Tolentino v. Secretary of Finance

Problem: The House Ways and Means Committee of the House of Representatives recommended for approval H. No. 11197 or the VAT Bill. The bill (H. No. 11197) was considered on second reading. The lower house also approved it after the third and final reading. It was sent to the Senate and was referred to its Committee on Ways and Means. The Senate Committee submitted its report recommending approval of S. No. 1630. It was stated that the bill was being submitted "in substitution of Senate Bill No. 1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197." The Senate then began consideration of the bill (S. No. 1630). It finished debates on the bill and approved it on second reading. It also approved the bill on the third reading. H. No. 11197 and its Senate version (S. No. 1630) were then referred to a conference committee which, after meeting four times recommended that "House Bill No. 11197, in consolidation with Senate Bill No. 1630, be approved in accordance with the attached copy of the bill as reconciled and approved by the conferees." The Conference Committee bill was thereafter approved by both the House of Representatives and by the Senate. The enrolled bill was then presented to the President of the Philippines who signed it. It became Republic Act No. 7716. It was published in two newspapers of general circulation and thereafter it took effect, although its implementation was suspended to allow time for the registration of business entities. It would have been enforced but its enforcement was stopped because the Supreme Court granted a temporary restraining order.

The contention of petitioners, former Senator Arturo Tolentino et al., is that in enacting Republic Act No. 7716, or the Expanded Value-Added Tax Law, Congress violated the Constitution because, although H. No. 11197 had originated in the House of Representatives, it was not passed by the Senate but was simply consolidated with the Senate version (S. No. 1630) in the Conference Committee to produce the bill which the President signed into law. The following provisions of the Constitution are cited in support of the proposition that because Republic Act No. 7716 was passed in this manner, it did not originate in the House of Representatives and it has not thereby become a law:

Art. VI, s. 24: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.

Art. VI, s. 26(2): No bill passed by either House shall become a law unless it has passed three readings on separate days, and printed copies thereof in its final form have been distributed to its Members three days before its passage, except when the President certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and the yeas and nays entered in the Journal.

Did RA 7716 violate Art. VI, Section 24 and Art. VI, Section 26(2) of the Constitution?

Answer: No. It is not the law but the revenue bill which is required by the Constitution to “originate exclusively” in the House of Representatives. It is important to emphasize this, because a bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. What is important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue statute and not only the bill which initiated the legislative process culminating in the enactment of the law must substantially be the same as the House bill would be to deny the Senate’s power not only to “concur with amendments” but also to “propose amendments.” It would be to violate the coequality of legislative power of the two houses of Congress and in fact make the House superior to the Senate. Furthermore, there is really no difference between the Senate preserving H. No. 11197 up to the enacting clause and then writing its own version following the enacting clause (which, it would seem, petitioners admit is an amendment by substitution), and, on the other hand, separately presenting a bill of its own on the same subject matter. In either case the result are two bills on the same subject.

Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or tax bills, bills authorizing an increase of the public debt, private bills and bills of local application must come from the House of Representatives on the theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are elected at large, are expected to approach the same problems from the national perspective. Both views are thereby made to bear on the enactment of such laws. Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the House, so long as action by the Senate as a body is withheld pending receipt of the House bill.

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The presidential certification dispensed with the requirement not only of printing but also that of reading the bill on separate days. The phrase “except when the President certifies to the necessity of its immediate enactment, etc.” in Art. VI, s. 26(2) qualifies the two stated conditions before a bill can become a law: (i) the bill has passed three readings on separate days and (ii) it has been printed in its final form and distributed three days before it is finally approved. In other words, the “unless” clause must be read in relation to the “except” clause, because the two are really coordinate clauses of the same sentence. To construe the “except” clause as simply dispensing with the second requirement in the “unless” clause (i.e., printing and distribution three days before final approval) would not only violate the rules of grammar. It would also negate the very premise of the “except” clause: the necessity of securing the immediate enactment of a bill which is certified in order to meet a public calamity or emergency. For if it is only the printing that is dispensed with by presidential certification, the time saved would be so negligible as to be of any use in insuring immediate enactment. It may well be doubted whether doing away with the necessity of printing and distributing copies of the bill three days before the third reading would insure speedy enactment of a law in the face of an emergency requiring the calling of a special election for President and Vice-President. Under the Constitution such a law is required to be made within seven days of the convening of Congress in emergency session.

As to the possibility of an entirely new bill emerging out of a Conference Committee, it has been explained: Under congressional rules of procedure, conference committees are not expected to make any material change in the measure at issue, either by deleting provisions to which both houses have already agreed or by inserting new provisions. But this is a difficult provision to enforce. Note the problem when one house amends a proposal originating in either house by striking out everything following the enacting clause and substituting provisions which make it an entirely new bill. The versions are now altogether different, permitting a conference committee to draft essentially a new bill. The result is a third version, which is considered an “amendment in the nature of a substitute,” the only requirement for which being that the third version be germane to the subject of the House and Senate bills. Indeed, this Court recently held that it is within the power of a conference committee to include in its report an entirely new provision that is not found either in the House bill or in the Senate bill. If the committee can propose an amendment consisting of one or two provisions, there is no reason why it cannot propose several provisions, collectively considered as an “amendment in the nature of a substitute,” so long as such amendment is germane to the subject of the bills before the committee. After all, its report was not final but needed the approval of both houses of Congress to become valid as an act of the legislative department. The charge that in this case the Conference Committee acted as a third legislative chamber is thus without any basis. Art. VI, s. 26(2) must, therefore be construed as referring only to bills introduced for the first time in either house of Congress, not to the conference committee report. For if the purpose of requiring three readings is to give members of Congress time to study bills, it cannot be gainsaid that H. No. 11197 was passed in the House after three readings; that in the Senate it was considered on first reading and then referred to a committee of that body; that although the Senate committee did not report out the House bill, it submitted a version (S. No. 1630) which it had prepared by “taking into consideration” the House bill; that for its part the Conference Committee consolidated the two bills and prepared a compromise version; that the Conference Committee Report was thereafter approved by the House and the Senate, presumably after appropriate study by their members. We cannot say that, as a matter of fact, the members of Congress were not fully informed of the provisions of the bill.

Whatever doubts there may be as to the formal validity of Republic Act No. 7716 must be resolved in its favor. Our cases manifest firm adherence to the rule that an enrolled copy of a bill is conclusive not only of its provisions but also of its due enactment. Not even claims that a proposed constitutional amendment was invalid because the requisite votes for its approval had not been obtained or that certain provisions of a statute had been “smuggled” in the printing of the bill have moved or persuaded us to look behind the proceedings of a coequal branch of the government. There is no reason now to depart from this rule. No claim is here made that the “enrolled bill” rule is absolute. In fact in one case we “went behind” an enrolled bill and consulted the Journal to determine whether certain provisions of a statute had been approved by the Senate in view of the fact that the President of the Senate himself, who had signed the enrolled bill, admitted a mistake and withdrew his signature, so that in effect there was no longer an enrolled bill to consider. But where allegations that the constitutional procedures for the passage of bills have not been observed have no more basis than another allegation that the Conference Committee “surreptitiously” inserted provisions into a bill which it had prepared, we should decline the invitation to go behind the enrolled copy of the bill. To disregard the “enrolled bill” rule in such cases would be to disregard the respect due the other two departments of our government.

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Stevedoring v. Trinidad

Problem: The plaintiff, Luzon Stevedoring Co. is and was a corporation engaged in the stevedoring business in Manila. Said business consisted of loading and unloading cargo from vessels in port, at certain rates of charge per unit of cargo and that all the work done by it is conducted under the direct supervision of the officers of the ships and under the instruction given to plaintiff’s men by the captain and officers of said ships. The plaintiff had no liability for the improper loading or unloading of vessels, the captain being responsible for said work and the latter also answered for all the cargo placed on board and for the manner in which said cargo is loaded. Plaintiff’s laborers were said to be under the direct control of the captain that no discretion was left to the plaintiff nor its men. The plaintiff was assessed taxes by the defendant, Internal Revenue Collector, whom the plaintiff paid under protest. The plaintiff commenced an action to recover the sum it paid to the defendant. In his special defense the defendant alleged that during the first quarter of the year 1921 the plaintiff was engaged in business as a contractor, its gross receipts from said business during said quarter amounting to P242,281.33, and that the defendant, under the provisions of section 1462 of Act No. 2711, levied and assessed on the above-mentioned amount the percentage tax amounting to P2,422.81, which the plaintiff paid on April 18, 1921, under protest, this protest having been duly overruled by the defendant.

Is the plaintiff a contractor making the collection of the tax he paid legal?

Answer: No. The plaintiff is not a contractor in the sense that that word is used in said section 1462 of Act No. 2711, and therefore the tax paid by the plaintiff under protest was illegally collected and should be repaid. In a general sense every person who enters into a contract may be called a contractor, yet the word, for want of a better one, has come to be used with special reference to a person who, in the pursuit of an independent business, undertakes to do a specific piece of job or work for other persons, using his own means and methods without submitting himself to control as to the petty details. The true test of a "contractor" would seem to be that he renders service in the course of an independent occupation representing the will of his employer only as to the result of his work, and not as to the means by which it is accomplished. The definition adopted by lexicographers cannot always be adopted as a correct meaning for statutory words and phrases. The intention of the legislature and the object which it intended to attain must be taken into consideration for the purpose of determining the meaning of words and phrases in a statute, rather than the definition of lexicographers. Revenue laws imposing taxes on business must be strictly construed in favor of the citizen. In construing a word. in a revenue statute susceptible of two or more meanings, the court will adopt that interpretation most in accord with the manifest purpose of the statute as gathered from the text. Where a particular word is obscure or of doubtful meaning, taken by itself, its obscurity or doubt may be removed by reference to associate words.

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Lorenzo v. Posada

Problem: Thomas Hanley died in Zamboanga City leaving a will and considerable amount of real and personal properties. Proceedings for the probate of his will and the settlement and distribution of his estate began in the Court of First Instance of Zamboanga. The will was admitted to probate. The Court of First Instance of Zamboanga considered it proper for the best interests of their estate to appoint a trustee to administer the real properties which, under the will, were to pass to Matthew Hanley ten years after the two executors named in the will, was, on March 8, 1924, appointed trustee. Moore took his oath of office and gave bond on March 10, 1924. He acted as trustee until February 29, 1932, when he resigned and the plaintiff, Pablo Lorenzo was appointed in his stead. During the incumbency of the plaintiff as trustee, the defendant Collector of Internal Revenue, assessed against the estate an inheritance tax amounting to P2,052.74. The defendant levied and assessed the inheritance tax due from the estate of Thomas Hanley under the provisions of section 1544 of the Revised Administrative Code, as amended by section 3 of Act No. 3606. But Act No. 3606 went into effect on January 1, 1930. It, therefore, was not the law in force when the testator died on May 27, 1922. The law at the time was section 1544 above-mentioned, as amended by Act No. 3031, which took effect on March 9, 1922.

Should the provisions of Act No. 3606, which is favorable to the taxpayer be given retroactive effect?

Answer: No. It is well-settled that inheritance taxation is governed by the statute in force at the time of the death of the decedent. The taxpayer cannot foresee and ought not to be required to guess the outcome of pending measures. Of course, a tax statute may be made retroactive in its operation. Liability for taxes under retroactive legislation has been “one of the incidents of social life” but legislative intent that a tax statute should operate retroactively should be perfectly clear. “A statute should be considered as prospective in its operation, whether it enacts, amends, or repeals an inheritance tax, unless the language of the statute clearly demands or expresses that it shall have a retroactive effect.” Though the last paragraph of section 5 of Regulations No. 65 of the Department of Finance makes section 3 of Act No. 3606, amending section 1544 of the Revised Administrative Code, applicable to all estates the inheritance taxes due from which have not been paid, Act No. 3606 itself contains no provisions indicating legislative intent to give it retroactive effect. No such effect can be given the statute by this court.

The defendant Collector of Internal Revenue maintains, however, that certain provisions of Act No. 3606 are more favorable to the taxpayer than those of Act No. 3031, that said provisions are penal in nature and, therefore, should operate retroactively in conformity with the provisions of article 22 of the Revised Penal Code. This is the reason why he applied Act No. 3606 instead of Act No. 3031. Indeed, under Act No. 3606, (1) the surcharge of 25 per cent is based on the tax only, instead of on both the tax and the interest, as provided for in Act No. 3031, and (2) the taxpayer is allowed twenty days from notice and demand by the Collector of Internal Revenue within which to pay the tax, instead of ten days only as required by the old law. Properly speaking, a statute is penal when it imposes punishment for an offense committed against the state which, under the Constitution, the Executive has the power to pardon. In common use, however, this sense has been enlarged to include within the term "penal statutes" all status which command or prohibit certain acts, and establish penalties for their violation, and even those which, without expressly prohibiting certain acts, impose a penalty upon their commission. Revenue laws, generally, which impose taxes collected by the means ordinarily resorted to for the collection of taxes are not classed as penal laws, although there are authorities to the contrary. Article 22 of the Revised Penal Code is not applicable to the case at bar, and in the absence of clear legislative intent, we cannot give Act No. 3606 a retroactive effect.

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Umali v. Estanislao

Problem: Congress enacted Rep. Act 7167. The said act was signed and approved by the President on 19 December 1991 and published on 14 January 1992 in "Malaya" a newspaper of general circulation. On 26 December 1991, respondents promulgated Revenue Regulations No. 1-92. On 27 February 1992, the petitioner, a taxpayer filed a petition for mandamus for himself and in behalf all individual Filipino taxpayers, to compel the respondents to implement Rep. Act 7167 with respect to taxable income of individual taxpayers earned or received on or after 1 January 1991 or as of taxable year ending 31 December 1991. On 28 February 1992, the petitioners likewise filed a petition for mandamus and prohibition on their behalf as well as for those other individual taxpayers who might be similarly situated, to compel the Commissioner of Internal Revenue to implement the mandate of Rep. Act 7167 adjusting the personal and additional exemptions allowable to individuals for income tax purposes in regard to income earned or received in 1991, and to enjoin the respondents from implementing Revenue Regulations No. 1-92.

Does RA 7167 also apply to compensation income earned or received during calendar year 1991?

Answer: Yes. Rep. Act 7167 should cover or extend to compensation income earned or received during calendar year 1991.

Sec. 29, par. (L), Item No. 4 of the National Internal Revenue Code, as amended, provides:Upon the recommendation of the Secretary of Finance, the President shall automatically adjust not more often than once every three years, the personal and additional exemptions taking into account, among others, the movement in consumer price indices, levels of minimum wages, and bare subsistence levels.

As the personal and additional exemptions of individual taxpayers were last adjusted in 1986, the President, upon the recommendation of the Secretary of Finance, could have adjusted the personal and additional exemptions in 1989 by increasing the same even without any legislation providing for such adjustment. But the President did not.However, House Bill 28970, which was subsequently enacted by Congress as Rep. Act 7167, was introduced in the House of Representatives in 1989 although its passage was delayed and it did not become effective law until 30 January 1992. A perusal, however, of the sponsorship remarks of Congressman Hernando B. Perez, Chairman of the House Committee on Ways and Means, on House Bill 28970, provides an indication of the intent of Congress in enacting Rep. Act 7167. The pertinent legislative journal contains the following:At the outset, Mr. Perez explained that the Bill Provides for increased personal additional exemptions to individuals in view of the higher standard of living.

The Bill, he stated, limits the amount of income of individuals subject to income tax to enable them to spend for basic necessities and have more disposable income. Mr. Perez added that inflation has raised the basic necessities and that it had been three years since the last exemption adjustment in 1986. Subsequently, Mr. Perez stressed the necessity of passing the measure to mitigate the effects of the current inflation and of the implementation of the salary standardization law. Stating that it is imperative for the government to take measures to ease the burden of the individual income tax filers, Mr. Perez then cited specific examples of how the measure can help assuage the burden to the taxpayers.

He then reiterated that the increase in the prices of commodities has eroded the purchasing power of the peso despite the recent salary increases and emphasized that the Bill will serve to compensate the adverse effects of inflation on the taxpayers.

It will also be observed that Rep. Act 7167 speaks of the adjustments that it provides for, as adjustments "to the poverty threshold level." Certainly, "the poverty threshold level" is the poverty threshold level at the time Rep. Act 7167 was enacted by Congress, not poverty threshold levels in futuro, at which time there may be need of further adjustments in personal exemptions. Moreover, the Court can not lose sight of the fact that these personal and additional exemptions are fixed amounts to which an individual taxpayer is entitled, as a means to cushion the devastating effects of high prices and a depreciated purchasing power of the currency. In the end, it is the lower-income and the middle-income groups of taxpayers (not the high-income taxpayers) who stand to benefit most from the increase of personal and additional exemptions provided for by Rep. Act 7167. To that extent, the act is a social legislation intended to alleviate in part the present economic plight of the lower income taxpayers. It is intended to remedy the inadequacy of the heretofore existing personal and additional exemptions for individual taxpayers.

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And then, Rep. Act 7167 says that the increased personal exemptions that it provides for shall be available thenceforth, that is, after Rep. Act 7167 shall have become effective. In other words, these exemptions are available upon the filing of personal income tax returns which is, under the National Internal Revenue Code, done not later than the 15th day of April after the end of a calendar year. Thus, under Rep. Act 7167, which became effective, as aforestated, on 30 January 1992, the increased exemptions are literally available on or before 15 April 1992 (though not before 30 January 1992). But these increased exemptions can be available on 15 April 1992 only in respect of compensation income earned or received during the calendar year 1991.

The personal exemptions as increased by Rep. Act 7167 cannot be regarded as available in respect of compensation income received during the 1990 calendar year; the tax due in respect of said income had already accrued, and been presumably paid, by 15 April 1991 and by 15 July 1991, at which time Rep. Act 7167 had not been enacted. To make Rep. Act 7167 refer back to income received during 1990 would require language explicitly retroactive in purport and effect, language that would have to authorize the payment of refunds of taxes paid on 15 April 1991 and 15 July 1991: such language is simply not found in Rep. Act 7167.

The personal exemptions as increased by Rep. Act 7167 cannot be regarded as available only in respect of compensation income received during 1992, as the implementing Revenue Regulations No. 1-92 purport to provide. Revenue Regulations No. 1-92 would in effect postpone the availability of the increased exemptions to 1 January-15 April 1993, and thus literally defer the effectivity of Rep. Act 7167 to 1 January 1993. Thus, the implementing regulations collide frontally with Section 3 of Rep. Act 7167 which states that the statute "shall take effect upon its approval." The objective of the Secretary of Finance and the Commissioner of Internal Revenue in postponing through Revenue Regulations No. 1-92 the legal effectivity of Rep. Act 7167 is, of course, entirely understandable –– to defer to 1993 the reduction of governmental tax revenues which irresistibly follows from the application of Rep. Act 7167. But the law-making authority has spoken and the Court cannot refuse to apply the law-maker's words. Whether or not the government can afford the drop in tax revenues resulting from such increased exemptions was for Congress (not this Court) to decide.

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CIR v. Solidbank

Problem: Solidbank filed its Quarterly Percentage Tax Returns reflecting gross receipts amounting to P1,474,693.44. It alleged that the total included P350,807,875.15 representing gross receipts from passive income which was already subjected to 20% final withholding tax (FWT). The Court of Tax Appeals (CTA) held in one case that the 20% FWT should not form part of its taxable gross receipts for purposes of computing the tax. Solidbank, relying on the strength of this decision, filed with the BIR a letter-request for the refund or tax credit. It also filed a petition for review with the CTA where it ordered the refund. The Commissioner claims that although the FWT was not actually received by Solidbank, the fact that the amount redounded to the bank’s benefit makes it part of the taxable gross receipts in computing the Gross Receipts Tax. Solidbank argues that the 20% FWT did not form part of the taxable gross receipts because the FWT was not actually received by the bank but was directly remitted to the government.

Does FWT form part of the gross receipts tax?

Answer: Yes. In a withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed. The payor, a separate entity, acts as no more than an agent of the government for the collection of tax in order to ensure its payment. This amount that is used to settle the tax liability is sourced from the proceeds constitutive of the tax base.

These proceeds are either actual or constructive. Both parties agree that there is no actual receipt by the bank. What needs to be determined is if there is constructive receipt. Since the payee is the real taxpayer, the rule on constructive receipt can be rationalized.

The Court  applied provisions of the Civil Code on actual and constructive possession. Article 531 of the Civil Code clearly provides that the acquisition of the right of possession is through the proper acts and legal formalities established.  The withholding process is one such act.  There may not be actual receipt of the income withheld; however, as provided for in Article 532, possession by any person without any power shall be considered as acquired when ratified by the person in whose name the act of possession is executed.

 In our withholding tax system, possession is acquired by the payor as the withholding agent of the government, because the taxpayer ratifies the very act of possession for the government. There is thus constructive receipt.

The processes of bookkeeping and accounting for interest on deposits and yield on deposit substitutes that are subjected to FWT are tantamount to delivery, receipt or remittance. Besides, Solidbank admits that its income is subjected to a tax burden immediately upon “receipt”, although it claims that it derives no pecuniary benefit or advantage through the withholding process.

There being constructive receipt, part of which is withheld, that income is included as part of the tax base on which the gross receipts tax is imposed.

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Collector v. La Tondena

Problem: The respondent "La Tondeña, Inc." a duly licensed rectifier, has been engaged in the business of manufacturing wines, and liquors, with a distillery at 1068 Velasquez, Tondo, Manila. Respondent has been purchasing the alcohol used in the manufacture of its products, principally from Binalbagan Isabela Sugar Central, Negros Occidental and Central Azcarera Don Pedro in Nasugbu, Batangas, and has been removing this alcohol from the centrals to respondent's distillery under joint bonds, without prepayment of specific taxes, with the express permission and approval of the petitioner Collector of Internal Revenue. The quantity of alcohol purchased and received by the respondent from the centrals are recorded and entered in the BIR Official Register Books of "La Tondeña, Inc. A-Account", under the column "CRUDE spirit" attested by the Inspector of the Bureau assigned to respondent's distillery. In the manufacture of "Manila Rum", respondent uses as basic materials low test alcohol, purchased in crude form from the suppliers, which it re-rectifies or subjects to further distillation, in order to suit the purpose of respondent in producing only high quality products. In the process of further rectification or distillation, losses thru evaporation had necessarily been incurred, for which the petitioner in the past had given the respondent allowance of not exceeding 7% for said losses. Respondent stated that the process adopted by it in the manufacture of its "Manila Rum", has now made this product the largest selling rum in the Philippines and the specific taxes that it had been paying the government, had steadily increased from P3,172,515.30 in 1950 to P4,973,123.40 in 1954. On May 8, 1954, petitioner wrote a demand letter to respondent for the payment of specific taxes, in the total amount of P154,663.10 on alcohol lost by evaporation, thru re-rectification or re-redistillation, covering the period from June 7, 1950 to February 7, 1954. On August 6, 1954, respondent answered the demand letter dated May 8, 1954, protesting against the said assessment. In a letter dated August 26, 1954, the petitioner made manifest its refusal to reconsider the assessment and urged the respondent to pay within 3 days from receipt, the amount of the assessment, which communication was received by the respondent on August 31, 1954. On September 1, 1954, the respondent appealed the decision to the Conference Staff in the same Bureau. On September 3, 1954, the Conference Staff gave the appeal due course.

Is La Tondeña, Inc. exempted from the payment of the specific tax on rectified alcohol lost in process of further rectification, during the period from January 1, 1951 to February 27, 1954?

Answer: Yes. It appears that the specific taxes in question were assessed by the petitioner "in accordance with section 133 the Tax Code". Up to December 31, 1950, said section reads:

SEC 133. Specific tax on distilled spirits. — On distilled spirits there shall be collected, except as hereinafter provided, specific taxes as follows:

(a) If produced from sap of the nipa, coconut, casava, camote, or buri palm, or from the juice syrup, or sugar of the cane, per proof liter, forty-five centavo.(b) If produced from any other material, per proof liter, one peso and seventy centavos.This tax shall be proportionately increased for any strength of the spirits taxed over proof spirits.

"Distilled spirits", as here used, includes all substances known as ethyl alcohol, dehydrated oxide of ethyl, or spirits of wine, which are commonly produced by the fermentation and subsequent distillation of grain starch, molasses, or sugar, or of some syrup of sap, including all dilutions or mixtures; and the tax shall attach to this substance as soon as it is in existence as such, whether it be subsequently separated as pure or impure spirits, or be immediately or at any subsequent time transformed into any other substance either in process of original production or by any subsequent process.

Pursuant to the above provision of law, therefore, "the tax shall attach to this substance as soon is it is in existence as such" etc. However, on January 1, 1951, Republic Act No. 592 took effect, amending section 133 and the clause underlined above had been eliminated. The evident intention of the law maker in deleting the all embracing underlined clauses, was to subject to specific tax not all kinds of alcoholic substances, but only distilled spirits as finished products, actually removed from the factory or bonded warehouse. The said amendment could not mean anything else; it is in harmony with section 129, of the same Tax Code which provides, “SEC 129. Removal of spirits or cigar under bond. — Spirits requiring rectification may be removed from the place of their manufacture to some other establishment for the purpose of rectification without the prepayment of the specific tax, provided the distiller removing such spirits and the rectifier receiving them shall file with the Collector of Internal Revenue their joint bond conditioned upon the future payment by the rectifier of the specific tax that may be due on any finished product.”

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And if one would consider that the Tax Code does not prohibit further rectification or distillation and defines in section 194 thereof, a rectifier as a person who rectifies, purifies or refines distilled spirits, the conclusion is logical that when alcohol, even if already distilled (as in the present case) or rectified, is again rectified, purified or refined, the specific tax should be based on the finished product, and not on the evaporated alcohol.

And on August 23, 1956, upon the recommendation of the Bureau of Internal Revenue itself, Rep. Act No. 1608 was passed, amending section 133 of the Tax Code, as amended by R. A. No. 592, restoring the very same clause which was eliminated (Sec. 7, R.A. No. 1608). The inference, therefore, is clear that from January 1, 1951, when Rep. Act No. 592, took effect, until August 23, 1956, when R.A. No. 1608 became a law, the tax on alcohol did not attach as soon as it was in existence as such, but on the finished product. And this must be so, otherwise a great injustice would be caused upon a duly licensed rectifier, who, like the respondent herein, will be made to pay the specific tax on the alcohol lost thru evaporation, from which no one has been benefited, based on the provision of laws then extant, of doubtful application. In every case of doubt, tax statutes are construed most strongly against the government and in favor of the citizens, because burdens are not to be imposed beyond what the statutes expressly and clearly import. It should be pointed out also that said section 129 was amended adding the following, “And provided, further, That in cases where alcohol has already been rectified either by original and continuous distillation or by redistillation is further rectified, no loss for rectification and handling shall be allowed and the rectifier thereof shall pay the specific tax due on such losses (Sec. 5, Rep. Act No. 1608)”, which obviously reveals that the purpose of the amendment is to tax, only now, alcohol lost, in further distillation or rectification. This law certainly should not be given retroactive effect, so as to cover the period in question (January 1, 1951 to February 27, 1954). It is only after August 23, 1956 that the government woke up from its lethargy and hastened to fill the hiatus.

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Serafica v. Treasurer of Ormoc City

Problem: Plaintiff, Dr. Hermenegildo Serafica, seeks a declaration of nullity of Ordinance No. 13, Series of 1964, of Ormoc City, imposing a "tax of P5.00 for every 1,000 board feet of lumber sold at Ormoc City by any person, partnership, firm, association, corporation, or entities", pursuant to which the Treasurer of said City levied on and collected from said plaintiff, as owner of the Serafica Sawmill, the aggregate sum of P1,837.84, as tax on 367,568 board feet of lumber sold, in said City, during the third quarter of 1964.

Is the City authorized to tax?

Answer: Yes. It was held in Ormoc Sugar Co. v. Municipal Board of Ormoc City, that the taxing power of the City of Ormoc, under the Local Autonomy Act is "broad" and "sufficiently plenary to cover everything, excepting those mentioned therein". It should be noted that in said case of Ormoc Sugar Co., the Supreme Court upheld the validity of a sales tax. Furthermore, what was applied by the City of Ormoc was not a form of double taxation because regulation and taxation are two different things, the first being an exercise of police power, whereas the latter is not, apart from the fact that double taxation is not prohibited in the Philippines.

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Roxas v. Rafferty

Problem: Plaintiffs, Viuda e Hijos de Pedro P. Roxas own a parcel of land located at Escolta in the city of Manila. On the latter part of 1913, The improvements of this land were demolished, and the construction of a reinforced concrete building was begun. No taxes on the improvements were levied or paid for the year 1914. Accepting the findings of fact by the trial court, the Roxas building in December, 1914, when the city assessor and collector attempted to assess it for taxation, still lacked the pavement of the entrances, the floors of some of the stores the dividing partitions between the stores, the dividing partitions between the greater part of the rooms in the upper stories, sanitary installation, the elevators, electrical installation, the roof of the building, the concrete covering and towers of the elevator shaft, and the doors and windows of many rooms. It was finished in all respects on February 15, 1915. The city assessor and collector of Manila, under the date of December 1, 1914, sent plaintiffs notice, received by them on December 25, 1914, requiring them to declare the new improvements for assessments for the year 1915. Prior to this, in November, the city assessor and collector had the building inspected and had assessed the new improvements for taxation for 1915 at P300,000. On January 15, 1915, plaintiffs were notified of this assessment. Plaintiffs paid the amount of the taxes, which amounted to P3,000, under protest.

Was there a legal assessment of the Roxas Building for the year 1915?

Answer: There was none. The Manila Charter provides: “It shall be the duty of each person who at any time acquires real estate in the city, and of any person who constructs or adds to any improvement on real estate owned by him within the city, to prepare and present to the city assessor and collector, within a period of sixty days next succeeding the completion of such acquisition, construction or addition, a sworn declaration setting forth the value of the real estate acquired or the improvement constructed or addition made by him and containing a description of such property sufficient to enable the city assessor and collector readily to identify the same (Section 2484, Administrative Code of 1917).” Plaintiffs were under obligation to present a declaration of their improvements within sixty days succeeding completion, i. e. on or before April 15, 1915. Under an attempted assessment in November and December, 1914, the plaintiffs had and could have had no opportunity to comply with the law.

The Charter continues: “The city assessor and collector shall, during the first fifteen days of December of each year, add to his list of taxable real estate in the city the value of the improvements placed upon such property during the preceding year, and any property which is taxable and which has therefore escaped taxation (Sec. 2487, Administrative Code of 1917).” Between December 1 and December 15, 1915, the city assessor and collector was under the obligation and adding the improvements on the Roxas property to the assessment list. Between December 1 and December 15, 1914, the city assessor and collector could not prematurely and by anticipation perform this duty on improvements not yet completed. There may be doubt as to the exact meaning which should be given to the words "during the preceding year." The common sense construction would be that the phrase includes December of the previous year and the current year to December. The city assessor and collector perforce could not in 1914 levy a tax on incomplete improvements made during the current year, when the statute only authorized him to make such levy upon completed improvements made during the year.

The Charter continues: “He (the city assessor and collector) shall give notice by publication for ten days prior to December first in two newspapers of general circulation published in the city, one printed in English and one in Spanish, that he will be present in his office for that purpose on said days, and he shall further notify in writing each person the amount of whose tax will be changed by such action or such proposed change, by delivering or mailing such notification to such person or his authorized agent at the last known address of such owner or agent in the Philippine Islands some time in the month of November (Sec. 2487, Administrative Code of 1917).” And finally the Charter provides that, “No court shall entertain any suit assailing the validity of a tax assessed under this article until the taxpayer shall have paid, under protest, the taxes assessed against him, nor shall any court declare any tax invalid by reason of irregularities or informalities in the proceedings of the officer in charged with the assessment or collection of taxes, or of failure to perform their duties within the times herein specified for their performance, unless such irregularities, informalities, or failures shall have impaired the substantial rights of the taxpayer; nor shall any court declare any tax assessed under the provisions of article invalid except upon condition that the taxpayer shall pay the just amount of his tax as determined by the court in the pending proceeding (Sec. 2504, Administrative Code of 1917).” It is a general rule that those provisions of a statute relating to the assessment of taxes, which are intended for the security of the citizen, or to insure the equality of taxation, or certainty as to the nature and amount of each person's tax, are mandatory but those designed merely for the information or direction of officers or to secure methodical and systematic modes of proceedings are merely directory. In the language of the United States Supreme Court, “When the regulations prescribed are intended for

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the protection of the citizen and to prevent a sacrifice of his property, and by a disregard of which his right might be, and generally would be, injuriously affected, they are not directory but mandatory.” Sometimes statutes requiring the assessor to notify the taxpayer have been held merely directory. But in the majority of jurisdictions this requirement is held to be mandatory, so that the assessor cannot make a valid assessment unless he has given proper notice. Applied to our facts, the assessor should have notified the plaintiffs during November, 1915. His attempted notification on December 25, 1914, was not given during the time fixed by statute and was no more than a reminder to plaintiffs to present a sworn declaration of the value of the new improvements on their property. In this instance there was no such substantial compliance with the law as amounts to due process of law.

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Pecson v. CA

Problem: Petitioner, Pedro Pecson, was the registered owner of a parcel of land in Quezon City consisting of 256 sq. meters and covered by TCT No. 79912 of the Registry of Deeds of Quezon City. For non-payment of realty taxes, petitioner's property was sold at public auction on November 12, 1980 by respondent, Anselmo Regis. Notices of sale were sent to petitioner at "No. 79 Paquita Street, Sampaloc, Manila," and were published in the Times Journal on October 6, 13, and 30, 1980. A final notice to exercise the right of redemption dated September 14, 1981 was sent to petitioner at "No. 79 Paquita Street, Sampaloc, Manila." There being no redemption made after one-year from the date of the auction sale, a Final Bill of Sale was executed on April 19, 1982 by respondent Regis in favor of respondent, Mamerto Nepomuceno.

Was the sale of the property by respondent Regis valid, which in turn depended on whether petitioner was duly notified of the public auction?

Answer: Yes. The governing law in this case is P.D. No. 464, known as the Real Property Tax Code. Section 73 thereof, with the epigraph "Advertisement of sale of real property at public auction," in pertinent part, provides: “Copy of notices shall forthwith be sent either by registered mail or by messenger, or through the barrio captain, to the delinquent taxpayer, at the address as shown in the tax rolls or property tax record cards of the municipality or city where the property is located, or at his residence, if known to said treasurer or barrio captain. Provided, however, that a return of the proof of service under oath shall be filed by the person making the service with the provincial or city treasurer concerned.”

Under the said provisions of the law, notices of the sale of the public auction may be sent to the delinquent taxpayer, either (i) at the address as shown in the tax rolls or property tax record cards of the municipality or city where the property is located or (ii) at his residence, if known to such treasurer or barrio captain.

Petitioner does not claim that the notices issued from 1980 to 1983 should have been sent to him at his residence in "No. 79 Kamias Road, Quezon City," his residence since 1965 and where the property in litigation is located. What he claims is that the notices should have been sent to him at his address at "No. 1009 Paquita St., Sampaloc" even if he was no longer residing there because letters sent to him at the said address were forwarded to him by the occupants of his former house. As found by the Court of Appeals, what appeared in the records of the Office of the City Treasurer of Quezon City as the address of petitioner was "1009 Paquita, Manila," and below the number 1009 was the number "79". From this entry, one can deduce that the taxpayer had transferred his residence to "No. 79 Paquita, Sampaloc, Manila" from "No. 1009 Paquita, Sampaloc, Manila". In the register for the tax years starting from 1982 (Exh. S; also Exh. 3), the address of petitioner was recorded as "79 Paquita, Mla." The Court of Appeals advanced the theory that the number "79" was furnished by petitioner himself, basing its conclusion on the address given by petitioner in his complaint, which was "No. 79 Kamias Road, Quezon City."

Petitioner's contention that he would have received the notices had they been sent to "No. 1009 Paquita, Sampaloc, Manila," because the occupants thereof forwarded the letters addressed to him to his Quezon City residence, loses force when one considers that the Court of First Instance of Quezon City sent him a notice, in connection with the proceedings for the consolidation of title, at "No. 1009 Paquita St., Sampaloc, Manila," which remained "unclaimed".

For this misfortune that befell petitioner, he has nobody to blame but himself. As a property owner and a school teacher at that, he should know that if an owner fails to pay the real estate taxes on property, the said property shall be sold at public auction to recover the delinquent taxes. When petitioner's property was sold at a public auction in December 1980, the tax delinquency must have accumulated for several years. It was only on July 12, 1982 that the order for consolidation of title in the name of respondent Nepomuceno was issued and it was only on December 8, 1983 that the title over the property was transferred to respondents Tan and Nuguid. All throughout these years, petitioner never displayed an interest in paying the real estate taxes on the property. Worse, he introduced improvements thereon without reporting the same for tax purposes. Had he reported the improvements he had introduced on the property, the Office of the Treasurer of Quezon City could have been informed of petitioner's new address in Quezon City.

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CIR v. CA

Problem: Fortune Tobacco Corporation ("Fortune Tobacco") is engaged in the manufacture of different brands of cigarettes. On various dates, the Philippine Patent Office issued to the corporation separate certificates of trademark registration over "Champion," "Hope," and "More" cigarettes. In a letter of then Commissioner of Internal Revenue Bienvenido A. Tan, Jr., to Deputy Minister Ramon Diaz of the Presidential Commission on Good Government, "the initial position of the Commission was to classify 'Champion,' 'Hope,' and 'More' as foreign brands since they were listed in the World Tobacco Directory as belonging to foreign companies. However, Fortune Tobacco changed the names of 'Hope' to Hope Luxury' and 'More' to 'Premium More,' thereby removing the said brands from the foreign brand category. Proof was also submitted to the Bureau of Internal Revenue that 'Champion' was an original Fortune Tobacco Corporation register and therefore a local brand." Ad Valorem taxes were imposed on these brands.

In the meantime, Republic Act ("RA") No. 7654 amended Section 142(c)(1) of the National Internal Revenue Code ("NIRC") to read; as follows:"SEC. 142. Cigars and Cigarettes. -"(c) Cigarettes packed by machine. - There shall be levied, assessed and collected on cigarettes packed by machine a tax at the rates prescribed below based on the constructive manufacturer's wholesale price or the actual manufacturer's wholesale price, whichever is higher:"(1) On locally manufactured cigarettes which are currently classified and taxed at 55% or the exportation of which is not authorized by contract or otherwise, 55% provided that the minimum tax shall not be less than P5.00 per pack."(2). On other locally manufactured cigarettes, 45% provided that the minimum tax shall not be less than P3.00 per pack."When the registered manufacturer's wholesale price or the actual manufacturer's wholesale price whichever is higher of existing brands of cigarettes, including the amounts intended to cover the taxes, of cigarettes packed in twenties does not exceed P4.80 per pack, the rate shall be 20%."

About a month after the enactment and 2 days before the effectivity of RA 7654, Revenue Memorandum Circular No. 37-93 (RMC 37-93) which states that HOPE, MORE and CHAMPION being manufactured by Fortune Tobacco Corporation are hereby considered locally manufactured cigarettes bearing a foreign brand subject to the 55% ad valorem tax on cigarettes and any ruling inconsistent herewith is revoked or modified accordingly.

Is RMC 37-93 valid?

Answer: No. 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.

Petitioner stresses on the wide and ample authority of the BIR in the issuance of rulings for the effective implementation of the provisions of the National Internal Revenue Code. Let it be made clear that such authority of the Commissioner is not here doubted. Like any other government agency, however, the CIR may not disregard legal requirements or applicable principles in the exercise of its quasi-legislative powers.

Not insignificantly, RMC 37–93 might have likewise infringed on uniformity of taxation. Article VI, Section 28, paragraph 1, of the 1987 Constitution mandates taxation to be uniform and equitable. Uniformity requires that all subjects or objects of taxation, similarly situated, are to be treated alike or put on equal footing both in privileges and liabilities. Thus, all taxable articles or kinds of property of the same class must be taxed at the same rate and the tax must operate with the same force and effect in every place where the subject may be found.

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CIR V. Telefunken

Problem: Private respondent, Telefunken is a domestic corporation registered with the Board of Investments (BOI) as an export producer on a preferred pioneer status under Republic Act No. 6135. From October 1979 to September 1981, Telefunken produced semi-conductor devices amounting to P92,843,774.00 which were entirely sold to foreign markets. It filed percentage tax returns on the said exportation declaring a total of P2,482,042.35 as contractor's tax, which was paid and verified to have been received by the government. Telefunken wrote a letter to the Appellate Division of the Bureau of Internal Revenue (BIR) dated January 19, 1982 stating that the payment of contractor's tax of P2,482,042.35 was erroneous and requested its refund or tax credit thereof. Telefunken contended that under the provisions of Section 7 of Republic Act No. 6135 in relation to Section 8 (a) of Republic Act No. 5186 (The Investment Act), it was exempted from the payment of all national internal revenue taxes for the period in question, except for income tax. Petitioner argues that the law speaks of firms registered under Republic Act No. 5186 and thus, the privilege of tax exemption cannot be made to apply to firms registered under Republic Act No. 6135. Specifically, he states that Telefunken is not covered by the Tax Code exemption because "exemption from contractor's tax is extended to pioneer enterprises registered with the Board of Investments under Republic Act No. 5186 in relation to Section 205 of the Tax Code."

Is Telefunken, a corporation registered under Republic Act No. 6135 as a pioneer export producer, exempted from payment of the 3% contractor's tax from October 1979 to September 1981?

Answer: Yes. Section 7 of Republic Act No. 6135 (the law under which Telefunken is registered) provides that registered export producers in a pioneer status are entitled to the incentives provided in section 8(a) of Republic Act No. 5186. It states that: “Sec. 7. Incentives to registered export producers — Registered export producers. — Registered export producers unless they already enjoy the same privileges under other laws shall be entitled to the incentives set forth in parahraphs (h), (i) and (j) of Section 7 of Republic Act Numbered Fifty-one hundred eigthy-six, known as the Investment Incentives Act; and registered export producers that are pioneer enterprises shall be entitled also to the incentives set forth in paragraphs (a), (b) and (c) of Section 8 of the said Act. In addition to the said incentives, and in lieu of other incentives provided in Section 7 and in Section 9 of that Act, registered export producer shall be entitled to benefits and incentives as enumerated hereunder.”

We find no ambiguity in the law. When construed together, the above-quoted provisions yield no other conclusion but that gross receipts of a pioneer enterprise registered with the Board of Investments, such as Telefunken, are exempt from the contractor's tax. This is in accordance with the policy of the government, as declared in Section 2 of Republic Act No. 6135: “to actively encourage, promote, and diversify exports of services and of manufacturers utilizing domestic raw materials to the fullest extent possible, and to develop new markets for Philippine products, in order to attain a rising level of production and employment, increase foreign exchange earnings, hasten the economic development of the nation, and ensure that the benefits of development accrue to the Filipino people.”

There is no difference between the gross receipts of pioneer enterprises registered with the Board of Investments under Republic Act No. 6135 and the gross receipts of registered pioneer enterprises under Republic Act No. 5186. In fact, petitioner himself had ruled in this vein on February 4, 1974 in the case of Asian Transmission Corporation.

Petitioner, in that case, said:

This refers to your letters dated November 29 and December 19, 1973 requesting a ruling as to whether your contractors namely, C.E. Construction Corporation and Marsteel Corporation are exempt from the payment of the 3% contractor's tax prescribed under Section 191(16) of the Tax Code. It appears that your application for registration as export producer under Republic Act No. 6135 has been approved by the Board of Investments on January 8, 1974 on a pioneer status.

In reply, I have the honor to inform you that under the last paragraph of Section 191(16) of the Tax Code, gross receipts . . . from a pioneer industry registered with the Board of Investments under the provisions of Republic Act Numbered Five Thousand One Hundred and eighty-six', are exempt from the contractor's tax. It is clear that the intention of the law is to relieve the pioneer industry from ultimately shouldering the contractor's tax which could be passed on to it legally by its contractor.

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Pursuant to Section 7 of Republic Act No. 6135, that corporation as a registered export producer on a pioneer status is entitled to the same tax incentives granted to a pioneer industry set forth in section 8(a) of republic Act No. 5186. Under this latter provision, a pioneer industry is exempt from all taxes under the National Internal Revenue Code, except income tax. In other words, both a registered export producer on a pioneer status under Republic Act No. 6135 and a pioneer industry under Republic Act No. 5186 are entitled to the same tax exemption benefits under the Tax Code. Such being the case, like the latter, the former should not also shoulder the contractor's tax which could be passed on it legally by its contractor.

In view thereof, the gross receipts derived by C.E. Construction Corporation and Marsteel Corporation from the construction of your transmission plant in Canlubang, Laguna, are exempt from the 3% contractor's tax. (Emphasis supplied)

Petitioner now maintains that this 1974 ruling has been abrogated with the passage of the 1977 Tax Code, Section 205(16) which expressly mentions only pioneer enterprises registered with the Board of Investments under Republic Act No. 5186 as exempt from the contractor's tax, with no reference being made regarding pioneer enterprises registered under Republic Act No. 6135.

When petitioner made his 1974 ruling, he based the same on Section 191(16) of the Tax Code which states:

Sec. 191. Contractors, proprietors or operators of dockyards, and others. — A contractor's tax of three per centum of the gross receipts is hereby imposed on the following: “(16) Business agents and other independent contractors except persons, associations and corporations under contract for embroidery and apparel for export, as well as their agents and contractors and except gross receipts of or from a pioneer industry registered with the Board of Investments under the provisions of RA 5168.”

A comparison of the above with the previously quoted Section 205(16) of the 1977 Tax Code reveals that both provisions specifically mention pioneer industries registered with the Board of Investments under Republic Act No. 5186 as exempt from payment of the contractor's tax. In fact, the wording of the relevant part at both provisions are the same. Clearly, Telefunken falls under the category of "pioneer industries" contemplated under Section 205(16) and should be entitled to the exemption provided for. Lastly, under Sec. 246 of the National Internal Revenue Code, rulings of the BIR may not be given retroactive effect, if the same is prejudicial to the taxpayer.

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