February 2013 Decision3 of the Court of Tax Appeals
TAX I CASES
1. University Physician Services, Inc., vs. CIR
GR No. 20599, March 7, 2018
MARTIRES, J.:
When a corporation overpays its income tax liability as
adjusted at the close of the taxable year, it has two
options: (1) to be refunded or issued a tax credit
certificate, or (2) to carry over such overpayment to the
succeeding taxable quarters to be applied as tax credit
against income tax due.1 Once the carry-over option is
taken, it becomes irrevocable such that the taxpayer
cannot later on change its mind in order to claim a cash
refund or the issuance of a tax credit certificate of the
very same amount of overpayment or excess m. come
tax credit.2
Does the irrevocability rule apply exclusively to the
carry-over option? Such is the novel issue presented in
this case.
THE FACTS
Before the Court is a petition for review under Rule 45 of
the Rules of Court filed by petitioner University
Physicians Services Inc.-Management, Inc. (UPSI-MI)
which seeks the reversal and setting aside of the 8
(CTA) En Banc in CTA-EB Case No. 828. ·Said decision
of the CTA En Banc affirmed the 5 July 2011 Decision
and 8 September 2011 Resolution of the CTA Second
Division (CTA Division) in CTA Case No. 7908. The CTA
Division denied the application of UPSI-MI for tax refund
or issuance of Tax Credit Certificate (TCC) of its excess
unutilized creditable income tax for the taxable year
2006.
The Antecedents
As narrated by the CTA, the facts are uncomplicated, viz:
UPSI-MI is a corporation incorporated and existing under
and by virtue of laws of the Republic of the Philippines,
with business address at 1122 General Luna Street,
Paco. Manila. Respondent on the other hand, is the duly
appointed Commissioner of Internal Revenue, with
power, among others, 10 act upon claims for refund or
tax credit of overpaid internal revenue taxes, with office
address at the Fifth Floor, BIR National Office Building,
BIR Road, Diliman , Quezon City.
On April 16, 2007. petitioner filed its Annual Income Tax
Return (ITR) for the year ended December 31, 2006 with
the Revenue District No. 34 of the Revenue Region No. 6
of the Bureau of Internal Revenue (BIR), reflecting an
income tax overpayment of 5,159,341.00. computed as
follows:4
1
Sales/Revenues/Receipt ₱ Tax Rate (except MCIT 35%
s/Fees 28,808,960. Rate)
00
Income Tax -
Less: Cost of 23,834,605.
Sales/Services 00 Minimum Corporate ₱
Income Tax (MCIT) 99,595.00
Gross Income from ₱
Operation 4,974,355.0
0

Add: Non-Operating & 5,375.00

Other Income
Aggregate Income Tax ₱
Due 99,595.00
Total Gross Income ₱
4,979,730.0
Less: Tax
0
Credits/Payments

Less: Deductions ₱
Prior Year's Excess ₱
4,979,730.0
Credits 2,331,102.0
0
0

Taxable Income -
Creditable Tax Withheld
for the First

2
 Three Quarters Less: Cost of 6,461,650
Sales/Services

Creditable Tax Withheld Gross Income from 1,027,609

for the Fourth Operation
2,972,834.0
Three Quarters 0
Add: Non-Operating & 479
Other Income
Total Tax ₱
Credits/Payments 5,258,936.0 Total Gross Income 1,028,088
0)
Less: Deductions 1,206,543
Tax ₱
Payable/(Overpayment) (5,159,341. Taxable Income (178,455)
00)

Subsequently, on November 14, 2007, petitioner filed an

Annual ITR for the short period fiscal year ended March
31, '.W07, reflecting the income tax overpayment of 5. Tax Rate (except MCIT 35%
159.341 from the previous period as "Prior Year’s Excess Rate)
Credit", as follows:5
Income Tax -

Sales/Revenues/Receipts/ 7,489,259
Minimum Corporate 20,562
Fees
Income Tax (MCIT)

3
 Tax (6,246,00
Payable/(Overpayment) 7)
Aggregate Income Tax Due 20,562

On the same date, petitioner filed an amended Annual

Less: Tax ITR for the short period fiscal year ended March 31,
Credits/Payments 2007, reflecting the removal of the amount of the instant
claim in the ''Prior Year's Excess Credit". Thus, the
Prior Year's Excess 5,159,341 amount thereof was changed from ₱5, 159,341 to
Credits ₱2,231,507.

On October 10, 2008, petitioner filed with the

Creditable Tax Withheld for 1,107,228
respondent's office, a claim for refund and/or issuance of
the First
a Tax Credit Certificate (TCC) in the amount of
Three Quarters ₱2,927.834.00, representing the alleged excess and
unutilized creditable withholding taxes for 2006.

In view of the fact that respondent has not acted upon the
Creditable Tax Withheld for
foregoing claim for refund/tax credit, petitioner filed with a
the Fourth
6,266,569 Petition for Review on April l4, 2009 before the Court in
Quarter Division.

The Ruling of the CTA Division

Total Tax 6,266,569 After trial, the CT A Division denied the petition for review
Credits/Payments for lack of merit. It reasoned that UPSI-MI effectively
exercised the carry-over option under Section 76 of the
National Internal Revenue Code (NIRC) of 1997. On
motion for reconsideration, UPSI-MI argued that the

4
irrevocability rule under Section 76 of the NIRC is not
applicable for the reason that it did not carry over to the
succeeding taxable period the 2006 excess income tax
credit. UPSI-MI added that the subject excess tax credits
were inadvertently included in its original 2007 ITR, and
such mistake was rectified in the amended 2007 ITR.
Thus, UPSI-MI insisted that what should control is its
election of the option "To be issued a Tax Credit
Certificate" in its 2006 ITR.
The CTA Division ruled that UPSI-MI's alleged
inadvertent inclusion of the 2006 excess tax credit in the
2007 original ITR belies its own allegation that it did not
carry over the said amount to the succeeding taxable
period. The amendment of the 2007 ITR cannot undo
UPSI-MI's actual exercise of the carry-over option in the
original 2007 ITR, for to do so would be against the
irrevocability rule. The dispositive portion of the CTA
Division's decision reads:
WHEREFORE, the instant Petition for Review is hereby
DENIED for lack of merit.6
Aggrieved, UPSI-MI appealed before the CTA En Banc.
The Ruling of the CTA En Banc
The CTA En Banc ruled that UPSI-MI is barred by
Section 76 of the NIRC from claiming a refund of its
excess tax credits for the taxable year 2006. The barring
effect applies after UPSI-MI carried over its excess tax
credits to the succeeding quarters of 2007, even if such
carry-over was allegedly done inadvertently. The court
emphasized that the prevailing law and jurisprudence
admit of no exception or qualification to the irrevocability
rule. Thus, the CTA En Banc affirmed the assailed
decision and resolution of the CTA Division, disposing as
follows:
WHEREFORE, all the foregoing considered, the instant
Petition for Review is hereby DENIED. The assailed
Decision dated July 5. 2011and Resolution dated
September 8, 2011 both rendered by the Court in Division
in CTA Case No. 7908 are hereby AFFIRMED.
7
SO ORDERED.
Notably, the said decision was met by a dissent from
Justice Esperanza R. Pabon-Victorino. Invoking Phi/am
Asset Management, Inc. v. Commissioner (Philam), 8
Justice Pabon-Victorino took the view that the
irrevocability rule applies as much to the option of refund
or tax credit certificate. She wrote:
A contextual appreciation of the ruling [Philam] would tell
us that any of the two alternatives once chosen is
irrevocable - be it for refund or carry over. The
controlling factor for the operation of the
irrevocability rule is that the taxpayer chose an
5
option; and once it had already done so, it could no
longer make another one.
Unsatisfied with the decision of the CTA En Banc,
UPSI-MI appealed before this Court.
The Present Petition for Review
UPSI-MI interposed the following reasons for its petition:
THE HONORABLE COURT OF TAX APPEALS (En
Banc) SERIOUSLY ERRED AND DECIDED IN A
MANNER NOT IN ACCORDANCE WITH THE LAW,
PREVAILING JURISPRUDENCE, AND FACTUAL
MILIEU SURROUNDING THE CASE, WHEN IT
ADOPTED THE DECISION OF THE COURT OF TAX
APPEALS IN DIVISION AND RULED THAT:
a. Petitioner is not entitled to the refund or issuance of a
Tax Credit Certificate in the amount of ₱2,927,834.00
representing its 2006 excess tax credits because of the
application of the "irrevocability rule" under Section 76 of
the NIRC of 1997.
b. The amendment of the original ITR for fiscal year
ended 31 March 2007 does not take back, cancel or
rescind the original option to refund through tax credit
certificate based on the argument that the Petitioner
allegedly made an option to carry-over the excess
credits.
THE HONORABLE COURT OF TAX APPEALS (En
Banc) SERIOUSLY ERRED WHEN IT IGNORED THAT
ON JOINT STIPULATIONS, THE RESPONDENT
ADMITTED THE FACT THAT PETITIONER INDICATED
IN THE CORRESPONDING BOX ITS
INTENTION TO BE ISSUED A TAX CREDIT
CERTIFICATE REPRESENTING ITS UNUTILIZED
CREDITABLE WITHHOLDING TAX WITHHELD FOR
THE TAXABLE YEAR 2006 BY MARKING THE
APPROPRIATE BOX.
THE HONORABLE COURT OF TAX APPEALS (En
Banc) SERIOUSLY ERRED WHEN IT DECIDED ON
THE ISSUE OF WHETHER OR NOT PEITIONER
CARRIED OVER ITS 2006 EXCESS TAX CREDITS TO
THE SUCCEEDING SHORT TAXABLE PERIOD OF
2007 WHEN THE SAME WAS NEVER RAISED IN THE
JOINT STIPULATION OF FACTS.
UPSI-MI faults the CTA En Banc for banking too much on
the irrevocability of the option to carry over. It contends
that even the option to be refunded through the issuance
of a TCC is likewise irrevocable. Taking cue from the
dissent of Justice Pabon-Victorino, UPSI-MI cites Philam
in restating this Court's pronouncement that "the options
of a corporate taxpayer, whose total quarterly income tax
payments exceed its tax liability, are alternative in nature
and the choice of one precludes the other." It also cites
Commissioner v. PL Management International
6
Philippines, Inc. (PL Management)9 that reiterated the creditable tax. Meanwhile, the creditable taxes withheld
rule that the choice of one precludes the other. Thus, for the year 2006 (₱2,927,834.00) remained intact and
when it indicated in its 2006 Annual ITR the option "To be
issued a Tax Credit Certificate," such choice precluded unutilized. In said 2006 Annual ITR, UPSI-MI chose the
the other option to carry over.10 option "To be issued a tax credit certificate" with respect
to the amount ₱2,927,834.00, representing unutilized
In other words, UPSI-MI proposes that the options of excess creditable taxes for the taxable year ending 31
refund on one hand and carry-over on the other hand are December 2006. The figures are summarized in the table
both irrevocable by nature. Relying again on the dissent below:
of Justice Pabon-Victorino, UPSI-MI also points to BIR
Form 1702 (Annual Income Tax Return) itself which
Taxable Exc Inc Less Tax Balance of
expressly states under line 31 thereof: Year ess om Tax Excess CWT
Cre e Credit Payabl
dita Ta e
"If overpayment, mark one box only: ble x
With Du
hold e
(once the choice is made, the same is irrevocable)" ing
Tax
(CW
Resume of relevant facts T)

To recapitulate, UPSI-MI had, as of 31 December 2005, 2005 P -- --- --- P 2,231,507.00

an outstanding amount of ₱2,331, 102.00 in excess and 2,33
1,
-

unutilized creditable withholding taxes. 102.

00

For the subsequent taxable year ending 31 December

2006 P P P P 0.00 P 2,927,834.00
2006, the total sum of creditable taxes withheld on the 2,92 99, 99,105.
management fees of UPSI-MI was ₱2,927,834.00. Per its 7,83
4.00
10
5.0
00 (A
portion
2006 Annual Income Tax Return (ITR), UPSI-MI's income 0 of the
excess
tax due amounted to ₱99,105.00. UPSI-MI applied its (M credit
CI of
"Prior Year's Excess Credits" of ₱2,331, 102.00 as tax T) Php2,3
credit against such 2006 Income Tax due, leaving a 3l,102.

balance of ₱2,231,507.00 of still unutilized excess

7
 00 in
2015)
In the following year, UPSI-MI changed its taxable period
from calendar year to fiscal year ending on the last day of
March. Thus, it filed on 14 November 2007 an Annual
ITR covering the short period from January 1 to March 31
of 2007. In the original 2007 Annual ITR, UPSI-MI opted
to carry over as "Prior Year's Excess Credits" the total
amount of ₱5,159,341.00 which included the 2006
unutilized creditable withholding tax of ₱2,927,834.00.
UPSI-MI amended the return by excluding the sum of
₱2,927,834.00 under the line "Prior Year's Excess
Credits" which amount is the subject of the refund claim.
In sum, the question to be resolved is whether UPSI-MI
may still be entitled to the refund of its 2006 excess tax
credits in the amount of ₱2,927,834.00 when it thereafter
filed its income tax return (for the short period ending 31
March 2007) indicating the option of carry-over.
OUR RULING
We affirm the CTA.
We cannot subscribe to the suggestion that the
irrevocability rule enshrined in Section 76 of the National
Internal Revenue Code (NIRC) applies to either of the
options of refund or carry-over. Our reading of the law
assumes the interpretation that the irrevocability is limited
only to the option of carry-over such that a taxpayer is
still free to change its choice after electing a refund of its
excess tax credit. But once it opts to carry over such
excess creditable tax, after electing refund or issuance of
tax credit certificate, the carry-over option becomes
irrevocable. Accordingly, the previous choice of a claim
for refund, even if subsequently pursued, may no longer
be granted.
The aforementioned Section 76 of the NIRC provides:
SECTION 76. Final Adjustment Return. - Every
corporation liable to tax under Section 27 shall file a final
adjustment return covering the total taxable income for
the preceding calendar or fiscal year. If the sum of the
quarterly tax payments made during the said taxable year
is not equal to the total tax due on the entire taxable
income of that year, the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry over the excess credit; or
(C) Be credited or refunded with the excess
amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund
of the excess estimated quarterly income taxes paid, the
excess amount shown on its final adjustment return may
be carried over and credited against the estimated
8
quarterly income tax liabilities for the taxable quarters of
the succeeding taxable years. Once the option to
carry-over and apply the excess quarterly income tax
against income tax due for the taxable quarters of the
succeeding taxable years has been made, such option
shall be considered irrevocable for that taxable period
and no application for cash refund or issuance of a tax
credit certificate shall be allowed therefor. (emphasis
supplied)
Under the cited law, there are two options available to the
corporation whenever it overpays its income tax for the
taxable year: (1) to carry over and apply the
overpayment as tax credit against the estimated quarterly
income tax liabilities of the succeeding taxable years
(also known as automatic tax credit) until fully utilized
(meaning, there is no prescriptive period); and (2) to
apply for a cash refund or issuance of a tax credit
certificate within the prescribed period.11 Such
overpayment of income tax is usually occasioned by the
over-withholding of taxes on the income payments to the
corporate taxpayer.
The irrevocability rule is provided in the last sentence of
Section 76. A perfunctory reading of the law
unmistakably discloses that the irrevocable option
referred to is the carry-over option only. There appears
nothing therein from which to infer that the other choice,
i.e., cash refund or tax credit certificate, is also
irrevocable. If the intention of the lawmakers was to make
such option of cash refund or tax credit certificate also
irrevocable, then they would have clearly provided so.
In other words, the law does not prevent a taxpayer who
originally opted for a refund or tax credit certificate from
shifting to the carry-over of the excess creditable taxes to
the taxable quarters of the succeeding taxable years.
However, in case the taxpayer decides to shift its option
to carryover, it may no longer revert to its original choice
due to the irrevocability rule. As Section 76 unequivocally
provides, once the option to carry over has been made, it
shall be irrevocable. Furthermore, the provision seems to
suggest that there are no qualifications or conditions
attached to the rule on irrevocability.
Law and jurisprudence unequivocally support the view
that only the option of carry-over is irrevocable.
Aside from the uncompromising last sentence of Section
76, Section 228 of the NIRC recognizes such freedom of
a taxpayer to change its option from refund to carry-over.
This law affords the government a remedy in case a
taxpayer, who had previously claimed a refund or tax
credit certificate (TCC) of excess creditable withholding
tax, subsequently applies such amount as automatic tax
credit. The pertinent text of Section 228 reads:
SEC. 228. Protesting of Assessment. - When the
Commissioner or his duly authorized representative finds
that proper taxes should be assessed, he shall first notify
9
the taxpayer of his findings: Provided, however, That a
pre-assessment notice shall not be required in the
following cases:
(a) When the finding for any deficiency tax is the result of
mathematical error in the computation of the tax as
appearing on the face of the return; or
(b) When a discrepancy has been determined between
the tax withheld and the amount actually remitted by the
withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax
credit of excess creditable withholding tax for a taxable
period was determined to have carried over and
automatically applied the same amount claimed
against the estimated tax liabilities for the taxable
quarter or quarters of the succeeding taxable year; or
(d) When the excise tax due on exciseable articles has
not been paid; or
(e) When the article locally purchased or imported by an
exempt person, such as, but not limited to, vehicles,
capital equipment, machineries and spare parts, has
been sold, traded or transferred to non-exempt persons.
The taxpayers shall be informed in writing of the law and
the facts on which the assessment is made; otherwise,
the assessment shall be void. x x x (emphasis supplied)
The provision contemplates three scenarios:
(1) Deficiency in the payment or remittance of tax to the
government (paragraphs [a], [b] and [d]);
(2) Overclaim of refund or tax credit (paragraph [ c ]); and
(3) Unwarranted claim of tax exemption (paragraph [e]).
In each case, the government is deprived of the rightful
amount of tax due it. The law assures recovery of the
amount through the issuance of an assessment against
the erring taxpayer. However, the usual two-stage
process in making an assessment is not strictly followed.
Accordingly, the government may immediately proceed to
the issuance of a final assessment notice (FAN), thus
dispensing with the preliminary assessment (PAN), for
the reason that the discrepancy or deficiency is so glaring
or reasonably within the taxpayer's knowledge such that
a preliminary notice to the taxpayer, through the issuance
of a PAN, would be a superfluity.
Pertinently, paragraph (c) contemplates a double
recovery by the taxpayer of an overpaid income tax that
arose from an over-withholding of creditable taxes. The
refundable amount is the excess and unutilized creditable
withholding tax.
This paragraph envisages that the taxpayer had
previously asked for and successfully recovered from
the BIR its excess creditable withholding tax through
10
refund or tax credit certificate; it could not be viewed
any other way. If the government had already granted the
refund, but the taxpayer is determined to have
automatically applied the excess creditable withholding
tax against its estimated quarterly tax liabilities in the
succeeding taxable year(s), the taxpayer would
undeservedly recover twice the same amount of excess
creditable withholding tax. There appears, therefore, no
other viable remedial recourse on the part of the
government except to assess the taxpayer for the double
recovery. In this instance, and in accordance with the
above rule, the government can right away issue a FAN.
If, on the other hand, an administrative claim for refund or
issuance of TCC is still pending but the taxpayer had in
the meantime automatically carried over the excess
creditable tax, it would appear not only wholly unjustified
but also tantamount to adopting an unsound policy if the
government should resort to the remedy of assessment.
First, on the premise that the carry-over is to be
sustained, there should be no more reason for the
government to make an assessment for the sum
(equivalent to the excess creditable withholding tax) that
has been justifiably returned already to the taxpayer
(through automatic tax credit) and for which the
government has no right to retain in the first place. In this
instance, all that the government needs to do is to deny
the refund claim.
Second, on the premise that the carry-over is to be
disallowed due to the pending application for refund, it
would be more complicated and circuitous if the
government were to grant first the refund claim and then
later assess the taxpayer for the claim of automatic tax
credit that was previously disallowed. Such procedure is
highly inefficient and expensive on the part of the
government due to the costs entailed by an assessment.
It unduly hampers, instead of eases, tax administration
and unnecessarily exhausts the government's time and
resources. It defeats, rather than promotes,
12
administrative feasibility. Such could not have been
intended by our lawmakers. Congress is deemed to have
enacted a valid, sensible, and just law.13
Thus, in order to place a sensible meaning to paragraph
(c) of Section 228, it should be interpreted as
contemplating only that situation when an application for
refund or tax credit certificate had already been
previously granted. Issuing an assessment against the
taxpayer who benefited twice because of the application
of automatic tax credit is a wholly acceptable remedy for
the government.
Going back to the case wherein the application for refund
or tax credit is still pending before the BIR, but the
taxpayer had in the meantime automatically carried over
its excess creditable tax in the taxable quarters of the
succeeding taxable year(s), the only judicious course of
action that the BIR may take is to deny the pending claim
11
for refund. To insist on giving due course to the refund in her dissent to the majority opinion in the assailed
claim only because it was the first option taken, and decision.
consequently disallowing the automatic tax credit, is to
encourage inefficiency or to suppress administrative We do not agree.
feasibility, as previously explained. Otherwise put,
The cases cited in the petition did not make an express
imbuing upon the choice of refund or tax credit certificate
declaration that the option of cash refund or TCC, once
the character of irrevocability would bring about an
made, is irrevocable. Neither should this be inferred from
irrational situation that Congress did not intend to remedy
the statement of the Court that the options are alternative
by means of an assessment through the issuance of a
and that the choice of one precludes the other. Such
FAN without a prior PAN, as provided in paragraph (c) of
statement must be understood in the light of the factual
Section 228. It should be remembered that Congress'
milieu obtaining in the cases.
declared national policy in passing the NIRC of 1997 is to
rationalize the internal revenue tax system of the Philam involved two cases wherein the taxpayer failed to
Philippines, including tax administration.14 signify its option in the Final Adjustment Return (FAR).
The foregoing simply shows that the lawmakers never In the first case (G.R. No. 156637), the Court ruled that
intended to make the choice of refund or tax credit such failure did not mean the outright barring of the
certificate irrevocable. Sections 76 and 228, paragraph request for a refund should one still choose this option
(c), unmistakably evince such intention. later on. Thy taxpayer did in fact file on 11 September
1998 an administrative claim for refund of its 1997
Philam and PL Management cases did not
excess creditable taxes. We sustained the refund claim
categorically declare the option of refund or TCC
in1 this case.
irrevocable.
It was different in the second case (G.R. No. 162004)
The petitioner hinges its claim of irrevocability of the
because the taxpayer filled out the portion "Prior Year's
option of refund on the statement of this Court in Philam
Excess Credits" in its subsequent FAR. The court
and PL Management that "the options xxx are alternative
considered the taxpayer to have constructively chosen
and the choice of one precludes the other." This also
the carry-over option. It was in this context that the court
appears as the basis of Justice Fabon-Victorino’s stance
determined the taxpayer to be bound by its initial choice

12
(of automatic tax credit), so that it is precluded from
asking for a refund of the excess CWT. It must be so
because the carry-over option is irrevocable, and it
cannot be allowed to recover twice for its overpayment of
tax.
Unlike the second case, there was no flip-flopping of
choices in the first one. The taxpayer did not indicate in
its 1997 FAR the choice of carryover. Neither did it apply
automatic tax credit in subsequent income tax returns so
as to be considered as having constructively chosen the
carry-over option. When it later on asked for a refund of
its 1997 excess CWT, the taxpayer was expressing its
option for the first time. It must be emphasized that the
Court sustained the application for refund but without
expressly declaring that such choice was irrevocable.
In either case, it is clear that the taxpayer cannot avail of
both refund and automatic tax credit at the same time.
Thus, as Philam declared: "One cannot get a tax refund
and a tax credit at the same time for the same excess
income taxes paid." This is the import of the Court's
pronouncement that the options under Section 76 are
alternative in nature.
In declaring that "the choice of one (option) precludes the
other," the Court in Philam cited Philippine Bank of
Communications v. Commissioner of Internal Revenue
(PBCom), 15 a case decided under the aegis of the old
NIRC of 1977 under which the irrevocability rule had not
yet been established. It was in PBCom that the Court
stated for the first time that "the choice of one precludes
the other."16 However, a closer perusal of PBCom reveals
that the taxpayer had opted for an automatic tax credit.
Thus, it was precluded from availing of the other remedy
of refund; otherwise, it would recover twice the same
excess creditable tax. Again, nowhere is it even
suggested that the choice of refund is irrevocable. For
one thing, it was not the choice taken by the taxpayer.
For another, the irrevocability rule had not yet been
provided.
As in PBCom, the Court also said in PL Management that
the choice of one (option) precludes the other.1âwphi1
Similarly, the taxpayer in PL Management initially
signified in the FAR its choice of automatic tax credit. But
unlike in PBCom, PL Management was decided under
the NIRC of 1997 when the irrevocability rule was already
applicable. Thus, although PL Management was unable
to actually apply its excess creditable tax in the next
succeeding taxable quarters due to lack of income tax
liability, its subsequent application for TCC was rightfully
denied by the Court. The reason is the irrevocability of its
choice of carry-over.
In other words, previous incarnations of the words "the
options are alternative... the choice of one precludes the
other" did not lay down a doctrinal rule that the option of
refund or tax credit certificate is irrevocable.
13
Again, we need not belabor the point that insisting upon
the irrevocability of the option for refund, even though the
taxpayer subsequently changed its mind by resorting to
automatic tax credit, is not only contrary to the apparent
intention of the lawmakers but is also clearly violative of
the principle of administrative feasibility.
Prior to the NIRC of 1997, the alternative options of
refund and carryover of excess creditable tax had already
been firmly established. However, the irrevocability rule
was not yet in place.17 As we explained in PL
Management, Congress added the last sentence of
Section 76 in order to lay down the irrevocability rule.
More recently, in Republic v. Team (Phils.) Energy Corp.,
18
we said that the rationale of the rule is to avoid
confusion and complication that could be brought about
by the flip-flopping on the options, viz:
The evident intent of the legislature, in adding the last
sentence to Section 76 of the NIRC of 1997, is to keep
the taxpayer from flip-flopping on its options, and avoid
confusion and complication as regards said taxpayer's
excess tax credit.19
The current rule specifically addresses the problematic
situation when a taxpayer, after claiming cash refund or
applying for the issuance of tax credit, and during the
pendency of such claim or application, automatically
carries over the same excess creditable tax and applies it
against the estimated quarterly income tax liabilities of
the succeeding year. Thus, the rule not only eases tax
administration but also obviates double recovery of the
excess creditable tax.
Further, nothing in the contents of BIR 1702 expressly
declares that the option of refund or TCC is irrevocable.
Even on the assumption that the irrevocability also
applies to the option of refund, such would be an
interpretation of the BIR that, as already demonstrated in
the foregoing discussion, is contrary to the intent of the
law. It must be stressed that such erroneous
interpretation is not binding on the court. Philippine Bank
of Communications v. CIR20 is apropos:
It is widely accepted that the interpretation placed upon a
statute by the executive officers, whose duty is to enforce
it, is entitled to great respect by the courts. Nevertheless,
such interpretation is not conclusive and will be ignored if
judicially found to be erroneous. Thus, courts will not
countenance administrative issuances that override,
instead of remaining consistent and in harmony with, the
law they seek to apply and implement.21
Applying the foregoing precepts to the given case,
UPSI-MI is barred from recovering its excess creditable
tax through refund or TCC. It is undisputed that despite
its initial option to refund its 2006 excess creditable tax,
UPSI-MI subsequently indicated in its 2007 short-period
FAR that it carried over the 2006 excess creditable tax
and applied the same against its 2007 income tax due.
14
The CTA was correct in considering UPSI-MI to have
constructively chosen the option of carry-over, for which
reason, the irrevocability rule forbade it to revert to its
initial choice. It does not matter that UPSI-Ml had not
actually benefited from the carry-over on the ground that
it did not have a tax due in its 2007 short period. Neither
may it insist that the insertion of the carry-over in the
2007 FAR was by mere mistake or inadvertence. As we
previously laid down, the irrevocability rule admits of no
qualifications or conditions.

In sum, the petitioner is clearly mistaken in its view that

the irrevocability rule also applies to the option of refund
or tax credit certificate. In view of the court's finding that it
constructively chose the option of can-y-over, it is already
barred from recovering its 2006 excess creditable tax
through refund or TCC even if it was its initial choice.

However, the petitioner remains entitled to the benefit of

carry-over and thus may apply the 2006 overpaid income
tax as tax credit in succeeding taxable years until fully
exhausted. This is because, unlike the remedy of refund
or tax credit certificate, the option of carry-over under
Section 76 is not subject to any prescriptive period.

WHEREFORE, the petition is DENIED for lack of merit.

The 8 February 2013 Decision of the Court of Tax
Appeals in CTA-EB Case No. 828 is hereby AFFIRMED.

SO ORDERED.

15

2. CIR vs. Phil. Aluminum Wheels, Inc. GR No.
216161, August 9, 2017
CARPIO, J.:
The Facts
Respondent is a corporation organized and existing
under Philippine laws which engages in the manufacture,
production, sale, and distribution of automotive parts and
accessories. On 16 December 2003, the Bureau of
Internal Revenue (BIR) issued a Preliminary Assessment
Notice (PAN) against respondent covering deficiency
taxes for the taxable year 2001.4 On 28 March 2004, the
BIR issued a Final Assessment Notice (FAN) against
respondent in the amount of ₱32,100,613.42.5 On 23
June 2004, respondent requested for reconsideration of
the FAN issued by the BIR. On 8 November 2006, the
BIR issued a Final Decision on Disputed Assessment
(FDDA) and demanded full payment of the deficiency tax
assessment from respondent.6 On 12 April 2007, the
FDDA was served through registered mail.
On 19 July 2007, respondent filed with the BIR an
application for the abatement of its tax liabilities under
Revenue Regulations No. 13-2001 for the taxable year
2001.7 In a letter dated 12 September 2007,8 the BIR
denied respondent's application for tax abatement on the
ground that the FDDA was already issued by the BIR and
that the FDDA had become final and executory due to
the failure of the respondent to appeal the FDDA with the
CTA. The BIR contended that the FDDA had been sent
through registered mail on 12 April 2007 and that the
FDDA had become final, executory, and demandable
because of the failure of the respondent to appeal the
FDDA with the CTA within thirty (30) days from receipt of
the FDDA.
In a letter dated 19 September 2007,9 respondent
informed the BIR that it already paid its tax deficiency on
withholding tax amounting to ₱736,726.89 through the
Electronic Filing and Payment System of the BIR and that
if was also in the process of availing of the Tax Amnesty
Program under Republic Act No. 9480 (RA 9480) as
implemented by Revenue Memorandum Circular No.
55-2007 to settle its deficiency tax assessment for the
taxable year 2001. On 21 September 2007, respondent
complied with the requirements of RA 9480 which
include: the filing of a Notice of Availment, Tax Amnesty
Return and Payment Form, and remitting the tax
payment. In a letter dated 29 January 2008, the BIR
denied respondent's request and ordered respondent to
pay the deficiency tax assessment amounting to ₱29,
108, 767 .63 .10
In a second letter dated 16 July 2008, the BIR reiterated
that the FDDA had become final and executory for the
failure of the respondent to appeal the FDDA with the
16
CTA within the prescribed period of thirty (30) days. The
BIR demanded the full payment of the tax assessment
and contended that the respondent's availment of the tax
amnesty under RA 9480 had no effect on the assessment
due to the finality of the FDDA prior to respondent's tax
amnesty availment. On 1 August 2008, respondent filed a
Petition for Review with the CTA assailing the letter of the
BIR dated 16 July 2008.
The Decision of the CTA First Division
On 12 November 2012, the CTA granted respondent's
Petition for Review and set aside the assessment in view
of respondent's availment of a tax amnesty under RA
9480. The CTA First Division held that RA 9480 covers all
national internal revenue taxes for the taxable year 2005
and prior years, with or without assessments duly issued,
that have remained unpaid as of 31 December 2005.11
The CTA First Division ruled that respondent complied
with all the requirements of RA 9480 including the
payment of the amnesty tax and submission of all
relevant documents. Having complied with all the
requirements of RA 9480, respondent is fully entitled to
the immunities and privileges granted under RA 9480.12
The dispositive portion of the Decision states:
WHEREFORE, premises considered, the instant Petition
for Review is GRANTED. The subject assessment in the
present case against petitioner is hereby SET ASIDE
solely in view of petitioner's availment of the Tax Amnesty
Program under R.A. No. 9480; and accordingly, petitioner
is hereby DECLARED ENTITLED to the immunities and
privileges provided by the Tax Amnesty Law being a
qualified tax amnesty applicant and for having complied
with all the documentary requirements set by law.
SO ORDERED.13
The CIR filed a Motion for Reconsideration14 on 3
December 2012 which the CTA First Division denied on 1
March 2013.15
The Decision of the CTA En Banc
On 19 May 2014, the CTA En Banc held that a qualified
tax amnesty applicant who has completed the
requirements of RA 9480 shall be deemed to have fully
complied with the Tax Amnesty Program. Upon
compliance with the requirements of the law, the taxpayer
shall, as mandated by law, be immune from the payment
of taxes as well as appurtenant civil, criminal, or
administrative penalties under the National Internal
Revenue Code. The CTA En Banc ruled that the finality
of a tax assessment did not disqualify respondent from
availing of a tax amnesty under RA 9480.
The dispositive portion of the Decision states:
WHEREFORE, premises considered, the Petition for
Review filed by the Commissioner of Internal Revenue is
17
DENIED, for lack of merit. The Decision of the First
Division of this Court promulgated on November 12, 2012
in CTA Case No. 781[7], captioned Philippine Aluminum
Wheels, Inc. v. Commissioner of Internal Revenue, and
the Resolution of the said Division dated March 1, 2013,
are AFFIRMED in toto.
SO ORDERED.16
The CIR filed a Motion for Reconsideration on 11 June
2014 which was denied on 5 January 2015.17
The Issue
Whether respondent is entitled to the benefits of the Tax
Amnesty Program under RA 9480.
The Decision of this Court
This Court denies the petition in view of the respondent's
availment of the Tax Amnesty Program under RA 9480.
A tax amnesty is 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. It partakes of an
absolute forgiveness or waiver by the government of its
right to collect what is due it and to give tax evaders who
wish to relent a chance to start with a clean slate. A tax
amnesty, much like a tax exemption, is never favored nor
presumed in law. The grant of a tax amnesty, similar to a
tax exemption, must be construed strictly against the
taxpayer and liberally in favor of the taxing authority.18
On 24 May 2007, RA 9480, or "An Act Enhancing
Revenue Administration and Collection by Granting an.
Amnesty on All Unpaid Internal Revenue Taxes Imposed
by the National Government for Taxable Year 2005 and
Prior Years," became law.
The pertinent provisions of RA 9480 are:
Section 1. Coverage. There is hereby authorized and
granted a tax amnesty which shall cover all national
internal revenue taxes for the taxable year 2005 and prior
years, with or without assessments duly issued
therefor, that have remained unpaid as of December 31,
2005: Provided, however, that the amnesty hereby
authorized and granted shall not cover persons or cases
enumerated under Section 8 hereof.
xxxx
Section 6. Immunities and Privileges. Those who availed
themselves of the tax amnesty under Section 5 hereof,
and have fully complied with all its conditions shall be
entitled to the following immunities and privileges:
(a) The taxpayer shall be immune from the· payment of
taxes, as well as additions thereto, and the appurtenant
civil, criminal or administrative penalties under the
National Internal Revenue Code of 1997, as amended,
18
arising from the failure to pay any and all internal revenue
taxes for taxable year 2005 and prior years.
x x x x (Emphasis supplied)
The Department of Finance issued DOF Department
Order No. 29-07 (DO 29-07).19 Section 6 of DO 29-07
provides for the method for availing a tax amnesty under
RA 9480, to wit:
Section 6. Method of Availment of Tax Amnesty.
1. Forms/Documents to be filed. To avail of the general
tax amnesty, concerned taxpayers shall file the following
documents/requirements:
a. Notice of Availment in such forms as may be
prescribed by the BIR; b. Statement of Assets, Liabilities
and Networth (SALN) as of December 31, 2005 in such
forms, as may be prescribed by the BIR; c. Tax Amnesty
Return in such forms as may be prescribed by the BIR.
The Acceptance of Payment Form, the Notice of
Availment, the SALN, and the Tax Amnesty Return shall
be submitted to the RDO, which shall be received only
after complete payment. The completion of these
requirements shall be deemed full compliance with
the provisions of RA 9480.
x x x x (Emphasis supplied)
In Philippine Banking Corporation v. Commissioner of
Internal Revenue,20 this Court held that the taxpayer's
completion of the requirements under RA 9480, as
implemented by DO 29-07, will extinguish the taxpayer's
tax liability, additions and all appurtenant civil, criminal, or
administrative penalties under the National Internal
Revenue Code, to wit:
Considering that the completion of these requirements
shall be deemed full compliance with the tax amnesty
program, the law mandates that the taxpayer shall
thereafter be immune from the payment of taxes, and
additions thereto, as well as the appurtenant civil,
criminal or administrative penalties under the NIRC of
1997, as amended, arising from the failure to pay any
and all internal revenue taxes for taxable year 2005 and
prior years.21
Similarly, in Metropolitan Bank and Trust Company
(Metrobank) v. Commissioner of Internal Revenue,22 this
Court sustained the validity of Metrobank's tax amnesty
upon full compliance with the requirements of RA 9480.
This Court ruled: "Therefore, by virtue of the availment by
Metrobank of the Tax Amnesty Program under Republic
Act No. 9480, it is already immune from the payment of
taxes, including DST on the UNISA for 1999, as well as
the addition thereto."23
On 19 September 2007, respondent availed of the Tax
Amnesty Program under RA 9480, as implemented by
19
DO 29-07.1âwphi1 Respondent submitted its Notice of
Availment, Tax Amnesty Return, Statement of Assets,
Liabilities and Net Worth, and comparative financial
statements for 2005 and 2006. Respondent paid the
amnesty tax to the Development Bank of the Philippines,
evidenced by its Tax Payment Deposit Slip dated 21
September 2007. Respondent's completion of the
requirements of the Tax Amnesty Program under RA
9480 is sufficient to extinguish its tax liability under the
FDDA of the BIR.
In Asia International Auctioneers, Inc. v. Commissioner of
Internal Revenue,24 this Court ruled that the tax liability of
Asia International Auctioneers, Inc. was fully settled when
it was able to avail of the Tax Amnesty Program under
RA 9480 in February 2008 while its Petition for Review
was pending before this Court. This Court declared the
pending case involving the tax liability of Asia
International Auctioneers, Inc. moot since the company's
compliance with the Tax Amnesty Program under RA
9480 extinguished the company's outstanding deficiency
taxes.
The CIR contends that respondent is disqualified to avail
of the tax amnesty under RA 9480. The CIR asserts that
the finality of its assessment, particularly its FDDA is
equivalent to a final and executory judgment by the
courts, falling within the exceptions to the Tax Amnesty
Program under Section 8 of RA 9480, which states:
Section 8. Exceptions. The tax amnesty provided in
Section 5 hereof shall not extend to the following persons
or cases existing as of the effectivity of this Act:
(a) Withholding agents with respect to their withholding
tax liabilities;
(b) Those with pending cases falling under the jurisdiction
of the Presidential Commission on Good Government;
(c) Those with pending cases involving unexplained or
unlawfully acquired wealth or under the Anti-Graft and
Corrupt Practices Act;
(d) Those with pending cases filed in court involving
violation of the Anti-Money Laundering Law;
(e) Those with pending criminal cases for tax evasion
and other criminal offenses under Chapter II of Title X of
the National Internal Revenue Code of 1997, as
amended, and the felonies of frauds, illegal exactions
and transactions, and malversation of public funds and
property under Chapters III and IV of Title VII of the
Revised Penal Code; and
(f) Tax cases subject of final and executory judgment
by the courts. (Emphasis supplied)
The CIR is wrong. Section 8(f) is clear: only persons with
"tax cases subject of final and executory judgment by the
courts" are disqualified to avail of the Tax Amnesty
20
Program under RA 9480. There must be a judgment
promulgated by a court and the judgment must have
become final and executory. Obviously, there is none in
this case. The FDDA issued by the BIR is not a tax,
case "subject to a final and executory judgment by
the courts" as contemplated by Section 8(f) of RA
9480. The determination of the tax liability of respondent
has not reached finality and is still not subject to an
executory judgment by the courts as it is the issue
pending before this Court. In fact, in Metrobank, this
Court held that the FDDA issued by the BIR was not a
final and executory judgment and did not prevent
Metrobank from availing of the immunities and privileges
granted under RA 9480, to wit:
x x x. As argued by Metrobank, the very fact that the
instant case is still subject of the present proceedings is
proof enough that it has not reached a final and
executory stage as to be barred from the tax amnesty
under Republic Act No. 9480. The assertion of the CIR
that deficiency DST is not covered by the Tax Amnesty
Program under Republic Act No. 9480 is downright
specious.25
The CIR alleges that respondent is disqualified to avail of
the Tax Amnesty Program under Revenue Memorandum
Circular No. 19-2008 (RMC No. 19-2008) dated 22
February 2008 issued by the BIR which includes
"delinquent accounts or accounts receivable considered
as assets by the BIR or the Government, including
self-assessed tax" as disqualifications to avail of the Tax
Amnesty Program under RA 9480. The exception of
delinquent accounts or accounts receivable by the BIR
under RMC No. 19- 2008 cannot amend RA 9480. As a
rule, executive issuances including implementing rules
and regulations cannot amend a statute passed by
Congress.
In National Tobacco Administration v. Commission on
Audit, 26 this Court held that in case there is a
discrepancy between the law and a regulation issued to
implement the law, the law prevails because the rule or
regulation cannot go beyond the terms and provisions of
the law, to wit: "[t]he Circular cannot extend the law or
expand its coverage as the power to amend or repeal a
statute is vested with the legislature." To give effect to the
exception under RMC No. 19-2008 of delinquent
accounts or accounts receivable by the BIR, as
interpreted by the BIR, would unlawfully create a new
exception for availing of the Tax Amnesty Program under
RA 9480.
WHEREFORE, we DENY the petition. We AFFIRM the
19 May 2014 Decision and the 5 January 2015
Resolution of the Court of Tax Appeals En Banc in CTA
EB No. 994. SO ORDERED.
21
3. National Tobacco Administration vs. COA
G.R. No. 119385 August 5, 1999
PURISIMA, J.:
At bar is a petition for review on certiorari under Rule 45
of the Revised Rules of Court to review and set aside the
decision of the Commission on Audit1 dated February 7,
1995 in COA Decision No. 95-108.2
The National Tobacco Administration (NTA, for short),
under Executive Order No. 116, as amended by
Executive Order No. 245,3 is a government-owned and
controlled corporation (GOCC, for brevity) tasked to
supervise and improve the viability of the tobacco
industry in this country.
On August 9, 1989, Congress passed Republic Act No.
6758,4 entitled "An Act Prescribing a Revised
Compensation and Position Classification in the
Government and for Other Purposes." On October 2,
1989, pursuant to Section 23 of said law, the Department
of Budget and Management (DBM) issued Corporate
Compensation Circular No. 10 (CCC No. 10) to serve as
the Implementing Rules and Regulations of R.A. No.
6758.1âwphi1.nêt
Pertinent records shows that even prior to the effectively
of Republic Act. No. 6758, officials and employees of the
NTA have been enjoying Mid-Year Social Amelioration
Benefit equivalent to one-and-half (11/2) month of their
basic salary. From 1989 to 1993, however, the said
benefit was reduced to one (1) month of the basic salary
due to the financial/budgetary constraints. In May, 1993,
the nomenclature of subject social amelioration benefit
was changed to educational assistance in order to reflect
the rationale behind the same, which is to encourage its
beneficiaries to pursue graduate studies and to finance
the schooling of their children.
Sometime in February, 1994, Miss Dalisay E. Aracan,
Resident Auditor of NTA, issued a Notice of Disallowance
of the payment of the educational for calendar year 1993,
opining that the NTA has no statutory authority to grant
the incentive. In January, 1995, the same Resident
Auditor caused the disallowance of the same benefit paid
in 1994, for the same reason.
On April 25, 1994, the petitioner appealed to the
Commission on Audit, praying for the lifting of the
disallowance in question, pointing out that: (1) Benefits
received by employees as of July 1, 1989 not integrated
into the standardized salary rates shall continue to be
authorized, pursuant to Section 12 R.A. 6758; (2) the
benefit having been received for so many years, even
prior to the effectivity of the Salary Standardization Law
of 1989, has been a vested right, on the part of the
recipients and (3) such allowance regularly granted,
forms part of the total compensation package of NTA
22
Officers and employees, and, therefore, the disallowance
thereof amounts to unauthorized diminution of pay.
On February 7, 1995, the Commission on Audit came out
with its questioned Decision the pertinent portion of
which, reads:
After a thorough evaluation, this Office believes and so
holds that the disallowance of the Auditor on the payment
of the mid-year social amelioration benefits or the
educational assistance benefits is in order. It bears stress
that Sec. 5.6 of CCC No. 10 (Implementing R.A. 6758) is
so explicit when it provides that:
Payment of other allowances/fringe benefit and all other
forms of compensation granted on top of basic salary,
whether in cash or in kind, not mentioned in
Sub-Paragraphs 5.4 and 5.5 above shall be discontinued
effective November 1, 1989. Payment made for such
allowance/fringe benefits after said date shall be
considered as illegal disbursement of public Funds.
Since the educational assistance or the mid-year social
amelioration is not among those allowances mentioned in
Sub-pars. 5.4 and 5.5 of CCC No. 10, the same shall be
discontinued effective November 1, 1989 and considering
that NTA paid its official/employees this type of
allowance, such payments shall be considered as illegal
disbursement of public funds.
The provision of Sec. 12 second sentence thereof as
invoked by the Administrator should be read in
conjunction with the first sentence thus —
Consolidation of Allowances and Compensation — All
allowances except for representation and transportation
allowances; clothing and laundry allowances;
subsistence [sic] allowance of marine officers and crew
on board government vessels and hospital personnel;
hazard pay; allowances of foreign service personnel
stationed abroad; and such other additional
compensation not otherwise specified herein as may be
determined by the DBM shall be deemed included in the
standardized salary rates herein prescribed. Such other
additional compensation, whether in cash or in kind,
being received by incumbents only as of July 1, 1989 not
integrated into the standardized salary rates shall
continue to be authorized. . . .
xxx xxx xxx
Premises considered and for lack of legal basis, the
herein request of the Administrator, NTA for the lifting of
the disallowance in question, may not be given due
course.5 [Emphasis; supplied]
Undaunted, petitioner found their way to this Court via
the present Petition for Review on Certiorari, filed on April
24, 1995, seeking the annulment of the said COA
23
Decision; theorizing that the respondent Commission on
Audit erred:
I.
IN HOLDING THAT THE PAYMENT OF SUBJECT
SOCIAL AMELIORATION/EDUCATIONAL ASSISTANCE
BENEFIT — A BENEFIT CONTINUOUSLY BEING
RECEIVED BY INDIVIDUAL PETITIONERS AND
OTHER NTA EMPLOYEES STARTING WAY BEFORE
THE EFFECTIVITY OF THE SALARY
STANDARDIZATION LAW (R.A. 6758) ON 1 JULY 1989
— IS NOT AUTHORIZED UNDER THE SAME LAW
(R.A. 6758) OR IS OTHERWISE WITHOUT LEGAL
BASIS.
II.
IN FAILING TO REALIZE AND CONSIDER THAT THE
DISALLOWANCE OF THE PAYMENT OF SUBJECT
SOCIAL AMELIORATION/EDUCATIONAL ASSISTANCE
BENEFIT IS CONSTITUTIVE OF DIMINUTION OF
COMPENSATION PROSCRIBED UNDER EXISTING
LAWS AND IN VIOLATION OF THE GENERAL
WELFARE CLAUSE OF THE CONSTITUTION;
III.
IN FAILING TO RECOGNIZE THAT INDIVIDUAL
PETITIONERS AND OTHER SIMILARLY SITUATED
NTA EMPLOYEES HAVE ACQUIRED A VESTED RIGHT
OVER SAID SOCIAL AMELIORATION/EDUCATIONAL
ASSISTANCE BENEFIT AND COA's DISALLOWANCE
THEREOF IS AN ILLEGAL VIOLATION OF SUCH
RIGHT.
Petitioners raise the pivotal issues: (1) whether or not the
social amelioration or educational assistance benefit
given to the individual petitioners prior to enactment of
R.A. 6758 is authorized under the law, (2) whether or not
the disallowance of the said benefit is tantamount to
diminution of pay, and (3) whether or not the individual
petitioners have acquired a vested right thereover.
FIRST ISSUE:
Proper Interpretation of Sections 12 and 17 of R.A. 6758
in Relation to Sub-paragraphs 4.1, 5.4 and 5.5 of
Corporate Compensation Circular No. 10, the
Implementing Rules and Regulation of R.A. 6758.
A. Sec. 12 and 17 of R.A. 6758, read:
Sec. 12: Consolidation of Allowances and Compensation
— All allowances, except for representation and
transportation allowances; clothing and laundry
allowances; subsistence allowance of marine officers and
crew on board government vessels and hospital
personnel; hazard pay; allowances of foreign service
personnel stationed abroad; and such other additional
compensation not otherwise specified herein as may be
24
determined by the DBM, shall be deemed included in the
standardized salary rates herein prescribed. Such other
additional compensation, whether in cash or in kind,
being received by incumbents only as of July 1, 1989 not
integrated into the standardized salary rates shall
continue to be authorized.
Existing additional compensation of any national
government official or employee paid from local funds of
a local government unit shall be absorbed into the basic
salary of said official or employee and shall be paid by
the National Government.
while
Sec. 17. Salaries of Incumbents — Incumbents of
positions presently receiving salaries and additional
compensation/fringe benefits including those absorbed
from local government units and other emoluments, the
aggregate of which exceeds the standardized salary rate
as herein prescribed, shall continue to receive such
excess compensation, which shall be referred to as
transition allowance. The transition allowance shall be
reduced by the amount of salary adjustment that the
incumbent shall received [sic] in the future.
B. Sec. 4.1 of CCC No. 10:
4.0 DEFINITION OF TERMS
4.1. The present salary of an incumbent for purposes of
this Circular shall refer to the sum total of actual basic
salary including allowances enumerated hereunder,
being received as of June 30, 1989 and certified and
authorized by the DBM.
4.1.1 Cost-of-Living Allowance (COLA)/Bank Equity Pay
(BEP) equivalent to forty percent (40%) of basic salary or
P300.00 per month, whichever is higher;
4.1.2 Amelioration Allowance equivalent to ten percent
(10%) of basic salary or P150.00 per month, which ever
is higher;
4.1.3 COLA granted to GOCCs/GFIs covered by the
Compensation and Position Classification Plan for the
regular agencies/offices of the National Government and
to GOCCs/GFIs following the Compensation and Position
Classification Plan under LOImp. No. 104/CCC No. 1 and
LOImp. No. 97/CCC No. 2, in the amount of P550. 00 per
month for those whose monthly basic salary is P1,500.00
and below, and P500.00 for those whose monthly basic
salary is P1,501.00 and above, granted on top of the
COLA/BEP mentioned in Item 4. 1.1 above;
4.1.4 Stabilization Allowance; and
4.1.5 Allowance/fringe benefits converted into "Transition
Allowance" pursuant to Memorandum Order No. 177, as
25
implemented by Corporate Budget Circular No. 15, both
series of 1988.
4.2 Allowances enumerated above are deemed
integrated into the basic salary, for the position effective
July 1, 1989.
4.3 Transition allowance, for purposes of this circular
shall mean the excess of the present salary of the
incumbent defined in Item 4.1 hereinabove, over the
eighth step of the Salary Grade to which his position is
allocated.
C. Sub-Paragraphs 5.4, 5.5 and 5.6 of CCC. No. 10:
5.0 IMPLEMENTING PROCEDURES
xxx xxx xxx
5.4 The rates of the following allowances/fringe benefits
which are not integrated into the basic salary and which
are allowed to be continued after June 30, 1989 shall be
subject to the condition that the grant of such benefit is
covered by statutory authority.
5.4.1 Representation and Transportation Allowances
(RATA) of incumbent of the position authorized to receive
the same at the highest amount legally authorized as of
June 30, 1989 of the level of his position within the
particular GOCC/GFI;
5.4.2 Uniform and Clothing Allowance at a rate as
previously authorized;
5.4.3 Hazard Pay as authorized by law;
5.4.4 Honoraria/additional compensation for employees
on detail with special projects of inter-agency
undertakings;
5.4.5 Honoraria for services rendered by researchers,
experts and specialists who are of acknowledged
authorities in their field of specialization;
5.4.6 Honoraria for lecturers and resource
persons/speakers;
5.4.7 Overtime Pay in accordance to Memorandum Order
No. 228;
5.4.8 Clothing/laundry allowances and subsistence of
marine officers and crew on board GOCCs/GFIs owned
vessels and used in their operations, and of hospital
personnel who attend directly to patients and who by
nature of their duties are required to wear uniforms;
5.4.9 Quarters Allowance of officials and employees who
are presently entitled to the same;
5.4.10 Overseas, Living Quarters and other allowances
presently authorized for personnel stationed abroad;
26
5.4.11 Night Differential of personnel on night duty;
5.4.12 Per Diems of members of governing Boards of
GOCCs/GFIs at the rate as prescribed in their respective
Charters;
5.4.13 Flying Pay of personnel undertaking aerial flights;
5.4.14 Per Diems/Allowances of Chairman and
Members/Staff of collegial bodies and Committees; and
5.4.15 Per Diems/Allowances of officials and employees
on official foreign and local travel outside of their official
station;
5.5 Other allowances/fringe benefits not likewise
Integrated into the basic salary and allowed to be
continued only for incumbents as of June 30, 1989
subject to the condition that the grant of the same is with
appropriate authorization either from the DBM, Office of
the President or legislative issuances are as follows.
5.5.1 Rice Subsidy;
5.5.2 Sugar Subsidy;
5.5.3 Death Benefits other than those granted by the
GSIS;
5.5.4 Medical/Dental/Optical Allowances/Benefits;
5.5.5 Children's Allowance;
5.5.6 Special Duty Pay/Allowance;
5.5.7 Meal Subsidy;
5.5.8 Longevity Pay; and
5.5.9 Teller's Allowance.
5.6 Payment of other allowance/fringe benefits and all
other forms of compensation granted on top of basic
salary, whether in cash or in kind, not mentioned in
Sub-paragraphs 5.4 and 5.5 above shall be discontinued
effective November 1, 1989. Payment made for such
allowance/fringe benefits after said date shall be
considered as illegal disbursement of public funds.
Petitioners maintain "that since they have been receiving
the social amelioration or educational assistance benefit
before July 1, 1989, when R.A No. 6758 took effect, and
the benefit was not integrated into their standardized
salary rate, they are entitled to receive it even after the
effectivity of the said Act"6 They base their claim on the
second sentence of Section 12 and on Section 17 of the
Salary Standardization Law which, for the sake of
thoroughness and clarity of discussion, we deem it
expedient to quote again, to wit:
Second Sentence of Section 12, R.A. 6758 — . . . Such
other additional compensation, whether in cash or in
kind, being received by incumbents only as of July 1,
27
1989 not integrated into the standardized salary rates
shall continue to be authorized;
xxx xxx xxx
Sec. 17: Salaries of Incumbents — Incumbents of
position presently receiving salaries and additional
compensation/fringe benefits including those absorbed
from local government units and other emoluments, the
aggregate of which exceeds the standardized salary rate
as herein prescribed, shall continue to be receive such
excess compensation, which shall be referred as
transition allowance. The transition allowance shall be
reduced by the amount of the salary adjustment that the
incumbent shall received in the future.
It is the submission of the Commission on Audit that
payment of the educational assistance in question is not
authorized not authorized under Republic Act No. 6758,
arguing "that the provision of Sec. 12, second sentence
thereof as invoked by the Administrator [representing the
petitioner herein] should be read in conjunction with the
first sentence. . . .;"7 and if the entire Section 12 is further
considered in relation to sub-paragraphs 5.4, 5.5 and 5.6
of CCC No. 10, respondent concluded that the grant of
subject educational assistance would have no legal basis
at all.
Confusion as to the proper interpretation of Section 12
springs from two seemingly contradictory provisions. The
last clause of the first sentence of Section 12, reads:
[A]nd such other additional compensation not otherwise
specified herein as may be determined by the DBM shall
be deemed included in the standardized salary rates
herein prescribed;
while the second sentence of Section 12 is to the
following effect:
Such other additional compensation, whether in cash or
in kind, being received by incumbents only as of July 1,
1989 not integrated into the standardized salary rates
shall continue to be authorized.
Before proceeding to rule on the proper interpretation of
the two provisos aforecited, the salient features of the
provision as a whole should first be pondered upon
tackled.
Under the first sentence of Section 12, all allowances are
integrated into the prescribed salary rates, except:
(1) representation and transportation allowances (RATA);
(2) clothing and laundry allowances;
(3) subsistence allowances of marine officers and crew
on board government vessels;
28
(4) subsistence allowance of hospital personnel;
(5) hazard pay;
(6) allowance of foreign service personnel stationed
abroad; and
(7) such other additional compensation not otherwise
specified in Section 12 as may be determined by the
DBM.
Analyzing No. 7, which is the last clause of the first
sentence of Section 12, in relation to the other benefits
therein enumerated, it can be gleaned unerringly that it is
a "catch-all proviso." Further reflection on the nature of
subject fringe benefits indicates that all of them have one
thing in common — they belong to one category of
privilege called allowances which are usually granted to
officials and employees of the government to defray or
reimburse the expenses incurred in the performance of
their official functions. In Philippine Ports Authority vs.
Commission on Audit,8 this Court rationalized that "if
these allowances are consolidated with the standardized
rate, then the government official or employee will be
compelled to spend his personal funds in attending to his
duties.
The conclusion — that the enumerated fringe benefits
are in the nature of allowance — finds support in
sub-paragraphs 5.4 and 5.5 of CCC No. 10.
Sub-paragraph 5.4 enumerates the allowance/fringe
benefits which are not integrated into the basic salary
and which may be continued after June 30, 1989 subject
to the condition that the grant of such benefit is covered
by statutory authority, to wit:
(1) RATA;
(2) Uniform and Clothing allowances;
(3) Hazard pay;
(4) Honoraria/additional compensation for employees on
detail with special projects or inter-agency undertakings;
(5) Honoraria for services rendered by researchers,
experts and specialists who are of acknowledged
authorities in their fields of specialization;
(6) Honoraria for lectures and resource persons or
speakers;
(7) Overtime pay in accordance to Memorandum Order
No. 228;
(8) Clothing/laundry allowances and subsistence
allowance of marine officers and crew on board
GOCCs/GFIs owned vessels and used in their
operations, and of hospital personnel who attend directly
to patients and who by nature of their duties are required
to wear uniforms;
29
(9) Quarters Allowance of officials and employees who
are presently entitled to the same;
(10) Overseas, Living Quarters and other allowances
presently authorized for personnel stationed abroad;
(11) Night differential of personnel on night duty;
(12) Per Diems of members of the governing Boards of
GOCCs/GFIs at the rate as prescribed in their respective
Charters;
(13) Flying pay of personnel undertaking aerial flights;
(14) Per Diems/Allowances of Chairman and Members or
Staff of collegial bodies and Committees; and
(15) Per Diems/Allowances of officials and employees on
official foreign and local travel outside of their official
station.
In addition, sub-paragraph 5.5 of the same Implementing
Rules provides for the other allowances/fringe benefits
not likewise integrated into the basic salary allowed to be
continued only for incumbents as of June 30, 1989
subject to the condition that the grant of the same is with
appropriate authorization either from the DBM, Office of
the President or legislative issuance's, as follows:
(1) Rice Subsidy;
(2) Sugar Subsidy;
(3) Death Benefits other than those granted by the GSIS;
(4) Medical/Dental/Optical Allowances/Benefits;
(5) Children's Allowances;
(6) Special Duty Pay/Allowance;
(7) Meal Subsidy;
(8) Longevity Pay; and
(9) Teller's Allowance.
On the other hand, the challenged financial incentive is
awarded by the government in order to encourage the
beneficiaries to pursue further studies and to help them
underwrite the expenses for the education of their
children and dependents. In other words, subject benefit
is in the nature of financial assistance and not of an
allowance. For the former, reimbursement is not
necessary while for the latter, reimbursement is required.
Not only that, the former is basically an incentive wage
which is defined as "a bonus or other payment made to
employees in addition to guaranteed hourly wages"9
while the latter cannot be reckoned with as a bonus or
additional income, strictly speaking.
30
It is indeed decisively clear that the benefits mentioned in
the first sentence of Section 12 and sub-paragraphs 5.4
and 5.5 of CCC No. 10 are entirely different from the
benefit in dispute, denominated as Educational
Assistance. The distinction elucidated upon is material in
arriving at the correct interpretation of the two seemingly
contradictory provisions of Section 12.
Cardinal is the rule in statutory constriction "that the
particular words, clauses and phrases should not be
studied as detached and isolated expressions, but the
whole and every part of the statute must be considered in
fixing the meaning of any of its parts and in order to
produce a harmonious whole. A statute must so
construed as to harmonize and give effect to all its
provisions whenever possible."10 And the rule — that
statute must be construed as a whole — requires that
apparently conflicting provisions should be reconciled
and harmonized, if at all possible.11 It is likewise a basic
precept in statutory construction that the intent of the
legislature is the controlling factor in the interpretation of
the subject statute.12 With this rules and the foregoing
distinction elaborated upon, it is evident that the two
seemingly irreconcilable propositions are susceptible to
perfect harmony.
Accordingly, the Court concludes that the under the
aforesaid "catch-all proviso," the legislative intent is just
to include the fringe benefits which are in the nature of
allowances and since the benefits under controversy is
not the same category, it is safe to hold that subject
educational assistance is not one of the fringe benefits
within the contemplation of the first sentence of Section
12 but rather, the second sentence of Section 12, in
relation to Section 17 of R.A. No. 6758, considering that
(1) the recipients were incumbents when R.A. No. 6758
took effect on July 1, 1989, (2) were, in fact, receiving the
same, at the time, and (3) such additional compensation
is distinct and separate from the specific allowances
above-listed, as the former is not integrated into the
standardized salary rate. Simply stated, the challenged
benefit is covered by the second sentence of Section 12
of R.A. No. 6758, the application of sub-paragraphs 5.4
and 5.5 of CCC No. 10 being only confined to the first
sentence of Section 12, particularly the last clause
thereof which amplifies the "catch-all proviso."
Furthermore, the non-inclusion by the Department of
Budget and Management of the controverted educational
assistance in Sub-paragraph 5.4 and 5.5 of CCC No. 10
is expected since the term allowance does not include
the questioned benefit which belongs to a different
genus. The argument that the said fringe benefit should
be disallowed on the ground that it is not mentioned in
the Implementing Rules of the Statute is consequently
fallacious. It is a settled rule of legal hermeneutics that
the implementing rules and regulations (CCC No. 10, in
this case) cannot amend the act of Congress (R.A..
6758). The second sentence of R.A. No. 6758 expressly
31
provides that "such additional compensation . . . being
received by incumbents . . . not integrated into the
standardized salary rates shall continue to be
authorized." To be sure, the said Circular cannot go
beyond the terms and provisions of the statute as to
prohibit something permitted and allowed by law.13 The
Circular cannot extend the law or expand its coverage as
the power to amend or repeal a statute is vested in the
legislature.14
Conformably, as mandated by the second sentence of
Section 12, in relation to Section 17 of the Republic Act
under interpretation, the mid-year educational assistance
should continue to be authorized.
law. Hence, while it cannot be said that the NTA
employees have acquired a vested right over the
educational assistance in dispute as it is always subject
to availability of funds,16 nevertheless, disallowing the
same, where funds are available as in the case under
consideration, would be violative of the principle of equity.
WHEREFORE, the petition is hereby GRANTED; the
assailed COA Decision, No. 95-108 is SET ASIDE, and
the disallowance in question LIFTED. No pronouncement
as to cost.
SO ORDERED.

THE SECOND AND THE THIRD ISSUES:

That the Disallowance of the Payment of Subject

Educational Assistance Constitutes Diminution of
Compensation; That the NTA Employees Have Already
Acquired a Vested Right Over the Same.

Gleanable from the wordings of the second sentence of

Section 12 of R.A. No. 6758 is the intention of Congress
to prevent any diminution of the pay and the benefits
being received by incumbents at the time of the
enactment of the Salary Standardization Law. Verily,
disallowing any such benefit is against the spirit of the
Statute and is inconsistent with the principle of equity
which "regards the spirit and not the letter. . ."15 of the

32

4. La Suerte Cigar & Cigarette Factory vs. CA,
November 11, 2014
LEONEN, J.:
These cases involve the taxability of stemmed leaf
tobacco imported and locally purchased by cigarette
manufacturers for use as raw material in the manufacture
of their cigarettes. Under the National Internal Revenue
Code of 1997 (1997 NIRC), before it was amended on
December 19, 2012 through Republic Act No. 10351[1]
(Sin Tax Law), stemmed leaf tobacco is subject to an
excise tax of P0.75 for each kilogram thereof.[2] The 1997
NIRC further provides that stemmed leaf tobacco — “leaf
tobacco which has had the stem or midrib removed”[3] —
“may be sold in bulk as raw material by one manufacturer
directly to another without payment of the tax, under such
conditions as may be prescribed in the rules and
regulations prescribed by the Secretary of Finance.”[4]
This is a consolidation of six petitions for review of
several decisions of the Court of Appeals, involving three
cigarette manufacturers and the Commissioner of
Internal Revenue.
G.R. No. 125346 is an appeal[5] from the Court of
Appeals (Sixth Division) that reversed[6] the Court of Tax
Appeals’ decision[7] and held petitioner La Suerte Cigar &
Cigarette Factory (La Suerte) liable for deficiency specific
tax on its purchase of imported and locally produced
stemmed leaf tobacco and sale of stemmed leaf tobacco
to Associated Anglo-American Tobacco Corporation
(AATC) during the period from January 1, 1986 to June
30, 1989.
G.R. Nos. 136328–29 is an appeal[8] by the
Commissioner of Internal Revenue (Commissioner) from
the decision[9] of the Court of Appeals that affirmed the
Court of Tax Appeals’ rulings[10] that Fortune Tobacco
Corporation (Fortune) was not obliged to pay the excise
tax on its importations of stemmed leaf tobacco for the
periods from January 1, 1986 to June 30, 1989 and July
1, 1989 to November 30, 1990.
In G.R. No. 148605, Sterling Tobacco Corporation
(Sterling) appeals[11] the decision[12] of the Court of
Appeals that reversed the Court of Tax Appeals’
decision[13] and held it liable to pay deficiency excise
taxes on its importation and local purchases of stemmed
leaf tobacco from November 1986 to June 24, 1989.
G.R. No. 144942 is an appeal[14] from the Court of
Appeals’ decision[15] that affirmed the Court of Tax
Appeals’ decision[16] and ordered the refund of specific
taxes paid by La Suerte on its importation of stemmed
leaf tobacco in April 1995.
33
In G.R. No. 158197, La Suerte sought to appeal[17] the
decision[18] of the Court of Appeals holding it liable for
deficiency specific tax on its local and imported
purchases of stemmed leaf tobacco and those it sold for
the period from June 21, 1989 to November 20, 1990.
Finally, in G.R. No. 165499, La Suerte again sought to
appeal by certiorari[19] the decision[20] of the Court of
Appeals reversing the Court of Tax Appeals and holding it
liable for deficiency specific tax on its importation of
stemmed leaf tobacco in March 1995.
Factual background
Overview of cigarette manufacturing
The primary component of cigarettes is tobacco, a
processed product derived from the leaves of the plants
in the genus Nicotiana.[21] Most cigarettes contain a
mixture or blend of several types of tobacco from a
variety of sources.
The tobacco types grown in the Philippines are: Virginia
(or ‘flue-cured’),[22] which accounts for 59.35% of
tobacco production, Burley (or ‘bright air-cured’),[23]
which makes up 22.21%, and the Native (or ‘dark
air-cured),[24] which makes up the remaining 18.44%.[25]
“[T]he ‘native’ type is normally categorized into three:
cigar filler type, wrapper type and chewing type, or . . .
‘Batek’ tobacco.”[26] Virginia and Burley, considered as the
aromatic type, are intended for cigarette manufacturing.
Growing and harvesting
“Tobacco seeds undergo a process of germination, which
takes about 7 to 10 days, depending on the tobacco
varieties. . . . The tobacco seedlings are then sown in
cold frames or hotbeds to prevent attacks from insects,
and then transplanted into the fields”[27] after 45 to 65
days.[28]
Harvesting begins 55 to 60 days after transplanting.[29] A
farmer carries out either priming (leaf by leaf) or stalk
harvesting (by the whole plant).[30]
Curing
“After harvest, tobacco is stored for curing, which allows
for the slow oxidation and degradation of carotenoids.
This allows for the leaves to take on properties that are
usually attributed to the ‘smoothness’ of the smoke.”[31]
“Curing methods vary with the type of tobacco grown.
The tobacco barn design varies accordingly.”[32] There are
two main ways of curing tobacco in the Philippine setting:
34

1)Air-curing (for Burley and Native
tobacco) “is carried out by hanging the
tobacco in well-ventilated barns,
where the tobacco is allowed to dry
over a period of 4 to 8 weeks.
Air-cured tobacco is generally low in
sugar content, which gives the
tobacco smoke a light, smooth,
semi-sweet flavor. These tobacco
leaves usually have a high nicotine
content[;]”[33] and
2)Flue-curing (for Virginia tobacco)
process “starts by the sticking of
tobacco leaves, which are then hung
from tier-poles in curing barns. The
procedure will generally take about a
week. Flue-cured tobacco generally
produces cigarette tobacco, which
usually has a high content of sugar,
with medium to high levels of
nicotine.”[34]
Once cured, the leaves are sorted into grades based on
size, color, and quality, and packed in standard bales.[35]
The bales are then moved to accredited trading centers
where they are purchased by leaf buyers such as
wholesale tobacco dealers and exporters or cigarette
manufacturing companies.[36]
Redrying and aging
After purchase, leaf tobacco is re-dried and then added
with moisture to make the tobacco pliable enough to
remove its large stems.[37] The leaves are stripped or
de-stemmed, either by hand or machine, cleaned and
compressed into boxes or porous wooden vats called
hogsheads, and aged.[38] Thereafter, the leaves are either
exported or used for the manufacture of cigarettes,
cigars, and other tobacco products.
Primary processing[39
In the cigarette factory, the tobacco leaves undergo a
conditioning process where “high temperatures and
humidity restore moisture to suitable levels for cutting
and blending tobacco and completing the
[40]
cigarette-making process.”
“[T]obaccos are precisely cut and blended according to . .
. formulas, or recipes, to produce tobaccos for various
brands of cigarettes. These brand recipes include
ingredients and flavors that are added to the tobacco to
give each brand its unique characteristics.”[41]
Cigarette making and packing[42]
35
“The blended tobacco — often referred to as “filler” or
“cut-filler” — . . . is delivered by a pneumatic feed system
to cigarette making machines . . . within the factory.”[43]
The machine disperses the shredded tobacco over a
continuous roll of cigarette paper and cuts the paper to
the desired length. The completed cigarettes are
subsequently packed, sealed, and placed in cartons.
Cigarette manufacturers
La Suerte Cigar & Cigarette Factory (La Suerte),[44]
Fortune Tobacco Corporation (Fortune),[45] and Sterling
Tobacco Corporation (Sterling)[46] are domestic
corporations engaged in the production and manufacture
of cigars and cigarettes. These companies import leaf
tobacco from foreign sources and purchase locally
produced leaf tobacco to be used in the manufacture of
cigars and cigarettes.[47]
The transactions of these cigarette manufacturers
pertinent to these consolidated cases are the following:
1. La Suerte’s local purchases, importations, and
sale of stemmed leaf tobacco from January 1,
1986 to June 30, 1989 (G.R. No. 125346), and
from June 1989 to November 1990 (G.R. No.
158197), and importations in March 1995 (G.R.
No. 165499) and April 1995 (G.R. No. 144942);
2. Fortune’s importation of tobacco strips from
January 1, 1986 to June 30, 1989, and from July
1, 1989 to November 30, 1990 (G.R. Nos.
136328–29); and
3. Sterling’s importations and local purchases of
stemmed leaf tobacco from November 1986 to
June 24, 1989 (G.R. No. 148605).
History of applicable tax provisions
The first tax code came into existence in 1939 with the
enactment of Commonwealth Act No. 466[48] (1939
Code). Section 136 of the 1939 Code imposed specific
(excise) taxes on manufactured products of tobacco, but
excluded cigars and cigarettes, which were subject to tax
under a different section.[49] Section 136 provided thus:
SECTION 136. Specific Tax on Products of Tobacco. –
On manufactured products of tobacco, except cigars,
cigarettes, and tobacco specially prepared for chewing so
as to be unsuitable for consumption in any other manner,
but including all other tobacco twisted by hand or
reduced into a condition to be consumed in any manner
other than by the ordinary mode of drying and curing; and
on all tobacco prepared or partially prepared for sale or
consumption, even if prepared without the use of any
machine or instrument and without being pressed or
sweetened; and on all fine-cut shorts and refuse, scraps,
clippings, cuttings, and sweepings of tobacco, there shall
be collected on each kilogram, sixty centavos.
36
 On tobacco specially prepared for chewing so as to be
unsuitable for use in any other manner, on each kilogram,
forty-eight centavos. (Emphasis supplied)
Section 132 of the 1939 Code, however, by way of
exception, provided that “stemmed leaf tobacco . . . may
be sold in bulk as raw material by one manufacturer
directly to another, under such conditions as may be
prescribed in the regulations of the Department of
Finance, without the prepayment of the tax.” Section 132
stated:
SECTION 132. Removal of Tobacco Products Without
Pre-payment of Tax. – Products of tobacco entirely unfit
for chewing or smoking may be removed free of tax for
agricultural or industrial use, under such conditions as
may be prescribed in the regulations of the Department
of Finance; and stemmed leaf tobacco, fine-cut shorts,
the refuse of fine-cut chewing tobacco, refuse, scraps,
cuttings, clippings and sweepings of tobacco may be sold
in bulk as raw material by one manufacturer directly to
another, under such conditions as may be prescribed
in the regulations of the Department of Finance,
without the pre-payment of the tax.
"Stemmed leaf tobacco," as herein used means leaf
tobacco which has had the stem or midrib removed. The
term does not include broken leaf tobacco. (Emphasis
supplied)
On September 29, 1954, upon the recommendation of
then Acting Collector of Internal Revenue J. Antonio
Araneta, the Department of Finance promulgated
Revenue Regulations No. V-39 (RR No. V-39), or “The
Tobacco Products Regulations,” relative to “the
enforcement of the provisions of Title IV of the [1939 Tax
Code] in so far as they affect the manufacture or
importation of, and the collection and payment of the
specific tax on, manufactured tobacco or products of
tobacco.”[50] Section 20(a) of RR No. V-39, which lays the
rules for tax exemption on tobacco products, states:
SECTION 20. Exemption from tax of tobacco
products intended for agricultural or industrial
purposes. — (a) Sale of stemmed leaf tobacco, etc.,
by one factory to another. — Subject to the limitations
herein established, products of tobacco entirely unfit for
chewing or smoking may be removed free of tax for
agricultural or industrial use; and stemmed leaf tobacco,
fine-cut shorts, the refuse of fine-cut chewing tobacco,
refuse, scraps, cuttings, clippings, and sweepings of
tobacco may be sold in bulk as raw materials by one
manufacturer directly to another without the prepayment
of specific tax.
Stemmed leaf tobacco, fine-cut shorts, the refuse of
fine-cut chewing tobacco, scraps, cuttings, clippings, and
sweeping of leaf tobacco or partially manufactured
tobacco or other refuse of tobacco may be transferred
from one factory to another under an official L-7 invoice
37
on which shall be entered the exact weight of the tobacco
at the time of its removal, and entry shall be made in the
L-7 register in the place provided on the page of
removals. Corresponding debit entry will be made in the
L-7 register book of the factory receiving the tobacco
under heading
“Refuse, etc., received from other factory,” showing the
date of receipt, assessment and invoice numbers, name
and address of the consignor, form in which received,
and the weight of the tobacco. This paragraph should
not, however, be construed to permit the transfer of
materials unsuitable for the manufacture of tobacco
products from one factory to another. (Emphasis
supplied)
Sections 10 and 11 of RR No. V-39 enumerate and
describe the record books to be kept and used by
manufacturers of tobacco products, viz:
SECTION 10. (a) Register, auxiliary, and stamps
requisition books for manufacturers. — The Collector
of Internal Revenue shall from time to time supply
provincial revenue agents or the Chief of the Tobacco Tax
Section with the necessary number of manufacturers
official register books and official auxiliary register books
as may be required in each locality by manufacturers of
tobacco products. Whenever any manufacturer shall
have qualified himself as such by executing a proper
bond, registering his factory, and paying the privilege tax
and shall have complied with all the requirements of
engaging in such business contained in the National
Internal Revenue Code and in these regulations, the
internal revenue agent within whose district the factory is
located shall deliver to said manufacturer the necessary
official register books and auxiliary register books. These
books consist of the following:
B.I.R. No. 31.09—Official Register Book, A-3 for
manufacturers of chewing and smoking tobacco.
B.I.R. No. 31.10—Manufactured tobacco (Transcript
sheet of above).
B.I.R. No. 31.18—Official Register Book, A-4, for
manufacturers of cigar.
B.I.R. No. 31.19—(Transcript sheet of the above).
B.I.R. No. 31.27—Official Register Book, A-5, for
Manufacturers of cigarettes.
B.I.R. No. 31.28—(Transcript sheet of above).
B.I.R. No. 31.01—Official Register Book, L-7, record of
raw materials for manufacturers of any class of tobacco
products.
B.I.R. No. 31.02—(Transcript sheet of above)[.]
38
B.I.R. No. 31.46—Auxiliary Register Book, L-7-1/2, bale
book, for manufacturers of any class of tobacco products.
B.I.R. No. 31.47—(Transcript sheet of above).
B.I.R. No. 31.12—Stamp requisition book,
manufacturers of manufactured tobacco.
B.I.R. No. 31.21—Stamp requisition book,
manufacturers of cigars.
B.I.R. No. 31.30—Stamp requisition book,
manufacturers of cigarettes.
B.I.R. No. 31.05—L-7 Official Invoice Book for, use in
connection with L-7 register book.
B.I.R. No. 31.05—L-7-1/2 Official Invoice Book, for use in
connection with L-7-1/2 bale book.
(b) General nature of official register and auxiliary
register books. — The L-7 official register book is the
record of all raw materials used in the manufacture of
tobacco products of all description in the factory. It is the
primary record of the internal operations of the factory. It
shows the raw materials used in the manufacture and the
articles actually manufactured or produced. The
Schedule A register books are the record of the articles
actually manufactured or produced, and transferred from
the credit side of the official register book, L-7. They
show the amount of taxes paid and the name of the
person to whom the finished products is consigned or
sold when leaving the factory. The bale book[,] L-7-1/2, is
an auxiliary to the L-7 official register book.
All official register books and other official records herein
for
required of manufacturers shall be kept in the factory
premises, or in the factory warehouse, in the case of bale
for books, and open to inspection by any internal revenue
officer at all times of the day or night.
for ....
SECTION 11. Entries to be made in the official
register and auxiliary register books; monthly
transcripts. — (a) Official bale book (L-7-1/2). All leaf
tobacco received in any factory or factory warehouse
shall be debited, and any removal of tobacco from the
factory shall be credited in the official bale book; except
cuttings, clippings, sweepings, and other partially
manufactured tobacco, which shall be credited in the L-7
register book.
The Collector of Internal Revenue may in his discretion
waive the requirements of keeping an official bale book
by small factories.
(b) The Official Register Book (L-7). — One L-7 books
shall suffice for each manufacturer of tobacco products,
regardless of the classes of tobacco manufactured by
him. All loose leaf tobacco received in the factory proper
39
and all bales of leaf tobacco which are opened in the
factory for use in the manufacture of tobacco products
shall be entered in the L-7 official register book under the
heading “Received from Dealers” at the net weights. In
the column headed “Name[”] and “Address” shall be
shown the words “Transferred from tobacco factory
warehouse”. All leaf tobacco received into a factory must
be entered in the official bale book pertaining to the
factory and bales of leaf tobacco shall not be taken up in
the L-7 register book until said bales are transferred for
use and credited in the official bale book. While leaf
tobacco must be taken in the official bale book, this is
done for statistical purposes only. As soon as it enters the
factory for use in manufacture it should be taken up in the
L-7 register book and credited in the official bale book.
All removals of waste of tobacco, whether transferred to
other factories, removed for agricultural or industrial
purposes, or destroyed on the premises or elsewhere,
shall be entered in the official register book, L-7, under
the heading “Raw Materials Removed”, showing all
information required therein. (Emphasis supplied)
Section 2 of RR No. V-39 broadly defined “manufactured
products of tobacco” and “manufacturer of tobacco
products” as follows:
Section 2. Definition of terms. — When used in there
[sic] regulations, the following terms shall be given the
interpretations indicated in their respective definitions
given below, except where the context indicates
otherwise:
(a) “Manufactured products of tobacco” shall include
cigars, cigarettes, smoking tobacco, chewing, snuff, and
all other forms of manufactured and partially
manufactured tobacco, as defined in section 194 (M)[51] of
the National Internal Revenue Code.
(b) “Manufacturer of tobacco products” shall include all
persons engaged in the manufacture of any of the forms
of tobacco mentioned in the next preceding paragraph.
In 1967, the Secretary of Finance promulgated Revenue
Regulations No. 17-67 (RR No. 17-67), as amended,[52]
or the “Tobacco Revenue Regulations on Leaf, Scrap,
Other Partially Manufactured Tobacco and Other Tobacco
Products; Grading, Classification, Inspection, Shipments,
Exportation, Importation and the Manufacturers thereof
under the provisions of Act No. 2613, as amended.”
Section 2(i) of RR No. 17-67 defined a “manufacturer of
tobacco” and included in the definition one who prepares
partially manufactured tobacco. Section 2(m) defined
“partially manufactured tobacco” as including stemmed
leaf tobacco. Thus, Sections 2(i) and (m) read:
40
(i)"Manufacturer of tobacco" — Includes
every person whose business it is to
(2 “Long-filler” — handstripped tobacco
manufacture tobacco o[r] snuff or who
) of good, long pieces of broken leaf
employs others to manufacture
usable as filler for cigars without
tobacco or snuff, whether such
further preparation, and free from
manufacture be by cutting, pressing
mold, dust stems and cigar cuttings.
(not baling), grinding, or rubbing
(grating) any raw or leaf tobacco, or
otherwise preparing raw or leaf
tobacco, or manufactured or partially (3 “Short-filler” — handstripped or
manufactured tobacco and snuff, or ) machine-stripped tobacco, clean,
putting up for consumption scraps, good, short pieces of broken leaf,
refuse, or stems of tobacco resulting which will not pass through a screen
from any process of handling tobacco of two inches (2") mesh.
stems, scraps, clippings, or waste by
sifting, twisting, screening or by any
other process.
(4 “Cigar-cuttings” — clean cuttings or
) clippings from cigars, unsized with
.... any other form of tobacco.

(m) “Partially manufactured tobacco” — Includes:

(5 “Machine-scrap tobacco” —
(1 “Stemmed leaf” — handstripped
) machine-threshed, clean, good
) tobacco, clean, good, partially broken
tobacco, not included in any of the
leaf only, free from mold and dust.

41
 above terms, usable in the cigarette manufacturers were considered L-7 permittees.
manufacture of tobacco products. Section 3 of RR No. 17-67 reads:

(a L-3 — Wholesale leaf tobacco dealer.

)
(6 “Stems” — midribs of leaf tobacco
) removed from the whole leaf or
broken leaf either by hand or
machine.
(b L-3F — Wholesale leaf tobacco dealer.
) Issued only in favor of Farmer's
Cooperative Marketing Association
(FaCoMas) duly organized in accordance
(7 “Waste tobacco” — denatured with law. [This function relative to tobacco
) tobacco; powder or dust, refuse, unfit trading was transferred to the Philippine
for human consumption; discarded Virginia Tobacco Administration (PVTA)
materials in the manufacture of under Section 15 of Republic Act No.
tobacco products, which may include 2265].
stems.

Section 3 of RR No. 17-67 classified entities that dealt (c L-3R — Wholesale leaf tobacco dealers.
with tobacco according to the type of permit that the ) Issued only in favor of persons or entities
Bureau of Internal Revenue issued to each entity. Under having fully equipped Redrying Plants.
this classification, wholesale leaf tobacco dealers were
considered L-3 permittees. Those (referring to wholesale
leaf tobacco dealers) that reprocess partially
manufactured tobacco for export, for themselves, and/or (d L-3-¼ — Buyers for wholesale leaf
for other L-6 or L-7 permittees were considered L-6 ) tobacco dealers.
permittees. Manufacturers of tobacco products such as

42
(e L-4 — Wholesale leaf tobacco dealers.
) Issued only in favor of persons or entities
(2 Re-process partially manufactured
having flue-curing barns, who may
) tobacco for themselves, or for other
purchase or receive green Virginia leaf
tobacco from bona fide tobacco planters L-6 or L-7 permittees;
only, or handle green leaf of their own
production, which tobacco shall be sold or
transferred only to holders of L-3 and
L-3R permits after flue-curing the tobacco. (3 Sell their partially manufactured
) tobacco to other L-6 permittees.

(f)L-5 — Tobacco planters selling to

consumers part or the whole of their (h L-7 — Manufacturers of tobacco products.
tobacco production. ) [L-7 ½ designates an auxiliary registered
book (bale books), for manufacturers of
tobacco products.]

(g L-6 — Wholesale leaf tobacco dealers

) who, exclusively for export, except as
otherwise provided for in these (i) B-14 — Wholesale leaf tobacco dealers
regulations, perform the following (Privilege tax receipt)
functions:

(j) B-14 (a) — Retail leaf tobacco dealers

(1 Handstripped and/or thresh whole (Privilege tax receipt)
) leaf tobacco for themselves or for
other L-6 or L-7 permittees;

43
La Suerte contends that on December 12, 1972, then
Internal Revenue Commissioner Misael P. Vera issued a
ruling which declared that:
. . . . The subsequent sale or transfer by the L-6/L-3R
permittee for export or to an L-7-1/2 for use in the
manufacture of cigars or cigarettes may also be allowed
without the prepayment of the specific tax.[53]
Almost 40 years from the enactment of the 1939 Tax
Code, Presidential Decree No. 1158-A, otherwise known
as the “National Internal Revenue Code of 1977,” was
promulgated on June 3, 1977, to consolidate and
integrate the various tax laws which have so far amended
or repealed the provisions found in the 1939 Tax Code.
Section 132 was renumbered as Section 144, and
Section 136 as Section 148. Sections 144 and 148, read:
SEC. 144. Removal of tobacco products without
prepayment of tax.—Products of tobacco entirely unfit for
chewing or smoking may be removed free of tax for
agricultural or industrial use, under such conditions as
may be prescribed in the regulations of the Department
of Finance, and stemmed leaf tobacco, fine-cut shorts,
the refuse of fine-cuts chewing tobacco, re-refuse,
scraps, cuttings, clippings, stems or midribs, and
sweepings of tobacco may be sold in bulk as raw
material by one manufacturer directly to another, under
such conditions as may be prescribed in the regulations
of the Department of Finance, without the prepayment of
the tax
“Stemmed leaf tobacco”, as herein used means leaf
tobacco which has had the stem or midrib removed. The
term does not include broken leaf tobacco.
...
SEC. 148. Specific tax on products of tobacco.—On
manufactured products of tobacco, except cigars,
cigarettes, and tobacco specially prepared for chewing so
as to be unsuitable for consumption in any other manner,
but including all other tobacco twisted by hand or
reduced into a condition to be consumed in any manner
other than by the ordinary mode of drying and curing; and
on all tobacco prepared or partially prepared for sale or
consumption, even if prepared without the use of any
machine or instrument and without being pressed or
sweetened; and on all fine-cut shorts and refuse, scraps,
clippings, cuttings, stems, and sweepings of tobacco,
there shall be collected on each kilogram, seventy-five
centavos:
Provided, however, That fine-cut shorts and refuse,
scraps, clippings, cuttings, stems and sweepings of
tobacco resulting from the handling, or stripping of whole
leaf tobacco may be transferred, disposed of, or
otherwise sold, without prepayment of the specific tax
herein provided for under such conditions as may be
prescribed in the regulations promulgated by the
44
Secretary of Finance upon recommendation of the
Commissioner if the same are to be exported or to be
used in the manufacture of other tobacco products on
which the specific tax will eventually be paid on the
finished product.
On tobacco specially prepared for chewing so as to be
unsuitable for use in any other manner, on each kilogram,
sixty centavos.
Sections 144 and 148 were subsequently renumbered as
Sections 120 and 125 respectively under Presidential
Decree No. 1994,[54] which took effect on January 1, 1986
(1986 Tax Code); then as Sections 137 and 141 under
Executive Order No. 273;[55] and finally as Sections 140
and 144 under Republic Act No. 8424 or the “Tax Reform
Act of 1997.” However, the provisions remained basically
unchanged.
The business transactions of La Suerte, Fortune, and
Sterling that the Commissioner found to be taxable for
specific tax took place during the effectivity of the 1986
Tax Code, as amended by Executive Order No. 273. The
pertinent provisions are Sections 137 and 141, thus:
SEC. 137. Removal of tobacco products without
prepayment of tax. – Products of tobacco entirely unfit for
chewing or smoking may be removed free of tax for
agricultural or industrial use, under such conditions as
may be prescribed in the regulations of the Ministry of
Finance. Stemmed leaf tobacco, fine-cut shorts, the
refuse of fine-cut chewing tobacco, scraps, cuttings,
clippings, stems or midribs, and sweepings of tobacco
may be sold in bulk as raw material by one manufacturer
directly to another, without payment of the tax under such
conditions as may be prescribed in the regulations of the
Ministry of Finance.
‘Stemmed leaf tobacco,' as herein used, means leaf
tobacco which has had the stem or midrib removed. The
term does not include broken leaf tobacco.
....
SEC. 141. Tobacco Products. – There shall be collected
a tax of seventy-five centavos on each kilogram of the
following products of tobacco:
(a) tobacco twisted by hand or reduced into a condition to
be consumed in any manner other than the ordinary
mode of drying and curing;
(b) tobacco prepared or partially prepared with or without
the use of any machine or instruments or without being
pressed or sweetened; and
(c) fine-cut shorts and refuse, scraps, clippings, cuttings,
stems and sweepings of tobacco.
45
Fine-cut shorts and refuse, scraps, clippings, cuttings,
stems and sweepings of tobacco resulting from the
handling or stripping of whole leaf tobacco may be
transferred, disposed of, or otherwise sold, without
prepayment of the specific tax herein provided for under
such conditions as may be prescribed in the regulations
promulgated by the Ministry of Finance upon
recommendation of the Commissioner, if the same are to
be exported or to be used in the manufacture of other
tobacco products on which the excise tax will eventually
be paid on the finished product.
On tobacco specially prepared for chewing so as to be
unsuitable for use in any other manner, on each kilogram,
sixty centavos.
Parenthetically, the present provisions explicitly state the
following:
Stemmed leaf tobacco, tobacco prepared or partially
prepared with or without the use of any machine or
instrument or without being pressed or sweetened,
fine-cut shorts and refuse, scraps, clippings, cuttings,
stems, midribs, and sweepings of tobacco resulting from
the handling or stripping of whole leaf tobacco shall be
transferred, disposed of, or otherwise sold, without any
prepayment of the excise tax . . . if the same are to be
exported or to be used in the manufacture of cigars,
cigarettes, or other tobacco products on which the excise
tax will eventually be paid on the finished product, under
such conditions as may be prescribed in the rules and
regulations promulgated by the Secretary of Finance,
upon recommendation of the Commissioner.[56]
BIR assessments
G.R. No. 125346
Sometime in June, 1989, a team of examiners from the
Bureau of Internal Revenue, led by Crisanto G. Luna,
Revenue Officer III of the Field Operation Division of the
Excise Tax Service, conducted an examination of the
books of La Suerte by virtue of a letter of authority issued
by then Commissioner Jose U. Ong.
On January 3, 1990, La Suerte received a letter from
then Commissioner Jose U. Ong demanding the payment
of P34,934,827.67 as deficiency excise tax on La
Suerte’s entire importation and local purchase of
stemmed leaf tobacco for the period covering January 1,
1986 to June 30, 1989.
On January 12, 1990, La Suerte . . . protest[ed] the
excise tax deficiency assessment . . . stressing that the
BIR assessment was based solely on Section 141(b) of
the Tax Code without, however, applying Section 137
thereof, the more specific provision, which expressly
allows the sale of stemmed leaf tobacco as raw material
by one manufacturer directly to another without payment
46
of the excise tax. However, in a letter, dated August 31,
1990, Commissioner Jose U. Ong denied La Suerte’s
protest, insisting that stemmed leaf tobacco is subject to
excise tax “unless there is an express grant of exemption
from [the] payment of tax.”
In a letter dated October 17, 1990, Commissioner Ong
reiterated his demand for the payment of the alleged
deficiency excise taxes due from La Suerte, to wit:
“Please be informed that in an investigation conducted by
this Office, it was ascertained that you incurred a
deficiency specific tax on your importation and local
purchase of stemmed leaf tobacco covering the period
from January 1, 1986 to June 30, 1989 in the total
amount of P34,904,247.00 computed as follows:
STEMMED–LEAF TOBACCO
Imp 13,918 P10,438,848.00
orte ,465
d kls. x
P0.75
Loc 32,620 24,465,399.00
al ,532
kls. x
0.75
Total Amount Due (Basic Tax) - - - - - - - - - - -
-P34,904,247.00
. . . .” (page 99, Rollo)
On December 6, 1990, La Suerte filed with the Court of
Tax Appeals a Petition for Review seeking for the
annulment of the assessments. . .
. . . On July 13, 1995, the Tax Court rendered [its]
Decision, the dispositive portion of which reads[:]
“WHEREFORE, in all the foregoing, the assessment of
alleged deficiency specific tax in the amount of
P34,904,247.00 issued by the Respondent is hereby
CANCELLED for lack of merit.
SO ORDERED.”[57]
The Commissioner appealed the Court of Tax Appeals’
decision before the Court of Appeals. On December 29,
1995, the Court of Appeals Sixth Division ruled against
La Suerte and found that RR No. V-39 limits the tax
exemption on transfers of stemmed leaf tobacco to
transfers between two L-7 permittees.[58] The Court of
Appeals ruled as follows:
IN THE LIGHT OF ALL THE FOREGOING, the Decision
appealed from is hereby REVERSED and SET ASIDE.
47
Respondent is ordered to pay the petitioner
Commissioner of Internal Revenue the amount of
P34,904,247.00 as deficiency specific tax on its
importations and local purchases of stemmed leaf
tobacco and its sale of stemmed leaf tobacco to
Associated Anglo-American Tobacco Corporation
covering the period from January 1, 1986 to June 30,
1989, plus 25% surcharge for late payment and 20%
interest per annum from October 17, 1990 until fully paid
pursuant to sections 248 and 249 of the Tax Code.
SO ORDERED.[59]
La Suerte filed a motion for reconsideration, which was
denied by the Court of Appeals in its June 7, 1996
resolution.[60]
On August 2, 1996, La Suerte filed the instant petition for
review,[61] praying for the reversal of the Court of Appeals’
decision and cancellation of the assessment by the
Commissioner. La Suerte raises the following grounds in
support of its prayer:
1. THE COURT OF APPEALS ERRED WHEN IT
CONSIDERED SECTION 20 (A) OF RR NO. V-39,
SINCE THE COMMISSIONER RAISED IT FOR
THE FIRST TIME IN THE COURT OF APPEALS
2. THE COURT OF APPEALS ERRED WHEN IT
HELD THAT SECTION 20(A) OF RR NO. V-39
RESTRICTS THE APPLICATION OF SECTION
137 OF THE TAX CODE, SINCE LANGUAGE IN
SEC. 137 IS UNQUALIFIED, WHILE SEC. 20(A)
CONTAINS NO RESTRICTIVE LANGUAGE
3. THE COURT OF APPEALS ERRED WHEN IT
IGNORED SEC. 43 OF RR NO. 17-67 AS WELL
AS OPINIONS OF BIR OFFICIALS WHICH
CONFIRMED THE EXEMPTION OF STEMMED
LEAF TOBACCO FROM PREPAYMENT OF
SPECIFIC TAX
4. THE COURT OF APPEALS ERRED WHEN IT
HELD THAT SEC. 43 OF RR NO. 17-67 DID NOT
REPEAL SECTIONS 35 AND 20(A) OF RR NO.
V-39, SINCE THEIR PROVISIONS ARE
REPUGNANT TO EACH OTHER
5. THE COURT OF APPEALS ERRED WHEN IT
HELD THAT RR NO. V-39 IMPOSES SPECIFIC
TAXES ON STEMMED LEAF TOBACCO, SINCE
IT MAKES NO MENTION AT ALL OF TAXES ON
STEMMED LEAF TOBACCO
6. THE COURT OF APPEALS ERRED WHEN IT
HELD RR NO. V-39 APPLIED TO L-6
PERMITTEES OR MANUFACTURERS OF
STEMMED LEAF TOBACCO, SINCE L-6
CLASSIFICATION WAS NON-EXISTENT AT THE
TIME
7. THE COURT OF APPEALS ERRED WHEN IT
INTERPRETED SECTION 20(A) OF RR NO. V-39
IN SUCH A WAY AS TO RESULT IN
ADMINISTRATIVE LEGISLATION, SINCE THE
48
 INTERPRETATION SANCTIONED THE
RESTRICTION OF AN UNQUALIFIED
PROVISION OF LAW BY A MERE REGULATION
8. THE COURT OF APPEALS ERRED WHEN IT
GAVE NO WEIGHT TO THE DECEMBER 12,
1972 BIR RULING AND OPINIONS OF OTHER
BIR OFFICIALS WHICH CONFIRMED THE
EXEMPTION OF STEMMED LEAF TOBACCO
FROM PREPAYMENT OF SPECIFIC TAX
9. THE COURT OF APPEALS ERRED WHEN IT
HELD [THAT] NON-APPLICATION OF [THE]
DECEMBER 12 RULING DID NOT IMPINGE ON
PRINCIPLE OF NON-RETROACTIVITY OF
RULINGS BECAUSE THE ASSESSMENT DID
NOT CITE THE RULING, SINCE CITATION OF A
RULING IN AN ASSESSMENT [IS] NOT
NECESSARY FOR PRINCIPLE TO APPLY
10. THE COURT OF APPEALS ERRED WHEN IT
DISREGARDED THE ADMINISTRATIVE
PRACTICE OF BIR FOR OVER HALF A
CENTURY OF NOT SUBJECTING STEMMED
LEAF TOBACCO TO SPECIFIC TAX
11. THE COURT OF APPEALS ERRED WHEN IT
HELD THAT SUBJECTING STEMMED LEAF
TOBACCO TO SPECIFIC TAX IS NOT
PROHIBITED FORM OF DOUBLE TAXATION,
SINCE A TAX ON BOTH STEMMED LEAF
TOBACCO AND CIGARETTES INTO WHICH IT
IS MANUFACTURED IS DOUBLE TAXATION
12. THE COURT OF APPEALS ERRED WHEN IT
HELD LA SUERTE LIABLE FOR SPECIFIC TAX
EVEN IF NO EFFORT WAS FIRST MADE TO
COLLECT THE TAX FROM THE
MANUFACTURER OF STEMMED LEAF
TOBACCO, SINCE TAX CODE ALLOWS THIS
ONLY IF SPECIAL ALLOWANCE IS GRANTED,
WHICH IS NOT THE CASE
13. THE COURT OF APPEALS ERRED WHEN IT
FAILED TO CONSIDER THAT THE
REENACTMENT OF THE 1939 CODE AS THE
1977 CODE AND 1986 TAX CODES ADOPTED
THE INTERPRETATION IN THE DECEMBER
1972 BIR RULING
14. THE COURT OF APPEALS ERRED WHEN IT
APPLIED THE RULES OF CONSTRUCTION ON
EXEMPTION FROM TAXES, SINCE NO TAX
EXEMPTION WAS INVOLVED BUT MERELY AN
EXEMPTION FROM PREPAYMENT OF TAX.[62]
G.R. No. 136328–29
In the letter dated November 24, 1989, the Commissioner
demanded from Fortune the payment of deficiency excise
tax in the amount of P28,938,446.25 for its importation of
tobacco strips from January 1, 1986 to June 30, 1989.
Fortune requested for reconsideration, which was denied
by the Commissioner on August 31, 1990. Undaunted,
Fortune appealed to the Court of Tax Appeals through a
petition for review, which was docketed as CTA Case No.
49
4587.[63]
In the decision dated November 23, 1994, the Court of
Tax Appeals ruled in favor of Fortune and set aside the
Commissioner’s assessment of P28,938,446.25 as
deficiency excise tax.
Meanwhile, on March 20, 1991, Fortune received another
letter from the Bureau of Internal Revenue, demanding
payment of P1,989,821.86 as deficiency specific tax on
its importation of stemmed leaf tobacco from July 1, 1989
to November 30, 1990.[64] Fortune filed its protest and
requested the Commissioner to cancel and withdraw the
assessment.[65] On April 18, 1991, the Commissioner
denied with finality Fortune’s request.[66] Fortune
appealed to the Court of Tax Appeals, and the case was
docketed as CTA Case No. 4616.[67]
In the decision dated October 6, 1994, the Court of Tax
Appeals ruled in favor of Fortune and set aside the
Commissioner’s assessment of P1,989,821.26 as
deficiency excise tax on stemmed leaf tobacco.
The Commissioner filed separate petitions before the
Court of Appeals, challenging the decisions rendered by
the Court of Tax Appeals in CTA Case Nos. 4587 and
4616. These petitions were consolidated on November
28, 1996.[68]
In the decision dated January 30, 1998, the Court of
Appeals Seventeenth Division dismissed the
consolidated petitions filed by the Commissioner and
affirmed the assailed decisions of the Court of Tax
Appeals. It also denied the Commissioner’s motion for
reconsideration.
Hence, the Commissioner filed the present petition[69] on
January 8, 1999. The Commissioner claims that the
Court of Appeals erred (1) “in holding that stemmed leaf
tobacco is not subject to the specific tax imposed under
Section 141 of the Tax Code[;]”[70] (2) “in not holding that
under Section 137 of the Tax Code, stemmed leaf
tobacco is exempt from specific tax when sold in bulk as
raw material by one manufacturer directly to another
under such conditions as may be prescribed in the
regulations of the Department of Finance[;]”[71] and (3) “in
holding that there is double taxation in the prohibited
sense when specific tax is imposed on stemmed leaf
tobacco and again on the finished product of which
stemmed leaf tobacco is a raw material.”[72]
G.R. No. 144942
In April 1995, “[La Suerte] imported stemmed leaf
tobacco from various sellers abroad.”[73] The
Commissioner “assessed specific taxes on the stemmed
leaf tobacco in the amount of P175,909.50, which [La
Suerte] paid under protest.”[74] “Consequently, [La Suerte]
50
filed a claim for refund with [the Commissioner], [who]
failed to act on the same.”[75] Undeterred, La Suerte
appealed to the Court of Tax Appeals, which in its March
9, 1999 decision, ruled in its favor.
The Commissioner appealed to the Court of Appeals
Third Division, which on August 31, 2000, rendered its
decision in CA-G.R. SP. No. 51902, affirming the decision
of the Court of Tax Appeals.
The Commissioner then filed the instant petition for
review[76] asking this court to overturn the Court of
Appeals’ decision. It avers that the Court of Appeals
erred in holding that Section 137 of the Tax Code applied
“without any conditions as to the domicile of the
manufacturers and that [the Commissioner] cannot
indirectly restrict its application to local manufacturers.”[77]
The Third Division of this court initially denied[78] the
petition due to an insufficient or defective verification and
because “the petition was filed by revenue lawyers and
not by the Solicitor General.”[79]
The Commissioner filed a motion for clarification[80]
seeking to clarify whether the Bureau of Internal Revenue
legal officers can file petitions for review pursuant to
Section 220 of the Tax Code without the intervention of
the Office of the Solicitor General.
[81]
The motion was referred to the En Banc on August 7,
2001, which issued the resolution on July 4, 2002,
holding that “Section 220 of the Tax Reform Act must not
be understood as overturning the long established
procedure before this Court in requiring the Solicitor
General to represent the interest of the Republic. This
Court continues to maintain that it is the Solicitor General
who has the primary responsibility to appear for the
government in appellate proceedings.”[82] In the same
resolution, this court also declared the following:
The present controversy ruminate upon the singular
issue of whether or not Revenue Regulation 1767 [sic]
issued by petitioner, in relation to Section 137 of the
Internal Revenue Code in the imposition of a tax on
stemmed-leaf tobacco, deviated from the tax code. This
question basically inquires then into whether or not the
revenue regulation has exceeded, on constitutional
grounds, the allowable limits of legislative delegation.
Aware that the dismissal of the petition could have
lasting effect on government tax revenues, the lifeblood
of the state, the Court heeds the plea of petitioner for a
chance to prosecute its case.[83] (Emphasis and
underscoring supplied)
This court resolved to reinstate[84] and give due course[85]
to the Commissioner’s petition.
G.R. No. 148605
51
“On January 12, 1990, [Sterling] received a
pre-assessment notice for alleged deficiency excise tax
on its importation and local purchase of stemmed-leaf
tobacco for P5,187,432.00 covering the period from
November 1986 to January 1989.”[86] Sterling filed its
protest letter[87] dated January 19, 1990. The
Commissioner, through its letters[88] dated August 31,
1990 and October 17, 1990, denied the protest with
finality.
Sterling filed before the Court of Tax Appeals a petition
for review[89] dated January 3, 1991, seeking the
cancellation of the deficiency assessment and praying
that the Commissioner be ordered to desist from
collecting the assessed excise tax. On July 13, 1995, the
Court of Tax Appeals rendered its decision ordering the
cancellation of the assessment for deficiency excise tax.
The Commissioner then appealed[90] to the Court of
Appeals. On March 7, 2001, the latter, through its Ninth
Division, rendered a decision reversing the Court of Tax
Appeals’ ruling, thus:
WHEREFORE, premises considered, the Decision of the
Court of Tax Appeals in C.T.A. Case No. 4532 is hereby
REVERSED and SET ASIDE, and the respondent is
ORDERED to pay to the public petitioner the amount of
P5,187,432.00 as deficiency specific tax on its imported
and locally purchased stemmed leaf tobacco from
November 1986 to June 24, 1989, plus 25% surcharge
on 5,187,432.00, and 20% interest per annum on the
total amount due from December 07, 1990 until full
payment, pursuant to Sections 248-49 of the Tax Code.
SO ORDERED.[91]
Sterling filed a motion for reconsideration,[92] which was
denied by the Court of Appeals in its June 19, 2001
resolution.
Hence, on August 13, 2001, Sterling filed the instant
petition for review.[93]
Sterling argues that the Court of Appeals erred in holding
that (1) then Section 141 of the Tax Code subjects
stemmed leaf tobacco to excise tax; (2) Section 137 of
the Tax Code did not exempt stemmed leaf tobacco from
prepayment of excise tax; (3) Section 20(A) of RR No.
V-39 restricts the application of Section 137 of the Tax
Code since its language was unqualified, while Section
20(A) contained no restrictive language; (4) RR No. V-39
imposed specific taxes on stemmed leaf tobacco since its
language made no mention of taxes on stemmed leaf
tobacco; (5) the reason behind limiting exemptions only
to transfers from one L-7 to another L-7 is because sale
has previously been subjected to specific tax; and (6) the
exemption from specific tax did not apply to imported
stemmed leaf tobacco.[94]
52
Sterling further argues that the Court of Appeals erred in
not holding that (1) the Commissioner’s interpretation of
Section 141 of the Tax Code and Section 20(A) of RR
No. V-39 amounts to an amendment of Sections 141 and
137 of the Tax Code by a mere administrative regulation;
(2) a December 12, 1972 Bureau of Internal Revenue
ruling and opinions of other Bureau of Internal Revenue
officials confirmed the exemption of stemmed leaf
tobacco from prepayment of specific tax; (3) the
administrative practice of the Bureau of Internal Revenue
for over half a century of not subjecting stemmed leaf
tobacco to excise tax proves that no excise taxes were
ever intended to be imposed; (4) imposition of excise tax
on stemmed leaf tobacco would result in the prohibited
form of double taxation; and (5) the re-enactment of the
relevant provisions in the 1977 and 1986 Tax Codes
adopted the interpretation in the December 1972 Bureau
of Internal Revenue ruling.[95] Sterling also contends that
the “Court of Appeals erred in applying the rules of
construction on exemption from taxes, since no tax
exemption was involved, but merely an exemption from
prepayment of excise tax.”[96]
G.R. No. 158197
On January 10, 1991, the Commissioner sent a
pre-assessment notice to La Suerte demanding payment
of P11,757,275.25 as deficiency specific tax on its local
purchases and importations and on the sale of stemmed
leaf tobacco during the period from September 14, 1989
to November 20, 1990.[97] On February 8, 1991, La
Suerte received the formal assessment letter of the
Commissioner.[98]
La Suerte filed its protest on March 8, 1991.[99] On May
14, 1991, La Suerte received the Commissioner’s
decision “denying the protest with finality.”[100
“On June 13, 1991, the Court of Tax Appeals
promulgated a Decision finding for . . . La Suerte and
disposing [as follows:]”[101
WHEREFORE, in view of the foregoing, We find the
petition for review meritorious and the same is hereby
GRANTED. Respondent’s decision dated April 29, 1991
is hereby set aside and the formal assessment for the
deficiency specific tax in the sum of P11,575,275.25
subject of the respondent’s letter, dated January 30,
1991, is deemed cancelled.
No pronouncement as to costs of suit. SO
ORDERED.[102]
The Commissioner filed a motion for reconsideration that
was denied by the Court of Tax Appeals in its April 5,
1995 resolution.[103]
The Commissioner appealed to the Court of Appeals.[104]
In its decision dated July 18, 2002, the Court of Appeals
53
reversed the decision of the Court of Tax Appeals. It cited 4. SECTION 2(H) OF RR NO. 17-67 EXCEEDED
Commissioner of Internal Revenue v. La Campaña THE CONSTITUTIONAL LIMITS ON THE
Fabrica de Tabacos, Inc.[105] as basis for its ruling. La DELEGATION OF LEGISLATIVE POWER.
Suerte filed a motion for reconsideration, but it was 5. SECTION 3(M) OF RR NO. 17-67 AS
denied by the Court of Appeals in the resolution[106] dated INTERPRETED BY COMMISSIONER
May 9, 2003. EXCEEDED ALLOWABLE LIMITS ON
DELEGATION OF LEGISLATIVE POWER.
La Suerte prays for the reversal of the Court of Appeals’ 6. THE HONORABLE COURT OF APPEALS
decision and resolution in its petition for review,[107] ERRED IN APPLYING SECTION 20(A) OF RR
wherein it raises the following arguments: NO. V-39 TO LA SUERTE’S IMPORTS OF
STEMMED LEAF TOBACCO, FOR THE
1. THE HONORABLE COURT OF APPEALS
APPLICABLE PROVISION IS CHAPTER V OF
ERRED WHEN IT HELD THAT SECTION 20(A)
RR NO. V-39.
OF REV. REGS. NO. V-39 LIMITED THE CLASS
7. THE COMMISSIONER’S PRESENT
OF MANUFACTURERS WHOSE SALES OF
INTERPRETATION OF SECTIONS 2(M)(1) AND
STEMMED LEAF TOBACCO WERE EXEMPT
3(H) OF RR NO. 17-67, WAS NOT THE
FROM PRE-PAYMENT OF SPECIFIC TAX.
INTERPRETATION GIVEN TO THOSE
2. EVEN IF SEC. 3 OF RR NO. 17-67 HAD BEEN
SECTIONS BY ITS FRAMERS, AS SHOWN BY
WAS [sic] INTENDED TO LIMIT
THE LONG ADMINISTRATIVE PRACTICE
MANUFACTURERS EXEMPT FROM
AFTER THE ISSUANCE OF RR NO. 17-67 AND
PREPAYMENT OF SPECIFIC TAX, THIS WOULD
THE BIR RULING DATED DECEMBER 12, 1972,
AMOUNT TO UNLAWFUL DELEGATION OF
WHICH CONFIRMED THE TAX-FREE
LEGISLATIVE POWER.
TRANSFER OF STEMMED- LEAF TOBACCO.[108]
3. RR NO. 17-67 WAS NEITHER ISSUED TO
AMEND RR NO. V-39 NOR TO AMEND THE TAX G.R. No. 165499
CODE, BUT SOLELY TO IMPLEMENT ACT NO.
2613, AS AMENDED, WHICH WAS ENACTED IN On various dates in March 1995, the Commissioner of
1916 AND HAD ABSOLUTELY NOTHING TO DO Internal Revenue . . . collected from La Suerte the
WITH TAXES. aggregate amount of THREE HUNDRED TWENTY-FIVE
THOUSAND FOUR HUNDRED TEN PESOS

54
(P325,410.00) for specific taxes on La Suerte’s bulk
purchases of stemmed-leaf tobacco from foreign tobacco
manufacturers. La Suerte paid the said amount under
protest.
....
On September 27, 1996 and October 2, 1996, La Suerte
instituted with the Commissioner of Internal Revenue . . .
and with Revenue District No. 52, a claim for refund of
specific taxes said to have been erroneously paid on its
importations of stemmed-leaf tobacco for the period of
November 1994 up to May 1995, including the amount of
Three Hundred Twenty Five Thousand Four Hundred Ten
Pesos (P325,410.00). . . .
Inasmuch as its claim for refund was not acted upon by
petitioner and in order to toll the running of the two-year
reglementary period within which to file a judicial claim for
such refund as provided under Section 229 of the 1997
National Internal Revenue Code, as amended, La Suerte
filed on February 8, 1997 a petition for review with the
CTA.[109]
On September 23, 1998, the Court of Tax Appeals
rendered judgment granting the petition for review and
ordering the Commissioner to refund the amount of
P325,410.00 to La Suerte.[110] The Commissioner filed a
motion for reconsideration, but this was denied by the
Court of Tax Appeals on December 15, 1998.[111]
On appeal, the Court of Appeals Fourth Division
reversed[112] the Court of Tax Appeals’ ruling. It also
denied[113] La Suerte’s motion for reconsideration. Hence,
this petition was filed,[114] reiterating the same arguments
already presented in the other cases.
This court ordered the consolidation of G.R. Nos.
136328–29 and 125346.[115] Thereafter, this court
consolidated G.R. Nos. 165499, 144942, and 148605.[116]
Finally, this court approved the consolidation of G.R. Nos.
125346, 136328–29, 144942, 148605, 158197, and
165499.[117]
Issues
1. Whether stemmed leaf tobacco is subject to
excise (specific) tax under Section 141 of the 1986
Tax Code;
2. Whether Section 137 of the 1986 Tax Code
exempting from the payment of specific tax the
sale of stemmed leaf tobacco by one manufacturer
to another is not subject to any qualification and,
therefore, exempts an L-7 manufacturer from
paying said tax on its purchase of stemmed leaf
tobacco from other manufacturers who are not
classified as L-7 permittees;
3. Whether stemmed leaf tobacco imported by La
Suerte, Fortune, and Sterling is exempt from
specific tax under Section 137 of the 1986 Tax
Code;
55
 4. Whether Section 20(a) of RR No. V-39, in relation
to RR No. 17-67, which limits the exemption from
payment of specific tax on stemmed leaf tobacco
to sales transactions between manufacturers
classified as L-7 permittees is a valid exercise by
the Department of Finance of its rule-making
power under Section 338[118] of the 1939 Tax Code;
5. Whether the possessor or owner of stemmed leaf
tobacco may be held liable for the payment of
specific tax if such tobacco product is removed
from the place of production without payment of
said tax;
6. Whether the August 31, 1990 ruling of then
Bureau of Internal Revenue Commissioner Jose
U. Ong denying La Suerte’s request for exemption
from specific tax on its local purchase and
importation of stemmed leaf tobacco violates the
principle on non-retroactivity of administrative
ruling for allegedly contradicting the previous
position taken by the Bureau of Internal Revenue
that such a transaction is not subject to specific
tax as expressed in the December 12, 1972 ruling
of then Bureau of Internal Revenue Commissioner
Misael P. Vera; and
7. Whether the imposition of excise tax on stemmed
leaf tobacco under Section 141 of the 1986 Tax
Code constitutes double taxation.
Arguments of the cigarette manufacturers
The cigarette manufacturers claim that since Section
137 of the 1986 Tax Code and Section 20(a) of RR No.
V-39 do not distinguish “as to the type of manufacturer
that may sell stemmed-leaf tobacco without the
prepayment of specific tax[,] [t]he logical conclusion is
that any kind of tobacco manufacturer is entitled to this
treatment.”[119]
The authority of the Secretary of Finance to prescribe the
“conditions” refers only to procedural matters and should
not curtail or modify the substantive right granted by the
law.[120] The cigarette manufacturers add that the
reference to an L-7 invoice and L-7 register book in the
second paragraph of Section 20(a) cannot limit the
application of the tax exemption provision only to
transfers between L-7 permittees because (1) it does not
so provide;[121] and (2) under the terms of RR No. V-39,
L-7 referred to manufacturers of any class of tobacco
products, including manufacturers of stemmed leaf
tobacco.[122]
They further argue that, going by the theory of the
Commissioner, RR No. 17-67 would have unduly
restricted the meaning of “manufacturers” by limiting it to
a few manufacturers such as manufacturers of cigars and
cigarettes.[123] Allegedly, RR No. 17-67 cannot change the
original meaning of L-7 in Section 20(A) of RR No. V-39
without exceeding constitutional limits of delegated
56
legislative power.[124] La Suerte further points out that RR
No. 17-67 was not even issued for the purpose of
implementing the Tax Code but for the sole purpose of
implementing Act No. 2613; and Section 3 of RR No.
17-67 restricts the new designations only for
administrative purposes.[125]
Moreover, the cigarette manufacturers contend “that
Section 132 does not operate as a tax exemption”
because “prepayment means payment of obligation in
advance or before it is due.”[126] Consequently, the rules
of construction on tax exemption do not apply.[127]
According to them, “the absence of tax prepayment for
the sale of stemmed leaf tobacco impliedly indicates the
underlying policy of the law: that stemmed leaf tobacco
shall not be taxed twice, first, as stemmed leaf tobacco
and, second, as a component of the finished products of
which it forms an integral part.”[128]
Fortune, for its part, claims that stemmed leaf tobacco is
not subject to excise tax. It argues that stemmed leaf
tobacco cannot be considered prepared or partially
prepared tobacco because it does not fall within the
definition of a “processed tobacco” under Section 1-b of
Republic Act No. 698, as amended.[129] Furthermore, it
adds that Section 141 should be strictly construed
against the taxing power.[130] “There being no explicit
reference to stemmed leaf tobacco in Section 141, it
cannot be claimed or construed to be subject to specific
tax.”[131]
According to Fortune, “a plain reading of Section 141
readily reveals that the intention was to impose excise
taxes on products of tobacco that are not to be used as
raw materials in the manufacture of other tobacco
products.”[132] “Section 2(m)(1) unduly expanded the
meaning of prepared or partially prepared tobacco to
include a raw material like stemmed leaf tobacco; hence,
ultra vires and invalid.”[133]
As regards the taxability of their importations, Sterling
argues that since locally manufactured stemmed leaf
tobaccos are not subject to specific tax, it follows that
imported stemmed leaf tobaccos are also not subject to
specific tax.[134] On the other hand, La Suerte claims that
Section 20(A) of RR No. V-39 does not apply to its
imports because the applicable provision is Section
128(b) of the 1986 Tax Code, which states that “imported
articles shall be subject to the same tax and the same
rates and basis of excise taxes applicable to locally
manufactured articles,” and Chapter V of RR No. V-39
(Payment of specific taxes on imported cigars, cigarettes,
smoking and chewing tobacco).[135]
Finally, La Suerte and Sterling[136] argues that the Court
of Appeals erred:
(1) in ignoring Section 43 of RR No. 17-67, December 12,
1972 Bureau of Internal Revenue ruling and other Bureau
57
of Internal Revenue opinions confirming the exemption of
stemmed leaf tobacco from prepayment of specific
tax;[137]
(2) in disregarding the Bureau of Internal Revenue’s
practice for over half a century of not subjecting stemmed
leaf tobacco to specific tax;[138]
(3) in failing to consider that the re-enactment of the 1939
Tax Code as the 1977 and 1986 Tax Codes impliedly
adopted the interpretation in the December 12, 1972
ruling; and
(4) in holding that non-application of the December 12,
1972 ruling did not impinge on the principle of
non-retroactivity of rulings.[139] Moreover, it argues that
the Tax Code does not authorize collection of specific tax
from buyers without a prior attempt to collect tax from
manufacturers.[140]
Respondent’s argument
Respondent counters that “under Section 141(b), partially
prepared or manufactured tobacco is subject to specific
tax.”[141] The definition of “partially manufactured tobacco”
in Section 2(m) of RR No. 17-67 includes stemmed leaf
tobacco; hence, stemmed leaf tobacco is subject to
specific tax.[142] “Imported stemmed leaf tobacco is also
subject to specific tax under Section 141(b) in relation to
Section 128 of the 1977 Tax Code.”[143] Fortune’s reliance
on the definition of “processed tobacco” in Section 1-b of
Republic Act No. 698[144] as amended by Republic Act
No. 1194 is allegedly misplaced because the definition
therein of processed tobacco merely clarified the type of
tobacco product that may not be imported into the
country.[145]
Respondent posits that “there is no double taxation in
the prohibited sense even if specific tax is also imposed
on the finished product of which stemmed leaf tobacco is
a raw material.”[146] Congress clearly intended it
“considering that stemmed leaf tobacco, as partially
prepared or manufactured tobacco, is subjected to
specific tax under Section 141(b), while cigars and
cigarettes, of which stemmed leaf tobacco is a raw
material, are also subjected to specific tax under Section
142.”[147] It adds that there is no constitutional prohibition
against double taxation.[148]
“Foreign manufacturers of tobacco products not engaged
in trade or business in the Philippines cannot be
classified as L-7, L-6, or L-3R since they are beyond the
pale of Philippine laws and regulations.”[149] “Since the
transfer of stemmed leaf tobacco from one factory to
another must be under an official L-7 invoice and entered
in the L-7 registers of both transferor and transferee, it is
obvious that the factories contemplated are those located
or operating in the Philippines and operated only by L-7
permittees.”[150] The transaction contemplated under
58
Section 137 is sale and not importation because the law
uses the word “sold.”[151] The law uses “importation” or
“imported” whenever the transaction involves bringing in
articles from foreign countries.[152]
Respondent argues that “the issuance of RR Nos. V-39
and 17-67 is a valid exercise by the Department of
Finance of its rule-making power” under Sections 132
and 338 of the 1939 Tax Code.[153] It explains that “the
reason for the exemption from specific tax of the sale of
stemmed leaf tobacco as raw material by one L-7 directly
to another L-7 is that the stemmed leaf tobacco is
supposed to have been already subjected to specific tax
when an L-7 purchased the same from an L-6.”[154]
“Section 20(A) of RR No. V-39 adheres to the standards
set forth in Section 245 because it provides the
conditions for a tax-free removal of stemmed leaf tobacco
under Section 137 without negating the imposition of
specific tax under Section 141(b).”[155] “To construe
Section 137 in the restrictive manner suggested by La
Suerte will practically defeat the revenue-generating
provision of Section 141(b).”[156]
It further argues that the August 31, 1990 ruling of then
Bureau of Internal Revenue Commissioner Jose U. Ong
denying La Suerte’s request for exemption from specific
tax on its local purchase and importation of stemmed leaf
tobacco does not violate the principle on non-retroactivity
of administrative ruling. It alleges that an erroneous
ruling, like the December 12, 1972 ruling, does not give
rise to a vested right that can be invoked by La
Suerte.[157]
Finally, respondent contends that under Section 127, if
domestic products are removed from the place of
production without payment of the excise taxes due
thereon, it is not required that the tax be collected first
from the manufacturer or producer before the possessor
thereof shall be liable.[158]
Court’s ruling
Nature of excise tax
Excise tax is a tax on the production, sale, or
consumption of a specific commodity in a country.
Section 110 of the 1986 Tax Code explicitly provides that
the “excise taxes on domestic products shall be paid by
the manufacturer or producer before [the] removal [of
those products] from the place of production.” “It does not
matter to what use the article[s] subject to tax is put; the
excise taxes are still due, even though the articles are
removed merely for storage in some other place and are
not actually sold or consumed.”[159] The excise tax based
on weight, volume capacity or any other physical unit of
measurement is referred to as “specific tax.” If based on
selling price or other specified value, it is referred to as
“ad valorem” tax.
59
Section 141 subjects partially prepared tobacco,
such as stemmed leaf tobacco, to excise tax
Section 141 of the 1986 Tax Code provides:
SEC. 141. Tobacco Products. – There shall be collected
a tax of seventy-five centavos on each kilogram of the
following products of tobacco:
(a) tobacco twisted by hand or reduced into a condition to
be consumed in any manner other than the ordinary
mode of drying and curing;
(b) tobacco prepared or partially prepared with or without
the use of any machine or instruments or without being
pressed or sweetened; and
(c) fine-cut shorts and refuse, scraps, clippings, cuttings,
stems and sweepings of tobacco.
Fine-cut shorts and refuse, scraps, clippings, cuttings,
stems and sweepings of tobacco resulting from the
handling or stripping of whole leaf tobacco may be
transferred, disposed of, or otherwise sold, without
prepayment of the specific tax herein provided for under
such conditions as may be prescribed in the regulations
promulgated by the Ministry of Finance upon
recommendation of the Commissioner, if the same are to
be exported or to be used in the manufacture of other
tobacco products on which the excise tax will eventually
be paid on the finished product.
On tobacco specially prepared for chewing so as to be
unsuitable for use in any other manner, on each kilogram,
sixty centavos. (Emphasis supplied)
It is evident that when tobacco is harvested and
processed either by hand or by machine, all its products
become subject to specific tax. Section 141 reveals the
legislative policy to tax all forms of manufactured tobacco
— in contrast to raw tobacco leaves — including tobacco
refuse or all other tobacco which has been cut, split,
twisted, or pressed and is capable of being smoked
without further industrial processing.
Stemmed leaf tobacco is subject to the specific tax under
Section 141(b). It is a partially prepared tobacco. The
removal of the stem or midrib from the leaf tobacco
makes the resulting stemmed leaf tobacco a prepared or
partially prepared tobacco. The following is La Suerte’s
own illustration of how the stemmed leaf tobacco comes
about: In the process of removing the stems, the whole
leaf tobacco breaks into pieces; after the stems or
midribs are removed, the tobacco is threshed (cut by
machine into fine narrow strips) and then undergoes a
process of redrying,[160] undoubtedly showing that
stemmed leaf tobacco is a partially prepared tobacco.
Since the Tax Code contained no definition of “partially
60
prepared tobacco,” then the term should be construed in which will not pass through a screen
its general, ordinary, and comprehensive sense.[161] of two inches (2") mesh.

RR No. 17-67, as amended, supplements the law by

delineating what products of tobacco are “prepared or
manufactured” and “partially prepared or partially
manufactured.” Section 2(m) states:
(m) “Partially manufactured tobacco” — Includes:
(4 “Cigar-cuttings” — clean cuttings or
) clippings from cigars, unsized with
any other form of tobacco.

(1 “Stemmed leaf” — handstripped

(5 “Machine-scrap tobacco” —
) tobacco, clean, good, partially broken
) machine-threshed, clean, good
leaf only, free from mold and dust.
tobacco, not included in any of the
above terms, usable in the
manufacture of tobacco products.
(2 “Long-filler” — handstripped tobacco
) of good, long pieces of broken leaf
usable as filler for cigars without
(6 “Stems” — midribs of leaf tobacco
further preparation, and free from
) removed from the whole leaf or
mold, dust stems and cigar cuttings.
broken leaf either by hand or
machine.

(3 “Short-filler” — handstripped or
) machine-stripped tobacco, clean,
(7 “Waste tobacco” — denatured
good, short pieces of broken leaf,
) tobacco; powder or dust, refuse, unfit
for human consumption; discarded

61
 materials in the manufacture of
tobacco products, which may include
stems.
Insisting on the inapplicability of RR No. 17-67, La Suerte
points to the different definitions given to stemmed leaf
tobacco by Section 2(m)(1) of RR No. 17-67 and Section
137. It argues that while RR No. 17-67 defines stemmed
leaf tobacco as handstripped tobacco of clean, good,
partially broken leaf only, free from mold and dust,
Section 137 defines it as leaf tobacco which has had the
stem or midrib removed. The term does not include
broken leaf tobacco. We are not convinced.
Different definitions of the term “stemmed leaf” are
unavoidable, especially considering that Section 2(m)(1)
is an implementing regulation of Act No. 2613, which was
enacted in 1916 for purposes of improving the quality of
Philippine tobacco products, while Section 137 defines
the tobacco product only for the purpose of exempting it
from the specific tax. Whichever definition is adopted,
there is no doubt that stemmed leaf tobacco is a partially
prepared tobacco.
The onus of proving that stemmed leaf tobacco is not
subject to the specific tax lies with the cigarette
manufacturers. Taxation is the rule, exemption is the
exception.[162] Accordingly, statutes granting tax
exemptions must be construed in strictissimi juris against
the taxpayer and liberally in favor of the taxing authority.
The cigarette manufacturers must justify their claim by a
clear and categorical provision in the law. Otherwise, they
are liable for the specific tax on stemmed leaf tobacco
found in their possession pursuant to Section 127[163] of
the 1986 Tax Code, as amended.
Stemmed leaf tobacco transferred in bulk between
cigarette manufacturers are exempt from excise tax
under Section 137 of the 1986 Tax Code in
conjunction with RR No. V-39 and RR No. 17-67
In the instant case, an exemption on the taxability of
stemmed leaf tobacco is found in Section 137, which
provides the following:
SEC. 137. Removal of tobacco products without
prepayment of tax. – Products of tobacco entirely unfit for
chewing or smoking may be removed free of tax for
agricultural or industrial use, under such conditions as
may be prescribed in the regulations of the Ministry of
Finance. Stemmed leaf tobacco, fine-cut shorts, the
refuse of fine-cut chewing tobacco, scraps, cuttings,
clippings, stems or midribs, and sweepings of tobacco
may be sold in bulk as raw material by one manufacturer
directly to another, without payment of the tax under such
conditions as may be prescribed in the regulations of the
Ministry of Finance.
‘Stemmed leaf tobacco,' as herein used, means leaf
62
tobacco which has had the stem or midrib removed. The
term does not include broken leaf tobacco. (Emphasis
and underscoring supplied)
Section 137 authorizes a tax exemption subject to the
following: (1) that the stemmed leaf tobacco is sold in
bulk as raw material by one manufacturer directly to
another; and (2) that the sale or transfer has complied
with the conditions prescribed by the Department of
Finance.
That the title of Section 137 uses the term “without
prepayment” while the body itself uses “without payment”
is of no moment. Both terms simply mean that stemmed
leaf tobacco may be removed from the factory or place of
production without prior payment of the specific tax.
This court has held in Commissioner of Internal Revenue
v. La Campaña Fabrica de Tabacos, Inc.,[164] reiterated in
Compania General de Tabacos de Filipinas v. Court of
Appeals[165] and Commissioner of Internal Revenue v. La
Suerte Cigar and Cigarette Factory, Inc.[166] that the
exemption from specific tax of the sale of stemmed leaf
tobacco is qualified by and is subject to “such conditions
as may be prescribed in the regulations of the
Department of Finance.” These conditions were provided
for in RR Nos. V-39 and 17-67. Thus, Section 137 must
be read and interpreted in accordance with these
regulations.
Section 20(a) of RR No. V-39 provides the rules for tax
exemption on tobacco products:
SECTION 20. Exemption from tax of tobacco
products intended for agricultural or industrial
purposes. — (a) Sale of stemmed leaf tobacco, etc.,
by one factory to another. — Subject to the limitations
herein established, products of tobacco entirely unfit for
chewing or smoking may be removed free of tax for
agricultural or industrial use; and stemmed leaf tobacco,
fine-cut shorts, the refuse of fine-cut chewing tobacco,
refuse, scraps, cuttings, clippings, and sweepings of
tobacco may be sold in bulk as raw materials by one
manufacturer directly to another without the prepayment
of the specific tax.
Stemmed leaf tobacco, fine-cut shorts, the refuse of
fine-cut chewing tobacco, scraps, cuttings, clippings, and
sweeping of leaf tobacco or partially manufactured
tobacco or other refuse of tobacco may be transferred
from one factory to another under an official L-7 invoice
on which shall be entered the exact weight of the tobacco
at the time of its removal, and entry shall be made in the
L-7 register in the place provided on the page of
removals. Corresponding debit entry will be made in the
L-7 register book of the factory receiving the tobacco
under heading “Refuse, etc., received from other factory,”
showing the date of receipt, assessment and invoice
63
numbers, name and address of the consignor, form in
which received, and the net weight of the tobacco. This
paragraph should not, however, be construed to permit
the transfer of materials unsuitable for the manufacture of
tobacco products from one factory to another. (Emphasis
supplied)
The conditions under which stemmed leaf tobacco may
be transferred from one factory to another without
prepayment of specific tax are as follows:
(a The transfer shall be under an official
) L-7 invoice on which shall be entered
the exact weight of the tobacco at the
time of its removal;
(b Entry shall be made in the L-7 register
) in the place provided on the page for
removals; and
(c Corresponding debit entry shall be
) made in the L-7 register book of the
factory receiving the tobacco under
the heading, “Refuse, etc., received
from the other factory,” showing the
date of receipt, assessment and
invoice numbers, name and address
of the consignor, form in which
received, and the weight of the
tobacco.
Under Section 3(h) of RR No. 17-67, entities that were
issued by the Bureau of Internal Revenue with an L-7
permit refer to "manufacturers of tobacco products."
Hence, the transferor and transferee of the stemmed leaf
tobacco must be an L-7 tobacco manufacturer.
La Campaña explained that the reason behind the tax
exemption of stemmed leaf tobacco transferred between
two L-7 manufacturers is that the same had already been
previously taxed when acquired by the L-7 manufacturer
from dealers of tobacco, thus:
[T]he exemption from specific tax of the sale of stemmed
leaf tobacco as raw material by one L-7 directly to
another L-7 is because such stemmed leaf tobacco has
been subjected to specific tax when an L-7 manufacturer
purchased the same from wholesale leaf tobacco dealers
designated under Section 3, Chapter I, Revenue
Regulations No. 17-67 (supra) as L-3, L-3F, L-3R, L-4, or
L-6, the latter being also a stripper of leaf tobacco. These
are the sources of stemmed leaf tobacco to be used as
raw materials by an L-7 manufacturer which does not
64
produce stemmed leaf tobacco. When an L-7
manufacturer sells the stemmed leaf tobacco purchased
from the foregoing suppliers to another L-7 manufacturer
as raw material, such sale is not subject to specific tax
under Section 137 (now Section 140), as implemented by
Section 20(a) of Revenue Regulations No. V-39.[167]
There is no new product when stemmed leaf tobacco is
transferred between two L-7 permit holders. Thus, there
can be no excise tax that will attach. The regulation,
therefore, is reasonable and does not create a new
statutory right.
RR Nos. V-39 and 17-67 did not exceed the allowable
limits of legislative delegation
The cigarette manufacturers contend that the authority of
the Department of Finance to prescribe conditions is
merely procedural. Its rule-making power is only for the
effective enforcement of the law, which implicitly rules out
substantive modifications. The Secretary of Finance
cannot, by mere regulation, limit the classes of
manufacturers that may be entitled to the tax exemption.
Otherwise, Section 137 (Section 132 in the 1939 Tax
Code) would be invalid as an undue delegation of
legislative power without the required standards or
parameters.
The power of taxation is inherently legislative and may
be imposed or revoked only by the legislature.[168]
Moreover, this plenary power of taxation cannot be
delegated by Congress to any other branch of
government or private persons, unless its delegation is
authorized by the Constitution itself.[169] Hence, the
discretion to ascertain the following — (a) basis, amount,
or rate of tax; (b) person or property that is subject to tax;
(c) exemptions and exclusions from tax; and (d) manner
of collecting the tax — may not be delegated away by
Congress.
However, it is well-settled that the power to fill in the
details and manner as to the enforcement and
administration of a law may be delegated to various
specialized administrative agencies like the Secretary of
Finance in this case.[170]
This court in Maceda v. Macaraig, Jr.[171] explained the
rationale behind the permissible delegation of legislative
powers to specialized agencies like the Secretary of
Finance:
The latest in our jurisprudence indicates that delegation
of legislative power has become the rule and its
non-delegation the exception. The reason is the
increasing complexity of modern life and many technical
fields of governmental functions as in matters pertaining
to tax exemptions. This is coupled by the growing inability
of the legislature to cope directly with the many problems
demanding its attention. The growth of society has
ramified its activities and created peculiar and
65
sophisticated problems that the legislature cannot be
expected reasonably to comprehend. Specialization even
in legislation has become necessary. To many of the
problems attendant upon present day undertakings, the
legislature may not have the competence, let alone the
interest and the time, to provide the required direct and
efficacious, not to say specific solutions.[172]
Thus, rules and regulations implementing the law are
designed to fill in the details or to make explicit what is
general, which otherwise cannot all be incorporated in
the provision of the law.[173] Such rules and regulations,
when promulgated in pursuance of the procedure or
authority conferred upon the administrative agency by
law,[174] “deserve to be given weight and respect by the
courts in view of the rule-making authority given to those
who formulate them and their specific expertise in their
respective fields.”[175] To be valid, a revenue regulation
must be within the scope of statutory authority or
standard granted by the legislature. Specifically, the
regulation must (1) be germane to the object and
purpose of the law;[176] (2) not contradict, but conform to,
the standards the law prescribes;[177] and (3) be issued for
the sole purpose of carrying into effect the general
provisions of our tax laws.[178]
Section 338 authorizes the Secretary of Finance to
promulgate all needful rules and regulations for the
effective enforcement of the provisions of the 1939 Tax
Code.
The specific authority of the Department of Finance to
issue regulations relating to the taxation of tobacco
products is found in Section 4[179] (Specific provisions to
be contained in regulations); Section 125[180] (Payment of
specific tax on imported articles to customs officers prior
to release from the customhouse); Section 132 (Removal
of tobacco products without prepayment of tax); Section
149[181] (Extent of supervision over establishments
producing taxable output); Section 150[182] (Records to be
kept by manufacturers; Assessment based thereon); and
Section 152[183] (Labels and form of packages) of the
1939 Tax Code.
RR No. V-39 was promulgated to enforce the provisions
of Title IV (Specific Taxes) of the 1939 Tax Code relating
to the manufacture and importation of, and payment of
specific tax on, manufactured tobacco or products of
tobacco. By an explicit provision in Section 132, the
lawmakers defer to the Department of Finance to provide
the details upon which the removal of stemmed leaf
tobacco may be exempt from the specific tax in view of
its supposed expertise in the tobacco trade. Section
20(a) of RR No. V-39 adhered to the standards because
it provided the conditions — the proper documentation
and recording of raw materials transferred from one
factory to another — for a tax-free removal of stemmed
leaf tobacco, without negating the imposition of specific
tax under Section 137. The “effective enforcement of the
provisions of [the Tax Code]” in Section 338 provides a
66
sufficient standard for the Secretary of Finance in
determining the conditions for the tax-free removal of
stemmed leaf tobacco. Section 4 further provides a
limitation on the contents of revenue regulations to be
issued by the Secretary of Finance.
On the other hand, RR No. 17-67 was promulgated “[i]n
accordance with the provisions of Section 79 (B) of the
Administrative Code, as amended by Act No. 2803.”[184]
Among the specific administrative powers conferred upon
a department head under the Administrative Code is that
of promulgating rules and regulations, not contrary to law,
“necessary to regulate the proper working and
harmonious and efficient administration of each and all of
the offices and dependencies of his Department, and for
the strict enforcement and proper execution of the laws
relative to matters under the jurisdiction of said
Department.”[185] Under the 1939 Tax Code, the Secretary
of Finance is authorized to prescribe regulations affecting
the business of persons dealing in articles subject to
specific tax, including the mode in which the processes of
production of tobacco and tobacco products should be
conducted and the records to be kept by manufacturers.
Clearly then, the provisions of RR No. 17-67 classifying
and regulating the business of persons dealing in
tobacco and tobacco products are within the rule-making
authority of the Secretary of Finance.
RR No. 17-67 did not create a new classification
The contention of the cigarette manufacturers that RR
No. 17-67 unduly restricted the meaning of
manufacturers of tobacco products by limiting it to a few
manufacturers such as manufacturers of cigars and
cigarettes is misleading.
The definitions in RR No. 17-67 of “manufacturer of
tobacco” and “manufacturer of cigars and/or cigarettes”
are in conformity with, as in fact they are verbatim
adoptions of, the definitions under Section 194(m) and
(n) of the 1939 Tax Code
The cigarette companies further argue that RR No. 17-67
unduly restricted the meaning of L-7 in Section 20(a) of
RR No. V-39 because when RR No. V-39 was issued,
there was no distinction at all between L-7, L-3, L-6
permittees, and L-7 referred to manufacturers of any
class of tobacco products including stemmed leaf
tobacco.
This argument is similarly misplaced.
A reading of the entire RR No. V-39 shows that the
regulation pertains particularly to activities of
manufacturers of smoking and chewing tobacco, cigars
and cigarettes.[186] This was rightly so because the
regulation was issued to enforce the tax law provisions in
relation to the manufacture and importation of tobacco
products. Clearly apparent in Section 10(a) is that when a
67
manufacturer of chewing and smoking tobacco, cigars, or
cigarettes has been qualified to conduct his or her
business as such, he or she is issued by the internal
revenue agent the corresponding register books and
auxiliary register books pertaining to his business as well
as the official register book, L-7, to be used as record of
the raw materials for his or her product. It is, therefore,
logical to conclude that the L-7 invoice and L-7 register
book under Section 20(a) refers to those invoice and
books used by manufacturers of chewing and smoking
tobacco, cigars or cigarettes.
RR No. 17-67 clarified RR No. V-39 by explicitly
designating the manufacturers of tobacco products as
L-7 permittees (Section 2), in contrast to wholesale leaf
tobacco dealers and those that process partially
manufactured tobacco such as stemmed leaf tobacco.
RR No. 17-67 did not create a new and restrictive
classification but only expressed in clear and categorical
terms the distinctions between “manufacturers” and
“dealers” of tobacco that were already implicit in RR No.
V-39.
Indeed, there is no repugnancy between RR No. 17-67
and RR No. V-39, on the one hand, and the Tax Code, on
the other. It is safer to presume that the term
“manufacturer” used in Section 137 on tax exempt
removals referred to an entity that is engaged in the
business of, and was licensed by the Bureau of Internal
Revenue as a, manufacturer of tobacco products. It does
not include an entity engaged in business as a dealer in
tobacco that, incidentally or in furtherance of its business
as a dealer, strip or thresh whole leaf tobacco or
reprocess partially manufactured tobacco.[187]
Such construction is consistent with the rule that tax
exemptions, deemed to be in derogation of the state’s
sovereign right of taxation, are strictly applied and may
be granted only under clear and unmistakable terms of
the law and not merely upon a vague implication or
inference.[188]
RR No. V-39 must be applied and read together with
RR No. 17-67
The cigarette manufacturers’ argument is misplaced,
stating that RR No. 17-67 could not modify RR No. V-39
because it was promulgated to enforce Act No. 2613, as
amended (entitled “An Act to Improve the Methods of
Production and the Quality of Tobacco in the Philippines
and to Develop the Export Trade Therein”), which
allegedly had nothing whatsoever to do with the Tax
Code or with the imposition of taxes.
“The Tobacco Inspection Service, instituted under Act No.
2613, was made part of the Bureau of Internal Revenue
and Bureau of Customs administration for . . . internal
revenue purposes.”[189] The Collector of Internal Revenue
was charged to enforce Act No. 2613, otherwise known
68
as the Tobacco Inspection Law, with a view to promoting
the Philippine tobacco trade and thereby increase the
revenues of the government. This can be inferred from a
reading of the following provisions of Act No. 2613:
SEC. 6. The Collector of Internal Revenue shall have the
power and it shall be his duty:
(a To establish general and local rules
) respecting the classification, marking,
and packing of tobacco for domestic
sale or factory use and for exportation
so far as may be necessary to secure
leaf tobacco of good quality and to
secure its handling under sanitary
conditions, and to the end that leaf
tobacco be not mixed, packed, and
marked and of the same quality when
it is not of the same class and origin.
(b To establish from time to time
) adequate rules defining the standard
and the type of leaf and manufactured
tobacco which shall be exported, as
well also as the manner in which
standard tobacco, shall be packed.
Before establishing the rules above
specified, the Collector of Internal
Revenue shall give due notice of the
proposed rules or amendments to
those interested and shall give them
an opportunity to present their
objections to such rules or
amendments.
(c To require, whenever it shall be
) deemed expedient the inspection of
and affixture of inspection labels to
tobacco removed from the province of
its origin to another province before
such removal, or to tobacco for
domestic sale or factory use.[190]
SEC. 7. No leaf tobacco or manufactured tobacco shall
be exported until it shall have been inspected by the
Collector of Internal Revenue or his duly authorized
representative and found to be standard for export.
Collector of customs shall not permit the exportation of
tobacco from the Philippines unless the shipment be in
conformity with the requirements set forth in this Act. The
prohibition contained in this section shall not apply to
waste and refuse tobacco accumulated in the
manufacturing process when it is invoiced and marked as
such waste and refuse.[191] (Emphasis supplied)
69
 ....
SEC. 9. The Collector of Internal Revenue may appoint
inspectors of tobacco for the purpose of making the
inspections herein required, and may also detail any
officer or employee of the Bureau to perform such duty.
Said inspectors or employees shall likewise be charged
with the duty of grading leaf tobacco and shall perform
such other duties as may be required of them in the
promotion of the Philippine tobacco industry.
The Collector of Internal Revenue shall likewise appoint,
with the approval of the Secretary of Finance, agents in
the United States for the purpose of promoting the export
trade in tobacco with the United States, whose duty it
shall be to inspect shipments of tobacco upon or after
their arrival in that country when so required, to assist
manufacturers of, exporters of, and dealers in tobacco in
disseminating information regarding Philippine tobacco
and, at the request of the parties, to act as arbitrators
between the exporter in the Philippine Islands and the
importer in the United States whenever a dispute arises
between them as to the quality, sizes, classes, or shapes
shipped or received. When acting as arbitrator as
aforesaid, the agent shall proceed in accordance with the
law governing arbitration and award in the locality where
the dispute arises. All agents, inspectors, and employees
acting under and by virtue of this Act shall be subject to
all penal provisions applicable to internal-revenue officers
generally.[192] (Emphasis supplied)
....
SEC. 12. The inspection fees collected by virtue of the
provisions of this Act shall constitute a special fund to be
known a the Tobacco Inspection Fund, which shall be
expended by the Collector of Internal Revenue, with the
approval of the Secretary of Finance, upon allotment by a
Board consisting of the Commissioner of Internal
Revenue, the Director of Plant Industry, the Director of
the Bureau of Commerce and Industry, two
manufacturers designated by the Manila Tobacco
Association, and two persons representing the interests
of the tobacco producers and growers, appointed by the
President of the Philippine Islands[.]
These funds may be expended for any of the following
purposes:
(a) The payment of the expenses incident to the
enforcement of this Act including the salaries of the
inspectors and agents.
(b) The payment of expenses incident to the
reconditioning and returning to the Philippine Islands of
damaged tobacco and the reimbursement of the value of
the United States internal-revenue stamps lost thereby.
(c) The advertising of Philippine tobacco products in the
United States and in foreign countries.
70
(d) The establishment of tobacco warehouses in the
Philippine Islands and in the United States at such points
as the trade conditions may demand.
(e) The payment of bounties to encourage the production
of leaf tobacco of high quality.
(f) The promotion and defense of the Philippine tobacco
interests in the United States and in foreign countries.
(g) The establishment, operation, and maintenance of
tobacco experimental farms for the purpose of studying
and testing the best methods for the improvement of the
leaves: Provided, however, That thirty per centum of the
total annual income of the tobacco inspection fund shall
be expended for the establishment, operation, and
maintenance of said tobacco experimental farms and for
the investigation and discovery of efficacious ways and
means for the extermination and control of the pests and
diseases of tobacco: Provided, further, That in the
establishment of experimental farms, preference shall be
given to municipalities offering the necessary suitable
land for the establishment of an experimental farm.
(h) The sending of special agents and commissions to
study the markets of the United States and foreign
countries with regard to the Philippine cigars and their
propaganda in said markets.
(i) The organization of exhibits of cigars and other
Philippine tobacco products in the United States and in
foreign countries.[193]
SEC. 13. The Collector Internal Revenue shall be the
executive officer charged with the enforcement of the
provisions of this Act and of the regulations issued in
accordance therewith, but it shall be the duty of the
Director of Agriculture, with the approval of the Secretary
of Public Instruction, to execute and enforce the
provisions hereof referring to the cultivation of tobacco.
(Emphasis supplied)
The cigarette manufacturers, thus, erroneously
concluded that Act No. 2613 does not involve taxation.
Parenthetically, Section 8 of Act No. 2613 pertained to
the imposition of tobacco inspection fees, which are
National Internal Revenue taxes, these being one of the
miscellaneous taxes provided for under the Tax Code.
Said Section 8 was in fact repealed by Section 369(b) of
the 1939 Tax Code, and the provision regarding
inspection fees are found in Section 302 of the 1939 Tax
Code.
Since the two revenue regulations, RR Nos. V-34 and
17-67, are in pari materia, i.e., they both pertain
specifically to the regulation of tobacco trade, they should
be read and applied together.
71
Statutes are in pari materia when they relate to the same
person or thing or to the same class of persons or things,
or object, or cover the same specific or particular subject
matter.
It is axiomatic in statutory construction that a statute
must be interpreted, not only to be consistent with itself,
but also to harmonize with other laws on the same
subject matter, as to form a complete, coherent and
intelligible system. The rule is expressed in the maxim,
“interpretare et concordare legibus est optimus
interpretandi,” or every statute must be so construed and
harmonized with other statutes as to form a uniform
system of jurisprudence.[194] (Citation omitted)
The foregoing rules on statutory construction can be
applied by analogy to administrative issuances such as
RR No. V-39 and RR No. 17-67, especially since both are
issued by the same administrative agency.
Importation of stemmed leaf tobacco not included in
the exemption under Section 137
The transaction contemplated in Section 137 does not
include importation of stemmed leaf tobacco for the
reason that the law uses the word “sold” to describe the
transaction of transferring the raw materials from one
manufacturer to another.
The Tax Code treats an importer and a manufacturer
differently. Section 123 clearly distinguishes between
goods manufactured or produced in the Philippines and
things imported. The law uses the proper term
“importation” or “imported” whenever the transaction
involves bringing in articles from foreign countries as
provided under Section 125 (cf. Section 124). Whenever
the Tax Code refers to importers and manufacturers, they
are separately mentioned as two distinct persons or
entities (Sections 156 and 160). Under Chapter II,
whenever the law uses the word manufacturer, it only
means local manufacturer or producer of domestic
products (Sections 150, 151, and 152 of the 1939 Tax
Code
Moreover, foreign manufacturers of tobacco products not
engaged in trade or business in the Philippines cannot be
designated as L-7 since these are beyond the pale of
Philippine law and regulations. The factories
contemplated are those located or operating only in the
Philippines.
Contrary to La Suerte’s claim, Chapter V, Section 61 of
RR No. V-39[195] is not applicable to justify the tax
exemption of its importation of stemmed leaf tobacco
because from the title of Chapter V, the provision
particularly refers to specific taxes on imported cigars,
cigarettes, smoking and chewing tobacco.
No estoppel against government
72
The cigarette manufacturers contend that for a long time
prior to the transactions herein involved, the Collector of
Internal Revenue had never subjected their purchases
and importations of stemmed leaf tobacco to excise
taxes. This prolonged practice allegedly represents the
official and authoritative interpretation of the law by the
Bureau of Internal Revenue which must be respected.
We are not persuaded.
In Philippine Long Distance Telephone Co. v. Collector of
Internal Revenue,[196] this court has held that this principle
is not absolute, and an erroneous implementation by an
officer based on a misapprehension of law may be
corrected when the true construction is ascertained.
Thus:
The appellant argues that the Collector of Internal
Revenue, previous to the transactions herein involved,
had never collected the franchise tax on items of the
same nature as those herein in question and this is
strong evidence that such transactions are not subject to
tax on the principle that a prolonged practice on the part
of an executive or administrative officer in charge of
executing a certain statute is an authoritative construction
of great weight. This contention may be granted, but the
principle is not absolute and may be overcome by strong
reasons to the contrary. If through a misapprehension of
law an officer has erroneously executed it for a long time,
the error may be corrected when the true construction is
ascertained. Such we deem to be the situation in the
present case. Incidentally, the doctrine of estoppel does
not apply here.[197] (Emphasis supplied)
This court reiterated this rule in Abello v. Commissioner
of Internal Revenue[198] where it rejected petitioners’ claim
that the prolonged practice (since 1939 up to 1988) of the
Bureau of Internal Revenue in not subjecting political
contributions to donor’s tax was an authoritative
interpretation of the statute, entitled to great weight and
the highest respect:
This Court holds that the BIR is not precluded from
making a new interpretation of the law, especially when
the old interpretation was flawed. It is a well-entrenched
rule that[:]
. . . erroneous application and enforcement of the law by
public officers do not block subsequent correct
application of the statute, and that the Government is
never estopped by mistake or error on the part of its
agents.[199] (Emphasis supplied, citations omitted)
Prolonged practice of the Bureau of Internal Revenue in
not collecting the specific tax on stemmed leaf tobacco
cannot validate what is otherwise an erroneous
application and enforcement of the law. The government
is never estopped from collecting legitimate taxes
because of the error committed by its agents.[200]
73
 In La Suerte Cigar and Cigarette Factory v. Court of Tax
Appeals,[201] this court upheld the validity of a revenue
memorandum circular issued by the Commissioner of
Internal Revenue to correct an error in a previous circular
that resulted in the non-collection of tobacco inspection
fees for a long time and declared that estoppel cannot
work against the government:
. . . the assailed Revenue Memorandum Circular was
issued to rectify the error in General Circular No. V-27
and to interpret the phrase “tobacco for domestic sale or
factory use” with the view of arresting huge losses of
tobacco inspection fees which were not col­lected and
imposed since the said Circular (No. V-27) took effect.
Furthermore, the questioned Revenue Memorandum
Circular was also issued to apprise those con­cerned of
the construction and interpretation which should be
accorded to Act No. 2613, as amended, and which
respondent is duty bound to enforce. It is an opinion on
how the law should be construed and there was no
attempt whatsoever to enlarge or restrict the meaning of
the law.
The basis for the issuance of said Memorandum Circular
was so stated in Resolution No. 2-67 of the Tobacco
Board, wherein petitioners as members of the Manila
Tobacco Association, Inc. were duly represen­ted, the
pertinent portions of which read:
“. . . .
WHEREAS, this original recommenda­tion of Mr.
Hernandez was perfectly in accordance with existing law,
more par­ticularly Sec. 1 of Republic Act No. 31 which
took effect since September 25, 1946, but perhaps thru
oversight by the former Commissioners and officers of
the Tobacco Inspection Service the propriety and legality
of effecting the inspection of tobacco products for local
sales and imported leaf tobacco for factory use might
have overlooked resulting in huge losses of tobacco
inspection fees . . .” (Italics supplied)
....
Tobacco Inspection fees are undoubtedly National
Internal Revenue taxes, they being one of the
miscellaneous taxes provided for under the Tax Code.
Section 228 (formerly Section 302) of Chapter VII of the
Code specifically provides for the collection and manner
of payment of the said inspection fees. It is within the
power and duty of the Commissioner to collect the same,
even without inspection, should tobacco products be
re­moved clandestinely or surreptitiously from the
estab­lishment of the wholesaler, manufacturer or redrying
plant and from the customs custody in case of imported
leaf tobacco. Errors, omissions or flaws committed by
BIR inspectors and representatives while in the
performance of their duties cannot be set up as estoppel
74
nor estop the Government from collecting a tax legally
due.
Tobacco inspection fees are levied and collected for
purposes of regulation and control and also as a source
of revenue since fifty percentum (50%) of said fees shall
accrue to the Tobacco Inspection Fee Fund created by
Sec. 12 of Act No. 2613, as amended and the other fifty
percentum, to the Cultural Center of the Philippines.
(Sec. 88, Chapter VII, NIRC)[202] (Emphasis in this
paragraph supplied, citation omitted)
Furthermore, the December 12, 1972 ruling of
Commissioner Misael P. Vera runs counter to Section
20(a) of RR No. V-39 in relation to RR No. 17-67, which
provides that only transfers of stemmed leaf tobacco
between L-7 permittees are exempt. An implementing
regulation cannot be superseded by a ruling which is a
mere interpretation of the law. While opinions and rulings
of officials of the government called upon to execute or
implement administrative laws command much respect
and weight, courts are not bound to accept the same if
they override, instead of remain consistent and in
harmony with, the law they seek to apply and
implement.[203]
Double taxation
The contention that the cigarette manufacturers are
doubly taxed because they are paying the specific tax on
the raw material and on the finished product in which the
raw material was a part is also devoid of merit.
For double taxation in the objectionable or prohibited
sense to exist, “the same property must be taxed twice,
when it should be taxed but once.”[204] “[B]oth taxes must
be imposed on the same property or subject- matter, for
the same purpose, by the same . . . taxing authority,
within the same jurisdiction or taxing district, during the
same taxing period, and they must be the same kind or
character of tax.”[205]
At all events, there is no constitutional prohibition against
double taxation in the Philippines.[206] This court has
explained in Pepsi-Cola Bottling Company of the
Philippines, Inc. v. Municipality of Tanauan, Leyte:[207]
There is no validity to the assertion that the delegated
authority can be declared unconstitutional on the theory
of double taxation. 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, since We have not adopted as part
thereof the injunction against double taxation found in the
Constitution of the United States and some states of the
Union. Double taxation becomes obnoxious only where
the taxpayer is taxed twice for the benefit of the same
75
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.[208] (Emphasis supplied, citations omitted)
“It is something not favored, but is permissible, provided
some other constitutional requirement is not thereby
violated, such as the requirement that taxes must be
uniform.”[209]
Excise taxes are essentially taxes on property[210]
because they are levied on certain specified goods or
articles manufactured or produced in the Philippines for
domestic sale or consumption or for any other
disposition, and on goods imported. In this case, there is
no double taxation in the prohibited sense because the
specific tax is imposed by explicit provisions of the Tax
Code on two different articles or products: (1) on the
stemmed leaf tobacco; and (2) on cigar or cigarette.[211]
WHEREFORE, this court:
1. DENIES the petition for review filed by La Suerte
Cigar & Cigarette Factory in G.R. No. 125346 and
AFFIRMS the questioned decision and resolution
of the Court of Appeals in CA-G.R. SP. No. 38107;
2. GRANTS the petition for review filed by the
Commissioner of Internal Revenue in G.R. Nos.
136328–29 and REVERSES and SETS ASIDE
the challenged decision and resolution of the
Court of Appeals in CA-G.R. SP. Nos. 38219 and
40313. Fortune Tobacco Corporation is
ORDERED to pay the following taxes:
a. P28,938,446.25 as deficiency excise tax for
the period covering January 1, 1986 to June 30,
1989, plus 20% interest per annum from
November 24, 1989 until fully paid; and
b. P1,989,821.26 as deficiency excise tax for the
period covering July 1, 1989 to November 30,
1990, plus 20% interest per annum from March 1,
1991 until fully paid.
3. GRANTS the petition for review filed by the
Commissioner of Internal Revenue in G.R. No.
144942 and REVERSES and SETS ASIDE the
challenged decision of the Court of Appeals in
CA-G.R. SP. No. 51902. La Suerte Cigar &
Cigarette Factory’s claim for refund of the amount
of P175,909.50 is DENIED.
4. DENIES the petition for review filed by Sterling
Tobacco Corporation in G.R. No. 148605 and
AFFIRMS the questioned decision and resolution
of the Court of Appeals in CA-G.R. SP. No. 38159;
5. DENIES the petition for review filed by La Suerte
Cigar & Cigarette Factory in G.R. No. 158197 and
AFFIRMS the questioned decision and resolution
of the Court of Appeals in CA-G.R. SP. No. 37124;
and
76
 6. DENIES the petition for review filed by La Suerte
Cigar & Cigarette Factory in G.R. No. 165499 and
AFFIRMS the questioned decision and resolution
of the Court of Appeals in CA-G.R. SP. No. 50241.
5. Petitioner-Organizations vs. Executive Secretary,
669 SCRA 49, April 10, 2012
ABAD, J.:
These are consolidated petitions to declare
unconstitutional certain presidential decrees and
executive orders of the martial law era relating to the
raising and use of coco-levy funds.
The Facts and the Case
On June 19, 1971 Congress enacted Republic Act (R.A.)
62601 that established a Coconut Investment Fund (CI
Fund) for the development of the coconut industry
through capital financing.2 Coconut farmers were to
capitalize and administer the Fund through the Coconut
Investment Company (CIC)3 whose objective was, among
others, to advance the coconut farmers’ interests. For
this purpose, the law imposed a levy of ₱0.55 on the
coconut farmer’s first domestic sale of every 100
kilograms of copra, or its equivalent, for which levy he
was to get a receipt convertible into CIC shares of stock.4
About a year following his proclamation of martial law in
the country or on August 20, 1973 President Ferdinand
E. Marcos issued Presidential Decree (P.D.) 276,5 which
established a Coconut Consumers Stabilization Fund
(CCS Fund), to address the crisis at that time in the
domestic market for coconut-based consumer goods.
The CCS Fund was to be built up through the imposition
of a ₱15.00-levy for every first sale of 100 kilograms of
copra resecada.6 The levy was to cease after a year or
earlier provided the crisis was over. Any remaining
balance of the Fund was to revert to the CI Fund
established under R.A. 6260.7
A year later or on November 14, 1974 President Marcos
issued P.D. 582,8 creating a permanent fund called the
Coconut Industry Development Fund (CID Fund) to
channel for the ultimate direct benefit of coconut farmers
part of the levies that they were already paying. The
Philippine Coconut Authority (PCA) was to provide ₱100
million as initial capital of the CID Fund and, thereafter,
give the Fund at least ₱0.20 per kilogram of copra
resecada out of the PCA’s collection of coconut
consumers stabilization levy. In case of the lifting of this
levy, the PCA was then to impose a permanent levy of
77
₱0.20 on the first sale of every kilogram of copra to form
part of the CID Fund.9 Also, under P.D. 582, the Philippine
National Bank (PNB), then owned by the Government,
was to receive on deposit, administer, and use the CID
Fund.10 P.D. 582 authorized the PNB to invest the unused
portion of the CID Fund in easily convertible investments,
the earnings of which were to form part of the Fund.11
In 1975 President Marcos enacted P.D. 75512 which
approved the acquisition of a commercial bank for the
benefit of the coconut farmers to enable such bank to
promptly and efficiently realize the industry’s credit
policy.13 Thus, the PCA bought 72.2% of the shares of
stock of First United Bank, headed by Pedro
Cojuangco.14 Due to changes in its corporate identity and
purpose, the bank’s articles of incorporation were
amended in July 1975, resulting in a change in the bank’s
name from First United Bank to United Coconut Planters
Bank (UCPB).15
On July 14, 1976 President Marcos enacted P.D. 961,16
the Coconut Industry Code, which consolidated and
codified existing laws relating to the coconut industry. The
Code provided that surpluses from the CCS Fund and
the CID Fund collections, not used for replanting and
other authorized purposes, were to be invested by
acquiring shares of stock of corporations, including the
San Miguel Corporation (SMC), engaged in undertakings
related to the coconut and palm oil industries.17 UCPB
was to make such investments and equitably distribute
these for free to coconut farmers.18 These investments
constituted the Coconut Industry Investment Fund (CIIF).
P.D. 961 also provided that the coconut levy funds
(coco-levy funds) shall be owned by the coconut farmers
in their private capacities.19 This was reiterated in the PD
146820 amendment of June 11, 1978.
In 1980, President Marcos issued P.D. 1699,21
suspending the collections of the CCS Fund and the CID
Fund. But in 1981 he issued P.D. 184122 which revived
the collection of coconut levies. P.D. 1841 renamed the
CCS Fund into the Coconut Industry Stabilization Fund
(CIS Fund).23 This Fund was to be earmarked
proportionately among several development programs,
such as coconut hybrid replanting program, insurance
coverage for the coconut farmers, and scholarship
program for their children.24
In November 2000 then President Joseph Estrada issued
Executive Order (E.O.) 312,25 establishing a Sagip
Niyugan Program which sought to provide immediate
income supplement to coconut farmers and encourage
the creation of a sustainable local market demand for
coconut oil and other coconut products.26 The Executive
Order sought to establish a ₱1-billion fund by disposing
of assets acquired using coco-levy funds or assets of
entities supported by those funds.27 A committee was
created to manage the fund under this program.28 A
majority vote of its members could engage the services
of a reputable auditing firm to conduct periodic audits.29
78
At about the same time, President Estrada issued E.O.
313,30 which created an irrevocable trust fund known as
the Coconut Trust Fund (the Trust Fund). This aimed to
provide financial assistance to coconut farmers, to the
coconut industry, and to other agri-related programs.31
The shares of stock of SMC were to serve as the Trust
Fund’s initial capital.32 These shares were acquired with
CII Funds and constituted approximately 27% of the
outstanding capital stock of SMC. E.O. 313 designated
UCPB, through its Trust Department, as the Trust Fund’s
trustee bank. The Trust Fund Committee would
administer, manage, and supervise the operations of the
Trust Fund.33 The Committee would designate an external
auditor to do an annual audit or as often as needed but it
may also request the Commission on Audit (COA) to
intervene.34
To implement its mandate, E.O. 313 directed the
Presidential Commission on Good Government, the
Office of the Solicitor General, and other government
agencies to exclude the 27% CIIF SMC shares from Civil
Case 0033, entitled Republic of the Philippines v.
Eduardo Cojuangco, Jr., et al., which was then pending
before the Sandiganbayan and to lift the sequestration
over those shares.35
On January 26, 2001, however, former President Gloria
Macapagal-Arroyo ordered the suspension of E.O.s 312
and 313.36 This notwithstanding, on March 1, 2001
petitioner organizations and individuals brought the
present action in G.R. 147036-37 to declare E.O.s 312
and 313 as well as Article III, Section 5 of P.D. 1468
unconstitutional. On April 24, 2001 the other sets of
petitioner organizations and individuals instituted G.R.
147811 to nullify Section 2 of P.D. 755 and Article III,
Section 5 of P.D.s 961 and 1468 also for being
unconstitutional.
The Issues Presented
The parties submit the following issues for adjudication:
Procedurally –
1. Whether or not petitioners’ special civil actions of
certiorari under Rule 65 constituted the proper remedy for
their actions; and
2. Whether or not petitioners have legal standing to bring
the same to court.
On the substance –
3. Whether or not the coco-levy funds are public funds;
and
4. Whether or not (a) Section 2 of P.D. 755, (b) Article III,
Section 5 of P.D.s 961 and 1468, (c) E.O. 312, and (d)
E.O. 313 are unconstitutional.
The Rulings of the Court
79
First. UCPB questions the propriety of the present
petitions for certiorari and mandamus under Rule 65 on
the ground that there are no ongoing proceedings in any
tribunal or board or before a government official
exercising judicial, quasi-judicial, or ministerial
37
functions. UCPB insists that the Court exercises
appellate jurisdiction with respect to issues of
constitutionality or validity of laws and presidential
orders.38
But, as the Court previously held, where there are
serious allegations that a law has infringed the
Constitution, it becomes not only the right but the duty of
the Court to look into such allegations and, when
warranted, uphold the supremacy of the Constitution.39
Moreover, where the issues raised are of paramount
importance to the public, as in this case, the Court has
the discretion to brush aside technicalities of procedure.40
Second. The Court has to uphold petitioners’ right to
institute these petitions. The petitioner organizations in
these cases represent coconut farmers on whom the
burden of the coco-levies attaches. It is also primarily for
their benefit that the levies were imposed.
The individual petitioners, on the other hand, join the
petitions as taxpayers. The Court recognizes their right to
restrain officials from wasting public funds through the
enforcement of an unconstitutional statute.41 This
so-called taxpayer’s suit is based on the theory that
expenditure of public funds for the purpose of executing
an unconstitutional act is a misapplication of such
funds.42
Besides, the 1987 Constitution accords to the citizens a
greater participation in the affairs of government. Indeed,
it provides for people's initiative, the right to information
on matters of public concern (including the right to know
the state of health of their President), as well as the right
to file cases questioning the factual bases for the
suspension of the privilege of writ of habeas corpus or
declaration of martial law. These provisions enlarge the
people’s right in the political as well as the judicial field. It
grants them the right to interfere in the affairs of
government and challenge any act tending to prejudice
their interest.
Third. For some time, different and conflicting notions had
been formed as to the nature and ownership of the
coco-levy funds. The Court, however, finally put an end to
the dispute when it categorically ruled in Republic of the
Philippines v. COCOFED43 that these funds are not only
affected with public interest; they are, in fact, prima facie
public funds. Prima facie means a fact presumed to be
true unless disproved by some evidence to the contrary.44
The Court was satisfied that the coco-levy funds were
raised pursuant to law to support a proper governmental
purpose. They were raised with the use of the police and
taxing powers of the State for the benefit of the coconut
80
industry and its farmers in general. The COA reviewed
the use of the funds. The Bureau of Internal Revenue
(BIR) treated them as public funds and the very laws
governing coconut levies recognize their public
character.45
The Court has also recently declared that the coco-levy
funds are in the nature of taxes and can only be used for
public purpose.46 Taxes are enforced proportional
contributions from persons and property, levied by the
State by virtue of its sovereignty for the support of the
government and for all its public needs.47 Here, the
coco-levy funds were imposed pursuant to law, namely,
R.A. 6260 and P.D. 276. The funds were collected and
managed by the PCA, an independent government
corporation directly under the President.48 And, as the
respondent public officials pointed out, the pertinent laws
used the term levy,49 which means to tax,50 in describing
the exaction.
Of course, unlike ordinary revenue laws, R.A. 6260 and
P.D. 276 did not raise money to boost the government’s
general funds but to provide means for the rehabilitation
and stabilization of a threatened industry, the coconut
industry, which is so affected with public interest as to be
within the police power of the State.51 The funds sought to
support the coconut industry, one of the main economic
backbones of the country, and to secure economic
benefits for the coconut farmers and farm workers. The
subject laws are akin to the sugar liens imposed by Sec.
7(b) of P.D. 388,52 and the oil price stabilization funds
under P.D. 1956,53 as amended by E.O. 137.54
Respondent UCPB suggests that the coco-levy funds are
closely similar to the Social Security System (SSS) funds,
which have been declared to be not public funds but
properties of the SSS members and held merely in trust
by the government.55 But the SSS Law56 collects premium
contributions. It does not collect taxes from members for
a specific public purpose. They pay contributions in
exchange for insurance protection and benefits like
loans, medical or health services, and retirement
packages. The benefits accrue to every SSS member,
not to the public, in general.57
Furthermore, SSS members do not lose ownership of
their contributions. The government merely holds these in
trust, together with his employer’s contribution, to answer
for his future benefits.58 The coco-levy funds, on the other
hand, belong to the government and are subject to its
administration and disposition. Thus, these funds,
including its incomes, interests, proceeds, or profits, as
well as all its assets, properties, and shares of stocks
procured with such funds must be treated, used,
administered, and managed as public funds.59
Lastly, the coco-levy funds are evidently special funds. In
Gaston v. Republic Planters Bank,60 the Court held that
the State collected stabilization fees from sugar millers,
planters, and producers for a special purpose: to finance
81
the growth and development of the sugar industry and all
its components. The fees were levied for a special
purpose and, therefore, constituted special fund when
collected. Its character as such fund was made clear by
the fact that they were deposited in the PNB (then a
wholly owned government bank) and not in the Philippine
Treasury. In Osmeña v. Orbos,61 the Court held that the
oil price stabilization fund was a special fund mainly
because this was segregated from the general fund and
placed in what the law referred to as a trust account. Yet
it remained subject to COA scrutiny and review. The
Court finds no substantial distinction between these
funds and the coco-levy funds, except as to the industry
they each support.
Fourth. Petitioners in G.R. 147811 assert that Section 2
of P.D. 755 above is void and unconstitutional for
disregarding the public character of coco-levy funds. The
subject section provides:
Section 2. Financial Assistance. x x x and since the
operations, and activities of the Philippine Coconut
Authority are all in accord with the present social
economic plans and programs of the Government, all
collections and levies which the Philippine Coconut
Authority is authorized to levy and collect such as but not
limited to the Coconut Consumers’ Stabilization Levy, and
the Coconut Industry Development Fund as prescribed
by Presidential Decree No. 582 shall not be considered
or construed, under any law or regulation, special and/or
fiduciary funds and do not form part of the general funds
of the national government within the contemplation of
Presidential Decree No. 711. (Emphasis ours)
The Court has, however, already passed upon this
question in Philippine Coconut Producers Federation,
Inc. (COCOFED) v. Republic of the Philippines.62 It held
as unconstitutional Section 2 of P.D. 755 for "effectively
authorizing the PCA to utilize portions of the CCS Fund
to pay the financial commitment of the farmers to acquire
UCPB and to deposit portions of the CCS Fund levies
with UCPB interest free. And as there also provided, the
CCS Fund, CID Fund and like levies that PCA is
authorized to collect shall be considered as non-special
or fiduciary funds to be transferred to the general fund of
the Government, meaning they shall be deemed private
funds."
Identical provisions of subsequent presidential decrees
likewise declared coco-levy funds private properties of
coconut farmers. Article III, Section 5 of P.D. 961 reads:
Section 5. Exemptions. The Coconut Consumers
Stabilization Fund and the Coconut Industry
Development Fund as well as all disbursements of said
funds for the benefit of the coconut farmers as herein
authorized shall not be construed or interpreted, under
any law or regulation, as special and/or fiduciary funds,
or as part of the general funds of the national government
within the contemplation of P.D. No. 711; nor as a
82
subsidy, donation, levy, government funded investment,
or government share within the contemplation of P.D.
898, the intention being that said Fund and the
disbursements thereof as herein authorized for the
benefit of the coconut farmers shall be owned by them in
their own private capacities. (Emphasis ours)
Section 5 of P.D. 1468 basically reproduces the above
provision, thus–
Section 5. Exemption. — The Coconut Consumers
Stabilization Fund and the Coconut Industry
Development Fund, as well as all disbursements as
herein authorized, shall not be construed or
interpreted, under any law or regulation, as special
and/or fiduciary funds, or as part of the general funds
of the national government within the contemplation of
P.D. 711; nor as subsidy, donation, levy government
funded investment, or government share within the
contemplation of P.D. 898, the intention being that
said Fund and the disbursements thereof as herein
authorized for the benefit of the coconut farmers
shall be owned by them in their private capacities:
Provided, however, That the President may at any time
authorize the Commission on Audit or any other officer of
the government to audit the business affairs,
administration, and condition of persons and entities who
receive subsidy for coconut-based consumer products x
x x. (Emphasis ours)
Notably, the raising of money by levy on coconut farm
production, a form of taxation as already stated, began in
1971 for the purpose of developing the coconut industry
and promoting the interest of coconut farmers. The use of
the fund was expanded in 1973 to include the
stabilization of the domestic market for coconut-based
consumer goods and in 1974 to divert part of the funds
for obtaining direct benefit to coconut farmers. After five
years or in 1976, however, P.D. 961 declared the
coco-levy funds private property of the farmers. P.D. 1468
reiterated this declaration in 1978. But neither
presidential decree actually turned over possession or
control of the funds to the farmers in their private
capacity. The government continued to wield
undiminished authority over the management and
disposition of those funds.
In any event, such declaration is void. There is ownership
when a thing pertaining to a person is completely
subjected to his will in everything that is not prohibited by
law or the concurrence with the rights of another.63 An
owner is free to exercise all attributes of ownership: the
right, among others, to possess, use and enjoy, abuse or
consume, and dispose or alienate the thing owned.64 The
owner is of course free to waive all or some of these
rights in favor of others. But in the case of the coconut
farmers, they could not, individually or collectively, waive
what have not been and could not be legally imparted to
them.
83
Section 2 of P.D. 755, Article III, Section 5 of P.D. 961,
and Article III, Section 5 of P.D. 1468 completely ignore
the fact that coco-levy funds are public funds raised
through taxation. And since taxes could be exacted only
for a public purpose, they cannot be declared private
properties of individuals although such individuals fall
within a distinct group of persons.65
The Court of course grants that there is no hard-and-fast
rule for determining what constitutes public purpose. It is
an elastic concept that could be made to fit into modern
standards. Public purpose, for instance, is no longer
restricted to traditional government functions like building
roads and school houses or safeguarding public health
and safety. Public purpose has been construed as
including the promotion of social justice. Thus, public
funds may be used for relocating illegal settlers, building
low-cost housing for them, and financing both urban and
agrarian reforms that benefit certain poor individuals.
Still, these uses relieve volatile iniquities in society and,
therefore, impact on public order and welfare as a whole.
But the assailed provisions, which removed the coco-levy
funds from the general funds of the government and
declared them private properties of coconut farmers, do
not appear to have a color of social justice for their
purpose. The levy on copra that farmers produce
appears, in the first place, to be a business tax judging by
its tax base. The concept of farmers-businessmen is
incompatible with the idea that coconut farmers are
victims of social injustice and so should be beneficiaries
of the taxes raised from their earnings.
It would altogether be different of course if the laws
mentioned set apart a portion of the coco-levy fund for
improving the lives of destitute coconut farm owners or
workers for their social amelioration to establish a proper
government purpose. The support for the poor is
generally recognized as a public duty and has long been
an accepted exercise of police power in the promotion of
the common good.66 But the declarations do not
distinguish between wealthy coconut farmers and the
impoverished ones. And even if they did, the Government
cannot just embark on a philanthropic orgy of inordinate
dole-outs for motives political or otherwise.67
Consequently, such declarations are void since they
appropriate public funds for private purpose and,
therefore, violate the citizens’ right to substantive due
process.68
On another point, in stating that the coco-levy fund "shall
not be construed or interpreted, under any law or
regulation, as special and/or fiduciary funds, or as part of
the general funds of the national government," P.D.s 961
and 1468 seek to remove such fund from COA scrutiny.
This is also the fault of President Estrada’s E.O. 312
which deals with ₱1 billion to be generated out of the sale
of coco-fund acquired assets. Thus–
84
Section 5. Audit of Fund and Submission of Report. –
The Committee, by a majority vote, shall engage the
services of a reputable auditing firm to conduct periodic
audits of the fund. It shall render a quarterly report on all
pertinent transactions and availments of the fund to the
Office of the President within the first three (3) working
days of the succeeding quarter. (Emphasis ours)
E.O. 313 has a substantially identical provision governing
the management and disposition of the Coconut Trust
Fund capitalized with the substantial SMC shares of
stock that the coco-fund acquired. Thus–
Section 13. Accounting. — x x x
The Fund shall be audited annually or as often as
necessary by an external auditor designated by the
Committee. The Committee may also request the
Commission on Audit to conduct an audit of the Fund.
(Emphasis ours)
But, since coco-levy funds are taxes, the provisions of
P.D.s 755, 961 and 1468 as well as those of E.O.s 312
and 313 that remove such funds and the assets acquired
through them from the jurisdiction of the COA violate
Article IX-D, Section 2(1)69 of the 1987 Constitution.
Section 2(1) vests in the COA the power and authority to
examine uses of government money and property. The
cited P.D.s and E.O.s also contravene Section 270 of P.D.
898 (Providing for the Restructuring of the Commission
on Audit), which has the force of a statute.
And there is no legitimate reason why such funds should
be shielded from COA review and audit. The PCA, which
implements the coco-levy laws and collects the coco-levy
funds, is a government-owned and controlled corporation
subject to COA review and audit.
E.O. 313 suffers from an additional infirmity. Its title,
"Rationalizing the Use of the Coconut Levy Funds by
Constituting a ‘Fund for Assistance to Coconut Farmers’
as an Irrevocable Trust Fund and Creating a Coconut
Trust Fund Committee for the Management thereof"
tends to mislead. Apparently, it intends to create a trust
fund out of the coco-levy funds to provide economic
assistance to the coconut farmers and, ultimately, benefit
the coconut industry.71 But on closer look, E.O. 313 strays
from the special purpose for which the law raises
coco-levy funds in that it permits the use of coco-levy
funds for improving productivity in other food areas.
Thus:
Section 2. Purpose of the Fund. — The Fund shall be
established for the purpose of financing programs of
assistance for the benefit of the coconut farmers, the
coconut industry, and other agri-related programs
intended to maximize food productivity, develop
business opportunities in the countryside, provide
85
livelihood alternatives, and promote anti-poverty
programs. (Emphasis ours)
xxxx
Section 9. Use and Disposition of the Trust Income. —
The Coconut Trust Fund Committee, on an annual basis,
shall determine and establish the amount comprising the
Trust Income. After such determination, the Committee
shall earmark, allocate and disburse the Trust Income for
the following purposes, namely:
xxxx
(d) Thirty percent (30%) of the Trust Income shall be
used to assist and fund agriculturally-related
programs for the Government, as reasonably
determined by the Trust Fund Committee, implemented
for the purpose of: (i) maximizing food productivity in the
agriculture areas of the country, (ii) enhancing the
upliftment and well-being of the living conditions of
farmers and agricultural workers, (iii) developing viable
industries and business opportunities in the countryside,
(iv) providing alternative means of livelihood to the direct
dependents of agriculture businesses and enterprises,
and (v) providing financial assistance and support to
coconut farmers in times of economic hardship due to
extremely low prices of copra and other coconut
products, natural calamities, world market dislocation and
similar occurrences, including financial support to the
ERAP’s Sagip Niyugan Program established under
Executive Order No. 312 dated November 3, 2000; x x x.
(Emphasis ours)
Clearly, E.O. 313 above runs counter to the constitutional
provision which directs that all money collected on any
tax levied for a special purpose shall be treated as a
special fund and paid out for such purpose only.72
Assisting other agriculturally-related programs is way off
the coco-fund’s objective of promoting the general
interests of the coconut industry and its farmers.
A final point, the E.O.s also transgress P.D. 1445,73
Section 84(2),74 the first part by the previously mentioned
sections of E.O. 313 and the second part by Section 4 of
E.O. 312 and Sections 6 and 7 of E.O. 313. E.O. 313
vests the power to administer, manage, and supervise
the operations and disbursements of the Trust Fund it
established (capitalized with SMC shares bought out of
coco-levy funds) in a Coconut Trust Fund Committee.
Thus–
Section 6. Creation of the Coconut Trust Fund
Committee. — A Committee is hereby created to
administer, manage and supervise the operations of
the Trust Fund, chaired by the President with ten (10)
members, as follows:
(a) four (4) representatives from the government sector,
two of whom shall be the Secretary of Agriculture and the
86
Secretary of Agrarian Reform who shall act as Vice
Chairmen;
(b) four (4) representatives from coconut farmers’
organizations, one of whom shall come from a list of
nominees from the Philippine Coconut Producers
Federation Inc. ("COCOFED");
(c) a representative from the CIIF; and
(d) a representative from a non-government organization
(NGO) involved in agricultural and rural development.
All decisions of the Coconut Trust Fund Committee shall
be determined by a majority vote of all the members.
The Coconut Trust Fund Committee shall perform the
functions and duties set forth in Section 7 hereof, with the
skill, care, prudence and diligence necessary under the
circumstances then prevailing that a prudent man acting
in like capacity would exercise.
The members of the Coconut Trust Fund Committee shall
be appointed by the President and shall hold office at his
pleasure.
The Coconut Trust Fund Committee is authorized to hire
administrative, technical and/or support staff as may be
required to enable it to effectively perform its functions
and responsibilities. (Emphasis ours)
Section 7. Functions and Responsibilities of the
Committee. — The Coconut Trust Fund Committee shall
have the following functions and responsibilities:
(a) set the investment policy of the Trust Fund;
(b) establish priorities for assistance giving preference to
small coconut farmers and farmworkers which shall be
reviewed periodically and revised as necessary in
accordance with changing conditions;
(c) receive, process and approve project proposals for
financing by the Trust Fund;
(d) decide on the use of the Trust Fund’s income or
net earnings including final action on applications for
assistance, grants and/or loans;
(e) avail of professional counsel and services by retaining
an investment and financial manager, if desired;
(f) formulate the rules and regulations governing the
allocation, utilization and disbursement of the Fund;
and
(g) perform such other acts and things as may be
necessary proper or conducive to attain the purposes of
the Fund. (Emphasis ours)
Section 4 of E.O. 312 does essentially the same thing. It
vests the management and disposition of the assistance
87
fund generated from the sale of coco-levy fund-acquired
assets into a Committee of five members. Thus, Section
4 of E.O. 312 provides –
Section 4. Funding. – Assets acquired through the
coconut levy funds or by entities financed by the coconut
levy funds identified by the President for appropriate
disposal or sale, shall be sold or disposed to generate a
maximum fund of ONE BILLION PESOS
(₱1,000,000,000.00) which shall be managed by a
Committee composed of a Chairman and four (4)
members to be appointed by the President whose term
shall be co-terminus with the Program. x x x (Emphasis
ours)
In effect, the above transfers the power to allocate, use,
and disburse coco-levy funds that P.D. 232 vested in the
PCA and transferred the same, without legislative
authorization and in violation of P.D. 232, to the
Committees mentioned above. An executive order cannot
repeal a presidential decree which has the same
standing as a statute enacted by Congress.
UCPB invokes the principle of separability to save the
assailed laws from being struck down. The general rule is
that where part of a statute is void as repugnant to the
Constitution, while another part is valid, the valid portion,
if susceptible to being separated from the invalid, may
stand and be enforced. When the parts of a statute,
however, are so mutually dependent and connected, as
conditions, considerations, or compensations for each
other, as to warrant a belief that the legislature intended
them as a whole, the nullity of one part will vitiate the
rest. In which case, if some parts are unconstitutional, all
the other provisions which are thus dependent,
conditional, or connected must consequently fall with
them.75
But, given that the provisions of E.O.s 312 and 313,
which as already stated invalidly transferred powers over
the funds to two committees that President Estrada
created, the rest of their provisions became
non-operational. It is evident that President Estrada
would not have created the new funding programs if they
were to be managed by some other entity. Indeed, he
made himself Chairman of the Coconut Trust Fund and
left to his discretion the appointment of the members of
the other committee.
WHEREFORE, the Court GRANTS the petition in G.R.
147036-37, PARTLY GRANTS the petition in G.R.
147811, and declares the following VOID:
a) E.O. 312, for being repugnant to Section 84(2) of P.D.
1445, and Article IX-D, Section 2(1) of the Constitution;
and
b) E.O. 313, for being in contravention of Section 84(2) of
P.D. 1445, and Article IX-D, Section 2(1) and Article VI,
Section 29(3) of the Constitution.
88
The Court has previously declared Section 2 of P.D. 755
and Article III, Section 5 of P.D.s 961 and 1468
unconstitutional.
SO ORDERED.
6. Spouses Emmanuel D. Pacquiao and Jinkee J.
Pacquiao, VS. CTA and CIR
G.R. No. 213394. April 06, 2016
DECISION
MENDOZA, J.:
The Antecedents
The genesis of the foregoing controversy began a few
years before the petitioners became elected officials in
their own right. Prior to their election as public officers,
the petitioners relied heavily on Pacquiao's claim to fame
as a world-class professional boxer. Due to his success,
Pacquiao was able to amass income from both the
Philippines and the United States of America (US). His
income from the US came primarily from the purses he
received for the boxing matches he took part under Top
Rank, Inc. On the other hand, his income from the
Philippines consisted of talent fees received from various
Philippine corporations for product endorsements,
advertising commercials and television appearances.
In compliance with his duty to his home country,
Pacquiao filed his 2008 income tax return on April 15,
2009 reporting his Philippine-sourced income.[5] It was
subsequently amended to include his US-sourced
income.[6]
The controversy began on March 25, 2010, when
Pacquiao received a Letter of Authority[7] (March LA) from
the Regional District Office No. 43 (RDO) of the Bureau
of Internal Revenue (BIR) for the examination of his
books of accounts and other accounting records for the
period covering January 1, 2008 to December 31, 2008.
On April 15, 2010, Pacquiao filed his 2009 income tax
return,[8] which although reflecting his Philippines-sourced
income, failed to include his income derived from his
earnings in the US.[9] He also failed to file his Value
Added Tax (VAT) returns for the years 2008 and 2009.[10]
Finding the need to directly conduct the investigation
and determine the tax liabilities of the petitioners,
respondent Commissioner on Internal Revenue (CIR)
issued another Letter of Authority, dated July 27, 2010
(July LA), authorizing the BIR's National Investigation
Division (NID) to examine the books of accounts and
other accounting records of both Pacquiao and Jinkee for
89
the last 15 years, from 1995 to 2009.[11] On September
21, 2010 and September 22, 2010, the CIR replaced the
July LA by issuing to both Pacquiao[12] and Jinkee[13]
separate electronic versions of the July LA pursuant to
Revenue Memorandum Circular (RMC) No. 56-2010.[14]
Due to these developments, the petitioners, through
counsel, wrote a letter[15] questioning the propriety of the
CIR investigation. According to the petitioners, they were
already subjected to an earlier investigation by the BIR
for the years prior to 2007, and no fraud was ever found
to have been committed. They added that pursuant to the
March LA issued by the RDO, they were already being
investigated for the year 2008.
In its letter,[16] dated December 13, 2010, the NID
informed the counsel of the petitioners that the July LA
issued by the CIR had effectively cancelled and
superseded the March LA issued by its RDO. The same
letter also stated that:
Although fraud had been established in the instant
case as determined by the Commissioner, your clients
would still be given the opportunity to present documents
as part of their procedural rights to due process with
regard to the civil aspect thereof. Moreover, any tax
credits and/or payments from the taxable year 2007 &
prior years will be properly considered and credited in the
current investigation.[17]
[Emphasis Supplied]
The CIR informed the petitioners that its reinvestigation
of years prior to 2007 was justified because the
assessment thereof was pursuant to a "fraud
investigation" against the petitioners under the "Run After
Tax Evaders" (RATE) program of the BIR.
On January 5 and 21, 2011, the petitioners submitted
various income tax related documents for the years
2007-2009.[18] As for the years 1995 to 2006, the
petitioners explained that they could not furnish the
bureau with the books of accounts and other, tax related
documents as they had already been disposed in
accordance with Section 235 of the Tax Code.[19] They
added that even if they wanted to, they could no longer
find copies of the documents because during those
years, their accounting records were then managed by
previous counsels, who had since passed away. Finally,
the petitioners pointed out that their tax liabilities for the
said years had already been fully settled with then CIR
Jose Mario Buñag, who after a review, found no fraud
against them.[20]
On June 21; 2011, on the same day that the petitioners
made their last compliance in submitting their tax-related
documents, the CIR issued a subpoena duces tecum[21]
requiring the petitioners rto submit additional income tax
and VAT-related documents for the years 1995-2009.
90
 After conducting its own- investigation, the CIR made its
initial assessment finding that the petitioners were unable
to fully settle their tax liabilities. Thus, the CIR issued its
Notice of Initial Assessment-Informal Conference
(NIC),[22] dated January 31, 2012, directly addressed to
the petitioners, informing them that based on the best
evidence obtainable, they were liable for deficiency
income taxes in the amount of P714,061,116.30 for
2008 and P1,446,245,864.33 for 2009, inclusive of
interests and surcharges. After being informed of this
development, the counsel for the petitioners sought to
have the conference reset but he never received a
response.
Then, on "February 20, 2012, the CIR issued the
Preliminary Assessment Notice[23] (PAN), informing the
petitioners that based on third-party information allowed
under Section 5(B)[24] and 6 of the National Internal
Revenue Code (NIRC),[25] they found the petitioners liable
not only for deficiency income taxes in the amount of
P714,061,116.30 for 2008 and P1,446;245,864.33 for
2009, but aiso for their non-payment of their VAT
liabilities in the amount P4,104,360.01 for 2008 and P
24,901,276.77 for 2009.
The petitioners filed their protest against the PAN.[26]
After denying the protest, the BIR issued its Formal
Letter Demand[27] (FLD), dated May 2, 2012, finding the
petitioners liable for deficiency income tax and VAT
amounting to P766,899,530.62 for taxable years 2008
and P1,433,421,214.61 for 2009, inclusive of interests
and surcharges. Again, the petitioners questioned the
findings of the CIR.[28]
On May 14, 2013, the BIR issued its Final Decision on
Disputed Assessment (FDDA),[29] addressed to Pacquiao
only, informing him that the CIR found him liable for
deficiency income tax and VAT for taxable years 2008
and 2009 which, inclusive of interests and surcharges,
amounted to a total of P2,261,217,439.92.
Seeking to collect the total outstanding tax liabilities of
the petitioners, the Accounts Receivable Monitoring
Division of the BIR (BIR-ARMD), issued the Preliminary
Collection Letter (PCL),[30] dated July 19, 2013,
demanding that both Pacquiao and Jinkee pay the
amount of P2,261,217,439.92, inclusive of interests and
surcharges.
Then, on August 7, 2013, the BIR-ARMD sent Pacquiao
and Jinkee the Final Notice Before Seizure (FNBS),[31]
informing the petitioners of their last opportunity to make
the necessary settlement of deficiency income and VAT
liabilities before the bureau would proceed against their
property.
Although they no longer questioned the BIR's
assessment of their deficiency VAT liability, the
91
petitioners requested that they be allowed to pay the
same in four (4) quarterly installments. Eventually,
through a series of installments, Pacquiao and Jinkee
paid a total P32,196,534.40 in satisfaction of their liability
for deficiency VAT.[32]
Proceedings at the CTA
Aggrieved that they were being made liable for
deficiency income taxes for the years 2008 and 2009,
the petitioners sought redress and filed a petition for
review[33] with the CTA.
Before the CTA, the petitioners contended that the
assessment of the CIR was defective because it was
predicated on its mere allegation that they were guilty of
fraud.[34]
They also questioned the validity of the attempt by the
CIR to collect deficiency taxes from Jinkee, arguing that
she was denied due process. According to the
petitioners, as all previous communications and notices
from the CIR were addressed to both petitioners, the
FDDA was void because it was only addressed to
Pacquiao. Moreover, considering that the PCL and FNBS
were based on the FDDA, the same should likewise be
declared void.[35]
The petitioners added that the CIR assessment, which
was not based on actual transaction documents but
simply on "best possible sources," was not sanctioned
by the Tax Code. They also argue that the assessment
failed to consider not only the taxes paid by Pacquiao to
the US authorities for his fights, but also the deductions
claimed by him for his expenses.[36]
Pending the resolution by the CTA of their appeal, the
petitioners sought the suspension of the issuance of
warrants of distraint and/or levy and warrants of
garnishment.[37]
Meanwhile, in a letter,[38] dated October 14, 2013, the
BIR-ARMD informed the petitioners that they were
denying their request to defer the collection enforcement
action for lack of legal basis. The same letter also
informed the petitioners that despite their initial payment,
the amount to be collected from both of them still
amounted to P3,259,643,792.24, for deficiency income
tax for taxable years 2008 and 2009, and
P46,920,235.74 for deficiency VAT for the same period.
A warrant of distraint and/or levy[39] against Pacquiao and
Jinkee was included in the letter.
Aggrieved, the petitioners filed the subject Urgent Motion
for the CTA to lift the warrants of distraint, levy and
garnishments issued by the CIR against their .assets and
to enjoin the CIR from collecting the assessed deficiency
taxes pending the resolution of their appeal. As for- the
cash deposit and bond requirement under Section 11 of
Republic Act (R.A.) No. 1125, the petitioners question the
92
necessity thereof, arguing that the CIR's assessment of
their tax liabilities was highly questionable. At the same
time, the petitioners manifested that they were willing to
file a bond for such reasonable amount to be fixed by the
tax court.
On April 22, 2014, the CTA issued the first assailed
resolution granting the petitioner's Urgent Motion,
ordering the CIR to desist from collecting on the
deficiency tax assessments against the petitioners. In its
resolution, the CTA noted that the amount sought to be
collected was way beyond the petitioners' net worth,
which, based on Pacquiao's Statement of Assets,
Liabilities and Net Worth (SALN), only amounted to
P1,185,984,697.00. Considering that the petitioners still
needed to cover the costs of their daily subsistence, the
CTA opined that the collection of the total amount of
P3,298,514,894.35 from the petitioners would be highly
prejudicial to their interests and should, thus, be
suspended pursuant to Section 11 of R.A. No. 1125, as
amended.
The CTA, however, saw no justification that the
petitioners should deposit less than the disputed amount.
They were, thus, required to deposit the amount of
P3,298,514,894.35 or post a bond in the amount of
P4,947,772,341.53.
The petitioners sought partial reconsideration of the April
22, 2014 CTA resolution, praying for the reduction of the
amount of the bond required or an extension of 30 days
to file the same. On July 11, 2014, the CTA issued the
second assailed resolution[40] denying the petitioner's
motion to reduce the required cash deposit or bond, but
allowed them an extension of thirty (30) days within
which to file the same.
Hence, this petition, raising the following grounds:
A.
Respondent Court acted with grave abuse of discretion
amounting to lack or excess of jurisdiction in presuming
the correctness of a fraud assessment without
evidentiary support other than the issuance of the fraud
assessments themselves, thereby violating Petitioner's
constitutional right to due process.
B.
Respondent Court acted with grave abuse of discretion
amounting to lack or excess of jurisdiction when it
required the Petitioners to post a bond even if the tax
collection processes employed by Respondent
Commissioner against Petitioners was patently in
violation of law thereby blatantly breaching Petitioners'
constitutional right to due process, to wit:
93
1. Respondent Commissioner commenced tax
collection process against Jinkee without issuing
or serving an FDDA against her.
2. Respondent Commissioner failed to comply with
the procedural due process requirements for
summary tax collection remedies under Sections
207(A) and (B) of the Tax Code when she
commenced summary collection remedies before
the expiration of the period for Petitioners to pay
the assessed deficiency taxes.
3. Respondent Commissioner failed to comply with
the procedural due process requirements for
summary tax collection remedies under Section
208 of the Tax Code when she failed to serve
Petitioners with warrants of garnishment against
their bank accounts
4. The Chief of the ARMD, without any authority from
Respondent Commissioner, increased the
aggregate amount of deficiency income tax and
VAT assessed against Petitioners from
P2,261,217,439.92 to P3,298,514,894.35 after the
filing of the Petition for Review with the Court of
Tax Appeals.
5. Respondent Commissioner arbitrarily refused to
admit that Petitioners had already paid the
deficiency VAT assessments for the years 2008
and 2009.
C.
Respondent Court acted with grave abuse of discretion
amounting to lack or excess of jurisdiction in requiring
Petitioners to post a cash bond in the amount of
P3,298,514,894.35 or a surety bond in the amount of
P4,947,772,341.53, which is effectively an impossible
condition given that their undisputed net worth is only
P1,185,984,697.00.
D.
Respondent Court acted with grave abuse of discretion
amounting to lack or excess of jurisdiction when it
imposed a bond requirement which will effectively
prevent Petitioners from continuing the prosecution of its
appeal from the arbitrary and bloated assessments
issued by Respondent Commissioner.[41]
Arguments of the Petitioners
94
Contending that the CTA En Bane has no certiorari
jurisdiction over interlocutory orders issued by its division,
the petitioners come before the Court, asking it to 1]
direct the CTA to dispense with the bond requirement
imposed under Section 11 of R.A. No. 1125, as amended;
and 2] direct the CIR to suspend the collection of the
deficiency income tax and VAT for the years 2008 and
2009. The petitioners also pray that a temporary
restraining order (TRO) be issued seeking a similar relief
pending the disposition of the subject petition.
In support of their position, the petitioners assert that the
CTA acted with grave abuse of discretion amounting to
lack or excess of jurisdiction in requiring them to provide
security required under Section 11 of R.A. No. 1125.
Under the circumstances, they claim that they should not
be required to make a cash deposit or post a bond to
stay the collection of the questioned deficiency taxes
considering that the assessment and collection efforts of
the BIR was marred by both procedural and substantive
errors. They are synthesized as follows:
First. The CTA erred when it required them to make a
cash deposit or post a bond on the basis of the fraud
assessment by the CIR. Similar to the argument they
raised in their petition for review with the CTA, they insist
that the fraud assessment by the CIR could not serve as
basis for security because the amount assessed by the
CIR was made without evidentiary basis,[42] but just
grounded on the "best possible sources," without any
detail.
Second... The BIR failed to accord them procedural due
process when it initiated summary collection remedies
even before the expiration of the period allowed for them
to pay the assessed deficiency taxes.[43] They also
claimed that they were not served with warrants of
garnishment and that the warrants of garnishment served
on their banks of account were made even before they
received the FDDA and PCL.[44]
Third. The BIR only served the FDDA to Pacquiao. There
was no similar notice to Jinkee. Considering such failure,
the CIR effectively did not find Jinkee liable for deficiency
taxes. The collection of deficiency taxes against Jinkee
was improper as it violated her right to due process of
law.[45] Accordingly, the petitioners question the propriety
of the CIR's attempt to collect deficiency taxes from
Jinkee.
Fourth. The amount assessed by the BIR as deficiency
taxes included the deficiency VAT for the years 2008 and
2009 which they had already paid, albeit in installments.
Fifth. The posting of the required security is effectively
an impossible condition given that their undisputed net
worth is only P1,185,984,697.00
95
Considering the issues raised, it is the position of the
petitioners that the circumstances of the case warrant the
application of the exception provided under Section 11 of
R.A. No. 1125 as affirmed by the ruling of the Court in
Collector of Internal Revenue v. Avelino[46] (Avelino) and
Collector of Internal Revenue v. Zulueta,[47] (Zulueta) and
that they should have been exempted from posting the
required security as a prerequisite to suspend the
collection of deficiency taxes from them.
On August 18, 2014, the Court resolved to grant the
petitioners' prayer for the issuance of a TRO and to
require the CIR to file its comment.[48]
Arguments of the CIR
For its part,- the CIR asserts that the CTA was correct in
insisting that the petitioners post the required cash
deposit or bond as a condition to suspend the collection
of deficiency taxes. According to. the tax administrator,
Section 11 of R.A. No. 1125, as amended, is without
exception when it states that notwithstanding an appeal
to the CTA, a taxpayer, in order to suspend the payment
of his tax liabilities, is required to deposit the amount
claimed by the CIR or to file a surety bond for not more
than double the amount due.[49]
As for the Court's rulings in Avelino and Zulueta invoked
by the petitioners, the CIR argues that they are
inapplicable considering that in the said cases, it was
ruled that the requirement of posting a bond to suspend
the collection of taxes could be dispensed with only if the
methods employed by the CIR in the tax collection were
clearly null and void and prejudicial to the taxpayer.[50]
The CIR points out that, in this case, the CTA itself made,
no finding that its collection by summary methods was
void and even ruled that "the alleged illegality of the
methods employed by the respondent (CIR) to effect the
collection of tax [is] not at all patent or evident xxx" and
could only be determined after a full-blown trial.[51] The
CIR even suggests that the Court revisit its ruling in
Avelino and Zulueta as Section 11 of R.A. No. 1125, as
amended, gives the CTA no discretion to allow the
dispensation of the required bond as a condition to
suspend the collection of taxes.
Finally, the CIR adds that whether the assessment and
collection of the petitioners' tax liabilities were proper as
to justify the application of Avelino and Zulueta is a
question of fact which is not proper in a petition for
certiorari under Rule 65, considering that the rule is only
confined to issues of jurisdiction.[52]
The Court's Ruling
Appeal will not suspend the collection of tax; Exception
96
Section 11 of R.A. No. 1125, as amended by R.A. No.
9282,[53] embodies the rule that an appeal to the CTA
from the decision of the CIR will not suspend the
payment, levy, distraint, and/or sale of any property of the
taxpayer for the satisfaction of his tax liability as provided
by existing law. When, in the view of the CTA, the
collection may jeopardize the interest of the Government
and/or the taxpayer, it may suspend the said collection
and require the taxpayer either to deposit the amount
claimed or to file a surety bond.
The application of the exception to the rule is the crux of
the subject controversy. Specifically, Section 11 provides:
SEC. 11. Who May Appeal; Mode of Appeal; Effect of
Appeal. - Any party adversely affected by a decision,
ruling or inaction of the Commissioner of Internal
Revenue, the Commissioner of Customs, the Secretary
of Finance, the Secretary of Trade and Industry or the
Secretary of Agriculture or the Central Board of
Assessment Appeals or the Regional Trial Courts may
file an appeal with the CTA within thirty (30) days after
the receipt of such decision or ruling or after the
expiration of the period fixed by law for action as referred
to in Section 7(a)(2) herein.
xxxx
No appeal taken to the CTA from the decision of the
Commissioner of Internal Revenue or the Commissioner
of Customs or the Regional Trial Court, provincial, city or
municipal treasurer or the Secretary of Finance, the
Secretary of Trade and Industry and Secretary of
Agriculture, as the case may be shall suspend the
payment, levy, distraint, and/or sale of any property of the
taxpayer for the satisfaction of his tax liability as provided
by existing law:
Provided, however, That when in the opinion of the
Court the collection by the aforementioned
government agencies may jeopardize the interest of
the Government and/or the taxpayer, the Court at any
stage of the proceeding may suspend the said
collection and require the taxpayer either to deposit
the amount claimed or to file a surety bond for not
more than double the amount with the Court.
Essentially, the petitioners ascribe grave abuse of
discretion on the part of the CTA when it issued the
subject resolutions requiring them to deposit-the amount
of P3,298,514,894.35 or post a bond in the amount of
P4,947,772,341.53 as a condition for its order enjoining
the CIR from collecting the taxes from them. The
petitioners anchor their contention on the premise that
the assessment and collection processes employed by
the CIR in exacting their tax liabilities were in patent
violation of their constitutional right to due process of law.
They, thus, posit that pursuant to Avelino and Zulueta,
97
the tax court should have not only ordered the CIR to
suspend the collection efforts it was pursuing in
satisfaction of their tax liability, but also dispensed with
the requirement of depositing a cash or filing a surety
bond.
To recall, the Court in Avelino upheld the decision of the
CTA to declare the warrants of garnishment, distraint and
levy and the notice of sale of the properties of Jose
Avelino null and void and ordered the CIR to desist from
collecting the deficiency income taxes which were
assessed for the years 1946 to 1948 through summary
administrative methods. The Court therein found that the
demand of the then CIR was made without authority of
law because it was made five (5) years and thirty-five
(35) days after the last two returns of Jose Avelino were
filed - clearly beyond the three (3)-year prescriptive
period provided under what was then Section 51(d) of the
National Internal Revenue Code. Dismissing the
contention of the CIR that the deposit of the amount
claimed or the filing of a bond as required by law was a
requisite before relief was granted, the Court therein
concurred with the opinion of the CTA that the courts
were clothed with authority to dispense with the
requirement "if the method employed by the Collector of
Internal Revenue in the collection of tax is not sanctioned
by law."[54]
In Zulueta, the Court likewise dismissed the argument
that the CTA erred in issuing the injunction without
requiring the taxpayer either to deposit the amount
claimed or to file a surety bond for an amount not more
than double the tax sought to be collected. The Court
cited Collector of Internal Revenue v. Aurelio P. Reyes
and the Court of Tax Appeals[55] where it was written:
Xxx. At first blush it might be as contended by the
Solicitor General, but a careful analysis of the second
paragraph of said Section 11 will lead Us to the
conclusion that the requirement of the bond as a
condition precedent to the issuance of a writ of injunction
applies only in cases where the processes by which the
collection sought to be made by means thereof are
carried out in consonance with law for such cases
provided and not when said processes are obviously in
violation of the law to the extreme that they have to be
SUSPENDED for jeopardizing the interests of the
taxpayer.[56]
The Court went on to explain the reason for empowering
the courts to issue such injunctive writs. It wrote:
"Section 11 of Republic Act No. 1125 is therefore
premised on the assumption that the collection by
summary proceedings is by itself in accordance with
existing laws; and then what is suspended is the act of
collecting, whereas, in the case at bar what the
respondent Court suspended was the use of the method
employed to verify the collection which was evidently
98
illegal after the lapse of the three-year limitation period.
The respondent Court issued the injunction in question
on the basis of its findings that the means intended to be
used by petitioner in the collection of the alleged
deficiency taxes were in violation of law.
It would certainly be an absurdity on the part of the
Court of Tax Appeals to declare that the collection by
the summary methods of distraint and levy was
violative of the law, and then, on the same breath
require the petitioner to deposit or file a bond as a
prerequisite of the issuance of a writ of injunction.
Let us suppose, for the sake of argument, that the Court
a quo would have required the petitioner to post the bond
in question and that the taxpayer would refuse or fail to
furnish said bond, would the Court a quo be obliged to
authorize or allow the Collector of Internal Revenue to
proceed with the collection from the petitioner of the
taxes due by a means it previously declared to be
contrary to law?"[57]
[Italics included. Emphases and Underlining Supplied]
Thus, despite the amendments to the law, the Court still
holds that the CTA has ample authority to issue injunctive
writs to restrain the collection of tax and to even
dispense with the deposit of the amount claimed or
the filing of the required bond, whenever the method
employed by the CIR in the collection of. tax jeopardizes
the interests of a taxpayer for being patently in violation
of the law. Such authority emanates from the jurisdiction
conferred to it not only by Section 11 of R.A. No. 1125,
but also by Section 7 of the same law, which, as
amended provides:
Sec. 7. Jurisdiction. - The Court of Tax Appeals shall
exercise:
a. Exclusive appellate jurisdiction to review by appeal, as
herein provided:
l. Decisions of the Commissioner of Internal Revenue in
cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising
under the National Internal Revenue or other laws
administered by the Bureau of Internal Revenue;
From all the foregoing, it is clear that the authority of the
courts to issue injunctive writs to restrain the collection of
tax and to dispense with the deposit of the amount
claimed or the filing of the required bond is not simply
confined to cases where prescription has set in. As
explained by the Court in those cases, whenever it is
determined by the courts that the method employed
by the Collector of Internal Revenue in the collection
of tax is not sanctioned by law, the bond requirement
under Section 11 of R.A. No. 1125 should be dispensed
99
with. The purpose of the rule is not only to prevent
jeopardizing the interest of the taxpayer, but more
importantly, to prevent the absurd situation wherein the
court would declare "that the collection by the summary
methods of distraint and levy was violative of law, and
then, in the same breath require the petitioner to deposit
or file a bond as a prerequisite for the issuance of a writ
of injunction."[58]
The determination of whether the petitioners.' case falls
within the exception provided under Section 11, R.A No.
1125 cannot be determined at this point
Applying the foregoing precepts to the subject
controversy, the Court finds no sufficient basis in the
records for the Court to determine whether the
dispensation of the required cash deposit or bond
provided under Section 11, R.A No. 1125 is appropriate.
It should first be highlighted that in rendering the
assailed resolution, the CTA, without stating the facts and
law, made a determination that the illegality of the
methods employed by the CIR to effect the collection of
tax was not patent. To quote the CTA:
In this case, the alleged illegality of the methods
employed by respondent to effect the collection of tax is
not at all patent or evident as in the foregoing cases.
At this early stage of the proceedings, it is premature for
this Court to rule on the issues of whether or not the
warrants were defectively issued; or whether the service
thereof was done in violation of the rules; or whether or
not respondent's assessments were valid. These
matters are evidentiary in nature, the resolution of
which can only be made after a full blown trial.
Apropos, the Court finds no legal basis to apply Avelino
and Zulueta to the instant case and exempt petitioners
from depositing a cash bond or filing a surety bond
before a suspension order may be effected.[59]
Though it may be true that it would have been premature
for the CTA to immediately determine whether the
assessment made against the petitioners was valid or
whether the warrants were properly issued and served,
still, it behooved upon the CTA to properly determine, at
least preliminarily, whether the CIR, in its assessment
of the tax liability of the petitioners, and its effort of
collecting the same, complied with the law and the
pertinent issuances of the BIR itself. The CTA should
have conducted a preliminary hearing and received
evidence so it could have properly determined whether
the requirement of providing the required security under
Section 11, R.A. No. 1125 could be reduced or dispensed
with pendente lite.
The Court cannot make a preliminary determination
on whether the CIR used methods not sanctioned by law
100
 Absent any evidence and preliminary determination by
the CTA, the Court cannot make any factual finding and
settle the issue of whether the petitioners should comply
with the security requirement under Section 11, R.A. No.
1125. The determination of whether the methods,
employed by the CIR in its assessment, jeopardized the
interests of a taxpayer for being patently in violation of
the law is a question of fact that calls for the
reception of evidence which would serve as basis. In
this regard, the CTA is in a better position to initiate this
given its time and resources. The remand of the "case to
the CTA on this question is, therefore, more sensible and
proper.
For the Court to make any finding of fact on this point
would be premature. As stated earlier, there is no
evidentiary basis. All the arguments are mere allegations
from both sides. Moreover, any finding by the Court
would pre-empt the CTA from properly exercising its
jurisdiction and settle the main issues presented before it,
that is, whether the petitioners were afforded due
process; whether the CIR has valid basis for its
assessment; and whether the petitioners should be held
liable for the deficiency taxes.
Petition to be remanded to the CTA; CTA to conduct
preliminary hearing
As the CTA is in a better, position to make such a
preliminary determination, a remand to the CTA is in
order. To resolve the issue of whether the petitioners
should be required to post the security bond under
Section 11 of R.A. No. 1125, and, if so, in what, amount,
the CTA must take into account, among others, the
following:
First. Whether the requirement of a Notice of Informal
Conference was complied with - The petitioners contend
that the BIR issued the PAN without first sending a NIC to
petitioners. One of the first requirements of Section 3 of
Revenue Regulation (R.R.) No. 12-99,[60] the then
prevailing regulation on the due process requirement in
tax audits and/or investigation,[61] is that a NIC be first
accorded to the taxpayer. The use of the word "shall" in
subsection 3.1.1 describes the mandatory nature of the
service of a NIC.
As with the other notices required under the regulation,
the purpose of sending a NIC is but part of the "due
process requirement in the issuance of a deficiency tax
assessment," the absence of which renders nugatory any
assessment made by the tax authorities.[62]
Second. Whether the 15-year period subject of the
CIR's investigation is arbitrary and excessive. - Section
203[63] of the Tax Code provides a 3-year limit for the
assessment. of internal revenue taxes. While the
prescriptive period to assess deficiency taxes may be
extended to 10 years in cases where there is false,
101
fraudulent, or non-filing of a tax return - the fraud
contemplated by law must be actual. It must be
intentional, consisting of deception willfully and
deliberately done or resorted to in order to induce
another to give up some right.[64]
Third. Whether fraud was duly established. - In its letter,
dated December 13, 2010, the NID had been conducting
a fraud investigation against the petitioners under its
RATE program and that it found that "fraud had been
established in the instant case as determined by the
Commissioner." Under Revenue Memorandum Order
(RMO) No. 27-10, it is required that a preliminary
investigation must first be conducted before a LA is
issued.[65]
Fourth. Whether the FLD issued against the petitioners
was irregular. - The FLD issued against the petitioners
allegedly stated that the amounts therein were
"estimates based on best possible sources." A
taxpayer should be informed in writing of the law and the
facts on which the assessment is made, otherwise, the
assessment is void.[66] An assessment, in order to stand
judicial scrutiny, must be based on facts. The
presumption of the correctness of an assessment, being
a mere presumption, cannot be made to rest on another
presumption.[67]
To stress, the petitioners had asserted that the
assessment of the CIR was not based on actual
transactions but on "estimates based on best possible
sources." This assertion has not been satisfactorily
addressed by the CIR in detail. Thus, there is a need for
the CTA to conduct a preliminary hearing.
Fifth. Whether the FDDA, the PCL, the FNBS, and the
Warrants of Distraint and/or Levy were validly issued. In
its hearing, the CTA must also determine if the following
allegations of the petitioners have merit:,
a. The FDDA and PCL were issued against petitioner
Pacquiao only. The Warrant of Distraint and/or
Levy/Garnishment issued by the CIR, however, were
made against the assets of both petitioners;
b. The warrants of garnishment had been served on the
banks of both petitioners even before the petitioners
received the FDDA and PCL;
c. The Warrant of Distraint and/or Levy/Garnishment
against the petitioners was allegedly made prior to the
expiration of the period allowed for the petitioners to
pay the assessed deficiency taxes;
d. The Warrant of Distraint and/or Levy/Garnishment
against petitioners failed to take into consideration that
the deficiency VAT was already paid in full; and
e. Petitioners were not given a copy of the Warrants.
102
Sections 207[68] and 208[69] of the Tax Code require the
Warrant of Distraint and/or Levy/Garnishment be served
upon the taxpayer.
Additional Factors
In case the CTA finds that the petitioners should provide
the necessary security under Section 11 of R.A. 1125, a
recomputation of the amount thereof is in order.- If there
would be a need for a bond or to reduce the same, the
CTA should take note that the Court, in A.M. No.
15-92-01-CTA, resolved to approve the CTA En Banc
Resolution No. 02-2015, where the phrase "amount
claimed" stated in Section 11 of R.A. No. 1125 was
construed to refer to the principal amount of the
deficiency taxes, excluding penalties, interests and
surcharges.
Moreover, the CTA should.also consider the claim of the
petitioners that they already paid a total of
P32,196,534.40 deficiency VAT assessed against' them..
Despite said payment, the CIR still assessed them the
total amount of P3,298,514,894.35, including the amount
assessed as VAT deficiency, plus surcharges, penalties
and interest. If so, these should also be deducted from
the.amount of the bond to be computed and required.
In the conduct of its preliminary hearing, the CTA must
balance the scale between the inherent power of the
State to tax and its right to prosecute perceived
transgressors of the law, on one side; and the
constitutional rights of petitioners to due process of law
and the equal protection of the laws, on the other. In case
of doubt, the tax court must remember that as in all tax
cases, such scale should favor the taxpayer, for a
citizen's right to due process and equal protection of the
law is amply protected by the Bill of Rights under the
Constitution.[70]
In view of all the foregoing, the April 22, 2014 and July
11, 2014 Resolutions of the CTA, in so far as it required
the petitioners to deposit first a cash bond in the amount
of P3,298,514,894.35 or post a bond of
P4,947,772,341.53, should be further enjoined until the
issues aforementioned are settled in a preliminary
hearing to be conducted by it. Thereafter, it should make
a determination if the posting of a bond would still be
required and, if so, compute it taking into account the
CTA En Banc Resolution, which was approved by the
Court in A.M. No. 15-02-01-CTA, and the claimed
payment of P32,196,534.40, among others.
WHEREFORE, the petition is PARTIALLY GRANTED.
Let a Writ of Preliminary Injunction be issued, enjoining
the implementation of the April 22, 2014 and July 11,
2014 Resolutions of the Court of Tax Appeals, First
Division, in CTA Case No. 8683, requiring the petitioners
to first deposit a cash bond in the amount of
103
P3,298,514,894.35 or post a bond of P4,947,772,341.53,
as a condition to restrain the collection of the deficiency
taxes assessed against them.

The writ shall remain in effect until the issues

aforementioned are settled in a preliminary hearing to be
conducted by the Court of Tax Appeals, First Division.

Accordingly, the case is hereby REMANDED to the

Court of Tax Appeals, First Division, which is ordered to
conduct a preliminary hearing to determine whether the
dispensation or reduction of the required cash deposit or
bond provided under Section 11, Republic Act No. 1125
is proper to restrain the collection of deficiency taxes
assessed against the petitioners.

If required, the Court of Tax Appeals, First Division, shall

proceed to compute the amount of the bond in
accordance with the guidelines aforestated, particularly
the provisions of A.M. No. 15-02-01-CTA. It should also
take into account the amounts already paid by the
petitioners.

After the posting of the required bond, or if the Court of

Tax Appeals, First Division, determines that no bond is
necessary, it shall proceed to hear and resolve the
petition for review pending before it. SO ORDERED.

104
7. PBCom vs. CIR, 302 SCRA 241
QUISUMBING, J.:
This petition for review assails the Resolution 1 of the
Court of Appeals dated September 22, 1993 affirming the
Decision2 and a Resolution 3 of the Court Of Tax Appeals
which denied the claims of the petitioner for tax refund
and tax credits, and disposing as follows:
IN VIEW OF ALL, THE FOREGOING, the instant petition
for review, is DENIED due course. The Decision of the
Court of Tax Appeals dated May 20, 1993 and its
resolution dated July 20, 1993, are hereby AFFIRMED in
toto.
SO ORDERED.4
The Court of Tax Appeals earlier ruled as follows:
WHEREFORE, Petitioner's claim for refund/tax credits of
overpaid income tax for 1985 in the amount of
P5,299,749.95 is hereby denied for having been filed
beyond the reglementary period. The 1986 claim for
refund amounting to P234,077.69 is likewise denied
since petitioner has opted and in all likelihood
automatically credited the same to the succeeding year.
The petition for review is dismissed for lack of merit.
SO ORDERED.5
The facts on record show the antecedent circumstances
pertinent to this case.
Petitioner, Philippine Bank of Communications (PBCom),
a commercial banking corporation duly organized under
Philippine laws, filed its quarterly income tax returns for
the first and second quarters of 1985, reported profits,
and paid the total income tax of P5,016,954.00. The
taxes due were settled by applying PBCom's tax credit
memos and accordingly, the Bureau of Internal Revenue
(BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85
for P3,401,701.00 and P1,615,253.00, respectively.
Subsequently, however, PBCom suffered losses so that
when it filed its Annual Income Tax Returns for the
year-ended December 31, 1986, the petitioner likewise
reported a net loss of P14,129,602.00, and thus declared
no tax payable for the year.
But during these two years, PBCom earned rental
income from leased properties. The lessees withheld and
remitted to the BIR withholding creditable taxes of
P282,795.50 in 1985 and P234,077.69 in 1986.
On August 7, 1987, petitioner requested the
Commissioner of Internal Revenue, among others, for a
tax credit of P5,016,954.00 representing the
overpayment of taxes in the first and second quarters of
1985.
105
Thereafter, on July 25, 1988, petitioner filed a claim for
refund of creditable taxes withheld by their lessees from
property rentals in 1985 for P282,795.50 and in 1986 for
P234,077.69.
Pending the investigation of the respondent
Commissioner of Internal Revenue, petitioner instituted a
Petition for Review on November 18, 1988 before the
Court of Tax Appeals (CTA). The petition was docketed
as CTA Case No. 4309 entitled: "Philippine Bank of
Communications vs. Commissioner of Internal Revenue."
The losses petitioner incurred as per the summary of
petitioner's claims for refund and tax credit for 1985 and
1986, filed before the Court of Tax Appeals, are as
follows:
1985 1986
——— ———
Net Income (Loss) (P25,317,288.00) (P14,129,602.00)
Tax Due NIL NIL
Quarterly tax.
Payments Made 5,016,954.00 —
Tax Withheld at Source 282,795.50 234,077.69
———————— ———————
Excess Tax Payments P5,299,749.50* P234,077.69
=============== =============
* CTA's decision reflects PBCom's 1985 tax claim as
P5,299,749.95. A forty five centavo difference was noted.
On May 20, 1993, the CTA rendered a decision which, as
stated on the outset, denied the request of petitioner for a
tax refund or credit in the sum amount of P5,299,749.95,
on the ground that it was filed beyond the two-year
reglementary period provided for by law. The petitioner's
claim for refund in 1986 amounting to P234,077.69 was
likewise denied on the assumption that it was
automatically credited by PBCom against its tax payment
in the succeeding year.
On June 22, 1993, petitioner filed a Motion for
Reconsideration of the CTA's decision but the same was
denied due course for lack of merit. 6
Thereafter, PBCom filed a petition for review of said
decision and resolution of the CTA with the Court of
Appeals. However on September 22, 1993, the Court of
Appeals affirmed in toto the CTA's resolution dated July
20, 1993. Hence this petition now before us.
The issues raised by the petitioner are:
I. Whether taxpayer PBCom — which relied in good faith
on the formal assurances of BIR in RMC No. 7-85 and
106
did not immediately file with the CTA a petition for review
asking for the refund/tax credit of its 1985-86 excess
quarterly income tax payments — can be prejudiced by
the subsequent BIR rejection, applied retroactivity, of its
assurances in RMC No. 7-85 that the prescriptive period
for the refund/tax credit of excess quarterly income tax
payments is not two years but ten (10).7
II. Whether the Court of Appeals seriously erred in
affirming the CTA decision which denied PBCom's claim
for the refund of P234,077.69 income tax overpaid in
1986 on the mere speculation, without proof, that there
were taxes due in 1987 and that PBCom availed of
tax-crediting that year.8
Simply stated, the main question is: Whether or not the
Court of Appeals erred in denying the plea for tax refund
or tax credits on the ground of prescription, despite
petitioner's reliance on RMC No. 7-85, changing the
prescriptive period of two years to ten years?
Petitioner argues that its claims for refund and tax credits
are not yet barred by prescription relying on the
applicability of Revenue Memorandum Circular No. 7-85
issued on April 1, 1985. The circular states that overpaid
income taxes are not covered by the two-year
prescriptive period under the tax Code and that taxpayers
may claim refund or tax credits for the excess quarterly
income tax with the BIR within ten (10) years under
Article 1144 of the Civil Code. The pertinent portions of
the circular reads:
REVENUE MEMORANDUM CIRCULAR NO. 7-85
SUBJECT: PROCESSING OF REFUND OR TAX
CREDIT OF EXCESS CORPORATE INCOME TAX
RESULTING FROM THE FILING OF THE FINAL
ADJUSTMENT RETURN.
TO: All Internal Revenue Officers and Others Concerned.
Sec. 85 And 86 Of the National Internal Revenue Code
provide:
xxx xxx xxx
The foregoing provisions are implemented by Section 7
of Revenue Regulations Nos. 10-77 which provide;
xxx xxx xxx
It has been observed, however, that because of the
excess tax payments, corporations file claims for
recovery of overpaid income tax with the Court of Tax
Appeals within the two-year period from the date of
payment, in accordance with sections 292 and 295 of the
National Internal Revenue Code. It is obvious that the
filing of the case in court is to preserve the judicial right of
the corporation to claim the refund or tax credit.
107
It should he noted, however, that this is not a case of
erroneously or illegally paid tax under the provisions of
Sections 292 and 295 of the Tax Code.
In the above provision of the Regulations the corporation
may request for the refund of the overpaid income tax or
claim for automatic tax credit. To insure prompt action on
corporate annual income tax returns showing refundable
amounts arising from overpaid quarterly income taxes,
this Office has promulgated Revenue Memorandum
Order No. 32-76 dated June 11, 1976, containing the
procedure in processing said returns. Under these
procedures, the returns are merely pre-audited which
consist mainly of checking mathematical accuracy of the
figures of the return. After which, the refund or tax credit
is granted, and, this procedure was adopted to facilitate
immediate action on cases like this.
In this regard, therefore, there is no need to file petitions
for review in the Court of Tax Appeals in order to
preserve the right to claim refund or tax credit the two
year period. As already stated, actions hereon by the
Bureau are immediate after only a cursory pre-audit of
the income tax returns. Moreover, a taxpayer may
recover from the Bureau of Internal Revenue excess
income tax paid under the provisions of Section 86 of the
Tax Code within 10 years from the date of payment
considering that it is an obligation created by law (Article
1144 of the Civil Code).9 (Emphasis supplied.)
Petitioner argues that the government is barred from
asserting a position contrary to its declared circular if it
would result to injustice to taxpayers. Citing ABS CBN
Broadcasting Corporation vs. Court of Tax Appeals 10
petitioner claims that rulings or circulars promulgated by
the Commissioner of Internal Revenue have no
retroactive effect if it would be prejudicial to taxpayers, In
ABS-CBN case, the Court held that the government is
precluded from adopting a position inconsistent with one
previously taken where injustice would result therefrom or
where there has been a misrepresentation to the
taxpayer.
Petitioner contends that Sec. 246 of the National Internal
Revenue Code explicitly provides for this rules as follows:
Sec. 246 Non-retroactivity of rulings— Any revocation,
modification or reversal of any of the rules and
regulations promulgated in accordance with the
preceding section or any of the rulings or circulars
promulgated by the Commissioner shall not be given
retroactive application if the revocation, modification or
reversal will be prejudicial to the taxpayers except in the
following cases:
a). where the taxpayer deliberately misstates or omits
material facts from his return or in any document required
of him by the Bureau of Internal Revenue;
108
b). where the facts subsequently gathered by the Bureau
of Internal Revenue are materially different from the facts
on which the ruling is based;
c). where the taxpayer acted in bad faith.
Respondent Commissioner of Internal Revenue, through
Solicitor General, argues that the two-year prescriptive
period for filing tax cases in court concerning income tax
payments of Corporations is reckoned from the date of
filing the Final Adjusted Income Tax Return, which is
generally done on April 15 following the close of the
calendar year. As precedents, respondent Commissioner
cited cases which adhered to this principle, to wit ACCRA
Investments Corp. vs. Court of Appeals, et al., 11 and
Commissioner of Internal Revenue vs. TMX Sales, Inc.,
et al.. 12
Respondent Commissioner also states that since the
Final Adjusted Income Tax Return of the petitioner for the
taxable year 1985 was supposed to be filed on April 15,
1986, the latter had only until April 15, 1988 to seek relief
from the court. Further, respondent Commissioner
stresses that when the petitioner filed the case before the
CTA on November 18, 1988, the same was filed beyond
the time fixed by law, and such failure is fatal to
petitioner's cause of action.
After a careful study of the records and applicable
jurisprudence on the matter, we find that, contrary to the
petitioner's contention, the relaxation of revenue
regulations by RMC 7-85 is not warranted as it
disregards the two-year prescriptive period set by law.
Basic is the principle that "taxes are the lifeblood of the
nation." The primary purpose is to generate funds for the
State to finance the needs of the citizenry and to advance
the common weal. 13 Due process of law under the
Constitution does not require judicial proceedings in tax
cases. This must necessarily be so because it is upon
taxation that the government chiefly relies to obtain the
means to carry on its operations and it is of utmost
importance that the modes adopted to enforce the
collection of taxes levied should be summary and
interfered with as little as possible. 14
From the same perspective, claims for refund or tax
credit should be exercised within the time fixed by law
because the BIR being an administrative body enforced
to collect taxes, its functions should not be unduly
delayed or hampered by incidental matters.
Sec. 230 of the National Internal Revenue Code (NIRC)
of 1977 (now Sec. 229, NIRC of 1997) provides for the
prescriptive period for filing a court proceeding for the
recovery of tax erroneously or illegally collected, viz.:
Sec. 230. Recovery of tax erroneously or illegally
collected. — No suit or proceeding shall be maintained in
any court for the recovery of any national internal
109
revenue tax hereafter alleged to have been erroneously
or illegally assessed or collected, or of any penalty
claimed to have been collected without authority, or of
any sum alleged to have been excessive or in any
manner wrongfully collected, until a claim for refund or
credit has been duly filed with the Commissioner; but
such suit or proceeding may be maintained, whether or
not such tax, penalty, or sum has been paid under protest
or duress.
In any case, no such suit or proceedings shall begun
after the expiration of two years from the date of payment
of the tax or penalty regardless of any supervening cause
that may arise after payment; Provided however, That the
Commissioner may, even without a written claim therefor,
refund or credit any tax, where on the face of the return
upon which payment was made, such payment appears
clearly to have been erroneously paid. (Emphasis
supplied)
The rule states that the taxpayer may file a claim for
refund or credit with the Commissioner of Internal
Revenue, within two (2) years after payment of tax,
before any suit in CTA is commenced. The two-year
prescriptive period provided, should be computed from
the time of filing the Adjustment Return and final payment
of the tax for the year.
In Commissioner of Internal Revenue vs. Philippine
American Life Insurance Co., 15 this Court explained the
application of Sec. 230 of 1977 NIRC, as follows:
Clearly, the prescriptive period of two years should
commence to run only from the time that the refund is
ascertained, which can only be determined after a final
adjustment return is accomplished. In the present case,
this date is April 16, 1984, and two years from this date
would be April 16, 1986. . . . As we have earlier said in
the TMX Sales case, Sections 68. 16 69, 17 and 70 18 on
Quarterly Corporate Income Tax Payment and Section
321 should be considered in conjunction with it 19
When the Acting Commissioner of Internal Revenue
issued RMC 7-85, changing the prescriptive period of two
years to ten years on claims of excess quarterly income
tax payments, such circular created a clear inconsistency
with the provision of Sec. 230 of 1977 NIRC. In so doing,
the BIR did not simply interpret the law; rather it
legislated guidelines contrary to the statute passed by
Congress.
It bears repeating that Revenue memorandum-circulars
are considered administrative rulings (in the sense of
more specific and less general interpretations of tax laws)
which are issued from time to time by the Commissioner
of Internal Revenue. It is widely accepted that the
interpretation placed upon a statute by the executive
officers, whose duty is to enforce it, is entitled to great
110
respect by the courts. Nevertheless, such interpretation is
not conclusive and will be ignored if judicially found to be
erroneous. 20 Thus, courts will not countenance
administrative issuances that override, instead of
remaining consistent and in harmony with the law they
seek to apply and implement. 21
In the case of People vs. Lim, 22 it was held that rules and
regulations issued by administrative officials to implement
a law cannot go beyond the terms and provisions of the
latter.
Appellant contends that Section 2 of FAO No. 37-1 is
void because it is not only inconsistent with but is
contrary to the provisions and spirit of Act. No 4003 as
amended, because whereas the prohibition prescribed in
said Fisheries Act was for any single period of time not
exceeding five years duration, FAO No 37-1 fixed no
period, that is to say, it establishes an absolute ban for all
time. This discrepancy between Act No. 4003 and FAO
No. 37-1 was probably due to an oversight on the part of
Secretary of Agriculture and Natural Resources. Of
course, in case of discrepancy, the basic Act prevails, for
the reason that the regulation or rule issued to implement
a law cannot go beyond the terms and provisions of the
latter. . . .
In this connection, the attention of the technical men in
the offices of Department Heads who draft rules and
regulation is called to the importance and necessity of
closely following the terms and provisions of the law
which they intended to implement, this to avoid any
possible misunderstanding or confusion as in the present
case.23
Further, fundamental is the rule that the State cannot be
put in estoppel by the mistakes or errors of its officials or
agents. 24 As pointed out by the respondent courts, the
nullification of RMC No. 7-85 issued by the Acting
Commissioner of Internal Revenue is an administrative
interpretation which is not in harmony with Sec. 230 of
1977 NIRC. for being contrary to the express provision of
a statute. Hence, his interpretation could not be given
weight for to do so would, in effect, amend the statute.
It is likewise argued that the Commissioner of Internal
Revenue, after promulgating RMC No. 7-85, is estopped
by the principle of non-retroactively of BIR rulings. Again
We do not agree. The Memorandum Circular, stating that
a taxpayer may recover the excess income tax paid
within 10 years from date of payment because this is an
obligation created by law, was issued by the Acting
Commissioner of Internal Revenue.
On the other hand, the decision, stating that the taxpayer
should still file a claim for a refund or tax credit and
corresponding petition fro review within the two-year
prescription period, and that the lengthening of the period
of limitation on refund from two to ten years would be
adverse to public policy and run counter to the positive
111
mandate of Sec. 230, NIRC, - was the ruling and judicial
interpretation of the Court of Tax Appeals.
Estoppel has no application in the case at bar because it
was not the Commissioner of Internal Revenue who
denied petitioner's claim of refund or tax credit. Rather, it
was the Court of Tax Appeals who denied (albeit
correctly) the claim and in effect, ruled that the RMC No.
7-85 issued by the Commissioner of Internal Revenue is
an administrative interpretation which is out of harmony
with or contrary to the express provision of a statute
(specifically Sec. 230, NIRC), hence, cannot be given
weight for to do so would in effect amend the statute.25
Art. 8 of the Civil Code 26 recognizes judicial decisions,
applying or interpreting statutes as part of the legal
system of the country. But administrative decisions do not
enjoy that level of recognition. A memorandum-circular of
a bureau head could not operate to vest a taxpayer with
shield against judicial action. For there are no vested
rights to speak of respecting a wrong construction of the
law by the administrative officials and such wrong
interpretation could not place the Government in estoppel
to correct or overrule the same. 27
Moreover, the non-retroactivity of rulings by the
Commissioner of Internal Revenue is not applicable in
this case because the nullity of RMC No. 7-85 was
declared by respondent courts and not by the
Commissioner of Internal Revenue. Lastly, it must be
noted that, as repeatedly held by this Court, a claim for
refund is in the nature of a claim for exemption and
should be construed in strictissimi juris against the
taxpayer.28
On the second issue, the petitioner alleges that the Court
of Appeals seriously erred in affirming CTA's decision
denying its claim for refund of P234,077.69 (tax overpaid
in 1986), based on mere speculation, without proof, that
PBCom availed of the automatic tax credit in 1987.
Sec. 69 of the 1977 NIRC 29 (now Sec. 76 of the 1997
NIRC) provides that any excess of the total quarterly
payments over the actual income tax computed in the
adjustment or final corporate income tax return, shall
either (a) be refunded to the corporation, or (b) may be
credited against the estimated quarterly income tax
liabilities for the quarters of the succeeding taxable year.
The corporation must signify in its annual corporate
adjustment return (by marking the option box provided in
the BIR form) its intention, whether to request for a
refund or claim for an automatic tax credit for the
succeeding taxable year. To ease the administration of
tax collection, these remedies are in the alternative, and
the choice of one precludes the other.
As stated by respondent Court of Appeals:
112
Finally, as to the claimed refund of income tax over-paid
in 1986 — the Court of Tax Appeals, after examining the
adjusted final corporate annual income tax return for
taxable year 1986, found out that petitioner opted to
apply for automatic tax credit. This was the basis used
(vis-avis the fact that the 1987 annual corporate tax
return was not offered by the petitioner as evidence) by
the CTA in concluding that petitioner had indeed availed
of and applied the automatic tax credit to the succeeding
year, hence it can no longer ask for refund, as to [sic] the
two remedies of refund and tax credit are alternative. 30
That the petitioner opted for an automatic tax credit in
accordance with Sec. 69 of the 1977 NIRC, as specified
in its 1986 Final Adjusted Income Tax Return, is a finding
of fact which we must respect. Moreover, the 1987
annual corporate tax return of the petitioner was not
offered as evidence to contovert said fact. Thus, we are
bound by the findings of fact by respondent courts, there
being no showing of gross error or abuse on their part to
disturb our reliance thereon. 31
WHEREFORE, the, petition is hereby DENIED, The
decision of the Court of Appeals appealed from is
AFFIRMED, with COSTS against the petitioner.
SO ORDERED.
8. CIR vs. Maritime Shipping, 238 SCRA 42
MENDOZA, J.:
The facts are as follows:
On January 12, 1984 the Commissioner of the Internal
Revenue sent two letters3 of demand to the respondent
Maritime Company of the Philippines for deficiency
common carrier's tax, fixed tax, 6% Commercial Broker's
tax, documentary stamp tax, income tax and withholding
taxes in the total amount of P17,284,882.45.
The assessment became final and executory as private
respondent did not contest it. But as private respondent
did not pay its tax liability either, the Commissioner of
Internal Revenue issued warrants of distraint of personal
property and levy of real property of private respondent.
Copies of the warrants, both dated January 23, 1985,
were served on January 28, 1985 on Yoly T. Petrache,
private respondent's accountant.4
On April 16, 1985 a "Receipt for Goods, Articles, and
Things Seized5 under Authority of the National Internal
Revenue Code" was executed, covering, among other
things, six barges identified as MCP-1,2,3,4,5 and 6. This
receipt is required by § 303 (now § 206) of the NIRC as
113
proof of the constructive distraint of property. It is an
undertaking by the taxpayer or person in possession of
the property covered that he will preserve the property
and deliver it upon order of the court or the Internal
Revenue Commissioner.
The receipt was prepared by the BIR for the signature of
a representative of respondent Maritime Company of the
Philippines, but it was not in fact signed. Petitioner later
explained that the individuals who had possession of the
barges had refused to sign the receipt.
This circumstance has given rise to the question in this
case as it appears that four of the barges placed under
constructive distraint were levied upon execution by
respondent deputy sheriff of Manila on July 20, 1985 to
satisfy a judgment for unpaid wages and other benefits of
employees of respondent Maritime Company of the
Philippines. More specifically, the question in this case is
the validity of the warrant of distraint served by the
Revenue Seizure Officer against the writ of execution
subsequently levied upon the same property by the
deputy sheriff of Manila to satisfy the claims of
employees in NLRC Case No. NCR-12-4233-84
(Domingo C. Niangar, et al. v. Maritime Company of the
Philippines) for P490,749.21.
The four barges were sold by respondent deputy sheriff
at a public auction on August 12, 1985. The highest
bidder, Daniel C. Sabino, subsequently sold them to
private respondents Fernando S. Tuliao and Tulmar
Trading Corporation.
On September 4, 1985, petitioner asked the Labor Arbiter
to annul the sale and to enjoin the sheriff from disposing
of the proceeds of the sale or, in the alternative, to remit
them to the Bureau of Internal Revenue so that the
amount could be applied to the payment of private
respondent Maritime Company's tax liabilities.
In an order dated September 30, 1985, Labor Arbiter
Ceferina Diosana denied the motion on the ground that
petitioner Commissioner of Internal Revenue failed to
show that the barges which were levied upon in
execution and sold at public auction had been validly
placed under constructive distraint.6 The Labor Arbiter
likewise rejected petitioner's contention that the
government's claim for taxes was preferred under Art.
2247, in relation to Art. 2241(1) of the Civil Code, on the
ground that under this provisions only taxes and fees
which are due on specific movables enjoy preference,
whereas the taxes claimed by petitioner were not due on
the four barges in question.
114
The order was appealed to the NLRC, which in resolution
dated April 4, 1986, affirmed the denial of the Internal
Revenue Commissioner's motion. Hence this petition for
certiorari.
For reasons to be presently stated, the petition is
granted.
The National Internal Revenue Code provides for the
collection of delinquent taxes by any of the following
remedies: (a) distraint of personal property or levy of real
property of the delinquent taxpayer and (b) civil or
criminal action.
With respect to the four barges in question, petitioner
resorted to constructive distraint pursuant to § 303 (now
§ 206) of the NLRC. This provisions states:
Constructive distraint of the property of a taxpayer. — To
safeguard the interest of the Government, the
Commissioner of Internal Revenue may place under
constructive distraint the property of a delinquent
taxpayer or any taxpayer who, in his opinion, is retiring
from any business subject to tax, or intends to leave the
Philippines, or remove his property therefrom, or hide or
conceal his property, or perform any act tending to
obstruct the proceedings, for collecting the tax due or
which may be due from him.
The constructive distraint of personal property shall be
effected by requiring the taxpayer or any person having
possession or control of such property to sign a receipt
covering the property distrained and obligate himself to
preserve the same intact and unaltered and not to
dispose of the same in any manner whatever without the
express authority of the Commissioner of Internal
Revenue.
In case the taxpayer or the person having the possession
and control of the property sought to be placed under
constructive distraint refuses or fails to sign the receipt
herein referred to, the revenue officer effecting the
constructive distraint shall proceed to prepare a list of
such property and in the presence of two witnesses leave
a copy thereof in the premises where the property
distrained is located, after which the said property shall
be deemed to have been placed under constructive
distraint..
Although the warrant of distraint in this case had been
issued earlier (January 23,1985) than the levy on
execution in the labor case on July 20, 1985, the Labor
Arbiter nevertheless held that there was no valid distraint
of personal property on the ground that the receipt of
property distrained had not been signed by the taxpayer
as required above. In her order, which the NLRC affirmed
in toto, the Labor Arbiter said:
115
It is claimed by the Commissioner of the Internal
Revenue that on January 23, 1984, he issued a warrant
of distraint of personal property on respondent to satisfy
the collection of the deficiency taxes in the aggregate
sum of P17,284,882.45 and a copy of said warrant was
served upon Maritime Company on January 28, 1985
and pursuant to the warrant, the Commissioner, through
Revenue Seizure Agent Roland L. Bombay, issued on
April 16, 1985, to Maritime Company a receipt for goods,
articles and things seized pursuant to authority granted to
him under the National Internal Revenue Code. Such
personal properties seized includes, among others, "Six
(6) units of barges MCI-6 . . . " However, his own receipts
for goods attached to his motions does not show that it
was received by Maritime; neither does it show any
signature of any of Maritime's Officers.
Apart from the foregoing, in his affidavit of 11 September
1985, Sheriff Cachero stated that before he sold the
subject four barges at public auction, he conducted an
investigation on the ownership of the said four barges. In
brief, he found out that the said four barges were
purchased by respondent through Makati Leasing and
that the whole purchase price has been paid by
respondent. In fact, the corresponding deed of sale has
already been signed. He did not find any lien or
encumbrance on any of the said four barges. Thus it
cannot be true that the Commissioner effected a valid
warrant of distraint of personal property on the four
barges in question.
However, this case arose out of the same facts involved
in Republic v. Enriquez,8 in which we sustained the
validity of the distraint of the six barges, which included
the four involved in this case, against the levy on
execution made by another deputy sheriff of Manila in
another case filed against Maritime Company. Two
barges (MCP-1 and MCP-4) were the subject of a levy in
the case. There we found that the "Receipt for Goods,
Articles and Things Seized under Authority of the
National Internal Revenue Code" covering the six barges
had been duly executed, with the Headquarters, First
Coast Guard District, Farola Compound Binondo, Manila
acknowledging receipt of several barges, vehicles and
two (2) bodegas of spare parts belonging to Maritime
Company of the Philippines.
Apparently, what had been attached to the petitioner's
motion filed by the government with the Labor Arbiter in
this case was a copy, not the original one showing the
rubber stamp of the Coast Guard and duly signed by its
representative. A xerox copy of this signed receipt was
submitted in the prior case.9 This could be due to the fact
that, except for Solicitor Erlinda B. Masakayan, the
government lawyers who prepared the petition in the
prior case were different from those who filed the present
petition. They admitted that the receipt of property
distrained had not been signed by the taxpayer or person
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in possession of the taxpayer's property allegedly
because they had refused to do so. What apparently they
did not know is that the receipt had been acknowledged
by the Coast Guard which obviously had the barges in its
possession.
In addition to the receipt duly acknowledged by the Coast
Guard, the record of the prior case also shows that on
October 4, 1985, the Commissioner of the Internal
Revenue issued a "Notice of Seizure of Personal
Property" stating that the goods and chattels listed on its
reverse side, among which were the four barges (MCP-2,
MCP-3, MCP-5, and MCP-6), had been distrained by the
Commissioner of Internal Revenue.10
The "Notice of Seizure of Personal Property," a copy of
which was received by Atty. Redentor R. Melo in behalf of
Maritime Company of the Philippines, together with the
receipt of the Coast Guard, belies the claim of
respondent deputy sheriff that when he levied upon the
four barges there was no indication that the barges had
previously been placed under distraint by the
Commissioner of Internal Revenue.
Accordingly, what we said in the prior case 11 in upholding
the validity of distraint of two of the six barges (MCP Nos.
1 and 4), fully applies in this case:
It is settled that the claim of the government predicated
on a tax lien is superior to the claim of a private litigant
predicated on a judgment. The tax lien attaches not only
from the service of the warrant of distraint of personal
property but from the time the tax became due and
payable. Besides, the distraint on the subject properties
of the Maritime Company of the Philippines as well as the
notice of their seizure were made by petitioner, through
the Commissioner of the Internal Revenue, long before
the writ of the execution was issued by the Regional Trial
Court of Manila, Branch 31.
There is no question then that at the time the writ of
execution was issued, the two (2) barges, MPC-1 and
MCP-4, were no longer properties of the Maritime
Company of the Philippines. The power of the court in
execution of judgments extends only to properties
unquestionably belonging to the judgment debtor.
Execution sales affect the rights of the judgment debtor
only, and the purchaser in an auction sale acquires only
such right as the judgment debtor had at the time of sale.
It is also well-settled that the sheriff is not authorized to
attach or levy on property not belonging to the judgment
debtor.
Nor is there any merit in the contention of the NLRC that
taxes are absolutely preferred claims only with respect to
movable or immovable properties on which they are due
and that since the taxes sought to be collected in this
case are not due on the barges in question the
government's claim cannot prevail over the claims of
employees of the Maritime Company of the Philippines
117
which, pursuant to Art. 110 of the Labor Code, "enjoy first
preference."
In Republic v. Peralta 12 this Court rejected a similar
contention. Through Mr. Justice Feliciano we held:
. . . [T]he claim of the Bureau of Internal Revenue for
unpaid tobacco inspection fees constitutes a claim for
unpaid internal revenue taxes which gives rise to a tax
lien upon all the properties and assets, movable or
immovable, of the insolvent as taxpayer. Clearly, under
Articles 2241 No. 1, 2242 No. 1, and 2246-2249 of the
Civil Code, this tax claim must be given preference over
any other claim of any other creditor, in respect of any
and all properties of the insolvent.
xxx xxx xxx
Article 110 of the Labor Code does not purport to create a
lien in favor of workers or employees for unpaid wages
either upon all of the properties or upon any particular
property owned by their employer. Claims for unpaid
wages do not therefore fall at all within the category of
specially preferred claims established under Articles
2241 and 2242 of the Civil Code, except to the extent
that such claims for unpaid wages are already covered
by Article 2241, number 6: "claims for laborer's wages,
on the goods manufactured or the work done," or by
Article 2242, number 3: "claims of laborers and other
workers engaged in the construction, reconstruction or
repair of buildings, canals and other works, upon said
buildings, canals or other works." To the extent that
claims for unpaid wages fall outside the scope of Article
2241, number 6 and 2242, number 3, they would come
with the ambit of the category of ordinary preferred
credits under Article 2244.
Applying Article 2241, number 6 to the instant case, the
claims of the Unions for separation pay of their members
constitute liens attaching to the processed leaf tobacco,
cigars and cigarettes and other products produced or
manufactured by the Insolvent, but not to other assets
owned by the Insolvent. And even in respect of such
tobacco and tobacco products produced by the Insolvent,
the claims of the Unions may be given effect only after
the Bureau of Internal Revenue's claim for unpaid
tobacco inspection fees shall have been satisfied out of
the products so manufactured by the Insolvent.
Article 2242, number 3, also creates a lien or
encumbrance upon a building or other real property of
the Insolvent in favor of workmen who constructed or
repaired such building or other real property. Article 2242,
number 3, does not however appear relevant in the
instant case, since the members of the Unions to whom
separation pay is due rendered services to the Insolvent
not (so far as the record of this case would show) in the
construction or repair of buildings or other real property,
but rather, in the regular course of the manufacturing
operations of the Insolvent. The Unions' claims do not
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therefore constitute a lien or encumbrance upon any applied as part payment of respondent Maritime
immovable property owned by the insolvent, but rather, Company's tax liabilities.
as already indicated, upon the Insolvent's existing
inventory (if any) of processed tobacco and tobacco SO ORDERED.
products.

In addition, we have held 13 that Art. 110 of the Labor

Code applies only in case of bankruptcy or judicial
liquidation of the employer. This is clear from the text of
the law.

Art. 110. Worker preference in case of bankruptcy. — In

the event of bankruptcy or liquidation of an employer's
business, his workers shall enjoy first preference as
regards wages due them for services rendered during the
period prior to the bankruptcy or liquidation, any provision
of law to the contrary notwithstanding. Unpaid wages
shall be paid in full before other creditors may establish
any claims to a share in the assets of the employer.

This case does not involve the liquidation of the

employer's business.

WHEREFORE, the petition for certiorari is GRANTED

and the resolution dated April 4, 1986 of respondent
NLRC in NLRC Case No. NCR-12-4233-84 is SET
ASIDE insofar as it denies the government's claim for
taxes, and respondent deputy sheriff Carmelo V. Cachero
or his successor is ORDERED to remit the proceeds of
the auction sale to the Bureau of Internal Revenue to be

119