THIRD DIVISION

G.R. No. 166408             October 6, 2008

QUEZON CITY and THE CITY TREASURER OF QUEZON CITY, petitioners, vs.ABS-CBN BROADCASTING CORPORATION, respondent.

D E C I S I O N

REYES, R.T., J.:

CLAIMS for tax exemption must be based on language in law too plain to be mistaken. It cannot be made out of inference or implication.

The principle is relevant in this petition for review on certiorari of the Decision1 of the Court of Appeals (CA) and that2 of the Regional Trial Court (RTC) ordering the refund and declaring invalid the imposition and collection of local franchise tax by the City Treasurer of Quezon City on ABS-CBN Broadcasting Corporation (ABS-CBN).

The Facts

Petitioner City Government of Quezon City is a local government unit duly organized and existing by virtue of Republic Act (R.A.) No. 537, otherwise known as the Revised Charter of Quezon City. Petitioner City Treasurer of Quezon City is primarily responsible for the imposition and collection of taxes within the territorial jurisdiction of Quezon City.

Under Section 31, Article 13 of the Quezon City Revenue Code of 1993,3 a franchise tax was imposed on businesses operating within its jurisdiction. The provision states:

Section 31. Imposition of Tax. - Any provision of special laws or grant of tax exemption to the contrary notwithstanding, any person, corporation, partnership or association enjoying a franchise whether issued by the national government or local government

and, doing business in Quezon City, shall pay a franchise tax at the rate of ten percent (10%) of one percent (1%) for 1993-1994, twenty percent (20%) of one percent (1%) for 1995, and thirty percent (30%) of one percent (1%) for 1996 and the succeeding years thereafter, of gross receipts and sales derived from the operation of the business in Quezon City during the preceding calendar year.

On May 3, 1995, ABS-CBN was granted the franchise to install and operate radio and television broadcasting stations in the Philippines under R.A. No. 7966.4 Section 8 of R.A. No. 7966 provides the tax liabilities of ABS-CBN which reads:

Section 8. Tax Provisions. - The grantee, its successors or assigns, shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations are now hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns, shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the radio/television business transacted under this franchise by the grantee, its successors or assigns, and the said percentage tax shall be in lieu of all taxes on this franchise or earnings thereof; Provided that the grantee, its successors or assigns shall continue to be liable for income taxes under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. (Emphasis added)

ABS-CBN had been paying local franchise tax imposed by Quezon City. However, in view of the above provision in R.A. No. 9766 that it "shall pay a franchise tax x x x in lieu of all taxes," the corporation developed the opinion that it is not liable to pay the local franchise tax imposed by Quezon City. Consequently, ABS-CBN paid under protest the local franchise tax imposed by Quezon City on the dates, in the amounts and under the official receipts as follows:

O.R. No. Date Amount Paid

2464274 7/18/1995 P 1,489,977.28

2484651 10/20/1995 1,489,977.28

2536134 1/22/1996 2,880,975.65

8354906 1/23/1997 8,621,470.83

48756 1/23/1997 2,731,135.81

67352 4/3/1997     2,731,135.81

Total P19,944,672.665

On January 29, 1997, ABS-CBN filed a written claim for refund for local franchise tax paid to Quezon City for 1996 and for the first quarter of 1997 in the total amount of Fourteen Million Two Hundred Thirty-Three Thousand Five Hundred Eighty-Two and 29/100 centavos (P14,233,582.29) broken down as follows:

O.R. No. Date Amount Paid

2536134 1-22-96 P 2,880,975.65

8354906 1-23-97 8,621,470.83

0048756 1-23-97     2,731,135.81

Total P14,233,582.296

In a letter dated March 3, 1997 to the Quezon City Treasurer, ABS-CBN reiterated its claim for refund of local franchise taxes paid.

On June 25, 1997, for failure to obtain any response from the Quezon City Treasurer, ABS-CBN filed a complaint before the RTC in Quezon City seeking the declaration of nullity of the imposition of local franchise tax by the City Government of Quezon City for being unconstitutional. It likewise prayed for the refund of local franchise tax in the amount of Nineteen Million Nine Hundred Forty-Four Thousand Six Hundred Seventy-Two and 66/100 centavos (P19,944,672.66) broken down as follows:

O.R. No. Date Amount Paid

2464274 7-18-95 P 1,489,977.28

2484651 10-20-95 1,489,977.28

2536134 1-22-96 2,880,975.65

8354906 1-23-97 8,621,470.83

0048756 1-23-97 2,731,135.81

0067352 4-03-97     2,731,135.81

Total P19,944,672.667

Quezon City argued that the "in lieu of all taxes" provision in R.A. No. 9766 could not have been intended to prevail over a constitutional mandate which ensures the viability and self-sufficiency of local government units. Further, that taxes collectible by and payable to the local government were distinct from taxes collectible by and payable to the national government, considering that the Constitution specifically declared that the taxes imposed by local government units "shall accrue exclusively to the local governments." Lastly, the City contended that the exemption claimed by ABS-CBN under R.A. No. 7966 was withdrawn by Congress when the Local Government Code (LGC) was passed.8 Section 193 of the LGC provides:

Section 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or -controlled corporations, except local water districts, cooperatives duly registered under R.A. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis added)

On August 13, 1997, ABS-CBN filed a supplemental complaint adding to its claim for refund the local franchise tax paid for the third quarter of 1997 in the amount of Two Million Seven Hundred Thirty-One Thousand One Hundred Thirty-Five and 81/100 centavos (P2,731,135.81) and of other amounts of local franchise tax as may have been and will be paid by ABS-CBN until the resolution of the case.

Quezon City insisted that the claim for refund must fail because of the absence of a prior written claim for it.

RTC and CA Dispositions

On January 20, 1999, the RTC rendered judgment declaring as invalid the imposition on and collection from ABS-CBN of local franchise tax paid pursuant

to Quezon City Ordinance No. SP-91, S-93, after the enactment of R.A. No. 7966, and ordered the refund of all payments made. The dispositive portion of the RTC decision reads:

WHEREFORE, judgment is hereby rendered declaring the imposition on and collection from plaintiff ABS-CBN BROADCASTING CORPORATION of local franchise taxes pursuant to Quezon City Ordinance No. SP-91, S-93 after the enactment of Republic Act No. 7966 to be invalid, and, accordingly, the Court hereby orders the defendants to refund all its payments made after the effectivity of its legislative franchise on May 3, 1995.

SO ORDERED.9

In its decision, the RTC ruled that the "in lieu of all taxes" provision contained in Section 8 of R.A. No. 7966 absolutely excused ABS-CBN from the payment of local franchise tax imposed under Quezon City Ordinance No. SP-91, S-93. The intent of the legislature to excuse ABS-CBN from payment of local franchise tax could be discerned from the usage of the "in lieu of all taxes" provision and from the absence of any qualification except income taxes. Had Congress intended to exclude taxes imposed from the exemption, it would have expressly mentioned so in a fashion similar to the proviso on income taxes.

The RTC also based its ruling on the 1990 case of Province of Misamis Oriental v. Cagayan Electric Power and Light Company, Inc. (CEPALCO).10 In said case, the exemption of respondent electric company CEPALCO from payment of provincial franchise tax was upheld on the ground that the franchise of CEPALCO was a special law, while the Local Tax Code, on which the provincial ordinance imposing the local franchise tax was based, was a general law. Further, it was held that whenever there is a conflict between two laws, one special and particular and the other general, the special law must be taken as intended to constitute an exception to the general act.

The RTC noted that the legislative franchise of ABS-CBN was granted years after the effectivity of the LGC. Thus, it was unavoidable to conclude that Section 8 of R.A. No. 7966 was an exception since the legislature ought to be presumed to have enacted it with the knowledge and awareness of the existence and prior enactment of Section 13711 of the LGC.

In addition, the RTC, again citing the case of Province of Misamis Oriental v. Cagayan Electric Power and Light Company, Inc. (CEPALCO),12 ruled that the imposition of the local franchise tax was an impairment of ABS-CBN's contract with the government. The imposition of another franchise on the corporation by the local authority would constitute an impairment of the former's charter, which is in the nature of a private contract between it and the government.

As to the amounts to be refunded, the RTC rejected Quezon City's position that a written claim for refund pursuant to Section 196 of the LGC was a condition sine qua non before filing the case in court. The RTC ruled that although Fourteen Million Two Hundred Thirty-Three Thousand Five Hundred Eighty-Two and 29/100 centavos (P14,233,582.29) was the only amount stated in the letter to the Quezon City Treasurer claiming refund, ABS-CBN should nonetheless be also refunded of all payments made after the effectivity of R.A. No. 7966. The inaction of the City Treasurer on the claim for refund of ABS-CBN legally rendered any further claims for refund on the part of plaintiff absurd and futile in relation to the succeeding payments.

The City of Quezon and its Treasurer filed a motion for reconsideration which was subsequently denied by the RTC. Thus, appeal was made to the CA. On September 1, 2004, the CA dismissed the petition of Quezon City and its Treasurer. According to the appellate court, the issues raised were purely legal questions cognizable only by the Supreme Court. The CA ratiocinated:

For another, the issues which appellants submit for this Court's consideration are more of legal query necessitating a legal opinion rather than a call for adjudication on the matter in dispute.

x x x x

The first issue has earlier been categorized in Province of Misamis Oriental v. Cagayan Electric and Power Co., Inc. to be a legal one. There is no more argument to this.

The next issue although it may need the reexamination of the pertinent provisions of the local franchise and the legislative franchise given to appellee, also needs no evaluation of facts. It suffices that there may be a conflict which may need to be reconciled, without regard to the factual backdrop of the case.

The last issue deals with a legal question, because whether or not there is a prior written claim for refund is no longer in dispute. Rather, the question revolves on whether the said requirement may be dispensed with, which obviously is not a factual issue.13

On September 23, 2004, petitioner moved for reconsideration. The motion was, however, denied by the CA in its Resolution dated December 16, 2004. Hence, the present recourse.

Issues

Petitioner submits the following issues for resolution:

I.

Whether or not the phrase "in lieu of all taxes" indicated in the franchise of the respondent appellee (Section 8 of RA 7966) serves to exempt it from the payment of the local franchise tax imposed by the petitioners-appellants.

II.

Whether or not the petitioners-appellants raised factual and legal issues before the Honorable Court of Appeals.14

Our Ruling

The second issue, being procedural in nature, shall be dealt with immediately. But there are other resultant issues linked to the first.

I. The dismissal by the CA of petitioners' appeal is in order because it raised purely legal issues, namely:

1) Whether appellee, whose franchise expressly provides that its payment of franchise tax shall be in lieu of all taxes in this franchise or earnings thereof, is absolutely excused from paying the franchise tax imposed by appellants;

2) Whether appellants' imposition of local franchise tax is a violation of appellee's legislative franchise; and

3) Whether one can do away with the requirement on prior written claim for refund.15

Obviously, these are purely legal questions, cognizable by this Court, to the exclusion of all other courts. There is a question of law when the doubt or difference arises as to what the law is pertaining to a certain state of facts.16

Section 2, Rule 50 of the Rules of Court provides that an appeal taken to the CA under Rule 41 raising only questions of law is erroneous and shall be dismissed, issues of pure law not being within its jurisdiction.17 Consequently, the dismissal by the CA of petitioners' appeal was in order.

In the recent case of Sevilleno v. Carilo,18 this Court ruled that the dismissal of the appeal of petitioner was valid, considering the issues raised there were pure questions of law, viz.:

Petitioners interposed an appeal to the Court of Appeals but it was dismissed for being the wrong mode of appeal. The appellate court held that since the issue being raised is whether the RTC has jurisdiction over the subject matter of the case, which is a question of law, the appeal should have been elevated to the Supreme Court under Rule 45 of the 1997 Rules of Civil Procedure, as amended. Section 2, Rule 41 of the same Rules which governs appeals from judgments and final orders of the RTC to the Court of Appeals, provides:

SEC. 2. Modes of appeal. -

(a) Ordinary appeal. - The appeal to the Court of Appeals in cases decided by the Regional Trial Court in the exercise of its original jurisdiction shall be taken by filing a notice of appeal with the court which rendered the judgment or final order appealed from and serving a copy thereof upon the adverse party. No record on appeal shall be required except in special proceedings and other cases of multiple or separate appeals where the law or these Rules so require. In

such cases, the record on appeal shall be filed and served in like manner.

(b) Petition for review. - The appeal to the Court of Appeals in cases decided by the Regional Trial Court in the exercise of its appellate jurisdiction shall be by petition for review in accordance with Rule 42.

(c) Appeal by certiorari. - In all cases where only questions of law are raised or involved, the appeal shall be to the Supreme Court by petition for review on certiorari in accordance with Rule 45.

In Macawili Gold Mining and Development Co., Inc. v. Court of Appeals, we summarized the rule on appeals as follows:

(1) In all cases decided by the RTC in the exercise of its original jurisdiction, appeal may be made to the Court of Appeals by mere notice of appeal where the appellant raises questions of fact or mixed questions of fact and law;

(2) In all cases decided by the RTC in the exercise of its original jurisdiction where the appellant raises only questions of law, the appeal must be taken to the Supreme Court on a petition for review on certiorari under Rule 45;

(3) All appeals from judgments rendered by the RTC in the exercise of its appellate jurisdiction, regardless of whether the appellant raises questions of fact, questions of law, or mixed questions of fact and law, shall be brought to the Court of Appeals by filing a petition for review under Rule 42.

It is not disputed that the issue brought by petitioners to the Court of Appeals involves the jurisdiction of the RTC over the subject matter of the case. We have a long standing rule that a court's jurisdiction over the subject matter of an action is conferred only by the Constitution or by statute. Otherwise put, jurisdiction of a court over the subject matter of the action is a matter of law.

Consequently, issues which deal with the jurisdiction of a court over the subject matter of a case are pure questions of law. As petitioners' appeal solely involves a question of law, they should have directly taken their appeal to this Court by filing a petition for review on certiorari under Rule 45, not an ordinary appeal with the Court of Appeals under Rule 41. Clearly, the appellate court did not err in holding that petitioners pursued the wrong mode of appeal.

Indeed, the Court of Appeals did not err in dismissing petitioners' appeal. Section 2, Rule 50 of the same Rules provides that an appeal from the RTC to the Court of Appeals raising only questions of law shall be dismissed; and that an appeal erroneously taken to the Court of Appeals shall be dismissed outright, x x x.19 (Emphasis added)

However, to serve the demands of substantial justice and equity, the Court opts to relax procedural rules and rule upon on the merits of the case. In Ong Lim Sing Jr. v. FEB Leasing and Finance Corporation,20 this Court stated:

Courts have the prerogative to relax procedural rules of even the most mandatory character, mindful of the duty to reconcile both the need to speedily put an end to litigation and the parties' right to due process. In numerous cases, this Court has allowed liberal construction of the rules when to do so would serve the demands of substantial justice and equity. In Aguam v. Court of Appeals, the Court explained:

"The court has the discretion to dismiss or not to dismiss an appellant's appeal. It is a power conferred on the court, not a duty. The "discretion must be a sound one, to be exercised in accordance with the tenets of justice and fair play, having in mind the circumstances obtaining in each case." Technicalities, however, must be avoided. The law abhors technicalities that impede the cause of justice. The court's primary duty is to render or dispense justice. "A litigation is not a game of technicalities." "Lawsuits unlike duels are not to be won by a rapier's thrust. Technicality, when it deserts its proper office as an aid to justice and

becomes its great hindrance and chief enemy, deserves scant consideration from courts." Litigations must be decided on their merits and not on technicality. Every party litigant must be afforded the amplest opportunity for the proper and just determination of his cause, free from the unacceptable plea of technicalities. Thus, dismissal of appeals purely on technical grounds is frowned upon where the policy of the court is to encourage hearings of appeals on their merits and the rules of procedure ought not to be applied in a very rigid, technical sense; rules of procedure are used only to help secure, not override substantial justice. It is a far better and more prudent course of action for the court to excuse a technical lapse and afford the parties a review of the case on appeal to attain the ends of justice rather than dispose of the case on technicality and cause a grave injustice to the parties, giving a false impression of speedy disposal of cases while actually resulting in more delay, if not a miscarriage of justice.21

II. The "in lieu of all taxes" provision in its franchise does not exempt ABS-CBN from payment of local franchise tax.

A. The present controversy essentially boils down to a dispute between the inherent taxing power of Congress and the delegated authority to tax of local governments under the 1987 Constitution and effected under the LGC of 1991.

The power of the local government of Quezon City to impose franchise tax is based on Section 151 in relation to Section 137 of the LGC, to wit:

Section 137. Franchise Tax. - Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at the rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized within its territorial jurisdiction. x x x

x x x x

Section 151. Scope of Taxing Powers. - Except as otherwise provided in this Code, the city may levy the taxes, fees and charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and component cities shall accrue to them and distributed in accordance with the provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes. (Emphasis supplied)

Such taxing power by the local government, however, is limited in the sense that Congress can enact legislation granting exemptions. This principle was upheld in City Government of Quezon City, et al. v. Bayan Telecommunications, Inc.22 Said this Court:

This thus raises the question of whether or not the City's Revenue Code pursuant to which the city treasurer of Quezon City levied real property taxes against Bayantel's real properties located within the City effectively withdrew the tax exemption enjoyed by Bayantel under its franchise, as amended.

Bayantel answers the poser in the negative arguing that once again it is only "liable to pay the same taxes, as any other persons or corporations on all its real or personal properties, exclusive of its franchise."

Bayantel's posture is well-taken. While the system of local government taxation has changed with the onset of the 1987 Constitution, the power of local government units to tax is still limited. As we explained in Mactan Cebu International Airport Authority:

"The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution.

Under the latter, the exercise of the power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy. x x x"

Clearly then, while a new slant on the subject of local taxation now prevails in the sense that the former doctrine of local government units' delegated power to tax had been effectively modified with Article X, Section 5 of the 1987 Constitution now in place, the basic doctrine on local taxation remains essentially the same. For as the Court stressed in Mactan, "the power to tax is [still] primarily vested in the Congress."

This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a Commissioner of the 1986 Constitutional Commission which crafted the 1987 Constitution, thus:

"What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation. What it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue. They no longer have to wait for a statutory grant of these powers. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. Moreover, these limitations must be "consistent with the basic policy of local autonomy." The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations. Henceforth, in interpreting statutory provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is understood, however, that taxes imposed by local government must be for a public purpose, uniform within a locality, must not be confiscatory, and must be within the jurisdiction of the local unit to pass."

In net effect, the controversy presently before the Court involves, at bottom, a clash between the inherent taxing power of the legislature, which necessarily includes the power to exempt, and the local government's delegated power to tax under the aegis of the 1987 Constitution.

Now to go back to the Quezon City Revenue Code which imposed real estate taxes on all real properties within the city's territory and removed exemptions theretofore "previously granted to, or presently enjoyed by all persons, whether natural or juridical [x x x]" there can really be no dispute that the power of the Quezon City Government to tax is limited by Section 232 of the LGC which expressly provides that "a province or city or municipality within the Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land, building, machinery, and other improvement not hereinafter specifically exempted." Under this law, the Legislature highlighted its power to thereafter exempt certain realties from the taxing power of local government units. An interpretation denying Congress such power to exempt would reduce the phrase "not hereinafter specifically exempted" as a pure jargon, without meaning whatsoever. Needless to state, such absurd situation is unacceptable.

For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao, this Court has upheld the power of Congress to grant exemptions over the power of local government units to impose taxes. There, the Court wrote:

"Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations."23 (Emphasis supplied)

In the case under review, the Philippine Congress enacted R.A. No. 7966 on March 30, 1995, subsequent to the effectivity of the LGC on January 1, 1992.

Under it, ABS-CBN was granted the franchise to install and operate radio and television broadcasting stations in the Philippines. Likewise, Section 8 imposed on ABS-CBN the duty of paying 3% franchise tax. It bears stressing, however, that payment of the percentage franchise tax shall be "in lieu of all taxes" on the said franchise.24

Congress has the inherent power to tax, which includes the power to grant tax exemptions. On the other hand, the power of Quezon City to tax is prescribed by Section 151 in relation to Section 137 of the LGC which expressly provides that notwithstanding any exemption granted by any law or other special law, the City may impose a franchise tax. It must be noted that Section 137 of the LGC does not prohibit grant of future exemptions. As earlier discussed, this Court in City Government of Quezon City v. Bayan Telecommunications, Inc.25 sustained the power of Congress to grant tax exemptions over and above the power of the local government's delegated power to tax.

B. The more pertinent issue now to consider is whether or not by passing R.A. No. 7966, which contains the "in lieu of all taxes" provision, Congress intended to exempt ABS-CBN from local franchise tax.

Petitioners argue that the "in lieu of all taxes" provision in ABS-CBN's franchise does not expressly exempt it from payment of local franchise tax. They contend that a tax exemption cannot be created by mere implication and that one who claims tax exemptions must be able to justify his claim by clearest grant of organic law or statute.

Taxes are what civilized people pay for civilized society. They are the lifeblood of the nation. Thus, statutes granting tax exemptions are construed stricissimi juris against the taxpayer and liberally in favor of the taxing authority. A claim of tax exemption must be clearly shown and based on language in law too plain to be mistaken. Otherwise stated, taxation is the rule, exemption is the exception.26 The burden of proof rests upon the party claiming the exemption to prove that it is in fact covered by the exemption so claimed.27

The basis for the rule on strict construction to statutory provisions granting tax exemptions or deductions is to minimize differential treatment and foster impartiality, fairness and equality of treatment among taxpayers.28 He who claims an exemption from his share of common burden must justify his claim that the legislature intended to exempt him by unmistakable terms. For exemptions from

taxation are not favored in law, nor are they presumed. They must be expressed in the clearest and most unambiguous language and not left to mere implications. It has been held that "exemptions are never presumed, the burden is on the claimant to establish clearly his right to exemption and cannot be made out of inference or implications but must be laid beyond reasonable doubt. In other words, since taxation is the rule and exemption the exception, the intention to make an exemption ought to be expressed in clear and unambiguous terms.29

Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax equivalent to three (3) percent of all gross receipts of the radio/television business transacted under the franchise and the franchise tax shall be "in lieu of all taxes" on the franchise or earnings thereof.

The "in lieu of all taxes" provision in the franchise of ABS-CBN does not expressly provide what kind of taxes ABS-CBN is exempted from. It is not clear whether the exemption would include both local, whether municipal, city or provincial, and national tax. What is clear is that ABS-CBN shall be liable to pay three (3) percent franchise tax and income taxes under Title II of the NIRC. But whether the "in lieu of all taxes provision" would include exemption from local tax is not unequivocal.

As adverted to earlier, the right to exemption from local franchise tax must be clearly established and cannot be made out of inference or implications but must be laid beyond reasonable doubt. Verily, the uncertainty in the "in lieu of all taxes" provision should be construed against ABS-CBN. ABS-CBN has the burden to prove that it is in fact covered by the exemption so claimed. ABS-CBN miserably failed in this regard.

ABS-CBN cites the cases Carcar Electric & Ice Plant v. Collector of Internal Revenue,30 Manila Railroad v. Rafferty,31 Philippine Railway Co. v. Collector of Internal Revenue,32 and Visayan Electric Co. v. David33 to support its claim that that the "in lieu of all taxes" clause includes exemption from all taxes.

However, a review of the foregoing case law reveals that the grantees' respective franchises expressly exempt them from municipal and provincial taxes. Said the Court in Manila Railroad v. Rafferty:34

On the 7th day of July 1906, by an Act of the Philippine Legislature, a special charter was granted to the Manila Railroad

Company. Subsection 12 of Section 1 of said Act (No. 1510) provides that:

"In consideration of the premises and of the granting of this concession or franchise, there shall be paid by the grantee to the Philippine Government, annually, for the period of thirty (30) years from the date hereof, an amount equal to one-half (1/2) of one per cent of the gross earnings of the grantee in respect of the lines covered hereby for the preceding year; after said period of thirty (30) years, and for the fifty (50) years thereafter, the amount so to be paid annually shall be an amount equal to one and one-half (1 1/2) per cent of such gross earnings for the preceding year; and after such period of eighty (80) years, the percentage and amount so to be paid annually by the grantee shall be fixed by the Philippine Government.

Such annual payments, when promptly and fully made by the grantee, shall be in lieu of all taxes of every name and nature - municipal, provincial or central - upon its capital stock, franchises, right of way, earnings, and all other property owned or operated by the grantee under this concession or franchise."35 (Underscoring supplied)

In the case under review, ABS-CBN's franchise did not embody an exemption similar to those in Carcar, Manila Railroad, Philippine Railway, and Visayan Electric. Too, the franchise failed to specify the taxing authority from whose jurisdiction the taxing power is withheld, whether municipal, provincial, or national. In fine, since ABS-CBN failed to justify its claim for exemption from local franchise tax, by a grant expressed in terms "too plain to be mistaken" its claim for exemption for local franchise tax must fail.

C. The "in lieu of all taxes" clause in the franchise of ABS-CBN has become functus officio with the abolition of the franchise tax on broadcasting companies with yearly gross receipts exceeding Ten Million Pesos.

In its decision dated January 20, 1999, the RTC held that pursuant to the "in lieu of all taxes" provision contained in Section 8 of R.A. No. 7966, ABS-CBN is exempt from the payment of the local franchise tax. The RTC further pronounced

that ABS-CBN shall instead be liable to pay a franchise tax of 3% of all gross receipts in lieu of all other taxes.

On this score, the RTC ruling is flawed. In keeping with the laws that have been passed since the grant of ABS-CBN's franchise, the corporation should now be subject to VAT, instead of the 3% franchise tax.

At the time of the enactment of its franchise on May 3, 1995, ABS-CBN was subject to 3% franchise tax under Section 117(b) of the 1977 National Internal Revenue Code (NIRC), as amended, viz.:

SECTION 117. Tax on franchises. - Any provision of general or special laws to the contrary notwithstanding, there shall be levied, assessed and collected in respect to all franchise, upon the gross receipts from the business covered by the law granting the franchise, a tax in accordance with the schedule prescribed hereunder:

(a) On electric utilities, city gas, and water supplies Two (2%) percent

(b) On telephone and/or telegraph systems, radio and/or broadcasting stations Three (3%) percent

(c) On other franchises Five (5%) percent. (Emphasis supplied)

On January 1, 1996, R.A. No. 7716, otherwise known as the Expanded Value Added Tax Law,36 took effect and subjected to VAT those services rendered by radio and/or broadcasting stations. Section 3 of R.A. No. 7716 provides:

Section 3. Section 102 of the National Internal Revenue Code, as amended is hereby further amended to read as follows:

SEC. 102. Value-added tax on sale of services and use or lease of properties. - (a) Rate and base of tax. - There shall be levied, assessed and collected, as value-added tax equivalent to 10% of gross receipts derived from the sale or

exchange of services, including the use or lease of properties.

The phrase "sale or exchange of services" means the performance of all kinds of services in the Philippines, for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; x x x services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 117 of this Code; x x x (Emphasis supplied)

Notably, under the same law, "telephone and/or telegraph systems, broadcasting stations and other franchise grantees" were omitted from the list of entities subject to franchise tax. The impression was that these entities were subject to 10% VAT but not to franchise tax. Only the franchise tax on "electric, gas and water utilities" remained. Section 12 of R.A. No. 7716 provides:

Section 12. Section 117 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:

SEC. 117. Tax on Franchises. - Any provision of general or special law to the contrary notwithstanding there shall be levied, assessed and collected in respect to all franchises on electric, gas and water utilities a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise. (Emphasis added)

Subsequently, R.A. No. 824137 took effect on January 1, 199738 containing more amendments to the NIRC. Radio and/or television companies whose annual gross receipts do not exceed P10,000,000.00 were granted the option to choose between paying 3% national franchise tax or 10% VAT. Section 9 of R.A. No. 8241 provides:

SECTION 9. Section 12 of Republic Act No. 7716 is hereby amended to read as follows:

"Sec. 12. Section 117 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:

"Sec. 117. Tax on franchise. - Any provision of general or special law to the contrary, notwithstanding, there shall be levied, assessed and collected in respect to all franchises on radio and/or television broadcasting companies whose annual gross receipts of the preceding year does not exceed Ten million pesos (P10,000,000.00), subject to Section 107(d) of this Code, a tax of three percent (3%) and on electric, gas and water utilities, a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise: Provided, however, That radio and television broadcasting companies referred to in this section, shall have an option to be registered as a value-added tax payer and pay the tax due thereon: Provided, further, That once the option is exercised, it shall not be revoked. (Emphasis supplied)

On the other hand, radio and/or television companies with yearly gross receipts exceeding P10,000,000.00 were subject to 10% VAT, pursuant to Section 102 of the NIRC.

On January 1, 1998, R.A. No. 842439 was passed confirming the 10% VAT liability of radio and/or television companies with yearly gross receipts exceeding P10,000,000.00.

R.A. No. 9337 was subsequently enacted and became effective on July 1, 2005. The said law further amended the NIRC by increasing the rate of VAT to 12%. The effectivity of the imposition of the 12% VAT was later moved from January 1, 2006 to February 1, 2006.

In consonance with the above survey of pertinent laws on the matter, ABS-CBN is subject to the payment of VAT. It does not have the option to choose between the payment of franchise tax or VAT since it is a broadcasting company with yearly gross receipts exceeding Ten Million Pesos (P10,000,000.00).

VAT is a percentage tax imposed on any person whether or not a franchise grantee, who in the course of trade or business, sells, barters, exchanges, leases,

goods or properties, renders services. It is also levied on every importation of goods whether or not in the course of trade or business. The tax base of the VAT is limited only to the value added to such goods, properties, or services by the seller, transferor or lessor. Further, the VAT is an indirect tax and can be passed on to the buyer.

The franchise tax, on the other hand, is a percentage tax imposed only on franchise holders. It is imposed under Section 119 of the Tax Code and is a direct liability of the franchise grantee.

The clause "in lieu of all taxes" does not pertain to VAT or any other tax. It cannot apply when what is paid is a tax other than a franchise tax. Since the franchise tax on the broadcasting companies with yearly gross receipts exceeding ten million pesos has been abolished, the "in lieu of all taxes" clause has now become functus officio, rendered inoperative.

In sum, ABS-CBN's claims for exemption must fail on twin grounds. First, the "in lieu of all taxes" clause in its franchise failed to specify the taxes the company is sought to be exempted from. Neither did it particularize the jurisdiction from which the taxing power is withheld. Second, the clause has become functus officio because as the law now stands, ABS-CBN is no longer subject to a franchise tax. It is now liable for VAT.

WHEREFORE, the petition is GRANTED and the appealed Decision REVERSED AND SET ASIDE. The petition in the trial court for refund of local franchise tax is DISMISSED.

SO ORDERED.

EN BANC

G.R. No. 156040             December 11, 2008

DIGITAL TELECOMMUNICATIONS PHILIPPINES, INC., petitioner, vs.CITY GOVERNMENT OF BATANGAS represented by HON. ANGELITO DONDON A. DIMACUHA, Batangas City Mayor, MR. BENJAMIN S. PARGAS, Batangas City Treasurer, and ATTY. TEODULFO A. DEQUITO, Batangas City Legal Officer, respondents.

D E C I S I O N

CARPIO, J.:

The Case

This is a petition for review on certiorari1 assailing the Regional Trial Court’s Order2 dated 2 May 2002 in Civil Case No. 5343 as well as the 19 November 2002 Order denying the Motion for Reconsideration. In the assailed orders, Branch 8 of the Regional Trial Court (RTC) of Batangas City (RTC-Branch 8) reversed the 28 March 2001 Order3 issued by Branch 3 of RTC-Batangas City (RTC-Branch 3). RTC-Branch 8 declared that under its legislative franchise, Digital Telecommunications Philippines, Inc. (petitioner) is not exempt from paying real property tax assessed by the Batangas City Government (respondent).

The Facts

On 17 February 1994, Republic Act No. 7678 (RA 7678)4 granted petitioner a 25-year franchise to install, operate and maintain telecommunications systems throughout the Philippines. Section 5 of RA 7678 reads:

Sec. 5. Tax Provisions. - The grantee shall be liable to pay the same taxes on its real estate, buildings, and personal property exclusive of this franchise as other persons or corporations are now or hereafter may be required by law to pay. In addition thereto, the grantee shall pay

to the Bureau of Internal Revenue each year, within thirty (30) days after the audit and approval of the accounts, a franchise tax as may be prescribed by law of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee; Provided, That the grantee shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto.

The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue. (Boldfacing and underscoring supplied)

Sometime in 1997, respondent issued a building permit for the installation of petitioner’s telecommunications facilities in Batangas City. After the installation of the facilities, petitioner applied with the Mayor’s office of Batangas City for a permit to operate. Because of a discrepancy in the actual investment costs used in computing the prescribed fees for the clearances and permits, petitioner was not able to secure a Mayor’s Permit for the year 1998. Petitioner was also advised to settle its unpaid realty taxes. However, petitioner claimed exemption from the payment of realty tax, citing the first sentence of Section 5 of RA 7678, the Letter-Opinion of the Bureau of Local Government Finance (BLGF) dated 8 April 1997,5 and the letter of the Office of the President dated 12 March 1996.6

In 1999, respondent refused to issue a Mayor’s Permit to petitioner without payment of its realty taxes.

On 22 June 1999, petitioner paid P68,890.39 under protest as fees for the permit to operate, but respondent refused to accept the payment unless petitioner also paid the realty taxes.7

On 2 July 1999, respondent threatened to close down petitioner’s operations. Hence, on 3 July 1999, petitioner instituted a complaint for prohibition and mandamus with prayer for a temporary restraining order or writ of preliminary injunction. This case was raffled to RTC-Branch 3. On the same date, respondent served a Cease and Desist Order on petitioner.8

On 20 January 2000, during the pendency of the complaint, petitioner paid its realty taxes of P2,043,265 under protest.9 Petitioner resumed its business, rendering the other issues raised in petitioner’s complaint moot. Consequently, the only issue left for resolution is whether petitioner is exempt from the realty tax under Section 5 of RA 7678.

The Ruling of RTC-Branch 3

On 28 March 2001, RTC-Branch 3 issued the following Order:

WHEREFORE, premises considered, the Court hereby declares that the real estate, buildings and personal property of plaintiff Digital Telecommunications Philippines, Inc. which are used in the operation of its franchise are exempt from payment of real property taxes, but those not so used should be held liable thereto.10

RTC-Branch 3 reasoned that the phrase "exclusive of this franchise" in the first sentence of Section 5 of RA 7678 limits the real properties that are subject to realty tax only to those which are not used in petitioner’s telecommunications business. In short, petitioner’s real properties used in its telecommunications business are not subject to realty tax.11

On 1 May 2001, respondent moved for reconsideration. Before acting on the motion, the Presiding Judge of RTC-Branch 3 voluntarily inhibited himself because the newly-elected mayor of Batangas City was his kumpadre.12 The case was re-raffled to RTC-Branch 8.

The Ruling of RTC-Branch 8

On 2 May 2002, RTC-Branch 8 issued an Order which reads:

WHEREFORE, the defendants’ Motion for Reconsideration is hereby granted. The Order of this Court dated March 21, 2001 is hereby set aside and, in lieu thereof, judgment is hereby rendered in favor of the defendants and against the plaintiff:

- DISMISSING the Amended Complaint;

- DECLARING that the plaintiff Digital Telecommunications Philippines, Inc., under its legislative franchise RA No. 7678, is not exempted from the payment of real property tax being collected by the defendant City of Batangas and, accordingly,

- ORDERING said plaintiff to pay the City of Batangas real estate taxes in the amount of Ph4,620,683.33 which was due as of January, 2000, as well as those due thereafter, plus corresponding interest and penalties.13

On 29 May 2002, petitioner moved for reconsideration. On 19 November 2002, RTC-Branch 8 denied petitioner’s motion for reconsideration.

Hence, this petition.

The Issue

The sole issue for resolution is whether, under the first sentence of Section 5 of RA 7678, petitioner’s real properties used in its telecommunications business are exempt from the realty tax.

Petitioner’s Contentions

Petitioner contends that its exemption from realty tax is based on the first sentence of Section 5 of RA 7678. Petitioner claims that the evident purpose of the phrase "exclusive of this franchise" is to limit the real properties that are subject to realty tax only to properties that are not used in petitioner’s telecommunications business.14 Petitioner asserts that the phrase "exclusive of this franchise" must not be construed as a useless surplusage. Petitioner points out that its exemption from realty tax was affirmed in two separate opinions, one rendered by the Office of the President on 12 March 1996 and the other by the BLGF on 8 April 1997 and reaffirmed on 4 January 1999.15 The BLGF declared that "the real properties of Digitel, which are used in the operation of its franchise are x x x found to be exempt from the payment of real property taxes beginning 1 January 1993. However, all other properties of that company not used in connection with the operation of its franchise shall remain taxable."16

Petitioner further argues that under the Local Government Code, the realty tax is imposed on all lands, buildings, machineries and other improvements attached to real property. A franchise is an incorporeal being, a special privilege granted by

the legislature. Hence, to read the first sentence of Section 5 of RA 7678 to mean that the franchisee shall pay taxes on its real properties used in its telecommunications business would render the phrase "exclusive of this franchise" meaningless.

Petitioner admits that the franchise granted under RA 7678 is a personal property, but the franchise is not the "personal property" referred to in the first sentence of Section 5. Petitioner asserts that the phrase "real estate, buildings, and personal property" in the first sentence of Section 5 refers solely to real properties and does not include personal properties. Petitioner explains thus:

For PTEs (public telecommunication entities), these personal properties include the switches which were installed in the exchange buildings as well as the outside and inside plant equipment. Initially, these telecommunications materials and equipment were personal property in character. But, having been installed and made operational by being attached to the exchange building, they are now converted into immovables or real property. That being the case, the phrase "real estate, buildings and personal property" actually refer[s] to properties that are liable for real estate tax. And, Congress having made the qualification with the phrase "exclusive of this franchise," only such real properties that are not used in furtherance of the franchise are subject to real property tax.17 (Emphasis supplied)

Respondent’s Contentions

Respondent contends that the phrase "exclusive of this franchise" does not mean that petitioner is exempt from the realty tax on its real properties used in its telecommunications business. The first sentence of Section 5 of RA 7678 makes petitioner "liable to pay the same taxes for its real estate, buildings, and personal property exclusive of this franchise as other persons or corporations are or hereafter may be required by law to pay." This shows the clear intent of Congress to tax petitioner’s real and personal properties.18 Respondent asserts that the phrase "exclusive of this franchise" is a qualification of the broad declaration on the franchisee’s liability for taxes which is the main thrust of the first sentence of Section 5. Respondent points out that petitioner is paying taxes and fees on all its motor vehicles, which are personal properties, without distinction.19 Respondent also points out that petitioner admits that the first sentence of Section 5 of RA

7678 is ambiguous with respect to the phrase "exclusive of this franchise,"20 thus petitioner resorted to the rules on statutory construction.21

Respondent adds that the legislative franchises granted to other telecommunications companies contain the same phrase "exclusive of this franchise." This shows the intent of Congress to make franchisees liable for the realty tax rather than exempt them even if the real properties are used in their telecommunications business.22

The Office of the Solicitor General (OSG), appearing for respondent, contends that the first sentence of Section 5 provides for petitioner’s general liability to pay taxes and does not provide for petitioner’s exemption from realty tax. The OSG invokes the doctrine of last antecedent which is an aid in statutory construction. The OSG argues that under this doctrine, the qualifying word or phrase only restricts the word or phrase to which the qualifying word or phrase is immediately associated and not the word or phrase which is distantly or remotely located. In the first sentence of Section 5, the phrase "exclusive of this franchise" restricts only the words "personal property" which immediately precede the phrase "exclusive of this franchise." This means that the franchise, an intangible personal property, should be excluded from the personal properties that are subject to taxes under the first sentence of Section 5. The OSG adds that the use of the comma to separate "real estate, buildings" from "personal property" exerts a dominant influence in the application of the doctrine of last antecedent. Further, the OSG reiterates that laws granting exemption from tax are to be construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.

The Ruling of the Court

The petition has no merit.

Section 5 of RA 7678 imposes taxesand does not exempt from realty tax

The issue in this case involves the interpretation of the phrase "exclusive of this franchise" in the first sentence of Section 5 of RA 7678.

Section 5 of RA 7678 states:

Sec. 5. Tax Provisions. - The grantee shall be liable to pay the same taxes on its real estate, buildings, and personal property exclusive of this franchise as other persons or corporations are now or hereafter may be required by law to pay. In addition thereto, the grantee shall pay to the Bureau of Internal Revenue each year, within thirty (30) days after the audit and approval of the accounts, a franchise tax as may be prescribed by law of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee; Provided, That the grantee shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto.

The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue. (Boldfacing and underscoring supplied)

The first sentence of Section 5 of RA 7678 is the same provision found in almost all legislative franchises in the telecommunications industry dating back to 1905.23

It is also the same provision that appears in the legislative franchises of other telecommunications companies like Philippine Long Distance Telephone Company,24 Smart Information Technologies, Inc.,25 and Globe Telecom.26 Since 1905, no telecommunications company has claimed exemption from realty tax based on the phrase "exclusive of this franchise," until petitioner filed the present case on 3 July 1999.27

The first sentence of Section 5 clearly states that the legislative franchisee shall be liable to pay the following taxes: (1) "the same taxes on its real estate, buildings, and personal property exclusive of this franchise as other persons or corporations are now or hereafter may be required by law to pay"; (2) "franchise tax as may be prescribed by law of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise";28 and (3) "income taxes payable under Title II of the National Internal Revenue Code."

The crux of the controversy lies in the interpretation of the phrase "exclusive of this franchise" in the first sentence of Section 5. Petitioner interprets the phrase to

mean that its real properties that are used in its telecommunications business shall not be subject to realty tax. Respondent interprets the same phrase to mean that the term "personal property" shall not include petitioner’s franchise, which is an intangible personal property.

We rule that the phrase "exclusive of this franchise" simply means that petitioner’s franchise shall not be subject to the taxes imposed in the first sentence of Section 5. The first sentence lists the properties that are subject to taxes, and the list excludes the franchise. Thus, the first sentence provides:

The grantee shall be liable to pay the same taxes on its real estate, buildings, and personal property exclusive of this franchise as other persons or corporations are now or hereafter may be required by law to pay. (Emphasis supplied)

A plain reading shows that the phrase "exclusive of this franchise" is meant to exclude the legislative franchise from the properties subject to taxes under the first sentence. In effect, petitioner’s franchise, which is a personal property, is not subject to the taxes imposed on properties under the first sentence of Section 5.

However, petitioner’s gross receipts from its franchise are subject to the "franchise tax" under the second sentence of Section 5. Thus, the second sentence provides:

In addition thereto, the grantee shall pay to the Bureau of Internal Revenue each year, within thirty (30) days after the audit and approval of the accounts, a franchise tax as may be prescribed by law of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee; x x x (Emphasis supplied)

In short, petitioner’s franchise is excluded from the properties taxable under the first sentence of Section 5 but the gross receipts from its franchise are expressly taxable under the second sentence of the same Section.

The first sentence of Section 5 imposes on the franchisee the "same taxes" that non-franchisees are subject to with respect to real and personal properties. The clear intent is to put the franchisees and non-franchisees in parity in the taxation of their real and personal properties. Since non-franchisees have obviously no franchises, the franchise must be excluded from the list of properties subject to tax

to maintain the parity between the franchisees and non-franchisees. However, the franchisee is taxable separately from its franchise. Thus, the second sentence of Section 5 imposes the "franchise tax" on gross receipts, which under Republic Act No. 7716 has been replaced by the 10% Valued Added Tax effective 1 January 1996.29

Section 5 can be divided into three parts. First is the first sentence which imposes taxes on real and personal properties, excluding one property, that is, the franchise. This puts in parity the franchisees and non-franchisees in the taxation of real and personal properties. Second is the second sentence which imposes the franchise tax, which is applicable solely to the franchisee. And third is the proviso in the second sentence that imposes the income tax on the franchisee, the same income tax payable by non-franchisees.

Petitioner claims that the first sentence refers only to real properties, and that the phrase "exclusive of this franchise" exempts petitioner from realty tax on its real properties used in its telecommunications business. This claim has no basis in the language of the law as written in the first sentence of Section 5. First, the first sentence expressly refers to taxes on "real estate" and on "personal property." Clearly, the first sentence does not refer only to taxes on real properties, but also to taxes on personal properties. The trial court correctly observed that petitioner pays taxes on its motor vehicles,30 which are personal properties, that are used in its telecommunications business.31 There is also the documentary stamp tax on transactions involving real and personal properties, which petitioner and other taxpayers are liable for.32

A franchise granted by Congress to operate a private radio station for the franchisee’s communications in deep-sea fishing shows that the first sentence of Section 5 of RA 7678 does not refer to real properties alone. Section 6 of Republic Act No. 3218 (RA 3218), entitled An Act Granting Batas Riego De Dios A Franchise To Construct, Maintain And Operate Private Radio Stations For Radio Communications In Its Deep-Sea Fishing Industry, provides:

SECTION 6. The grantee shall be liable (1) to pay the same taxes on its real estate, building, fishing boats and personal property, exclusive of this franchise as other persons or corporations are now, or hereafter may be required by law to pay, and shall further be liable (2) to pay all other taxes that may be imposed by the National Internal Revenue Code by reason of this franchise. (Emphasis supplied)

The inclusion of "fishing boats," personal properties that can never be attached to a land or building so as to make them real properties, demonstrates that Section 6 of RA 3218, like the first sentence of Section 5 of RA 7678, not only applies to real properties but also to personal properties.

Second, there is no language in the first sentence of Section 5 expressly or even impliedly exempting petitioner from the realty tax. The phrases "exemption from real estate tax," "free from real estate tax" or "not subject to real estate tax" do not appear in the first sentence. No matter how one reads the first sentence, there is no grant of exemption, express or implied, from realty tax. In fact, the first sentence expressly imposes taxes on both real and personal properties, excluding only the intangible personal property that is the franchise.

A tax exemption cannot arise from vague inference. The first sentence of Section 5 does not grant any express or even implied exemption from realty tax. On the contrary, the first sentence categorically states that the franchisee is subject to the "same taxes currently imposed, and those taxes that may be subsequently imposed, on other persons or corporations," taxpayers that admittedly are all subject to realty tax. The first sentence does not limit the imposition of the "same taxes" to realty tax only but even to "those taxes" that may in the future be imposed on other taxpayers, which future taxes shall also be imposed on petitioner. Thus, the first sentence of Section 5 imposes on petitioner not only realty tax but also other taxes.

The phrase "personal property exclusive of this franchise" merely means that "personal property" does not include the franchise even if the franchise is an intangible personal property. Stated differently, the first sentence of Section 5 provides that petitioner shall pay tax on its real properties as well as on its personal properties but the franchise, which is an intangible personal property, shall not be deemed personal property.

The historical usage of the phrase "exclusive of this franchise" in franchise laws enacted by Congress indubitably shows that the phrase is not a grant of tax exemption, but an exclusion of one type of personal property subject to taxes, and the excluded personal property is the franchise. Thus, the franchises of telecommunications companies in Republic Act Nos. 4137,33 5692,34 5739,35 5785,36 5790,37 5791,38 5795,39 5810,40 5847,41 5848,42 5856,43 5857,44 5913,45 5914,46 5929,47 5937,48 5958,49 5959,50 5974,51 5993,52 5994,53 6002,54 6006,55

6007,56 6013,57 6024,58 6097,59 6510,60 6536,61 and 653062 contain the following common tax provision:

The grantee shall be liable to pay the same taxes, unless exempted therefrom, on its business, real estate, buildings, and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay. (Emphasis supplied)

The phrase "unless exempted therefrom" in the common provision clearly clarifies that the phrase "exclusive of this franchise" does not grant any tax exemption. To claim tax exemption, there must be an express exemption from tax in another provision of law. On the other hand, the deletion of the phrase "unless exempted therefrom" from the common provision does not give rise to any tax exemption.

Bayantel and Digitel Cases

In City Government of Quezon City v. Bayan Telecommunications, Inc.,63 this Court’s Second Division held that "all realties which are actually, directly and exclusively used in the operation of its franchise are ‘exempted’ from any property tax." The Second Division added that Bayantel’s franchise being national in character, the "exemption" granted applies to all its real and personal properties found anywhere within the Philippines. The Second Division reasoned in this wise:

The legislative intent expressed in the phrase ‘exclusive of this franchise’ cannot be construed other than distinguishing between two (2) sets of properties, be they real or personal, owned by the franchisee, namely, (a) those actually, directly and exclusively used in its radio or telecommunications business, and (b) those properties which are not so used. It is worthy to note that the properties subject of the present controversy are only those which are admittedly falling under the first category.

To the mind of the Court, Section 14 of Rep. Act No. 3259 effectively works to grant or delegate to local governments of Congress’ inherent power to tax the franchisee’s properties belonging to the second group of properties indicated above, that is, all properties which, "exclusive of this franchise," are not actually and directly used in the pursuit of its franchise.

As may be recalled, the taxing power of local governments under both the 1935 and the 1973 Constitutions solely depended upon an enabling law. Absent such enabling law, local government units were without authority to impose and collect taxes on real properties within their respective territorial jurisdictions. While Section 14 of Rep. Act No. 3259 may be validly viewed as an implied delegation of power to tax, the delegation under that provision, as couched, is limited to impositions over properties of the franchisee which are not actually, directly and exclusively used in the pursuit of its franchise. Necessarily, other properties of Bayantel directly used in the pursuit of its business are beyond the pale of the delegated taxing power of local governments. In a very real sense, therefore, real properties of Bayantel, save those exclusive of its franchise, are subject to realty taxes. Ultimately, therefore, the inevitable result was that all realties which are actually, directly and exclusively used in the operation of its franchise are "exempted" from any property tax. (Emphasis supplied)

In Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan,64 this Court’s Third Division ruled that Digitel’s real properties located within the territorial jurisdiction of Pangasinan that are actually, directly and exclusively used in its franchise are exempt from realty tax under the first sentence of Section 5 of RA 7678. The Third Division explained thus:

The more pertinent issue to consider is whether or not, by passing Republic Act No. 7678, Congress intended to exempt petitioner DIGITEL’s real properties actually, directly and exclusively used by the grantee in its franchise.

The fact that Republic Act No. 7678 was a later piece of legislation can be taken to mean that Congress, knowing fully well that the Local Government Code had already withdrawn exemptions from real property taxes, chose to restore such immunity even to a limited degree. Accordingly:

The Court views this subsequent piece of legislation as an express and real intention on the part of Congress to once again remove from the LGC’s delegated taxing power, all of the franchisee’s x x x properties that are actually, directly and exclusively used in the pursuit of its franchise.

In view of the unequivocal intent of Congress to exempt from real property tax those real properties actually, directly and exclusively used by petitioner DIGITEL in the pursuit of its franchise, respondent Province of Pangasinan can only levy real property tax on the remaining real properties of the grantee located within its territorial jurisdiction not part of the above-stated classification. Said exemption, however, merely applies from the time of the effectivity of petitioner DIGITEL’s legislative franchise and not a moment sooner.

Nowhere in the language of the first sentence of Section 5 of RA 7678 does it expressly or even impliedly provide that petitioner’s real properties that are actually, directly and exclusively used in its telecommunications business are exempt from payment of realty tax. On the contrary, the first sentence of Section 5 specifically states that the petitioner, as the franchisee, shall pay the "same taxes on its real estate, buildings, and personal property exclusive of this franchise as other persons or corporations are now or hereafter may be required by law to pay."

The heading of Section 5 is "Tax Provisions," not Tax Exemptions. To reiterate, the phrase "exemption from real estate tax" or other words conveying exemption from realty tax do not appear in the first sentence of Section 5. The phrase "exclusive of this franchise" in the first sentence of Section 5 merely qualifies the phrase "personal property" to exclude petitioner’s legislative franchise, which is an intangible personal property. Petitioner’s franchise is subject to tax in the second sentence of Section 5 which imposes the "franchise tax." Thus, there is no grant of tax exemption in the first sentence of Section 5.

The interpretation of the phrase "exclusive of this franchise" in the Bayantel and Digitel cases goes against the basic principle in construing tax exemptions. In PLDT v. City of Davao,65 the Court held that "tax exemptions should be granted only by clear and unequivocal provision of law on the basis of language too plain to be mistaken. They cannot be extended by mere implication or inference."

Tax exemptions must be clear and unequivocal. A taxpayer claiming a tax exemption must point to a specific provision of law conferring on the taxpayer, in clear and plain terms, exemption from a common burden. Any doubt whether a tax exemption exists is resolved against the taxpayer.66

RCPI case

In Radio Communications of the Philippines, Inc. (RCPI) v. Provincial Assessor of South Cotabato,67the Court’s First Division held that RCPI’s radio relay station tower, radio station building, and machinery shed are real properties and are subject to real property tax. The Court added that:

RCPI cannot also invoke the equality of treatment clause under Section 23 of Republic Act No. 7925. The franchises of Smart, Islacom, TeleTech, Bell, Major Telecoms, Island Country, and IslaTel,68 all expressly declare that the franchisee shall pay the real estate tax, using words similar to Section 14 of RA 2036, as amended. The provisions of these subsequent telecommunication franchises imposing the real estate tax on franchisees only confirm that RCPI is subject to the real estate tax. Otherwise, RCPI will stick out like a sore thumb, being the only telecommunications company exempt from the real estate tax, in mockery of the spirit of equality of treatment that RCPI is invoking, not to mention the violation of the constitutional rule on uniformity of taxation.

It is an elementary rule in taxation that exemptions are strictly construed against the taxpayer and liberally in favor of the taxing authority. It is the taxpayer’s duty to justify the exemption by words too plain to be mistaken and too categorical to be misinterpreted. (Emphasis supplied)

In RCPI, the Court emphasized that telecommunications companies which were granted legislative franchise are liable to realty tax. The intent to grant realty tax exemption cannot be discerned from Republic Act No. 405469 and neither from the legislative franchises of other telecommunications companies. Tax exemptions granted to one or more, but not to all, telecommunications companies similarly situated will violate the constitutional rule on uniformity of taxation.70

The intent of Congress is to makelegislative franchisees liable to tax

In PLDT v. City of Davao,71 it was observed that after the imposition of VAT on telecommunications companies, Congress refused to grant any tax exemption to telecommunications companies that sought new franchises from Congress, except the exemption from specific tax.72 More importantly, the uniform tax provision in these new franchises expressly states that the franchisee shall pay not only all taxes, except specific tax, under the National Internal Revenue Code, but also all

taxes under "other applicable laws,"73 one of which is the Local Government Code which imposes the realty tax.74

In fact, Section 12 of Republic Act No. 9180 (RA 9180),75 the legislative franchise of Digitel Mobile, a 100%-owned subsidiary of petitioner, states that the franchisee, its successors or assigns shall be subject to the payment of "all taxes, duties, fees or charges and other impositions under the National Internal Revenue Code of 1997, as amended, and other applicable laws."76 Section 12 of RA 9180 provides:

SECTION 12. Tax Provisions. \emdash The grantee, its successors or assigns, shall be subject to the payment of all taxes, duties, fees or charges and other impositions under the National Internal Revenue Code of 1997, as amended, and other applicable laws: Provided, That nothing herein shall be construed as repealing any specific tax exemptions, incentives, or privileges granted under any relevant law: Provided, further, That all rights, privileges, benefits and exemptions accorded to existing and future telecommunications franchises shall likewise be extended to the grantee.

The grantee shall file the return with the city or province where its facility is located and pay the income tax due thereon to the Commissioner of Internal Revenue or his duly authorized representatives in accordance with the National Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue. (Emphasis supplied)

Thus, Digitel Mobile is subject to tax on its real estate and personal properties, whether or not used in its telecommunications business.

In Compagnie Financiere Sucres et Denrees v. Commissioner of Internal Revenue,77 the Court ruled that "the governing principle is that tax exemptions are to be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority \endash he who claims an exemption must be able to justify his claim by the clearest grant of statute." A person claiming an exemption has the burden of justifying the exemption by words too plain to be mistaken and too categorical to be misinterpreted. Tax exemptions are never presumed and the burden lies with the taxpayer to clearly establish his right to exemption.78

BLGF Opinions

On 25 October 2004, the BLGF issued Memorandum Circular No. 15-2004.79 This circular reversed the BLGF’s Letter-Opinion dated 8 April 1997 recognizing realty tax exemption under the phrase "exclusive of this franchise." This later circular states that the real properties owned by Globe and Smart Telecommunications and all other telecommunications companies similarly situated are subject to the realty tax. The BLGF has reversed its opinion on the realty tax exemption of telecommunications companies. Hence, petitioner’s claim of tax exemption based on BLGF’s opinion does not hold water. Besides, the BLGF has no authority to rule on claims for exemption from the realty tax.80

WHEREFORE, we DENY the petition. We AFFIRM the 2 May 2002 and 19 November 2002 Orders of the Regional Trial Court, Branch 8, Batangas City, in Civil Case No. 5343.

SO ORDERED.

SECOND DIVISION

COMMISSIONER OF INTERNAL G.R. Nos. 167274-75REVENUE,

Petitioner, Present:

QUISUMBING, J.,Chairperson,

YNARES-SANTIAGO,- versus - CARPIO MORALES,

TINGA, andVELASCO, JR., JJ.

FORTUNE TOBACCO CORPORATION, Promulgated: Respondent. July 21, 2008

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

D E C I S I O N

TINGA, J.:

Simple and uncomplicated is the central issue involved, yet

whopping is the amount at stake in this case.

After much wrangling in the Court of Tax Appeals (CTA) and

the Court of Appeals, Fortune Tobacco Corporation (Fortune

Tobacco) was granted a tax refund or tax credit representing specific

taxes erroneously collected from its tobacco products. The tax refund

is being re-claimed by the Commissioner of Internal Revenue

(Commissioner) in this petition.

The following undisputed facts, summarized by the Court of

Appeals, are quoted in the assailed Decisioni[1] dated 28 September

2004:

CAG.R. SP No. 80675

x x x x

Petitionerii[2] is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines, with principal address at Fortune Avenue, Parang, Marikina City.

Petitioner is the manufacturer/producer of, among others, the following cigarette brands, with tax rate classification based on net retail price prescribed by Annex “D” to R.A. No. 4280, to wit:

Brand Tax Rate

Champion M 100 P1.00Salem M 100 P1.00Salem M King P1.00

Camel F King P1.00Camel Lights Box 20’s P1.00 Camel Filters Box 20’s P1.00Winston F Kings P5.00 Winston Lights P5.00

Immediately prior to January 1, 1997, the above-mentioned cigarette brands were subject to ad valorem tax pursuant to then Section 142 of the Tax Code of 1977, as amended. However, on January 1, 1997, R.A. No. 8240 took effect whereby a shift from the ad valorem tax (AVT) system to the specific tax system was made and subjecting the aforesaid cigarette brands to specific tax under [S]ection 142 thereof, now renumbered as Sec. 145 of the Tax Code of 1997, pertinent provisions of which are quoted thus:

Section 145. Cigars and Cigarettes-

(A) Cigars. – There shall be levied, assessed and collected on cigars a tax of One peso (P1.00) per cigar.

“(B) Cigarettes packed by hand. – There shall be levied, assessesed and collected on cigarettes packed by hand a tax of Forty centavos (P0.40) per pack.

(C) Cigarettes packed by machine. – There shall be levied, assessed and collected on cigarettes packed by machine a tax at the rates prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos ( P 10.00) per pack, the tax shall be Twelve (P12.00) per pack;

(2) If the net retail price (excluding the excise tax and the value added tax) exceeds Six pesos and Fifty centavos ( P 6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall be Eight Pesos ( P 8.00) per pack .

(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos ( P 5.00) but does not

exceed Six Pesos and fifty centavos ( P 6.50) per pack , the tax shall be Five pesos ( P 5.00) per pack ;

(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos ( P 5.00) per pack, the tax shall be One peso ( P 1.00) per pack;

“Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of R.A. No. 8240 shall be taxed under the highest classification of any variant of that brand.

The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No. 8240 shall not be lower than the tax, which is due from each brand on October 1, 1996. Provided, however, that in cases were (sic) the excise tax rate imposed in paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in excise tax of more than seventy percent (70%), for a brand of cigarette, the increase shall take effect in two tranches: fifty percent (50%) of the increase shall be effective in 1997 and one hundred percent (100%) of the increase shall be effective in 1998.

Duly registered or existing brands of cigarettes or new brands thereof packed by machine shall only be packed in twenties.

The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3) and (4) hereof, shall be increased by twelve percent (12%) on January 1, 2000. (Emphasis supplied)

New brands shall be classified according to their current net retail price.

For the above purpose, ‘net retail price’ shall mean the price at which the cigarette is sold on retail in twenty (20) major supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount

intended to cover the applicable excise tax and value-added tax. For brands which are marketed only outside Metro [M]anila, the ‘net retail price’ shall mean the price at which the cigarette is sold in five (5) major supermarkets in the region excluding the amount intended to cover the applicable excise tax and the value-added tax.

The classification of each brand of cigarettes based on its average retail price as of October 1, 1996, as set forth in Annex “D,” shall remain in force until revised by Congress.

Variant of a brand shall refer to a brand on which a modifier is prefixed and/or suffixed to the root name of the brand and/or a different brand which carries the same logo or design of the existing brand.

To implement the provisions for a twelve percent (12%) increase of excise tax on, among others, cigars and cigarettes packed by machines by January 1, 2000, the Secretary of Finance, upon recommendation of the respondent Commissioner of Internal Revenue, issued Revenue Regulations No. 17-99, dated December 16, 1999, which provides the increase on the applicable tax rates on cigar and cigarettes as follows:

SECTION DESCRIPTION OF

ARTICLES

PRESENT SPECIFIC TAX RATE PRIOR

TO JAN. 1, 2000

NEW SPECIFIC TAX RATE

EFFECTIVE JAN. 1, 2000

145 (A) P1.00/cigar P1.12/cigar

(B)Cigarettes packed by machine

(1) Net retail price (excluding VAT and P12.00/pack P13.44/ pack

excise) exceeds P10.00 per pack

(2) Exceeds P10.00 per pack

(3) Net retail price (excluding VAT and excise) is P5.00 to P6.50 per pack

(4) Net Retail Price (excluding VAT and excise) is below P5.00 per pack

P8.00/pack

P5.00/pack

P1.00/pack

P8.96/pack

P5.60/pack

P1.12/pack

Revenue Regulations No. 17-99 likewise provides in the last paragraph of Section 1 thereof, “(t)hat the new specific tax rate for any existing brand of cigars, cigarettes packed by machine, distilled spirits, wines and fermented liquor shall not be lower than the excise tax that is actually being paid prior to January 1, 2000.”

For the period covering January 1-31, 2000, petitioner allegedly paid specific taxes on all brands manufactured and removed in the total amounts of P585,705,250.00.

On February 7, 2000, petitioner filed with respondent’s Appellate Division a claim for refund or tax credit of its purportedly overpaid excise tax for the month of January 2000 in the amount of P35,651,410.00

On June 21, 2001, petitioner filed with respondent’s Legal Service a letter dated June 20, 2001 reiterating all the claims for refund/tax credit of its overpaid excise taxes filed on

various dates, including the present claim for the month of January 2000 in the amount of P35,651,410.00.

As there was no action on the part of the respondent, petitioner filed the instant petition for review with this Court on December 11, 2001, in order to comply with the two-year period for filing a claim for refund.

In his answer filed on January 16, 2002, respondent raised the following Special and Affirmative Defenses;

4. Petitioner’s alleged claim for refund is subject to administrative routinary investigation/examination by the Bureau;

5. The amount of P35,651,410 being claimed by petitioner as alleged overpaid excise tax for the month of January 2000 was not properly documented.

6. In an action for tax refund, the burden of proof is on the taxpayer to establish its right to refund, and failure to sustain the burden is fatal to its claim for refund/credit.

7. Petitioner must show that it has complied with the provisions of Section 204(C) in relation [to] Section 229 of the Tax Code on the prescriptive period for claiming tax refund/credit;

8. Claims for refund are construed strictly against the claimant for the same partake of tax exemption from taxation; and

9. The last paragraph of Section 1 of Revenue Regulation[s] [No.]17-99 is a valid implementing regulation which has the force and effect of law.”

CA G.R. SP No. 83165

The petition contains essentially similar facts, except that the said case questions the CTA’s December 4, 2003 decision in CTA Case No. 6612 granting respondent’s1[3] claim for refund of the amount of P355,385,920.00 representing erroneously or illegally collected specific taxes covering the period January 1, 2002 to December 31, 2002, as well as its March 17, 2004 Resolution denying a reconsideration thereof.

x x x x

In both CTA Case Nos. 6365 & 6383 and CTA No. 6612, the Court of Tax Appeals reduced the issues to be resolved into two as stipulated by the parties, to wit: (1) Whether or not the last paragraph of Section 1 of Revenue Regulation[s] [No.] 17-99 is in accordance with the pertinent provisions of Republic Act [No.] 8240, now incorporated in Section 145 of the Tax Code of 1997; and (2) Whether or not petitioner is entitled to a refund of P35,651,410.00 as alleged overpaid excise tax for the month of January 2000.

x x x x

Hence, the respondent CTA in its assailed October 21, 2002 [twin] Decisions[s] disposed in CTA Case Nos. 6365 & 6383:

WHEREFORE, in view of the foregoing, the court finds the instant petition meritorious and in accordance with law. Accordingly, respondent is hereby ORDERED to REFUND to petitioner the amount of P35,651.410.00 representing erroneously paid excise taxes for the period January 1 to January 31, 2000.

SO ORDERED.

Herein petitioner sought reconsideration of the above-quoted decision. In [twin] resolution[s] [both] dated July 15, 2003, the Tax Court, in an apparent change of heart, granted the petitioner’s consolidated motions for reconsideration, thereby denying the respondent’s claim for refund.

1

However, on consolidated motions for reconsideration filed by the respondent in CTA Case Nos. 6363 and 6383, the July 15, 2002 resolution was set aside, and the Tax Court ruled, this time with a semblance of finality, that the respondent is entitled to the refund claimed. Hence, in a resolution dated November 4, 2003, the tax court reinstated its December 21, 2002 Decision and disposed as follows:

WHEREFORE, our Decisions in CTA Case Nos. 6365 and 6383 are hereby REINSTATED. Accordingly, respondent is hereby ORDERED to REFUND petitioner the total amount of P680,387,025.00 representing erroneously paid excise taxes for the period January 1, 2000 to January 31, 2000 and February 1, 2000 to December 31, 2001.

SO ORDERED.

Meanwhile, on December 4, 2003, the Court of Tax Appeals rendered decision in CTA Case No. 6612 granting the prayer for the refund of the amount of P355,385,920.00 representing overpaid excise tax for the period covering January 1, 2002 to December 31, 2002. The tax court disposed of the case as follows:

IN VIEW OF THE FOREGOING, the Petition for Review is GRANTED. Accordingly, respondent is hereby ORDERED to REFUND to petitioner the amount of P355,385,920.00 representing overpaid excise tax for the period covering January 1, 2002 to December 31, 2002.

SO ORDERED.

Petitioner sought reconsideration of the decision, but the same was denied in a Resolution dated March 17, 2004.2[4] (Emphasis supplied) (Citations omitted)

2

The Commissioner appealed the aforesaid decisions of the CTA. The petition questioning the grant of refund in the amount of P680,387,025.00 was docketed as CA-G.R. SP No. 80675, whereas that assailing the grant of refund in the amount of P355,385,920.00 was docketed as CA-G.R. SP No. 83165. The petitions were consolidated and eventually denied by the Court of Appeals. The appellate court also denied reconsideration in its Resolution3[5] dated 1 March 2005.

In its Memorandum4[6] 22 dated November 2006, filed on behalf

of the Commissioner, the Office of the Solicitor General (OSG) seeks

to convince the Court that the literal interpretation given by the CTA

and the Court of Appeals of Section 145 of the Tax Code of 1997

(Tax Code) would lead to a lower tax imposable on 1 January 2000

than that imposable during the transition period. Instead of an

increase of 12% in the tax rate effective on 1 January 2000 as

allegedly mandated by the Tax Code, the appellate court’s ruling

would result in a significant decrease in the tax rate by as much as

66%.

The OSG argues that Section 145 of the Tax Code admits of

several interpretations, such as:

1. That by January 1, 2000, the excise tax on cigarettes should be the higher tax imposed under the specific tax system and the

3

4

tax imposed under the ad valorem tax system plus the 12% increase imposed by par. 5, Sec. 145 of the Tax Code;

2. The increase of 12% starting on January 1, 2000 does not apply to the brands of cigarettes listed under Annex “D” referred to in par. 8, Sec. 145 of the Tax Code;

3. The 12% increment shall be computed based on the net retail price as indicated in par. C, sub-par. (1)-(4), Sec. 145 of the Tax Code even if the resulting figure will be lower than the amount already being paid at the end of the transition period. This is the interpretation followed by both the CTA and the Court of Appeals.5[7]

This being so, the interpretation which will give life to the legislative

intent to raise revenue should govern, the OSG stresses.

Finally, the OSG asserts that a tax refund is in the nature of a

tax exemption and must, therefore, be construed strictly against the

taxpayer, such as Fortune Tobacco.

In its Memorandum6[8] dated 10 November 2006, Fortune

Tobacco argues that the CTA and the Court of Appeals merely

followed the letter of the law when they ruled that the basis for the

12% increase in the tax rate should be the net retail price of the

cigarettes in the market as outlined in paragraph C, sub paragraphs

(1)-(4), Section 145 of the Tax Code. The Commissioner allegedly

5

6

has gone beyond his delegated rule-making power when he

promulgated, enforced and implemented Revenue Regulation No. 17-

99, which effectively created a separate classification for cigarettes

based on the excise tax “actually being paid prior to January 1,

2000.”7[9]

It should be mentioned at the outset that there is no dispute

between the fact of payment of the taxes sought to be refunded and

the receipt thereof by the Bureau of Internal Revenue (BIR). There is

also no question about the mathematical accuracy of Fortune

Tobacco’s claim since the documentary evidence in support of the

refund has not been controverted by the revenue agency. Likewise, the

claims have been made and the actions have been filed within the two

(2)-year prescriptive period provided under Section 229 of the Tax

Code.

The power to tax is inherent in the State, such power being

inherently legislative, based on the principle that taxes are a grant of

the people who are taxed, and the grant must be made by the

immediate representatives of the people; and where the people have

laid the power, there it must remain and be exercised.8[10]

7

8

This entire controversy revolves around the interplay between

Section 145 of the Tax Code and Revenue Regulation 17-99. The

main issue is an inquiry into whether the revenue regulation has

exceeded the allowable limits of legislative delegation.

For ease of reference, Section 145 of the Tax Code is again

reproduced in full as follows:

Section 145. Cigars and Cigarettes-

(A) Cigars.—There shall be levied, assessed and collected on cigars a tax of One peso (P1.00) per cigar.

(B). Cigarettes packed by hand.—There shall be levied, assessed and collected on cigarettes packed by hand a tax of Forty centavos (P0.40) per pack.

(C) Cigarettes packed by machine.—There shall be levied, assessed and collected on cigarettes packed by machine a tax at the rates prescribed below:

(1) If the net retail price (excluding the excise tax and the value-added tax) is above Ten pesos (P10.00) per pack, the tax shall be Twelve pesos (P12.00) per pack;

(2) If the net retail price (excluding the excise tax and the value added tax) exceeds Six pesos and Fifty centavos ( P 6.50) but does not exceed Ten pesos (P10.00) per pack, the tax shall be Eight Pesos (P8.00) per pack.

(3) If the net retail price (excluding the excise tax and the value-added tax) is Five pesos (P5.00) but does not exceed Six Pesos and fifty centavos (P6.50) per pack, the tax shall be Five pesos (P5.00) per pack;

(4) If the net retail price (excluding the excise tax and the value-added tax) is below Five pesos (P5.00) per pack, the tax shall be One peso (P1.00) per pack;

Variants of existing brands of cigarettes which are introduced in the domestic market after the effectivity of R.A. No. 8240 shall be taxed under the highest classification of any variant of that brand.

The excise tax from any brand of cigarettes within the next three (3) years from the effectivity of R.A. No. 8240 shall not be lower than the tax, which is due from each brand on October 1, 1996. Provided, however, That in cases where the excise tax rates imposed in paragraphs (1), (2), (3) and (4) hereinabove will result in an increase in excise tax of more than seventy percent (70%), for a brand of cigarette, the increase shall take effect in two tranches: fifty percent (50%) of the increase shall be effective in 1997 and one hundred percent (100%) of the increase shall be effective in 1998.

Duly registered or existing brands of cigarettes or new brands thereof packed by machine shall only be packed in twenties.

The rates of excise tax on cigars and cigarettes under paragraphs (1), (2) (3) and (4) hereof, shall be increased by twelve percent (12%) on January 1, 2000.

New brands shall be classified according to their current net retail price.

For the above purpose, ‘net retail price’ shall mean the price at which the cigarette is sold on retail in twenty (20) major supermarkets in Metro Manila (for brands of cigarettes marketed nationally), excluding the amount intended to cover the applicable excise tax and value-added tax. For brands which are marketed only outside Metro Manila, the ‘net retail price’ shall mean the

price at which the cigarette is sold in five (5) major intended to cover the applicable excise tax and the value-added tax.

The classification of each brand of cigarettes based on its average retail price as of October 1, 1996, as set forth in Annex “D,” shall remain in force until revised by Congress.

Variant of a brand’ shall refer to a brand on which a modifier is prefixed and/or suffixed to the root name of the brand and/or a different brand which carries the same logo or design of the existing brand.9[11](Emphasis supplied)

Revenue Regulation 17-99, which was issued pursuant to the

unquestioned authority of the Secretary of Finance to promulgate

rules and regulations for the effective implementation of the Tax

Code,10[12] interprets the above-quoted provision and reflects the 12%

increase in excise taxes in the following manner:

SECTION DESCRIPTION OF

ARTICLES

PRESENT SPECIFIC TAX RATES PRIOR TO JAN. 1, 2000

NEW SPECIFIC TAX RATE

Effective Jan.. 1, 2000

145 (A) Cigars P1.00/cigar P1.12/cigar

(B)Cigarettes packed by Machine

9

10

(1) Net Retail Price (excluding VAT and Excise) exceeds P10.00 per pack

(2) Net Retail Price (excluding VAT and Excise) is P6.51 up to P10.00 per pack

(3) Net Retail Price (excluding VAT and excise) is P5.00 to P6.50 per pack

(4) Net Retail Price (excluding VAT and excise) is below P5.00 per pack)

P12.00/pack

P8.00/pack

P5.00/pack

P1.00/pack

P13.44/pack

P8.96/pack

P5.60/pack

P1.12/pack

This table reflects Section 145 of the Tax Code insofar as it

mandates a 12% increase effective on 1 January 2000 based on the

taxes indicated under paragraph C, sub-paragraph (1)-(4). However,

Revenue Regulation No. 17-99 went further and added that “[T]he

new specific tax rate for any existing brand of cigars, cigarettes

packed by machine, distilled spirits, wines and fermented liquor shall

not be lower than the excise tax that is actually being paid prior to

January 1, 2000.”11[13]

Parenthetically, Section 145 states that during the transition

period, i.e., within the next three (3) years from the effectivity of the

Tax Code, the excise tax from any brand of cigarettes shall not be

lower than the tax due from each brand on 1 October 1996. This

qualification, however, is conspicuously absent as regards the 12%

increase which is to be applied on cigars and cigarettes packed by

machine, among others, effective on 1 January 2000. Clearly and

unmistakably, Section 145 mandates a new rate of excise tax for

cigarettes packed by machine due to the 12% increase effective on 1

January 2000 without regard to whether the revenue collection

starting from this period may turn out to be lower than that collected

prior to this date.

By adding the qualification that the tax due after the 12%

increase becomes effective shall not be lower than the tax actually

paid prior to 1 January 2000, Revenue Regulation No. 17-99

effectively imposes a tax which is the higher amount between the ad

valorem tax being paid at the end of the three (3)-year transition

period and the specific tax under paragraph C, sub-paragraph (1)-(4),

11

as increased by 12%—a situation not supported by the plain wording

of Section 145 of the Tax Code.

This is not the first time that national revenue officials had

ventured in the area of unauthorized administrative legislation.

In Commissioner of Internal Revenue v. Reyes,12[14] respondent

was not informed in writing of the law and the facts on which the

assessment of estate taxes was made pursuant to Section 228 of the

1997 Tax Code, as amended by Republic Act (R.A.) No. 8424. She

was merely notified of the findings by the Commissioner, who had

simply relied upon the old provisions of the law and Revenue

Regulation No. 12-85 which was based on the old provision of the

law. The Court held that in case of discrepancy between the law as

amended and the implementing regulation based on the old law, the

former necessarily prevails. The law must still be followed, even

though the existing tax regulation at that time provided for a different

procedure.13[15]

In Commissioner of Internal Revenue v. Central Luzon Drug

Corporation,14[16] the tax authorities gave the term “tax credit” in

Sections 2(i) and 4 of Revenue Regulation 2-94 a meaning utterly 12

13

14

disparate from what R.A. No. 7432 provides.  Their interpretation

muddled up the intent of Congress to grant a mere discount privilege

and not a sales discount.  The Court, striking down the revenue

regulation, held that an administrative agency issuing regulations may

not enlarge, alter or restrict the provisions of the law it administers,

and it cannot engraft additional requirements not contemplated by the

legislature. The Court emphasized that tax administrators are not

allowed to expand or contract the legislative mandate and that the

“plain meaning rule” or verba legis in statutory construction should be

applied such that where the words of a statute are clear, plain and free

from ambiguity, it must be given its literal meaning and applied

without attempted interpretation.

As we have previously declared, rule-making power must be

confined to details for regulating the mode or proceedings in order to

carry into effect the law as it has been enacted, and it cannot be

extended to amend or expand the statutory requirements or to embrace

matters not covered by the statute. Administrative regulations must

always be in harmony with the provisions of the law because any

resulting discrepancy between the two will always be resolved in

favor of the basic law.15[17]

15

In Commissioner of Internal Revenue v. Michel J. Lhuillier

Pawnshop, Inc.,16[18] Commissioner Jose Ong issued Revenue

Memorandum Order (RMO) No. 15-91, as well as the clarificatory

Revenue Memorandum Circular (RMC) 43-91, imposing a 5%

lending investor’s tax under the 1977 Tax Code, as amended by

Executive Order (E.O.) No. 273, on pawnshops. The Commissioner

anchored the imposition on the definition of lending investors

provided in the 1977 Tax Code which, according to him, was broad

enough to include pawnshop operators. However, the Court noted

that pawnshops and lending investors were subjected to different tax

treatments under the Tax Code prior to its amendment by the

executive order; that Congress never intended to treat pawnshops in

the same way as lending investors; and that the particularly involved

section of the Tax Code explicitly subjected lending investors and

dealers in securities only to percentage tax. And so the Court affirmed

the invalidity of the challenged circulars, stressing that

“administrative issuances must not override, supplant or modify the

law, but must remain consistent with the law they intend to carry

out.”17[19]

16

17

In Philippine Bank of Communications v. Commissioner of

Internal Revenue,18[20] the then acting Commissioner issued RMC 7-

85, changing the prescriptive period of two years to ten years for

claims of excess quarterly income tax payments, thereby creating a

clear inconsistency with the provision of Section 230 of the 1977 Tax

Code. The Court nullified the circular, ruling that the BIR did not

simply interpret the law; rather it legislated guidelines contrary to the

statute passed by Congress. The Court held:

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 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.19[21]

In Commissioner of Internal Revenue v. CA, et al.,20[22] the

central issue was the validity of RMO 4-87 which had construed the

amnesty coverage under E.O. No. 41 (1986) to include only

assessments issued by the BIR after the promulgation of the executive

18

19

20

order on 22 August 1986 and not assessments made to that date.

Resolving the issue in the negative, the Court held:

x x x all such issuances must not override, but must remain consistent and in harmony with, the law they seek to apply and implement. Administrative rules and regulations are intended to carry out, neither to supplant nor to modify, the law.21[23]

x x x

If, as the Commissioner argues, Executive Order No. 41 had not been intended to include 1981-1985 tax liabilities already assessed (administratively) prior to 22 August 1986, the law could have simply so provided in its exclusionary clauses. It did not. The conclusion is unavoidable, and it is that the executive order has been designed to be in the nature of a general grant of tax amnesty subject only to the cases specifically excepted by it.22[24]

In the case at bar, the OSG’s argument that by 1 January 2000,

the excise tax on cigarettes should be the higher tax imposed under the

specific tax system and the tax imposed under the ad valorem tax

system plus the 12% increase imposed by paragraph 5, Section 145 of

the Tax Code, is an unsuccessful attempt to justify what is clearly an

impermissible incursion into the limits of administrative legislation.

Such an interpretation is not supported by the clear language of the

law and is obviously only meant to validate the OSG’s thesis that

21

22

Section 145 of the Tax Code is ambiguous and admits of several

interpretations.

The contention that the increase of 12% starting on 1 January

2000 does not apply to the brands of cigarettes listed under Annex

“D” is likewise unmeritorious, absurd even. Paragraph 8, Section

145 of the Tax Code simply states that, “[T]he classification of each

brand of cigarettes based on its average net retail price as of October

1, 1996, as set forth in Annex ‘D’, shall remain in force until revised

by Congress.” This declaration certainly does not lend itself to the

interpretation given to it by the OSG. As plainly worded, the average

net retail prices of the listed brands under Annex “D,” which classify

cigarettes according to their net retail price into low, medium or high,

obviously remain the bases for the application of the increase in

excise tax rates effective on 1 January 2000.

The foregoing leads us to conclude that Revenue Regulation

No. 17-99 is indeed indefensibly flawed. The Commissioner cannot

seek refuge in his claim that the purpose behind the passage of the

Tax Code is to generate additional revenues for the government.

Revenue generation has undoubtedly been a major consideration in

the passage of the Tax Code. However, as borne by the legislative

record,23[25] the shift from the ad valorem system to the specific tax

system is likewise meant to promote fair competition among the

players in the industries concerned, to ensure an equitable

distribution of the tax burden and to simplify tax administration by

classifying cigarettes, among others, into high, medium and low-

priced based on their net retail price and accordingly graduating tax

rates.

At any rate, this advertence to the legislative record is merely

gratuitous because, as we have held, the meaning of the law is clear

on its face and free from the ambiguities that the Commissioner

imputes. We simply cannot disregard the letter of the law on the

pretext of pursuing its spirit.24[26]

Finally, the Commissioner’s contention that a tax refund

partakes the nature of a tax exemption does not apply to the tax refund

to which Fortune Tobacco is entitled. There is parity between tax

refund and tax exemption only when the former is based either on a

tax exemption statute or a tax refund statute. Obviously, that is not

the situation here. Quite the contrary, Fortune Tobaccos claim for

23

24

refund is premised on its erroneous payment of the tax, or better still

the government’s exaction in the absence of a law.

Tax exemption is a result of legislative grace. And he who

claims an exemption from the burden of taxation must justify his

claim by showing that the legislature intended to exempt him by

words too plain to be mistaken.25[27] The rule is that tax exemptions

must be strictly construed such that the exemption will not be held to

be conferred unless the terms under which it is granted clearly and

distinctly show that such was the intention.26[28]

A claim for tax refund may be based on statutes granting tax

exemption or tax refund. In such case, the rule of strict interpretation

against the taxpayer is applicable as the claim for refund partakes of

the nature of an exemption, a legislative grace, which cannot be

allowed unless granted in the most explicit and categorical language.

The taxpayer must show that the legislature intended to exempt him

from the tax by words too plain to be mistaken.27[29]

25

26

27

Tax refunds (or tax credits), on the other hand, are not founded

principally on legislative grace but on the legal principle which

underlies all quasi-contracts abhorring a person’s unjust enrichment at

the expense of another.28[30] The dynamic of erroneous payment of tax

fits to a tee the prototypic quasi-contract, solutio indebiti, which

covers not only mistake in fact but also mistake in law.29[31]

The Government is not exempt from the application of solutio

indebiti.30[32] Indeed, the taxpayer expects fair dealing from the

Government, and the latter has the duty to refund without any

unreasonable delay what it has erroneously collected.31[33] If the State

expects its taxpayers to observe fairness and honesty in paying their

taxes, it must hold itself against the same standard in refunding excess

(or erroneous) payments of such taxes. It should not unjustly enrich

itself at the expense of taxpayers.32[34] And so, given its essence, a

claim for tax refund necessitates only preponderance of evidence for

its approbation like in any other ordinary civil case.

Under the Tax Code itself, apparently in recognition of the

pervasive quasi-contract principle, a claim for tax refund may be

28

29

30

31

32

based on the following: (a) erroneously or illegally assessed or

collected internal revenue taxes; (b) penalties imposed without

authority; and (c) any sum alleged to have been excessive or in any

manner wrongfully collected.33[35]

What is controlling in this case is the well-settled doctrine of

strict interpretation in the imposition of taxes, not the similar doctrine

as applied to tax exemptions. The rule in the interpretation of tax laws

is that a statute will not be construed as imposing a tax unless it does

so clearly, expressly, and unambiguously. A tax cannot be imposed

without clear and express words for that purpose. Accordingly, the

general rule of requiring adherence to the letter in construing statutes

applies with peculiar strictness to tax laws and the provisions of a

taxing act are not to be extended by implication. In answering the

question of who is subject to tax statutes, it is basic that in case of

doubt, such statutes are to be construed most strongly against the

government and in favor of the subjects or citizens because burdens

are not to be imposed nor presumed to be imposed beyond what

statutes expressly and clearly import.34[36] As burdens, taxes should

33

34

not be unduly exacted nor assumed beyond the plain meaning of the

tax laws.35[37]

WHEREFORE, the petition is DENIED. The Decision of the

Court of Appeals in CA G.R. SP No. 80675, dated 28 September

2004, and its Resolution, dated 1 March 2005, are AFFIRMED. No

pronouncement as to costs.

SO ORDERED.

FIRST DIVISION

35

G.R. No. 170574               January 30, 2009

PHILIPPINE BANKING CORPORATION (NOW: GLOBAL BUSINESS BANK, INC.), Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE, Respondent.

D E C I S I O N

CARPIO, J.:

The Case

The Philippine Banking Corporation, now, Global Business Bank, Inc., (petitioner) filed this Petition for Review1 to reverse the Court of Tax Appeals’ Decision2 dated 23 November 2005 in CTA EB No. 63 (C.T.A. Case No. 6395). In the assailed decision, the Court of Tax Appeals En Banc ordered petitioner to pay P17,595,488.75 and P47,767,756.24 as deficiency documentary stamp taxes for the taxable years 1996 and 1997, respectively, on its bank product called "Special/Super Savings Deposit Account" (SSDA).

The Facts

Petitioner is a domestic corporation duly licensed as a banking institution.3 For the taxable years 1996 and 1997, petitioner offered its SSDA to its depositors. The SSDA is a form of a savings deposit evidenced by a passbook and earning a higher interest rate than a regular savings account. Petitioner believes that the SSDA is not subject to Documentary Stamp Tax (DST) under Section 180 of the 1977 National Internal Revenue Code (NIRC), as amended.4

On 10 January 2000, the Commissioner of Internal Revenue (respondent) sent petitioner a Final Assessment Notice assessing deficiency DST based on the outstanding balances of its SSDA, including increments, in the total sum of P17,595,488.75 for 1996 and P47,767,756.24 for 1997. These assessments were based on the outstanding balances of the SSDA appearing in the schedule attached to petitioner’s audited financial statements for the taxable years 1996 and 1997.5

Petitioner claims that the SSDA is in the nature of a regular savings account since both types of accounts have the following common features:

a. They are both evidenced by a passbook;

b. The depositors can make deposits or withdrawals anytime which are not subject to penalty; and

c. Both can have an Automatic Transfer Agreement (ATA) with the depositor’s current or checking account.6

Petitioner alleges that the only difference between the regular savings account and the SSDA is that the SSDA is for depositors who maintain savings deposits with a substantial average daily balance, and as an incentive, they are given higher interest rates than regular savings accounts. These deposits are classified separately in petitioner’s financial statements in order to maintain a separate record for savings deposits with substantial balances entitled to higher interest rates.7

Petitioner maintains that the tax assessments are erroneous because Section 180 of the 1977 NIRC does not include deposits evidenced by a passbook among the enumeration of instruments subject to DST. Petitioner asserts that the language of the law is clear and requires no interpretation.8 Section 180 of the 1977 NIRC, as amended,9 provides:

Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and securities issued by the government or any of its instrumentalities, certificates of deposit bearing interest and others not payable on sight or demand. — On all loan agreements signed abroad wherein the object of the contract is located or used in the Philippines; bills of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities or certificates of deposits drawing interest, or orders for the payment of any sum of money otherwise than at the sight or on demand, or on all promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos, or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit, or note: provided, that only one documentary stamp tax shall be imposed on either loan agreement, or promissory note issued to secure such loan, whichever will yield a higher tax: provided, however, that loan agreements or promissory notes the aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000)

executed by an individual for his purchase on installment for his personal use or that of his family and not for business, resale, barter or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt from the payment of the documentary stamp tax provided under this section. (Boldfacing supplied)

Petitioner insists that the SSDA, being issued in the form of a passbook, cannot be construed as a certificate of deposit subject to DST under Section 180 of the 1977 NIRC. Petitioner explains that the SSDA is a necessary offshoot of the deregulated interest rate regime in bank deposits.10 Petitioner elucidates:

With the removal of the respective interest rate ceilings on savings and time deposit, banks are enabled to legitimately offer higher rates on savings account which may even be at par with rates on time deposit. Practically, the distinction between a savings and a time deposit was removed insofar as interest rates are concerned. This being so, and for the legitimate purpose of further enticing deposits for savings account, banks have evolved a product – the Super/Special Savings Account – which offers the flexibility of a savings deposit but does away with the rigidity of a time deposit account and with interest rate at par with the latter. This is offered as an incentive for depositors who maintain or who wish to maintain deposits with substantial average daily balance. Such depositors will be entitled to an attractive interest rate, a rate higher than that to which the regular savings account is entitled. Just like an ordinary savings, Super/Special Savings Deposits can be withdrawn anytime. Of course, to be entitled to preferential interest rate, such account must conform to a stated minimum deposit balance within a specified holding period. Otherwise, the depositor will lose the incentive of a higher interest rate and the account will revert to an ordinary savings account and be entitled only to prevailing rates of interest applicable to regular savings account. And unlike a time deposit account, the Super/Special Savings Account comes in the form of a passbook, hence need not be formally renewed in the manner that a time deposit certificate has to be formally surrendered and renewed upon maturity.11

Petitioner argues that the DST is imposed on the basis of a mere inference or perceived implication of what the SSDA is supposed to be and not on the basis of what the law specifically states. Petitioner points out the differences between the SSDA and time deposits:12

Time Deposits SSDA

1. The holding period is fixed beforehand. 1. The holding period floats at the option of the depositor. It can be 30, 60, 90 or 120 days or more and as an incentive for maintaining a longer holding period, the depositor earns higher interest.

2. There is pre-termination because there is no partial withdrawal of a certificate. Pre-termination results in the surrender and cancellation of the certificate of deposit.

2. No pre-termination and the passbook account is simply reverted to an ordinary savings status in case of early or partial withdrawal or if the required holding period is not met.

Petitioner also argues that even on the assumption that a passbook evidencing the SSDA is a certificate of deposit, no DST will be imposed because only negotiable certificates of deposits are subject to tax under Section 180 of the 1977 NIRC.13 Petitioner reasons that a savings passbook is not a negotiable instrument and it cannot be denied that savings passbooks have never been taxed as certificates of deposits.14

Petitioner alleges that prior to the passage of Republic Act No. 924315 (RA 9243), there was no law subjecting SSDA to DST during the taxable years 1996 and 1997. The amendatory provision in RA 9243 now specifically includes "certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date."16 Petitioner admits that with this new taxing clause, its SSDA is now subject to DST. However, the fact remains that this provision was non-existent during the taxable years 1996 and 1997 subject of the assessments in the present case.17

Respondent, through the Office of the Solicitor General, contends that the SSDA is substantially the same and identical to that of a time deposit account because in order to avail of the SSDA, one has to deposit a minimum of P50,000 and this amount must be maintained for a required period of time to earn higher interest rates.18 In a time deposit account, the minimum deposit requirement is P20,000

and this amount must be maintained for the agreed period to earn the agreed interest rate. If a time deposit is pre-terminated, a penalty will be imposed resulting in a lower interest income. In a regular savings account, the interest rate is fixed and there is no penalty imposed for as long as the required minimum balance is maintained. Thus, respondent asserts that the SSDA is a time deposit account, albeit in the guise of a regular savings account evidenced by a passbook.19

Respondent explains that under Section 180 of the 1977 NIRC, certificates of deposits deriving interest are subject to the payment of DST. Petitioner’s passbook evidencing its SSDA is considered a certificate of deposit, and being very similar to a time deposit account, it should be subject to the payment of DST.20

Respondent also argues that Section 180 of the 1977 NIRC categorically states that certificates of deposit deriving interest are subject to DST without limiting the enumeration to negotiable certificates of deposit. Based on the definition of a certificate of deposit in Far East Bank and Trust Company v. Querimit,21 a certificate of deposit may or may not be negotiable, since it may be payable only to the depositor.22

The Ruling of the Court of Tax Appeals

On 23 November 2005, the Court of Tax Appeals En Banc (CTA) affirmed the Decision and Resolution of the CTA’s Second Division. The dispositive portion reads:

WHEREFORE, the instant petition is DENIED for lack of merit. Accordingly, the petitioner is hereby ORDERED to PAY the amounts of P17,595,488.75 and P47,767,756.24 as deficiency documentary stamp taxes for the taxable years 1996 and 1997, plus 25% surcharge for late payment and 20% annual delinquency interest for late payment from January 20, 2002 until fully paid pursuant to Sections 248 and 249 of the Tax Code.23

The CTA ruled that a deposit account with the same features as a time deposit, i.e., a fixed term in order to earn a higher interest rate, is subject to DST imposed in Section 180 of the 1977 NIRC.24 It is clear that "certificates of deposit drawing interest" are subject to DST. The CTA, citing Far East Bank and Trust Company v. Querimit,25 defined a certificate of deposit as "a written acknowledgment by a

bank or banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or some other person or his order, whereby the relation of debtor and creditor between the bank and the depositor is created."26

The CTA pointed out that this Court neither referred to a particular form of deposit nor limited the coverage to time deposits only. This Court used the term "written acknowledgment" which means that for as long as there is some written memorandum of the fact that the bank accepted a deposit of a sum of money from a depositor, the writing constitutes a certificate of deposit. The CTA held that a passbook representing an interest-earning deposit account issued by a bank qualifies as a certificate of deposit drawing interest.27

The CTA emphasized that Section 180 of the 1977 NIRC imposes DST on documents, whether the documents are negotiable or non-negotiable.28 The CTA held that petitioner’s argument that Section 180 of the 1977 NIRC imposes the DST only on negotiable certificates of deposit as implied from the old tax provision is erroneous.29 Section 217 of Commonwealth Act No. 466, as amended (old NIRC) reads:

Sec. 217. Stamp tax on negotiable promissory notes, bills of exchange, drafts, certificate of deposit bearing interest and others not payable on sight or demand. - On all bills of exchange (between points within the Philippines), drafts or certificates of deposit drawing interest, or orders for the payment of any sum of money otherwise than at sight or on demand, or all negotiable promissory notes, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of four centavos on each two hundred pesos, or fractional part thereof, of the face value of any such bill of exchange, draft, certificate of deposit, or note. (As amended by Sec. 6, Republic Act No. 40)30 (Emphasis in the original)

The CTA observed that the requirement of negotiability pertains to promissory notes only. Such intention is disclosed by the fact that the word negotiable was written before promissory notes followed by a comma, hence, the word negotiable modifies promissory notes only. Therefore, with respect to all other documents mentioned in Section 217 of the old NIRC, the attribute of negotiability is not required.31 The CTA added that the applicable provision is Section 180 of the 1977 NIRC and not Section 217 of the old NIRC.32 Section 180 of the 1977 NIRC provides that the following are subject to DST, to wit: (1) Loan

Agreements; (2) Bills of Exchange; (3) Drafts; (4) Instruments and Securities issued by the Government or any of its instrumentalities; (5) Certificates of Deposits drawing interest; (6) Orders for the payment of any sum of money otherwise than at sight or on demand; and (7) Promissory Notes, whether negotiable or non-negotiable. Therefore, the DST is imposed on all certificates of deposit drawing interest without any qualification.33

The CTA held that a certificate of time deposit, a type of a certificate of deposit drawing interest, is subject to DST. The CTA observed that the SSDA has the same nature and characteristics as a time deposit.34 The CTA discussed the similarities of a time deposit account with an SSDA:

In order for the depositor to earn the agreed higher interest rate in a Special/Super Savings Account, the required minimum amount of deposit must not only be met but should also be maintained for a definite period. Thus, the Special/Super Savings Account is a deposit with a fixed term. Withdrawal before the expiration of said fixed term results to the reduction of the interest rate. The fixed term and reduction of interest rate in case of pre-termination are essentially the features of a time deposit. Hence, this Court concurs with the conclusion reached in the assailed Decision that petitioner’s Special/Super Savings Deposits and certificates of time deposit are substantially the same, if not one and the same product, and therefore both are subject to the DST on certificates of deposit.35

The CTA stated that the fact that the SSDA is evidenced by a passbook is immaterial because in determining whether certain instruments are subject to DST, substance would control over form and labels.36

On 14 December 2005, petitioner appealed to this Court the CTA decision.37

The Issue

Petitioner submits this sole issue for our consideration: whether petitioner’s product called Special/Super Savings Account is subject to DST under Section 180 of the 1977 NIRC prior to the passage of RA 9243 in 2004.38

The Ruling of the Court

The issue in the present case is whether petitioner’s SSDAs are "certificates of deposits drawing interest" as used in Section 180 of the 1977 NIRC. If they are,

then the SSDAs are subject to DST. If not, then they are merely regular savings account which concededly are not subject to DST. So what are "certificates of deposits drawing interest," and how do they differ from a regular savings account?

Section 180 of the 1977 NIRC, as amended, provides:

Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and securities issued by the government or any of its instrumentalities, certificates of deposit bearing interest and others not payable on sight or demand. — On all loan agreements signed abroad wherein the object of the contract is located or used in the Philippines; bills of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities or certificates of deposits drawing interest, or orders for the payment of any sum of money otherwise than at the sight or on demand, or on all promissory notes, whether negotiable or non- negotiable, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos, or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit, or note: provided, that only one documentary stamp tax shall be imposed on either loan agreement, or promissory note issued to secure such loan, whichever will yield a higher tax: provided, however, that loan agreements or promissory notes the aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000) executed by an individual for his purchase on installment for his personal use or that of his family and not for business, resale, barter or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt from the payment of the documentary stamp tax provided under this section. lavvphil.zw+(Boldfacing and underscoring supplied)

In Far East Bank and Trust Company v. Querimit,39 the Court defined a certificate of deposit as "a written acknowledgment by a bank or banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or to some other person or his order, whereby the relation of debtor and creditor between the bank and the depositor is created." A certificate of deposit is also defined as "a receipt issued by a bank for an interest-bearing time deposit coming due at a specified future date."40

The deposit operations of a bank as listed in the Bangko Sentral ng Pilipinas Manual of Regulations for Banks41 consist of the following:

1. Demand Deposits – are deposits, subject to withdrawal either by check or thru the automated tellering machines which are otherwise known as current or checking accounts. The Bank may or may not pay interest on these accounts.42

2. Savings Deposits – are interest-bearing deposits which are withdrawable either upon presentation of a properly accomplished withdrawal slip together with the corresponding passbook or thru the automated tellering machines.43

3. Negotiable Order of Withdrawal Accounts – are interest-bearing savings deposit which are withdrawable by means of Negotiable Orders of Withdrawal.44

4. Time Deposits – are interest-bearing deposits with specific maturity dates and evidenced by certificates issued by the bank.45

Petitioner treats the SSDA as a regular savings deposit account since it is evidenced by a passbook and allows withdrawal. Respondent treats the SSDA as a time deposit account because of the higher interest rates and holding period. It is then significant to differentiate a regular savings deposit and a time deposit vis-à-vis the SSDA to determine if the SSDA is a certificate of deposit drawing interest referred to in Section 180 of the 1977 NIRC. A comparison of a savings account, time deposit account, and SSDA is shown in the table below:

  Savings Account Time Deposit SSDA

Interest rate Regular savings interest Higher interest rate Higher interest rate

Period None Fixed Term Fixed Term

Evidenced by: Passbook Certificate of Time Deposit

Passbook

Pre-termination None With penalty With penalty

Holding Period None Yes Yes

Withdrawal Allowed Withdrawal amounts to pre-termination

Allowed provided the minimum amount to earn the higher interest rate is maintained, otherwise, the regular savings interest rate will apply.

Based on the definition and comparison, it is clear that a certificate of deposit drawing interest as used in Section 180 of the 1977 NIRC refers to a time deposit account. As the Bureau of Internal Revenue (BIR) explained in Revenue Memorandum Circular No. 16-2003,46 the distinct features of a certificate of deposit from a technical point of view are as follows:

a. Minimum deposit requirement;

b. Stated maturity period;

c. Interest rate is higher than the ordinary savings account;

d. Not payable on sight or demand, but upon maturity or in case of pre-termination, prior notice is required; and

e. Early withdrawal penalty in the form of partial loss or total loss of interest in case of pre-termination.

The SSDA is for depositors who maintain savings deposits with substantial average daily balance and which earn higher interest rates. The holding period of an SSDA floats at the option of the depositor at 30, 60, 90, 120 days or more and for maintaining a longer holding period, the depositor earns higher interest rates. There is no pre-termination of accounts in an SSDA because the account is simply reverted to an ordinary savings status in case of early or partial withdrawal or if the required holding period is not met. Based on the foregoing, the SSDA has all of the distinct features of a certificate of deposit.

Petitioner argues that a deposit account evidenced by a passbook cannot be construed as a certificate of deposit subject to DST under Section 180 of the 1977 NIRC. In International Exchange Bank v. Commissioner of Internal Revenue,47 this Court categorically ruled that a passbook representing an interest earning deposit account issued by a bank qualifies as a certificate of deposit drawing interest and should be subject to DST. The Court added that "a document to be deemed a certificate of deposit requires no specific form as long as there is some written memorandum that the bank accepted a deposit of a sum of money from a depositor."48

Petitioner also argues that prior to the passage of RA 9243, there was no law subjecting SSDA to DST. In International Exchange Bank v. Commissioner of Internal Revenue,49 the Court held that the amendment to include "other evidences of deposits that are drawing interest significantly higher than the regular savings deposit" was intended to eliminate the ambiguity. The Court explained:

If at all, the further amendment was intended to eliminate precisely the scheme used by banks of issuing passbooks to "cloak" its time deposits as regular savings deposits. This is reflected from the following exchanges between Mr. Miguel Andaya of the Bankers Association of the Philippines and Senator Ralph Recto, Senate Chairman of the Committee on Ways and Means, during the deliberations on Senate Bill No. 2518 which eventually became RA 9243:

MR. MIGUEL ANDAYA (Bankers Association of the Philippines). Just to clarify. Savings deposit at the present is not subject to DST.

THE CHAIRMAN. That’s right.

MR. ANDAYA. Time deposit is subject. I agree with you in principle that if we are going to encourage deposits, whether savings or time...

THE CHAIRMAN. Uh-huh.

MR. ANDAYA. ...it’s questionable whether we should tax it with DST at all, even the question of imposing final withholding tax has been raised as an issue.

THE CHAIRMAN. If I had it my way, I'll cut it by half.

MR. ANDAYA. Yeah, but I guess concerning the constraint of government revenue, even the industry itself right now is not pushing in that direction, but in the long term, when most of us in this room are gone, we hope that DST will disappear from the face of this earth, no.

Now, I think the move of the DOF to expand the coverage of or to add that phrase, "Other evidence of indebtedness," it just removed ambiguity. When we testified earlier in the House on this very same bill, we did not interpose any objections if only for the sake of avoiding further ambiguity in the implementation of DST on deposits. Because of what has happened so far is, we don't know whether the examiner is gonna come in and say, "This savings deposit is not savings but it’s time deposit." So, I think what DOF has done is to eliminate any confusion. They said that a deposit that has a maturity...

THE CHAIRMAN. Uh-huh.

MR. ANDAYA. ...which is time, in effect, regardless of what form it takes should be subject to DST.

THE CHAIRMAN. Would you include savings deposit now?

MR. ANDAYA. So that if we cloaked a deposit as savings deposit but it has got a fixed maturity...

THE CHAIRMAN. Uh-huh.

MR. ANDAYA. ..that would fall under the purview. (Italics in the original)

DST is imposed on Certificates of Deposits Bearing Interestincluding a special savings account evidenced by a passbook.

Documentary stamp tax is a tax on documents, instruments, loan agreements, and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property incident thereto. A DST is actually an excise tax because it is imposed on the transaction rather than on the document.50 A DST is also levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments.51 Hence, in imposing the DST, the Court considers not only the document but also the nature and character of the transaction.

Section 180 of the 1977 NIRC imposes a DST of P0.30 on each P200 of the face value of any certificate of deposit drawing interest. As correctly observed by the CTA, a certificate of deposit is a written acknowledgment by a bank of the receipt of a sum of money on deposit which the bank promises to pay to the depositor, to the order of the depositor, or to some other person or his order, whereby the relation of debtor or creditor between the bank and the depositor is created.52

Petitioner’s SSDA has the following features:

1. Although the money placed in the SSDA can be withdrawn anytime, the money is subject to a holding period in order to earn a higher interest rate. Otherwise, in case of premature withdrawal, the depositor will not earn the preferred interest ranging from 8% or higher but only the normal interest rate on regular savings deposit.

2. In order to qualify for an SSDA, the depositor must place a substantial amount of money of not less than P50,000. This amount is even larger than what is needed to open a time deposit which is P20,000. Aside from the substantial amount of money required, this amount must be maintained within a certain period just like a time deposit.

3. On the issue of penalty, in an SSDA, if the depositor withdraws the money and the balance falls below the "minimum balance" of P50,000, the interest is reduced. This condition is identical to that imposed on a time deposit that is withdrawn before maturity. 53

Based on these features, it is clear that the SSDA is a certificate of deposit drawing interest subject to DST even if it is evidenced by a passbook and non-negotiable in character. In International Exchange Bank v. Commissioner of Internal Revenue,54 we held that:

A document to be deemed a certificate of deposit requires no specific form as long as there is some written memorandum that the bank accepted a deposit of a sum of money from a depositor. What is important and controlling is the nature or meaning conveyed by the passbook and not the particular label or nomenclature attached to it, inasmuch as substance, not form, is paramount.lavvph!l.net

Moreover, a certificate of deposit may be payable to the depositor, to the order of the depositor, or to some other person or his order. From the use of the conjunction or, instead of and, the negotiable character of a certificate of deposit is immaterial in determining the imposition of DST.55

In Banco de Oro Universal Bank v. Commissioner of Internal Revenue,56 this Court upheld the CTA’s decision and ruled:

The CTA en banc likewise declared that in practice, a time deposit transaction is covered by a certificate of deposit while petitioner's Investment Savings Account (ISA) transaction is through a passbook. Despite the differences in the form of any documents, the CTA en banc ruled that a time deposit and ISA have essentially the same attributes and features. It explained that like time deposit, ISA transactions bear a fixed term or maturity because the bank acknowledges receipt of a sum of money on deposit which the bank promises to pay the depositor, bearer or to the order of a bearer on a specified period of time. Section 180 of the 1997 NIRC does not prescribed the form of a certificate of deposit. It may be any 'written acknowledgment by a bank of the receipt of money on deposit.' The definition of a certificate of deposit is all encompassing to include a savings account deposit such as ISA. (Emphasis supplied)

Availment of the Tax Amnesty Program

On 24 May 2007, during the pendency of this case before this Court, Republic Act No. 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" (RA 9480), lapsed into 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.

x x x

Sec. 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:

1. The taxpayer shall be immune from the payment of taxes, as well as addition thereto, and the appurtenant civil, criminal or administrative penalties under the National Internal Revenue Code of 1997, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.

x x x

Sec. 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:

1. Withholding agents with respect to their withholding tax liabilities;

2. Those with pending cases falling under the jurisdiction of the Presidential Commission on Good Government;

3. Those with pending cases involving unexplained or unlawfully acquired wealth or under the Anti-Graft and Corrupt Practices Act;

4. Those with pending cases filed in court involving violation of the Anti-Money Laundering Law;

5. 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

6. Tax cases subject of final and executory judgment by the courts. (Emphasis supplied)

The Department of Finance (DOF) issued DOF Department Order No. 29-07 (DO 29-07).57 Section 6 of DO 29-07 provides:

SEC. 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 form as may be prescribed by the BIR;

b. Statements of Assets, Liabilities and Networth (SALN) as of December 31, 2005 in such form, as may be prescribed by the BIR;

c. Tax Amnesty Return in such form as may be prescribed by the BIR.

x x x

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. (Emphasis supplied)

The BIR issued Revenue Memorandum Circular No. 19-2008 (RMC 19-2008).58 The pertinent provisions are:

Who may avail of the amnesty?

The following taxpayers may avail of the Tax Amnesty Program:

P Individuals

P Estates and Trusts

P Corporations

P Cooperatives and tax-exempt entities that have become taxable as of December 31, 2005

P Other juridical entities including partnerships.

Ø Fiscal year taxpayers may likewise avail of the tax amnesty using their Financial Statement ending in any month of 2005.

EXCEPT:

Q Withholding agents with respect to their withholding tax liabilities

Q Those with pending cases:

Q Under the jurisdiction of the PCGG

Q Involving violations of the Anti-Graft and Corrupt Practices Act

Q Involving violations of the Anti-Money Laundering Law

Q For tax evasion and other criminal offenses under the NIRC and/or the RPC

Q Issues and cases which were ruled by any court (even without finality) in favor of the BIR prior to amnesty availment of the taxpayer. (e.g. Taxpayers who have failed to observe or follow BOI and/or PEZA rules on entitlement to Income Tax Holiday Incentives and other incentives)

Q Cases involving issues ruled with finality by the Supreme Court prior to the effectivity of RA 9480 (e.g. DST on Special Savings Account)

Q Taxes passed on and collected from customers for remittance to the BIR

Q Delinquent Accounts/Accounts Receivable considered as assets of the BIR/Government, including self-assessed tax. (Emphasis supplied)

The BIR also issued Revenue Memorandum Circular No. 69-2007 (RMC 69-2007).59 The pertinent portion provides:

Q-32 May surviving or new corporations avail of the tax amnesty in behalf of the corporations absorbed or dissolved pursuant to a merger or consolidation that took effect prior to Taxable Year 2005? Can they avail of the Tax Amnesty?

A-32 Yes, these companies can avail of the tax amnesty for purposes of obtaining tax clearances for the dissolved or absorbed corporations. (Emphasis supplied)

On 21 September 2007, Metropolitan Bank and Trust Company (Metrobank), the surviving entity that absorbed petitioner’s banking business, filed a Tax Amnesty Return,60 paid the amnesty tax and fully complied with all the requirements61 of the Tax Amnesty Program under RA 9480. Petitioner alleges that by virtue of this availment, petitioner is now deemed "immune from the payment of taxes as well as additions thereto," and is statutorily discharged from paying all internal revenue tax liabilities for the taxable year 2005 and prior years. Petitioner contends that the availment includes all deficiency tax assessments of the BIR subject of this petition.

A tax amnesty is a general pardon or the intentional overlooking by the State of its authority to impose penalties on persons otherwise guilty of violation of a tax law. It partakes of an absolute 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.62

The DST is one of the taxes covered by the Tax Amnesty Program under RA 9480.63 As discussed above, petitioner is clearly liable to pay the DST on its SSDA for the years 1996 and 1997. However, petitioner, as the absorbed corporation, can avail of the tax amnesty benefits granted to Metrobank.

Records show that Metrobank, a qualified tax amnesty applicant,64 has duly complied with the requirements enumerated in RA 9480, as implemented by DO 29-07 and RMC 19-2008.65 Considering that the completion of these requirements shall be deemed full compliance with the tax amnesty program,66 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.67

The BIR’s inclusion of "issues and cases which were ruled by any court (even without finality) in favor of the BIR prior to amnesty availment of the taxpayer" as one of the exceptions in RMC 19-2008 is misplaced. RA 9480 is specifically clear that the exceptions to the tax amnesty program include "tax cases subject of final and executory judgment by the courts." The present case has not become final and executory when Metrobank availed of the tax amnesty program.

Wherefore, we GRANT the petition, and SET ASIDE the Court of Tax Appeals’ Decision dated 23 November 2005 in CTA EB No. 63 solely in view of petitioner’s availment of the Tax Amnesty Program.

SO ORDERED.

ANTONIO T. CARPIOAssociate Justice

THIRD DIVISION

METROPOLITAN BANK AND TRUST CO., Petitioner,

- versus -

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

G.R. No. 178797

Present: YNARES-SANTIAGO, J., Chairperson,CHICO-NAZARIO, VELASCO, JR.,NACHURA, andPERALTA, JJ.

Promulgated:

August 4, 2009x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

D E C I S I O N

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari under

Rule 45 of the Revised Rules of Court seeking the reversal and setting

aside of the Decision36[1] dated 21 May 2007 and Resolution37[2] dated

9 July 2007 of the Court of Tax Appeals (CTA) en banc in C.T.A. E.B.

No. 247. The CTA en banc affirmed the assessment by the Bureau of

Internal Revenue (BIR) against petitioner Metropolitan Bank and

Trust Co. (Metrobank) for deficiency Documentary Stamp Tax (DST)

for taxable year 1999.

There is no dispute as to the antecedent facts of this case.

Metrobank is a domestic corporation and a duly licensed

banking institution. It offers to the public a product called the

Universal Savings Account (UNISA). UNISA is for a depositor able to

maintain a savings deposit with Metrobank with substantial average

daily balance. A depositor is entitled to a higher interest rate in a

UNISA, than in a regular savings account. When a depositor opens a

UNISA, he/she is issued a passbook by Metrobank. The depositor

may withdraw from his/her UNISA anytime. However, to be entitled

to the preferential interest rate, the depositor must be able to

conform to the stated minimum deposit balance for the specified

36

37

holding period for the UNISA, otherwise, his/her account will revert

to a regular savings account.

Pursuant to Letter of Authority No. LOA 2000 00052501 dated

26 June 2001, the BIR investigated Metrobank for its Gross Receipts

Tax (GRT), Final Withholding Tax (FWT), and DST liabilities for 1999.

As a result of said investigation, respondent Commissioner of Internal

Revenue (CIR), through Edwin R. Abella (Abella), Assistant

Commissioner of the Large Taxpayers Service (ACIR-LTS) of the BIR,

issued on 30 September 2002, a Pre-Assessment Notice (PAN)38[3]

assessing Metrobank for deficiency DST on its UNISA for 1999, based

on Section 180 of the National Internal Revenue Code (NIRC). Said

DST deficiency of Metrobank for 1999, together with surcharge and

interest, amounted to P473,207,457.97, per the following calculation

in the PAN:

Special Savings Account or UNISA 170,980,990,473.33Rate of Tax (Sec. 180 NIRC) 0.15%Basic DST Due 256,471,485.71Add: Surcharge 64,117,871.43 Interest until 12/31/02 152,618,100.54 216,735,971.97TOTAL AMOUNT DUE 473,207,457.97

38

Metrobank filed with ACIR-LTS Abella on 11 December 2002 a

protest to the PAN.39[4] Metrobank argued that its UNISA should not

be subject to DST and it should not be made liable for the 25%

surcharge on its alleged deficiency DST for 1999.

On 7 January 2003, ACIR-LTS Abella issued Assessment No.

DST-2-99-000022 and a Formal Letter of Demand40[5] to Metrobank,

requesting the latter to pay the deficiency DST on the UNISA for

1999, together with surcharge, interest, and compromise penalty, in

the total amount of P477,588,959.62, computed as follows:

ASSESSMENT NO. DST-2-99-000022

Universal Savings Account (UNISA) (Gross Amount)

Php 170,980,990,473.33

Rate of Tax (Sec. 180 NIRC) 0.15%Basic DST Due 256,471,485.71 Add: Surcharge Php

64,117,871.42 Interest (1/10/00-1/31/03) 156,974,602.49 Compromise Penalty 25,000.00 221,117,473.91 Total DST Deficiency Php 477,588,959.62

39

40

Metrobank filed with the CIR on 17 January 2003 a protest

against Assessment No. DST-2-99-000022. Said protest was denied

by the CIR in a Decision41[6] dated 2 March 2004, the fallo of which

reads:

WHEREFORE, predicated on all the foregoing, METROBANK’s protest against Assessment Notice No. DST-2-99-000022 is hereby DENIED. Consequently, METROBANK is hereby ordered to pay the total amount of P477,588,959.62, as deficiency documentary stamp tax for the taxable year 1999, plus increments that have legally accrued thereon until the actual date of payment, to the Large Taxpayer’s Service, BIR National Office Building, Diliman, Quezon City, within thirty (30) days from receipt hereof; otherwise, collection thereof will be effected through the summary remedies provided by law.

This constitutes the Final Decision of this Office on the matter.

Petitioner filed a Petition for Review with the CTA on 21 April

2004. The Petition was docketed as C.T.A. Case No. 6955, and raffled

to the CTA Second Division. The CTA Second Division failed to find

merit in the Petition of Metrobank and, thus, decreed in its

Decision42[7] dated 1 September 2006:

WHEREFORE, the Petition for Review is hereby DISMISSED for lack of merit. The Decision of the [CIR] dated March 2, 2004 is hereby AFFIRMED with modifications. The compromise penalty of P25,000.00

41

42

is hereby CANCELLED there being no mutual agreement arrived at between the parties.

Accordingly, [Metrobank] is ORDERED TO PAY the [CIR] the amount of P477,563,959.62 representing deficiency documentary stamp taxes for the taxable year 1999, computed as follows:

Basic Tax P 256,471,485.71Add: 25% Surcharge 64,117,871.42Interest 156,974,602.49

P 477,563,959.62

In addition, [Metrobank] is ORDERED TO PAY 20% delinquency interest on the amount of P477,563,959.62 computed from April 26, 2004 until full payment thereof, pursuant to Section 249(C) of the National Internal Revenue Code of 1997.

The Motion for Reconsideration of Metrobank was denied by

the CTA Second Division in a Resolution43[8] dated 3 January 2007.

Metrobank thereafter filed a Petition for Review with the CTA

en banc, docketed as C.T.A. E.B. No. 247. In a Decision promulgated

on 21 May 2007, the CTA en banc affirmed the Decision dated 1

September 2006 and Resolution dated 3 January 2007 of the CTA

Second Division in C.T.A. Case No. 6955, and dismissed the Petition of

Metrobank. According to the CTA en banc, the decisive issue of

whether special savings accounts evidenced by passbooks, such as

43

the UNISA of Metrobank, were subject to DST under Section 180 of

the NIRC, had already been resolved in the affirmative by this Court

in its Resolution dated 15 January 2007 in Banco de Oro Universal

Bank v. Commissioner of Internal Revenue (BDO case)44[9] and its

Decision dated 4 April 2007 in International Exchange Bank v.

Commissioner of Internal Revenue (IEB case).45[10]

The CTA en banc denied the Motion for Reconsideration of

Metrobank in a Resolution dated 9 July 2007.

Hence, Metrobank comes before this Court via the present

Petition, raising the sole issue of whether the UNISA was subject to

DST in 1999 under Section 180 of the NIRC, prior to the amendment

thereof by Republic Act No. 9243, which took effect on 20 May 2004.

I

Prior to Republic Act No. 9243, Section 180 of the NIRC

imposed DST on the following documents or instruments:

44

45

SEC. 180. Stamp Tax on all Bonds, Loan Agreements, Promissory Notes, Bills of Exchange, Drafts, Instruments and Securities Issued by the Government or Any of its Instrumentalities, Deposit Substitute Debt Instruments, Certificates of Deposits Bearing Interest and Others Not Payable on Sight or Demand. – On all bonds, loan agreements, including those signed abroad, wherein the object of the contract is located or used in the Philippines, bills of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities, deposit substitute debt instruments, certificates of deposits drawing interest, orders for the payment of any sum of money otherwise than at sight or on demand, on all promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos (P200), or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit, or note: x x x (Emphases ours.)

It is beyond question that a certificate of deposit issued by a

bank for a time deposit was subject to DST under Section 180 of the

NIRC. The CIR treated the UNISA of Metrobank like a time deposit,

although a passbook is issued for the former, rather than a certificate

of deposit. The CIR pointed out that in order to be entitled to the

premium rate for UNISA, the depositor, just like in a time deposit,

must wait for the holding period to expire before making the

withdrawal. This constitutes a restriction on the depositor’s right to

withdraw from his deposit prior to the expiration of the holding

period. Although the passbook issued by Metrobank for UNISA is not

in the form of certificate nor is it labeled as such, it has a fixed

maturity date and earns premium interest. Given the nature and

substance of the passbook issued by Metrobank for UNISA, it is, for

all intents and purposes, a certificate of deposit earning interest,

which is subject to DST.

Metrobank opposes the assessment against it for deficiency

DST on the UNISA for 1999 because the passbook issued for such an

account was not among the documents subject to DST enumerated

in Section 180 of the NIRC, prior to its amendment by Republic Act

No. 9243. Section 180 of the NIRC imposed DST only on a certificate

of deposit bearing interest that is not payable on sight or demand,

such as the certificate issued by a bank for a time deposit.

Metrobank explains that a UNISA is not the same as a time

deposit account. It is a new product developed by Metrobank after

the removal of interest ceilings on both savings and time deposits. It

offers the flexibility of a savings deposit account by doing away with

the rigidity of a time deposit account, but with interest rate on par

with the latter. A time deposit can be distinguished from a UNISA by

the following features: (1) in a time deposit account, the depositor

agrees that the bank shall keep the money for a fixed period; in a

UNISA, the depositor can make withdrawals anytime, just like an

ordinary savings account; to be entitled to the preferential interest

rate for UNISA, however, the depositor must maintain the required

minimum deposit balance within the specified holding period; (2) a

time deposit account is evidenced by a certificate of deposit; on the

other hand, a UNISA is covered by a passbook; (3) for renewal, the

certificate issued for a time deposit has to be formally surrendered

upon maturity, while the passbook issued for UNISA need not be

renewed in the same manner; and (4) the withdrawal of the money

from a time deposit account before the expiration of the fixed period

would mean the pretermination of said account; in comparison,

there can be no pretermination of a UNISA, since the account simply

reverts to an ordinary savings account in case the depositor makes a

withdrawal, which would result in non-compliance with the required

maintaining balance or holding period for UNISA.

Metrobank further insists that to be taxable under Section 180

of the NIRC, the certificate of deposit must be negotiable. It must be

payable to the depositor, to his order, or to some other person or his

order. A passbook, by all accounts, is not negotiable. It is merely a

paper book issued by a bank or savings institution to a depositor to

record deposits to, withdrawals from, and interest earned by a

savings account.

Finally, Metrobank refers to the deliberations of both Houses

of Congress on the precursor bills for Republic Act No. 9243.

According to Metrobank, records of said deliberations reveal that the

legislators acknowledged the existence of a loophole in Section 180

of the NIRC, as it was then worded, by virtue of which, banks offering

special savings accounts, with high interest rates and specified

holding periods, evidenced by passbooks instead of certificates of

deposit, escape payment of DST. Thus, the legislators deemed it

necessary to amend Section 180 of the NIRC through Republic Act

No. 9243. Re-numbered as Section 179, the amended provision now

reads:

SEC. 179. Stamp Tax on All Debt Instruments. – On every original issue of debt instruments, there shall be collected a documentary stamp tax on One peso (P1.00) on each Two hundred pesos (P200), or fractional part thereof, of the issue price of any such debt instruments: Provided, That for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its term in number of days to three hundred sixty-five (365) days: Provided, further, That only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan.

For purposes of this section, the term debt instrument shall mean instruments representing borrowing and lending transactions including but not limited to debentures, certificates of indebtedness, due bills, bonds, loan agreements, including those signed abroad wherein the object of contract is located or used in the Philippines, instruments and securities issued by the government of any of its instrumentalities, deposit substitute debt instruments, certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date, orders for payment of any sum of money otherwise than at sight or on demand, promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation. (Emphasis ours.)

Metrobank posits that only after Republic Act No. 9243

amended the NIRC on 20 March 2004, did the UNISA of Metrobank

become subject to DST under the aforequoted Section 179.

The Court agrees with the CTA en banc that the pivotal issue in

this case had been squarely resolved in the BDO case and the IEB

case, which involved assessments issued by the BIR against the banks

BDO and IEB for DST on their respective special savings accounts,

closely similar to the UNISA of Metrobank.

In the BDO case, this Court dismissed the Petition for Review

on Certiorari of BDO for the latter’s failure to submit a verified

statement of the dates of receipt of the assailed judgment and filing

of the motion for reconsideration, as required by Sections 4(b) and 5,

Rule 45, in relation to Section 5(d), Rule 56, of the Revised Rules of

Court. Yet, the Court also declared that even without the technical

lapse of BDO, the Petition of said bank should still be denied, there

being no reversible error committed by the CTA en banc when the

latter ruled as follows:

On April 7, 2006[,] the CTA en banc rendered the herein challenged decision affirming the findings of its First Division that petitioner’s ISA is the equivalent of the certificate of deposit and which would make it subject to documentary stamp tax under Section 180 of the NIRC.

The CTA en banc likewise declared [t]hat in practice, a time deposit transaction is covered by a certificate of deposit while petitioner’s ISA transaction is through a passbook. Despite the differences in the form of the documents, the CTA en banc ruled that a time deposit and ISA have essentially the same attributes and features. It explained that like time deposit, ISA transactions bear a fixed term or maturity because the bank acknowledges receipt of a sum of money on deposit which the bank promises to pay the depositor, bearer or to the order of a bearer on a specified period of time. Section 180 of the 1997 NIRC does not prescribed the form of a certificate of deposit. It may be any “written acknowledgement by a bank of the receipt of money on deposit.” The definition of a certificate of deposit is all encompassing to include a savings account deposit such as ISA.

x x x x

Dedicated exclusively to the study and consideration of tax problems, the CTA has necessarily developed an expertise in the subject

of taxation that this Court has recognized time and again. For this reason, the findings of fact of a division of the CTA, particularly when affirmed en banc, are generally conclusive on this Court absent grave abuse of discretion or palpable error, which are not present in this case.46[11] (Emphases ours.)

Metrobank avers that the Petition in the BDO case was

dismissed on a matter of procedure, and that the declaration made

by the Court on the merits of the same constitutes obiter dictum,47[12]

which should not bind the Court in its resolution of the case at bar.

The Court is not persuaded. The Court resolved the BDO case

on both procedural and substantive grounds. The declaration of the

Court in the BDO case – that the Petition therein should be denied

because the CTA en banc committed no reversible error in rendering

its assailed decision – was purposely and categorically made. An

additional reason in a decision (or in this case, a resolution), brought

forward after the case has been disposed of on one ground, is not to

be regarded as dicta. So, also, where a case presents two or more

points, any one of which is sufficient to determine the ultimate issue,

but the court actually decides all such points, the case becomes an

authoritative precedent as to every point decided; none of such

46

47

points can be regarded as having the status of a dictum, and one

point should not be denied authority merely because another point

was more dwelt on and more fully argued and considered; nor does a

decision on one proposition make statements of the court regarding

other propositions dicta.48[13]

Hence, if according to the BDO case, the special savings

account of BDO (i.e., Investment Savings Account [ISA], covered by

a passbook), is a certificate of deposit bearing interest, which is

subject to DST under Section 180 of the NIRC; then the identical

product of Metrobank (i.e., UNISA) should likewise be subject to

DST.

The Court was able to more thoroughly consider and address

in the IEB case the very same arguments raised herein by Metrobank.

Just as in the BDO case, the Court held in the IEB case that a

passbook issued by a bank, representing an interest-earning deposit

account, qualifies as a certificate of deposit drawing interest, which is

subject to DST.49[14] 48

49

The Court, in the IEB case, referred to the definition of a

certificate of deposit in Far East Bank and Trust Company v.

Querimit,50[15] viz:

A certificate of deposit is defined as a written acknowledgment by a bank or banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or to some other person or his order, whereby the relation of debtor and creditor between the bank and the depositor is created. x x x.

The Court then proceeded to elucidate even further in the IEB

case on what constitutes a certificate of deposit:

A document to be deemed a certificate of deposit requires no specific form as long as there is some written memorandum that the bank accepted a deposit of a sum of money from a depositor. What is important and controlling is the nature or meaning conveyed by the passbook and not the particular label or nomenclature attached to it, inasmuch as substance, not form, is paramount.

Contrary to petitioner’s claim, not all certificates of deposit are negotiable. A certificate of deposit may or may not be negotiable as gathered from the use of the conjunction or, instead of and, in its definition. A certificate of deposit may be payable to the depositor, to the order of the depositor, or to some other person or his order.

In any event, the negotiable character of any and all documents under Section 180 is immaterial for purposes of imposing DST.

50

Orders for the payment of sum of money payable at sight or on demand are of course explicitly exempted from the payment of DST. Thus, a regular savings account with a passbook which is withdrawable at any time is not subject to DST, unlike a time deposit which is payable on a fixed maturity date.51[16]

The Court rejected the claim of IEB in the IEB case that

its special savings account, i.e., Fixed-Savings Deposit (FSD),

was more akin to a regular savings account than a time deposit

account, ratiocinating that:

The FSD, like a time deposit, provides for a higher interest rate when the deposit is not withdrawn within the required fixed period; otherwise, it earns interest pertaining to a regular savings deposit. Having a fixed term and the reduction of interest rates in case of pre-termination are essential features of a time deposit. Thus explains the CTA En Banc:

It is well-settled that certificates of time deposit are subject to the DST and that a certificate of time deposit is but a type of a certificate of deposit drawing interest. Thus, in resolving the issue before Us, it is necessary to determine whether petitioner’s Savings Account-Fixed Savings Deposit (SA-FSD) has the same nature and characteristics as a time deposit. In this regard, the findings of fact stated in the assailed Decision [of the CTA Division] are as follows:

"In this case, a depositor of a savings deposit-FSD is required to keep the money with the bank for at least thirty (30) days in order to yield a higher interest rate. Otherwise, the deposit earns interest pertaining only to a regular savings deposit.

51

The same feature is present in a time deposit. A depositor is allowed to withdraw his time deposit even before its maturity subject to bank charges on its pre[-]termination and the depositor loses his entitlement to earn the interest rate corresponding to the time deposit. Instead, he earns interest pertaining only to a regular savings deposit. Thus, petitioner’s argument that the savings deposit-FSD is withdrawable anytime as opposed to a time deposit which has a maturity date, is not tenable. In both cases, the deposit may be withdrawn anytime but the depositor gets to earn a lower rate of interest. The only difference lies on the evidence of deposit, a savings deposit-FSD is evidenced by a passbook, while a time deposit is evidenced by a certificate of time deposit."

In order for a depositor to earn the agreed higher interest rate in a SA-FSD, the amount of deposit must be maintained for a fixed period. Such being the case, We agree with the finding that the SA-FSD is a deposit account with a fixed term. Withdrawal before the expiration of said fixed term results in the reduction of the interest rate. Having a fixed term and reduction of interest rate in case of pre-termination are essentially the features of a time deposit. Hence, this Court concurs with the conclusion reached in the assailed Decision that petitioner’s SA-FSD and time deposit are substantially the same. . . . (Italics in the original; underscoring supplied)

The findings and conclusions reached by the CTA which, by the very nature of its function, is dedicated exclusively to the consideration of tax problems and has necessarily developed an expertise on the subject, and unless there has been an abuse or improvident exercise of authority, and none has been shown in the present case, deserves respect.

It bears emphasis that DST is levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments. It is an excise upon the privilege,

opportunity or facility offered at exchanges for the transaction of the business.

While tax avoidance schemes and arrangements are not prohibited, tax laws cannot be circumvented in order to evade payment of just taxes. To claim that time deposits evidenced by passbooks should not be subject to DST is a clear evasion of the rule on equality and uniformity in taxation that requires the imposition of DST on documents evidencing transactions of the same kind, in this particular case, on all certificates of deposits drawing interest.52[17]

The amendment of Section 180 of the NIRC and its re-

numbering as Section 179 by Republic Act No. 9243 in 2004 do

not mean that prior thereto, special savings deposits evidenced

by passbooks were exempted from payment of DST. The Court

determined in the IEB case that:

If at all, the further amendment was intended to eliminate precisely the scheme used by banks of issuing passbooks to "cloak" its time deposits as regular savings deposits. This is reflected from the following exchanges between Mr. Miguel Andaya of the Bankers Association of the Philippines and Senator Ralph Recto, Senate Chairman of the Committee on Ways and Means, during the deliberations on Senate Bill No. 2518 which eventually became R.A. 9243:

MR. MIGUEL ANDAYA (Bankers Association of the Philippines). Just to clarify. Savings deposit at the present time is not subject to DST.

THE CHAIRMAN. That’s right.MR. ANDAYA. Time deposit is subject. I agree with you in principle that if we are going to encourage deposits, whether savings or time…

52

THE CHAIRMAN. Uh-huh.

MR. ANDAYA. . .it’s questionable whether we should tax it with DST at all, even the question of imposing final withholding tax has been raised as an issue.

THE CHAIRMAN. If I had it my way, I’ll cut it by half.

MR. ANDAYA. Yeah, but I guess concerning the constraint of government revenue, even the industry itself right now is not pushing in that direction, but in the long term, when most of us in this room are gone, we hope that DST will disappear from the face of this earth, ‘no.

Now, I think the move of the DOF to expand the coverage of or to add that phrase, "Other evidence of indebtedness," it just removed ambiguity. When we testified earlier in the House on this very same bill, we did not interpose any objections if only for the sake of avoiding further ambiguity in the implementation of DST on deposits. Because of what has happened so far is, we don’t know whether the examiner is gonna come in and say, "This savings deposit is not savings but it’s time deposit." So, I think what DOF has done is to eliminate any confusion. They said that a deposit that has a maturity. . .

THE CHAIRMAN. Uh-huh.

MR. ANDAYA. . . . which is time, in effect, regardless of what form it takes should be subject to DST.

THE CHAIRMAN. Would that include savings deposit now?

MR. ANDAYA. So that if we cloaked a deposit as savings deposit but it has got a fixed maturity . . .

THE CHAIRMAN. Uh-huh.

MR. ANDAYA. . . that would fall under the purview.53

[18] (Underscoring supplied.)

53

Given that the IEB case and the present case

substantially involve the same facts and arguments, then the 4

April 2007 Decision in the former serves as a judicial precedent

in the latter. The averment of Metrobank in the instant Petition

that the judgment in the IEB case is still not final, since IEB filed

a Motion for Reconsideration of the same, is no longer true.

The Court denied with finality the Motion for Reconsideration of

IEB in a Resolution dated 1 August 2007 and, accordingly,

entry of judgment has been made in the IEB case on 15

January 2008.

In a more recent case, Philippine Banking Corporation

(Now: Global Business Bank, Inc.) v. Commissioner of Internal

Revenue (PBC case),54[19] the Court again considered the

Special/Super Savings Deposit Account (SSDA) of PBC,

evidenced by a passbook, as a certificate of deposit bearing

interest on which DST under Section 180 of the NIRC could be

imposed, citing both the BDO case and the IEB case.

54

In the absence of any compelling reason, the Court

cannot depart from the foregoing jurisprudence. There can be

no doubt that the UNISA – the special savings account of

Metrobank, granting a higher tax rate to depositors able to

maintain the required minimum deposit balance for the

specified holding period, and evidenced by a passbook – is a

certificate of deposit bearing interest, already subject to DST

even under the then Section 180 of the NIRC. Hence, the

assessment by the CIR against Metrobank for deficiency DST

on the UNISA for 1999 was only proper.

II

Nevertheless, the Court takes note of an intervening

event, which significantly affects its resolution of the Petition at

bar.

On 17 April 2008, during the pendency of the present

Petition, Metrobank filed a Manifestation before this Court.

Metrobank manifested that it had availed itself of the Tax

Amnesty Program under Republic Act No. 9480, which lapsed

into law on 24 May 2007.55[20] Metrobank claimed that it was

qualified to avail itself of the Tax Amnesty Program, and that it

had fully complied with the requirements for the same. As a

result, it became entitled to immunity from the payment of any

and all taxes due from it for the taxable year 2005 and prior

years, including the deficiency DST on the UNISA for 1999. On

the basis of the tax amnesty, Metrobank again prayed for the

reversal and setting aside of the 21 May 2007 Decision and 9

July 2007 Resolution of the CTA en banc in C.T.A. E.B. No.

247, and the cancellation of Final Assessment No. DST-2-99-

000022.

A tax amnesty is a general pardon or the intentional

overlooking by the State of its authority to impose penalties on

persons otherwise guilty of violation of a tax law. It partakes of

an absolute 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 or presumed in law. The grant

of a tax amnesty, similar to a tax exemption, must be construed

55

strictly against the taxpayer and liberally in favor of the taxing

authority.56[21]

The coverage of Republic Act No. 9480 is laid down in

Section 1 thereof:

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 therefore, 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. (Emphases ours.)

Section 8 of Republic Act No. 9480 enumerates persons

or cases which cannot be covered by the tax amnesty:

SEC. 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;

56

(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. (Emphases supplied.)

In his Comment on the Manifestation of Metrobank, the

CIR asserts that: (1) Metrobank is merely a withholding agent

for the depositors with respect to the DST on the UNISA, so it is

disqualified from availing itself of the tax amnesty following

Section 8(a) of Republic Act No. 9480; (2) the assessment

against Metrobank for the deficiency DST for 1999 already

attained finality, and it no longer qualifies for tax amnesty

pursuant to Section 8(f) of Republic Act No. 9480; and (3)

deficiency in DST is not covered by the tax amnesty under

Republic Act No. 9480.

The reliance by the CIR on paragraphs (a) and (f) of

Section 8 of Republic Act No. 9480 to oppose the availment by

Metrobank of the Tax Amnesty Program is untenable.

This is the first time that the CIR has alleged that

Metrobank is only a withholding agent for the DST on the

UNISA. As pointed out by Metrobank, it was assessed by the

CIR, not as a withholding agent that failed to withhold and/or

remit the DST on the UNISA for 1999, but as one that was

directly liable for the said tax and failed to pay the same.

The CIR did not provide the basis, whether in law or

administrative issuances, for its averment that Metrobank was a

withholding agent for the DST on the UNISA. In contrast, it is

clear from Section 3 of Revenue Regulations No. 9-200057[22]

that a bank shall be responsible for the payment and remittance

of the DST prescribed under Title VII of the NIRC; and unless it

is exempt from said tax, then it shall remit the same only as a

collecting agent of the CIR. The pertinent provisions of

Revenue Regulations No. 9-2000 are quoted hereunder:

SECTION 3. Mode of Payment and Remittance of the Tax. –

(a) In general. – Unless otherwise provided in these Regulations, any of the aforesaid parties to the taxable transaction shall pay and remit the full amount of the tax in accordance with the provisions of Section 200 of the Code.

(b) Exceptions. –

57

(1) If one of the parties to the taxable transaction is exempt from the tax, the other party who is not exempt shall be the one directly liable for the tax, in which case, the tax shall be paid and remitted by the said non-exempt party, unless otherwise provided in these Regulations.

(2) If the said tax-exempt party is one of the persons enumerated in Section 3(c)(4) hereof, he shall be constituted as agent of the Commissioner for the collection of the tax, in which case, he shall remit the tax so collected in the same manner and in accordance with the provisions of Section 200 of the Code: Provided, however, that if he fails to collect and remit the same as herein required, he shall be treated personally liable for the tax, in addition to the penalties prescribed under Title X of the Code for failure to pay the tax on time.

x x x x

(c) Persons liable to remit the DST. – In general, the full amount of the tax imposed under Title VII of the Code may be remitted by any of the party or parties to the taxable transaction, except in the following cases:

x x x x

(4) When one of the parties to the taxable document or transaction is included in any of the entities enumerated below, such entity shall be responsible for the remittance of the stamp tax prescribed under Title VII of the Code: Provided, however, that if such entity is exempt from the tax herein imposed, it shall remit the tax as a collecting agent, pursuant to the preceding paragraph Section 3(b)(2) hereof, any provision of these Regulations to the contrary notwithstanding:

(a) A bank, a quasi-bank or non-bank financial intermediary, a finance company, or an insurance, a surety, a fidelity, or annuity company. (Emphases ours.)

There has never been any allegation made in this case that

Metrobank is exempt from the DST on the UNISA and, thus, it is

tasked to remit the said tax only as a collecting agent. The standing

presumption, therefore, is that Metrobank is directly liable for the

payment and remittance of the DST on the UNISA.

Neither is there any merit in the insistence of the CIR that

Assessment No. DST-2-99-000022 is already final and executory in

light of the failure of Metrobank, firstly, to submit all the relevant

supporting documents within 60 days from filing of its protest with

the CIR; and, secondly, to appeal to the CTA the inaction of the CIR on

its protest within 30 days from the lapse of the 180-day period as

provided in Section 228 of the NIRC.58[23]

The Court cannot simply accept the allegation of the CIR that

Metrobank failed to submit the relevant supporting documents

within 60 days from the filing of its protest on 17 January 2003, when

the CIR does not even identify what these documents are. If the

Court does not know what particular documents Metrobank

purportedly failed to submit in support of its protest, then the Court

likewise cannot make a determination on the relevance of such

documents. In addition, there appear to be sufficient documents

58

submitted by Metrobank to the CIR to have enabled the latter to

render on 2 March 2004 a Decision on the protest of the former.

This brings the Court to its next point. Per the computation of

the CIR, the 180-day period for the CIR to act on the protest of

Metrobank ended on 13 September 2003, and the 30-day period for

Metrobank to file an appeal with the CTA ended on 13 October 2003.

If, indeed, Assessment No. DST-2-99-000022 became final and

executory when the bank failed to file an appeal with the CTA by 13

October 2003, why then did the CIR even bother with resolving the

protest of Metrobank against the said assessment and rendering a

Decision thereon on 2 March 2004? That the CIR issued a Decision

on 2 March 2004 denying the protest of Metrobank belies its own

assertion herein that the assessment subject of the protest became

final and executory after 13 October 2003. It also bears to stress that

both the CTA Second Division and the CTA en banc took cognizance

of the successive appeals of Metrobank, resolving both appeals on

their merits without regard to the supposed finality of the appealed

assessment. 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.

To avail itself of the tax amnesty, Metrobank paid 5% of the

resulting increase in its networth, following the amendment of its

statement of assets and liabilities as of 31 December 2005, to include

therein previously undeclared assets and/or liabilities.59[24] The

submission of the CIR that the foregoing payment by Metrobank of

the amnesty tax “relates only to a determination of [Metrobank]’s

revised taxable income, and does not delve on its unrecognized

documentary stamp tax liabilities”60[25] is rebuffed by the all-

encompassing words of Republic Act No. 9480 that those who

availed themselves of the tax amnesty, by paying the amnesty tax

and complying with all of its conditions, “shall be immune from the

payment of taxes, as well as addition thereto, and the appurtenant

civil, criminal or administrative penalties under the National Internal 59

60

Revenue Code of 1997, as amended, arising from the failure to pay

any and all internal revenue taxes for taxable year 2005 and prior

years.”61[26] The Court has absolutely no basis to limit the immunity,

resulting from the payment by Metrobank of the amnesty tax, only to

income tax, and to exclude DST therefrom.

Finally, the CIR never questioned or rebutted that Metrobank

had fully complied with the requirements for tax amnesty under

Republic Act No. 9480. Still, Metrobank calls the attention of this

Court to the developments in another case before the CTA en banc,

also between said bank and the CIR, docketed as C.T.A. EB No. 269,

entitled Metropolitan Bank and Trust Company v. Commissioner of

Internal Revenue.

C.T.A. EB No. 269 involved the assessment by the CIR against

Metrobank for deficiency DST on the UNISA for 1995 to 1998, as well

as on its Interbank Call Loans for 1998. The CTA en banc already

promulgated on 30 March 2007 a Decision in C.T.A. EB No. 269

against Metrobank, prompting the latter to file a Motion to Suspend

Collection of Taxes and/or Enjoin the Issuance of Warrant of

61

Distraint, Garnishment and Levy and Motion for Waiver of Posting of

Bond. While said Motions were pending before the CTA en banc,

Metrobank applied for tax amnesty under Republic Act No. 9480. In

its Resolution62[27] dated 28 March 2008 in C.T.A. EB No. 269, the CTA

en banc found that:

An examination of the records shows that being a qualified tax amnesty applicant, [Metrobank] duly complied with the requisites enumerated in R.A. No. 9480, as implemented by RMC No. 19-2008. The law mandates that a tax amnesty compliant applicant shall be exempt from the payment of taxes, including the civil, criminal, or administrative penalties under the Tax Code, pursuant to Section 6 of R.A. No. 9480 which states:

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 taxpayers 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, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.

Considering that the [Metrobank] satisfied the requisites of the tax amnesty law, and is duly qualified tax amnesty applicant under R.A. No. 9480, the Court sees no cogent reason to resolve [Metrobank]’s Motion to Suspend Collection of Taxes and/or Enjoin the

62

Issuance of Warrant of Distraint, Garnishment and Levy, and its Motion for Waiver of Posting of Bond, for being moot.

Given [Metrobank]’s compliance with the tax amnesty law, the subject tax deficiencies are extinguished.

WHEREFORE, premises considered, C.T.A. EB Case No. 269 is hereby considered CLOSED and TERMINATED. (Emphases ours.)

Also worthy of note is the fact that this Court, in the PBC case,

made its own determination that Metrobank was entitled to the tax

amnesty under Republic Act No. 9480. PBC and Metrobank merged,

with Metrobank as the surviving entity. The tax liabilities of PBC for

2005 and prior years were absorbed by Metrobank and were, thus,

deemed included in the application for tax amnesty filed by

Metrobank. The Court found in the PBC case that:

Records show that Metrobank, a qualified tax amnesty applicant, has duly complied with the requirements enumerated in RA 9480, as implemented by DO 29-07 and RMC 19-2008. 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.63[28]

63

Metrobank filed only one application for tax amnesty under

Republic Act No. 9480, since it already covered all national internal

revenue taxes for 2005 and prior years. Hence, the factual

determination made by the CTA en banc in C.T.A. EB No. 269 and by

this Court in the PBC case – that Metrobank had complied with the

requirements for its application and was qualified for the tax

amnesty under Republic Act No. 9480 – is binding on this Court,

involving as it does the very same application for tax amnesty of

Metrobank being invoked herein. 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 the deficiency DST on the UNISA for 1999, as well as the

addition thereto.

WHEREFORE, the instant Petition is GRANTED. The Decision dated

21 May 2007 and Resolution dated 9 July 2007 of the Court of Tax

Appeals en banc in C.T.A. E.B. No. 247 is REVERSED and SET ASIDE,

and Assessment No. DST-2-99-000022 is CANCELLED, solely in view of

the availment by petitioner Metropolitan Bank and Trust Co. of the

Tax Amnesty Program under Republic Act No. 9480.

SO ORDERED.

THIRD DIVISION

COMMISSIONER OF INTERNAL REVENUE, Petitioner,

- versus -

PHILIPPINE AIRLINES, INC., Respondent.

G.R. No. 180066

Present: YNARES-SANTIAGO, J., Chairperson,CHICO-NAZARIO, VELASCO, JR.,NACHURA, andPERALTA, JJ.

Promulgated:

_____________________x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

D E C I S I O N

CHICO-NAZARIO, J.:

Before this Court is a Petition for Review on Certiorari, under

Rule 45 of the Revised Rules of Court, seeking the reversal and

setting aside of the Decision64[1] dated 9 August 2007 and

Resolution65[2] dated 11 October 2007 of the Court of Tax Appeals

(CTA) en banc in CTA E.B. No. 246. The CTA en banc affirmed the

Decision66[3] dated 31 July 2006 of the CTA Second Division in C.T.A.

Case No. 7010, ordering the cancellation and withdrawal of

Preliminary Assessment Notice (PAN) No. INC FY-3-31-01-000094

dated 3 September 2003 and Formal Letter of Demand dated 12

January 2004, issued by the Bureau of Internal Revenue (BIR) against

respondent Philippine Airlines, Inc. (PAL), for the payment of

Minimum Corporate Income Tax (MCIT) in the amount of

P272,421,886.58.

There is no dispute as to the antecedent facts of this case.

PAL is a domestic corporation organized under the corporate

laws of the Republic of the Philippines; declared the national flag

carrier of the country; and the grantee under Presidential Decree No.

64 [1] Penned by Associate Justice Erlinda P. Uy with Presiding Justice Ernesto D. Acosta and Associate Justices Juanito C. Castañeda, Jr., Lovell R. Bautista, Caesar A. Casanova, and Olga Palanca-Enriquez, concurring; rollo, pp. 43-56.

65 [2] Id. at 67-68.66 [3] Penned by Associate Justice Juanito C. Castañeda with Associate Justices

Erlinda P. Uy and Olga Palanca-Enriquez, concurring, id. at 70-90.

159067[4] of a franchise to establish, operate, and maintain transport

services for the carriage of passengers, mail, and property by air, in

and between any and all points and places throughout the

Philippines, and between the Philippines and other countries.68[5]

For its fiscal year ending 31 March 2001 (FY 2000-2001), PAL

allegedly incurred zero taxable income,69[6] which left it with

unapplied creditable withholding tax70[7] in the amount of

P2,334,377.95. PAL did not pay any MCIT for the period.

In a letter dated 12 July 2002, addressed to petitioner

Commissioner of Internal Revenue (CIR), PAL requested for the

refund of its unapplied creditable withholding tax for FY 2000-2001.

PAL attached to its letter the following: (1) Schedule of Creditable Tax

Withheld at Source for FY 2000-2001; (2) Certificates of Creditable

Taxes Withheld; and (3) Audited Financial Statements.

67 [4] An Act Granting a New Franchise to Philippine Airlines, Inc. to Establish, Operate, and Maintain Air-Transport Services in the Philippines and Other Countries.

68[5] Section 1 of Presidential Decree No. 1590.69 [6] According to the Annual Income Tax Return of PAL for the fiscal year in

question, its allowable deductions exactly equalled its total gross income of P39,470,862,232.00, thus, leaving zero taxable income.

70 [7] Withheld at source, meaning, it was previously deducted and withheld by various withholding agents from the income payments made to PAL.

Acting on the aforementioned letter of PAL, the Large

Taxpayers Audit and Investigation Division 1 (LTAID 1) of the BIR

Large Taxpayers Service (LTS), issued on 16 August 2002, Tax

Verification Notice No. 00201448, authorizing Revenue Officer

Jacinto Cueto, Jr. (Cueto) to verify the supporting documents and

pertinent records relative to the claim of PAL for refund of its

unapplied creditable withholding tax for FY 2000-20001. In a letter

dated 19 August 2003, LTAID 1 Chief Armit S. Linsangan invited PAL

to an informal conference at the BIR National Office in Diliman,

Quezon City, on 27 August 2003, at 10:00 a.m., to discuss the results

of the investigation conducted by Revenue Officer Cueto, supervised

by Revenue Officer Madelyn T. Sacluti.

BIR officers and PAL representatives attended the scheduled

informal conference, during which the former relayed to the latter

that the BIR was denying the claim for refund of PAL and, instead,

was assessing PAL for deficiency MCIT for FY 2000-2001. The PAL

representatives argued that PAL was not liable for MCIT under its

franchise. The BIR officers then informed the PAL representatives

that the matter would be referred to the BIR Legal Service for

opinion.

The LTAID 1 issued, on 3 September 2003, PAN No. INC FY-3-

31-01-000094, which was received by PAL on 23 October 2003.

LTAID 1 assessed PAL for P262,474,732.54, representing deficiency

MCIT for FY 2000-2001, plus interest and compromise penalty,

computed as follows:

Sales/Revenues from Operation P 38,798,721,685.00Less: Cost of Services 30,316,679,013.00Gross Income from Operation 8,482,042,672.00Add: Non-operating income 465,111,368.00Total Gross Income for MCIT purposes 9,947,154,040.0071[8]

Rate of Tax 2%Tax Due 178,943,080.80Add: 20% interest (8-16-00 to 10-31-03) 83,506,651.74 Compromise Penalty 25,000.00Total Amount Due P 262,474,732.5472[9]

PAL protested PAN No. INC FY-3-31-01-000094 through a letter

dated 4 November 2003 to the BIR LTS.

On 12 January 2004, the LTAID 1 sent PAL a Formal Letter of

Demand for deficiency MCIT for FY 2000-2001 in the amount of

P271,421,88658, based on the following calculation:

71[8] Should be P8,947,154,040.00.72[9] Rollo, p. 105.

Sales/Revenues from Operation P 38,798,721,685.00Less: Cost of Services Direct Costs - P 30,749,761,017.00 Less: Non-deductible interest expense 433,082,004.00 30,316,679,013.00Gross Income from Operation P 8,482,042,672.00Add: Non-operating Income 465,111,368.00Total Gross Income for MCIT purposes P 9,947,154,040.00MCIT tax due P 178,943,080.80Interest – 20% per annum – 7/16/01 to 02/15/04 92,453,805.78Compromise Penalty 25,000.00Total MCIT due and demandable P

271,421,886.5873[10]

PAL received the foregoing Formal Letter of Demand on 12

February 2004, prompting it to file with the BIR LTS a formal written

protest dated 13 February 2004.

The BIR LTS rendered on 7 May 2004 its Final Decision on

Disputed Assessment, which was received by PAL on 26 May 2004.

Invoking Revenue Memorandum Circular (RMC) No. 66-2003, the BIR

LTS denied with finality the protest of PAL and reiterated the request

that PAL immediately pay its deficiency MCIT for FY 2000-2001,

inclusive of penalties incident to delinquency.

73[10] Id. at 114.

PAL filed a Petition for Review with the CTA, which was

docketed as C.T.A. Case No. 7010 and raffled to the CTA Second

Division. The CTA Second Division promulgated its Decision on 31

July 2006, ruling in favor of PAL. The dispositive portion of the

judgment of the CTA Second Division reads:

WHEREFORE, premises considered, the instant Petition for Review is hereby GRANTED. Accordingly, Assessment Notice No. INC FY-3-31-01-000094 and Formal Letter of Demand for the payment of deficiency Minimum Corporate Income Tax in the amount of P272,421,886.58 are hereby CANCELLED and WITHDRAWN.74[11]

In a Resolution dated 2 January 2007, the CTA Second Division

denied the Motion for Reconsideration of the CIR.

It was then the turn of the CIR to file a Petition for Review with

the CTA en banc, docketed as C.T.A. E.B. No. 246. The CTA en banc

found that “the cited legal provisions and jurisprudence are teeming

with life with respect to the grant of tax exemption too vivid to pass

unnoticed,” and that “the Court in Division correctly ruled in favor of

the respondent [PAL] granting its petition for the cancellation of

Assessment Notice No. INC FY-3-31-01-000094 and Formal Letter of

74[11] Id. at 89.

Demand for the deficiency MCIT in the amount of

P272,421,886.58.”75[12] Consequently, the CTA en banc denied the

Petition of the CIR for lack of merit. The CTA en banc likewise denied

the Motion for Reconsideration of the CIR in a Resolution dated 11

October 2007.

Hence, the CIR comes before this Court via the instant Petition

for Review on Certiorari, based on the grounds stated hereunder:

THE COURT OF TAX APPEALS ERRED ON A QUESTION OF LAW IN ITS ASSAILED DECISION BECAUSE:

(1) [PAL] CLEARLY OPTED TO BE COVERED BY THE INCOME TAX PROVISION OF THE NATIONAL INTERNAL REVENUE CODE OF 1997 (NIRC OF 1997). (sic) AS AMENDED; HENCE, IT IS COVERED BY THE MCIT PROVISION OF THE SAME CODE.

(2) THE MCIT DOES NOT BELONG TO THE CATEGORY OF “OTHER TAXES” WHICH WOULD ENABLE RESPONDENT TO AVAIL ITSELF OF THE “IN LIEU” (sic) OF ALL OTHER TAXES” CLAUSE UNDER SECTION 13 OF P.D. NO. 1590 (“CHARTER”).

(3) THE MCIT PROVISION OF THE NIRC OF 1997 IS NOT AN AMENDMENT OF [PAL’S] CHARTER.

(4) PAL IS NOT ONLY GIVEN THE PRIVILEGE TO CHOOSE BETWEEN WHAT WILL GIVE IT THE BENEFIT OF A LOWER TAX, BUT ALSO THE RESPONSIBILITY OF PAYING ITS SHARE OF THE TAX BURDEN, AS IS EVIDENT IN SECTION 22 OF RA NO. 9337.

75[12] Id. at 55.

(5) A CLAIM FOR EXEMPTION FROM TAXATION IS NEVER PRESUMED; [PAL] IS LIABLE FOR THE DEFICIENCY MCIT.76[13]

There is only one vital issue that the Court must resolve in the

Petition at bar, i.e., whether PAL is liable for deficiency MCIT for FY

2000-2001.

The Court answers in the negative.

Presidential Decree No. 1590, the franchise of PAL, contains

provisions specifically governing the taxation of said corporation, to

wit:

Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay to the Philippine Government during the life of this franchise whichever of subsections (a) and (b) hereunder will result in a lower tax:

(a) The basic corporate income tax based on the grantee's annual net taxable income computed in accordance with the provisions of the National Internal Revenue Code; or

(b) A franchise tax of two per cent (2%) of the gross revenues derived by the grantee from all sources, without distinction as to transport or nontransport operations; provided, that with respect to international air-transport service, only the gross passenger, mail, and freight revenues from its outgoing flights shall be subject to this tax.

76[13] Id. at 17-18.

The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government agency, now or in the future, including but not limited to the following:

1. All taxes, duties, charges, royalties, or fees due on local purchases by the grantee of aviation gas, fuel, and oil, whether refined or in crude form, and whether such taxes, duties, charges, royalties, or fees are directly due from or imposable upon the purchaser or the seller, producer, manufacturer, or importer of said petroleum products but are billed or passed on to the grantee either as part of the price or cost thereof or by mutual agreement or other arrangement; provided, that all such purchases by, sales or deliveries of aviation gas, fuel, and oil to the grantee shall be for exclusive use in its transport and nontransport operations and other activities incidental thereto;

2. All taxes, including compensating taxes, duties, charges, royalties, or fees due on all importations by the grantee of aircraft, engines, equipment, machinery, spare parts, accessories, commissary and catering supplies, aviation gas, fuel, and oil, whether refined or in crude form and other articles, supplies, or materials; provided, that such articles or supplies or materials are imported for the use of the grantee in its transport and nontransport operations and other activities incidental thereto and are not locally available in reasonable quantity, quality, or price;

3. All taxes on lease rentals, interest, fees, and other charges payable to lessors, whether foreign or domestic, of aircraft, engines, equipment, machinery, spare parts, and other property rented, leased, or chartered by the grantee where the payment of such taxes is assumed by the grantee;

4. All taxes on interest, fees, and other charges on foreign loans obtained and other obligations incurred by the grantee where the payment of such taxes is assumed by the grantee;

5. All taxes, fees, and other charges on the registration, licensing, acquisition, and transfer of aircraft, equipment, motor vehicles, and all other personal and real property of the grantee; and

6. The corporate development tax under Presidential Decree No. 1158-A.

The grantee, shall, however, pay the tax on its real property in conformity with existing law.

For purposes of computing the basic corporate income tax as provided herein, the grantee is authorized:

(a) To depreciate its assets to the extent of not more than twice as fast the normal rate of depreciation; and

(b) To carry over as a deduction from taxable income any net loss incurred in any year up to five years following the year of such loss.

Section 14. The grantee shall pay either the franchise tax or the basic corporate income tax on quarterly basis to the Commissioner of Internal Revenue. Within sixty (60) days after the end of each of the first three quarters of the taxable calendar or fiscal year, the quarterly franchise or income-tax return shall be filed and payment of either the franchise or income tax shall be made by the grantee.

A final or an adjustment return covering the operation of the grantee for the preceding calendar or fiscal year shall be filed on or before the fifteenth day of the fourth month following the close of the calendar or fiscal year. The amount of the final franchise or income tax to be paid by the grantee shall be the balance of the total franchise or income tax shown in the final or adjustment return after deducting therefrom the total quarterly franchise or income taxes already paid during the preceding first three quarters of the same taxable year.

Any excess of the total quarterly payments over the actual

annual franchise of income tax due as shown in the final or adjustment franchise or income-tax return shall either be refunded to the grantee or credited against the grantee's quarterly franchise or income-tax liability for the succeeding taxable year or years at the option of the grantee.

The term "gross revenues" is herein defined as the total gross income earned by the grantee from; (a) transport, nontransport, and other services; (b) earnings realized from investments in money-

market placements, bank deposits, investments in shares of stock and other securities, and other investments; (c) total gains net of total losses realized from the disposition of assets and foreign-exchange transactions; and (d) gross income from other sources. (Emphases ours.)

According to the afore-quoted provisions, the taxation of PAL,

during the lifetime of its franchise, shall be governed by two

fundamental rules, particularly: (1) PAL shall pay the Government

either basic corporate income tax or franchise tax, whichever is

lower; and (2) the tax paid by PAL, under either of these alternatives,

shall be in lieu of all other taxes, duties, royalties, registration,

license, and other fees and charges, except only real property tax.

The basic corporate income tax of PAL shall be based on

its annual net taxable income, computed in accordance with the

National Internal Revenue Code (NIRC). Presidential Decree

No. 1590 also explicitly authorizes PAL, in the computation of

its basic corporate income tax, to (1) depreciate its assets twice

as fast the normal rate of depreciation;77[14] and (2) carry over as

77 [14] As a general rule, there shall be allowed as a depreciation deduction a reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business. (Section 34(F)(1) of the NIRC of 1997)

a deduction from taxable income any net loss incurred in any

year up to five years following the year of such loss.78[15]

Franchise tax, on the other hand, shall be two per cent (2%) of

the gross revenues derived by PAL from all sources, whether

transport or nontransport operations. However, with respect to

international air-transport service, the franchise tax shall only be

imposed on the gross passenger, mail, and freight revenues of PAL

from its outgoing flights.

In its income tax return for FY 2000-2001, filed with the BIR,

PAL reported no net taxable income for the period, resulting in zero

basic corporate income tax, which would necessarily be lower than

any franchise tax due from PAL for the same period.

The CIR, though, assessed PAL for MCIT for FY 2000-2001. It is

the position of the CIR that the MCIT is income tax for which PAL is

liable. The CIR reasons that Section 13(a) of Presidential Decree No.

1590 provides that the corporate income tax of PAL shall be

78 [15] In general, losses shall be deducted from gross income in the same taxable year said losses were incurred. The recognized exception under Section 39(D) of the NIRC of 1997, allowing net capital loss carryover, may only be availed of by a taxpayer “other than a corporation.”

computed in accordance with the NIRC. And, since the NIRC of 1997

imposes MCIT, and PAL has not applied for relief from the said tax,

then PAL is subject to the same.

The Court is not persuaded. The arguments of the CIR are

contrary to the plain meaning and obvious intent of Presidential

Decree No. 1590, the franchise of PAL.

Income tax on domestic corporations is covered by Section 27

of the NIRC of 1997,79[16] pertinent provisions of which are

reproduced below for easy reference:

SEC. 27. Rates of Income Tax on Domestic Corporations. –

(A) In General – Except as otherwise provided in this Code, an income tax of thirty-five percent (35%) is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).

x x x x

79 [16] Prior to its amendment by Republic Act No. 9337, which was signed into law on 24 May 2005 and took effect on 1 July 2005.

(E) Minimum Corporate Income Tax on Domestic Corporations. –

(1) Imposition of Tax. – A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year.

Hence, a domestic corporation must pay whichever is higher

of: (1) the income tax under Section 27(A) of the NIRC of 1997,

computed by applying the tax rate therein to the taxable income of

the corporation; or (2) the MCIT under Section 27(E), also of the NIRC

of 1997, equivalent to 2% of the gross income of the corporation.

Although this may be the general rule in determining the income tax

due from a domestic corporation under the NIRC of 1997, it can only

be applied to PAL to the extent allowed by the provisions in the

franchise of PAL specifically governing its taxation.

After a conscientious study of Section 13 of Presidential Decree

No. 1590, in relation to Sections 27(A) and 27(E) of the NIRC of 1997,

the Court, like the CTA en banc and Second Division, concludes that

PAL cannot be subjected to MCIT for FY 2000-2001.

First, Section 13(a) of Presidential Decree No. 1590 refers to

“basic corporate income tax.” In Commissioner of Internal Revenue

v. Philippine Airlines, Inc.,80[17] the Court already settled that the

“basic corporate income tax,” under Section 13(a) of Presidential

Decree No. 1590, relates to the general rate of 35% (reduced to 32%

by the year 2000) as stipulated in Section 27(A) of the NIRC of 1997.

Section 13(a) of Presidential Decree No. 1590 requires that the

basic corporate income tax be computed in accordance with the

NIRC. This means that PAL shall compute its basic corporate income

tax using the rate and basis prescribed by the NIRC of 1997 for the

said tax. There is nothing in Section 13(a) of Presidential Decree No.

1590 to support the contention of the CIR that PAL is subject to the

entire Title II of the NIRC of 1997, entitled “Tax on Income.”

Second, Section 13(a) of Presidential Decree No. 1590 further

provides that the basic corporate income tax of PAL shall be based on

its annual net taxable income. This is consistent with Section 27(A)

of the NIRC of 1997, which provides that the rate of basic corporate

80[17] G.R. No. 160528, 9 October 2006, 504 SCRA 90, 100.

income tax, which is 32% beginning 1 January 2000, shall be imposed

on the taxable income of the domestic corporation.

Taxable income is defined under Section 31 of the NIRC of

1997 as the pertinent items of gross income specified in the said

Code, less the deductions and/or personal and additional

exemptions, if any, authorized for such types of income by the

same Code or other special laws. The gross income, referred to in

Section 31, is described in Section 32 of the NIRC of 1997 as income

from whatever source, including compensation for services; the

conduct of trade or business or the exercise of profession; dealings in

property; interests; rents; royalties; dividends; annuities; prizes and

winnings; pensions; and a partner’s distributive share in the net

income of a general professional partnership.

Pursuant to the NIRC of 1997, the taxable income of a

domestic corporation may be arrived at by subtracting from gross

income deductions authorized, not just by the NIRC of 1997,81[18] but

also by special laws. Presidential Decree No. 1590 may be

considered as one of such special laws authorizing PAL, in computing 81 [18] Section 34 of the NIRC of 1997 enumerates the allowable deductions, while

Section 35 identifies the personal and additional exemptions.

its annual net taxable income, on which its basic corporate income

tax shall be based, to deduct from its gross income the following: (1)

depreciation of assets at twice the normal rate; and (2) net loss carry-

over up to five years following the year of such loss.

In comparison, the 2% MCIT under Section 27(E) of the NIRC of

1997 shall be based on the gross income of the domestic

corporation. The Court notes that gross income, as the basis for

MCIT, is given a special definition under Section 27(E)(4) of the NIRC

of 1997, different from the general one under Section 34 of the same

Code.

According to the last paragraph of Section 27(E)(4) of the NIRC

of 1997, gross income of a domestic corporation engaged in the sale

of service means gross receipts, less sales returns, allowances,

discounts and cost of services. “Cost of services” refers to all direct

costs and expenses necessarily incurred to provide the services

required by the customers and clients including (a) salaries and

employee benefits of personnel, consultants, and specialists directly

rendering the service; and (b) cost of facilities directly utilized in

providing the service, such as depreciation or rental of equipment

used and cost of supplies.82[19] Noticeably, inclusions in and

exclusions/deductions from gross income for MCIT purposes are

limited to those directly arising from the conduct of the taxpayer’s

business. It is, thus, more limited than the gross income used in the

computation of basic corporate income tax.

In light of the foregoing, there is an apparent distinction under

the NIRC of 1997 between taxable income, which is the basis for

basic corporate income tax under Section 27(A); and gross income,

which is the basis for the MCIT under Section 27(E). The two terms

have their respective technical meanings, and cannot be used

interchangeably. The same reasons prevent this Court from

declaring that the basic corporate income tax, for which PAL is liable

under Section 13(a) of Presidential Decree No. 1590, also covers

MCIT under Section 27(E) of the NIRC of 1997, since the basis for the

first is the annual net taxable income, while the basis for the second

is gross income.

82[19] Section 27(E)(4) of the NIRC of 1997.

Third, even if the basic corporate income tax and the MCIT are

both income taxes under Section 27 of the NIRC of 1997, and one is

paid in place of the other, the two are distinct and separate taxes.

The Court again cites Commissioner of Internal Revenue v.

Philippine Airlines, Inc.,83[20] wherein it held that income tax on the

passive income84[21] of a domestic corporation, under Section 27(D) of

the NIRC of 1997, is different from the basic corporate income tax on

the taxable income of a domestic corporation, imposed by Section

27(A), also of the NIRC of 1997. Section 13 of Presidential Decree No.

1590 gives PAL the option to pay basic corporate income tax or

franchise tax, whichever is lower; and the tax so paid shall be in lieu

of all other taxes, except real property tax. The income tax on the

passive income of PAL falls within the category of “all other taxes”

from which PAL is exempted, and which, if already collected, should

be refunded to PAL.

83[20] Supra note 17at 98, 100.84 [21] Passive income includes interest from deposits and yield or any other monetary

benefit from deposit substitutes and from trust funds and similar arrangements and royalties [Section 27(D)(1) of the Tax Code of 1997]; capital gains from the sale of shares of stock not traded in the stock exchange [Section 27(D)(2); income derived under the Expanded Foreign Currency Deposit System [Section 27(D)(3)]; intercorporate dividends [Section 27(D)(4)]; and capital gains realized from sale, exchange or disposition of lands and/or buildings [Section 27(D)(5)].

The Court herein treats MCIT in much the same way. Although

both are income taxes, the MCIT is different from the basic corporate

income tax, not just in the rates, but also in the bases for their

computation. Not being covered by Section 13(a) of Presidential

Decree No. 1590, which makes PAL liable only for basic corporate

income tax, then MCIT is included in “all other taxes” from which PAL

is exempted.

That, under general circumstances, the MCIT is paid in place of

the basic corporate income tax, when the former is higher than the

latter, does not mean that these two income taxes are one and the

same. The said taxes are merely paid in the alternative, giving the

Government the opportunity to collect the higher amount between

the two. The situation is not much different from Section 13 of

Presidential Decree No. 1590, which reversely allows PAL to pay,

whichever is lower of the basic corporate income tax or the franchise

tax. It does not make the basic corporate income tax

indistinguishable from the franchise tax.

Given the fundamental differences between the basic

corporate income tax and the MCIT, presented in the preceding

discussion, it is not baseless for this Court to rule that, pursuant to

the franchise of PAL, said corporation is subject to the first tax, yet

exempted from the second.

Fourth, the evident intent of Section 13 of Presidential Decree

No. 1520 is to extend to PAL tax concessions not ordinarily available

to other domestic corporations. Section 13 of Presidential Decree

No. 1520 permits PAL to pay whichever is lower of the basic

corporate income tax or the franchise tax; and the tax so paid shall

be in lieu of all other taxes, except only real property tax. Hence,

under its franchise, PAL is to pay the least amount of tax possible.

Section 13 of Presidential Decree No. 1520 is not unusual. A

public utility is granted special tax treatment (including tax

exceptions/exemptions) under its franchise, as an inducement for the

acceptance of the franchise and the rendition of public service by the

said public utility.85[22] In this case, in addition to being a public utility

providing air-transport service, PAL is also the official flag carrier of

the country.

85 [22] See Carcar Electric and Ice Plant Co., Inc. v. Collector of Internal Revenue, 100 Phil. 50, 54 (1956).

The imposition of MCIT on PAL, as the CIR insists, would result

in a situation that contravenes the objective of Section 13 of

Presidential Decree No. 1590. In effect, PAL would not just have two,

but three tax alternatives, namely, the basic corporate income tax,

MCIT, or franchise tax. More troublesome is the fact that, as

between the basic corporate income tax and the MCIT, PAL shall be

made to pay whichever is higher, irrefragably, in violation of the

avowed intention of Section 13 of Presidential Decree No. 1590 to

make PAL pay for the lower amount of tax.

Fifth, the CIR posits that PAL may not invoke in the instant case

the “in lieu of all other taxes” clause in Section 13 of Presidential

Decree No. 1520, if it did not pay anything at all as basic corporate

income tax or franchise tax. As a result, PAL should be made liable

for “other taxes” such as MCIT. This line of reasoning has been

dubbed as the Substitution Theory, and this is not the first time the

CIR raised the same. The Court already rejected the Substitution

Theory in Commissioner of Internal Revenue v. Philippine Airlines,

Inc.,86[23] to wit:

“Substitution Theory”86[23] Supra note 17 at 100-101.

of the CIR Untenable

A careful reading of Section 13 rebuts the argument of the CIR that the “in lieu of all other taxes” proviso is a mere incentive that applies only when PAL actually pays something. It is clear that PD 1590 intended to give respondent the option to avail itself of Subsection (a) or (b) as consideration for its franchise. Either option excludes the payment of other taxes and dues imposed or collected by the national or the local government. PAL has the option to choose the alternative that results in lower taxes. It is not the fact of tax payment that exempts it, but the exercise of its option.

Under Subsection (a), the basis for the tax rate is respondent’s annual net taxable income, which (as earlier discussed) is computed by subtracting allowable deductions and exemptions from gross income. By basing the tax rate on the annual net taxable income, PD 1590 necessarily recognized the situation in which taxable income may result in a negative amount and thus translate into a zero tax liability.

Notably, PAL was owned and operated by the government at the time the franchise was last amended. It can reasonably be contemplated that PD 1590 sought to assist the finances of the government corporation in the form of lower taxes. When respondent operates at a loss (as in the instant case), no taxes are due; in this instances, it has a lower tax liability than that provided by Subsection (b).

The fallacy of the CIR’s argument is evident from the fact that the payment of a measly sum of one peso would suffice to exempt PAL from other taxes, whereas a zero liability arising from its losses would not. There is no substantial distinction between a zero tax and a one-peso tax liability. (Emphasis ours.)

Based on the same ratiocination, the Court finds the

Substitution Theory unacceptable in the present Petition.

The CIR alludes as well to Republic Act No. 9337, for reasons

similar to those behind the Substitution Theory. Section 22 of

Republic Act No. 9337, more popularly known as the Expanded Value

Added Tax (E-VAT) Law, abolished the franchise tax imposed by the

charters of particularly identified public utilities, including

Presidential Decree No. 1590 of PAL. PAL may no longer exercise its

options or alternatives under Section 13 of Presidential Decree No.

1590, and is now liable for both corporate income tax and the 12%

VAT on its sale of services. The CIR alleges that Republic Act No.

9337 reveals the intention of the Legislature to make PAL share the

tax burden of other domestic corporations.

The CIR seems to lose sight of the fact that the Petition at bar

involves the liability of PAL for MCIT for the fiscal year ending 31

March 2001. Republic Act No. 9337, which took effect on 1 July

2005, cannot be applied retroactively87[24] and any amendment

introduced by said statute affecting the taxation of PAL is immaterial

in the present case.

87 [24] Article 4 of the Civil Code provides that “Laws shall have no retroactive effect, unless the contrary is provided.”

And sixth, Presidential Decree No. 1590 explicitly allows PAL, in

computing its basic corporate income tax, to carry over as deduction

any net loss incurred in any year, up to five years following the year

of such loss. Therefore, Presidential Decree No. 1590 does not only

consider the possibility that, at the end of a taxable period, PAL shall

end up with zero annual net taxable income (when its deductions

exactly equal its gross income), as what happened in the case at bar,

but also the likelihood that PAL shall incur net loss (when its

deductions exceed its gross income). If PAL is subjected to MCIT, the

provision in Presidential Decree No. 1590 on net loss carry-over will

be rendered nugatory. Net loss carry-over is material only in

computing the annual net taxable income to be used as basis for the

basic corporate income tax of PAL; but PAL will never be able to avail

itself of the basic corporate income tax option when it is in a net loss

position, because it will always then be compelled to pay the

necessarily higher MCIT.

Consequently, the insistence of the CIR to subject PAL to MCIT

cannot be done without contravening Presidential Decree No. 1520.

Between Presidential Decree No. 1520, on one hand, which is

a special law specifically governing the franchise of PAL, issued on 11

June 1978; and the NIRC of 1997, on the other, which is a general law

on national internal revenue taxes, that took effect on 1 January

1998, the former prevails. The rule is that on a specific matter, the

special law shall prevail over the general law, which shall be resorted

to only to supply deficiencies in the former. In addition, where there

are two statutes, the earlier special and the later general – the terms

of the general broad enough to include the matter provided for in

the special – the fact that one is special and the other is general

creates a presumption that the special is to be considered as

remaining an exception to the general, one as a general law of the

land, the other as the law of a particular case. It is a canon of

statutory construction that a later statute, general in its terms and

not expressly repealing a prior special statute, will ordinarily not

affect the special provisions of such earlier statute.88[25]

Neither can it be said that the NIRC of 1997 repealed or

amended Presidential Decree No. 1590.

88 [25] Commissioner of Internal Revenue v. Central Luzon Drug Corporation, G.R. No. 159647, 15 April 2005, 456 SCRA 414, 449.

While Section 16 of Presidential Decree No. 1590 provides that

the franchise is granted to PAL with the understanding that it shall be

subject to amendment, alteration, or repeal by competent authority

when the public interest so requires, Section 24 of the same Decree

also states that the franchise or any portion thereof may only be

modified, amended, or repealed expressly by a special law or decree

that shall specifically modify, amend, or repeal said franchise or any

portion thereof. No such special law or decree exists herein.

The CIR cannot rely on Section 7(B) of Republic Act No. 8424,

which amended the NIRC in 1997 and reads as follows:

Section 7. Repealing Clauses. –

x x x x

(B) The provisions of the National Internal Revenue Code, as amended, and all other laws, including charters of government-owned or controlled corporations, decrees, orders, or regulations or parts thereof, that are inconsistent with this Act are hereby repealed or amended accordingly.

The CIR reasons that PAL was a government-owned and controlled

corporation when Presidential Decree No. 1590, its franchise or

charter, was issued in 1978. Since PAL was still operating under the

very same charter when Republic Act No. 8424 took effect in 1998,

then the latter can repeal or amend the former by virtue of Section

7(B).

The Court disagrees.

A brief recount of the history of PAL is in order. PAL was

established as a private corporation under the general law of the

Republic of the Philippines in February 1941. In November 1977, the

government, through the Government Service Insurance System

(GSIS), acquired the majority shares in PAL. PAL was privatized in

January 1992 when the local consortium PR Holdings acquired a 67%

stake therein.89[26]

It is true that when Presidential Decree No. 1590 was issued on

11 June 1978, PAL was then a government-owned and controlled

corporation; but when Republic Act No. 8424, amending the NIRC,

took effect on 1 January 1998, PAL was already a private corporation

for six years. The repealing clause under Section 7(B) of Republic Act

No. 8424 simply refers to charters of government-owned and

89[26] http://www.philippineairlines.com/about_pal/milestones/milestones.jsp

controlled corporations, which would simply and plainly mean

corporations under the ownership and control of the government at

the time of effectivity of said statute. It is already a stretch for the

Court to read into said provision charters, issued to what were then

government-owned and controlled corporations that are now

private, but still operating under the same charters.

That the Legislature chose not to amend or repeal Presidential

Decree No. 1590, even after PAL was privatized, reveals the intent of

the Legislature to let PAL continue enjoying, as a private corporation,

the very same rights and privileges under the terms and conditions

stated in said charter. From the moment PAL was privatized, it had

to be treated as a private corporation, and its charter became that of

a private corporation. It would be completely illogical to say that PAL

is a private corporation still operating under a charter of a

government-owned and controlled corporation.

The alternative argument of the CIR – that the imposition of

the MCIT is pursuant to the amendment of the NIRC, and not of

Presidential Decree No. 1590 – is just as specious. As has already

been settled by this Court, the basic corporate income tax under

Section 13(a) of Presidential Decree No. 1590 relates to the general

tax rate under Section 27(A) of the NIRC of 1997, which is 32% by the

year 2000, imposed on taxable income. Thus, only provisions of the

NIRC of 1997 necessary for the computation of the basic corporate

income tax apply to PAL. And even though Republic Act No. 8424

amended the NIRC by introducing the MCIT, in what is now Section

27(E) of the said Code, this amendment is actually irrelevant and

should not affect the taxation of PAL, since the MCIT is clearly distinct

from the basic corporate income tax referred to in Section 13(a) of

Presidential Decree No. 1590, and from which PAL is consequently

exempt under the “in lieu of all other taxes” clause of its charter.

The CIR calls the attention of the Court to RMC No. 66-2003,

on “Clarifying the Taxability of Philippine Airlines (PAL) for Income

Tax Purposes As Well As Other Franchise Grantees Similarly

Situated.” According to RMC No. 66-2003:

Section 27(E) of the Code, as implemented by Revenue Regulations No. 9-98, provides that MCIT of two percent (2%) of the gross income as of the end of the taxable year (whether calendar or fiscal year, depending on the accounting period employed) is imposed upon any domestic corporation beginning the 4th taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed

whenever such corporation has zero or negative taxable income or whenever the amount of MCIT is greater than the normal income tax due from such corporation.

With the advent of such provision beginning January 1, 1998, it is certain that domestic corporations subject to normal income tax as well as those choose to be subject thereto, such as PAL, are bound to pay income tax regardless of whether they are operating at a profit or loss.

Thus, in case of operating loss, PAL may either opt to subject itself to minimum corporate income tax or to the 2% franchise tax, whichever is lower. On the other hand, if PAL is operating at a profit, the income tax liability shall be the lower amount between:

(1) normal income tax or MCIT whichever is higher; and

(2) 2% franchise tax.

The CIR attempts to sway this Court to adopt RMC No. 66-2003

since the “[c]onstruction by an executive branch of government of a

particular law although not binding upon the courts must be given

weight as the construction comes from the branch of the

government called upon to implement the law.”90[27]

But the Court is unconvinced.

It is significant to note that RMC No. 66-2003 was issued only

on 14 October 2003, more than two years after FY 2000-2001 of PAL 90[27] Memorandum of the CIR, rollo, p. 264.

ended on 31 March 2001. This violates the well-entrenched principle

that statutes, including administrative rules and regulations, operate

prospectively only, unless the legislative intent to the contrary is

manifest by express terms or by necessary implication.91[28]

Moreover, despite the claims of the CIR that RMC No. 66-2003

is just a clarificatory and internal issuance, the Court observes that

RMC No. 66-2003 does more than just clarify a previous regulation

and goes beyond mere internal administration. It effectively

increases the tax burden of PAL and other taxpayers who are

similarly situated, making them liable for a tax for which they were

not liable before. Therefore, RMC No. 66-2003 cannot be given

effect without previous notice or publication to those who will be

affected thereby. In Commissioner of Internal Revenue v. Court of

Appeals,92[29] the Court ratiocinated that:

It should be understandable that when an administrative rule is merely interpretative in nature, its applicability needs nothing further than its bare issuance for it gives no real consequence more than what the law itself has already prescribed. When, upon the other hand, the administrative rule goes beyond merely providing for the means that can facilitate or render least cumbersome the implementation of the law but substantially adds to or increases the burden of those

91[28] BPI Leasing Corporation v. Court of Appeals, 461 Phil. 451, 460 (2003).92[29] 329 Phil. 987, 1007-1009 (1996).

governed, it behooves the agency to accord at least to those directly affected a chance to be heard, and thereafter to be duly informed, before that new issuance is given the force and effect of law.

A reading of RMC 37-93, particularly considering the circumstances under which it has been issued, convinces us that the circular cannot be viewed simply as a corrective measure (revoking in the process the previous holdings of past Commissioners) or merely as construing Section 142(c)(1) of the NIRC, as amended, but has, in fact and most importantly, been made in order to place "Hope Luxury," "Premium More" and "Champion" within the classification of locally manufactured cigarettes bearing foreign brands and to thereby have them covered by RA 7654. Specifically, the new law would have its amendatory provisions applied to locally manufactured cigarettes which at the time of its effectivity were not so classified as bearing foreign brands. Prior to the issuance of the questioned circular, "Hope Luxury," "Premium More," and "Champion" cigarettes were in the category of locally manufactured cigarettes not bearing foreign brand subject to 45% ad valorem tax. Hence, without RMC 37-93, the enactment of RA 7654, would have had no new tax rate consequence on private respondent's products. Evidently, in order to place "Hope Luxury," "Premium More," and "Champion" cigarettes within the scope of the amendatory law and subject them to an increased tax rate, the now disputed RMC 37-93 had to be issued. In so doing, the BIR not simply interpreted the law; verily, it legislated under its quasi-legislative authority. The due observance of the requirements of notice, of hearing, and of publication should not have been then ignored.

Indeed, the BIR itself, in its RMC 10-86, has observed and provided:

"RMC NO. 10-86

Effectivity of Internal Revenue Rules and Regulations "It has been observed that one of the problem areas bearing on compliance with Internal Revenue Tax rules and regulations is lack or insufficiency of due notice to the tax paying public. Unless there is due notice, due compliance therewith may not be reasonably expected. And most

importantly, their strict enforcement could possibly suffer from legal infirmity in the light of the constitutional provision on 'due process of law' and the essence of the Civil Code provision concerning effectivity of laws, whereby due notice is a basic requirement (Sec. 1, Art. IV, Constitution; Art. 2, New Civil Code).

"In order that there shall be a just enforcement of rules and regulations, in conformity with the basic element of due process, the following procedures are hereby prescribed for the drafting, issuance and implementation of the said Revenue Tax Issuances:

"(1). This Circular shall apply only to (a) Revenue Regulations; (b) Revenue Audit Memorandum Orders; and (c) Revenue Memorandum Circulars and Revenue Memorandum Orders bearing on internal revenue tax rules and regulations.

"(2). Except when the law otherwise expressly provides, the aforesaid internal revenue tax issuances shall not begin to be operative until after due notice thereof may be fairly presumed.

"Due notice of the said issuances may be fairly presumed only after the following procedures have been taken:

"xxx xxx xxx "(5). Strict compliance with the foregoing procedures is enjoined.13

Nothing on record could tell us that it was either impossible or impracticable for the BIR to observe and comply with the above requirements before giving effect to its questioned circular. (Emphases ours.)

The Court, however, stops short of ruling on the validity of

RMC No. 66-2003, for it is not among the issues raised in the instant

Petition. It only wishes to stress the requirement of prior notice to

PAL before RMC No. 66-2003 could have become effective. Only

after RMC No. 66-2003 was issued on 14 October 2003 could PAL

have been given notice of said circular, and only following such

notice to PAL would RMC No. 66-2003 have taken effect. Given this

sequence, it is not possible to say that RMC No. 66-2003 was already

in effect and should have been strictly complied with by PAL for its

fiscal year which ended on 31 March 2001.

Even conceding that the construction of a statute by the CIR is

to be given great weight, the courts, which include the CTA, are not

bound thereby if such construction is erroneous or is clearly shown

to be in conflict with the governing statute or the Constitution or

other laws. "It is the role of the Judiciary to refine and, when

necessary, correct constitutional (and/or statutory) interpretation, in

the context of the interactions of the three branches of the

government."93[30] It is furthermore the rule of long standing that this

Court will not set aside lightly the conclusions reached by the CTA 93 [30] Philippine Scout Veterans Security and Investigation Agency, Inc. v. National

Labor Relations Commission, 330 Phil. 665, 676 (1996).

which, by the very nature of its functions, is dedicated exclusively to

the resolution of tax problems and has, accordingly, developed an

expertise on the subject, unless there has been an abuse or

improvident exercise of authority.94[31] In the Petition at bar, the CTA

en banc and in division both adjudged that PAL is not liable for MCIT

under Presidential Decree No. 1590, and this Court has no sufficient

basis to reverse them.

As to the assertions of the CIR that exemption from tax is not

presumed, and the one claiming it must be able to show that it

indubitably exists, the Court recalls its pronouncements in

Commissioner of Internal Revenue v. Court of Appeals95[32]:

We disagree. Petitioner Commissioner of Internal Revenue erred in applying the principles of tax exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes. It is obviously both illogical and impractical to determine who are exempted without first determining who are covered by the aforesaid provision. The Commissioner should have determined first if private respondent was covered by Section 205, applying the rule of strict interpretation of laws imposing taxes and other burdens on the populace, before asking Ateneo to prove its exemption therefrom. The Court takes this occasion to reiterate the hornbook doctrine in the interpretation of tax laws that “(a) statute will not be construed as

94 [31] Commissioner of Internal Revenue v. Philippine National Bank, G.R. No. 161997, 25 October 2005, 474 SCRA 303, 320; Commissioner of Internal Revenue v. Manila Mining Corporation, G.R. No. 153204, 31 August 2005, 468 SCRA 571, 593-594.

95[32] 338 Phil. 322, 330-331 (1997).

imposing a tax unless it does so clearly, expressly, and unambiguously. x x x (A) tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication.” Parenthetically, in answering the question of who is subject to tax statutes, it is basic that “in case of doubt, such statutes are to be construed most strongly against the government and in favor of the subjects or citizens because burdens are not to be imposed nor presumed to be imposed beyond what statutes expressly and clearly import.” (Emphases ours.)

For two decades following the grant of its franchise by

Presidential Decree No. 1590 in 1978, PAL was only being held liable

for the basic corporate income tax or franchise tax, whichever was

lower; and its payment of either tax was in lieu of all other taxes,

except real property tax, in accordance with the plain language of

Section 13 of the charter of PAL. Therefore, the exemption of PAL

from “all other taxes” was not just a presumption, but a previously

established, accepted, and respected fact, even for the BIR.

The MCIT was a new tax introduced by Republic Act No. 8424.

Under the doctrine of strict interpretation, the burden is upon the

CIR to primarily prove that the new MCIT provisions of the NIRC of

1997, clearly, expressly, and unambiguously extend and apply to PAL,

despite the latter’s existing tax exemption. To do this, the CIR must

convince the Court that the MCIT is a basic corporate income tax,96[33]

and is not covered by the “in lieu of all other taxes” clause of

Presidential Decree No. 1590. Since the CIR failed in this regard, the

Court is left with no choice but to consider the MCIT as one of “all

other taxes,” from which PAL is exempt under the explicit provisions

of its charter.

Not being liable for MCIT in FY 2000-2001, it necessarily

follows that PAL need not apply for relief from said tax as the CIR

maintains.

WHEREFORE, premises considered, the instant Petition for

Review is hereby DENIED, and the Decision dated 9 August 2007 and

Resolution dated 11 October 2007 of the Court of Tax Appeals en

banc in CTA E.B. No. 246 is hereby AFFIRMED. No costs.

SO ORDERED.

96[33] Since it is readily apparent that the MCIT does not constitute the alternative franchise tax.

C E R T I F I C A T I O N

Pursuant to Article VIII, Section 13 of the Constitution, and the Division Chairman’s Attestation, it is hereby certified that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNOChief Justice

THIRD DIVISION

COMMISSIONER OF INTERNAL REVENUE,

Petitioner,

- versus -

BANK OF THE PHILIPPINE ISLANDS,

Respondent.

G.R. No. 178490

Present:

YNARES-SANTIAGO, J., Chairperson,CHICO-NAZARIO, VELASCO, JR., NACHURA, andPERALTA, JJ.

Promulgated:

July 7, 2009x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

D E C I S I O N

CHICO-NAZARIO, J.:

This is a Petition for Review assailing the Decision97[1] dated 29

April 2005 and the Resolution dated 20 April 2007 of the Court of

Appeals in CA-G.R. SP No. 77655, which annulled and set aside the

Decision dated 12 March 2003 of the Court of Tax Appeals (CTA) in

CTA Case No. 6276, wherein the CTA held that respondent Bank of

the Philippine Islands (BPI) already exercised the irrevocable option

to carry over its excess tax credits for the year 1998 to the

succeeding years 1999 and 2000 and was, therefore, no longer

entitled to claim the refund or issuance of a tax credit certificate for

the amount thereof.

On 15 April 1999, BPI filed with the Bureau of Internal Revenue

(BIR) its final adjusted Corporate Annual Income Tax Return (ITR) for

the taxable year ending on 31 December 1998, showing a taxable

income of P1,773,236,745.00 and a total tax due of P602,900,493.00.

For the same taxable year 1998, BPI already made income tax

payments for the first three quarters, which amounted to

P563,547,470.46.98[2] The bank also received income in 1998 from

97 [1] Penned by Associate Justice Bienvenido L. Reyes with Associate Justices Godardo A. Jacinto and Rosalinda Asuncion-Vicente concurring. Rollo, pp. 25-33.

98[2] Computed as follows:

various third persons, which, were already subjected to expanded

withholding taxes amounting to P7,685,887.90. BPI additionally

acquired foreign tax credit when it paid the United States

government taxes in the amount of $151,467.00, or the equivalent of

P6,190,014.46, on the operations of former’s New York Branch.

Finally, respondent BPI had carried over excess tax credit from the

prior year, 1997, amounting to P59,424,222.00.

Crediting the aforementioned amounts against the total tax

due from it at the end of 1998, BPI computed an overpayment to the

BIR of income taxes in the amount of P33,947,101.00. The

computation of BPI is reproduced below:

Total Income Taxes Due P602,900,493.00Less: Tax Credits:

Prior year’s tax credits P59,424,222.00Quarterly payments 563,547,470.46Creditable taxes withheld 7,685,887.90Foreign tax credit 6,190,014.00 636,847,594.00

------------------- -------------------Net Tax Payable/(Refundable) P(33,947,101.00)

Quarter coveredDate filedQuarterly Income Tax Paid1st Quarter06-01-98378,564,898.342nd

Quarter08-31-98184,982,572.123rd Quarter11-27-98--- Total563,547,470.46

BPI opted to carry over its 1998 excess tax credit, in the

amount of P33,947,101.00, to the succeeding taxable year ending 31

December 1999.99[3] For 1999, however, respondent BPI ended up

with (1) a net loss in the amount of P615,742,102.00; (2) its still

unapplied excess tax credit carried over from 1998, in the amount of

P33,947,101.00; and (3) more excess tax credit, acquired in 1999, in

the sum of P12,975,750.00. So in 1999, the total excess tax credits of

BPI increased to P46,922,851.00, which it once more opted to carry

over to the following taxable year.

For the taxable year ending 31 December 2000, respondent

BPI declared in its Corporate Annual ITR: (1) zero taxable income; (2)

excess tax credit carried over from 1998 and 1999, amounting to

P46,922,851.00; and (3) even more excess tax credit, gained in 2000,

in the amount of P25,207,939.00. This time, BPI failed to indicate in

its ITR its choice of whether to carry over its excess tax credits or to

claim the refund of or issuance of a tax credit certificate for the

amounts thereof.

99[3] Exhibit “A-2.”

On 3 April 2001, BPI filed with petitioner Commissioner of

Internal Revenue (CIR) an administrative claim for refund in the

amount of P33,947,101.00, representing its excess creditable income

tax for 1998.

The CIR failed to act on the claim for tax refund of BPI. Hence,

BPI filed a Petition for Review before the CTA, docketed as CTA Case

No. 6276.

The CTA promulgated its Decision in CTA Case No. 6276 on 12

March 2003, ruling therein that since BPI had opted to carry over its

1998 excess tax credit to 1999 and 2000, it was barred from filing a

claim for the refund of the same.

The CTA relied on the irrevocability rule laid down in Section 76

of the National Internal Revenue Code (NIRC) of 1997, which states

that once the taxpayer opts to carry over and apply its excess income

tax to succeeding taxable years, its option shall be irrevocable for

that taxable period and no application for tax refund or issuance of a

tax credit shall be allowed for the same.

The CTA Decision adjudged:

i

ii

A close scrutiny of the 1998 income tax return of [BPI] reveals that it opted to carry over its excess tax credits, the amount subject of this claim, to the succeeding taxable year by placing an “x” mark on the corresponding box of said return (Exhibits A-2 & 3-a). For the year 1999, [BPI] again manifested its intention to carry over to the succeeding taxable period the subject claim together with the current excess tax credits (Exhibit J). Still unable to apply its prior year’s excess credits in 1999 as it ended up in a net loss position, petitioner again carried over the said excess credits in the year 2000 (Exhibit K).

The court already categorically ruled in a number of cases that once the option to carry-over and apply the excess quarterly income tax against the income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable and no application for cash refund or issuance of a tax credit certificate shall be allowed therefore (Pilipinas Transport Industries vs. Commissioner of Internal Revenue, CTA Case No. 6073, dated March 1, 2002; Pilipinas Hino, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6074, dated April 19, 2002; Philam Asset Management, Inc. vs. Commissioner of Internal Revenue, CTA Case No. 6210, dated May 2, 2002; The Philippine Banking Corporation (now known as Global Business Bank, Inc.) vs. Commissioner of Internal Revenue, CTA Resolution, CTA Case No. 6280, August 16, 2001. Since [BPI] already exercised the irrevocable option to carry over its excess tax credits for the year 1998 to the succeeding years 1999 and 2000, it is, therefore, no longer entitled to claim for a refund or issuance of a tax credit certificate.100[4]

In the end, the CTA decreed:

100[4] CA rollo, pp. 28-29.

IN VIEW OF ALL THE FOREGOING, the instant petition for review is hereby DENIED for lack of merit.101[5]

BPI filed a Motion for Reconsideration of the foregoing

Decision, but the CTA denied the same in a Resolution dated 3 June

2003.

BPI filed an appeal with the Court of Appeals, docketed as CA-

G.R. SP No. 77655. On 29 April 2005, the Court of Appeals rendered

its Decision, reversing that of the CTA and holding that BPI was

entitled to a refund of the excess income tax it paid for 1998.

The Court of Appeals conceded that BPI indeed opted to carry

over its excess tax credit in 1998 to 1999 by placing an “x” mark on

the corresponding box of its 1998 ITR. Nonetheless, there was no

actual carrying over of the excess tax credit, given that BPI suffered a

net loss in 1999, and was not liable for any income tax for said

taxable period, against which the 1998 excess tax credit could have

been applied.

101[5] CA rollo, p. 29.

The Court of Appeals added that even if Section 76 was to be

construed strictly and literally, the irrevocability rule would still not

bar BPI from seeking a tax refund of its 1998 excess tax credit despite

previously opting to carry over the same. The phrase “for that

taxable period” qualified the irrevocability of the option of BIR to

carry over its 1998 excess tax credit to only the 1999 taxable period;

such that, when the 1999 taxable period expired, the irrevocability of

the option of BPI to carry over its excess tax credit from 1998 also

expired.

The Court of Appeals further reasoned that the government

would be unjustly enriched should the appellate court hold that the

irrevocability rule barred the claim for refund of a taxpayer, who

previously opted to carry-over its excess tax credit, but was not able

to use the same because it suffered a net loss in the succeeding year.

Finally, the appellate court cited BPI-Family Savings Bank, Inc.

v. Court of Appeals102[6] wherein this Court held that if a taxpayer

suffered a net loss in a year, thus, incurring no tax liability to which

the tax credit from the previous year could be applied, there was no

102[6] 386 Phil. 719 (2000).

reason for the BIR to withhold the tax refund which rightfully

belonged to the taxpayer.103[7]

In a Resolution dated 20 April 2007, the Court of Appeals

denied the Motion for Reconsideration of the CIR.104[8]

Hence, the CIR filed the instant Petition for Review, alleging

that:

I

THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN HOLDING THAT THE “IRREVOCABILITY RULE” UNDER SECTION 76 OF THE TAX CODE DOES NOT OPERATE TO BAR PETITIONER FROM ASKING FOR A TAX REFUND.

II

THE COURT OF APPEALS COMMITTED GRAVE ERROR WHEN IT REVERSED AND SET ASIDE THE DECISION OF THE COURT OF TAX APPEALS AND HELD THAT RESPONDENT IS ENTITLED TO THE CLAIMED TAX REFUND.

The Court finds merit in the instant Petition.

103[7] Id. at 727.104[8] Rollo, pp. 34-39.

The Court of Appeals erred in relying on BPI-Family, missing

significant details that rendered said case inapplicable to the one at

bar.

In BPI-Family, therein petitioner BPI-Family declared in its

Corporate Annual ITR for 1989 excess tax credits of P185,001.00

from 1988 and P112,491.00 from 1989, totaling P297,492.00. BPI-

Family clearly indicated in the same ITR that it was carrying over said

excess tax credits to the following year. But on 11 October 1990,

BPI-Family filed a claim for refund of its P112,491.00 tax credit from

1989. When no action from the BIR was forthcoming, BPI-Family

filed its claim with the CTA. The CTA denied the claim for refund of

BPI-Family on the ground that, since the bank declared in its 1989 ITR

that it would carry over its tax credits to the following year, it should

be presumed to have done so. In its Motion for Reconsideration filed

with the CTA, BPI-Family submitted its final adjusted ITR for 1989

showing that it incurred P52,480,173.00 net loss in 1990. Still, the

CTA denied the Motion for Reconsideration of BPI-Family. The Court

of Appeals likewise denied the appeal of BPI-Family and merely

affirmed the judgment of the CTA. The Court, however, reversed the

CTA and the Court of Appeals.

This Court decided to grant the claim for refund of BPI-Family

after finding that the bank had presented sufficient evidence to

prove that it incurred a net loss in 1990 and, thus, had no tax liability

to which its tax credit from 1989 could be applied. The Court

stressed in BPI Family that “the undisputed fact is that [BPI-Family]

suffered a net loss in 1990; accordingly, it incurred no tax liability to

which the tax credit could be applied. Consequently, there is no

reason for the BIR and this Court to withhold the tax refund which

rightfully belongs to the [BPI-Family].” It was on the basis of this fact

that the Court granted the appeal of BPI-Family, brushing aside all

procedural and technical objections to the same through the

following pronouncements:

Finally, respondents argue that tax refunds are in the nature of tax exemptions and are to be construed strictissimi juris against the claimant. Under the facts of this case, we hold that [BPI-Family] has established its claim. [BPI-Family] may have failed to strictly comply with the rules of procedure; it may have even been negligent. These circumstances, however, should not compel the Court to disregard this cold, undisputed fact: that petitioner suffered a net loss in 1990, and that it could not have applied the amount claimed as tax credits.

Substantial justice, equity and fair play are on the side of [BPI-Family]. Technicalities and legalisms, however exalted,

should not be misused by the government to keep money not belonging to it and thereby enrich itself at the expense of its law-abiding citizens. If the State expects its taxpayers to observe fairness and honesty in paying their taxes, so must it apply the same standard against itself in refunding excess payments of such taxes. Indeed, the State must lead by its own example of honor, dignity and uprightness.105[9]

It is necessary for this Court, however, to emphasize that BPI-

Family involved tax credit acquired by the bank in 1989, which it

initially opted to carry over to 1990. The prevailing tax law then was

the NIRC of 1985, Section 79106[10] of which provided:

Sec. 79. Final Adjustment Return. - Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total net 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 net income of that year the corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly income taxes-paid, the refundable amount shown on its final adjustment return may be credited against the

105[9] BPI-Family Savings Bank, Inc. v. Court of Appeals, supra note 6 at 728-729.106 [10] The provision was erroneously cited as Section 69 in BPI-Family. While the said

provision was indeed Section 69 of the NIRC of 1977, it was already re-numbered as Section 79 of the NIRC of 1985.

estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable year. (Emphases ours.)

By virtue of the afore-quoted provision, the taxpayer with

excess income tax was given the option to either (1) refund the

amount; or (2) credit the same to its tax liability for succeeding

taxable periods.

Section 79 of the NIRC of 1985 was reproduced as Section 76

of the NIRC of 1997,107[11] with the addition of one important

sentence, which laid down the irrevocability rule:

Section 76. Final Adjustment Return. - Every corporation liable to tax under Section 24 shall file a final adjustment return covering the total net 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 net income of that year the corporation shall either:

(a) Pay the excess tax still due; or

(b) Be refunded the excess amount paid, as the case may be.

In case the corporation is entitled to a refund of the excess estimated quarterly income taxes paid, the refundable amount shown on its final adjustment return may be credited against the

107[11] Took effect on 1 January 1998.

estimated 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 tax refund or issuance of a tax credit certificate shall be allowed therefor. (Emphases ours.)

When BPI-Family was decided by this Court, it did not yet have

the irrevocability rule to consider. Hence, BPI-Family cannot be cited

as a precedent for this case.

The factual background of Philam Asset Management, Inc. v.

Commissioner of Internal Revenue,108[12] cited by the CIR, is closer to

the instant Petition. Both involve tax credits acquired and claims for

refund filed more than a decade after those in BPI-Family, to which

Section 76 of the NIRC of 1997 already apply.

The Court, in Philam, recognized the two options offered by

Section 76 of the NIRC of 1997 to a taxable corporation whose total

quarterly income tax payments in a given taxable year exceeds its

total income tax due. These options are: (1) filing for a tax refund or

(2) availing of a tax credit. The Court further explained:

108[12] G.R. No. 156637 and No. 162004, 14 December 2005, 477 SCRA 761.

The first option is relatively simple. Any tax on income that is paid in excess of the amount due the government may be refunded, provided that a taxpayer properly applies for the refund.

The second option works by applying the refundable amount, as shown on the [Final Adjustment Return (FAR)] of a given taxable year, against the estimated quarterly income tax liabilities of the succeeding taxable year.

These two options under Section 76 are alternative in nature. The choice of one precludes the other. Indeed, in Philippine Bank of Communications v. Commissioner of Internal Revenue, the Court ruled that a corporation must signify its intention -- whether to request a tax refund or claim a tax credit -- by marking the corresponding option box provided in the FAR. While a taxpayer is required to mark its choice in the form provided by the BIR, this requirement is only for the purpose of facilitating tax collection.

One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid.109[13] x x x

The Court categorically declared in Philam that: “Section 76

remains clear and unequivocal. Once the carry-over option is

taken, actually or constructively, it becomes irrevocable.” It

mentioned no exception or qualification to the irrevocability rule.

109[13] Id. at 772.

Hence, the controlling factor for the operation of the

irrevocability rule is that the taxpayer chose an option; and once it

had already done so, it could no longer make another one.

Consequently, after the taxpayer opts to carry-over its excess tax

credit to the following taxable period, the question of whether or not

it actually gets to apply said tax credit is irrelevant. Section 76 of the

NIRC of 1997 is explicit in stating that once the option to carry over

has been made, “no application for tax refund or issuance of a tax

credit certificate shall be allowed therefor.”

The last sentence of Section 76 of the NIRC of 1997 reads:

“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

tax refund or issuance of a tax credit certificate shall be allowed

therefor.” The phrase “for that taxable period” merely identifies the

excess income tax, subject of the option, by referring to the taxable

period when it was acquired by the taxpayer. In the present case,

the excess income tax credit, which BPI opted to carry over, was

acquired by the said bank during the taxable year 1998. The option

of BPI to carry over its 1998 excess income tax credit is irrevocable; it

cannot later on opt to apply for a refund of the very same 1998

excess income tax credit.

The Court of Appeals mistakenly understood the phrase “for

that taxable period” as a prescriptive period for the irrevocability

rule. This would mean that since the tax credit in this case was

acquired in 1998, and BPI opted to carry it over to 1999, then the

irrevocability of the option to carry over expired by the end of 1999,

leaving BPI free to again take another option as regards its 1998

excess income tax credit. This construal effectively renders nugatory

the irrevocability rule. 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. The

interpretation of the Court of Appeals only delays the flip-flopping to

the end of each succeeding taxable period.

The Court similarly disagrees in the declaration of the Court of

Appeals that to deny the claim for refund of BPI, because of the

irrevocability rule, would be tantamount to unjust enrichment on the

part of the government. The Court addressed the very same

argument in Philam, where it elucidated that there would be no

unjust enrichment in the event of denial of the claim for refund

under such circumstances, because there would be no forfeiture of

any amount in favor of the government. The amount being claimed

as a refund would remain in the account of the taxpayer until utilized

in succeeding taxable years,110[14] as provided in Section 76 of the

NIRC of 1997. It is worthy to note that unlike the option for refund of

excess income tax, which prescribes after two years from the filing of

the FAR, there is no prescriptive period for the carrying over of the

same. Therefore, the excess income tax credit of BPI, which it

acquired in 1998 and opted to carry over, may be repeatedly carried

over to succeeding taxable years, i.e., to 1999, 2000, 2001, and so on

and so forth, until actually applied or credited to a tax liability of BPI.

Finally, while the Court, in Philam, was firm in its position that

the choice of option as regards the excess income tax shall be

irrevocable, it was less rigid in the determination of which option the

taxpayer actually chose. It did not limit itself to the indication by the

taxpayer of its option in the ITR. 110[14] Philam Asset Management, Inc. v. Commissioner of Internal Revenue, supra note 12 at 768.

Thus, failure of the taxpayer to make an appropriate marking

of its option in the ITR does not automatically mean that the

taxpayer has opted for a tax credit. The Court ratiocinated in G.R.

No. 156637111[15] of Philam:

One cannot get a tax refund and a tax credit at the same time for the same excess income taxes paid. Failure to signify one’s intention in the FAR does not mean outright barring of a valid request for a refund, should one still choose this option later on. A tax credit should be construed merely as an alternative remedy to a tax refund under Section 76, subject to prior verification and approval by respondent.

The reason for requiring that a choice be made in the FAR upon its filing is to ease tax administration, particularly the self-assessment and collection aspects. A taxpayer that makes a choice expresses certainty or preference and thus demonstrates clear diligence. Conversely, a taxpayer that makes no choice expresses uncertainty or lack of preference and hence shows simple negligence or plain oversight.

111 [15] Philam actually involved two consolidated cases, G.R. No. 156637 and G.R. No. 162004. In G.R. No. 156637, therein petitioner Philam paid excess income tax for 1997. It did not indicate its option to carry over or refund said excess income tax in its ITR for 1997. On 11 September 1998, however, it filed a claim for refund of the same. In G.R. No. 162004, Philam incurred a net loss in 1998 and had unapplied excess creditable income tax for the same period in the amount of P459,756.07. In its ITR for the succeeding year of 1999, Philam reported a tax due of only P80,042.00, creditable withholding tax of P915,995.00, and excess credit carried over from 1998 of P459,756.07. On 14 November 2000, Philam filed a claim for tax refund, alleging that its tax liability for 1999 was deducted from its creditable withholding tax for the same taxable period; leaving its excess tax credit carried over from 1998 still unapplied.

x x x x

x x x Despite the failure of [Philam] to make the appropriate marking in the BIR form, the filing of its written claim effectively serves as an expression of its choice to request a tax refund, instead of a tax credit. To assert that any future claim for a tax refund will be instantly hindered by a failure to signify one’s intention in the FAR is to render nugatory the clear provision that allows for a two-year prescriptive period.112[16] (Emphases ours.)

Philam reveals a meticulous consideration by the Court of the

evidence submitted by the parties and the circumstances

surrounding the taxpayer’s option to carry over or claim for refund.

When circumstances show that a choice has been made by the

taxpayer to carry over the excess income tax as credit, it should be

respected; but when indubitable circumstances clearly show that

another choice – a tax refund – is in order, it should be granted.

“Technicalities and legalisms, however exalted, should not be

misused by the government to keep money not belonging to it and

thereby enrich itself at the expense of its law-abiding citizens.”

Therefore, as to which option the taxpayer chose is generally a

matter of evidence. It is axiomatic that a claimant has the burden of

112 [16] Philam Asset Management, Inc. v. Commissioner of Internal Revenue, supra note 12 at 772, 776. See also Commissioner of Internal Revenue v. PERF Realty Corporation, G.R. No. 163345, 4 July 2008.

proof to establish the factual basis of his or her claim for tax credit or

refund. Tax refunds, like tax exemptions, are construed strictly

against the taxpayer.113[17]

In the Petition at bar, BPI was unable to discharge the burden

of proof necessary for the grant of a refund. BPI expressly indicated

in its ITR for 1998 that it was carrying over, instead of refunding, the

excess income tax it paid during the said taxable year. BPI

consistently reported the said amount in its ITRs for 1999 and 2000

as credit to be applied to any tax liability the bank may incur; only,

no such opportunity arose because it suffered a net loss in 1999 and

incurred zero tax liability in 2000. In G.R. No. 162004 of Philam, the

Court found:

First, the fact that it filled out the portion “Prior Year’s Excess Credits” in its 1999 FAR means that it categorically availed itself of the carry-over option. In fact, the line that precedes that phrase in the BIR form clearly states “Less: Tax Credits/Payments.” The contention that it merely filled out that portion because it was a requirement – and that to have done otherwise would have been tantamount to falsifying the FAR – is a long shot.

113 [17] Paseo Realty and Development Corporation v. Court of Appeals, G.R. No. 119286, 13 October 2004, 440 SCRA 235, 247.

The FAR is the most reliable firsthand evidence of corporate acts pertaining to income taxes. In it are found the itemization and summary of additions to and deductions from income taxes due. These entries are not without rhyme or reason. They are required, because they facilitate the tax administration process.114[18]

BPI itself never denied that its original intention was to carry

over the excess income tax credit it acquired in 1998, and only chose

to refund the said amount when it was unable to apply the same to

any tax liability in the succeeding taxable years. There can be no

doubt that BPI opted to carry over its excess income tax credit from

1998; it only subsequently changed its mind – which it was barred

from doing by the irrevocability rule.

The choice by BPI of the option to carry over its 1998 excess

income tax credit to succeeding taxable years, which it explicitly

indicated in its 1998 ITR, is irrevocable, regardless of whether it was

able to actually apply the said amount to a tax liability. The

reiteration by BPI of the carry over option in its ITR for 1999 was

already a superfluity, as far as its 1998 excess income tax credit was

concerned, given the irrevocability of the initial choice made by the

114[18] Philam Asset Management, Inc. v. Commissioner of Internal Revenue, supra note 12 at 778.

bank to carry over the said amount. For the same reason, the failure

of BPI to indicate any option in its ITR for 2000 was already

immaterial to its 1998 excess income tax credit.

WHEREFORE, the instant Petition for Review of the

Commissioner for Internal Revenue is GRANTED. The Decision dated

29 April 2005 and the Resolution dated 20 April 2007 of the Court of

Appeals in CA-G.R. SP No. 77655 are REVERSED and SET ASIDE. The

Decision dated 12 March 2003 of the Court of Tax Appeals in CTA

Case No. 6276, denying the claim of respondent Bank of the

Philippine Islands for the refund of its 1998 excess income tax credits,

is REINSTATED. No costs.

SO ORDERED.

Republic of the Philippines

Supreme CourtManila

THIRD DIVISION

QUEZON CITY and THE CITY G.R. No. 166408TREASURER OF QUEZON CITY,

Petitioners,Present:

YNARES-SANTIAGO, J.,

Chairperson,

- versus - AUSTRIA-MARTINEZ,

CHICO-NAZARIO, NACHURA, and REYES, JJ.

ABS-CBN BROADCASTING Promulgated:CORPORATION,

Respondent. October 6, 2008

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D E C I S I O N

REYES, R.T., J.:

CLAIMS for tax exemption must be based on language in law

too plain to be mistaken. It cannot be made out of inference or

implication.

The principle is relevant in this petition for review on certiorari

of the Decision115[1] of the Court of Appeals (CA) and that116[2] of the

115[1] Rollo, pp. 56-67. Dated August 31, 2004. Penned by Associate Justice Magdangal M. De Leon, with Associate Justices Romeo A. Brawner and Mariano C. Del Castillo, concurring.116[2] Id. at 46-54. Dated January 20, 1999. Penned by then Judge, now CA Associate Justice, Lucas P. Bersamin.

Regional Trial Court (RTC) ordering the refund and declaring invalid

the imposition and collection of local franchise tax by the City

Treasurer of Quezon City on ABS-CBN Broadcasting Corporation

(ABS-CBN).

The Facts

Petitioner City Government of Quezon City is a local

government unit duly organized and existing by virtue of Republic Act

(R.A.) No. 537, otherwise known as the Revised Charter of Quezon

City. Petitioner City Treasurer of Quezon City is primarily responsible

for the imposition and collection of taxes within the territorial

jurisdiction of Quezon City.

Under Section 31, Article 13 of the Quezon City Revenue Code

of 1993,117[3] a franchise tax was imposed on businesses operating

within its jurisdiction. The provision states:

Section 31. Imposition of Tax. – Any provision of special laws or grant of tax exemption to the contrary notwithstanding, any person, corporation, partnership or association enjoying a franchise whether issued by the national government or local government and, doing

117[3] Quezon City Ordinance No. SP-91, S-93.

business in Quezon City, shall pay a franchise tax at the rate of ten percent (10%) of one percent (1%) for 1993-1994, twenty percent (20%) of one percent (1%) for 1995, and thirty percent (30%) of one percent (1%) for 1996 and the succeeding years thereafter, of gross receipts and sales derived from the operation of the business in Quezon City during the preceding calendar year.

On May 3, 1995, ABS-CBN was granted the franchise to install

and operate radio and television broadcasting stations in the

Philippines under R.A. No. 7966.118[4] Section 8 of R.A. No. 7966

provides the tax liabilities of ABS-CBN which reads:

Section 8. Tax Provisions. – The grantee, its successors or assigns, shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations are now hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns, shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the radio/television business transacted under this franchise by the grantee, its successors or assigns, and the said percentage tax shall be in lieu of all taxes on this franchise or earnings thereof; Provided that the grantee, its successors or assigns shall continue to be liable for income taxes under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto. (Emphasis added)

ABS-CBN had been paying local franchise tax imposed by

Quezon City. However, in view of the above provision in R.A. No. 118[4] “An Act Granting the ABS-CBN Broadcasting Corporation a Franchise to Construct, Install, Operate and Maintain Television and Radio Broadcasting Stations in the Philippines, and for Other Purposes.” Enacted on March 30, 1995 and date of effectivity on May 3, 1995.

9766 that it “shall pay a franchise tax x x x in lieu of all taxes,” the

corporation developed the opinion that it is not liable to pay the local

franchise tax imposed by Quezon City. Consequently, ABS-CBN paid

under protest the local franchise tax imposed by Quezon City on the

dates, in the amounts and under the official receipts as follows:

O.R. No. Date Amount Paid2464274 07-18-95 P 1,489,977.282484651 10-20-95 1,489,977.282536134 1-22-96 2,880,975.658354906 1-23-97 8,621,470.83 0048756 1-23-97 2,731,135.810067352 4-03-97 2,731,135.81Total P19,944,672.66119[5]

On January 29, 1997, ABS-CBN filed a written claim for refund

for local franchise tax paid to Quezon City for 1996 and for the first

quarter of 1997 in the total amount of Fourteen Million Two

Hundred Thirty-Three Thousand Five Hundred Eighty-Two and

29/100 centavos (P14,233,582.29) broken down as follows:

O.R. No Date Amount Paid2536134 1-22-96 P 2,880,975.658354906 1-23-97 8,621,470.83 0048756 1-23-97 2,731,135.81Total P14,233,582.29120[6]

119[5] Rollo, p. 17.120[6] Id.

In a letter dated March 3, 1997 to the Quezon City Treasurer,

ABS-CBN reiterated its claim for refund of local franchise taxes paid.

On June 25, 1997, for failure to obtain any response from the

Quezon City Treasurer, ABS-CBN filed a complaint before the RTC in

Quezon City seeking the declaration of nullity of the imposition of

local franchise tax by the City Government of Quezon City for being

unconstitutional. It likewise prayed for the refund of local franchise

tax in the amount of Nineteen Million Nine Hundred Forty-Four

Thousand Six Hundred Seventy-Two and 66/100 centavos

(P19,944,672.66) broken down as follows:

O.R. No. Date Amount Paid2464274 7-18-95 P 1,489,977.282484651 10-20-95 1,489,977.282536134 1-22-96 2,880,975.658354906 1-23-97 8,621,470.83 0048756 1-23-97 2,731,135.810067352 4-03-97 2,731,135.81Total P19,944,672.66121[7]

121[7] Id. at 17-18.

Quezon City argued that the “in lieu of all taxes” provision in

R.A. No. 9766 could not have been intended to prevail over a

constitutional mandate which ensures the viability and self-

sufficiency of local government units. Further, that taxes collectible

by and payable to the local government were distinct from taxes

collectible by and payable to the national government, considering

that the Constitution specifically declared that the taxes imposed by

local government units “shall accrue exclusively to the local

governments.” Lastly, the City contended that the exemption

claimed by ABS-CBN under R.A. No. 7966 was withdrawn by Congress

when the Local Government Code (LGC) was passed.122[8] Section 193

of the LGC provides:

Section 193. Withdrawal of Tax Exemption Privileges. – Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or -controlled corporations, except local water districts, cooperatives duly registered under R.A. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis added)

On August 13, 1997, ABS-CBN filed a supplemental complaint

adding to its claim for refund the local franchise tax paid for the third

122[8] Id. at 46-60.

quarter of 1997 in the amount of Two Million Seven Hundred Thirty-

One Thousand One Hundred Thirty-Five and 81/100 centavos

(P2,731,135.81) and of other amounts of local franchise tax as may

have been and will be paid by ABS-CBN until the resolution of the

case.

Quezon City insisted that the claim for refund must fail

because of the absence of a prior written claim for it.

RTC and CA Dispositions

On January 20, 1999, the RTC rendered judgment declaring as

invalid the imposition on and collection from ABS-CBN of local

franchise tax paid pursuant to Quezon City Ordinance No. SP-91, S-

93, after the enactment of R.A. No. 7966, and ordered the refund of

all payments made. The dispositive portion of the RTC decision

reads:

WHEREFORE, judgment is hereby rendered declaring the imposition on and collection from plaintiff ABS-CBN BROADCASTING CORPORATION of local franchise taxes pursuant to Quezon City Ordinance No. SP-91, S-93 after the enactment of Republic Act No. 7966 to be invalid, and, accordingly, the Court hereby orders the defendants

to refund all its payments made after the effectivity of its legislative franchise on May 3, 1995.

SO ORDERED.123[9]

In its decision, the RTC ruled that the “in lieu of all taxes”

provision contained in Section 8 of R.A. No. 7966 absolutely excused

ABS-CBN from the payment of local franchise tax imposed under

Quezon City Ordinance No. SP-91, S-93. The intent of the legislature

to excuse ABS-CBN from payment of local franchise tax could be

discerned from the usage of the “in lieu of all taxes” provision and

from the absence of any qualification except income taxes. Had

Congress intended to exclude taxes imposed from the exemption, it

would have expressly mentioned so in a fashion similar to the proviso

on income taxes.

The RTC also based its ruling on the 1990 case of Province of

Misamis Oriental v. Cagayan Electric Power and Light Company, Inc.

(CEPALCO).124[10] In said case, the exemption of respondent electric

company CEPALCO from payment of provincial franchise tax was

upheld on the ground that the franchise of CEPALCO was a special

law, while the Local Tax Code, on which the provincial ordinance 123[9] Id. at 54.124[10] G.R. No. 45355, January 12, 1990, 181 SCRA 38.

imposing the local franchise tax was based, was a general law.

Further, it was held that whenever there is a conflict between two

laws, one special and particular and the other general, the special

law must be taken as intended to constitute an exception to the

general act.

The RTC noted that the legislative franchise of ABS-CBN was

granted years after the effectivity of the LGC. Thus, it was

unavoidable to conclude that Section 8 of R.A. No. 7966 was an

exception since the legislature ought to be presumed to have

enacted it with the knowledge and awareness of the existence and

prior enactment of Section 137125[11] of the LGC.

In addition, the RTC, again citing the case of Province of

Misamis Oriental v. Cagayan Electric Power and Light Company, Inc.

(CEPALCO),126[12] ruled that the imposition of the local franchise tax

was an impairment of ABS-CBN’s contract with the government. The

imposition of another franchise on the corporation by the local

125[11] Section 137. Franchise Tax. – Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on business is enjoying a franchise , at the rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction. x x x126[12] Supra.

authority would constitute an impairment of the former’s charter,

which is in the nature of a private contract between it and the

government.

As to the amounts to be refunded, the RTC rejected Quezon

City’s position that a written claim for refund pursuant to Section 196

of the LGC was a condition sine qua non before filing the case in

court. The RTC ruled that although Fourteen Million Two Hundred

Thirty-Three Thousand Five Hundred Eighty-Two and 29/100

centavos (P14,233,582.29) was the only amount stated in the letter

to the Quezon City Treasurer claiming refund, ABS-CBN should

nonetheless be also refunded of all payments made after the

effectivity of R.A. No. 7966. The inaction of the City Treasurer on the

claim for refund of ABS-CBN legally rendered any further claims for

refund on the part of plaintiff absurd and futile in relation to the

succeeding payments.

The City of Quezon and its Treasurer filed a motion for

reconsideration which was subsequently denied by the RTC. Thus,

appeal was made to the CA. On September 1, 2004, the CA

dismissed the petition of Quezon City and its Treasurer. According

to the appellate court, the issues raised were purely legal questions

cognizable only by the Supreme Court. The CA ratiocinated:

For another, the issues which appellants submit for this Court’s consideration are more of legal query necessitating a legal opinion rather than a call for adjudication on the matter in dispute.

x x x x

The first issue has earlier been categorized in Province of Misamis Oriental v. Cagayan Electric and Power Co., Inc. to be a legal one. There is no more argument to this.

The next issue although it may need the reexamination of the pertinent provisions of the local franchise and the legislative franchise given to appellee, also needs no evaluation of facts. It suffices that there may be a conflict which may need to be reconciled, without regard to the factual backdrop of the case.

The last issue deals with a legal question, because whether or not there is a prior written claim for refund is no longer in dispute. Rather, the question revolves on whether the said requirement may be dispensed with, which obviously is not a factual issue.127[13]

On September 23, 2004, petitioner moved for reconsideration.

The motion was, however, denied by the CA in its Resolution dated

December 16, 2004. Hence, the present recourse.

Issues

127[13] Rollo, pp. 64-65.

Petitioner submits the following issues for resolution:

I.Whether or not the phrase “in lieu of all taxes” indicated in the

franchise of the respondent appellee (Section 8 of RA 7966) serves to exempt it from the payment of the local franchise tax imposed by the petitioners-appellants.

II.Whether or not the petitioners-appellants raised factual and

legal issues before the Honorable Court of Appeals.128[14]

Our Ruling

The second issue, being procedural in nature, shall be dealt

with immediately. But there are other resultant issues linked to the

first.

I. The dismissal by the CA of petitioners’ appeal is in order

because it raised purely legal issues, namely:

1) Whether appellee, whose franchise expressly

provides that its payment of franchise tax shall be in

lieu of all taxes in this franchise or earnings thereof,

128[14] Id. at 23.

is absolutely excused from paying the franchise tax

imposed by appellants;

2) Whether appellants’ imposition of local franchise

tax is a violation of appellee’s legislative franchise;

and

3) Whether one can do away with the requirement on

prior written claim for refund.129[15]

Obviously, these are purely legal questions, cognizable by this

Court, to the exclusion of all other courts. There is a question of law

when the doubt or difference arises as to what the law is pertaining

to a certain state of facts.130[16]

Section 2, Rule 50 of the Rules of Court provides that an appeal

taken to the CA under Rule 41 raising only questions of law is

erroneous and shall be dismissed, issues of pure law not being within

129[15] Id. at 65.130[16] Calvo v. Vergara, G.R. No. 134741, December 19, 2001, 372 SCRA 650, as cited in Lavides v. Pre, G.R. No. 127830, October 17, 2001, 367 SCRA 382.

its jurisdiction.131[17] Consequently, the dismissal by the CA of

petitioners’ appeal was in order.

In the recent case of Sevilleno v. Carilo,132[18] this Court ruled

that the dismissal of the appeal of petitioner was valid, considering

the issues raised there were pure questions of law, viz.:

Petitioners interposed an appeal to the Court of Appeals but it was dismissed for being the wrong mode of appeal. The appellate court held that since the issue being raised is whether the RTC has jurisdiction over the subject matter of the case, which is a question of law, the appeal should have been elevated to the Supreme Court under Rule 45 of the 1997 Rules of Civil Procedure, as amended. Section 2, Rule 41 of the same Rules which governs appeals from judgments and final orders of the RTC to the Court of Appeals, provides:

SEC. 2. Modes of appeal. – (a) Ordinary appeal. – The appeal to the Court of

Appeals in cases decided by the Regional Trial Court in the exercise of its original jurisdiction shall be taken by

131[17] Rule 50, Sec. 2. Dismissal of improper appeal to the Court of Appeals. – An appeal under Rule 41 taken from the Regional Trial Court to the Court of Appeals raising only questions of law shall be dismissed, issues of pure law not being reviewable by said court. Similarly, an appeal by notice of appeal instead of by petition for review from the appellate judgment of a Regional Trial Court shall be dismissed. An appeal erroneously taken to the Court of Appeals shall not be transferred to the appropriate court but shall be dismissed outright.132[18] G.R. No. 146454, September 14, 2007.

filing a notice of appeal with the court which rendered the judgment or final order appealed from and serving a copy thereof upon the adverse party. No record on appeal shall be required except in special proceedings and other cases of multiple or separate appeals where the law or these Rules so require. In such cases, the record on appeal shall be filed and served in like manner.

(b) Petition for review. – The appeal to the Court of Appeals in cases decided by the Regional Trial Court in the exercise of its appellate jurisdiction shall be by petition for review in accordance with Rule 42.

(c) Appeal by certiorari. – In all cases where only questions of law are raised or involved, the appeal shall be to the Supreme Court by petition for review on certiorari in accordance with Rule 45.

In Macawili Gold Mining and Development Co., Inc. v. Court of Appeals, we summarized the rule on appeals as follows:

(1) In all cases decided by the RTC in the exercise of its original jurisdiction, appeal may be made to the Court of Appeals by mere notice of appeal where the appellant raises questions of fact or mixed questions of fact and law;

(2) In all cases decided by the RTC in the exercise of its original jurisdiction where the appellant raises only questions of law, the appeal must be taken to the Supreme Court on a petition for review on certiorari under Rule 45;

(3) All appeals from judgments rendered by the RTC in the exercise of its appellate jurisdiction, regardless of whether the appellant raises questions of fact, questions of law, or mixed questions of fact and

law, shall be brought to the Court of Appeals by filing a petition for review under Rule 42.

It is not disputed that the issue brought by petitioners to the Court of Appeals involves the jurisdiction of the RTC over the subject matter of the case. We have a long standing rule that a court’s jurisdiction over the subject matter of an action is conferred only by the Constitution or by statute. Otherwise put, jurisdiction of a court over the subject matter of the action is a matter of law. Consequently, issues which deal with the jurisdiction of a court over the subject matter of a case are pure questions of law. As petitioners’ appeal solely involves a question of law, they should have directly taken their appeal to this Court by filing a petition for review on certiorari under Rule 45, not an ordinary appeal with the Court of Appeals under Rule 41. Clearly, the appellate court did not err in holding that petitioners pursued the wrong mode of appeal.

Indeed, the Court of Appeals did not err in dismissing petitioners’ appeal. Section 2, Rule 50 of the same Rules provides that an appeal from the RTC to the Court of Appeals raising only questions of law shall be dismissed; and that an appeal erroneously taken to the Court of Appeals shall be dismissed outright, x x x.133[19] (Emphasis added)

However, to serve the demands of substantial justice and

equity, the Court opts to relax procedural rules and rule upon on the

merits of the case. In Ong Lim Sing Jr. v. FEB Leasing and Finance

Corporation,134[20] this Court stated:

133[19] Sevilleno v. Carilo, id.134[20] G.R. No. 168115, June 8, 2007, 524 SCRA 333.

Courts have the prerogative to relax procedural rules of even the most mandatory character, mindful of the duty to reconcile both the need to speedily put an end to litigation and the parties’ right to due process. In numerous cases, this Court has allowed liberal construction of the rules when to do so would serve the demands of substantial justice and equity. In Aguam v. Court of Appeals, the Court explained:

“The court has the discretion to dismiss or not

to dismiss an appellant’s appeal. It is a power conferred on the court, not a duty. The “discretion must be a sound one, to be exercised in accordance with the tenets of justice and fair play, having in mind the circumstances obtaining in each case.” Technicalities, however, must be avoided. The law abhors technicalities that impede the cause of justice. The court’s primary duty is to render or dispense justice. “A litigation is not a game of technicalities.” “Lawsuits unlike duels are not to be won by a rapier’s thrust. Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts.” Litigations must be decided on their merits and not on technicality. Every party litigant must be afforded the amplest opportunity for the proper and just determination of his cause, free from the unacceptable plea of technicalities. Thus, dismissal of appeals purely on technical grounds is frowned upon where the policy of the court is to encourage hearings of appeals on their merits and the rules of procedure ought not to be applied in a very rigid, technical sense; rules of procedure are used only to help secure, not override substantial justice. It is a far better and more prudent course of action for the court to excuse a technical lapse and afford the parties a review of the case on appeal to attain the ends of justice rather than dispose of the case on technicality and cause a grave injustice to the parties, giving a false impression of speedy disposal

of cases while actually resulting in more delay, if not a miscarriage of justice.135[21]

II. The “in lieu of all taxes” provision in its franchise does not

exempt ABS-CBN from payment of local franchise tax.

A. The present controversy essentially boils down to a dispute

between the inherent taxing power of Congress and the delegated

authority to tax of local governments under the 1987 Constitution

and effected under the LGC of 1991.

The power of the local government of Quezon City to impose

franchise tax is based on Section 151 in relation to Section 137 of the

LGC, to wit:

Section 137. Franchise Tax. – Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at the rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized within its territorial jurisdiction. x x x

x x x x

Section 151. Scope of Taxing Powers. – Except as otherwise provided in this Code, the city may levy the taxes, fees and charges

135[21] Ong Lim Sing Jr. v. FEB Leasing and Finance Corporation, id. at 343-344.

which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and component cities shall accrue to them and distributed in accordance with the provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes. (Emphasis supplied)

Such taxing power by the local government, however, is

limited in the sense that Congress can enact legislation granting

exemptions. This principle was upheld in City Government of Quezon

City, et al. v. Bayan Telecommunications, Inc.136[22] Said this Court:

This thus raises the question of whether or not the City’s Revenue Code pursuant to which the city treasurer of Quezon City levied real property taxes against Bayantel’s real properties located within the City effectively withdrew the tax exemption enjoyed by Bayantel under its franchise, as amended.

Bayantel answers the poser in the negative arguing that once again it is only “liable to pay the same taxes, as any other persons or corporations on all its real or personal properties, exclusive of its franchise.”

Bayantel’s posture is well-taken. While the system of local government taxation has changed with the onset of the 1987

136[22] G.R. No. 162015, March 6, 2006, 484 SCRA 169.

Constitution, the power of local government units to tax is still limited. As we explained in Mactan Cebu International Airport Authority:

“The power to tax is primarily vested in the

Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely be virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution. Under the latter, the exercise of the power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy. x x x”

Clearly then, while a new slant on the subject of local taxation now prevails in the sense that the former doctrine of local government units’ delegated power to tax had been effectively modified with Article X, Section 5 of the 1987 Constitution now in place, the basic doctrine on local taxation remains essentially the same. For as the Court stressed in Mactan, “the power to tax is [still] primarily vested in the Congress.”

This new perspective is best articulated by Fr. Joaquin G. Bernas, S.J., himself a Commissioner of the 1986 Constitutional Commission which crafted the 1987 Constitution, thus:

“What is the effect of Section 5 on the fiscal position of municipal corporations? Section 5 does not change the doctrine that municipal corporations do not possess inherent powers of taxation. What it does is to confer municipal corporations a general power to levy taxes and otherwise create sources of revenue. They no longer have to wait for a statutory grant of these powers. The power of the legislative authority relative to the fiscal powers of local governments has been reduced to the authority to impose limitations on municipal powers. Moreover, these limitations must be “consistent with the basic policy of local autonomy.” The important legal effect of Section 5 is thus to reverse the principle that doubts are resolved against municipal corporations. Henceforth, in interpreting statutory

provisions on municipal fiscal powers, doubts will be resolved in favor of municipal corporations. It is understood, however, that taxes imposed by local government must be for a public purpose, uniform within a locality, must not be confiscatory, and must be within the jurisdiction of the local unit to pass.”

In net effect, the controversy presently before the Court involves, at bottom, a clash between the inherent taxing power of the legislature, which necessarily includes the power to exempt, and the local government’s delegated power to tax under the aegis of the 1987 Constitution.

Now to go back to the Quezon City Revenue Code which imposed real estate taxes on all real properties within the city’s territory and removed exemptions theretofore “previously granted to, or presently enjoyed by all persons, whether natural or juridical [x x x]” there can really be no dispute that the power of the Quezon City Government to tax is limited by Section 232 of the LGC which expressly provides that “a province or city or municipality within the Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land, building, machinery, and other improvement not hereinafter specifically exempted.” Under this law, the Legislature highlighted its power to thereafter exempt certain realties from the taxing power of local government units. An interpretation denying Congress such power to exempt would reduce the phrase “not hereinafter specifically exempted” as a pure jargon, without meaning whatsoever. Needless to state, such absurd situation is unacceptable.

For sure, in Philippine Long Distance Telephone Company, Inc. (PLDT) vs. City of Davao, this Court has upheld the power of Congress to grant exemptions over the power of local government units to impose taxes. There, the Court wrote:

“Indeed, the grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in

interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations.”137[23] (Emphasis supplied)

In the case under review, the Philippine Congress enacted R.A.

No. 7966 on March 30, 1995, subsequent to the effectivity of the LGC

on January 1, 1992. Under it, ABS-CBN was granted the franchise to

install and operate radio and television broadcasting stations in the

Philippines. Likewise, Section 8 imposed on ABS-CBN the duty of

paying 3% franchise tax. It bears stressing, however, that payment of

the percentage franchise tax shall be “in lieu of all taxes” on the said

franchise.138[24]

Congress has the inherent power to tax, which includes the

power to grant tax exemptions. On the other hand, the power of

Quezon City to tax is prescribed by Section 151 in relation to Section

137 of the LGC which expressly provides that notwithstanding any

137[23] City Government of Quezon City v. Bayan Telecommunications, Inc., id. at 183-186.138[24] Section 8. Tax Provisions. – The grantee, its successors or assigns, shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations are now hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns, shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the radio/television business transacted under this franchise by the grantee, its successors or assigns, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof; Provided that the grantee, its successors or assigns shall continue to be liable for income taxes under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto.

exemption granted by any law or other special law, the City may

impose a franchise tax. It must be noted that Section 137 of the LGC

does not prohibit grant of future exemptions. As earlier discussed,

this Court in City Government of Quezon City v. Bayan

Telecommunications, Inc.139[25] sustained the power of Congress to

grant tax exemptions over and above the power of the local

government’s delegated power to tax.

B. The more pertinent issue now to consider is whether or not

by passing R.A. No. 7966, which contains the “in lieu of all taxes”

provision, Congress intended to exempt ABS-CBN from local

franchise tax.

Petitioners argue that the “in lieu of all taxes” provision in

ABS-CBN’s franchise does not expressly exempt it from payment of

local franchise tax. They contend that a tax exemption cannot be

created by mere implication and that one who claims tax exemptions

must be able to justify his claim by clearest grant of organic law or

statute.

139[25] Supra note 20.

Taxes are what civilized people pay for civilized society. They

are the lifeblood of the nation. Thus, statutes granting tax

exemptions are construed stricissimi juris against the taxpayer and

liberally in favor of the taxing authority. A claim of tax exemption

must be clearly shown and based on language in law too plain to be

mistaken. Otherwise stated, taxation is the rule, exemption is the

exception.140[26] The burden of proof rests upon the party claiming the

exemption to prove that it is in fact covered by the exemption so

claimed.141[27]

The basis for the rule on strict construction to statutory

provisions granting tax exemptions or deductions is to minimize

differential treatment and foster impartiality, fairness and equality of

treatment among taxpayers.142[28] He who claims an exemption from

his share of common burden must justify his claim that the

legislature intended to exempt him by unmistakable terms. For

exemptions from taxation are not favored in law, nor are they

presumed. They must be expressed in the clearest and most

140[26] Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, September 11, 1996, 261 SCRA 667, 680.141[27] Agpalo, R.E., Statutory Construction, 2003 ed., p. 301.142[28] Maceda v. Macaraeg, Jr., G.R. No. 88291, May 31, 1991, 197 SCRA 771, 799, citing Sands, C.D., Statutes and Statutory Construction, Vol. 3, p. 207.

unambiguous language and not left to mere implications. It has been

held that “exemptions are never presumed, the burden is on the

claimant to establish clearly his right to exemption and cannot be

made out of inference or implications but must be laid beyond

reasonable doubt. In other words, since taxation is the rule and

exemption the exception, the intention to make an exemption ought

to be expressed in clear and unambiguous terms.143[29]

Section 8 of R.A. No. 7966 imposes on ABS-CBN a franchise tax

equivalent to three (3) percent of all gross receipts of the

radio/television business transacted under the franchise and the

franchise tax shall be “in lieu of all taxes” on the franchise or earnings

thereof.

The “in lieu of all taxes” provision in the franchise of ABS-CBN

does not expressly provide what kind of taxes ABS-CBN is exempted

from. It is not clear whether the exemption would include both local,

whether municipal, city or provincial, and national tax. What is clear

is that ABS-CBN shall be liable to pay three (3) percent franchise tax

and income taxes under Title II of the NIRC. But whether the “in lieu

143[29] See note 27, at 302.

of all taxes provision” would include exemption from local tax is not

unequivocal.

As adverted to earlier, the right to exemption from local

franchise tax must be clearly established and cannot be made out of

inference or implications but must be laid beyond reasonable doubt.

Verily, the uncertainty in the “in lieu of all taxes” provision should be

construed against ABS-CBN. ABS-CBN has the burden to prove that it

is in fact covered by the exemption so claimed. ABS-CBN miserably

failed in this regard.

ABS-CBN cites the cases Carcar Electric & Ice Plant v. Collector

of Internal Revenue,144[30] Manila Railroad v. Rafferty,145[31] Philippine

Railway Co. v. Collector of Internal Revenue,146[32] and Visayan Electric

Co. v. David147[33] to support its claim that that the “in lieu of all taxes”

clause includes exemption from all taxes.

However, a review of the foregoing case law reveals that the

grantees’ respective franchises expressly exempt them from

144[30] 53 O.G. (No. 4) 1068.145[31] 40 Phil 224 (1919).146[32] 91 Phil 35 (1952).147[33] 92 Phil. 969 (1953).

municipal and provincial taxes. Said the Court in Manila Railroad v.

Rafferty:148[34]

On the 7th day of July 1906, by an Act of the Philippine Legislature, a special charter was granted to the Manila Railroad Company. Subsection 12 of Section 1 of said Act (No. 1510) provides that:

“In consideration of the premises and of the granting of this concession or franchise, there shall be paid by the grantee to the Philippine Government, annually, for the period of thirty (30) years from the date hereof, an amount equal to one-half (1/2) of one per cent of the gross earnings of the grantee in respect of the lines covered hereby for the preceding year; after said period of thirty (30) years, and for the fifty (50) years thereafter, the amount so to be paid annually shall be an amount equal to one and one-half (1½) per cent of such gross earnings for the preceding year; and after such period of eighty (80) years, the percentage and amount so to be paid annually by the grantee shall be fixed by the Philippine Government.

Such annual payments, when promptly and fully made by the grantee, shall be in lieu of all taxes of every name and nature – municipal, provincial or central – upon its capital stock, franchises, right of way, earnings, and all other property owned or operated by the grantee under this concession or franchise.”149[35]

(Underscoring supplied)

148[34] Supra.149[35] Manila Railroad v. Rafferty, id. at 226.

In the case under review, ABS-CBN’s franchise did not embody

an exemption similar to those in Carcar, Manila Railroad, Philippine

Railway, and Visayan Electric. Too, the franchise failed to specify the

taxing authority from whose jurisdiction the taxing power is

withheld, whether municipal, provincial, or national. In fine, since

ABS-CBN failed to justify its claim for exemption from local franchise

tax, by a grant expressed in terms “too plain to be mistaken” its

claim for exemption for local franchise tax must fail.

C. The “in lieu of all taxes” clause in the franchise of ABS-CBN

has become functus officio with the abolition of the franchise tax on

broadcasting companies with yearly gross receipts exceeding Ten

Million Pesos.

In its decision dated January 20, 1999, the RTC held that

pursuant to the “in lieu of all taxes” provision contained in Section 8

of R.A. No. 7966, ABS-CBN is exempt from the payment of the local

franchise tax. The RTC further pronounced that ABS-CBN shall

instead be liable to pay a franchise tax of 3% of all gross receipts in

lieu of all other taxes.

On this score, the RTC ruling is flawed. In keeping with the

laws that have been passed since the grant of ABS-CBN’s franchise,

the corporation should now be subject to VAT, instead of the 3%

franchise tax.

At the time of the enactment of its franchise on May 3, 1995,

ABS-CBN was subject to 3% franchise tax under Section 117(b) of the

1977 National Internal Revenue Code (NIRC), as amended, viz.:

SECTION 117. Tax on franchises. – Any provision of general or special laws to the contrary notwithstanding, there shall be levied, assessed and collected in respect to all franchise, upon the gross receipts from the business covered by the law granting the franchise, a tax in accordance with the schedule prescribed hereunder:

(a) On electric utilities, city gas, and water supplies Two (2%) percent

(b) On telephone and/or telegraph systems, radio and/or broadcasting stations Three (3%) percent

(c) On other franchises Five (5%) percent. (Emphasis supplied)

On January 1, 1996, R.A. No. 7716, otherwise known as the

Expanded Value Added Tax Law,150[36] took effect and subjected to VAT

150[36] Approved on May 5, 1994.

those services rendered by radio and/or broadcasting stations.

Section 3 of R.A. No. 7716 provides:

Section 3. Section 102 of the National Internal Revenue Code, as amended is hereby further amended to read as follows:

SEC. 102. Value-added tax on sale of services and use or lease of properties. – (a) Rate and base of tax. – There shall be levied, assessed and collected, as value-added tax equivalent to 10% of gross receipts derived from the sale or exchange of services, including the use or lease of properties.

The phrase “sale or exchange of services” means the performance of all kinds of services in the Philippines, for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors; x x x services of franchise grantees of telephone and telegraph, radio and television broadcasting and all other franchise grantees except those under Section 117 of this Code; x x x (Emphasis supplied)

Notably, under the same law, “telephone and/or telegraph

systems, broadcasting stations and other franchise grantees” were

omitted from the list of entities subject to franchise tax. The

impression was that these entities were subject to 10% VAT but not

to franchise tax. Only the franchise tax on “electric, gas and water

utilities” remained. Section 12 of R.A. No. 7716 provides:

Section 12. Section 117 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:

SEC. 117. Tax on Franchises. – Any provision of general or special law to the contrary notwithstanding there shall be levied, assessed and collected in respect to all franchises on electric, gas and water utilities a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise. (Emphasis added)

Subsequently, R.A. No. 8241151[37] took effect on January 1,

1997152[38] containing more amendments to the NIRC. Radio and/or

television companies whose annual gross receipts do not exceed

P10,000,000.00 were granted the option to choose between paying

3% national franchise tax or 10% VAT. Section 9 of R.A. No. 8241

provides:

SECTION 9. Section 12 of Republic Act No. 7716 is hereby amended to read as follows:

“Sec. 12. Section 117 of the National Internal Revenue Code, as amended, is hereby further amended to read as follows:

“Sec. 117. Tax on franchise. – Any provision of general or special law to the contrary, notwithstanding,

151[37] Entitled “An Act Amending Republic Act No. 7716, Otherwise Known as the Expanded Value-Added Tax Law and Other Pertinent Provisions of the National Internal Revenue Code, as Amended.” Approved on December 20, 1996.152[38] Published in the Philippine Star on January 9, 1997. Published in the Official Gazette, Vol. 93, No. 6, p. 1463, on March 10, 1997.

there shall be levied, assessed and collected in respect to all franchises on radio and/or television broadcasting companies whose annual gross receipts of the preceding year does not exceed Ten million pesos (P10,000,000.00), subject to Section 107(d) of this Code, a tax of three percent (3%) and on electric, gas and water utilities, a tax of two percent (2%) on the gross receipts derived from the business covered by the law granting the franchise: Provided, however, That radio and television broadcasting companies referred to in this section, shall have an option to be registered as a value-added tax payer and pay the tax due thereon: Provided, further, That once the option is exercised, it shall not be revoked. (Emphasis supplied)

On the other hand, radio and/or television companies with

yearly gross receipts exceeding P10,000,000.00 were subject to 10%

VAT, pursuant to Section 102 of the NIRC.

On January 1, 1998, R.A. No. 8424153[39] was passed confirming

the 10% VAT liability of radio and/or television companies with

yearly gross receipts exceeding P10,000,000.00.

R.A. No. 9337 was subsequently enacted and became effective

on July 1, 2005. The said law further amended the NIRC by

increasing the rate of VAT to 12%. The effectivity of the imposition

of the 12% VAT was later moved from January 1, 2006 to February 1,

153[39] Otherwise known as the Tax Reform Act of 1997, amended some provisions of the 1977 NIRC by renumbering Section 117 as 119 and Section 102 as 108.

2006.

In consonance with the above survey of pertinent laws on the

matter, ABS-CBN is subject to the payment of VAT. It does not have

the option to choose between the payment of franchise tax or VAT

since it is a broadcasting company with yearly gross receipts

exceeding Ten Million Pesos (P10,000,000.00).

VAT is a percentage tax imposed on any person whether or not

a franchise grantee, who in the course of trade or business, sells,

barters, exchanges, leases, goods or properties, renders services. It is

also levied on every importation of goods whether or not in the

course of trade or business. The tax base of the VAT is limited only to

the value added to such goods, properties, or services by the seller,

transferor or lessor. Further, the VAT is an indirect tax and can be

passed on to the buyer.

The franchise tax, on the other hand, is a percentage tax

imposed only on franchise holders. It is imposed under Section 119

of the Tax Code and is a direct liability of the franchise grantee.

The clause “in lieu of all taxes” does not pertain to VAT or any

other tax. It cannot apply when what is paid is a tax other than a

franchise tax. Since the franchise tax on the broadcasting companies

with yearly gross receipts exceeding ten million pesos has been

abolished, the “in lieu of all taxes” clause has now become functus

officio, rendered inoperative.

In sum, ABS-CBN’s claims for exemption must fail on twin

grounds. First, the “in lieu of all taxes” clause in its franchise failed to

specify the taxes the company is sought to be exempted from.

Neither did it particularize the jurisdiction from which the taxing

power is withheld. Second, the clause has become functus officio

because as the law now stands, ABS-CBN is no longer subject to a

franchise tax. It is now liable for VAT.

WHEREFORE, the petition is GRANTED and the appealed

Decision REVERSED AND SET ASIDE. The petition in the trial court

for refund of local franchise tax is DISMISSED.

SO ORDERED.

FIRST DIVISION

G.R. No. 120935               May 21, 2009

LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE LOS REYES, in their capacities as President, Treasurer and Secretary of Adamson Management Corporation, Petitioners, vs.COURT OF APPEALS and LIWAYWAY VINZONS-CHATO, in her capacity as Commissioner of the Bureau of Internal Revenue, Respondents.

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

G.R. No. 124557               May 21, 2009

INTERNAL REVENUE, Petitioner, vs.COMMISSIONER OF COURT OF APPEALS, COURT OF TAX APPEALS, ADAMSON MANAGEMENT CORPORATION, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE LOS REYES, Respondents.

D E C I S I O N

PUNO, C.J.:

Before the Court are the consolidated cases of G.R. No. 120935 and G.R. No. 124557.

G.R. No. 120935 involves a petition for review on certiorari filed by petitioners LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON, and SARA S. DE LOS REYES (private respondents), in their respective capacities as president, treasurer and secretary of Adamson Management Corporation (AMC) against then Commissioner of Internal Revenue Liwayway Vinzons-Chato (COMMISSIONER), under Rule 45 of the Revised Rules of Court. They seek to review and reverse the Decision promulgated on March 21, 1995 and Resolution issued on July 6, 1995 of the Court of Appeals in CA-G.R. SP No. 35488 (Liwayway Vinzons-Chato, et al. v. Hon. Judge Erna Falloran-Aliposa, et al.).

G.R. No. 124557 is a petition for review on certiorari filed by the Commissioner, assailing the Decision dated March 29, 1996 of the Court of Appeals in CA-G.R. SP No. 35520, titled Commissioner of Internal Revenue v. Court of Tax Appeals, Adamson Management Corporation, Lucas G. Adamson, Therese June D.

Adamson and Sara S. de los Reyes. In the said Decision, the Court of Appeals upheld the Resolution promulgated on September 19, 1994 by the Court of Tax Appeals (CTA) in C.T.A. Case No. 5075 (Adamson Management Corporation, Lucas G. Adamson, Therese Adamson and Sara de los Reyes v. Commissioner of Internal Revenue).

The facts, as culled from the findings of the appellate court, follow:

On June 20, 1990, Lucas Adamson and AMC sold 131,897 common shares of stock in Adamson and Adamson, Inc. (AAI) to APAC Holding Limited (APAC). The shares were valued at P7,789,995.00.1 On June 22, 1990, P159,363.21 was paid as capital gains tax for the transaction.

On October 12, 1990, AMC sold to APAC Philippines, Inc. another 229,870 common shares of stock in AAI for P17,718,360.00. AMC paid the capital gains tax of P352,242.96.

On October 15, 1993, the Commissioner issued a "Notice of Taxpayer" to AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes, informing them of deficiencies on their payment of capital gains tax and Value Added Tax (VAT). The notice contained a schedule for preliminary conference.

The events preceding G.R. No. 120935 are the following:

On October 22, 1993, the Commissioner filed with the Department of Justice (DOJ) her Affidavit of Complaint2 against AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes for violation of Sections 45 (a) and (d)3 , and 1104 , in relation to Section 1005 , as penalized under Section 255,6 and for violation of Section 2537 , in relation to Section 252 (b) and (d) of the National Internal Revenue Code (NIRC).8

AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes filed with the DOJ a motion to suspend proceedings on the ground of prejudicial question, pendency of a civil case with the Supreme Court, and pendency of their letter-request for re-investigation with the Commissioner. After the preliminary investigation, State Prosecutor Alfredo P. Agcaoili found probable cause. The Motion for Reconsideration against the findings of probable cause was denied by the prosecutor.

On April 29, 1994, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes were charged before the Regional Trial Court (RTC) of Makati, Branch 150 in Criminal Case Nos. 94-1842 to 94-1846. They filed a Motion to Dismiss or Suspend the Proceedings. They invoked the grounds that there was yet no final assessment of their tax liability, and there were still pending relevant Supreme Court and CTA cases. Initially, the trial court denied the motion. A Motion for Reconsideration was however filed, this time assailing the trial court’s lack of jurisdiction over the nature of the subject cases. On August 8, 1994, the trial court granted the Motion. It ruled that the complaints for tax evasion filed by the Commissioner should be regarded as a decision of the Commissioner regarding the tax liabilities of Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes, and appealable to the CTA. It further held that the said cases cannot proceed independently of the assessment case pending before the CTA, which has jurisdiction to determine the civil and criminal tax liability of the respondents therein.

On October 10, 1994, the Commissioner filed a Petition for Review with the Court of Appeals assailing the trial court’s dismissal of the criminal cases. She averred that it was not a condition prerequisite that a formal assessment should first be given to the private respondents before she may file the aforesaid criminal complaints against them. She argued that the criminal complaints for tax evasion may proceed independently from the assessment cases pending before the CTA.

On March 21, 1995, the Court of Appeals reversed the trial court’s decision and reinstated the criminal complaints. The appellate court held that, in a criminal prosecution for tax evasion, assessment of tax deficiency is not required because the offense of tax evasion is complete or consummated when the offender has knowingly and willfully filed a fraudulent return with intent to evade the tax.9 It ruled that private respondents filed false and fraudulent returns with intent to evade taxes, and acting thereupon, petitioner filed an Affidavit of Complaint with the Department of Justice, without an accompanying assessment of the tax deficiency of private respondents, in order to commence criminal action against the latter for tax evasion.10

Private respondents filed a Motion for Reconsideration, but the trial court denied the motion on July 6, 1995. Thus, they filed the petition in G.R. No. 120935, raising the following issues:

1. WHETHER OR NOT THE RESPONDENT HONORABLE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE IN UNGAB V. CUSI (Nos. L-41919-24, May 30, 1980, 97 SCRA 877) TO THE CASE AT BAR.

2. WHETHER OR NOT AN ASSESSMENT IS REQUIRED UNDER THE SECOND CATEGORY OF THE OFFENSE IN SECTION 253 OF THE NIRC.

3. WHETHER OR NOT THERE WAS A VALID ASSESSMENT MADE BY THE COMMISSIONER IN THE CASE AT BAR.

4. WHETHER OR NOT THE FILING OF A CRIMINAL COMPLAINT SERVES AS AN IMPLIED ASSESSMENT ON THE TAX LIABILITY OF THE TAXPAYER.

5. WHETHER OR NOT THE FILING OF THE CRIMINAL INFORMATION FOR TAX EVASION IN THE TRIAL COURT IS PREMATURE BECAUSE THERE IS YET NO BASIS FOR THE CRIMINAL CHARGE OF WILLFULL INTENT TO EVADE THE PAYMENT OF A TAX.

6. WHETHER OR NOT THE DOCTRINES LAID DOWN IN THE CASES OF YABES V. FLOJO (No. L-46954, July 20, 1982, 115 SCRA 286) AND CIR V. UNION SHIPPING CORP. (G.R. No. 66160, May 21, 1990, 185 SCRA 547) ARE APPLICABLE TO THE CASE AT BAR.

7. WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION OVER THE DISPUTE ON WHAT CONSTITUTES THE PROPER TAXES DUE FROM THE TAXPAYER.

In parallel circumstances, the following events preceded G.R. No. 124557:

On December 1, 1993, AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes filed a letter request for re-investigation with the Commissioner of the "Examiner’s Findings" earlier issued by the Bureau of Internal Revenue (BIR), which pointed out the tax deficiencies.

On March 15, 1994 before the Commissioner could act on their letter-request, AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes filed a Petition for Review with the CTA. They assailed the Commissioner’s finding of tax evasion against them. The Commissioner moved to dismiss the

petition, on the ground that it was premature, as she had not yet issued a formal assessment of the tax liability of therein petitioners. On September 19, 1994, the CTA denied the Motion to Dismiss. It considered the criminal complaint filed by the Commissioner with the DOJ as an implied formal assessment, and the filing of the criminal informations with the RTC as a denial of petitioners’ protest regarding the tax deficiency.

The Commissioner repaired to the Court of Appeals on the ground that the CTA acted with grave abuse of discretion. She contended that, with regard to the protest provided under Section 229 of the NIRC, there must first be a formal assessment issued by the Commissioner, and it must be in accord with Section 6 of Revenue Regulation No. 12-85. She maintained that she had not yet issued a formal assessment of tax liability, and the tax deficiency amounts mentioned in her criminal complaint with the DOJ were given only to show the difference between the tax returns filed and the audit findings of the revenue examiner.

The Court of Appeals sustained the CTA’s denial of the Commissioner’s Motion to Dismiss. Thus, the Commissioner filed the petition for review under G.R. No. 124557, raising the following issues:

1. WHETHER OR NOT THE INSTANT PETITION SHOULD BE DISMISSED FOR FAILURE TO COMPLY WITH THE MANDATORY REQUIREMENT OF A CERTIFICATION UNDER OATH AGAINST FORUM SHOPPING;

2. WHETHER OR NOT THE CRIMINAL CASE FOR TAX EVASION IN THE CASE AT BAR CAN PROCEED WITHOUT AN ASSESSMENT;

3. WHETHER OR NOT THE COMPLAINT FILED WITH THE DEPARTMENT OF JUSTICE CAN BE CONSTRUED AS AN IMPLIED ASSESSMENT; and

4. WHETHER OR NOT THE COURT OF TAX APPEALS HAS JURISDICTION TO ACT ON PRIVATE RESPONDENTS’ PETITION FOR REVIEW FILED WITH THE SAID COURT.

The issues in G.R. No. 124557 and G.R. No. 120935 can be compressed into three:

1. WHETHER THE COMMISSIONER HAS ALREADY RENDERED AN ASSESSMENT (FORMAL OR OTHERWISE) OF THE TAX LIABILITY OF AMC, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON AND SARA S. DE LOS REYES;

2. WHETHER THERE IS BASIS FOR THE CRIMINAL CASES FOR TAX EVASION TO PROCEED AGAINST AMC, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON AND SARA S. DE LOS REYES; and

3. WHETHER THE COURT OF TAX APPEALS HAS JURISDICTION TO TAKE COGNIZANCE OF BOTH THE CIVIL AND THE CRIMINAL ASPECTS OF THE TAX LIABILITY OF AMC, LUCAS G. ADAMSON, THERESE JUNE D. ADAMSON AND SARA S. DE LOS REYES.

The case of CIR v. Pascor Realty, et al.11 is relevant. In this case, then BIR Commissioner Jose U. Ong authorized revenue officers to examine the books of accounts and other accounting records of Pascor Realty and Development Corporation (PRDC) for 1986, 1987 and 1988. This resulted in a recommendation for the issuance of an assessment in the amounts of P7,498,434.65 and P3,015,236.35 for the years 1986 and 1987, respectively.

On March 1, 1995, the Commissioner filed a criminal complaint before the DOJ against PRDC, its President Rogelio A. Dio, and its Treasurer Virginia S. Dio, alleging evasion of taxes in the total amount of P10,513,671.00. Private respondents filed an Urgent Request for Reconsideration/Reinvestigation disputing the tax assessment and tax liability.

The Commissioner denied the urgent request for reconsideration/reinvestigation because she had not yet issued a formal assessment.

Private respondents then elevated the Decision of the Commissioner to the CTA on a petition for review. The Commissioner filed a Motion to Dismiss the petition on the ground that the CTA has no jurisdiction over the subject matter of the petition, as there was yet no formal assessment issued against the petitioners. The CTA denied the said motion to dismiss and ordered the Commissioner to file an answer within thirty (30) days. The Commissioner did not file an answer nor did she move to reconsider the resolution. Instead, the Commissioner filed a petition for review of the CTA decision with the Court of Appeals. The Court of Appeals

upheld the CTA order. However, this Court reversed the Court of Appeals decision and the CTA order, and ordered the dismissal of the petition. We held:

An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also signals the time when penalties and interests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by the taxpayer. Accordingly, an affidavit, which was executed by revenue officers stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax evasion, cannot be deemed an assessment that can be questioned before the Court of Tax Appeals.

Neither the NIRC nor the revenue regulations governing the protest of assessments12 provide a specific definition or form of an assessment. However, the NIRC defines the specific functions and effects of an assessment. To consider the affidavit attached to the Complaint as a proper assessment is to subvert the nature of an assessment and to set a bad precedent that will prejudice innocent taxpayers.

True, as pointed out by the private respondents, an assessment informs the taxpayer that he or she has tax liabilities. But not all documents coming from the BIR containing a computation of the tax liability can be deemed assessments.

To start with, an assessment must be sent to and received by a taxpayer, and must demand payment of the taxes described therein within a specific period. Thus, the NIRC imposes a 25 percent penalty, in addition to the tax due, in case the taxpayer fails to pay the deficiency tax within the time prescribed for its payment in the notice of assessment. Likewise, an interest of 20 percent per annum, or such higher rate as may be prescribed by rules and regulations, is to be collected from the date prescribed for its payment until the full payment.13

The issuance of an assessment is vital in determining the period of limitation regarding its proper issuance and the period within which to protest it. Section 20314 of the NIRC provides that internal revenue taxes must be assessed within three years from the last day within which to file the return. Section 222,15 on the other hand, specifies a period of ten years in case a fraudulent return with intent to evade was submitted or in case of failure to file a return. Also, Section 22816 of the same law states that said assessment may be protested only within thirty days from receipt thereof. Necessarily, the taxpayer must be certain that a specific

document constitutes an assessment. Otherwise, confusion would arise regarding the period within which to make an assessment or to protest the same, or whether interest and penalty may accrue thereon.

It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed, an assessment is deemed made only when the collector of internal revenue releases, mails or sends such notice to the taxpayer.17

In the present case, the revenue officers’ Affidavit merely contained a computation of respondents’ tax liability.lawphil.net It did not state a demand or a period for payment. Worse, it was addressed to the justice secretary, not to the taxpayers.

Respondents maintain that an assessment, in relation to taxation, is simply understood to mean:

"A notice to the effect that the amount therein stated is due as tax and a demand for payment thereof."18

"Fixes the liability of the taxpayer and ascertains the facts and furnishes the data for the proper presentation of tax rolls."19

Even these definitions fail to advance private respondents’ case. That the BIR examiners’ Joint Affidavit attached to the Criminal Complaint contained some details of the tax liabilities of private respondents does not ipso facto make it an assessment. The purpose of the Joint Affidavit was merely to support and substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to be a notice of the tax due and a demand to the private respondents for payment thereof.

The fact that the Complaint itself was specifically directed and sent to the Department of Justice and not to private respondents shows that the intent of the commissioner was to file a criminal complaint for tax evasion, not to issue an assessment. Although the revenue officers recommended the issuance of an assessment, the commissioner opted instead to file a criminal case for tax evasion. What private respondents received was a notice from the DOJ that a criminal case for tax evasion had been filed against them, not a notice that the Bureau of Internal Revenue had made an assessment.

Private respondents maintain that the filing of a criminal complaint must be preceded by an assessment. This is incorrect, because Section 222 of the NIRC specifically states that in cases where a false or fraudulent return is submitted or in cases of failure to file a return such as this case, proceedings in court may be commenced without an assessment. Furthermore, Section 205 of the same Code clearly mandates that the civil and criminal aspects of the case may be pursued simultaneously. In Ungab v. Cusi,20 petitioner therein sought the dismissal of the criminal Complaints for being premature, since his protest to the CTA had not yet been resolved. The Court held that such protests could not stop or suspend the criminal action which was independent of the resolution of the protest in the CTA. This was because the commissioner of internal revenue had, in such tax evasion cases, discretion on whether to issue an assessment or to file a criminal case against the taxpayer or to do both.

Private respondents insist that Section 222 should be read in relation to Section 255 of the NIRC,21 which penalizes failure to file a return. They add that a tax assessment should precede a criminal indictment. We disagree. To reiterate, said Section 222 states that an assessment is not necessary before a criminal charge can be filed. This is the general rule. Private respondents failed to show that they are entitled to an exception. Moreover, the criminal charge need only be supported by a prima facie showing of failure to file a required return. This fact need not be proven by an assessment.

The issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is then given a chance to submit position papers and documents to prove that the assessment is unwarranted. If the commissioner is unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing the latter specifically and clearly that an assessment has been made against him or her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not that the commissioner has issued an assessment. It must be stressed that a criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code.

In the cases at bar, the Commissioner denied that she issued a formal assessment of the tax liability of AMC, Lucas G. Adamson, Therese June D. Adamson and Sara S. de los Reyes. She admits though that she wrote the recommendation

letter22 addressed to the Secretary of the DOJ recommending the filing of criminal complaints against AMC and the aforecited persons for fraudulent returns and tax evasion.

The first issue is whether the Commissioner’s recommendation letter can be considered as a formal assessment of private respondents’ tax liability.

In the context in which it is used in the NIRC, an assessment is a written notice and demand made by the BIR on the taxpayer for the settlement of a due tax liability that is there definitely set and fixed. A written communication containing a computation by a revenue officer of the tax liability of a taxpayer and giving him an opportunity to contest or disprove the BIR examiner’s findings is not an assessment since it is yet indefinite.23

We rule that the recommendation letter of the Commissioner cannot be considered a formal assessment. Even a cursory perusal of the said letter would reveal three key points:

1. It was not addressed to the taxpayers.

2. There was no demand made on the taxpayers to pay the tax liability, nor a period for payment set therein.

3. The letter was never mailed or sent to the taxpayers by the Commissioner.

In fine, the said recommendation letter served merely as the prima facie basis for filing criminal informations that the taxpayers had violated Section 45 (a) and (d), and 110, in relation to Section 100, as penalized under Section 255, and for violation of Section 253, in relation to Section 252 9(b) and (d) of the Tax Code.24

The next issue is whether the filing of the criminal complaints against the private respondents by the DOJ is premature for lack of a formal assessment.

Section 269 of the NIRC (now Section 222 of the Tax Reform Act of 1997) provides:

Sec. 269. Exceptions as to period of limitation of assessment and collection of taxes.-(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, the tax may be assessed, or a proceeding in court after the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has become final and executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal action for collection thereof…

The law is clear. When fraudulent tax returns are involved as in the cases at bar, a proceeding in court after the collection of such tax may be begun without assessment. Here, the private respondents had already filed the capital gains tax return and the VAT returns, and paid the taxes they have declared due therefrom. Upon investigation of the examiners of the BIR, there was a preliminary finding of gross discrepancy in the computation of the capital gains taxes due from the sale of two lots of AAI shares, first to APAC and then to APAC Philippines, Limited. The examiners also found that the VAT had not been paid for VAT-liable sale of services for the third and fourth quarters of 1990. Arguably, the gross disparity in the taxes due and the amounts actually declared by the private respondents constitutes badges of fraud.

Thus, the applicability of Ungab v. Cusi25 is evident to the cases at bar. In this seminal case, this Court ruled that there was no need for precise computation and formal assessment in order for criminal complaints to be filed against him. It quoted Merten’s Law of Federal Income Taxation, Vol. 10, Sec. 55A.05, p. 21, thus:

An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to defeat and evade the income tax. A crime is complete when the violator has knowingly and willfully filed a fraudulent return, with intent to evade and defeat the tax. The perpetration of the crime is grounded upon knowledge on the part of the taxpayer that he has made an inaccurate return, and the government’s failure to discover the error and promptly to assess has no connections with the commission of the crime.

This hoary principle still underlies Section 269 and related provisions of the present Tax Code.

We now go to the issue of whether the CTA has no jurisdiction to take cognizance of both the criminal and civil cases here at bar.1avvphi1

Under Republic Act No. 1125 (An Act Creating the Court of Tax Appeals) as amended, the rulings of the Commissioner are appealable to the CTA, thus:

SEC. 7. Jurisdiction. – The Court of Tax Appeals shall exercise exclusive appellate jurisdiction to review by appeal, as herein provided -

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code or other laws or part of law administered by the Bureau of Internal Revenue;

Republic Act No. 8424, titled "An Act Amending the National Internal Revenue Code, As Amended, And For Other Purposes," later expanded the jurisdiction of the Commissioner and, correspondingly, that of the CTA, thus:

SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. – The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance.

The power to decide disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed in relation thereto, or other matters arising under this Code or other laws or portions thereof administered by the Bureau of Internal Revenue is vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of Tax Appeals.

The latest statute dealing with the jurisdiction of the CTA is Republic Act No. 9282.26 It provides:

SEC. 7. Section 7 of the same Act is hereby amended to read as follows:

Sec. 7. Jurisdiction. — The CTA shall exercise:

(a) Exclusive appellate jurisdiction to review by appeal, as herein provided:

(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue or other laws administered by the Bureau of Internal Revenue;

(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the National Internal Revenue Code provides a specific period of action, in which case the inaction shall be deemed a denial;

(3) Decisions, orders or resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them in the exercise of their original or appellate jurisdiction;

x x x

(b) Jurisdiction over cases involving criminal offenses as herein provided:

(1) Exclusive original jurisdiction over all criminal offenses arising from violations of the National Internal Revenue Code or Tariff and Customs Code and other laws administered by the Bureau of Internal Revenue or the Bureau of Customs: Provided, however, That offenses or felonies mentioned in this paragraph where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One million pesos (P1,000,000.00) or where there is no specified amount claimed shall be tried by the regular courts and the jurisdiction of the CTA shall be appellate. Any provision of law or the Rules of Court to the contrary notwithstanding, the criminal action and the corresponding civil action for the recovery of civil liability for taxes and penalties shall at all times be simultaneously instituted with, and jointly determined in the same proceeding by the CTA, the filing of the criminal action being deemed to necessarily carry with it the filing of the civil action, and no right to reserve the filling of such civil action separately from the criminal action will be recognized.

(2) Exclusive appellate jurisdiction in criminal offenses:

(a) Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax cases originally decided by them, in their respected territorial jurisdiction.

(b) Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts in their respective jurisdiction.

(c) Jurisdiction over tax collection cases as herein provided:

(1) Exclusive original jurisdiction in tax collection cases involving final and executory assessments for taxes, fees, charges and penalties: Provided, however, That collection cases where the principal amount of taxes and fees, exclusive of charges and penalties, claimed is less than One million pesos (P1,000,000.00) shall be tried by the proper Municipal Trial Court, Metropolitan Trial Court and Regional Trial Court.

(2) Exclusive appellate jurisdiction in tax collection cases:

(a) Over appeals from the judgments, resolutions or orders of the Regional Trial Courts in tax collection cases originally decided by them, in their respective territorial jurisdiction.

(b) Over petitions for review of the judgments, resolutions or orders of the Regional Trial Courts in the exercise of their appellate jurisdiction over tax collection cases originally decided by the Metropolitan Trial Courts, Municipal Trial Courts and Municipal Circuit Trial Courts, in their respective jurisdiction.

These laws have expanded the jurisdiction of the CTA. However, they did not change the jurisdiction of the CTA to entertain an appeal only from a final decision or assessment of the Commissioner, or in cases where the Commissioner

has not acted within the period prescribed by the NIRC. In the cases at bar, the Commissioner has not issued an assessment of the tax liability of private respondents.

Finally, we hold that contrary to private respondents’ stance, the doctrines laid down in CIR v. Union Shipping Co. and Yabes v. Flojo are not applicable to the cases at bar. In these earlier cases, the Commissioner already rendered an assessment of the tax liabilities of the delinquent taxpayers, for which reason the Court ruled that the filing of the civil suit for collection of the taxes due was a final denial of the taxpayers’ request for reconsideration of the tax assessment.

IN VIEW WHEREOF, premises considered, judgment is rendered:

1. In G.R. No. 120935, AFFIRMING the CA decision dated March 21, 1995, which set aside the Regional Trial Court’s Order dated August 8, 1994, and REINSTATING Criminal Case Nos. 94-1842 to 94-1846 for further proceedings before the trial court; and

2. In G.R. No. 124557, REVERSING and SETTING ASIDE the Decision of the Court of Appeals dated March 29, 1996, and ORDERING the dismissal of C.T.A. Case No. 5075.

No costs.

SO ORDERED.

G.R. No. 128315 June 29, 1999

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.PASCOR REALTY AND DEVELOPMENT CORPORATION, ROGELIO A. DIO and VIRGINIA S. DIO, respondents.

 

PANGANIBAN, J.:

An assessment contains not only a computation of tax liabilities, but also a demand for payment within a prescribed period. It also signals the time when penalties and protests begin to accrue against the taxpayer. To enable the taxpayer to determine his remedies thereon, due process requires that it must be served on and received by the taxpayer. Accordingly, an affidavit, which was executed by revenue officers stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax evasion, cannot be deemed an assessment that can be questioned before the Court of Tax Appeals.

Statement of the Case

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court praying for the nullification of the October 30, 1996Decision 1 of the Court of Appeals 2 in CA-GR SP No. 40853, which effectively affirmed the January 25, 1996 Resolution 3 of the Court of Tax Appeals 4 CTA Case No. 5271. The CTA disposed as follows:

WHEREFORE, finding [the herein petitioner's] "Motion to Dismiss" as UNMERITORIOUS, the same is hereby DENIED. [The CIR] is hereby given a period of thirty (30) days from receipt hereof to file her answer.

Petitioner also seeks to nullify the February 13, 1997 Resolution 5 of the Court of Appeals denying reconsideration.

The Facts

As found by the Court of Appeals, the undisputed facts of the case are as follows:

It appears that by virtue of Letter of Authority No. 001198, then BIR Commissioner Jose U. Ong authorized Revenue Officers Thomas T.

Que, Sonia T. Estorco and Emmanuel M. Savellano to examine the books of accounts and other accounting records of Pascor Realty and Development Corporation. (PRDC) for the years ending 1986, 1987 and 1988. The said examination resulted in a recommendation for the issuance of an assessment in the amounts of P7,498,434.65 and P3,015,236.35 for the years 1986 and 1987, respectively.

On March 1, 1995, the Commissioner of Internal Revenue filed a criminal complaint before the Department of Justice against the PRDC, its President Rogelio A. Dio, and its Treasurer Virginia S. Dio, alleging evasion of taxes in the total amount of P10,513,671 .00. Private respondents PRDC, et. al. filed an Urgent Request for Reconsideration/Reinvestigation disputing the tax assessment and tax liability.

On March 23, 1995, private respondents received a subpoena from the DOJ in connection with the criminal complaint filed by the Commissioner of Internal Revenue (BIR) against them. 1âwphi1.nêt

In a letter dated May 17, 1995, the CIR denied the urgent request for reconsideration/reinvestigation of the private respondents on the ground that no formal assessment of the has as yet been issued by the Commissioner.

Private respondents then elevated the Decision of the CIR dated May 17, 1995 to the Court of Tax Appeals on a petition for review docketed as CTA Case No. 5271 on July 21, 1995. On September 6, 1995, the CIR filed a Motion to Dismiss the petition on the ground that the CTA has no jurisdiction over the subject matter of the petition, as there was no formal assessment issued against the petitioners. The CTA denied the said motion to dismiss in a Resolution dated January 25, 1996 and ordered the CIR to file an answer within thirty (30) days from receipt of said resolution. The CIR received the resolution on January 31, 1996 but did not file an answer nor did she move to reconsider the resolution.

Instead, the CIR filed this petition on June 7, 1996, alleging as grounds that:

Respondent Court of Tax Appeals acted with grave abuse of discretion and without jurisdiction in considering the affidavit/report of the revenue officer and the indorsement of said report to the secretary of

justice as assessment which may be appealed to the Court of Tax Appeals;

Respondent Court Tax Appeals acted with grave abuse of discretion in considering the denial by petitioner of private respondents' Motion for Reconsideration as [a] final decision which may be appealed to the Court of Tax Appeals.

In denying the motion to dismiss filed by the CIR, the Court of Tax Appeals stated:

We agree with petitioners' contentions, that the criminal complaint for tax evasion is the assessment issued, and that the letter denial of May 17, 1995 is the decision properly appealable to [u]s. Respondent's ground of denial, therefore, that there was no formal assessment issued, is untenable.

It is the Court's honest belief, that the criminal case for tax evasion is already anassessment. The complaint, more particularly, the Joint Affidavit of Revenue Examiners Lagmay and Savellano attached thereto, contains the details of the assessment like the kind and amount of tax due, and the period covered:

Petitioners are right, in claiming that the provisions of Republic Act No. 1125, relating to exclusive appellate jurisdiction of this Court, do not, make any mention of "formal assessment." The law merely states, that this Court has exclusive appellate jurisdiction over decisions of the Commissioner of Internal Revenue on disputed assessments, and other matters arising under the National Internal Revenue Code, other law or part administered by the Bureau of Internal Revenue Code.

As far as this Court is concerned, the amount and kind of tax due, and the period covered, are sufficient details needed for an "assessment." These details are more than complete, compared to the following definitions of the term as quoted hereunder. Thus:

Assessment is laying a tax. Johnson City v. Clinchfield R. Co., 43 S.W. (2d) 386, 387, 163 Tenn. 332. (Words and Phrases, Permanent Edition, Vol. 4, p. 446).

The word assessment when used in connection with taxation, may have more than one meaning. The ultimate purpose of an assessment to such a connection is to ascertain the amount that each taxpayer is to pay. More commonly, the word "assessment" means the official valuation of a taxpayer's property for purpose of taxation. State v. New York, N.H. and H.R. Co. 22 A. 765, 768, 60 Conn. 326, 325. (Ibid. p. 445)

From the above, it can be gleaned that an assessment simply states how much tax is due from a taxpayer. Thus, based on these definitions, the details of the tax as given in the Joint Affidavit of respondent's examiners, which was attached to the tax evasion complaint, more than suffice to qualify as an assessment. Therefore, this assessment having been disputed by petitioners, and there being a denial of their letter disputing such assessment, this Court unquestionably acquired jurisdiction over the instant petition for review. 6

As earlier observed, the Court of Appeals sustained the CTA and dismissed the petition.

Hence, this recourse to this Court. 7

Ruling of the Court of Appeals

The Court of Appeals held that the tax court committed no grave abuse of discretion in ruling that the Criminal Complaint for tax evasion filed by the Commissioner of Internal Revenue with the Department of Justice constituted an "assessment" of the tax due, and that the said assessment could be the subject of a protest. By definition, an assessment is simply the statement of the details and the amount of tax due from a taxpayer. Based on this definition, the details of the tax contained in the BIR examiners' Joint Affidavit, 8 which was attached to the criminal Complaint, constituted an assessment. Since the assailed Order of the CTA was merely interlocutory and devoid of grave abuse of discretion, a petition for certiorari did not lie.

Issues

Petitioners submit for the consideration of this Court following issues:

(1) Whether or not the criminal complaint for tax evasion can be construed as an assessment.

(2) Whether or not an assessment is necessary before criminal charges for tax evasion may be instituted.

(3) Whether or not the CTA can take cognizance of the case in the absence of an assessment. 9

In the main, the Court will resolve whether the revenue officers' Affidavit-Report, which was attached to criminal revenue Complaint filed the Department of Justice, constituted an assessment that could be questioned before the Court of Tax Appeals.

The Court's Ruling

The petition is meritorious.

Main Issue: Assessment

Petitioner argues that the filing of the criminal complaint with the Department of Justice cannot in any way be construed as a formal assessment of private respondents' tax liabilities. This position is based on Section 205 of the National Internal Revenue Code 10 (NIRC), which provides that remedies for the collection of deficient taxes may be by either civil or criminal action. Likewise, petitioner cites Section 223(a) of the same Code, which states that in case of failure to file a return, the tax may be assessed or a proceeding in court may be begun without assessment.

Respondents, on the other hand, maintain that an assessment is not an action or proceeding for the collection of taxes, but merely a notice that the amount stated therein is due as tax and that the taxpayer is required to pay the same. Thus, qualifying as an assessment was the BIR examiners' Joint Affidavit, which contained the details of the supposed taxes due from respondent for taxable years ending 1987 and 1988, and which was attached to the tax evasion Complaint filed with the DOJ. Consequently, the denial by the BIR of private respondents' request for reinvestigation of the disputed assessment is properly appealable to the CTA.

We agree with petitioner. Neither the NIRC nor the regulations governing the protest of assessments 11 provide a specific definition or form of an assessment. However, the NIRC defines the specific functions and effects of an assessment. To consider the affidavit attached to the Complaint as a proper assessment is to subvert the nature of an assessment and to set a bad precedent that will prejudice innocent taxpayers.

True, as pointed out by the private respondents, an assessment informs the taxpayer that he or she has tax liabilities. But not all documents coming from the BIR containing a computation of the tax liability can be deemed assessments.

To start with, an assessment must be sent to and received by a taxpayer, and must demand payment of the taxes described therein within a specific period. Thus, the NIRC imposes a 25 percent penalty, in addition to the tax due, in case the taxpayer fails to pay deficiency tax within the time prescribed for its payment in the notice of assessment. Likewise, an interest of 20 percent per annum, or such higher rates as may be prescribed by rules and regulations, is to be collected form the date prescribed for its payment until the full payment. 12

The issuance of an assessment is vital in determining, the period of limitation regarding its proper issuance and the period within which to protest it. Section 203 13 of the NIRC provides that internal revenue taxes must be assessed within three years from the last day within which to file the return. Section 222, 14 on the other hand, specifies a period of ten years in case a fraudulent return with intent to evade was submitted or in case of failure to file a return. Also, Section 228 15 of the same law states that said assessment may be protested only within thirty days from receipt thereof. Necessarily, the taxpayer must be certain that a specific document constitutes an assessment. Otherwise, confusion would arise regarding the period within which to make an assessment or to protest the same, or whether interest and penalty may accrue thereon.

It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed, an assessment is deemed made only when the collector of internal revenue releases, mails or sends such notice to the taxpayer. 16

In the present case, the revenue officers' Affidavit merely contained a computation of respondents' tax liability. It did not state a demand or a period for payment. Worse, it was addressed to the justice secretary, not to the taxpayers.

Respondents maintain that an assessment, in relation to taxation, is simply understood' to mean:

A notice to the effect that the amount therein stated is due as tax and a demand for payment thereof. 17

Fixes the liability of the taxpayer and ascertains the facts and furnishes the data for the proper presentation of tax rolls. 18

Even these definitions fail to advance private respondents' case. That the BIR examiners' Joint Affidavit attached to the Criminal Complaint contained some details

of the tax liabilities of private respondents does not ipso facto make it an assessment. The purpose of the Joint Affidavit was merely to support and substantiate the Criminal Complaint for tax evasion. Clearly, it was not meant to be a notice of the tax due and a demand to the private respondents for payment thereof.

The fact that the Complaint itself was specifically directed and sent to the Department of Justice and not to private respondents shows that the intent of the commissioner was to file a criminal complaint for tax evasion, not to issue an assessment. Although the revenue officers recommended the issuance of an assessment, the commissioner opted instead to file a criminal case for tax evasion. What private respondents received was a notice from the DOJ that a criminal case for tax evasion had been filed against them, not a notice that the Bureau of Internal Revenue had made an assessment.

In addition, what private respondents sent to the commissioner was a motion for a reconsideration of the tax evasion charges filed, not of an assessment, as shown thus:

This is to request for reconsideration of the tax evasion charges against my client, PASCOR Realty and Development Corporation and for the same to be referred to the Appellate Division in order to give my client the opportunity of a fair and objective hearing. 19

Additional Issues:

Assessment Not

Necessary Before Filing of

Criminal Complaint

Private respondents maintain that the filing of a criminal complaint must be preceded by an assessment. This is incorrect, because Section 222 of the NIRC specifically states that in cases where a false or fraudulent return is submitted or in cases of failure to file a return such as this case, proceedings in court may be commenced without an assessment. Furthermore, Section 205 of the same Code clearly mandates that the civil and criminal aspects of the case may be pursued simultaneously. In Ungab v. Cusi, 20 petitioner therein sought the dismissal of the criminal Complaints for being premature, since his protest to the CTA had not yet been resolved. The Court held that such protests could not stop or suspend the criminal action which was independent of the resolution of the protest in the CTA. This was because the commissioner of internal revenue had, in such tax evasion

cases, discretion on whether to issue an assessment or to file a criminal case against the taxpayer or to do both.

Private respondents insist that Section 222 should be read in relation to Section 255 of the NLRC, 21 which penalizes failure to file a return. They add that a tax assessment should precede a criminal indictment. We disagree. To reiterate, said Section 222 states that an assessment is not necessary before a criminal charge can be filed. This is the general rule. Private respondents failed to show that they are entitled to an exception. Moreover, the criminal charge need only be supported by a prima facie showing of failure to file a required return. This fact need not be proven by an assessment.

The issuance of an assessment must be distinguished from the filing of a complaint. Before an assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The taxpayer is then given a chance to submit position papers and documents to prove that the assessment is unwarranted. If the commissioner is unsatisfied, an assessment signed by him or her is then sent to the taxpayer informing the latter specifically and clearly that an assessment has been made against him or her. In contrast, the criminal charge need not go through all these. The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified that a criminal case had been filed against him, not that the commissioner has issued an assessment. It must be stressed that a criminal complaint is instituted not to demand payment, but to penalize the taxpayer for violation of the Tax Code.

WHEREFORE, the petition is hereby GRANTED. The assailed Decision is REVERSED and SET ASIDE. CTA Case No. 5271 is likewise DISMISSED. No costs.

SO ORDERED.

Vitug, Purisima and Gonzaga-Reyes, JJ., concur.

Romero, J., abroad on official business.

G.R. No. L-20569 August 23, 1974

JOSE B. AZNAR, in his capacity as Administrator of the Estate of the deceased, Matias H. Aznar, petitioner, vs.COURT OF TAX APPEALS and COLLECTOR OF INTERNAL REVENUE, respondents.

Sato, Enad Garcia for petitioner.

Office of the Solicitor General Arturo A. Alafriz, Solicitor Alejandro B. Afurong and Special Attorney Librada R. Natividad for respondents.

 

ESGUERRA, J.:p

Petitioner, as administrator of the estate of the deceased, Matias H. Aznar, seeks a review and nullification of the decision of the Court of Tax Appeals in C.T.A. Case No. 109, modifying the decision of respondent Commissioner of Internal Revenue and ordering the petitioner to pay the government the sum of P227,691.77 representing deficiency income taxes for the years 1946 to 1951, inclusive, with the condition that if the said amount is not paid within thirty days from the date the decision becomes final, there shall be added to the unpaid amount the surcharge of 5%, plus interest at the rate of 12% per annum from the date of delinquency to the date of payment, in accordance with Section 51 of the National Internal Revenue Code, plus costs against the petitioner.

It is established that the late Matias H. Aznar who died on May 18, 1958, predecessor in interest of herein petitioner, during his lifetime as a resident of Cebu City, filed his income tax returns on the cash and disbursement basis, reporting therein the following:

Year

Net Income

Amount of Tax Paid

Exhibit

1945

P12,822.00

P114.66

pp. 85-88 B.I.R. rec.

1946

9,910.94

114.66

38-A (pp.

329-332 B.I.R rec.)

1947

10,200.00

132.00

39 (pp. 75-78 B.I.R rec.)

1948

9,148.34

68.90

40 (pp. 70-73 B.I.R. rec.)

1949

8,990.66

59.72

41 (pp. 64-67 B.I.R. rec.)

1950

8,364.50

28.22

42 (pp. 59-62, BIR rec.)

1951

6,800.00

n o n e

43 (pp. 54-

57 BIR rec.).

The Commissioner of Internal Revenue having his doubts on the veracity of the reported income of one obviously wealthy, pursuant to the authority granted him by Section 38 of the National Internal Revenue Code, caused B.I.R. Examiner Honorio Guerrero to ascertain the taxpayer's true income for said years by using the net worth and expenditures method of tax investigation. The assets and liabilities of the taxpayer during the above-mentioned years were ascertained and it was discovered that from 1946 to 1951, his net worth had increased every year, which increases in net worth was

very much more than the income reported during said years. The findings clearly indicated that the taxpayer did not declare correctly the income reported in his income tax returns for the aforesaid

years.

Based on the above findings of Examiner Guerrero, respondent Commissioner, in his letter dated November 28, 1952, notified the taxpayer (Matias H. Aznar) of the assessed tax delinquency to the amount of P723,032.66, plus compromise penalty. The taxpayer requested a reinvestigation which was granted for the purpose of verifying the merits of the various objections of the taxpayer to the

deficiency income tax assessment of November 28, 1952.

After the reinvestigation, another deficiency assessment to the reduced amount of P381,096.07 dated February 16, 1955, superseded the previous assessment and notice thereof was received by

Matias H. Aznar on March 2, 1955.

The new deficiency assessment was based on the following computations:

1 9 4 6

Net income per return ........................ P9,910.94Add: Under declared income .............. 22,559.94Net income per investigation............... 32,470.45

Deduct: Income tax liability per return as assessed ...................................................... 114.66

Balance of tax due ........................................................... P3,687.10 Add: 50% surcharge ........................................................ 1,843.55

DEFICIENCY INCOME TAX ...................................... P5,530.65

1 9 4 7

Net income per return ..................................................... P10,200.00 Add: Under declared income ............................................ 90,413.56

Net income per reinvestigation ....................................... P100,613.56 Deduct: Personal and additional exemption ...................... 7,000.00

Amount of income subject to tax ...................................... P93,613.56 Total tax liability ............................................................... P24,753.15

Deduct: Income tax liability per return as assessed ............ 132.00 Balance of tax due ........................................................... P24,621.15

Add: 50% surcharge ........................................................ 12,310.58 DEFICIENCY INCOME TAX ...................................... P36,931.73

1 9 4 8

Net income per return ...................................................... P9,148.34 Add: Under declared income ............................................. 15,624.63

Net income per reinvestigation .......................................... P24,772.97 Deduct: Personal and additional exemptions ...................... 7,000.00

Amount of income subject to tax ....................................... P17,772.97 Total tax liability ............................................................... 2,201.40 Deduct: Income tax liability per return as assessed ............ 68.90

Balance of tax due ........................................................... P2,132.500Add: 50% surcharge ........................................................ 1,066.25 DEFICIENCY INCOME

TAX ...................................... P3,198.75

1 9 4 9

Net income per return ....................................................... P9,990.66 Add: Under declared income ............................................. 105,418.53 Net income per reinvestigation .......................................... 114,409.19 Deduct: Personal and additional exemptions ...................... P7,000.00 Amount of income subject to tax ....................................... P107,409.19Total tax liability ............................................................... P30,143.68

Deduct: Income tax liability per return as assessed ............. 59.72 Balance of tax due ............................................................ P30,083.96

Add: 50% surcharge ......................................................... 15,041.98 DEFICIENCY INCOME TAX ....................................... P45,125.94

1 9 5 0

Net income per return ....................................................... P8,364.50 Add: Under declared income ............................................. 365,578.76

Net income per reinvestigation .......................................... P373,943.26 Deduct: Personal and additional exemptions ...................... 7,800.00

Amount of income subject to tax ....................................... P366,143.26 Total tax liability ............................................................... P185,883.00

Deduct: Income tax liability per return as assessed ............. 28.00 Balance of tax due ............................................................ P185,855.00

Add: 50% surcharge ......................................................... 92,928.00 DEFICIENCY INCOME TAX ....................................... P278,783.00

1 9 5 1

Net income per return ........................................................ P6,800.00 Add: Under declared income ............................................... 33,355.80

Net income per reinvestigation ............................................ P40,155.80

Deduct: Personal and additional exemptions ........................ 7,200.00 Amount of income subject to tax ......................................... P32,955.80 Total tax liability .................................................................. P7,684.00Deduct: Income tax liability per return as assessed ............... - o - .

Balance of tax due .............................................................. P7,684.00 Add: 50% surcharge ........................................................... 3,842.00 DEFICIENCY INCOME

TAX .......................................... P11,526.00

S U M M A R Y

1946 .... P5,530.65

1947 .... 36,931.73

1948 .... 3,198.75

1949 .... 45,125.94

1950 .... 278,783.00

1951 .... 11,526.00

Total .... P381,096.07

In determining the unreported income, the respondent Commissioner of Internal Revenue resorted to the networth method which is based on the following computations:

1 9 4 5

Real estate inventory ................................ P64,738.00 Other assets ............................................. 37,606.87

Total assets ............................................ P102,344.87Less: Depreciation allowed ...................... 2,027.00

Networth as of Dec. 31, 1945 ................ P100,316.97

1 9 4 6

Real estate inventory ................................. P86,944.18 Other assets ............................................. 60,801.65

Total assets ............................................. P147,745.83Less: Depreciation allowed ...................... 4,875.41

Net assets ................................................ P142,870.42 Less: Liabilities .................. P17,000.00

Net Worth as of Jan. 1, 1946 ................... P100,316.97 P117,316.97 Increase in networth ................................. 25,553.45 Add: Estimated living expenses ................. 6,917.00 Net income .............................................. P32,470.45

1 9 4 7

Real estate inventory .................................. P237,824.18 Other assets ............................................... 54,495.52

Total assets ............................................... P292,319.70 Less: Depreciation allowed ......................... 12,835.72 Net assets .................................................. 279,483.98

Less: Liabilities ................... P60,000.00 Networth as of

Jan. 1, 1947 ........................ 125,870.42 P185,870.42 Increase in networth ................................... P93,613.56 Add: Estimated living expenses ................... 7,000.00 Net income ................................................P100,613.56

1 9 4 8

Real estate inventory .................................. P244,824.18 Other assets .............................................. 118,720.60

Total assets ............................................... P363,544.78 Less: Depreciation allowed ........................ 20,936.03

Net assets ................................................. P342,608.75 Less: Liabilities ................... P105,351.80

Networth as of Jan. 1, 1948 ...................... 219,483.98 P324,835.78

Increase in networth ................................... P17,772.97 Add: Estimated living expenses ................... 7,000.00 Net income ................................................ P24,772.97

1 9 4 9

Real estate inventory ................................. P400,515.52 Investment in schools and other colleges .... 23,105.29 Other assets ............................................. 70,311.00

Total assets ............................................... P493,931.81 Less: Depreciation allowed ........................ 32,657.08

Net assets ................................................. P461.274.73 Less; Liabilities .................. P116,608.59

Networth as of Jan. 1, 1949 ...................... 237,256.95 P353,865.54

Increase in networth .................................. P107,409.19Add: Estimated living expenses .................. 7,000.00

Net income ............................................... P114,409.19

1 9 5 0

Real estate inventory .................................. P412,465.52 Investment in Schools and

other colleges ................................ 193,460.99 October assets .......................................... 310,788.87

Total assets ............................................... P916,715.38 Less; Depreciation allowed ........................ 47,561.99

Net assets ................................................. P869,153.39 Less: Liabilities .................. P158,343.99

Networth as of Jan. 1, 1950 ... 344,666.14 P503,010.13 Increase in networth ................................... P366,143.26

Add: Estimated living expenses ................... 7,800.00 Net income ................................................. P373,943.26

1 9 5 1

Real estate inventory ................................... P412,465.52 Investment in schools and other colleges ..... 214,016.21 Other assets ............................................... 320,209.40

Total assets ................................................ P946,691.13 Less: Depreciation allowed ......................... 62,466.90

Net assets .................................................. P884,224.23 Less: Liabilities ........................................... P140,459.03

Networth as of Jan. 1, 1951 ................ 710,809.40 P851,268.43

Increase in networth .................................... P32,955.80 Add: Estimated living expenses .................... 7,200.00 Net income ................................................. P40,155.80

(Exh. 45-B, BIR rec. p. 188)

On February 20, 1953, respondent Commissioner of Internal Revenue, thru the City Treasurer of Cebu, placed the properties of Matias H. Aznar under distraint and levy to secure payment of the deficiency income tax in question. Matias H. Aznar filed his petition for review of the case with the

Court of Tax Appeals on April 1, 1955, with a subsequent petition immediately thereafter to restrain respondent from collecting the deficiency tax by summary method, the latter petition being granted on February 8, 1956, per C.T.A. resolution, without requiring petitioner to file a bond. Upon review,

this Court set aside the C.T.A. resolution and required the petitioner to deposit with the Court of Tax Appeals the amount demanded by the Commissioner of Internal Revenue for the years 1949 to

1951 or furnish a surety bond for not more than double the amount.

On March 5, 1962, in a decision signed by the presiding judge and the two associate judges of the Court of Tax Appeals, the lower court concluded that the tax liability of the late Matias H. Aznar for the year 1946 to 1951, inclusive should be P227,788.64 minus P96.87 representing the tax credit

for 1945, or P227,691.77, computed as follows:

1 9 4 6

Net income per return .............................................. P9,910.94 Add: Under declared income ..................................... 22,559.51 Net income ............................................................ P32,470.45

Less: Personal and additional exemptions .................. 6,917.00 Income subject to tax ............................................. P25,553.45 Tax due thereon ...................................................... P3,801.76

Less: Tax already assessed ...................................... 114.66 Balance of tax due .................................................... P3,687.10 Add: 50% surcharge ................................................. 1,843.55

Deficiency income tax ................................................ P5,530.65

1 9 4 7

Net income per return ............................................ P10,200.00 Add: Under declared income .................................. 57,551.19 Net income ........................................................... P67,751.19 Less: Personal and additional exemptions ............... 7,000.00 Income subject to tax ............................................. P60,751.19 Tax due thereon ..................................................... P13,420.38 Less: Tax already assessed ..................................... P132.00

Balance of tax due ................................................... P13,288.38 Add: 50% surcharge ................................................ 6,644.19

Deficiency income tax .............................................. P19,932.57

1 9 4 8

Net income per return .............................................. P9,148.34 Add: Under declared income ..................................... 8,732.10 Net income ............................................................ P17,880.44 Less: Personal and additional exemptions ................. 7,000.00 Income subject to tax .............................................. P10,880.44 Tax due thereon ...................................................... P1,029.67

Less: Tax already assessed ....................................... 68.90 Balance of tax due .................................................... 960.77 Add: 50% surcharge ................................................. 480.38

Deficiency income tax ............................................... P1,441.15

1 9 4 9

Net income per return ................................................. P8,990.66 Add: under declared income ......................................... 43,718.53 Net income ............................................................... P52,709.19 Less: Personal and additional exemptions .................... 7,000.00 Income subject to tax ................................................. P45,709.19 Tax due thereon ......................................................... P8,978.57

Less: Tax already assessed ......................................... 59.72 Balance of tax due ....................................................... P8,918.85 Add: 50% surcharge .................................................... 4,459.42

Deficiency income tax ................................................. P13,378.27

1 9 5 0

Net income per return .................................................. P6,800.00 Add: Under declared income ......................................... 33,355.80 Net income ................................................................. P40,155.80

Less: Personal and additional exemptions ...................... 7,200.00 Income subject to tax .................................................. P32,955.80 Tax due thereon ........................................................... P7,684.00

Less: Tax already assessed ........................................... -o- .Balance of tax due ........................................................ P7,684.00

Add: 50% surcharge .................................................... 3,842.00Deficiency income tax .................................................. P11,526.00

1 9 5 1

Net income per return ................................................... P8,364.50 Add: Under declared income ........................................ 246,449.06 Net income ............................................................... P254.813.56 Less: Personal and additional exemptions .................... 7,800.00 Income subject to tax ................................................ P247,013.56Tax due thereon ........................................................ P117,348.00

Less: Tax already assessed ........................................ 28.00 Balance of tax due ..................................................... P117,320.00

Add: 50% surcharge .................................................. 58,660.00 Deficiency income tax ................................................ P175 980.00

S U M M A R Y

1946 P5,530.65

1947 19,932.57

1948 1,441.15

1949 13,378.27

1950 175,980.00

1951 11,526.00

P227,788.64.

I

The first vital issue to be decided here is whether or not the right of the Commissioner of Internal Revenue to assess deficiency income taxes of the late Matias H. Aznar for the years 1946, 1947, and 1948 had already prescribed at the time the assessment was made on November 28, 1952.

Petitioner's contention is that the provision of law applicable to this case is the period of five years limitation upon assessment and collection from the filing of the returns provided for in See. 331 of the National Internal Revenue Code. He argues that since the 1946 income tax return could be

presumed filed before March 1, 1947 and the notice of final and last assessment was received by

the taxpayer on March 2, 1955, a period of about 8 years had elapsed and the five year period provided by law (Sec. 331 of the National Internal Revenue Code) had already expired. The same

argument is advanced on the taxpayer's return for 1947, which was filed on March 1, 1948, and the return for 1948, which was filed on February 28, 1949. Respondents, on the other hand, are of the firm belief that regarding the prescriptive period for assessment of tax returns, Section 332 of the

National Internal Revenue Code should apply because, as in this case, "(a) In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time

within ten years after the discovery of the falsity, fraud or omission" (Sec. 332 (a) of the NIRC).

Petitioner argues that Sec. 332 of the NIRC does not apply because the taxpayer did not file false and fraudulent returns with intent to evade tax, while respondent Commissioner of Internal

Revenue insists contrariwise, with respondent Court of Tax Appeals concluding that the very "substantial under declarations of income for six consecutive years eloquently demonstrate the

falsity or fraudulence of the income tax returns with an intent to evade the payment of tax."

To our minds we can dispense with these controversial arguments on facts, although we do not deny that the findings of facts by the Court of Tax Appeals, supported as they are by very

substantial evidence, carry great weight, by resorting to a proper interpretation of Section 332 of the NIRC. We believe that the proper and reasonable interpretation of said provision should be that

in the three different cases of (1) false return, (2) fraudulent return with intent to evade tax, (3) failure to file a return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within ten years after the discovery of the (1)

falsity, (2) fraud, (3) omission. Our stand that the law should be interpreted to mean a separation of the three different situations of false return, fraudulent return with intent to evade tax, and failure to file a return is strengthened immeasurably by the last portion of the provision which segregates the

situations into three different classes, namely "falsity", "fraud" and "omission". That there is a difference between "false return" and "fraudulent return" cannot be denied. While the first merely

implies deviation from the truth, whether intentional or not, the second implies intentional or deceitful entry with intent to evade the taxes due.

The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec. 331 of the NIRC should be applicable to normal circumstances, but whenever the government is placed at

a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities due to false returns, fraudulent return intended to evade payment of tax or failure to file returns, the period of ten years provided for in Sec. 332 (a) NIRC, from the time of the discovery of the falsity, fraud or

omission even seems to be inadequate and should be the one enforced.

There being undoubtedly false tax returns in this case, We affirm the conclusion of the respondent Court of Tax Appeals that Sec. 332 (a) of the NIRC should apply and that the period of ten years within which to assess petitioner's tax liability had not expired at the time said assessment was

made.

II

As to the alleged errors committed by the Court of Tax Appeals in not deducting from the alleged undeclared income of the taxpayer for 1946 the proceeds from the sale of jewelries valued at

P30,000; in not excluding from other schedules of assets of the taxpayer (a) accounts receivable from customers in the amount of P38,000 for 1948, P126,816.50 for 1950, and provisions for

doubtful accounts in the amount of P41,810.56 for 1950; (b) over valuation of hospital and dental

buildings for 1949 in the amount of P32,000 and P6,191.32 respectively; (c) investment in hollow block business in the amount of P8,603.22 for 1949; (d) over valuation of surplus goods in the

amount of P23,000 for the year 1949; (e) various lands and buildings included in the schedule of assets for the years 1950 and 1951 in the total amount of P243,717.42 for 1950 and P62,564.00 for 1951, these issues would depend for their resolution on determination of questions of facts based on an evaluation of evidence, and the general rule is that the findings of fact of the Court of Tax Appeals supported by substantial evidence should not be disturbed upon review of its decision

(Section 2, Rule 44, Rules of Court).

On the question of the alleged sale of P30,000 worth of jewelries in 1946, which amount petitioner contends should be deducted from the taxpayer's net worth as of December 31, 1946, the record

shows that Matias H. Aznar, when interviewed by B.I.R. Examiner Guerrero, stated that at the beginning of 1945 he had P60,000 worth of jewelries inherited from his ancestors and were

disposed off as follows: 1945, P10,000; 1946, P20,000; 1947, P10,000; 1948, P10,000; 1949, P7,000; (Report of B.I.R. Examiner Guerrero, B.I.R. rec. pp. 90-94).

During the hearing of this case in the Court of Tax Appeals, petitioner's accountant testified that on January 1, 1945, Matias H. Aznar had jewelries worth P60,000 which were acquired by purchase during the Japanese occupation (World War II) and sold on various occasions, as follows: 1945,

P5,000 and 1946, P30,000. To corroborate the testimony of the accountant, Mrs. Ramona Agustines testified that she bought from the wife of Matias H. Aznar in 1946 a diamond ring and a

pair of earrings for P30,000; and in 1947 a wrist watch with diamonds, together with antique jewelries, for P15,000. Matias H. Aznar, on the other hand testified that in 1945, his wife sold to Sards Parino jewelries for P5,000 and question, Mr. Aznar stated that his transaction with Sards

Parino, with respect to the sale of jewelries, amounted to P15,000.

The lower court did not err in finding material inconsistencies in the testimonies of Matias H. Aznar and his witnesses with respect to the values of the jewelries allegedly disposed off as stated by the witnesses. Thus, Mr. Aznar stated to the B.I.R. examiner that jewelries worth P10,000 were sold in

1945, while his own accountant testified that the same jewelries were sold for only P5,000. Mr. Aznar also testified that Mrs. Agustines purchased from his wife jewelries for P35,000, and yet Mrs. Agustines herself testified that she bought jewelries for P30,000 and P15,000 on two occasions, or

a total of P45,000.

We do not see any plausible reason to challenge the fundamentally sound basis advanced by the Court of Tax Appeals in considering the inconsistencies of the witnesses' testimony as material, in

the following words:

We do not say that witnesses testifying on the same transaction should give identical testimonies. Because of the frailties and the limitations of the human mind, witnesses' statements are apt to be inconsistent in certain points, but

usually the inconsistencies refer to the minor phases of the transaction. It is the insignificance of the detail of an occurrence that fails to impress the human mind.

When that same mind, made to recall what actually happened, the significant point which it failed to take note is naturally left out. But it is otherwise as regards

significant matters, for they leave indelible imprints upon the human mind. Hence, testimonial inconsistencies on the minor details of an occurrence are dismissed lightly by the courts, while discrepancies on significant points are

taken seriously and weigh adversely to the party affected thereby.

There is no sound basis for deviating from the lower court's conclusion that: "Taxwise in view of the aforesaid inconsistencies, which we deem material and significant, we dismiss as without factual basis petitioner's allegation that jewelries form part of his inventory of assets for the purpose of

establishing his net worth at the beginning of 1946."

As to the accounts receivable from the United States government for the amount of P38,254.90, representing a claim for goods commandered by the U.S. Army during World War II, and which

amount petitioner claimed should be included in his net worth as of January 1, 1946, the Court of Tax Appeals correctly concluded that the uncontradicted evidence showed that "the collectible

accounts of Mr. Aznar from the U.S. Government in the sum of P38,254.90 should be added to his assets (under accounts receivable) as of January 1, 1946. As of December 31, 1947, and

December 31, 1948, the years within which the accounts were paid to him, the 'accounts receivable shall decrease by P31,362.37 and P6,892.53, respectively."

Regarding a house in Talisay Cebu, (covered by Tax Declaration No. 8165) which was listed as an asset during the years 1945 and 1947 to 1951, but which was not listed as an asset in 1946 because of a notation in the tax declaration that it was reconstructed in 1947, the lower court

correctly concluded that the reconstruction of the property did not render it valueless during the time it was being reconstructed and consequently it should be listed as an asset as of January 1,

1946, with the same valuation as in 1945, that is P1,500.

On the question of accounts receivable from customers in the amount of P38,000 for 1948, and P123,816.58 for the years 1950 and 1951, which were included in the assets of Mr. Aznar for those years by the respondent Commissioner of Internal Revenue, it is very clear that those figures were

taken from the statements (Exhs. 31 and 32) filed by Mr. Matias H. Aznar with the Philippine National Bank when he was intending to obtain a loan. These statements were under oath and the natural implication is that the information therein reflected must be the true and accurate financial condition of the one who executed those statements. To believe the petitioner's argument that the

late Mr. Aznar included those figures in his sworn statement only for the purpose of obtaining a bigger credit from the bank is to cast suspicion on the character of a man who can no longer

defend himself. It would be as if pointing the finger of accusation on the late Mr. Aznar that he intentionally falsified his sworn statements (Exhs. 31 and 32) to make it appear that there were

non-existent accounts receivable just to increase his assets by fictitious entries so that his credit with the Philippine National Bank could be enhanced. Besides, We do not lose sight of the fact that

those statements (Exhs. 31 and 32) were executed before this tax controversy arose and the disputable presumptions that a person is innocent of crime or wrong; that a person intends the

ordinary consequences of his voluntary act; that a person takes ordinary care of his concerns; that private transaction have been fair and regular; that the ordinary course of business has been

followed; that things have happened according to the ordinary course of nature and the ordinary habits of life; that the law has been obeyed (Sec. 5, (a), (c), (d), (p), (q), (z), (ff), Rule 131 of the

Rules of Court), together with the conclusive presumption that "whenever a party has, by his own declaration, act, or omission, intentionally and deliberately led another to believe a particular thing true, and to act upon such belief, he cannot, in any litigation arising out of such declaration, act or

omission, be permitted to falsify it" (Sec. 3 (a), Rule 131, Rules of Court), convincingly indicate that the accounts receivable stated by Mr. Aznar in Exhibits 31 and 32 were true, in existence, and

accurate to the very amounts mentioned.

There is no merit to petitioners argument that those statements were only for the purpose of obtaining a bigger credit from the bank (impliedly stating that those statements were false) and

those accounts were allegedly back accounts of students of the Southwestern Colleges and were

worthless, and if collected, would go to the funds of the school. The statement of the late Mr. Aznar that they were accounts receivable from customers should prevail over the mere allegation of

petitioner, unsupported as they are by convincing evidence. There is no reason to disturb the lower court's conclusion that the amounts of P38,000 and P123,816.58 were accounts receivable from

customers and as such must be included as petitioner's assets for the years indicated.

As to the questions of doubtful accounts (bad debts), for the amount of P41,810.56, it is clear that said amount is taken from Exhibit 31, the sworn statement of financial condition filed by Mr. Matias H. Aznar with the Philippine National Bank. The lower court did not commit any error in again giving

much weight to the statement of Mr. Aznar and in concluding that inasmuch as this is an item separate and apart from the taxpayer's accounts receivable and non-deductible expense, it should

be reverted to the accounts receivable and, consequently, considered as an asset in 1950.

On the alleged over valuation of two buildings (hospital building which respondent Commissioner of Internal Revenue listed as an asset from 1949-1951 at the basic valuation of P130,000, and which

petitioner claims to be over valued by P32,000; dentistry building valued by respondent Commissioner of Internal Revenue at P36,191.34, which petitioner claims to be over valued by

P6,191.34), We find no sufficient reason to alter the conclusion of respondent Court of Tax Appeals sustaining the respondent Commissioner of Internal Revenue's valuation of both properties.

Respondent Commissioner of Internal Revenue based his valuation of the hospital building on the representation of Mr. Matias H. Aznar himself who, in his letter (Exh. 35) to the Philippine National Bank dated September 5, 1949, stated that the hospital building cost him P132,000. However in

view of the effect of a typhoon in 1949 upon the building, the value allowed was P130,000. Exhibit 35, contrary to petitioner's contention, should be given probative value because, although it is an

unsigned plain copy, that exhibit was taken by the investigating examiner of the B.I.R. from the files of the Southwestern Colleges and formed part of his report of investigation as a public official. The

estimates of an architect and a civil engineer who agreed that a value of P84,240 is fair for the hospital building, made years after the building was constructed, cannot prevail over the petitioner's

own estimate of his property's value.

Respondent Commissioner of Internal Revenue's valuation of P36,191.34 of the Dentistry Building is based on the letter of Mr. and Mrs. Matias H. Aznar to the Southwestern Colleges, dated

December 15, 1950, which is embodied in the minutes of the meeting of the Board of Trustees of the Southwestern Colleges held on May 7, 1951 (Exhibit G-1). In Exhibit 26 A, which is the cash book of the Southwestern Colleges, this building was listed as of the same amount. Petitioner's

estimate of P30,000 for this building, based on Architect Paca's opinion, cannot stand against the owner's estimate and that which appears in the cash book of the Southwestern Colleges, if we take

into consideration that the owner's (Mr. Matias H. Aznar) letter was written long before this tax proceeding was initiated, while architect Paca's estimate was made upon petitioner's request solely

for the purpose of evidence in this tax case.

In the inventory of assets of petitioner, respondent Commissioner of Internal Revenue included the administrative building valued at P19,200 for the years 1947 and 1948, and P16,700 for the years 1949 to 1951; and a high school building valued at P48,000 for 1947 and 1948, and P45,000 for 1949, 1950 and 1951. The reduced valuation for the latter years are due to allowance for partial

loss resulting from the 1949 typhoon. Petitioner did not question the inclusion of these buildings in the inventory for the years prior to 1950, but objected to their inclusion as assets as of January 1,

1950, because both buildings were destroyed by a typhoon in November of 1949. There is sufficient evidence (Exh. G-1, affidavit of Jesus S. Intan, employee in the office of City Assessor of

Cebu City, Exh. 18, Mr. Intan's testimony, a copy of a letter of the City Assessor of Cebu City) to prove that the two buildings were really destroyed by typhoon in 1949 and, therefore, should be

eliminated from the petitioner's inventory of assets beginning December 31, 1949.

On the issue of investment in the hollow blocks business, We see no compelling reason to alter the lower court's conclusion that "whatever was spent in the hollow blocks business is an investment,

and being an investment, the same should be treated as an asset. With respect to the amount representing the value of the building, there is no duplication in the listing as the inventory of real

property does not include the building in question."

Respondent Commissioner of Internal Revenue included in the inventory, under the heading of other asset, the amount of P8,663.22, treated as investment in the hollow block business.

Petitioner objects to the inclusion of P1,683.42 which was spent on the building and in the business and of P674.35 which was spent for labor, fuel, raw materials, office supplies etc., contending that the former amount is a duplication of inventory (included among the list of properties) and the latter

is a business expense which should be eliminated from the list of assets.

The inclusion of expenses (labor and raw materials) as part of the hollow block business is sanctioned in the inventory method of tax verification. It is a sound accounting practice to include

raw materials that will be used for future manufacture. Inclusion of direct labor is also proper, as all these items are to be embodied in a summary of assets (investment by the taxpayer credited to his

capital account as reflected in Exhibit 72-A, which is a working sheet with entries taken from the journal of the petitioner concerning his hollow blocks business). There is no evidence to show that

there was duplication in the inclusion of the building used for hollow blocks business as part of petitioner's investment as this building was not included in the listing of real properties of petitioner

(Exh. 45-C p. 187 B.I.R. rec.).

As to the question of the real value of the surplus goods purchased by Mr. Matias H. Aznar from the U.S. Army, the best evidence, as observed correctly by the lower court, is the statement of Mr. Matias H. Aznar, himself, as appearing Exh. 35 (copy of a letter dated September 5, 1949 to the Philippine National Bank), to the effect "as part of my assets I have different merchandise from

Warehouse 35, Tacloban, Leyte at a total cost of P43,000.00 and valued at no less than P20,000 at present market value." Petitioner's claim that the goods should be valued at only P20,000 in accordance with an alleged invoice is not supported by evidence since the invoice was not

presented as exhibit. The lower court's act in giving more credence to the statement of Mr. Aznar cannot be questioned in the light of clear indications that it was never controverted and it was given

at a time long before the tax controversy arose.

The last issue on propriety of inclusion in petitioner's assets made by respondent Commissioner of Internal Revenue concerns several buildings which were included in the list of petitioner's assets as

of December 31, 1950. Petitioner contends that those buildings were conveyed and ceded to Southwestern Colleges on December 15, 1950, in consideration of P100,723.99 to be paid in cash. The value of the different buildings are listed as: hospital building, P130,000; gymnasium, P43,000;

dentistry building, P36,191.34; bodega 1, P781.18; bodega 2, P7,250; college of law, P10,950; laboratory building, P8,164; home economics, P5,621; morgue, P2,400; science building, P23,600;

faculty house, P5,760. It is suggested that the value of the buildings be eliminated from the real estate inventory and the sum of P100,723.99 be included as asset as of December 31, 1950.

The lower court could not find any evidence of said alleged transfer of ownership from the taxpayer to the Southwestern Colleges as of December 15, 1950, an allegation which if true could easily be

proven. What is evident is that those buildings were used by the Southwestern Colleges. It is true that Exhibit G-1 shows that Mr. and Mrs. Matias H. Aznar offered those properties in exchange for shares of stocks of the Southwestern Colleges, and Exhibit "G" which is the minutes of the meeting

of the Board of Trustees of the Southwestern Colleges held on August 6, 1951, shows that Mr. Aznar was amenable to the value fixed by the board of trustees and that he requested to be paid in

cash instead of shares of stock. But those are not sufficient evidence to prove that transfer of ownership actually happened on December 15, 1950. Hence, the lower court did not commit any

error in sustaining the respondent Commissioner of Internal Revenue's act of including those buildings as part of the assets of petitioner as of December 31, 1950.

Petitioner also contends that properties allegedly ceded to the Southwestern Colleges in 1951 for P150,000 worth of shares of stocks, consisting of: land, P22,684; house, P13,700; group of houses, P8,000; building, P12,000; nurses home, P4,100; nurses home, P2,080, should be

excluded from the inventory of assets as of December 31, 1951. The evidence (Exh. H), however, clearly shows that said properties were formally conveyed to the Southwestern Colleges only on

September 25, 1952. Undoubtedly, petitioner was the owner of those properties prior to September 25, 1952 and said properties should form part of his assets as of December 31, 1951.

The uncontested portions of the lower court's decision consisting of its conclusions that library books valued at P7,041.03, appearing in a journal of the Southwestern Colleges marked as' Exhibit 25-A, being an investment, should be treated as an asset beginning December 31, 1950; that the expenses for construction to the amount of P113,353.70, which were spent for the improvement of the buildings appearing in Exhibit 24 are deemed absorbed in the increased value of the buildings as appraised by respondent Commissioner of Internal Revenue at cost after improvements were made, and should be taken out as additional assets; that the amount receivable of P5,776 from a certain Benito Chan should be treated as petitioner's asset but the amount of P5,776 representing the value of a house and lot given as collateral to secure said loan should not be considered as an

asset of petitioner since to do so would result in a glaring duplication of items, are all affirmed. There seems to be no controversy as to the rest of the items listed in the inventory of assets.

III

The second issue which appears to be of vital importance in this case centers on the lower court's imposition of the fraud penalty (surcharge of 50% authorized in Section 72 of the Tax Code). The petitioner insists that there might have been false returns by mistake filed by Mr. Matias H. Aznar

as those returns were prepared by his accountant employees, but there were no proven fraudulent returns with intent to evade taxes that would justify the imposition of the 50% surcharge authorized

by law as fraud penalty.

The lower court based its conclusion that the 50% fraud penalty must be imposed on the following reasoning: .

It appears that Matias H. Aznar declared net income of P9,910.94, P10,200, P9,148.34, P8,990.66, P8,364.50 and P6,800 for the years 1946, 1947, 1948, 1949, 1950 and 1951, respectively. Using the net worth method of determining the net income of a taxpayer, we find that he had net incomes of P32,470.45,

P67,751.19, P17,880.44, P52,709.11, P254,813.56 and P40,155.80 during the respective years 1946, 1947, 1948, 1949, 1950, and 1951. In consequence, he

underdeclared his income by 227% for 1946, 564% for 1947, 95%, for 1948, 486% for 1949, 2,946% for 1950 and 490% for 1951. These substantial under

declarations of income for six consecutive years eloquently demonstrate the falsity or fraudulence of the income tax return with an intent to evade the

payment of tax. Hence, the imposition of the fraud penalty is proper (Perez vs. Court of Tax Appeals, G.R. No. L-10507, May 30, 1958). (Emphasis supplied)

As could be readily seen from the above rationalization of the lower court, no distinction has been made between false returns (due to mistake, carelessness or ignorance) and fraudulent returns

(with intent to evade taxes). The lower court based its conclusion on the petitioner's alleged fraudulent intent to evade taxes on the substantial difference between the amounts of net income

on the face of the returns as filed by him in the years 1946 to 1951 and the net income as determined by the inventory method utilized by both respondents for the same years. The lower court based its conclusion on a presumption that fraud can be deduced from the very substantial disparity of incomes as reported and determined by the inventory method and on the similarity of consecutive disparities for six years. Such a basis for determining the existence of fraud (intent to evade payment of tax) suffers from an inherent flaw when applied to this case. It is very apparent

here that the respondent Commissioner of Internal Revenue, when the inventory method was resorted to in the first assessment, concluded that the correct tax liability of Mr. Aznar amounted to

P723,032.66 (Exh. 1, B.I.R. rec. pp. 126-129). After a reinvestigation the same respondent, in another assessment dated February 16, 1955, concluded that the tax liability should be reduced to P381,096.07. This is a crystal-clear, indication that even the respondent Commissioner of Internal Revenue with the use of the inventory method can commit a glaring mistake in the assessment of

petitioner's tax liability. When the respondent Court of Tax Appeals reviewed this case on appeal, it concluded that petitioner's tax liability should be only P227,788.64. The lower court in three

instances (elimination of two buildings in the list of petitioner's assets beginning December 31, 1949, because they were destroyed by fire; elimination of expenses for construction in petitioner's assets as duplication of increased value in buildings, and elimination of value of house and lot in

petitioner's assets because said property was only given as collateral) supported petitioner's stand on the wrong inclusions in his lists of assets made by the respondent Commissioner of Internal Revenue, resulting in the very substantial reduction of petitioner's tax liability by the lower court.

The foregoing shows that it was not only Mr. Matias H. Aznar who committed mistakes in his report of his income but also the respondent Commissioner of Internal Revenue who committed mistakes in his use of the inventory method to determine the petitioner's tax liability. The mistakes committed

by the Commissioner of Internal Revenue which also involve very substantial amounts were also repeated yearly, and yet we cannot presume therefrom the existence of any taint of official fraud.

From the above exposition of facts, we cannot but emphatically reiterate the well established doctrine that fraud cannot be presumed but must be proven. As a corollary thereto, we can also state that fraudulent intent could not be deduced from mistakes however frequent they may be,

especially if such mistakes emanate from erroneous entries or erroneous classification of items in accounting methods utilized for determination of tax liabilities The predecessor of the petitioner undoubtedly filed his income tax returns for "the years 1946 to 1951 and those tax returns were

prepared for him by his accountant and employees. It also appears that petitioner in his lifetime and during the investigation of his tax liabilities cooperated readily with the B.I.R. and there is no

indication in the record of any act of bad faith committed by him.

The lower court's conclusion regarding the existence of fraudulent intent to evade payment of taxes was based merely on a presumption and not on evidence establishing a willful filing of false and

fraudulent returns so as to warrant the imposition of the fraud penalty. The fraud contemplated by law is actual and not constructive. It must be intentional fraud, consisting of deception willfully and deliberately done or resorted to in order to induce another to give up some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade the tax contemplated by

the law. It must amount to intentional wrong-doing with the sole object of avoiding the tax. It necessarily follows that a mere mistake cannot be considered as fraudulent intent, and if both

petitioner and respondent Commissioner of Internal Revenue committed mistakes in making entries in the returns and in the assessment, respectively, under the inventory method of determining tax liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of

the respondent as made in good faith.

We conclude that the 50% surcharge as fraud penalty authorized under Section 72 of the Tax Code should not be imposed, but eliminated from the income tax deficiency for each year from 1946 to

1951, inclusive. The tax liability of the petitioner for each year should, therefore, be:

1946 P 3,687.10 1947 13,288.38

1948 960.77 1949 8,918.85

1950 117,320.00 1951 7,684.00 P151,859.10

The total sum of P151,859.10 should be decreased by P96.87 representing the tax credit for 1945, thereby leaving a balance of P151,762.23.

WHEREFORE, the decision of the Court of Tax Appeals is modified in so far as the imposition of the 50% fraud penalty is concerned, and affirmed in all other respects. The petitioner is ordered to

pay to the Commissioner of Internal Revenue, or his duly authorized representative, the sum of P151,762.23, representing deficiency income taxes for the years 1946 to 1951, inclusive, within 30

days from the date this decision becomes final. If the said amount is not paid within said period, there shall be added to the unpaid amount the surcharge of 5%, plus interest at the rate of 12% per annum from the date of delinquency to the date of payment, in accordance with Section 51 of the

National Internal Revenue Code.

With costs against the petitioner.

Makalintal, C.J, Castro, Teehankee, Makasiar and Muñoz Palma, JJ., concur

EN BANC

G.R. No. 166387             January 19, 2009

COMMISSIONER OF INTERNAL REVENUE, Petitioners, vs.ENRON SUBIC POWERCORPORATION, Respondents.

R E S O L U T I O N

CORONA, J.:

In this petition for review on certiorari under Rule 45 of the Rules of Court, petitioner Commissioner of Internal Revenue (CIR) assails the November 24, 2004 decision1 of the Court of Appeals (CA) annulling the formal assessment notice issued by the CIR against respondent Enron Subic Power Corporation (Enron) for failure to state the legal and factual bases for such assessment.

Enron, a domestic corporation registered with the Subic Bay Metropolitan Authority as a freeport enterprise,2 filed its annual income tax return for the year 1996 on April 12, 1997. It indicated a net loss of P7,684,948. Subsequently, the Bureau of Internal Revenue, through a preliminary five-day letter,3 informed it of a proposed assessment of an alleged P2,880,817.25 deficiency income tax.4 Enron disputed the proposed deficiency assessment in its first protest letter.5

On May 26, 1999, Enron received from the CIR a formal assessment notice6 requiring it to pay the alleged deficiency income tax of P2,880,817.25 for the taxable year 1996. Enron protested this deficiency tax assessment.7

Due to the non-resolution of its protest within the 180-day period, Enron filed a petition for review in the Court of Tax Appeals (CTA). It argued that the deficiency tax assessment disregarded the provisions of Section 228 of the National Internal Revenue Code (NIRC), as amended,8and Section 3.1.4 of Revenue Regulations (RR) No. 12-999 by not providing the legal and factual bases of the assessment. Enron likewise questioned the substantive validity of the assessment.10

In a decision dated September 12, 2001, the CTA granted Enron’s petition and ordered the cancellation of its deficiency tax assessment for the year 1996. The CTA reasoned that the assessment notice sent to Enron failed to comply with the requirements of a valid written notice under Section 228 of the NIRC and RR No. 12-99. The CIR’s motion for reconsideration of the CTA decision was denied in a resolution dated November 12, 2001.

The CIR appealed the CTA decision to the CA but the CA affirmed it. The CA held that the audit working papers did not substantially comply with Section 228 of the NIRC and RR No. 12-99 because they failed to show the applicability of the cited law to the facts of the assessment. The CIR filed a motion for reconsideration but this was deemed abandoned when he filed a motion for extension to file a petition for review in this Court.

The CIR now argues that respondent was informed of the legal and factual bases of the deficiency assessment against it.

We adopt in toto the findings of fact of the CTA, as affirmed by the CA. In Compagnie Financiere Sucres et Denrees v. CIR,11 we held:

We reiterate the well-established doctrine that as a matter of practice and principle, [we] will not set aside the conclusion reached by an agency, like the CTA, especially if affirmed by the [CA]. By the very nature of its function, it has dedicated itself to the study and consideration of tax problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority on its part, which is not present here.

The CIR errs in insisting that the notice of assessment in question complied with the requirements of the NIRC and RR No. 12-99.

A notice of assessment is:

[A] declaration of deficiency taxes issued to a [t]axpayer who fails to respond to a Pre-Assessment Notice (PAN) within the prescribed period of time, or whose reply to the PAN was found to be without merit. The Notice of Assessment shall inform the [t]axpayer of this fact, and that the report of investigation submitted by the Revenue Officer conducting the audit shall be given due course.

The formal letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the fact, the law, rules and regulations or jurisprudence on which the assessment is based, otherwise the formal letter of demand and the notice of assessment shall be void. (emphasis supplied)12

Section 228 of the NIRC provides that the taxpayer shall be informed in writing of the law and the facts on which the assessment is made. Otherwise, the assessment is void. To implement the provisions of Section 228 of the NIRC, RR No. 12-99 was enacted. Section 3.1.4 of the revenue regulation reads:

3.1.4. Formal Letter of Demand and Assessment Notice. – The formal letter of demand and assessment notice shall be issued by the Commissioner or his duly

authorized representative. The letter of demand calling for payment of the taxpayer’s deficiency tax or taxes shall state the facts, the law, rules and regulations, or jurisprudence on which the assessment is based, otherwise, the formal letter of demand and assessment notice shall be void. The same shall be sent to the taxpayer only by registered mail or by personal delivery. xxx (emphasis supplied)

It is clear from the foregoing that a taxpayer must be informed in writing of the legal and factual bases of the tax assessment made against him. The use of the word “shall” in these legal provisions indicates the mandatory nature of the requirements laid down therein. We note the CTA’s findings:

In [this] case, [the CIR] merely issued a formal assessment and indicated therein the supposed tax, surcharge, interest and compromise penalty due thereon. The Revenue Officers of the [the CIR] in the issuance of the Final Assessment Notice did not provide Enron with the written bases of the law and facts on which the subject assessment is based. [The CIR] did not bother to explain how it arrived at such an assessment. Moreso, he failed to mention the specific provision of the Tax Code or rules and regulations which were not complied with by Enron.13

Both the CTA and the CA concluded that the deficiency tax assessment merely itemized the deductions disallowed and included these in the gross income. It also imposed the preferential rate of 5% on some items categorized by Enron as costs. The legal and factual bases were, however, not indicated.

The CIR insists that an examination of the facts shows that Enron was properly apprised of its tax deficiency. During the pre-assessment stage, the CIR advised Enron’s representative of the tax deficiency, informed it of the proposed tax deficiency assessment through a preliminary five-day letter and furnished Enron a copy of the audit working paper14 allegedly showing in detail the legal and factual bases of the assessment. The CIR argues that these steps sufficed to inform Enron of the laws and facts on which the deficiency tax assessment was based.

We disagree. The advice of tax deficiency, given by the CIR to an employee of Enron, as well as the preliminary five-day letter, were not valid substitutes for the mandatory notice in writing of the legal and factual bases of the assessment. These steps were mere perfunctory discharges of the CIR’s duties in correctly assessing a taxpayer.15 The requirement for issuing a preliminary or final notice, as the case may be, informing a taxpayer of the existence of a deficiency tax assessment is markedly different from the requirement of what such notice must contain. Just because the CIR issued an advice, a preliminary letter during the pre-assessment stage and a final notice, in the order required by law, does not necessarily mean that Enron was informed of the law and facts on which the deficiency tax assessment was made.

The law requires that the legal and factual bases of the assessment be stated in the formal letter of demand and assessment notice. Thus, such cannot be presumed. Otherwise, the express provisions of Article 228 of the NIRC and RR No. 12-99 would be rendered nugatory. The alleged “factual bases” in the advice, preliminary letter and “audit working papers” did not suffice. There was no going around the mandate of the law that the legal and factual bases of the assessment be stated in writing in the formal letter of demand accompanying the assessment notice.

We note that the old law merely required that the taxpayer be notified of the assessment made by the CIR. This was changed in 1998 and the taxpayer must now be informed not only of the law but also of the facts on which the assessment is made.16 Such amendment is in keeping with the constitutional principle that no person shall be deprived of property without due process.17 In view of the absence of a fair opportunity for Enron to be informed of the legal and factual bases of the assessment against it, the assessment in question was void. We reiterate our ruling in Reyes v. Almanzor, et al.:18

Verily, taxes are the lifeblood of the Government and so should be collected without unnecessary hindrance. However, such collection should be made in accordance with law as any arbitrariness will negate the very reason for the Government itself.

WHEREFORE, the petition is hereby DENIED. The November 24, 2004 decision of the Court of Appeals isAFFIRMED.

No costs.

SO ORDERED.

RENATO C. CORONAAssociate Justice