revenue for government operations, while the
proceeds of the margin fee are applied to strengthen our
country's international reserves. Earlier, in Chamber of
Agriculture and Natural Resources of the Philippines v.
Central Bank, 3 the same idea was expressed, though in
connection with a different levy, through Justice J.B.L.
Reyes:
Neither do we find merit in the argument that the 20%
retention of exporter's foreign exchange constitutes an
export tax. A tax is a levy for the purpose of providing
revenue for government operations, while the proceeds of
the 20% retention, as we have seen, are applied to
strengthen the Central Bank's international reserve.
2. The margin fees are not ordinary and necessary
business expenses. Petitioner contends that such
remittance was an expenditure necessary and proper for
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
the conduct of its corporate affairs. The Court cited Atlas
Consolidated Mining and Development Corporation v.
Commissioner of Internal Revenue, where it laid down the
rules on the deductibility of business expenses, thus:
“ the law allowing expenses as deduction from gross
income for purposes of the income tax is Section 30(a) (1)
of the National Internal Revenue which allows a
deduction of 'all the ordinary and necessary expenses
paid or incurred during the taxable year in carrying on
any trade or business.' An item of expenditure, in order to
be deductible under this section of the statute, must fall
squarely within its language. We come, then, to the
statutory test of deductibility where it is axiomatic that to
be deductible as a business expense, three conditions are
imposed, namely: (1) the expense must be ordinary and
necessary, (2) it must be paid or incurred within the
taxable year, and (3) it must be paid or incurred in
carrying on a trade or business. In addition, not only
must the taxpayer meet the business test, he must
substantially prove by evidence or records the deductions
claimed under the law, otherwise, the same will be
disallowed.
Ordinarily, an expense will be considered 'necessary'
where the expenditure is appropriate and helpful in the
development of the taxpayer's business. It is 'ordinary'
when it connotes a payment which is normal in relation
to the business of the taxpayer and the surrounding
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circumstances…Assuming that the expenditure is
ordinary and necessary in the operation of the taxpayer's
business, the answer to the question as to whether the
expenditure is an allowable deduction as a business
expense must be determined from the nature of the
expenditure itself, which in turn depends on the extent
and permanency of the work accomplished by the
expenditure.
The Court held that the CTA was correct in saying that
the margin fees are not expenses in connection with the
production or earning of petitioner's incomes in the
Philippines.
‘Since the margin fees in question were incurred for the
remittance of funds to petitioner's Head Office in New
York, which is a separate and distinct income taxpayer
from the branch in the Philippines, for its disposal
abroad, it can never be said therefore that the margin fees
were appropriate and helpful in the development of
petitioner's business in the Philippines exclusively or were
incurred for purposes proper to the conduct of the affairs
of petitioner's branch in the Philippines exclusively or for
the purpose of realizing a profit or of minimizing a loss in
the Philippines exclusively.“
ESSO has not shown that the remittance to the head
office of part of its profits was made in furtherance of its
own trade or business. It is clear that ESSO, having
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
assumed an expense properly attributable to its head
office, cannot now claim this as an ordinary and
necessary expense paid or incurred in carrying on its own
trade or business.
WHEREFORE, the decision of the Court of Tax Appeals
denying the petitioner's claims for refund of P102,246.00
for 1959 and P434,234.92 for 1960, is AFFIRMED, with
costs against the petitioner. SO ORDERED. Narvasa
(Chairman), Gancayco, Griño-Aquino and Medialdea, JJ.,
concur.
21. OLIVER O. LOZANO vs ENERGY REGULATORY
BOARD
G.R. Nos. 95119-21, December 18, 1990
Facts:
Caltex, Shell and Petron proffered separate application
with the Energy Regulatory Board for permission to
increase the wholesale posted price of petroleum
products. The Board order granted provisional relief.
various petroleum products enumerated below, refined
and/or marketed by them locally. The petitioners submit
that the above Order had been issued with grave abuse of
discretion, tantamount to lack of jurisdiction, and
correctible by Certiorari.
The petitioner, Senator Ernesto Maceda, also submits
that the same was issued without proper notice and
hearing in violation of Section 3, paragraph (e), of
Page 3

Executive Order No. 172; that the Board, in decreeing an
increase, had created a new source for the Oil Price
Stabilization Fund (OPSF), or otherwise that it had levied
a tax, a power vested in the legislature, and/or that it had
"re-collected", by an act of taxation, ad valorem taxes on
oil which Republic Act No. 6965 had abolished. The
petitioner, Atty. Oliver Lozano, likewise argues that the
Board's Order was issued without notice and hearing,
and hence, without due process of law.
Issue:
WON the Board's Order was issued without notice and
hearing, and hence, without due process of law
Ruling:
No.
What must be stressed is that while under Executive
Order No. 172, a hearing is indispensable, it does not
preclude the Board from ordering, ex parte, a provisional
increase, as it did here, subject to its final disposition of
whether or not: (1) to make it permanent; (2) to reduce or
increase it further; or (3) to deny the application. Section
37 paragraph (e) is akin to a temporary restraining order
or a writ of preliminary attachment issued by the courts,
which are given ex parte, and which are subject to the
resolution of the main case.
Section 3, paragraph (e) and Section 8 do not negate each
other, or otherwise, operate exclusively of the other, in
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
that the Board may resort to one but not to both at the
same time. Section 3(e) outlines the jurisdiction of the
Board and the grounds for which it may decree a price
adjustment, subject to the requirements of notice and
hearing. Pending that, however, it may order, under
Section 8, an authority to increase provisionally, without
need of a hearing, subject to the final outcome of the
proceeding. The Board, of course, is not prevented from
conducting a hearing on the grant of provisional authority
— which is of course, the better procedure — however, it
cannot be stigmatized later if it failed to conduct one. As
we held in Citizens' Alliance for Consumer Protection v.
Energy Regulatory Board. In the light of Section 8 quoted
above, public respondent Board need not even have
conducted formal hearings in these cases prior to
issuance of its Order of 14 August 1987 granting a
provisional increase of prices. The Board, upon its own
discretion and on the basis of documents and evidence
submitted by private respondents, could have issued an
order granting provisional relief immediately upon filing
by private respondents of their respective applications. In
this respect, the Court considers the evidence presented
by private respondents in support of their applications —
i.e., evidence showing that importation costs of petroleum
products had gone up; that the peso had depreciated in
value; and that the Oil Price Stabilization Fund (OPSF)
had by then been depleted — as substantial and hence
constitutive of at least prima facie basis for issuance by
Page 4

the Board of a provisional relief order granting an
increase in the prices of petroleum products. We do not
therefore find the challenged action of the Board to have
been done in violation of the due process clause. The
petitioners may contest however, the applications at the
hearings proper.
22. MERALCO SECURITIES INDUSTRIAL
CORPORATION, petitioner, v CENTRAL BOARD OF
ASSESSMENT APPEALS, BOARD OF ASSESSMENT
APPEALS OF LAGUNA and PROVINCIAL ASSESSOR OF
LAGUNA, respondents. May 31, 1982
Special Civil Action of certiorari to review the decision of
the CBAA
AQUINO, J. FACTS: Pursuant to a pipeline concession
issued under the Petroleum Act of 1949, RA No. 387,
Meralco Securities installed from Batangas to Manila a
pipeline system consisting of cylindrical steel pipes joined
together and buried not less than one meter below the
surface along the shoulder of the public highway. The
portion passing through Laguna is about thirty kilometers
long. In points where the pipeline traversed rivers or
creeks, the pipes were laid beneath the bed thereof.
Hence, the pipes are permanently attached to the land.
However, Meralco Securities notes that segments of the
pipeline can be moved from one place to another (if for
example, req'd by the Gov't, should they be affected by
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
any road repair or improvement.) Pursuant to the
Assessment Law, Commonwealth Act No. 470, the
provincial assessor of Laguna treated the pipeline as real
property and issued Tax Declarations, containing the
assessed values of portions of the pipeline. Meralco
Securities appealed the assessments to the Board of
Assessment Appeals of Laguna, which, however, upheld
the assessments. Meralco Securities then brought the
case to the Central Board of Assessment Appeals but
ended w/ the same result. Meralco Securities filed its MR.
It was denied, hence this petition.
CBAA: Meralco Securities' pipeline is subject to realty tax
as the pipes are machinery or improvements, as
contemplated in the Assessment Law and the Real
Property Tax Code. They do not fall within the category of
property exempt from realty tax under those laws. Articles
415 and 416 of the Civil Code, defining real and personal
property, have no application to this case and that even
under A415, the steel pipes can be regarded as realty
because they are constructions adhered to the soil and
things attached to the land in a fixed manner and that
Meralco Securities is not exempt from realty tax under
the Petroleum Law.
Meralco: Its pipeline is not subject to realty tax because it
is not real property within the meaning of A415.
Page 5

WON Meralco's pipeline is a real property subject to realty
tax. Held: Yes. (1) It is incontestable that the pipeline of
Meralco Securities does not fall within any of the classes
of exempt real property enumerated in S3 of the
Assessment Law and S40 of the Real Property Tax Code.
(2) Article 415[l] and [3] provides that real property may
consist of constructions of all kinds adhered to the soil
and everything attached to an immovable in a fixed
manner, in such a way that it cannot be separated
therefrom without breaking the material or deterioration
of the object.
The pipeline system in question is indubitably a
construction adhering to the soil. It is attached to the
land in such a way that it cannot be separated therefrom
without dismantling the steel pipes which were welded to
form the pipeline.
Insofar as the pipeline uses valves, pumps and control
devices to maintain the flow of oil, it is in sense
machinery within the meaning of the Real Property Tax
Code.
It should be borne in mind that what are being
characterized as real property are not the steel pipes but
the pipeline system as a whole.
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
DISPOSITIVE: The questioned decision and resolution are
affirmed. The petition is dismissed. No costs.
23. PROCTER &GAMBLE PHIL. MANUFACTURING
CORP.vMUNICIPALITY OF JAGNA
G.R. No. L-24265; December 28, 1979; Melencio-
Herrera, J.
Digest prepared by Efren II Resurreccion
Facts:
1. December 13, 1957, the Municipal Council of Jagna,
Bohol enacted Mun. Ordinance No. 4 Series of 1957
“Imposing Storage Fees [on] All Exportable Copra
Deposited in the Bodega Within the Jurisdiction of the
Municipality.”
2. For six years (1958-1963), Procter & Gamble paid the
Municipality under protest, storage fees totaling
P42,265.13.
3. March 3, 1964, Procter & Gamble (P&G) filed suit in
the CFI of Manila seeking that: 1) Ordinance no 4 be
declared inapplicable to it, or that it be called ultra
vires, and 2) that the Municipality be ordered to refund
the amount paid under protest + costs.
a. Municipality: questioned the jurisdiction of the trial
court to take cognizance of the action and pleaded
prescription and laches for failure to timely
question the validity of the ordinance.
4. TC: Upheld jurisdiction as well as Municipality’s power
to enact the Ordinance under the Revised Admin
Page 6

Code’s sec. 2238, known as the general welfare clause.
It also declared P&G’s right of action prescribed under
the 5 year period provided by Art 1149 NCC.
5. P&G appeals the case submitting that:
a. The ordinance is inapplicable as it is not engaged in
the business trade of storing copra for others for
compensation or profit, and that the only copra it
stores is for exclusive use in connection with its
business as a manufacturer of soap, edible oil,
margarine and other similar products.
b. That the levy is intended as an “export tax” since it
is collected from “exportable copra” which is beyond
the powers of the Municipal Council.
c. That the fee of P0.10 for every 100 kilos of copra
stored in the bodega is excessive, unreasonable and
oppressive and is imposed more for revenue than as
a regulatory fee.
Issues:
W/N the Municipality of Jagna was authorized to
impose and collect the storage fee provided or in
Ordinance No. 4– YES.
Held:
The validity of the ordinance is sustained.
Ratio:
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
 The Validity of the ordinance must be upheld pursuant
to the broad authority conferred upon municipalities
by Commonwealth Act No. 472 (prevailing when the
ordinance was enacted).
o Under such article, a municipality is
authorized to impose three kinds of licenses 1)
a license for regulation of useful occupation or
enterprises, 2) license for restriction or
regulation of non-useful occupations or
enterprises, and 3) license for revenue.
o It is thus unnecessary to determine whether
the subject storage fee is a tax for revenue
purposes or a license fee to reimburse the
municipality for supervision services since
both are within the powers granted to the
municipality.
 The storage fee imposed under the ordinance is
actually a municipal license tax or fee on
persons, firms and corporations exercising the
privilege of storing copra in a bodega within the
muicipality’s territorial jurisdiction.
o “License tax” has not acquired a fixed
meaning. It is often use to indiscriminately
designate impositions exacted for various
privileges including revenue raising activities.
 Further, the business of buying and selling and
sorting copra is properly the subject of regulation
within the police power granted to municipalities
Page 7

under the Revised Admin Code’s “general welfare
clause”. Since it has been held that warehouses
keeping copra is a likely danger to public safety
because it contains flammable substances that
are difficult to put under the control of water.
 The claim that P0.10 / 100kilos fee is beyond the
cost of regulation and surveillance is not well
taken. As discussed Victorias Milling v
Municipality of Victorias, “[t]he cost of regulation
cannot be taken as a gauge, if the municipality
reallt intended to enact a revenue ordinance[…]”
 Municipal corps. Are allowed wide discretion in
determining the rates of imposable license fees
even in cases of purely police power measures.
 In the absence of proof as to municipal
conditions and the nature of business being
taxed as well as other factors relevant to the
issue of arbitrariness of the questioned rates,
courts will go slow in writing off an ordinance.
 P&G’s averment that even if presumed valid, the
ordinance is inapplicable to it since it is not in
the business of buying or selling copra should
also fail. The question is irrelevant since the
storage fee is an imposition on the privilege of
storing copra in bodegas in the municipality.
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
 The imposition is also not an export tax,
prohibited by the Admin code. Only where there
is a clear showing that what is being taxed is an
export to any foreign country would the
prohibition come into play.
o “exportable” copra in the ordinance does not
exclusively mean export to a foreign country,
but shipment out of the municipality.
o It is also not a tax on exports because it is
also impose upon copra to be used for
domestic purposes.
 However, the lower court erred in claiming that
the action has prescribed. In Municipality of Opon
v Caltex, the prescription period for actions to
recover municipal license taxes is six years,
governed by Art. 1145(2) NCC.
24. G.R. No. L-18534 December 24, 1964
GOLDEN RIBBON LUMBER COMPANY, INC.,vs.THE
CITY OF BUTUAN and FRANCISCO MAGNO, in his
capacity as City Treasurer of the City of Butuan,
defendants-appellants.
DIZON, J.:
Facts:
Page 8

Appellee, a duly organized domestic corporation,
operated a lumber mill and lumber yard in Butuan City.
Pursuant to the provisions of Section 1 of Ordinance No.
5, as amended by Ordinance Nos. 9, 10, 47 and 49 of said
city, appellee paid to appellants the taxes provided for
therein amounting to the total sum P2,069.26. Claiming
that said ordinance, as amended, was void, it later
brought the present action to have it so declared; to
recover the amount mentioned heretofore, and to have
appellants permanently enjoined from enforcing said
ordinance, as amended.
After the denial of their motion to dismiss the complaint
on the ground that it did not state a cause of action,
appellants filed their answer in which, after making some
denials and admissions, they alleged, as affirmative
defenses, (a) that the tax assessed under Ordinance No.
5, as amended. is a privilege tax on business and is
therefore legal under paragraph p, section 15, Article III of
Republic Act No. 523, otherwise known as the Charter of
the City of Butuan, and (b) that since the payments were
not made under protest, appellee could not ask for their
refund. As counterclaim they also alleged that appellee
had incurred tax delinquencies and surcharges as of
July, 1957 in the amount of P16,978.44 and additional
undetermined taxes from August, 1957 up to and
including January 1958 exclusive of interests under
Ordinance No. 5, as amended by Ordinance No. 49, Series
of 1954.
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
The principal issue to be resolved is whether Ordinance
No. 5, as originally approved or as later amended, is a
valid tax that derives legal basis from the Charter of the
City of Butuan? NO, it is void. (Dito kuna nilagay to para
kasunod ng copy ng law and charter ng city.
AN ORDINANCE IMPOSING A TAX ON LUMBER MILLS
SECTION 1. — Every person, association or corporation
operating a lumber mill and/or lumber yard within the
territory of the City of Butuan shall pay to the City a tax
of two fifths (P.004) centavo for every board foot of lumber
sawn manufactured and/or produced (regardless of
group). The tax shall be paid within the first twenty (20),
days of the following month. If the tax is not paid within
the time herein prescribed, there shall be added to the
unpaid amount a surcharge of ten per centum (10%)
every month of fractional part thereof, but in no case
shall the total surcharge exceed twenty-five per centum
(25%).
SECTION 2. — It shall be the duty of every person,
association or corporation operating a lumber mill to
submit to the City Treasurer within the first fifteen (15)
days of every month a sworn statement of the number of
board feet sawn manufactured or produced by it during
the preceding month.
Page 9

Falls within the provisions of paragraph 5, Section 15 of
Republic Act No. 523, which empowers the municipal
board of the City of Butuan:
To tax, fix the license fee for, regulate the business and
fix the location of, match factories, blacksmith shops,
foundries, steam boilers, lumber mills and lumber yards,
shipyards, the storage and sale of gunpowder, tar pitch,
resin coal, oil, gasoline, benzine turpentine, hemp, cotton,
nitroglycerine, petroleum, or any of the products thereof,
and of all other highly combustible or explosive materials
and other establishments likely to endanger the public
safety or give rise to conflagrations or explosions, and
subject to the rules and regulations incured by the
Director of Health in accordance with law, tanneries
renderies, tallow chandeleries, embalmers, and funeral
parlors, bone factories and soap factories.
Issue:
WON Ordinance No. 5, as amended is valid and
legal and that whether or not the plaintiff's corporation is
legally bound to pay the taxes provided for in said to
ordinance in question?
WON the tax imposed by Ordinance No. 5, is a
sales tax on the sawn manufactured or produced lumber,
which are forest products and WON said ordinance is null
and void.
Held:
Ordinance No. 5 is ultra vires.
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
Said ordinance is a sales tax on the sawn
manufactured or produced lumber, it is null and void
because the City of Butuan is not empowered to impose
this type of tax pursuant to its City Charter.
Ratio:
The title given to the original ordinance in question
was "An ordinance imposing a tax on the sales of lumber".
Section 1 thereof made the tax collectible on "every board
foot of lumber sold" by every person, association or
corporation operating a lumber mill within the territory of
the City of Butuan, while Section 4 expressly exempted
lumber mills from the payment of the quarterly sales tax
provided for in Section 3, Article 11 of Ordinance No. 47,
Series of 1949.
The above would seem to be sufficient to show that the
tax imposed is and was really intended to be on lumber
sold and not a tax on, or, license fee for the privilege of
operating a lumber mill and/or a lumber yard.
The amendatory ordinances did not change the nature of
the tax imposed by the original. Ordinance No. 9 simply
changed the title of the latter so as to make it read as an
ordinance imposing a tax on the "produce of lumber
mills"; Ordinance No. 10, while entitled as one imposing a
tax on lumber mills made the tax collectible on "every
board foot of lumber, regardless of group, sawn
manufactured or produced, etc."; Ordinance No. 47, in
turn, made the tax collectible on "every board foot of
lumber sold and/or shipped"; Ordinance No. 49, while
Page 10

changing again the title of the original ordinance so as to
make it read as "An ordinance imposing a tax on lumber
mills", also required the tax to be paid "for every board
foot of lumber sawn manufactured and/or produced, etc."
The clear implication from the original as well as the
amendatory ordinances is that the tax imposed is one on
lumber sold, manufactured, sawn or produced by parties
duly licensed to engage in said trade or business. As the
lower court said — and this we quote with approval. —
The intent of Ordinance No. 5 to tax the sale of lumber is
clear and unmistakable. The subsequent ordinances Nos.
9, 10, 47 and 49, Exhs. B, C, D, and E respectively, being
all amendatory, naturally did not alter the essence or
spirit of the basic ordinance. This is evident, if we
consider that section 4 of the original ordinance which
exempts lumber mills from the of quarterly sales tax, as
provided in an earlier ordinance was never repealed and
instead was carried over and continued to be in force
until the latest amendment.
Moreover, the tax thus levied is virtually one on "forest
products" since manufactured or sawn lumber is so
considered under the provisions of Section 263, National
Internal Revenue Code, which is embraced in Chapter V
thereof entitled "Charges on Forest Products", as
construed by Section VI, Regulation No. 85, Department
of Finance. Municipal corporations are prohibited from
imposing charges of taxes of such nature (Commonwealth
Act No. 472, Section 3; Republic Act No. 2264).
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
Appellants' claim that the questioned tax is one on
business or a privilege tax for the operation of a lumber
mill or a lumber yard is without merit.
The character or nature of a tax is determined not by the
title of the act or ordinance imposing it but by its
operation, practical results and incidents (Dawson vs.
Distilleries, etc., 255 U.S. 288, 65 L. Ed. 638; Association
of Customs Brokers, Inc., et al. vs. The Municipal Board,
et al., G.R. No. L-4376, May 22, 1953).
Neither the original ordinance in question nor the
amendatory ones show that the tax provided for therein is
imposed by reason of the enjoyment of the privilege to
engage in a particular trade or business. Neither do they
provide that payment thereof is a condition precedent to
the enjoyment of such privilege or that its non-payment
would result in the cancellation of any previous license
granted. The only consequence of its non-payment
appears to be the imposition of a surcharge or liability to
suffer the penal sanctions prescribed in Section 3 of the
original ordinance. These circumstances lead Us to the
conclusion that the questioned tax cannot be considered
as one imposed upon a party for engaging in the business
of operating a lumber mill or a lumber yard.
We likewise find to be unmeritorious appellants'
contention that the power of the City of Butuan to tax
lumber mills and lumber yards includes the power to tax
the sale, production, sawing and/or manufacture of
lumber by them. The rule is well-settled that municipal
Page 11

corporations, unlike sovereign states, are clothed with no
power of taxation; that its charter or a statute must
clearly show an intent to confer that power or the
municipal corporation cannot assume and exercise it, and
that any such power granted must be construed strictly,
any doubt or ambiguity arising out from the terms of the
grant to be resolved against the municipality. (Cu Unjieng
vs. Patstone 42 Phil. 818; Vega, et al. vs. Municipal
Board, etc., 50 O.G. No. 6,p. 2456)
25. CITY OF OZAMIS VS LUMAPAS
G.R.No. L-30727, 65 SCRA 33, July 15, 1975
FACTS:
This case is about a bus company, Romar Line,
transporting passengers and cargo with Ozamis City and
Pagadian City as terminal points. Said bus company is
operated by the respondent SERAPIO LUMAPAS.
Then, the Municipal Board of Ozamis City enacted
Ordinance No. 466 imposing parking fees for every motor
vehicle parked on any parking space in Ozamis City.
Since Romar Line is affected of said ordinance, Lumapas
paid said fee under protest for 2 years and 4 months.
After 4 years, Lumapas filed a complained against City of
Ozamis, with CFI-Misamis Occidental, for recovery of
parking fees, alleging that the said ordinance is ULTRA
VIRES.
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
CFI ruled in favor of Lumapas and held that the parking
area where buses of Romar Lines are parked is part of the
municipal street and the parking fee is in the nature of a
toll fee for the use of a public road. As such, the
enactment of said ordinance is in violation of Sec. 59 (b)
of RA No. 4136 (Land Transportation and Traffic Code) for
it has no prior approval by the president of the
Philippines with recommendation of Secretary of Public
Works and Communications, and is NULL & VOID.
Hence, this appeal by certiorari.
ISSUE (1) WON the Ordinance No. 466, which imposes
parking fees in Ozamis, is valid.
HELD:
City of Ozamis has been clothed with full power to
CONTROL and REGULATE its street to promote public
health, safety and welfare.
The SC held that power to tax can only be exercised by
the Congress, unless delegated or conferred to others as
provided for by law. Included in said delegation is the
express grant of powers, among others. And such
delegation of power to tax are to be construed against the
Municipality. In this case, RA 321 (Ozamis City Chapter)
delegates to the Municipal Board the power to regulate
the use of the streets, among other public places.
Page 12

Said republic act delegates the police power to the
municipal corporation to be exercised as a governmental
functions for municipal purposes.
ISSUE (2) WON the fee charged is a parking fee and not a
toll fee.
HELD:
The SC ruled that the word TOLL is defined as a DUTY
imposed on goods and passengers travelling public roads,
and not for use, as a parking place for vehicles.
In this case, the contested ordinance defined parking as
the STOPPAGE of a motor vehicle on an existing parking
areas to unload and load passengers or cargoes.
Considering the use of the land, the fee paid is that of a
PARKING FEE and not a toll fee, and which is imposed to
cover the expenses for supervision, inspection and
control, to ensure smooth flow of traffic in the environs of
the public market, and for safety and convenience of the
public.
SC reversed decision of CFI and declared Ordinance No.
466 VALID.
26. GR No. L-47252 April 18, 1941
THE APOSTOLIC PREFECT OF THE MOUNTAIN
PROVINCE, plaintiff-appellant,
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
vs.
THE TREASURER OF THE CITY OF BAGUIO,
defendant-appealed.
Messrs. Cavanna, Jasmines and Tianco in
representation of the appellant.
The Attorney General representing the appellee.
IMPERIAL, J .:
The plaintiff exercised this action to recover from the
defendant the sum of P1,019.37 that he paid under
protest as a special contribution on his properties in the
City of Baguio, corresponding to the year 1937. Appeal of
the judgment of the Court of First Instance of said city
that he dismissed your demand, without costs.
The parties submitted the matter by means of the
following partial stipulation of facts:
1. The plaintiff is a one-person corporation of a religious
nature, organized in accordance with the laws of the
Philippines, with residence in the city of Baguio;
2. The defendant is a public servant of the city of Baguio
and acts as treasurer and collector of said city;
3. That the defendant demanded and collected from the
plaintiff on June 25, 1937, the sum of one thousand
nineteen pesos and thirty-seven cents (P1,019.37),
Philippine currency, pursuant to the provisions of
Ordinance No. 137, as amended and amended by
Ordinances No. 263, 277, 283, 297, 311, 325, 348, 367,
Page 13

387, 419, 471, 45, 455, 466, 512, 552, 591, 592, and
Resolution of the Council of the City of Baguio No. 10
dated January 22, 1918. All the aforementioned
ordinances, as well as Resolution No. 10, series of 1918,
become integral parts of this agreement.
4. That the payment made by the plaintiff of p1,019.37
corresponds to the year 1937 and was made under
protest formulated in a letter dated June 25, 1937 in
which the reasons for the portestation were presented
and the favorable resolution of the protest and the return
of the amount paid;
5. That the defendant denied the protest;
6. The lands affected by the payment of P1,019.37 are
land owned by the plaintiff's property dedicated to
worship and education during the year 1937 and in
previous years;
7. That the City of Baguio built in accordance with the
ordinances cited above in paragraph 2 of this stipulation
a sewer and drainage system;
8. That the applicant was paying in previous years to
1937, without protest, the sums that the city demanded
in accordance with the ordinances and referred to; and
for the first time I protest the year 1937, protest that is
the object of this litigation;
9. That a list of properties valued in the city of Baguio
was included in Ordinance No. 137 and that relationship
became part of Ordinance No. 137 and was called and
converted into "SPECIAL ASSESSMENT LIST, CITY OF
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
BAGUIO" , for the purposes of the aforementioned
ordinance and that the properties affected in the protest
payment of the applicant were and are included in said
list and have not been excluded so far by virtue of any
ordinance subsequent to No. 137;
10. That the construction of the drainage and sewerage
system has benefited and is benefiting directly and
especially to all the owners whose lots and lands are
included in the "SPECIAL ASSESSMENT LIST, CITY OF
BAGUIO" including the lands of the applicant here
affected in said list and in the payment under protest and
that this system of drainage and sewerage has promoted
the cleaning and sanitary condition of the lands of the
aforementioned list.
11. That the parties reserve the right to practice
additional tests.
The appellant maintains in its error statements the
following propositions: (1) that its real estate and its
mojoras in the City of Baguio for being exempt from
payment of all taxes by the Constitution and by the laws
in force must be equally exempt from the payment of the
special contribution that the appellee has charged him
and he has paid under protest; (2) that Ordinance No.
137 and its amendments, under which the special
contribution has been collected, exclude from its
provisions its properties exempt from the payment of all
taxes; (3) that in the event that the aforementioned
ordinances do not exclude their properties from the
Page 14

payment of the special contribution, they are null and
ineffective; and (4) in the event that the aforementioned
ordinances were legal the appellee, as Treasurer of the
City of Baguio,
The first proposition involves the question of whether the
properties on which the special contribution is charged
are effectively exempt from said payment. The special
contribution was collected by the appellee under the
provisions of articles 2 and 5 of Ordinance No. 137 that
provide:
It having heretofore been ascertained that said work will
benefit each and every owner or property subject to
taxation, lying and being within the corporate limits of the
City, it is hereby stated that benefit will accrue from said
work to each and all said persons, and said persons shall
pay a compensation for said benefit.
The City Assessor having heretofore compiled from the
City Assessment and Valuation aforesaid and certified to
the City Treasurer a list containing and setting forth the
total amount of property within the corporate limits of the
City subject to assessment and levy for the purposes in
this Ordinance recited, The total amount of the properties
individually owned and possessed, and the name of each
individual owner and possessor, the rate per cent, to wit:
ONE PER CENTUM ad valorem of said total value which
is necessary for the purposes set forth in Section III
hereof, is hereby made the amount to be paid individually
by each owner or possessor as his share, and the above-
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
mentioned list is hereby made part hereof and named
"SPECIAL ASSESSMENT LIST," and said list is hereby
declared to be,and made the City official list and basis for
assessing, levying and collecting the rate of compensation
aforesaid from the above-mentioned owners and
possessors, and each owner or possessor is required to,
and shall pay the amount in said list stated as his
individual share to the City Treasurer on or after the first
of March and not later than June 30th, 1914.
The appellant maintains that his property is exempt from
the payment of the special contribution both by what is
provided in Article 2 of Ordinance No. 137 and by what is
stated in Article 14, (3), Title VI, of the Constitution of the
Philippines. it reads as follows:
(3) Cementary, churches, parishes and convents attached
to these, and all land, buildings and improvements used
exclusively for religious, charitable or educational
purposes, shall be exempt from taxation.
It is alleged that, according to Article 2 of Ordinance No.
137, only those properties that are not subject to the
payment of a tax must pay the special contribution and,
in accordance with the aforementioned constitutional
provision, the properties of the appellant are exempt from
the payment of the tax. Special contribution for being
dedicated to religious purposes. This claim requires that
it be resolved, in the first place, if the special tax imposed
by Ordinance No. 13 is a tax in its legal meaning. It is a
well-established rule on tax that the special contributions
Page 15

that are created and charged to amortize extraodinary
expenses that cause works, such as the drainage and
sewerage system, that benefit the inhabitants in a special
way is not a tax in its sense legal. According to the
ordinance, the special contribution charged to the
properties located in the City of Baguio, was created to
amortize the extraordinary expenses caused by the
drainage and sewage system that was built, a work that
benefits all owners in a special way. city. Judge Cooley, in
drawing the distinction between taxes and special
contributions in his tax treaty, expresses himself in these
terms:
While the word "tax" in its broad meaning, includes both
general taxes and special assessments, and in general
sense a tax is an assessment, and an assessment is a tax,
yet there is a recognized distinction between them in that
assessment is confined to local impositions upon property
for the payment of the cost of public improvements in its
immediate vicinity and levied with reference to special
benefits to the assessed property. The differences between
a special assessment and a tax are that (1) a special
assessment can be levied only on land; (2) a special
assessment can not (at least in most states) be a personal
liability of the person assessed; (3) a special assessment
is based wholly on benefits; and (4) a special assessment
is exceptional both as to time and locality. The imposition
of a charge on all property, Real and personal, in a
prescribed area, is a tax assessment, although the
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
purpose is to make a local improvement on a street or
highway. A charge imposed only on property owners
benefited is a special assessment rather than a tax
notwithstanding the statute calls it a tax.
If the special contribution charged to the appellant is not
strictly speaking a tax whose payment is exempt from it,
it is evident that neither under the ordinance nor the
Constitution the aforementioned appellant is exempt from
the payment of the special contribution.
In addition, according to the stipulation of facts, the
appellant can not successfully invoke the exemption
established by the Constitution because it has not been
admitted or proven that its properties that paid the
special contribution were used exclusively for religious
purposes. It is true that it was stipulated that the
properties were dedicated to religious purposes, but it
was not agreed or proved that such use was exclusive,
and it may therefore occur that the properties, besides
being dedicated to religious purposes, were also destined
and used for other purposes. not religious.
Regarding the validity of Ordinance No. 137 and its
amendments, it is undeniable that the City of Baguio is
authorized by Article 8 (1) of Law No. 1963, today Article
2553 (1) of the Revised Administrative Code, for create the
special contribution discussed in order to amortize the
cats caused by the sewage and drainage system that was
built for the benefit of all the inhabitants of the
aforementioned city.
Page 16

The ultimate pretension of the appellant is that assuming
valid Ordinance No. 137 and its amendments he is not
already obliged to pay special contribution in view of that
already satisfied in years prior to 1937 the aliquot part
that corresponded to said special contribution. The claim
is equally unfounded, because it results from Exhibit 1
that the cost of the drainage and sewer system amounts
to P502,750.75 and the city only charged by special
contribution until 1937 the sum of P291,290.08;
resulting in the cost of the system, in 1937, was not yet
fully satisfied.
If the sentence appealed is adjusted to the law, it is
confirmed in all its parts, with the costs of this instance
to the appellant. This is how it is ordered.
Avanceña, Pres., Diaz, Laurel, and Horrilleno, MM., Are
satisfied.
27. VICTORIAS MILLING CO., INC. vs. OFFICE OF THE
PRESIDENTIAL ASSISTANT FOR LEGAL AFFAIRS and
PHILIPPINE PORTS AUTHORITY
G.R. No. 73705 August 27, 1987
FACTS:
On April 28, 1981, the Iloilo Port Manager of Philippine
Ports Authority (PPA) wrote Victorias Milling requiring it
to (1) have its tugboats and barges undergo harbor
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
formalities, (2) pay entrance/clearance fees as well as
berthing fees effective May 1, 1981, (3) secure a permit for
cargo handling operations at its Da-an Banua wharf, and
(4) remit 10% of its gross income for said operations as
the government's share.
To these demands, Victorias Milling sent two letters
wherein it maintained that it was exempt from paying PPA
any fee or charge because: (1) the wharf and its facilities
were built and installed in its land; (2) repair and
maintenance thereof were solely paid by it; (3) even the
dredging and maintenance of the Malijao River Channel
from Guimaras Strait up to said private wharf were being
done by its equipment and personnel; (4) at no time had
the government ever spent a single centavo for such
activities; and (5) the wharf was being used mainly to
handle sugar purchased from district planters pursuant
to existing milling agreements.
Victorias Milling filed a petition before the Court of
Tax Appeals (CTA) but it was dismissed on the ground
that it had no jurisdiction. The CTA recommended that
the appeal be addressed to the Office of the President
(OP). Victorias Milling elevated the case to the Supreme
Court (SC) but it was likewise denied. Thereafter, it
appealed to the OP but it was denied on the ground that
the appeal was filed beyond the reglementary period.
Hence, the instant petition.
Page 17

Victorias Milling maintained and submitted that
there was no basis for the PPA to assess and impose the
dues and charges it was collecting since the wharf was
private, constructed and maintained at no expense to the
government, and that it existed primarily so that its
tugboats and barges would ferry the sugarcane of its
Panay planters.
ISSUE:
Whether or not the requirement to remit 10% of its gross
income for its arrastre and stevedoring operations is valid
RULING:
Yes. The requirement to remit 10% of its gross income for
its arrastre and stevedoring operations is valid.
Section 6B-(ix) of the Presidential Decree No. 857
authorized the PPA "To levy dues, rates, or charges for the
use of the premises, works, appliances, facilities, or for
services provided by or belonging to the Authority, or any
organization concerned with port operations." This 10%
government share of earnings of arrastre and stevedoring
operators is in the nature of contractual compensation to
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
which a person desiring to operate arrastre service must
agree as a condition to the grant of the permit to operate.
As correctly stated by the Solicitor General, the fees and
charges PPA collects are not for the use of the wharf that
petitioner owns but for the privilege of navigating in
public waters, of entering and leaving public harbors and
berthing on public streams or waters.
28. G.R. No. L-13912 September 30, 1960
THE COMMISSIONER OF INTERNAL REVENUE,
petitioner,
vs.
CONSUELO L. VDA. DE PRIETO, respondent.
Office of the Solicitor General Edilberto Barot, Solicitor
F.R. Rosete and Special Atty. B. Gatdula, Jr. for
petitioner.
Formilleza and Latorre for respondent.
GUTIERREZ DAVID, J.:
This is an appeal from a decision of the Court of tax
Appeals reversing the decision of the Commissioner of
Internal Revenue which held herein respondent Consuelo
L. Vda. de Prieto liable for the payment of the sum of
P21,410.38 as deficiency income tax, plus penalties and
monthly interest.
Page 18

The case was submitted for decision in the court below
upon a stipulation of facts, which for brevity is
summarized as follows: On December 4, 1945, the
respondent conveyed by way of gifts to her four children,
namely, Antonio, Benito, Carmen and Mauro, all
surnamed Prieto, real property with a total assessed value
of P892,497.50. After the filing of the gift tax returns on
or about February 1, 1954, the petitioner Commissioner
of Internal Revenue appraised the real property donated
for gift tax purposes at P1,231,268.00, and assessed the
total sum of P117,706.50 as donor's gift tax, interest and
compromises due thereon. Of the total sum of
P117,706.50 paid by respondent on April 29, 1954, the
sum of P55,978.65 represents the total interest on
account of deliquency. This sum of P55,978.65 was
claimed as deduction, among others, by respondent in
her 1954 income tax return. Petitioner, however,
disallowed the claim and as a consequence of such
disallowance assessed respondent for 1954 the total sum
of P21,410.38 as deficiency income tax due on the
aforesaid P55,978.65, including interest up to March 31,
1957, surcharge and compromise for the late payment.
Under the law, for interest to be deductible, it must be
shown that there be an indebtedness, that there should
be interest upon it, and that what is claimed as an
interest deduction should have been paid or accrued
within the year. It is here conceded that the interest paid
by respondent was in consequence of the late payment of
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
her donor's tax, and the same was paid within the year it
is sought to be declared. The only question to be
determined, as stated by the parties, is whether or not
such interest was paid upon an indebtedness within the
contemplation of section 30 (b) (1) of the Tax Code, the
pertinent part of which reads:
SEC. 30 Deductions from gross income. — In computing
net income there shall be allowed as deductions —
xxx xxx xxx
(b) Interest:
(1) In general. — The amount of interest paid within the
taxable year on indebtedness, except on indebtedness
incurred or continued to purchase or carry obligations
the interest upon which is exempt from taxation as
income under this Title.
The term "indebtedness" as used in the Tax Code of the
United States containing similar provisions as in the
above-quoted section has been defined as an
unconditional and legally enforceable obligation for the
payment of money.1awphîl.nèt (Federal Taxes Vol. 2, p.
13,019, Prentice-Hall, Inc.; Merten's Law of Federal
Income Taxation, Vol. 4, p. 542.) Within the meaning of
that definition, it is apparent that a tax may be
considered an indebtedness. As stated by this Court in
the case of Santiago Sambrano vs. Court of Tax Appeals
and Collector of Internal Revenue (101 Phil., 1; 53 Off.
Gaz., 4839) —
Page 19

Although taxes already due have not, strictly speaking,
the same concept as debts, they are, however, obligations
that may be considered as such.
The term "debt" is properly used in a comprehensive
sense as embracing not merely money due by contract
but whatever one is bound to render to another, either for
contract, or the requirement of the law. (Camben vs. Fink
Coule and Coke Co. 61 LRA 584)
Where statute imposes a personal liability for a tax, the
tax becomes, at least in a board sense, a debt. (Idem).
A tax is a debt for which a creditor's bill may be brought
in a proper case. (State vs. Georgia Co., 19 LRA 485).
It follows that the interest paid by herein respondent for
the late payment of her donor's tax is deductible from her
gross income under section 30(b) of the Tax Code above
quoted.
The above conclusion finds support in the established
jurisprudence in the United States after whose laws our
Income Tax Law has been patterned. Thus, under sec.
23(b) of the Internal Revenue Code of 1939, as amended 1
, which contains similarly worded provisions as sec. 30(b)
of our Tax Code, the uniform ruling is that interest on
taxes is interest on indebtedness and is deductible. (U.S.
vs. Jaffray, 306 U.S. 276. See also Lustig vs. U.S., 138 F.
Supp. 870; Commissioner of Internal Revenue vs. Bryer,
151 F. 2d 267, 34 AFTR 151; Penrose vs. U.S. 18 F.
Supp. 413, 18 AFTR 1289; Max Thomas Davis, et al. vs.
Commissioner of Internal Revenue, 46 U.S. Boared of Tax
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
Appeals Reports, p. 663, citing U.S. vs. Jaffray, 6 Tax
Court of United States Reports, p. 255; Armour vs.
Commissioner of Internal Revenue, 6 Tax Court of the
United States Reports, p. 359; The Koppers Coal Co. vs.
Commissioner of Internal Revenue, 7 Tax Court of United
States Reports, p. 1209; Toy vs. Commissioner of Internal
Revenue; Lucas vs. Comm., 34 U.S. Board of Tax Appeals
Reports, 877; Evens and Howard Fire Brick Co. vs.
Commissioner of Internal Revenue, 3 Tax Court of United
States Reports, p. 62). The rule applies even though the
tax is nondeductible. (Federal Taxes, Vol. 2, Prentice Hall,
sec. 163, 13,022; see also Merten's Law of Federal Income
Taxation, Vol. 5, pp. 23-24.)
To sustain the proposition that the interest payment in
question is not deductible for the purpose of computing
respondent's net income, petitioner relies heavily on
section 80 of Revenue Regulation No. 2 (known as Income
Tax Regulation) promulgated by the Department of
Finance, which provides that "the word `taxes' means
taxes proper and no deductions should be allowed for
amounts representing interest, surcharge, or penalties
incident to delinquency." The court below, however, held
section 80 as inapplicable to the instant case because
while it implements sections 30(c) of the Tax Code
governing deduction of taxes, the respondent taxpayer
seeks to come under section 30(b) of the same Code
providing for deduction of interest on indebtedness. We
find the lower court's ruling to be correct. Contrary to
Page 20

petitioner's belief, the portion of section 80 of Revenue
Regulation No. 2 under consideration has been part and
parcel of the development to the law on deduction of taxes
in the United States. (See Capital Bldg. and Loan Assn.
vs. Comm., 23 BTA 848. Thus, Mertens in his treatise
says: "Penalties are to be distinguished from taxes and
they are not deductible under the heading of taxs." . . .
Interest on state taxes is not deductible as taxes." (Vol. 5,
Law on Federal Income Taxation, pp. 22-23, sec. 27.06,
citing cases.) This notwithstanding, courts in that
jurisdiction, however, have invariably held that interest
on deficiency taxes are deductible, not as taxes, but as
interest. (U.S. vs. Jaffray, et al., supra; see also Mertens,
sec. 26.09, Vol. 4, p. 552, and cases cited therein.)
Section 80 of Revenue Regulation No. 2, therefore, merely
incorporated the established application of the tax
deduction statute in the United States, where deduction
of "taxes" has always been limited to taxes proper and has
never included interest on delinquent taxes, penalties and
surcharges.
To give to the quoted portion of section 80 of our Income
Tax Regulations the meaning that the petitioner gives it
would run counter to the provision of section 30(b) of the
Tax Code and the construction given to it by courts in the
United States. Such effect would thus make the
regulation invalid for a "regulation which operates to
create a rule out of harmony with the statute, is a mere
nullity." (Lynch vs. Tilden Produce Co., 265 U.S. 315;
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
Miller vs. U.S., 294 U.S. 435.) As already stated, section
80 implements only section 30(c) of the Tax Code, or the
provision allowing deduction of taxes, while herein
respondent seeks to be allowed deduction under section
30(b), which provides for deduction of interest on
indebtedness.
In conclusion, we are of the opinion and so hold that
although interest payment for delinquent taxes is not
deductible as tax under Section 30(c) of the Tax Code and
section 80 of the Income Tax Regulations, the taxpayer is
not precluded thereby from claiming said interest
payment as deduction under section 30(b) of the same
Code.
In view of the foregoing, the decision sought to be
reviewed is affirmed, without pronouncement as to costs.
Bengzon, Bautista Angelo, Labrador, Barrera, Paredes,
and Dizon, JJ., concur.
Paras, C. J., Concepcion, and Reyes, J.B.L., JJ., concur
in the result.
29. G.R. No. 107135 February 23, 1999
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE COURT OF APPEALS, CENTRAL VEGETABLE
MANUFACTURING CO., INC., and THE COURT OF TAX
APPEALS, respondents.
PURISIMA, J.:
Page 21

Before the Court is a Petition for Review on Certiorari
from the judgment of the Court of Appeals affirming in
totothe decision of the Court of Tax Appeals which
required the Commissioner of Internal Revenue to credit
the sales taxes paid by Central Vegetable Oil
Manufacturing Co., Inc. (CENVOCO) on containers and
packaging materials of its milled products, against the
deficiency miller's tax due thereon for the year 1986.
As culled in the decision of the Court of Tax Appeals, the
undisputed facts are, as follows:
Petitioner (private respondent CENVOCO herein) is a
manufacturer of edible and coconut/coprameal cake and
such other coconut related oil subject to the miller's tax
of 3%. Petitioner also manufactures lard, detergent and
laundry soap subject to the sales tax of 10%.
In 1986, petitioner purchased a specified number of
containers and packaging materials for its edible oil from
its suppliers and paid the sales tax due thereon.
After an investigation conducted by respondent's Revenue
Examiner, Assessment Notice No. FAS-B-86-88-001661-
001664 dated April 22, 1988 was issued against
petitioner for deficiency miller's tax in the total amount of
P1,575,514.70 . . . .
On June 29, 1988, petitioner filed with respondent a
letter dated June 27, 1988 requesting for reconsideration
of the above deficiency miller's tax assessments,
contending that the final provision of Section 168 of the
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
Tax Code does not a apply to sales tax paid on containers
and packaging materials, hence, the amount paid therefor
should have been credited against the miller's tax
assessed against it. Again, thru letter dated September
28, 1988, petitioner reiterated its request for
reconsideration.
On November 17, 1988, respondent wrote CENVOCO, the
full text of which letter reads:
November 17, 1988
Central Vegetable Oil
Manufacturing Co. Inc.
P.O. Box 2816
Manila
Attention: Mr. James Chua
President
Gentlemen:
We have received your letter of September 28,1988,
relative to our assessment against your company in the
amount of P1,575,514.75, as deficiency miller's tax for
the year 1986.
Sec. 188 of the Tax Code provides that sales, miller's or
excise taxes paid on raw materials or supplies used in the
milling process shall not be allowed against the miller's
tax due. You contend that since packaging materials are
not used in the milling process then, the sales taxes paid
Page 22

thereon should be allowed as a credit against the miller's
tax due because they do not fall within the scope of the
prohibition.
It is our position, however, that since the law specifically
does not allow taxes paid on the raw materials or supplies
used in the milling process as a credit against the miller's
tax due, with more reasons should the sales taxes paid on
materials not used in the milling process be allowed as a
credit against the miller's tax due. There is no provision of
law which allows such a credit-to-be made.
In view of the above, we are reiterating the assessment
referred to above. We request that you make payment
immediately so that this case may be considered closed
and terminated.
Very truly yours,
(SGD) EUFRACIO D. SANTOS
Deputy Commissioner
(CA Decision, pp. 31-33 Rollo)
Dissatisfied with the adverse action taken by the BIR,
CENVOCO filed a petition for review with the Court of Tax
Appeals, which came out with a decision, dated December
3, 1990, in favor of CENVOCO, disposing, thus:
WHEREFORE, in view of the foregoing, petitioner Central
Vegetable Oil Manufacturing Co., Inc., is not liable for
deficiency miller's tax for the year 1986 in the amount of
P1,575,514.70.
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
No pronouncement as to costs.
SO ORDERED. (Rollo, p. 53)
Appealed to the Court of Appeals, the said decision was
affirmed in toto. (Rollo, p. 38)
The Court of Appeals adopted the reasons cited and
ratiocination by the Court of Tax Appeals for allowing the
sales tax paid by CENVOCO on the containers and
packaging materials of its milled products to be credited
against the miller's tax due thereon, viz —
The main issuein this case is whether or not respondent
CENVOCO is liable for deficiency miller's tax for the year
1986 in the amount of P1,575,514.70. This in turn hinges
on whether or not containers and packaging materials are
raw materials used in the milling process within the
contemplation of the final proviso of Section 168 of the
National Internal Revenue Code, which reads:
Provided, finally, that credit for any sales, miller's or
excise taxes paid on raw materials or supplies used in the
milling process shall not be allowed against the miller's
tax due, except in the case of a proprietor or operator of a
refined sugar factory as provided hereunder.
xxx xxx xxx
. . . We agree with respondent Court that containers and
packages cannot be considered "raw materials" utilized in
the milling process. In arriving at the conclusion,
respondent Court quoted with approval the reasons cited
by CENVOCO, as follows:
Page 23

FIRST; The raw materials used by Cenvoco in
manufacturing edible oil are copra and/or coconut oil. In
other words, the term "used" in the final proviso of
Section 168 of the NIRC refers or is strictly confined to
"raw materials" or supplies fed, supplied or put into the
apparatus, equipment, machinery or its adjuncts that
cause or execute the milling process. On the other hand,
the containers, such as tin cans, and/or packages are not
used or fed into the milling machinery nor were ever
intended for conversion to form part of the finished
product, i.e., refined coconut/edible oil. Consequently, it
would be absurd to say that said containers and
packages are "used in the milling process", for the
process. involves "grinding, crushing, stamping, cutting,
shaping or polishing". (See THE DICTIONARY, by TIME,
COPYRIGHT 1974, p. 444) . . .
SECOND; Petitioner's interpretation of the term raw
materials is contrary to law and jurisprudence. Thus, raw
materials as used in the definition of " manufacture",
denotes materials from which final product is made
(Black's Law Dictionary, 4th ed. citing State vs. Hennessy
Co., 71 Mont. 301, 230, p. 64, 65). And consistent with
said definition, Revenue Regulations Nos. 2-86 and 11-86
[effective January 1, 1986 and August 11 1986,
respectively] which govern the filing of quarterly
percentage tax returns and payment thereof under the
provisions, inter alia, of Section 168 of the NIRC, define
raw materials or material, to wit:
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
Any article which when used in the MANUFACTURE of
another article becomes a homogenous part thereof, such
that it can no longer be identified in its original state nor
may be removed therefrom without destroying or
rendering useless the finished article to which it has been
merged, mixed or dissolved. . . .
Tested in the light of the foregoing statutory definition, it
is evident that containers and packages used by Cenvoco
are not "raw materials" and do not fall within the purview
of the final proviso of Section 168 of the NIRC. . . . As a
coup de grace, it is pertinent to note the case of Caltex
(Phils.) Inc.vs. Manila Port Service (17 SCRA 1075) where
the Supreme Court aptly defined containers and/or
packages.
. . . a package or a bundle made up for transportation; a
packet; a bale; a parcel; or that in which anything is
packed: box, case, barrel, crate , etc. in which goods are
packed; a container. (Emphasis Ours)
The definition is an emphatic rejection of petitioner's
construction that Cenvoco's containers and packages are
raw materials used in the milling process. . . .
. . . Moreover, Section 168 of the Revenue Code expressly
limits the articles subject to percentage tax (miller's tax)
to: "rope, sugar, coconut oil, palm oil, cassava flour or
starch, desiccated coconuts, manufactured, processed or
milled by them, including the by-product of the raw
materials, from which said articles are produced,
processed or manufactured". . . .
Page 24

(CR Decision, Rollo pp. 34-36)
Hence, the petition under consideration, posing the issue:
WHETHER OR NOT THE SALES TAX PAID BY CENVOCO
WHEN IT PURCHASED CONTAINERS AND PACKAGING
MATERIALS FOR ITS MILLED PRODUCTS CAN BE
CREDITED AGAINST THE DEFICIENCY MILLER'S TAX
DUE THEREON.
Resolution of the issue posited by the petitioner hinges
on. the proper application of Section 168 of the then
applicable National Internal Revenue Code, particularly
the last proviso of said section, which reads:
Sec. 168. Percentage tax upon proprietors or operators of
rope factories, sugar centrals and mills, coconut oil mills,
palm oil mills, cassava mills and desiccated coconut
factories. Proprietors or operators of rope factories, sugar
centrals and mills, coconut oil mills, palm oil mills,
cassava mills, and desiccated coconut factories, shall pay
a tax equivalent to three (3) percent of the gross value of
money of all the rope, sugar, coconut, oil, palm oil,
cassava flour or starch, desiccated coconut,
manufactured, processed or milled by them, including the
by-product of the raw materials, from which said articles
are produced, processed or manufactured, such tax to be
based on the actual selling price or market value of these
articles at the time they leave the factory or mill
warehouse: Provided, however, that this tax shall not
apply to rope, coconut oil, palm oil and the by-product of
copra from which it is produced or manufactured, and
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
dessiccated coconuts, if such rope, coconut oil, palm oil,
copra by-products and dessiccated coconuts, shall be
removed for exportation by the proprietor of operator or
the factory or mill himself, and are actually exported
without returning to the Philippines, whether in their
original state or as an ingredient or part of any
manufactured article or product: Provided further, That
where the planter or the owner of the raw materials is the
exporter of the aforementioned milled or manufactured
products, he shall be entitled to a tax credit of the miller's
taxes withheld by the proprietor or operator of the factory
or mill, corresponding to the quantity exported, which
may be used against any internal revenue tax directly due
from him: and Provided, finally, That credit for any sales.
miller's or excise taxes paid on raw materials or supplies
used in the milling process shall not be allowed against
the miller's tax due, except in the case of a proprietor or
operator of a refined sugar factory as provided hereunder.
(emphasis supplied)
Notably, the law relied upon by the BIR Commissioner as
the basis for not allowing Cenvoco's tax credit is just a
proviso of Section 168 of the old Tax Code. The restriction
in the said proviso, however, is limited only to sales,
miller's or excise taxes paid "on raw materials used in the
milling process".
Under the rules of statutory construction, exceptions, as
a general rule, should be strictly but reasonably
construed. They extend only so far as their language fairly
Page 25

warrants, and all doubts should be resolved in favor of
the general provisions rather than the exception. Where a
general rule is established by statute with exceptions, the
court will not curtail the former nor add to the latter by
implication. . . . (Samson vs. Court of Appeals, 145 SCRA
659 [1986]).
The exception provided for in Section 168 of the old Tax
Code should thus be strictly construed. Conformably, the
sales, miller's and excise taxes paid on all Other materials
(except on raw materials used in the milling process),
such as the sales taxes paid on containers and packaging
materials of the milled products under consideration, may
be credited against the miller's tax due therefor.
It is a basic rule of interpretation that words and phrases
used in the statute, in the absence of a clear legislative
intent to the contrary, should be given their plain,
ordinary and common usage or meaning. (Mustang
Lumber Inc. v. CA, 257 SCRA 430 [1996] citing Ruben E.
Agpalo, Statutory Construction, second ed. [1990], 131).
From the disquisition and rationalization aforequoted,
containers and packaging materials are certainly not raw
materials. Cans and tetrakpaks are not used in the
manufacture of Cenvoco's finished products which are
coconut, edible oil or coprameal cake. Such finished
products are packed in cans and tetrapaks.
Petitioner laments the pronouncement by the Court of
Appeals that Deputy Commissioner Eufracio Santos' 1988
ruling may not reverse Commissioner Ruben Ancheta's
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
favorable ruling on a similar claim of CENVOCO of
October, 1984, which reads in part:
. . . This refers to your letter dated September 5, 1984
requesting that the 10% sales tax paid on container cans
purchased by you, be credited against the 2% (now 3%)
miller's tax due on the refined coconut edible oil.
It is represented that you process copra and/or coconut
oil and sell the refined edible oil in cans; that said cans
are purchased from can manufacturers who in turn bill to
you the price of the cans and the 10% tax paid thereon
which are separately shown on the invoice; and that the
cost of the cans, including the 2% miller's tax is
computed.
In reply, I have the honor to inform you that your request
is hereby granted. . . . (Pacific Oxygen & Acetylene Co. vs.
Commissioner, GR No. L-17708, April 30, 1905). (Rollo p.
36)
According to petitioner, to hold, as what the Court of
Appeals did, that a reversal of the aforesaid ruling would
be violative of the rule on non-retroactivity of rulings of
tax officials when prejudicial to the taxpayer (Section 278
of the old Tax Code) would, in effect, create a perpetual
exemption in favor of CENVOCO although there may be
subsequent changes in circumstances warranting a
reversal.
This Court is mindful of the well-entrenched principle
that the government is never estopped from collecting
taxes because of mistakes or errors on the part of its
Page 26

agents, but this rule admits of exceptions in the interest
of justice and fairplay. (ABS CBN Broadcasting Corp. vs.
Court of Tax Appeals, 108 SCRA 151 [1951]) More so in
the present case, where we discern no error in allowing
the sales taxes paid by CENVOCO on the containers and
packages of its milled products, to be credited against the
deficiency miller's tax due thereon, for a proper
application of the law.
It bears stressing 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. (The
Province of Bulacan, et. al, vs. Hon. CA, et. al., GR No.
226232, November 27, 1998; Republic vs. IAC, 196 SCRA
335[1931]; CIR vs. Firemen's Fund Ins. Co., 148 SCRA
315 (1987); CIR vs. CA, 204 SCRA 182 [1991])
Then, too, it has been the long standing policy and
practice of this Court to respect conclusions arrived at by
quasi-judicial agencies, especially the Court of Tax
Appeals which: by the nature of its functions, is dedicated
exclusively to the study and consideration of tax
problems, and which has thus developed an expertise on
the subject, unless an abuse or improvident exercise of its
authority is shown. Finding no such abuse or improvident
exercise of authority or discretion under the premises, the
decision of the Court of Appeals, affirming that of the
Court of Tax Appeals, should be upheld. (Commissioner
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
of Internal Revenue vs. Court of Appeals, 204 SCRA 189
[1991])
WHEREFORE, the petition is hereby DISMISSED and the
decision of the Court of Appeals AFFIRMED. No
pronouncement as to costs.
SO ORDERED.
Romero, Panganiban and Gonzaga-Reyes, JJ., concur.
Vitug, J., on official leave.
30. G.R. No. L-30232 July 29, 1988
LUZON STEVEDORING CORPORATION, petitioner-
appellant,
vs.
COURT OF TAX APPEALS and the HONORABLE
COMMISSIONER OF INTERNAL REVENUE,
respondents-appellees.
H. San Luis & V.L. Simbulan for petitioner-appellant.
PARAS, J.:
This is a petition for review of the October 21, 1968
Decision * of the Court of Tax Appeals in CTA Case No.
1484, "Luzon Stevedoring Corporation v. Hon. Ramon
Oben, Commissioner, Bureau of Internal Revenue",
denying the various claims for tax refund; and the
February 20, 1969 Resolution of the same court denying
the motion for reconsideration.
Page 27

Herein petitioner-appellant, in 1961 and 1962, for the
repair and maintenance of its tugboats, imported various
engine parts and other equipment for which it paid,
under protest, the assessed compensating tax. Unable to
secure a tax refund from the Commissioner of Internal
Revenue, on January 2, 1964, it filed a Petition for Review
(Rollo, pp. 14-18) with the Court of Tax Appeals, docketed
therein as CTA Case No. 1484, praying among others,
that it be granted the refund of the amount of
P33,442.13. The Court of Tax Appeals, however, in a
Decision dated October 21, 1969 (Ibid., pp. 22-27), denied
the various claims for tax refund. The decretal portion of
the said decision reads:
WHEREFORE, finding petitioner's various claims for
refund amounting to P33,442.13 without sufficient legal
justification, the said claims have to be, as they are
hereby, denied. With costs against petitioner.
On January 24, 1969, petitioner-appellant filed a Motion
for Reconsideration (Ibid., pp. 28-34), but the same was
denied in a Resolution dated February 20, 1969 (Ibid., p.
35). Hence, the instant petition.
This Court, in a Resolution dated March 13, 1969, gave
due course to the petition (Ibid., p. 40). Petitioner-
appellant raised three (3) assignments of error, to wit:
I vessel. ....
The lower court erred in holding that the petitioner-
appellant is engaged in business as stevedore, the work of
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
unloading and loading of a vessel in port, contrary to the
evidence on record.
II
The lower court erred in not holding that the business in
which petitioner-appellant is engaged, is part and parcel
of the shipping industry.
III
The lower court erred in not allowing the refund sought
by petitioner-appellant.
The instant petition is without merit.
The pivotal issue in this case is whether or not
petitioner's tugboats" can be interpreted to be included in
the term "cargo vessels" for purposes of the tax exemption
provided for in Section 190 of the National Internal
Revenue Code, as amended by Republic Act No. 3176.
Said law provides:
Sec. 190. Compensating tax. — ... And Provided further,
That the tax imposed in this section shall not apply to
articles to be used by the importer himself in the
manufacture or preparation of articles subject to specific
tax or those for consignment abroad and are to form part
thereof or to articles to be used by the importer himself as
passenger and/or cargo vessel, whether coastwise or
oceangoing, including engines and spare parts of said
Petitioner contends that tugboats are embraced and
included in the term cargo vessel under the tax exemption
provisions of Section 190 of the Revenue Code, as
Page 28

amended by Republic Act. No. 3176. He argues that in
legal contemplation, the tugboat and a barge loaded with
cargoes with the former towing the latter for loading and
unloading of a vessel in part, constitute a single vessel.
Accordingly, it concludes that the engines, spare parts
and equipment imported by it and used in the repair and
maintenance of its tugboats are exempt from
compensating tax (Rollo, p. 23).
On the other hand, respondents-appellees counter that
petitioner-appellant's "tugboats" are not "Cargo vessel"
because they are neither designed nor used for carrying
and/or transporting persons or goods by themselves but
are mainly employed for towing and pulling purposes. As
such, it cannot be claimed that the tugboats in question
are used in carrying and transporting passengers or
cargoes as a common carrier by water, either coastwise or
oceangoing and, therefore, not within the purview of
Section 190 of the Tax Code, as amended by Republic Act
No. 3176 (Brief for Respondents-Appellees, pp. 45).
This Court has laid down the rule that "as the power of
taxation is a high prerogative of sovereignty, the
relinquishment is never presumed and any reduction or
dimunition thereof with respect to its mode or its rate,
must be strictly construed, and the same must be
coached in clear and unmistakable terms in order that it
may be applied." (84 C.J.S. pp. 659-800), More
specifically stated, the general rule is that any claim for
exemption from the tax statute should be strictly
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
construed against the taxpayer (Acting Commissioner of
Customs v. Manila Electric Co. et al., 69 SCRA 469 [1977]
and Commissioner of Internal Revenue v. P.J. Kiener Co.
Ltd., et al., 65 SCRA 142 [1975]).
As correctly analyzed by the Court of Tax Appeals, in
order that the importations in question may be declared
exempt from the compensating tax, it is indispensable
that the requirements of the amendatory law be complied
with, namely: (1) the engines and spare parts must be
used by the importer himself as a passenger and/or
cargo, vessel; and (2) the said passenger and/or cargo
vessel must be used in coastwise or oceangoing
navigation (Decision, CTA Case No. 1484; Rollo, p. 24).
As pointed out by the Court of Tax Appeals, the
amendatory provisions of Republic Act No. 3176 limit tax
exemption from the compensating tax to imported items
to be used by the importer himself as operator of
passenger and/or cargo vessel (Ibid., p. 25).
As quoted in the decision of the Court of Tax Appeals, a
tugboat is defined as follows:
A tugboat is a strongly built, powerful steam or power
vessel, used for towing and, now, also used for
attendance on vessel. (Webster New International
Dictionary, 2nd Ed.)
A tugboat is a diesel or steam power vessel designed
primarily for moving large ships to and from piers for
Page 29

towing barges and lighters in harbors, rivers and canals.
(Encyclopedia International Grolier, Vol. 18, p. 256).
A tug is a steam vessel built for towing, synonymous with
tugboat. (Bouvier's Law Dictionary.) (Rollo, p. 24).
Under the foregoing definitions, petitioner's tugboats
clearly do not fall under the categories of passenger
and/or cargo vessels. Thus, it is a cardinal principle of
statutory construction that where a provision of law
speaks categorically, the need for interpretation is
obviated, no plausible pretense being entertained to
justify non-compliance. All that has to be done is to apply
it in every case that falls within its terms (Allied
Brokerage Corp. v. Commissioner of Customs, L-27641,
40 SCRA 555 [1971]; Quijano, etc. v. DBP, L-26419, 35
SCRA 270 [1970]).
And, even if construction and interpretation of the law is
insisted upon, following another fundamental rule that
statutes are to be construed in the light of purposes to be
achieved and the evils sought to be remedied (People v.
Purisima etc., et al., L-42050-66, 86 SCRA 544 [1978], it
will be noted that the legislature in amending Section 190
of the Tax Code by Republic Act 3176, as appearing in the
records, intended to provide incentives and inducements
to bolster the shipping industry and not the business of
stevedoring, as manifested in the sponsorship speech of
Senator Gil Puyat (Rollo, p. 26).
On analysis of petitioner-appellant's transactions, the
Court of Tax Appeals found that no evidence was adduced
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
by petitioner-appellant that tugboats are passenger
and/or cargo vessels used in the shipping industry as an
independent business. On the contrary, petitioner-
appellant's own evidence supports the view that it is
engaged as a stevedore, that is, the work of unloading
and loading of a vessel in port; and towing of barges
containing cargoes is a part of petitioner's undertaking as
a stevedore. In fact, even its trade name is indicative that
its sole and principal business is stevedoring and
lighterage, taxed under Section 191 of the National
Internal Revenue Code as a contractor, and not an entity
which transports passengers or freight for hire which is
taxed under Section 192 of the same Code as a common
carrier by water (Decision, CTA Case No. 1484; Rollo, p.
25).
Under the circumstances, there appears to be no
plausible reason to disturb the findings and conclusion of
the Court of Tax Appeals.
As a matter of principle, this Court will not set aside the
conclusion reached by an agency such as the Court of
Tax Appeals, which is, by the very nature of its function,
dedicated exclusively to the study and consideration of
tax problems and has necessarily developed an expertise
on the subject unless there has been an abuse or
improvident exercise of authority (Reyes v. Commissioner
of Internal Revenue, 24 SCRA 199 [1981]), which is not
present in the instant case.
Page 30

PREMISES CONSIDERED, the instant petition is
DISMISSED and the decision of the Court of Tax Appeals
is AFFIRMED.
SO ORDERED.
31. 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
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
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
Page 31

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.
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
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.
Page 32

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
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
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
Page 33

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.
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
SO ORDERED.
Narvasa, Melencio-Herrera, Cruz, Feliciano, Gancayco
and Sarmiento, JJ., concur.
CIR vs. John Gotamco and Sons, et.al.[G.R. No. No. L-
31092 February 27, 1987]
Facts: The World Health Organization (WHO for short) is
an international organization which has a regional office
in Manila. An agreement was 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.” The WHO decided to construct a building
to house its own offices, as well as the other United
Nations offices stationed in Manila. A bidding was held for
the building construction. The WHO informed the bidders
that the building to be constructed belonged to an
international organization exempted 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." Thereafter, the construction
contract was awarded to John Gotamco & Sons, Inc.
(Gotamco for short). Subsequently, the Commissioner of
Internal Revenue sent a letter of demand to Gotamco
demanding payment of for the 3% contractor's tax plus
surcharges on the gross receipts it received from the WHO
Page 34

in the construction of the latter's building. WHO. The
WHO issued a certification that the bid of John Gotamco
& Sons, should be exempted from any taxes in connection
with the construction of the World Health Organization
office building because such can be considered as an
indirect tax to WHO. However, The Commissioner of
Internal Revenue contends that 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, and thus not
covered by the tax exemption agreement
Issue: Whether or not the said 3% contractor’s tax
imposed upon petitioner is covered by the “direct and
indirect tax exemption” granted to WHO by the
government.
Held: Yes. The 3% contractor’s tax imposed upon
petitioner is covered by the “direct and indirect tax
exemption” granted to WHO. Hence, petitioner cannot be
held liable for such contractor’s tax. The Supreme Court
explained that 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. While it is true that the contractor's tax is
payable by the contractor, However in the last analysis it
is the owner of the building that shoulders the burden of
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
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 against the WHO because, although it is
payable by the petitioner, the latter can shift its burden
on the WHO.
32. CIR v. CA, CTA, Ateneo De Manila University
Facts:
Ateneo de Manila University, is a non-stock, non-profit
educational institution with auxiliary units and branches
all over the Philippines. One auxiliary unit is the Institute
of Philippine Culture (IPC), which has no legal personality
separate and distinct from that of private respondent. The
IPC is a Philippine unit engaged in social science studies
of Philippine society and culture. Occasionally, it accepts
sponsorships for its research activities from international
organizations, private foundations and government
agencies. On 8 July 1983, private respondent received
from Commissioner of Internal Revenue (CIR) a demand
letter dated 3 June 1983, assessing private respondent
the sum of P174,043.97 for alleged deficiency contractor’s
tax, and an assessment dated 27 June 1983 in the sum
of P1,141,837 for alleged deficiency income tax, both for
the fiscal year ended 31 March 1978. Denying said tax
liabilities, private respondent sent petitioner a letter-
protest and subsequently filed with the latter a
memorandum contesting the validity of the assessments.
Page 35

On 17 March 1988, petitioner rendered a letter-decision
cancelling the assessment for deficiency income tax but
modifying the assessment for deficiency contractor’s tax
by increasing the amount due to P193,475.55.
Unsatisfied, private respondent requested for a
reconsideration or reinvestigation of the modified
assessment.
At the same time, it filed in the respondent court a
petition for review of the said letter-decision of the
petitioner. While the petition was pending before the
respondent court, petitioner issued a final decision dated
3 August 1988 reducing the assessment for deficiency
contractor’s tax from P193,475.55 to P46,516.41,
exclusive of surcharge and interest. On 12 July 1993, the
respondent court set aside respondent’s decision, and
cancelling the deficiency contractor’s tax assessment in
the amount of P46,516.41 exclusive of surcharge and
interest for the fiscal year ended 31 March 1978. No
pronouncement as to cost. On 27 April 1994, Court of
Appeals, in CA-GR SP 31790, affirmed the decision of the
Court of Tax Appeals. Not in accord with said decision,
petitioner came to Supreme Court via a petition for
review.
Issue:
Whether the private respondent is taxable as an
independent contractor.
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
Held: The Commissioner erred in applying the principles
of tax exemption without first applying the well-settled
doctrine of strict interpretation in the imposition of taxes.
It is obviously both illogical and impractical to determine
who are exempted without first determining who are
covered by the aforesaid provision. The Commissioner
should have determined first if private respondent was
covered by Section 205, applying the rule of strict
interpretation of laws imposing taxes and other burdens
on the populace, before asking Ateneo to prove its
exemption therefrom, following the rule of construction
where “the tax exemptions are to be strictly construed
against the taxpayer”.
The doctrine in the interpretation of tax laws is that a
statute will not be construed as imposing a tax unless it
does so clearly, expressly, and unambiguously. Tax
cannot be imposed without clear and express words for
that purpose. Accordingly, the general rule of requiring
adherence to the letter in construing statutes applies with
peculiar strictness to tax laws and the provisions of a
taxing act are not to be extended by implication.” In case
of doubt, such statutes are to be construed most strongly
against the government and in favor of the subjects or
citizens because burdens are not to be imposed nor
presumed to be imposed beyond what statutes expressly
and clearly import. In the present case, Ateneo’s Institute
of Philippine Culture never sold its services for a fee to
anyone or was ever engaged in a business apart from and
Page 36

independently of the academic purposes of the university.
Funds received by the Ateneo de Manila University are
technically not a fee. They may however fall as gifts or
donations which are “tax-exempt” as shown by private
respondent’s compliance with the requirement of Section
123 of the National Internal Revenue Code providing for
the exemption of such gifts to an educational institution.
The Supreme Court denied the petition and affirmed the
assailed Decision of the Court of Appeals. The Court ruled
that the private respondent is not a contractor selling its
services for a fee but an academic institution conducting
these researches pursuant to its commitments to
education and, ultimately, to public service. For the
institute to have tenaciously continued operating for so
long despite its accumulation of significant losses, we can
only agree with both the Court of Tax Appeals and the
Court of Appeals that “education and not profit is motive
for undertaking the research projects.
33. G.R. No. L-45355 January 12, 1990
THE PROVINCE OF MISAMIS ORIENTAL, represented
by its PROVINCIAL TREASURER, petitioner,
vs.
CAGAYAN ELECTRIC POWER AND LIGHT COMPANY,
INC. (CEPALCO), respondent.
Jaime A. Chaves for petitioner.
Quiason, Makalintal, Barot & Torres for respondent.
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
GRIÑO-AQUINO, J.:
The issue in this case is a legal one: whether or not a
corporation whose franchise expressly provides that the
payment of the "franchise tax of three per centum of the
gross earnings shall be in lieu of all taxes and
assessments of whatever authority upon privileges,
earnings, income, franchise, and poles, wires,
transformers, and insulators of the grantee." (p. 20,
Rollo), is exempt from paying a provincial franchise tax.
Cagayan Electric Power and Light Company, Inc.
(CEPALCO for short) was granted a franchise on June 17,
1961 under Republic Act No. 3247 to install, operate and
maintain an electric light, heat and power system in the
City of Cagayan de Oro and its suburbs. Said franchise
was amended on June 21, 1963 by R.A. No. 3570 which
added the municipalities of Tagoloan and Opol to
CEPALCO's sphere of operation, and was further
amended on August 4, 1969 by R.A. No. 6020 which
extended its field of operation to the municipalities of
Villanueva and Jasaan.
R.A. Nos. 3247, 3570 and 6020 uniformly provide that:
Sec. 3. In consideration of the franchise and rights hereby
granted, the grantee shall pay a franchise tax equal to
three per centum of the gross earnings for electric current
sold under this franchise, of which two per centum goes
Page 37

into the National Treasury and one per centum goes into
the treasury of the Municipalities of Tagoloan, Opol,
Villanueva and Jasaan and Cagayan de Oro City, as the
case may be: Provided, That the said franchise tax of
three per centum of the gross earnings shall be in lieu of
all taxes and assessments of whatever authority upon
privileges earnings, income, franchise, and poles, wires,
transformers, and insulators of the grantee from which
taxes and assessments the grantee is hereby expressly
exempted. (Emphasis supplied.)
On June 28, 1973, the Local Tax Code (P.D. No. 231) was
promulgated, Section 9 of which provides:
Sec. 9. Franchise Tax.—Any provision of special laws to
the contrary notwithstanding, the province may impose a
tax on businesses enjoying franchise, based on the gross
receipts realized within its territorial jurisdiction, at the
rate of not exceeding one-half of one per cent of the gross
annual receipts for the preceding calendar year.
In the case of newly started business, the rate shall not
exceed three thousand pesos per year. Sixty per cent of
the proceeds of the tax shall accrue to the general fund of
the province and forty per cent to the general fund of the
municipalities serviced by the business on the basis of
the gross annual receipts derived therefrom by the
franchise holder. In the case of a newly started business,
forty per cent of the proceeds of the tax shall be divided
equally among the municipalities serviced by the
business. (Emphasis supplied.)
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
Pursuant thereto, the Province of Misamis Oriental
(herein petitioner) enacted Provincial Revenue Ordinance
No. 19, whose Section 12 reads:
Sec. 12. Franchise Tax.—There shall be levied, collected
and paid on businesses enjoying franchise tax of one-half
of one per cent of their gross annual receipts for the
preceding calendar year realized within the territorial
jurisdiction of the province of Misamis Oriental. (p. 27,
Rollo.)
The Provincial Treasurer of Misamis Oriental demanded
payment of the provincial franchise tax from CEPALCO.
The company refused to pay, alleging that it is exempt
from all taxes except the franchise tax required by R.A.
No. 6020. Nevertheless, in view of the opinion rendered by
the Provincial Fiscal, upon CEPALCO's request,
upholding the legality of the Revenue Ordinance,
CEPALCO paid under protest on May 27, 1974 the sum of
P 4,276.28 and appealed the fiscal's ruling to the
Secretary of Justice who reversed it and ruled in favor of
CEPALCO.
On June 26, 1976, the Secretary of Finance issued Local
Tax Regulation No. 3-75 adopting entirely the opinion of
the Secretary of Justice.
On February 16, 1976, the Province filed in the Court of
First Instance of Misamis Oriental a complaint for
declaratory relief praying, among others, that the Court
exercise its power to construe P.D. No. 231 in relation to
the franchise of CEPALCO (R.A. No. 6020), and to declare
Page 38

the franchise as having been amended by P.D. No. 231.
The Court dismissed the complaint and ordered the
Province to return to CEPALCO the sum of P4,276.28
paid under protest.
The Province has appealed to this Court, alleging that the
lower court erred in holding that:
1) CEPALCO's tax exemption under Section 3 of Republic
Act No. 6020 was not amended or repealed by P.D. No.
231;
2) the imposition of the provincial franchise tax on
CEPALCO would subvert the purpose of P.D. No. 231;
3) CEPALCO is exempt from paying the provincial
franchise tax; and
4) petitioner should refund CEPALCO's tax payment of
P4,276.28.
We find no merit in the petition for review.
There is no provision in P.D. No. 231 expressly or
impliedly amending or repealing Section 3 of R.A. No.
6020. The perceived repugnancy between the two statutes
should be very clear before the Court may hold that the
prior one has been repealed by the later, since there is no
express provision to that effect (Manila Railroad Co. vs.
Rafferty, 40 Phil. 224). The rule is that a special and local
statute applicable to a particular case is not repealed by a
later statute which is general in its terms, provisions and
application even if the terms of the general act are broad
enough to include the cases in the special law (id.) unless
there is manifest intent to repeal or alter the special law.
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
Republic Acts Nos. 3247, 3570 and 6020 are special laws
applicable only to CEPALCO, while P.D. No. 231 is a
general tax law. The presumption is that the special
statutes are exceptions to the general law (P.D. No. 231)
because they pertain to a special charter granted to meet
a particular set of conditions and circumstances.
The franchise of respondent CEPALCO expressly exempts
it from payment of "all taxes of whatever authority" except
the three per centum (3%) tax on its gross earnings.
In an earlier case, the phrase "shall be in lieu of all taxes
and at any time levied, established by, or collected by any
authority" found in the franchise of the Visayan Electric
Company was held to exempt the company from payment
of the 5% tax on corporate franchise provided in Section
259 of the Internal Revenue Code (Visayan Electric Co. vs.
David, 49 O.G. [No. 4] 1385).
Similarly, we ruled that the provision: "shall be in lieu of
all taxes of every name and nature" in the franchise of the
Manila Railroad (Subsection 12, Section 1, Act No. 1510)
exempts the Manila Railroad from payment of internal
revenue tax for its importations of coal and oil under Act
No. 2432 and the Amendatory Acts of the Philippine
Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).
The same phrase found in the franchise of the Philippine
Railway Co. (Sec. 13, Act No. 1497) justified the
exemption of the Philippine Railway Company from
payment of the tax on its corporate franchise under
Section 259 of the Internal Revenue Code, as amended by
Page 39

R.A. No. 39 (Philippine Railway Co. vs. Collector of
Internal Revenue, 91 Phil. 35).
Those magic words: "shall be in lieu of all taxes" also
excused the Cotabato Light and Ice Plant Company from
the payment of the tax imposed by Ordinance No. 7 of the
City of Cotabato (Cotabato Light and Power Co. vs. City of
Cotabato, 32 SCRA 231).
So was the exemption upheld in favor of the Carcar
Electric and Ice Plant Company when it was required to
pay the corporate franchise tax under Section 259 of the
Internal Revenue Code, as amended by R.A. No. 39
(Carcar Electric & Ice Plant vs. Collector of Internal
Revenue, 53 O.G. [No. 4] 1068). This Court pointed out
that such exemption is part of the inducement for the
acceptance of the franchise and the rendition of public
service by the grantee. As a charter is in the nature of a
private contract, the imposition of another franchise tax
on the corporation by the local authority would constitute
an impairment of the contract between the government
and the corporation.
Recently, this Court ruled that the franchise (R.A. No.
3843) of the Lingayen Gulf Electric Power Company which
provided that the company shall pay:
tax equal to 2% per annum of the gross receipts . . . and
shall be in lieu of any and all taxes . . . now or in the
future . . . from which taxes . . . the grantee is hereby
expressly exempted and . . . no other tax . . . other than
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
the franchise tax of 2% on the gross receipts as provided
for in the original franchise shall be collected.
exempts the company from paying the franchise tax
under Section 259 of the National Internal Revenue Code
(Commissioner of Internal Revenue vs. Lingayen Gulf
Electric Power Co., Inc., G.R. No. 23771, August 4, 1988).
On the other hand, the Balanga Power Plant Company,
Imus Electric Company, Inc., Guagua Electric Company,
Inc. were subjected to the 5% tax on corporate franchise
under Section 259 of the Internal Revenue Code, as
amended, because Act No. 667 of the Philippine
Commission and the ordinance or resolutions granting
their respective franchises did not contain the "in-lieu-of-
all-taxes" clause (Balanga Power Plant Co. vs.
Commissioner of Internal Revenue, G.R. No. L-20499,
June 30, 1965; Imus Electric Co. vs. Court of Tax
Appeals, G.R. No. L-22421, March 18, 1967; Guagua
Electric Light vs. Collector of Internal Revenue, G.R. No.
L-23611, April 24, 1967).
Local Tax Regulation No. 3-75 issued by the Secretary of
Finance on June 26, 1976, has made it crystal clear that
the franchise tax provided in the Local Tax Code (P.D. No.
231, Sec. 9) may only be imposed on companies with
franchises that do not contain the exempting clause.
Thus it provides:
The franchise tax imposed under local tax ordinance
pursuant to Section 9 of the Local Tax Code, as amended,
shall be collected from businesses holding franchise but
Page 40

not from business establishments whose franchise
contain the "in-lieu-of-all-taxes-proviso".
Manila Electric Company vs. Vera, 67 SCRA 351, cited by
the petitioner, is not applicable here because what the
Government sought to impose on Meralco in that case
was not a franchise tax but a compensating tax on the
poles, wires, transformers and insulators which it
imported for its use.
WHEREFORE, the petition for review is denied, and the
decision of the Court of First Instance is hereby affirmed
in toto. No costs.
SO ORDERED.
34. G.R. No. 108358 January 20, 1995
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
THE HON. COURT OF APPEALS, R.O.H. AUTO
PRODUCTS PHILIPPINES, INC. and THE HON. COURT
OF TAX APPEALS, respondents.
VITUG, J.:
On 22 August 1986, during the period when the President
of the Republic still wielded legislative powers, Executive
Order No. 41 was promulgated declaring a one-time tax
amnesty on unpaid income taxes, later amended to
include estate and donor's taxes and taxes on business,
for the taxable years 1981 to 1985.
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
Availing itself of the amnesty, respondent R.O.H. Auto
Products Philippines, Inc., filed, in October 1986 and
November 1986, its Tax Amnesty Return No. 34-F-00146-
41 and Supplemental Tax Amnesty Return No. 34-F-
00146-64-B, respectively, and paid the corresponding
amnesty taxes due.
Prior to this availment, petitioner Commissioner of
Internal Revenue, in a communication received by private
respondent on 13 August 1986, assessed the latter
deficiency income and business taxes for its fiscal years
ended 30 September 1981 and 30 September 1982 in an
aggregate amount of P1,410,157.71. The taxpayer wrote
back to state that since it had been able to avail itself of
the tax amnesty, the deficiency tax notice should
forthwith be cancelled and withdrawn. The request was
denied by the Commissioner, in his letter of 22 November
1988, on the ground that Revenue Memorandum Order
No. 4-87, dated 09 February 1987, implementing
Executive Order No. 41, had construed the amnesty
coverage to include only assessments issued by the
Bureau of Internal Revenue after the promulgation of the
executive order on 22 August 1986 and not to
assessments theretofore made. The invoked provisions of
the memorandum order read:
TO: All Internal Revenue Officers and Others Concerned:
Page 41

1.0. To give effect and substance to the immunity
provisions of the tax amnesty under Executive Order No.
41, as expanded by Executive Order No. 64, the following
instructions are hereby issued:
xxx xxx xxx
1.02. A certification by the Tax Amnesty Implementation
Officer of the fact of availment of the said tax amnesty
shall be a sufficient basis for:
xxx xxx xxx
1.02.3. In appropriate cases, the cancellation/withdrawal
of assessment notices and letters of demand issued after
August 21, 1986 for the collection of income, business,
estate or donor's taxes due during the same taxable
years.1 (Emphasis supplied)
Private respondent appealed the Commissioner's denial to
the Court of Tax Appeals. Ruling for the taxpayer, the tax
court said:
Respondent (herein petitioner Commissioner) failed to
present any case or law which proves that an assessment
can withstand or negate the force and effects of a tax
amnesty. This burden of proof on the petitioner (herein
respondent taxpayer) was created by the clear and
express terms of the executive order's intention —
qualified availers of the amnesty may pay an amnesty tax
in lieu of said unpaid taxes which are forgiven (Section 2,
Section 5, Executive Order No. 41, as amended). More
specifically, the plain provisions in the statute granting
tax amnesty for unpaid taxes for the period January 1,
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
1981 to December 31, 1985 shifted the burden of proof
on respondent to show how the issuance of an
assessment before the date of the promulgation of the
executive order could have a reasonable relation with the
objective periods of the amnesty, so as to make petitioner
still answerable for a tax liability which, through the
statute, should have been erased with the proper
availment of the amnesty.
Additionally, the exceptions enumerated in Section 4 of
Executive Order No. 41, as amended, do not indicate any
reference to an assessment or pending investigation aside
from one arising from information furnished by an
informer. . . . Thus, we deem that the rule in Revenue
Memorandum Order No. 4-87 promulgating that only
assessments issued after August 21, 1986 shall be abated
by the amnesty is beyond the contemplation of Executive
Order No. 41, as amended.2
On appeal by the Commissioner to the Court of Appeals,
the decision of the tax court was affirmed. The appellate
court further observed:
In the instant case, examining carefully the words used in
Executive Order No. 41, as amended, we find nothing
which justifies petitioner Commissioner's ground for
denying respondent taxpayer's claim to the benefits of the
amnesty law. Section 4 of the subject law enumerates, in
no uncertain terms, taxpayers who may not avail of the
amnesty granted,. . . .
Page 42

Admittedly, respondent taxpayer does not fall under any
of the . . . exceptions. The added exception urged by
petitioner Commissioner based on Revenue Memorandum
Order No. 4-87, further restricting the scope of the
amnesty clearly amounts to an act of administrative
legislation quite contrary to the mandate of the law which
the regulation ought to implement.
xxx xxx xxx
Lastly, by its very nature, a tax amnesty, being a general
pardon or intentional overlooking by the State of its
authority to impose penalties on persons otherwise guilty
of evasion or violation of a revenue or tax law, partakes of
an absolute forgiveness or waiver by the Government of
its right to collect what otherwise would be due it, and in
this sense, prejudicial thereto, particularly to give tax
evaders, who wish to relent and are willing to reform a
chance to do so and thereby become a part of the new
society with a clean slate. (Republic vs. Intermediate
Appellate Court. 196 SCRA 335, 340 [1991] citing
Commissioner of Internal Revenue vs. Botelho Shipping
Corp., 20 SCRA 487) To follow [the restrictive application
of Revenue Memorandum Order No. 4-87 pressed by
petitioner Commissioner would be to work against the
raison d'etre of E.O. 41, as amended, i.e., to raise
government revenues by encouraging taxpayers to declare
their untaxed income and pay the tax due thereon. (E.O.
41, first paragraph)]3
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
In this petition for review, the Commissioner raises these
related issues:
1. WHETHER OR NOT REVENUE MEMORANDUM
ORDER NO. 4-87, PROMULGATED TO IMPLEMENT E.O.
NO. 41, IS VALID;
2. WHETHER OR NOT SAID DEFICIENCY ASSESSMENTS
IN QUESTION WERE EXTINGUISHED BY REASON OR
PRIVATE RESPONDENT'S AVAILMENT OF EXECUTIVE
ORDER NO. 41 AS AMENDED BY EXECUTIVE ORDER
NO. 64;
3. WHETHER OR NOT PRIVATE RESPONDENT HAS
OVERCOME THE PRESUMPTION OF VALIDITY OF
ASSESSMENTS.4
The authority of the Minister of Finance (now the
Secretary of Finance), in conjunction with the
Commissioner of Internal Revenue, to promulgate all
needful rules and regulations for the effective enforcement
of internal revenue laws cannot be controverted. Neither
can it be disputed that such rules and regulations, as
well as administrative opinions and rulings, ordinarily
should deserve weight and respect by the courts. Much
more fundamental than either of the above, however, is
that all such issuances must not override, but must
remain consistent and in harmony with, the law they seek
to apply and implement. Administrative rules and
regulations are intended to carry out, neither to supplant
nor to modify, the law.
Page 43

The real and only issue is whether or not the position
taken by the Commissioner coincides with the meaning
and intent of executive Order No. 41.
We agree with both the court of Appeals and court of Tax
Appeals that Executive Order No. 41 is quite explicit and
requires hardly anything beyond a simple application of
its provisions. It reads:
Sec. 1. Scope of Amnesty. — A one-time tax amnesty
covering unpaid income taxes for the years 1981 to 1985
is hereby declared.
Sec. 2. Conditions of the Amnesty. — A taxpayer who
wishes to avail himself of the tax amnesty shall, on or
before October 31, 1986;
a) file a sworn statement declaring his net worth as of
December 31, 1985;
b) file a certified true copy of his statement declaring his
net worth as of December 31, 1980 on record with the
Bureau of Internal Revenue, or if no such record exists,
file a statement of said net worth therewith, subject to
verification by the Bureau of Internal Revenue;
c) file a return and pay a tax equivalent to ten per cent
(10%) of the increase in net worth from December 31,
1980 to December 31, 1985: Provided, That in no case
shall the tax be less than P5,000.00 for individuals and
P10,000.00 for judicial persons.
Sec. 3. Computation of Net Worth. — In computing the
net worths referred to in Section 2 hereof, the following
rules shall govern:
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
a) Non-cash assets shall be valued at acquisition cost.
b) Foreign currencies shall be valued at the rates of
exchange prevailing as of the date of the net worth
statement.
Sec. 4. Exceptions. — The following taxpayers may not
avail themselves of the amnesty herein granted:
a) Those falling under the provisions of Executive Order
Nos. 1, 2 and 14;
b) Those with income tax cases already filed in Court as of
the effectivity hereof;
c) Those with criminal cases involving violations of the
income tax already filed in court as of the effectivity filed
in court as of the effectivity hereof;
d) Those that have withholding tax liabilities under the
National Internal Revenue Code, as amended, insofar as
the said liabilities are concerned;
e) Those with tax cases pending investigation by the
Bureau of Internal Revenue as of the effectivity hereof as
a result of information furnished under Section 316 of the
National Internal Revenue Code, as amended;
f) Those with pending cases involving unexplained or
unlawfully acquired wealth before the Sandiganbayan;
g) Those liable under Title Seven, Chapter Three (Frauds,
Illegal Exactions and Transactions) and Chapter Four
(Malversation of Public Funds and Property) of the
Revised Penal Code, as amended.
xxx xxx xxx
Page 44

Sec. 9. The Minister of finance, upon the recommendation
of the Commissioner of Internal Revenue, shall
promulgate the necessary rules and regulations to
implement this Executive Order.
xxx xxx xxx
Sec. 11. This Executive Order shall take effect
immediately.
DONE in the City of Manila, this 22nd day of August in
the year of Our Lord, nineteen hundred and eighty-six.
The period of the amnesty was later extended to 05
December 1986 from 31 October 1986 by Executive Order
No. 54, dated 04 November 1986, and, its coverage
expanded, under Executive Order No. 64, dated 17
November 1986, to include estate and honors taxes and
taxes on business.
If, as the Commissioner argues, Executive Order No. 41
had not been intended to include 1981-1985 tax liabilities
already assessed (administratively) prior to 22 August
1986, the law could have simply so provided in its
exclusionary clauses. It did not. The conclusion is
unavoidable, and it is that the executive order has been
designed to be in the nature of a general grant of tax
amnesty subject only to the cases specifically excepted by
it.
It might not be amiss to recall that the taxable periods
covered by the amnesty include the years immediately
preceding the 1986 revolution during which time there
had been persistent calls, all too vivid to be easily
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
forgotten, for civil disobedience, most particularly in the
payment of taxes, to the martial law regime. It should be
understandable then that those who ultimately took over
the reigns of government following the successful
revolution would promptly provide for abroad, and not a
confined, tax amnesty.
Relative to the two other issued raised by the
Commissioner, we need only quote from Executive Order
No. 41 itself; thus:
Sec. 6. Immunities and Privileges. — Upon full
compliance with the conditions of the tax amnesty and
the rules and regulations issued pursuant to this
Executive order, the taxpayer shall enjoy the following
immunities and privileges:
a) The taxpayer shall be relieved of any income tax
liability on any untaxed income from January 1, 1981 to
December 31, 1985, including increments thereto and
penalties on account of the non-payment of the said tax.
Civil, criminal or administrative liability arising from the
non-payment of the said tax, which are actionable under
the National Internal Revenue Code, as amended, are
likewise deemed extinguished.
b) The taxpayer's tax amnesty declaration shall not be
admissible in evidence in all proceedings before judicial,
quasi-judicial or administrative bodies, in which he is a
defendant or respondent, and the same shall not be
examined, inquired or looked into by any person,
government official, bureau or office.
Page 45

c) The books of account and other records of the taxpayer
for the period from January 1, 1981 to December 31,
1985 shall not be examined for income tax purposes:
Provided, That the Commissioner of Internal Revenue
may authorize in writing the examination of the said
books of accounts and other records to verify the validity
or correctness of a claim for grant of any tax refund, tax
credit (other than refund on credit of withheld taxes on
wages), tax incentives, and/or exemptions under existing
laws.
There is no pretension that the tax amnesty returns and
due payments made by the taxpayer did not conform with
the conditions expressed in the amnesty order.
WHEREFORE, the decision of the court of Appeals,
sustaining that of the court of Tax Appeals, is hereby
AFFIRMED in toto. No costs.
SO ORDERED.
Feliciano, Bidin, Romero and Melo, JJ., concur.
35. ERNESTO M. MACEDA, petitioner, vs. HON.
CATALINO MACARAIG, JR
G.R. No. 88291 May 31, 1991; G.R. No. 88291 June 8,
1993
FACTS:
On November 3, 1986, Commonwealth Act No. 120
created the NPC as a public corporation to undertake the
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
development of hydraulic power and the production of
power from other sources.
Effective March 10, 1987, Executive Order No. 93 once
again withdrew all tax and duty incentives granted to
government and private entities which had been restored
under Presidential Decree Nos. 1931 and 1955 but it gave
the authority to FIRB to restore, revise the scope and
prescribe the date of effectivity of such tax and/or duty
exemptions.
On June 24, 1987 the FIRB issued Resolution No. 17-87
restoring NPC's tax and duty exemption privileges
effective March 10, 1987. On October 5, 1987, the
President, through respondent Executive Secretary
Macaraig, Jr., confirmed and approved FIRB Resolution
No. 17-87.
Though the issues raised was resolved by the Supreme
Court in G.R. No. 88291, the issues was again brought to
the Supreme Court for the second time by the petitioner
in G.R. No. 88291.
ISSUE: Whether or not the powers conferred upon the
FIRB by Section 2(a), (b), and (c) and (4) of Executive
Order No. 93 "constitute undue delegation of legislative
power and is, therefore, unconstitutional.”
RULING: No.
With the growing complexities of modern life and the
many technical fields of governmental functions, as in
matters pertaining to tax exemptions, delegation of
Page 46

legislative powers has become the rule and non-
delegation the exception. The legislature may not have the
competence, let alone the interest and the time, to provide
direct and efficacious solutions to many problems
attendant upon present day undertakings. The legislature
could not be expected to state all the detailed situations
wherein the tax exemption privilege would be restored.
The task may be assigned to an administrative body like
the Fiscal Incentives Review Board (FIRB).
When E.O No. 93 (S'86) was issued, President Aquino was
exercising both Executive and Legislative powers. Thus,
there was no power delegated to her, rather it was she
who was delegating her power. She delegated it to the
FIRB, which, for purposes of E.O No. 93 (S'86), is a
delegate of the legislature. Clearly, she was not sub-
delegating her power.
And E.O. No. 93 (S'86), as a delegating law, was complete
in itself — it set forth the policy to be carried out 85 and
it fixed the standard to which the delegate had to conform
in the performance of his functions, 86 both qualities
having been enunciated by this Court in Pelaez vs.
Auditor General. 87
For delegation to be constitutionally valid, the law must
be complete in itself and must set forth sufficient
standards.
Certain aspects of the taxing process that are not really
legislative in nature are vested in administrative agencies.
In this case, there really is no delegation, to wit: a) power
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
to value property; b) power to assess and collect taxes; c)
power to perform details of computation, appraisement or
adjustment; among others.
36. COMMISSIONER OF INTERNAL REVENUE VS DE
LA SALLE UNIVERSITY
GR No. 196596 November 9, 2016a
FACTS:
In 2004, the Bureau of Internal Revenue (BIR) issued a
Letter of Authority to DLSU authorizing its revenue
officers to examine the latter’s books of accounts and
other accounting records for all internal revenue taxes for
the period “Fiscal Year Ending 2003 and Unverified Prior
Years.” Subsequently, the BIR issued a Formal Letter of
Demand to which the DLSU protested. Arguing the said
assessment, DLSU stated that RMO No. 43-90 prohibits
the practice of issuing a LoA with any indication of
unverified prior years. A LoA issued contrary to the RMO
is void, thus, an assessment issued based on such
defective LoA must also be void. ISSUE: Whether or not
the Letter of Authority issued by the BIR is void HELD:
The LoA issued to DLSU is not entirely void. The
assessment for taxable year 2003 is valid. The relevant
provision is Sec. C of RMO No. 43-90, the pertinent
portion of which reads: 3. A Letter of Authority [LOA]
should cover a taxable period not exceeding one taxable
year. The practice of issuing [LOAs] covering audit of
Page 47

unverified prior years is hereby prohibited. If the audit of
a taxpayer shall include more than one taxable period,
the other periods or years shall be specifically indiated in
the [LOA]. What this provision clearly prohibits is the
practice of issuing LOAs covering audit of unverified prior
years. RMO 43-90 does not say that a LOA which
contains unverified prior years is void. It merely
prescribes that if the audit includes more than one
taxable period, the other periods or years must be
specified. The provision read as a whole requires that if a
taxpayer is audited for more than one taxable year, the
BIR must specify each taxable year or taxable
38. G.R. Nos. L-23236 and L-23254 May 31, 1967
CENTRAL AZUCARERA DON PEDRO, petitioner,
vs.
COURT OF TAX APPEALS and COMMISSIONER OF
INTERNAL REVENUE, respondents.
FACTS:
In G.R. No. L-23236 (CTA Case No. 1273),
• Petitioner Central Azucarera Don Pedro had been
filing its income tax returns on the "fiscal year" basis
ending August 31, of every year.
• Within the period allowed it under Section 46 of the
National Internal Revenue Code, petitioner filed, on
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
October 24, 1954, with the Bureau of Internal Revenue,
its income tax return for the fiscal year ending August 31,
1954, for which it paid the total sum of P491,038.00, as
income tax, computed on the basis of said return.
• On October 15, 1959, Respondent Commissioner of
Internal Revenue assessed against petitioner the amount
of P167,935.00, as deficiency income tax for the
abovementioned fiscal year, but he did not assess and
impose any interest thereon.
• Petitioner protested, in a letter dated October 26,
1959, said deficiency income tax assessment and
requested that the same be cancelled.
• Acting on the letter-protest, respondent finally
ascertained and assessed, in a letter dated December 20,
1961, against petitioner the amount of P10,062.00, as
deficiency income tax, to which was added the sum of
P1,509.30 as ½% monthly interest thereon,
• Petitioner was satisfied with the revised assessment
of said deficiency income tax proper and, accordingly, it
paid, on January 16, 1962, the said amount of
P10,062.00 to respondent; however, it objected, in a
letter-protest dated January 18, 1962, to the demand and
imposition of interest which was assessed and included
for the first time in respondent's letter of December
20,1961.
• In due time petitioner went to the Tax Court in a
petition for review, claiming that the imposition of ½%
monthly interest on its deficiency tax for the fiscal year
Page 48

1954, Pursuant to Section 51 (d) of the Revenue Code, as
amended by Republic Act No. 2343, is illegal, because the
imposition of interest on efficiency income tax earned
prior to the effectivity of the amendatory law (Rep. Act
2343) will be tantamount to giving it (Rep. Act No. 2343)
retroactive application.
• On June 15, 1964, the Tax Court rendered its
decision, upholding the ruling of respondent
Commissioner.
In G. R. No. L-23254 (CTA Case No. 1278
• The same petitioner (Central Azucarera Don Pedro)
filed its income tax returns within the prescribed period
for the succeeding fiscal years ending August 31 — 1955,
1956, 1957, and 1958, for which it paid the
corresponding income taxes, based on said returns.
• After verification and examination of petitioner's
income tax returns for the abovestated fiscal years,
respondent Commissioner ascertained and assessed, for
each of said fiscal years against petitioner, deficiency
income taxes in the total amount of P21,330.00, and
interest thereon in the total sum of P2,307.10, which
interest were likewise imposed pursuant to Section 51 (d)
of the Internal Revenue Code, as amended by Republic
Act No. 2343.
• Petitioner paid said deficiency income taxes and
interests within the period prescribed by respondent to
pay the same; however, on January 19, 1962, it filed with
the latter a claim for refund or tax credit of the aforesaid
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
sum of P2,307.00, which was paid as interests, claiming
that said payment was erroneous and the collection
thereof by respondent was illegal, which contention is
similar to that alleged in its previous protest (now CTA
Case No. 1273).
ISSUE: Whether or not the interest provided for in Section
51 (d) of the National Internal Revenue Code, as amended
by Republic Act No. 2343 (effective June 20, 1959) is
imposable on deficiency income tax due on income earned
prior to the effectivity of said Republic Act No. 2343, but
assessed after it.
HELD: YES. It is thus evident that petitioner's contention
that "interest on such deficiency accrued only when the
taxpayer failed to pay the tax within the period prescribed
therefor by respondent (Commissioner of Internal
Revenue)" is not correct; said interest was imposable in
case of non-payment on time, not only on the basic
income tax, but also on the deficiency tax, since the
deficiency was part and parcel of petitioner's income tax
liability.
RATIO:
The interest in this case is imposed on deficiency income
tax due on income earned prior to the amendment, but
assessed after it.
TAX CODE BEFORE AMENDMENT
TAX CODE AFTER AMENDMENT
Page 49

Sec. 51. Assessment and payment of income tax. —
(a) Assessment of Tax. — All assessments shall be made
by the Collector of Internal Revenue and all persons and
corporation subject to tax shall be notified of the amount
for which the are respectively liable on or before the first
day of May each successive year.
(b) Time of payment. — The total amount of tax imposed
by this Title shall be paid on or before the fifteenth day of
May following the close of the calendar year, by the
person subject to tax, and in case of a corporation, by the
president, vice-president, or other responsible officer
thereof. If the return is made on the basis of a fiscal year,
the total amount of the tax shall be paid on or before the
fifteenth day of the fifth month following the close of the
fiscal year.
xxx xxx xxx
(d) Refusal or neglect to make returns; fraudulent
returns, etc. — In case(s) of . . . erroneous . . . returns,
the Collector of Internal Revenue shall, upon discovery
thereof, . . . make a return upon information obtained as
provided for in this code or by existing law, or require the
necessary corrections to be made, and the assessment
made by the Collector of Internal Revenue thereon shall
be paid by such person or corporation immediately upon
notification of the amount of such assessment.
(e) Surcharge and interest in case of delinquency.—To any
sum or sums due and unpaid after the dates prescribed
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
in subsections (b), (c) and (d) for the payment of the same,
there shall be added the sum of fiveper centum on the
amount of tax unpaid and interest at the rate of one per
centum a month upon said tax from the time the same
became due, except from the estates of insane, deceased,
or insolvent persons.1äwphï1.ñët Sec. 51. Payment
and Assessment of income tax. —
(a) Payment of tax. — (1) In general. — The total amount
of tax imposed by this Title shall be paid at the time the
return is filed but not later than the fifteenth day of April
following the close of the calendar year, or, if the return is
made on the basis of a fiscal year, then not later than the
fifteenth day of the fourth month following the close of the
fiscal year. Such tax shall be paid by the person subject
thereto, and in the case of a corporation by the President,
Vice-President, or other responsible officer thereof:
Provided, That if in any preceding year, the payer was
entitled to a refund of any amount thereof, if not yet
refunded, it may be deducted from the amount of tax to
be paid.
xxx xxx xxx
(b) Assessment and payment of deficiency tax. — After the
return is filed, the Commissioner of Internal Revenue
shall examine it and assess the correct amount of the tax.
The tax or deficiency in tax so discovered shall be paid
upon notice and demand from the Commissioner of
Internal Revenue.
xxx xxx xxx
Page 50

(d) Interest on deficiency. — Interest upon the amount
determined as a deficiency shall be assessed at the same
time as the deficiency and shall be paid upon notice and
demand from the Commissioner of Internal Revenue; and
shall be collected as a part of the tax, at the rate of six per
centum per annum from the date prescribed for the
payment of the tax (or, if the tax is paid in installments,
from the date prescribed for the payment of the first
installment) to the date the deficiency is assessed:
Provided, That the maximum amount that may be
collected as interest on deficiency shall in no case exceed
the amount corresponding to a period of three years, the
present provisions regarding prescription to the contrary
notwithstanding.
Sec. 46. Corporation returns. — . . .
(b) When to file. — The return shall be rendered on or
before the first day of March of each year for the
preceding calendar year, or if the corporation has
designated a fiscal year, then within sixty days after the
close of such fiscal year. Sec. 46. Corporation returns. — .
...
(b) When to file. — The return shall be filed on or before
the fifteenth day of April of each year for the preceding
calendar year, or if the corporation has designated a fiscal
year, on or before the fifteenth day of the fourth month
following the close of such fiscal year.
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
From a perusal and comparison of the above quoted
sections of the Tax Code, before and after its amendment,
it will be observed that, although the Commissioner
(formerly Collector) of Internal Revenue, under the old
Section 51 (a) was required to assess the tax due, based
on the taxpayer's return, and notify the taxpayer of said
assessment, still, under subsection (b) of the same old
Section 51, the time prescribed for the payment of tax
was fixed, whether or not a notice of the assessment was
given to the taxpayer. Under the new provision, the time
of payment is also fixed and pre-determined (usually
coinciding with the filing of the return) without the
necessity of giving notification of the assessment to the
taxpayer by the Commissioner.
It should further be observed that, under the old Section
51 (e), the interest on deficiency was imposed from the
time the tax became due; while under the new Section 51
(d), said interest is imposed on the deficiency from the
date prescribed for the payment of the tax.
It is thus evident that petitioner's contention that
"interest on such deficiency accrued only when the
taxpayer failed to pay the tax within the period prescribed
therefor by respondent (Commissioner of Internal
Revenue)" is not correct; said interest was imposable in
case of non-payment on time, not only on the basic
income tax, but also on the deficiency tax, since the
deficiency was part and parcel of petitioner's income tax
liability.
Page 51

It appearing that the new Section 51 (d) under Republic
Act 2343 expressly provides that the interest on
deficiency shall be assessed at the same time as the
deficiency income tax; and that respondent Commissioner
of Internal Revenue imposed and sought to collect the
interest only from June 20, 1959, which was the date of
effectivity of said Republic Act No. 2343; that the
deficiency income taxes in question were assessed and
unpaid when said Act was already in force, the Tax Court
correctly held that said Section 51 (d), as amended, is not
being applied retroactively as contended by petitioner
herein.
Moreover, the application of said Section 51 (d), as
amended, in the cases at bar, operated and worked in
favor of petitioner-appellant, since instead of imposing the
rate of one per centum (1%) monthly interest prescribed
in the old section 51 (e) from the time the tax became
due, i.e., from January 15, — 1955, 1956, 1957, 1958
and 1959, respectively, respondent Commissioner merely
imposed the new ½% monthly interest from January 20,
1959, which interests, as computed, are less than what
would be due under the old law.
With respect to the petitioner's contention that the
application of the amended provision (now Sec. 51-d of
the Tax Code) to the cases at bar would run counter to
the constitutional restriction against the enactment of ex
post factolaws, it is to be noted that the collection of
interest in these cases is not penal in nature,
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
39. CIR v Benguet Corporation
Re: A petition for declaratory relief to Test the validity of
Ordinance No. 3379 passed by the Municipal Board of the
City of Manila on March 24, 1950.
Ponente: BAUTISTA ANGELO, J.:
DOCTRINE: While as a rule an ad valorem tax is a
property tax, the rule should not be taken in its absolute
sense if the nature and purpose of the tax as gathered
from the context show that it is in effect an excise or a
license tax. Thus, it has been held that "If a tax is in its
nature an excise, it does not become a property tax
because it is proportioned in amount to the value of the
property used in connection with the occupation, privilege
or act which is taxed…. If it is really imposed upon the
performance of an act, enjoyment of a privilege, or the
engaging in an occupation, it will be considered an excise
tax."
QUICK FACTS: The Association composed of all brokers
and public service operators of motor vehicles in the City
of Manila challenged the validity of Ordinance No. 3379
on the ground that (1) while it levies a so-called property
tax it is in reality a license tax which is beyond the power
of the Municipal Board of the City of Manila; (2) said
Page 52

ordinance offends against the rule of uniformity of
taxation; and (3) it constitutes double taxation.
FACTS:
Tax: 10% VAT on selling price of gold pursuant to Sec. 99
of NIRC.
Benguet Corporation is a domestic corporation engaged in
the exploration, development and operation of mineral
resources, and the sale or marketing thereof to various
entities. It is a value added tax (VAT) registered
enterprise.
The transactions in question occurred during the period
between 1988 and 1991. Under Sec. 99 of NIRC as
amended by E.O. 273 s. 1987 then in effect, 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 is liable
for output VAT at rates of either 10% or 0% (zero-rated)
depending on the classification of the transaction under
Sec. 100 of the NIRC.
In January of 1988, Benguet applied for and was granted
by the BIR a zero-rated status on its sale of gold to
Central Bank. On 28 August 1988, (BIR) VAT Ruling No.
3788-88 was issued which declared that the sale of gold
to Central Bank is considered as export sale subject to
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
zero-rate pursuant to Section 100 of the Tax Code, as
amended by EO 273. Relying on its zero-rated status and
the above issuances, Benguet sold gold to the Central
Bank during the period of 1 August 1989 to 31 July 1991
and entered into transactions that resulted in input VAT
incurred in relation to the subject sales of gold. It then
filed applications for tax refunds/credits corresponding to
input VAT.
However, such request was not granted due to BIR VAT
Ruling No. 008-92 dated 23 January 1992 that was
issued subsequent to the consummation of the subject
sales of gold to the Central Bank which provides that
sales of gold to the Central Bank shall not be considered
as export sales and thus, shall be subject to 10% VAT.
BIR VAT Ruling No. 008-92 withdrew, modified, and
superseded all inconsistent BIR issuances.
Both petitioner and Benguet agree that the retroactive
application of VAT Ruling No. 008-92 is valid only if it
would not be prejudicial to the Benguet pursuant Sec.
246 of the NIRC.
? Contention: the so-called property tax is in reality a
license tax which is beyond the power of the Municipal
Board of the City of Manila, the said ordinance offends
against the rule of uniformity of taxation; and it
constitutes double taxation.
Page 53

Benguet Corporation’s Contention: Retroactive application
of BIR VAT Ruling No. 008-92 would violate Sec. 246 of
the NIRC, which mandates the non-retroactivity of rulings
or circulars issued by the Commissioner of Internal
Revenue that would operate to prejudice the taxpayer.
CFI of manila: Sustained validity of ordinance and
dismissed the petition. Hence the appeal.
ISSUE: WON the new BIR ruling which changed the VAT
categorization of respondent’s transactions with the
Central Bank from zero-rated to 10% can be applied
retroactively to Benguet’s sale of gold to the Central Bank.
DECISION: No.
HELD:
At the time when the subject transactions were
consummated, the prevailing BIR regulations relied upon
by Benguet ordained that gold sales to the Central Bank
were zero-rated. Benguet should not be faulted for relying
on the BIRs interpretation of the said laws and
regulations.
While it is true, as CIR alleges, that government is not
estopped from collecting taxes which remain unpaid on
account of the errors or mistakes of its agents and/or
officials and there could be no vested right arising from
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
an erroneous interpretation of law, these principles must
give way to exceptions based on and in keeping with the
interest of justice and fair play. (Similar to the ABS-CBN
case).
The adverse effect is that Benguet Corp became the
unexpected and unwilling debtor to the BIR of the
amount equivalent to the total VAT cost of its product, a
liability it previously could have recovered from the BIR in
a zero-rated scenario or at least passed on to the Central
Bank had it known it would have been taxed at a 10%
rate. Thus, it is clear that Benguet suffered economic
prejudice when its consummated sales of gold to the
Central Bank were taken out of the zero-rated category.
The change in the VAT rating of Benguet’s transactions
with the Central Bank resulted in the twin loss of its
exemption from payment of output VAT and its
opportunity to recover input VAT, and at the same time
subjected it to the 10% VAT sans the option to pass on
this cost to the Central Bank, with the total prejudice in
money terms being equivalent to the 10% VAT levied on
its sales of gold to the Central Bank.
Even assuming that the right to recover Benguets excess
payment of income tax has not yet prescribed, this relief
would only address Benguet’s overpayment of income tax
but not the other burdens discussed above. Verily, this
remedy is not a feasible option for Benguet because the
Page 54

very reason why it was issued a deficiency tax assessment
is that its input VAT was not enough to offset its
retroactive output VAT. Indeed, the burden of having to
go through an unnecessary and cumbersome refund
process is prejudice enough.
40. G.R. No. 153205 January 22, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
BURMEISTER AND WAIN SCANDINAVIAN
CONTRACTOR MINDANAO, INC., Respondent.
FACTS:
A foreign consortium, parent company of Burmeister,
entered into an O&M contract with NPC. The foreign
entity then subcontracted the actual O&M to Burmeister.
NPC paid the foreign consortium a mixture of currencies
while the consortium, in turn, paid Burmeister foreign
currency inwardly remitted into the Philippines. BIR did
not want to grant refund since the services are “not
destined for consumption abroad” (or the destination
principle).
ISSUE:
Are the receipts of Burmeister entitled to VAT zero-rated
status?
HELD:
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
PARTIALLY. Respondent is entitled to the refund prayed
for BUT ONLY for the period covered prior to the filing of
CIR’s Answer in the CTA.
The claim has no merit since the consortium, which was
the recipient of services rendered by Burmeister, was
deemed doing business within the Philippines since its
15-year O&M with NPC can not be interpreted as an
isolated transaction.
In addition, the services referring to ‘processing,
manufacturing, repacking’ and ‘services other than those
in (1)’ of Sec. 102 both require (i) payment in foreign
currency; (ii) inward remittance; (iii) accounted for by the
BSP; AND (iv) that the service recipient is doing business
outside the Philippines. The Court ruled that if this is not
the case, taxpayers can circumvent just by stipulating
payment in foreign currency.
The refund was partially allowed since Burmeister
secured a ruling from the BIR allowing zero-rating of its
sales to foreign consortium. However, the ruling is only
valid until the time that CIR filed its Answer in the CTA
which is deemed revocation of the previously-issued
ruling. The Court said the revocation can not retroact
since none of the instances in Section 246 (bad faith,
omission of facts, etc.) are present
Page 55

41. CIR v Ayala Securities Corporation
(Imprescribility of Taxes)
Facts:
Ayala Securities Corp. (Ayala) failed to file returns of their
accumulated surplus so Ayala was charged with 25%
surtax by the Commissioner of internal Revenue. The CTA
(Court of Tax Appeals) reversed the Commissioner’s
decision and held that the assessment made against
Ayala was beyond the 5-yr prescriptive period as provided
in section 331 of the National Internal Revenue Code.
Commissioner now files a motion for reconsideration of
this decision. Ayala invokes the defense of prescription
against the right of the Commissioner to assess the
surtax.
Issue: Whether or not the right to assess and collect the
25% surtax has prescribed after five years.
Held: No. There is no such time limit on the right of the
Commissioner to assess the 25% surtax since there is no
express statutory provision limiting such right or
providing for its prescription. Hence, the collection of
surtax is imprescriptible. The underlying purpose of the
surtax is to avoid a situation where the corporation
unduly retains its surplus earnings instead of declaring
and paying dividends to its shareholders. SC reverses the
ruling of the CTA.
Gurrero Notes:
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
Commissioner of Internal Revenue vs. Ayala Securities
Corp. (GR L-29485, 21 November 1980)
Facts: An assessment made on 21 February 1961 by the
Commissioner of Internal Revenue against the Ayala
Securities Corporation (and received by the latter on 22
March 1961) in the sum of P758,687.04 on its surplus of
P2,758,442.37 for its fiscal year ending 30 September
1955. Raised before the Court of Tax Appeals, the tax
court reversed the assessment of the 25% surtax and
interest in the amount of P758,687.04, and thereby
cancelled and declared of no force and effect the
assessment of the Commissioner for 1955. On 8 April
1976, the Supreme Court affirmed the decision of the
Court of Tax Appeals and ruled that the assessment fell
under the 5-year prescriptive period provided in section
331 of the National Internal Revenue
Code (NIRC) and that the assessment had, therefore, been
made after the expiration of the said 5-year prescriptive
period and was of no binding force and effect. The
Commissioner moved for reconsideration.
The Supreme Court set aside its decision of 8 April 1976,
and rendered in lieu thereof another judgment ordering
the corporation to pay the assessment in the sum of
P758,687.04 as 25% surtax on its unreasonably
accumulated surplus, plus the 5% surcharge and 1%
monthly interest thereon, pursuant to section 51 (e) of the
NIRC, as amended by RA 2343; with costs
Page 56

42. Pepsi Cola Bottling Company vs Municipality of
Tanauan
69 SCRA 460 – Taxation – Delegation to Local
Governments – Double Taxation
Pepsi Cola has a bottling plant in the Municipality of
Tanauan, Leyte. In September 1962, the Municipality
approved Ordinance No. 23 which levies and collects
“from soft drinks producers and manufacturers a tai of
one-sixteenth (1/16) of a centavo for every bottle of soft
drink corked.”
In December 1962, the Municipality also approved
Ordinance No. 27 which levies and collects “on soft drinks
produced or manufactured within the territorial
jurisdiction of this municipality a tax of one centavo
P0.01) on each gallon of volume capacity.”
Pepsi Cola assailed the validity of the ordinances as it
alleged that they constitute double taxation in two
instances: a) double taxation because Ordinance No. 27
covers the same subject matter and impose practically the
same tax rate as with Ordinance No. 23, b) double
taxation because the two ordinances impose percentage
or specific taxes.
Pepsi Cola also questions the constitutionality of Republic
Act 2264 which allows for the delegation of taxing powers
to local government units; that allowing local
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
governments to tax companies like Pepsi Cola is
confiscatory and oppressive.
The Municipality assailed the arguments presented by
Pepsi Cola. It argued, among others, that only Ordinance
No. 27 is being enforced and that the latter law is an
amendment of Ordinance No. 23, hence there is no
double taxation.
ISSUE: Whether or not there is undue delegation of taxing
powers. Whether or not there is double taxation.
HELD: No. There is no undue delegation. The
Constitution even allows such delegation. Legislative
powers may be delegated to local governments in respect
of matters of local concern. By necessary implication, the
legislative power to create political corporations for
purposes of local self-government carries with it the
power to confer on such local governmental agencies the
power to tax. Under the New Constitution, local
governments are granted the autonomous authority to
create their own sources of revenue and to levy taxes.
Section 5, Article XI provides: “Each local government
unit shall have the power to create its sources of revenue
and to levy taxes, subject to such limitations as may be
provided by law.” Withal, it cannot be said that Section 2
of Republic Act No. 2264 emanated from beyond the
sphere of the legislative power to enact and vest in local
governments the power of local taxation.
There is no double taxation. The argument of the
Municipality is well taken. Further, Pepsi Cola’s assertion
Page 57

that the delegation of taxing power in itself constitutes
double taxation cannot be merited. It must be observed
that the delegating authority specifies the limitations and
enumerates the taxes over which local taxation may not
be exercised. The reason is that the State has exclusively
reserved the same for its own prerogative. Moreover,
double taxation, in general, is not forbidden by our
fundamental law unlike in other jurisdictions. Double
taxation becomes obnoxious only where the taxpayer is
taxed twice for the benefit of the same governmental
entity or by the same jurisdiction for the same purpose,
but not in a case where one tax is imposed by the State
and the other by the city or municipality.
43. CIR V SC JOHNSON INC. June 25, 1999
Monday, January 26, 2009 Posted by Coffeeholic
Writes
Labels: Case Digests, Taxation
Facts: Respondent is a domestic corporation organized
and operating under the Philippine Laws, entered into a
licensed agreement with the SC Johnson and Son, USA, a
non-resident foreign corporation based in the USA
pursuant to which the respondent was granted the right
to use the trademark, patents and technology owned by
the later including the right to manufacture, package and
distribute the products covered by the Agreement and
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
secure assistance in management, marketing and
production from SC Johnson and Son USA.
For the use of trademark or technology, respondent was
obliged to pay SC Johnson and Son, USA royalties based
on a percentage of net sales and subjected the same to
25% withholding tax on royalty payments which
respondent paid for the period covering July 1992 to May
1993 in the total amount of P1,603,443.00.
On October 29, 1993, respondent filed with the
International Tax Affairs Division (ITAD) of the BIR a
claim for refund of overpaid withholding tax on royalties
arguing that, the antecedent facts attending respondents
case fall squarely within the same circumstances under
which said MacGeorge and Gillette rulings were issued.
Since the agreement was approved by the Technology
Transfer Board, the preferential tax rate of 10% should
apply to the respondent. So, royalties paid by the
respondent to SC Johnson and Son, USA is only subject
to 10% withholding tax.
The Commissioner did not act on said claim for refund.
Private respondent SC Johnson & Son, Inc. then filed a
petition for review before the CTA, to claim a refund of the
overpaid withholding tax on royalty payments from July
1992 to May 1993.
Page 58

On May 7, 1996, the CTA rendered its decision in favor of
SC Johnson and ordered the CIR to issue a tax credit
certificate in the amount of P163,266.00 representing
overpaid withholding tax on royalty payments beginning
July 1992 to May 1993.
The CIR thus filed a petition for review with the CA which
rendered the decision subject of this appeal on November
7, 1996 finding no merit in the petition and affirming in
toto the CTA ruling.
Issue: Whether or not tax refunds are considered as tax
exemptions.
Held: It bears stress that tax refunds are in the nature of
tax exemptions. As such they are registered as in
derogation of sovereign authority and to be construed
strictissimi juris against the person or entity claiming the
exemption. The burden of proof is upon him who claims
the exemption in his favor and he must be able to justify
his claim by the clearest grant of organic or statute law.
Private respondent is claiming for a refund of the alleged
overpayment of tax on royalties; however there is nothing
on record to support a claim that the tax on royalties
under the RP-US Treaty is paid under similar
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
circumstances as the tax on royalties under the RP-West
Germany Tax Treaty.
44. CIR vs Rufino ( Merger)
Facts:
Private respondents ( RUFINOS: Vicente, Remedios,
Ernesto, El vira, Rafael) were majority stockholders of the
defunct Eastern Theatrical INC Co., a corporation
organized in 1934 for a period of 25 years termination on
Ja. 25, 1959. It had an original capital stock of P 500K
which was increased in 1949 to P 2 million and was
organized to engage in the business of operating theaters,
opera houses, places of amusement and other related
business and enterprises , more particularly the Lyric and
Capitol Theaters in Manila. The president of the
corportation ( OLD Corporation ) during the year in
question was Ernesto Rufino.
The same private respondents are also the majority and
controlling stockholders of another corporation , the
Eastern Theatrical Co which was organized on Dec. 8,
1958, for a term of 50 years , with authorized capital
stock of P200K. The corporation is engaged in the same
kind of business as the OLD corporation.
In a special meeting of stockholders of the OLD
corporation in Dec. 1958, a resolution was passed
Page 59

authorizing the OLD corporation to merge with NEW
corporation by transferring its business, assets, good will
and liabilities to the latter, which in exchange would issue
and distribute to shareholders of the OLD corporation one
share for each share held by them in said corporation. It
was expressly declare that the merger of the OLD corp
and NEW corp was necessary to continue the exhibition
of moving pictures at the Lyric and Capitol even after
expiration of the corporate existence of the OLD corp. , in
view of its pending booking contracts, not to mention its
collecting bargaining agreements with its employees.
Pursuant to said resolution, a deed of assignment
providing the conveyance and transfer of the OLD to the
NEW corp in exchange of the latter’s shares of stock to be
distributed among the share holders on the basis of one
stock for each stockholder held in the OLD corp.
Thereafter, the resolution was duly approved by the
stockholders of the NEW CORP in special meeting in
1959. The deed of assignment has retroactive effect on
Jan. 1, 1959.
BIR examined later the series of transactions made by the
private respondents. BIR averred that the merger was not
undertaken for a bonafide business purpose but merely to
avoid liability for capital gains tax on the exchange of the
OLD for the new shares of stock . Accordingly, CIR
imposed the deficiency assessments against the private
respondents. Private respondents requested for
reconsideration but it was denied.
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
Petitioner further posited that the deed of assignment
concluded was intended merely to evade the burden of
taxation, the petitioner pointed out that the NEW corp did
not actually issue stocks in exchange of the properties of
the OLD corp. and that the exchange was only on the
paper. Consequently, as there was no merger, the
automatic dissolution of the OLD corp on its expiry date
resulted in its liquidation , for which the respondents are
now liable in taxes on their capital gains.
CTA: Reversed petitioner’s decision.
Issue: Whether the merger is valid?
Held: YES. There was a VALID merger although the actual
transfer of the properties subject of the deed of
assignment was not made on the date of the merger. In
the nature of things, this was not possible. It was
necessary for the OLD corp to surrender its net assets
first to the NEW CORP before the latter could issue its
own stock to the shareholders of the OLD corp. because
the NEW corp had to increase its capitalization for this
purpose. The required adoption of the resolution to this
effect at the special meeting in 1959, the registration of
such issuance with the SEC and approval by the body. All
these took place AFTER the date of the merger but they
were deemed part and parcel of and indispensable to the
validity and enforceability of the deed of assignment.
Thus, there was no impediment to the exchange of of
property for stock between the 2 coprorations being
considered to have been effected on the date of merger
Page 60

and that in fact , was the intention and the reason why
the deed of assignment was made retroactive on Ja. 1,
1959. Such retroaction provided in effect all transactions
set forth in the merger agreement shall be deemed to be
taking place simultaneously on Jan 1, 1959, when the
deed of assignment became operative.
Additionally, there was no indication that the scheme
adopted by private respondents was to evade tax burdens
because it is clear that the purpose of the merger was to
continue the business of the OLD corp, whose corporate
life was about to expire, thru the NEW corp. to which all
assets and obligations of the former had been transferred.
The NEW CORP continues to do so today after taking over
the business of the OLD corp 27 years ago.
45. DELPHER TRADES CORPORATION, and DELPHIN
PACHECO vs.
INTERMEDIATE APPELLATE COURT and HYDRO
PIPES PHILIPPINES, INC.,
G.R. No. L-69259, January 26, 1988
FACTS:
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco,
were the owners of 27,169 square meters of real estate
Identified as Lot. No. 1095, Malinta Estate, in the
Municipality of Polo (now Valenzuela), Province of
Bulacan (now Metro Manila) which is covered by Transfer
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
Certificate of Title No. T-4240 of the Bulacan land
registry.
On April 3, 1974, the said co-owners leased to
Construction Components International Inc. the same
property and providing that during the existence or after
the term of this lease the lessor should he decide to sell
the property leased shall first offer the same to the lessee
and the letter has the priority to buy under similar
conditions.
4 months later, lessee Construction Components
International, Inc. assigned its rights and obligations
under the contract of lease in favor of Hydro Pipes
Philippines, Inc. with the signed conformity and consent
of lessors Delfin Pacheco and Pelagia Pacheco.
The contract of lease, as well as the assignment of lease
were annotated at the back of the title, as per stipulation
of the parties.
On January 3, 1976, a deed of exchange was executed
between lessors Delfin and Pelagia Pacheco and
defendant Delpher Trades Corporation whereby the
former conveyed to the latter the leased property together
with another parcel of land for 2,500 shares of stock of
defendant corporation with a total value of P1,500,000.00
On the ground that it was not given the first option to buy
the leased property pursuant to the proviso in the lease
agreement, respondent Hydro Pipes Philippines, Inc., filed
an amended complaint for reconveyance of Lot. No. 1095
in its favor under conditions similar to those whereby
Page 61

Delpher Trades Corporation acquired the property from
Pelagia Pacheco and Delphin Pacheco.
The CFI of Bulacan ruled in favor of the plaintiff.
The IAC affirmed the decision of the CFI.
ISSUE:
Whether or not the "Deed of Exchange" of the properties
executed by the Pachecos on the one hand and the
Delpher Trades Corporation on the other was meant to be
a contract of sale which, in effect, prejudiced the private
respondent's right of first refusal over the leased property
included in the "deed of exchange."
ARGUMENTS:
Eduardo Neria, a CPA and son-in-law of the late
Pelagia Pacheco testified that Delpher Trades Corporation
is a family corporation and that the corporation was
organized by the children of the two spouses (spouses
Pelagia Pacheco and Benjamin Hernandez and spouses
Delfin Pacheco and Pilar Angeles in order to perpetuate
their control over the property through the corporation
and as a means to avoid taxes.
Under this factual backdrop, the petitioners contend that
there was actually no transfer of ownership of the subject
parcel of land since the Pachecos remained in control of
the property. Thus, the petitioners allege: "Considering
that the beneficial ownership and control of Petitioner
Corporation remained in the hands of the original co-
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
owners, there was no transfer of actual ownership
interests over the land when the same was transferred to
Petitioner Corporation in exchange for the latter's shares
of stock. The transfer of ownership, if anything, was
merely in form but not in substance. In reality, Petitioner
Corporation is a mere alter ego or conduit of the Pacheco
co-owners
On the other hand, the private respondent argues that
Delpher Trades Corporation is a corporate entity separate
and distinct from the Pachecosn and that there was
actual transfer of ownership interests over the leased
property when the same was transferred to Delpher
Trades Corporation in exchange for the latter's shares of
stock.
RULING:
No, it was not meant to be a contract of sale.
After incorporation, one becomes a stockholder of a
corporation by subscription or by purchasing stock
directly from the corporation or from individual owners
thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649,
citing Bole v. Fulton [1912], 233 Pa., 609). In the case at
bar, in exchange for their properties, the Pachecos
acquired 2,500 original unissued no par value shares of
stocks of the Delpher Trades Corporation. Consequently,
the Pachecos became stockholders of the corporation by
subscription "The essence of the stock subscription is an
Page 62

agreement to take and pay for original unissued shares of
a corporation, formed or to be formed.
It is to be stressed that by their ownership of the 2,500 no
par shares of stock, the Pachecos have control of the
corporation. Their equity capital is 55% as against 45% of
the other stockholders, who also belong to the same
family group.
In effect, the Delpher Trades Corporation is a business
conduit of the Pachecos. What they really did was to
invest their properties and change the nature of their
ownership from unincorporated to incorporated form by
organizing Delpher Trades Corporation to take control of
their properties and at the same time save on inheritance
taxes.
The records do not point to anything wrong or
objectionable about this "estate planning" scheme
resorted to by the Pachecos. "The legal right of a taxpayer
to decrease the amount of what otherwise could be his
taxes or altogether avoid them, by means which the law
permits, cannot be doubted.
The "Deed of Exchange" of property between the Pachecos
and Delpher Trades Corporation cannot be considered a
contract of sale. There was no transfer of actual
ownership interests by the Pachecos to a third party. The
Pacheco family merely changed their ownership from one
form to another. The ownership remained in the same
hands. Hence, the private respondent has no basis for its
claim of a light of first refusal under the lease contract.
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
DISPOSITIVE PORTION
WHEREFORE, the instant petition is hereby GRANTED,
The questioned decision and resolution of the then
Intermediate Appellate Court are REVERSED and SET
ASIDE. The amended complaint in Civil Case No. 885-V-
79 of the then Court of First Instance of Bulacan is
DISMISSED. No costs.
46. CIR v. Estate of Benigno Toda Jr. (2004)
G.R. No. 147188
FACTS:
March 2, 1989: Cibeles Insurance Corp. (CIC) authorized
Benigno P. Toda Jr., President and Owner of 99.991% of
outstanding capital stock, to sell the Cibeles Building and
2 parcels of land which he sold to Rafael A. Altonaga on
August 30, 1987 for P 100M who then sold it on the same
day to Royal Match Inc. for P 200M.
CIC included gains from sale of real property of P
75,728.021 in its annual income tax return while
Altonaga paid a 5% capital gains tax of P 10M
July 12, 1990: Toda sold his shares to Le Hun T. Choa for
P 12.5M evidenced by a deed of ale of shares of stock
which provides that the buyer is free from all income tax
liabilities for 1987, 1988 and 1989. Toda Jr. died 3 years
later.
Page 63

March 29, 1994: BIR sent an assessment notice and
demand letter to CIC for deficiency of income tax of P
79,099, 999.22
January 27, 1995: BIR sent the same to the estate of
Toda Jr.
Estate filed a protest which was dismissed - fraudulent
sale to evade the 35% corporate income tax for the
additional gain of P 100M and that there is in fact only 1
sale. Since it is falsity or fraud, the prescription period is
10 years from the discovery of the falsity or fraud as
prescribed under Sec. 223 (a) of the NIRC.
CTA: No proof of fraudulent transaction so the applicable
period is 3 years after the last day prescribed by law for
filing the return.
ISSUE: W/N there is falsity or fraud resulting to tax
evasion rather than tax avoidance so the period for
assessment has not prescribed.
RULING: YES. Estate shall be liable since NOT yet
prescribed.
Tax avoidance and tax evasion are the two most common
ways used by taxpayers in escaping from taxation. ax
avoidance is the tax saving device within the means
sanctioned by law. This method should be used by the
taxpayer in good faith and at arms length. Tax evasion,
on the other hand, is a scheme used outside of those
lawful means and when availed of, it usually subjects the
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
taxpayer to further or additional civil or criminal
liabilities.
Tax evasion connotes the integration of three factors:
(1) the end to be achieved, i.e., the payment of less than
that known by the taxpayer to be legally due, or the non-
payment of tax when it is shown that a tax is due
(2) an accompanying state of mind which is described as
being evil, in bad faith, willfull,or deliberate and not
accidental; and
(3) a course of action or failure of action which is
unlawful.
All are present in this case. The trial balance showed
that RMI debited P 40M as "other-inv. Cibeles Building"
that indicates RMI Paid CIC (NOT Altonaga)
Fraud in its general sense, is deemed to comprise
anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or
equitable duty, trust or confidence justly reposed,
resulting in the damage to another, or by which an undue
and unconscionable advantage is taken of another.
Here, it is obvious that the objective of the sale to
Altonaga was to reduce the amount of tax to be paid
especially that the transfer from him to RMI would then
subject the income to only 5% individual capital gains
tax, and not the 35% corporate income tax.
Generally, a sale of or exchange of assets will have an
income tax incidence only when it is consummated but
Page 64

such tax incidence depends upon the substance of the
transaction rather them mere formalities.
47. Collector v. UST (1958)
FACTS:
On October 17, 1950, UST requested in writing from the
respondent the refund of the sum of on account of the
following: The amount paid by the other departments to
the UST Press was for the purposes of accounting only
and does not legally constitute gross receipts subject to
the percentage tax The printing and binding of the fall
under the exception provided for in Section 191 in
relation to Section 183(a) of the Tax Code.
CTA applied the doctrine of equitable recoupment.
ISSUE:
W/N THE CTA ERRED IN APPLYING THE DOCTRINE OF
EQUITABLE RECOUPMENT IN THE CASE?
Held:
YES. With this doctrine available and enforceable to both
parties, The tax collector would be tempted to delay and
neglect the collection of taxes within the period set by the
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
law confident that when it finally wakes up from its
lethargy, it could still recover the tax it failed to collect by
having it set off or recouped from any tax which it may
have illegally collected from the same taxpayer
As regards the taxpayer, he may also be tempted to delay
and neglect the filing of the corresponding suit for refund
of a tax illegally or erroneously collected, trusting that he
can always recover or be credited with the same or part
thereof by refusing to pay a valid tax assessed against
him and compelling the Government to set-off the same
against a tax payment he could no longer recover.
48. Philex Mining vs CIR
PHILEX MINING CORP. v. CIR
GR No. 125704, August 28, 1998
294 SCRA 687
FACTS:
Petitioner Philex Mining Corp. assails the decision of the
Court of Appeals affirming the Court of Tax
Appeals decision ordering it to pay the amount of P110.7
M as excise tax liability for the period from the 2nd
quarter of 1991 to the 2nd quarter of 1992 plus 20%
annual interest from 1994 until fully paid pursuant to
Sections 248 and 249 of the Tax Code of 1977. Philex
protested the demand for payment of the tax liabilities
Page 65

stating that it has pending claims for VAT input
credit/refund for the taxes it paid for the years 1989 to
1991 in
the amount of P120 M plus interest. Therefore these
claims for tax credit/refund should be applied against the
tax liabilities.
ISSUE: Can there be an off-setting between the tax
liabilities vis-a-vis claims of tax refund of the petitioner?
HELD: No. Philex's claim is an outright disregard of the
basic principle in tax law that taxes are the lifeblood of
the
government and so should be collected without
unnecessary hindrance. Evidently, to countenance
Philex's
whimsical reason would render ineffective our tax
collection system. Too simplistic, it finds no support in
law or in jurisprudence.
To be sure, Philex cannot be allowed to refuse the
payment of its tax liabilities on the ground that it has a
pending tax claim for refund or credit against the
government which has not yet been granted.Taxes cannot
be subject to compensation for the simple reason that the
government and the taxpayer are not creditors and
debtors of each other. There is a material distinction
between a tax and debt. Debts are due to the Government
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
in its corporate capacity, while taxes are due to the
Government in its sovereign capacity. xxx There can be
no off-setting of taxes against the claims that the taxpayer
may have against the government. A person cannot refuse
to pay a tax on the ground that the government owes him
an amount equal to or greater than the tax
being collected. The collection of a tax cannot await the
results of a lawsuit against the government.
49. CIR vs ESSO Standard Eastern (G.R. No. L-28502-
03. April 18, 1989)
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
ESSO STANDARD EASTERN, INC. and THE COURT OF
TAX APPEALS, respondents.
Ponente: NARVASA
FACTS:
Respondent overpaid its 1959 income tax by
P221,033.00. It was granted a tax credit by the
Commissioner accordingly on 1964. However, ESSOs
payment of its income tax for 1960 was found to be short
by P367,994.00. The Commissioner (of Internal Revenue)
wrote to ESSO demanding payment of the deficiency tax,
together with interest thereon for the period from 1961 to
Page 66

1964. ESSO paid under protest the amount alleged to be
due, including the interest as reckoned by the
Commissioner. It protested the computation of interest,
contending it was more than that properly due. It claimed
that it should not have been required to pay interest on
the total amount of the deficiency tax, P367,994.00, but
only on the amount of P146,961.00—representing the
difference between said deficiency, P367,994.00, and
ESSOs earlier overpayment of P221,033.00 (for which it
had been granted a tax credit). ESSO thus asked for a
refund. The Internal Revenue Commissioner denied the
claim for refund. ESSO appealed to the Court of Tax
Appeals which ordered payment to ESSO of its refund-
claim representing overpaid interest.
The Commissioner argued the tax credit of P221,033.00
was approved only on year 1964, it could not be availed of
in reduction of ESSOs earlier tax deficiency for the year
1960; as of that year, 1960, there was as yet no tax credit
to speak of, which would reduce the deficiency tax
liability for 1960. In support of his position, the
Commissioner invokes the provisions of Section 51 of the
Tax Code.
ISSUE:
Whether or not the interest on delinquency should be
applied on the full tax deficiency of P367,994.00 despite
Atty. Agnes Santos, Taxation 1
Dumaual, Jeanne Pauline J. 2019-2020
the existence of overpayment in the amount of
P221,033.00.
HELD:
NO. Petition was denied. Decision of CTA was affirmed.
RATIO:
The fact is that, as respondent Court of Tax Appeals has
stressed, as early as 1960, the Government already had
in its hands the sum of P221,033.00 representing excess
payment. Having been paid and received by mistake, as
petitioner Commissioner subsequently acknowledged,
that sum unquestionably belonged to ESSO, and the
Government had the obligation to return it to ESSO That
acknowledgment of the erroneous payment came some
four (4) years afterwards in nowise negates or detracts
from its actuality. The obligation to return money
mistakenly paid arises from the moment that payment is
made, and not from the time that the payee admits the
obligation to reimburse.The obligation to return money
mistakenly paid arises from the moment that payment is
made, and not from the time that the payee admits the
obligation to reimburse. The obligation of the payee to
reimburse an amount paid to him results from the
mistake, not from the payee’s confession of the mistake or
recognition of the obligation to reimburse.
Page 67

A literal interpretation is to be rejected if it would be
unjust or lead to absurd results. Statutes should receive
a sensible construction, such as will give effect to the
legislative intention and so as to avoid an unjust or
absurd conclusion.
50. CIR VS. PASCOR REALTY
GR NO.178697, June 29, 1999
FACTS:
It appears that by virtue of Letter of Authority No.
001198, then BIR Commissioner Jose U. Ong authorized
Revenue Officers Thomas T. Que, Sonia T. Estorco and
Emmanuel M. Savellano to examine the books of
accounts and other accounting records of Pascor Realty
and Development Corporation. (PRDC) for the years
ending 1986, 1987 and 1988. The said examination
resulted in a recommendation for the issuance of an
assessment in the amounts of P7,498,434.65 and
P3,015,236.35 for the years 1986 and 1987, respectively.
On March 1, 1995, the Commissioner of Internal Revenue
filed a criminal complaint before the Department of
Justice against the PRDC, its President Rogelio A. Dio,
and its Treasurer Virginia S. Dio, alleging evasion of taxes
in the total amount of P10,513,671.00. Private
respondents PRDC, et. al. filed an Urgent Request for
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Dumaual, Jeanne Pauline J. 2019-2020
Reconsideration/Reinvestigation disputing the tax
assessment and tax liability.
ISSUE:
(1) Whether or not the criminal complaint for tax evasion
can be construed as an assessment.
(2) Whether or not an assessment is necessary before
criminal charges for tax evasion may be instituted.
HELD:
1. No. Petitioner argues that the filing of the criminal
complaint with the Department of Justice cannot in any
way be construed as a formal assessment of private
respondents tax liabilities. This position is based on
Section 205 of the National Internal Revenue Code[10
(NIRC), which provides that remedies for the collection of
deficient taxes may be by either civil or criminal action.
Likewise, petitioner cites Section 223(a) of the same Code,
which states that in case of failure to file a return, the tax
may be assessed or a proceeding in court may be begun
without assessment.
2. No. Section 222 of the NIRC specifically states that
in cases where a false or fraudulent return is submitted
or in cases of failure to file a return such as this case,
proceedings in court may be commenced without an
assessment. Furthermore, Section 205 of the same Code
clearly mandates that the civil and criminal aspects of the
case may be pursued simultaneously.
Page 68
 Dumaual, Jeanne Pauline J. 2019-2020

Said Section 222 states that an assessment is not

necessary before a criminal charge can be filed. This is
the general rule. Private respondents failed to show that
they are entitled to an exception. Moreover, the criminal
charge need only be supported by a prima facie showing
of failure to file a required return. This fact need not be
proven by an assessment.

Atty. Agnes Santos, Taxation 1 Page 69