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G.R. No. L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. ALGUE, INC., and THE
COURT OF TAX APPEALS, respondents.

CRUZ, J.:
Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance On the other hand, such collection should be made in accordance with law as any
arbitrariness will negate the very reason for government itself. It is therefore necessary to
reconcile the apparently conflicting interests of the authorities and the taxpayers so that the
real purpose of taxation, which is the promotion of the common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly
disallowed the P75,000.00 deduction claimed by private respondent Algue as legitimate
business expenses in its income tax returns. The corollary issue is whether or not the appeal of
the private respondent from the decision of the Collector of Internal Revenue was made on
time and in accordance with law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation
engaged in engineering, construction and other allied activities, received a letter from the
petitioner assessing it in the total amount of P83,183.85 as delinquency income taxes for the
years 1958 and 1959. 1 On January 18, 1965, Algue flied a letter of protest or request for
reconsideration, which letter was stamp received on the same day in the office of the
petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private
respondent, through its counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the
ground of the pending protest. 3 A search of the protest in the dockets of the case proved
fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR agent Ramon
Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally
informed that the BIR was not taking any action on the protest and it was only then that he
accepted the warrant of distraint and levy earlier sought to be served. 5 Sixteen days later, on
April 23, 1965, Algue filed a petition for review of the decision of the Commissioner of
Internal Revenue with the Court of Tax Appeals. 6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No.
1125, the appeal may be made within thirty days after receipt of the decision or ruling
challenged. 7 It is true that as a rule the warrant of distraint and levy is "proof of the finality of
the assessment" 8 and renders hopeless a request for reconsideration," 9 being "tantamount to
an outright denial thereof and makes the said request deemed rejected." 10 But there is a
special circumstance in the case at bar that prevents application of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's notice of
assessment, it filed its letter of protest. This was apparently not taken into account before the
warrant of distraint and levy was issued; indeed, such protest could not be located in the office
of the petitioner. It was only after Atty. Guevara gave the BIR a copy of the protest that it was,
if at all, considered by the tax authorities. During the intervening period, the warrant was
premature and could therefore not be served.

As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was
not pro forma and was based on strong legal considerations. It thus had the effect of
suspending on January 18, 1965, when it was filed, the reglementary period which started on
the date the assessment was received, viz., January 14, 1965. The period started running again
only on April 7, 1965, when the private respondent was definitely informed of the implied
rejection of the said protest and the warrant was finally served on it. Hence, when the appeal
was filed on April 23, 1965, only 20 days of the reglementary period had been consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed
because it was not an ordinary reasonable or necessary business expense. The Court of Tax
Appeals had seen it differently. Agreeing with Algue, it held that the said amount had been
legitimately paid by the private respondent for actual services rendered. The payment was in
the form of promotional fees. These were collected by the Payees for their work in the creation
of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of
the properties of the Philippine Sugar Estate Development Company.

Parenthetically, it may be observed that the petitioner had Originally claimed these
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promotional fees to be personal holding company income 12 but later conformed to the
decision of the respondent court rejecting this assertion. 13 In fact, as the said court found, the
amount was earned through the joint efforts of the persons among whom it was distributed It
has been established that the Philippine Sugar Estate Development Company had earlier
appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing
process. Pursuant to such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara,
Edith, O'Farell, and Pablo Sanchez, worked for the formation of the Vegetable Oil Investment
Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation
largely through the promotion of the said persons, this new corporation purchased the PSEDC
properties. 15 For this sale, Algue received as agent a commission of P126,000.00, and it was
from this commission that the P75,000.00 promotional fees were paid to the aforenamed
individuals. 16

There is no dispute that the payees duly reported their respective shares of the fees in their
income tax returns and paid the corresponding taxes thereon. 17 The Court of Tax Appeals
also found, after examining the evidence, that no distribution of dividends was involved. 18

The petitioner claims that these payments are fictitious because most of the payees are
members of the same family in control of Algue. It is argued that no indication was made as to
how such payments were made, whether by check or in cash, and there is not enough
substantiation of such payments. In short, the petitioner suggests a tax dodge, an attempt to
evade a legitimate assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its
President, Alberto Guevara, and the accountant, Cecilia V. de Jesus, testified that the payments
were not made in one lump sum but periodically and in different amounts as each payee's need
arose. 19 It should be remembered that this was a family corporation where strict business
procedures were not applied and immediate issuance of receipts was not required. Even so, at
the end of the year, when the books were to be closed, each payee made an accounting of all of
the fees received by him or her, to make up the total of P75,000.00. 20 Admittedly, everything
seemed to be informal. This arrangement was understandable, however, in view of the close
relationship among the persons in the family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive.
The total commission paid by the Philippine Sugar Estate Development Co. to the private
respondent was P125,000.00. 21 After deducting the said fees, Algue still had a balance of
P50,000.00 as clear profit from the transaction. The amount of P75,000.00 was 60% of the
total commission. This was a reasonable proportion, considering that it was the payees who
did practically everything, from the formation of the Vegetable Oil Investment Corporation to
the actual purchase by it of the Sugar Estate properties. This finding of the respondent court is
in accord with the following provision of the Tax Code:

SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as
deductions

(a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including a reasonable allowance for salaries
or other compensation for personal services actually rendered; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses
paid or incurred in carrying on any trade or business may be included a reasonable allowance
for salaries or other compensation for personal services actually rendered. The test of
deductibility in the case of compensation payments is whether they are reasonable and are, in
fact, payments purely for service. This test and deductibility in the case of compensation
payments is whether they are reasonable and are, in fact, payments purely for service. This test
and its practical application may be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of
services, is not deductible. (a) An ostensible salary paid by a corporation may be a distribution
of a dividend on stock. This is likely to occur in the case of a corporation having few
stockholders, Practically all of whom draw salaries. If in such a case the salaries are in excess
of those ordinarily paid for similar services, and the excessive payment correspond or bear a
close relationship to the stockholdings of the officers of employees, it would seem likely that
the salaries are not paid wholly for services rendered, but the excessive payments are a
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distribution of earnings upon the stock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue
nor were they its controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the
validity of the claimed deduction. In the present case, however, we find that the onus has been
discharged satisfactorily. The private respondent has proved that the payment of the fees was
necessary and reasonable in the light of the efforts exerted by the payees in inducing investors
and prominent businessmen to venture in an experimental enterprise and involve themselves in
a new business requiring millions of pesos. This was no mean feat and should be, as it was,
sufficiently recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government
would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the
natural reluctance to surrender part of one's hard earned income to the taxing authorities, every
person who is able to must contribute his share in the running of the government. The
government for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values. This
symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it
is an arbitrary method of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in
all democratic regimes that it be exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and the courts will then come
to his succor. For all the awesome power of the tax collector, he may still be stopped in his
tracks if the taxpayer can demonstrate, as it has here, that the law has not been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed
on time with the respondent court in accordance with Rep. Act No. 1125. And we also find
that the claimed deduction by the private respondent was permitted under the Internal Revenue
Code and should therefore not have been disallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto,
without costs.

SO ORDERED.

G.R. No. L-68252 May 26, 1995
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. TOKYO SHIPPING CO.
LTD., represented by SORIAMONT STEAMSHIP AGENCIES INC., and COURT OF TAX
APPEALS, respondents.

PUNO, J.:
For resolution is whether or not private respondent Tokyo Shipping Co. Ltd., is entitled to a
refund or tax credit for amounts representing pre-payment of income and common carrier's
taxes under the National Internal Revenue Code, section 24 (b) (2), as amended. 1

Private respondent is a foreign corporation represented in the Philippines by Soriamont
Steamship Agencies, Incorporated. It owns and operates tramper vessel M/V Gardenia. In
December 1980, NASUTRA 2 chartered M/V Gardenia to load 16,500 metric tons of raw
sugar in the Philippines. 3 On December 23, 1980, Mr. Edilberto Lising, the operations
supervisor of Soriamont Agency, 4 paid the required income and common carrier's taxes in the
respective sums of FIFTY-NINE THOUSAND FIVE HUNDRED TWENTY-THREE PESOS
and SEVENTY-FIVE CENTAVOS (P59,523.75) and FORTY-SEVEN THOUSAND SIX
HUNDRED NINETEEN PESOS (P47,619.00), or a total of ONE HUNDRED SEVEN
THOUSAND ONE HUNDRED FORTY-TWO PESOS and SEVENTY-FIVE CENTAVOS
(P107,142.75) based on the expected gross receipts of the vessel. 5 Upon arriving, however, at
Guimaras Port of Iloilo, the vessel found no sugar for loading. On January 10, 1981,
NASUTRA and private respondent's agent mutually agreed to have the vessel sail for Japan
without any cargo.

Claiming the pre-payment of income and common carrier's taxes as erroneous since no receipt
was realized from the charter agreement, private respondent instituted a claim for tax credit or
refund of the sum ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY-TWO
PESOS and SEVENTY-FIVE CENTAVOS (P107,142.75) before petitioner Commissioner of
Internal Revenue on March 23, 1981. Petitioner failed to act promptly on the claim, hence, on
May 14, 1981, private respondent filed a petition for review 6 before public respondent Court
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of Tax Appeals.

Petitioner contested the petition. As special and affirmative defenses, it alleged the following:
that taxes are presumed to have been collected in accordance with law; that in an action for
refund, the burden of proof is upon the taxpayer to show that taxes are erroneously or illegally
collected, and the taxpayer's failure to sustain said burden is fatal to the action for refund; and
that claims for refund are construed strictly against tax claimants. 7

After trial, respondent tax court decided in favor of the private respondent. It held:

It has been shown in this case that 1) the petitioner has complied with the mentioned statutory
requirement by having filed a written claim for refund within the two-year period from date of
payment; 2) the respondent has not issued any deficiency assessment nor disputed the
correctness of the tax returns and the corresponding amounts of prepaid income and
percentage taxes; and 3) the chartered vessel sailed out of the Philippine port with absolutely
no cargo laden on board as cleared and certified by the Customs authorities; nonetheless 4)
respondent's apparent bit of reluctance in validating the legal merit of the claim, by and large,
is tacked upon the "examiner who is investigating petitioner's claim for refund which is the
subject matter of this case has not yet submitted his report. Whether or not respondent will
present his evidence will depend on the said report of the examiner." (Respondent's
Manifestation and Motion dated September 7, 1982). Be that as it may the case was submitted
for decision by respondent on the basis of the pleadings and records and by petitioner on the
evidence presented by counsel sans the respective memorandum.

An examination of the records satisfies us that the case presents no dispute as to relatively
simple material facts. The circumstances obtaining amply justify petitioner's righteous
indignation to a more expeditious action. Respondent has offered no reason nor made effort to
submit any controverting documents to bash that patina of legitimacy over the claim. But as
might well be, towards the end of some two and a half years of seeming impotent anguish over
the pendency, the respondent Commissioner of Internal Revenue would furnish the satisfaction
of ultimate solution by manifesting that "it is now his turn to present evidence, however, the
Appellate Division of the BIR has already recommended the approval of petitioner's claim for
refund subject matter of this petition. The examiner who examined this case has also
recommended the refund of petitioner's claim. Without prejudice to withdrawing this case after
the final approval of petitioner's claim, the Court ordered the resetting to September 7, 1983."
(Minutes of June 9, 1983 Session of the Court) We need not fashion any further issue into an
apparently settled legal situation as far be it from a comedy of errors it would be too much of a
stretch to hold and deny the refund of the amount of prepaid income and common carrier's
taxes for which petitioner could no longer be made accountable.

On August 3, 1984, respondent court denied petitioner's motion for reconsideration, hence,
this petition for review on certiorari.

Petitioner now contends: (1) private respondent has the burden of proof to support its claim of
refund; (2) it failed to prove that it did not realize any receipt from its charter agreement; and
(3) it suppressed evidence when it did not present its charter agreement.

We find no merit in the petition.

There is no dispute about the applicable law. It is section 24 (b) (2) of the National Internal
Revenue Code which at that time provides as follows:

A corporation organized, authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines, shall be taxable as provided in subsection
(a) of this section upon the total net income derived in the preceding taxable year from all
sources within the Philippines: Provided, however, That international carriers shall pay a tax
of two and one-half per cent (2 1/2%) on their gross Philippine billings: "Gross Philippine
Billings" include gross revenue realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of passage documents sold therein,
whether for passenger, excess baggage or mail, provided the cargo or mail originates from the
Philippines. The gross revenue realized from the said cargo or mail include the gross freight
charge up to final destination. Gross revenue from chartered flights originating from the
Philippines shall likewise form part of "Gross Philippine Billings" regardless of the place or
payment of the passage documents . . . . .

Pursuant to this provision, a resident foreign corporation engaged in the transport of cargo is
liable for taxes depending on the amount of income it derives from sources within the
Philippines. Thus, before such a tax liability can be enforced the taxpayer must be shown to
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have earned income sourced from the Philippines.

We agree with petitioner that a claim for refund is in the nature of a claim for exemption 8 and
should be construed in strictissimi juris against the taxpayer. 9 Likewise, there can be no
disagreement with petitioner's stance that private respondent has the burden of proof to
establish the factual basis of its claim for tax refund.

The pivotal issue involves a question of fact whether or not the private respondent was able
to prove that it derived no receipts from its charter agreement, and hence is entitled to a refund
of the taxes it pre-paid to the government.

The respondent court held that sufficient evidence has been adduced by the private respondent
proving that it derived no receipt from its charter agreement with NASUTRA. This finding of
fact rests on a rational basis, and hence must be sustained. Exhibits "E", "F," and "G"
positively show that the tramper vessel M/V "Gardenia" arrived in Iloilo on January 10, 1981
but found no raw sugar to load and returned to Japan without any cargo laden on board.
Exhibit "E" is the Clearance Vessel to a Foreign Port issued by the District Collector of
Customs, Port of Iloilo while Exhibit "F" is the Certification by the Officer-in-Charge, Export
Division of the Bureau of Customs Iloilo. The correctness of the contents of these documents
regularly issued by officials of the Bureau of Customs cannot be doubted as indeed, they have
not been contested by the petitioner. The records also reveal that in the course of the
proceedings in the court a quo, petitioner hedged and hawed when its turn came to present
evidence. At one point, its counsel manifested that the BIR examiner and the appellate division
of the BIR have both recommended the approval of private respondent's claim for refund. The
same counsel even represented that the government would withdraw its opposition to the
petition after final approval of private respondents' claim. The case dragged on but petitioner
never withdrew its opposition to the petition even if it did not present evidence at all. The
insincerity of petitioner's stance drew the sharp rebuke of respondent court in its Decision and
for good reason. Taxpayers owe honesty to government just as government owes fairness to
taxpayers.

In its last effort to retain the money erroneously prepaid by the private respondent, petitioner
contends that private respondent suppressed evidence when it did not present its charter
agreement with NASUTRA. The contention cannot succeed. It presupposes without any basis
that the charter agreement is prejudicial evidence against the private respondent. 10 Allegedly,
it will show that private respondent earned a charter fee with or without transporting its
supposed cargo from Iloilo to Japan. The allegation simply remained an allegation and no
court of justice will regard it as truth. Moreover, the charter agreement could have been
presented by petitioner itself thru the proper use of a subpoena duces tecum. It never did either
because of neglect or because it knew it would be of no help to bolster its position. 11 For
whatever reason, the petitioner cannot take to task the private respondent for not presenting
what it mistakenly calls "suppressed evidence."

We cannot but bewail the unyielding stance taken by the government in refusing to refund the
sum of ONE HUNDRED SEVEN THOUSAND ONE HUNDRED FORTY TWO PESOS
AND SEVENTY FIVE CENTAVOS (P107,142.75) erroneously prepaid by private
respondent. The tax was paid way back in 1980 and despite the clear showing that it was
erroneously paid, the government succeeded in delaying its refund for fifteen (15) years. After
fifteen (15) long years and the expenses of litigation, the money that will be finally refunded
to the private respondent is just worth a damaged nickel. This is not, however, the kind of
success the government, especially the BIR, needs to increase its collection of taxes. Fair deal
is expected by our taxpayers from the BIR and the duty demands that BIR should refund
without any unreasonable delay what it has erroneously collected. Our ruling in Roxas v.
Court of Tax Appeals 12 is apropos to recall:

The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden
egg." And, in order to maintain the general public's trust and confidence in the Government
this power must be used justly and not treacherously.

IN VIEW HEREOF, the assailed decision of respondent Court of Tax Appeals, dated
September 15, 1983, is AFFIRMED in toto. No costs.

SO ORDERED.

G.R. No. 122480 April 12, 2000
BPI-FAMILY SAVINGS BANK, Inc., petitioner, vs. COURT OF APPEALS, COURT OF
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TAX APPEALS and the COMMISSIONER OF INTERNAL REVENUE, respondents.



PANGANIBAN, J.:

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. When it is undisputed
that a taxpayer is entitled to a refund, the State should not invoke technicalities to keep money
not belonging to it. No one, not even the State, should enrich oneself at the expense of another.

The Case

Before us is a Petition for Review assailing the March 31, 1995 Decision of the Court of
Appeals1 (CA) in CA-GR SP No. 34240, which affirmed the December 24, 1993 Decision2 of
the Court of Tax Appeals (CTA). The CA disposed as follows:

WHEREFORE, foregoing premises considered, the petition is hereby DISMISSED for lack of
merit.3

On the other hand, the dispositive portion of the CTA Decision affirmed by the CA reads as
follows:

WHEREFORE, in [view of] all the foregoing, Petitioner's claim for refund is hereby DENIED
and this Petition for Review is DISMISSED for lack of merit.4

Also assailed is the November 8, 1995 CA Resolution5 denying reconsideration.

The Facts
The facts of this case were summarized by the CA in this wise: This case involves a claim for
tax refund in the amount of P112,491.00 representing petitioner's tax withheld for the year
1989.
In its Corporate Annual Income Tax Return for the year 1989, the following items are
reflected:

Income P1,017,931,831.00
Deductions P1,026,218,791.00
Net Income (Loss) (P8,286,960.00)
Taxable Income (Loss) (P8,286,960.00)

Less:
1988 Tax Credit P185,001.00
1989 Tax Credit P112,491.00
TOTAL AMOUNT P297,492.00

REFUNDABLE

It appears from the foregoing 1989 Income Tax Return that petitioner had a total refundable
amount of P297,492 inclusive of the P112,491.00 being claimed as tax refund in the present
case. However, petitioner declared in the same 1989 Income Tax Return that the said total
refundable amount of P297,492.00 will be applied as tax credit to the succeeding taxable year.

On October 11, 1990, petitioner filed a written claim for refund in the amount of P112,491.00
with the respondent Commissioner of Internal Revenue alleging that it did not apply the 1989
refundable amount of P297,492.00 (including P112,491.00) to its 1990 Annual Income Tax
Return or other tax liabilities due to the alleged business losses it incurred for the same year.

Without waiting for respondent Commissioner of Internal Revenue to act on the claim for
refund, petitioner filed a petition for review with respondent Court of Tax Appeals, seeking the
refund of the amount of P112,491.00.

The respondent Court of Tax Appeals dismissed petitioner's petition on the ground that
petitioner failed to present as evidence its corporate Annual Income Tax Return for 1990 to
establish the fact that petitioner had not yet credited the amount of P297,492.00 (inclusive of
the amount P112,491.00 which is the subject of the present controversy) to its 1990 income
tax liability.

Petitioner filed a motion for reconsideration, however, the same was denied by respondent
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court in its Resolution dated May 6, 1994.6

As earlier noted, the CA affirmed the CTA. Hence, this Petition.7
Ruling of the Court of Appeals
In affirming the CTA, the Court of Appeals ruled as follows:
It is incumbent upon the petitioner to show proof that it has not credited to its 1990 Annual
income Tax Return, the amount of P297,492.00 (including P112,491.00), so as to refute its
previous declaration in the 1989 Income Tax Return that the said amount will be applied as a
tax credit in the succeeding year of 1990. Having failed to submit such requirement, there is
no basis to grant the claim for refund. . . .

Tax refunds are in the nature of tax exemptions. As such, they are regarded as in derogation of
sovereign authority and to be construed strictissimi juris against the person or entity claiming
the exemption. In other words, the burden of proof rests upon the taxpayer to establish by
sufficient and competent evidence its entitlement to the claim for refund.8

Issue

In their Memorandum, respondents identify the issue in this wise:
The sole issue to be resolved is whether or not petitioner is entitled to the refund of
P112,491.90, representing excess creditable withholding tax paid for the taxable year 1989.9

The Court's Ruling The Petition is meritorious.
Main Issue:
Petitioner Entitled to Refund

It is undisputed that petitioner had excess withholding taxes for the year 1989 and was thus
entitled to a refund amounting to P112,491. Pursuant to Section 69 10 of the 1986 Tax Code
which states that a corporation entitled to a refund may opt either (1) to obtain such refund or
(2) to credit said amount for the succeeding taxable year, petitioner indicated in its 1989
Income Tax Return that it would apply the said amount as a tax credit for the succeeding
taxable year, 1990. Subsequently, petitioner informed the Bureau of Internal Revenue (BIR)
that it would claim the amount as a tax refund, instead of applying it as a tax credit. When no
action from the BIR was forthcoming, petitioner filed its claim with the Court of Tax Appeals.

The CTA and the CA, however, denied the claim for tax refund. Since petitioner declared in its
1989 Income Tax Return that it would apply the excess withholding tax as a tax credit for the
following year, the Tax Court held that petitioner was presumed to have done so. The CTA and
the CA ruled that petitioner failed to overcome this presumption because it did not present its
1990 Return, which would have shown that the amount in dispute was not applied as a tax
credit. Hence, the CA concluded that petitioner was not entitled to a tax refund.

We disagree with the Court of Appeals. As a rule, the factual findings of the appellate court are
binding on this Court. This rule, however, does not apply where, inter alia, the judgment is
premised on a misapprehension of facts, or when the appellate court failed to notice certain
relevant facts which if considered would justify a different conclusion. 11 This case is one
such exception.

In the first place, petitioner presented evidence to prove its claim that it did not apply the
amount as a tax credit. During the trial before the CTA, Ms. Yolanda Esmundo, the manager of
petitioner's accounting department, testified to this fact. It likewise presented its claim for
refund and a certification issued by Mr. Gil Lopez, petitioner's vice-president, stating that the
amount of P112,491 "has not been and/or will not be automatically credited/offset against any
succeeding quarters' income tax liabilities for the rest of the calendar year ending December
31, 1990." Also presented were the quarterly returns for the first two quarters of 1990.

The Bureau of Internal Revenue, for its part, failed to controvert petitioner's claim. In fact, it
presented no evidence at all. Because it ought to know the tax records of all taxpayers, the CIR
could have easily disproved petitioner's claim. To repeat, it did not do so.

More important, a copy of the Final Adjustment Return for 1990 was attached to petitioner's
Motion for Reconsideration filed before the CTA. 12 A final adjustment return shows whether
a corporation incurred a loss or gained a profit during the taxable year. In this case, that Return
clearly showed that petitioner incurred P52,480,173 as net loss in 1990. Clearly, it could not
have applied the amount in dispute as a tax credit.

Again, the BIR did not controvert the veracity of the said return. It did not even file an
opposition to petitioner's Motion and the 1990 Final Adjustment Return attached thereto. In
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denying the Motion for Reconsideration, however, the CTA ignored the said Return. In the
same vein, the CA did not pass upon that significant document.

True, strict procedural rules generally frown upon the submission of the Return after the
trial.1wphi1 The law creating the Court of Tax Appeals, however, specifically provides that
proceedings before it "shall not be governed strictly by the technical rules of evidence." 13
The paramount consideration remains the ascertainment of truth. Verily, the quest for orderly
presentation of issues is not an absolute. It should not bar courts from considering undisputed
facts to arrive at a just determination of a controversy.

In the present case, the Return attached to the Motion for Reconsideration clearly showed that
petitioner suffered a net loss in 1990. Contrary to the holding of the CA and the CTA,
petitioner could not have applied the amount as a tax credit. In failing to consider the said
Return, as well as the other documentary evidence presented during the trial, the appellate
court committed a reversible error.

It should be stressed that the rationale of the rules of procedure is to secure a just
determination of every action. They are tools designed to facilitate the attainment of justice. 14
But there can be no just determination of the present action if we ignore, on grounds of strict
technicality, the Return submitted before the CTA and even before this Court. 15 To repeat, the
undisputed fact is that petitioner 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 petitioner.

Public respondents maintain that what was attached to petitioner's Motion for Reconsideration
was not the final adjustment Return, but petitioner's first two quarterly returns for 1990. 16
This allegation is wrong. An examination of the records shows that the 1990 Final Adjustment
Return was attached to the Motion for Reconsideration. On the other hand, the two quarterly
returns for 1990 mentioned by respondent were in fact attached to the Petition for Review
filed before the CTA. Indeed, to rebut respondents' specific contention, petitioner submitted
before us its Surrejoinder, to which was attached the Motion for Reconsideration and Exhibit
"A" thereof, the Final Adjustment Return for 1990. 17

CTA Case No. 4897

Petitioner also calls the attention of this Court, as it had done before the CTA, to a Decision
rendered by the Tax Court in CTA Case No. 4897, involving its claim for refund for the year
1990. In that case, the Tax Court held that "petitioner suffered a net loss for the taxable year
1990 . . . ." 18 Respondent, however, urges this Court not to take judicial notice of the said
case.
As a rule, "courts are not authorized to take judicial notice of the contents of the records of
other cases, even when such cases have been tried or are pending in the same court, and
notwithstanding the fact that both cases may have been heard or are actually pending before
the same judge." 20

Be that as it may, Section 2, Rule 129 provides that courts may take judicial notice of matters
ought to be known to judges because of their judicial functions. In this case, the Court notes
that a copy of the Decision in CTA Case No. 4897 was attached to the Petition for Review
filed before this Court. Significantly, respondents do not claim at all that the said Decision was
fraudulent or nonexistent. Indeed, they do not even dispute the contents of the said Decision,
claiming merely that the Court cannot take judicial notice thereof.

To our mind, respondents' reasoning underscores the weakness of their case. For if they had
really believed that petitioner is not entitled to a tax refund, they could have easily proved that
it did not suffer any loss in 1990. Indeed, it is noteworthy that respondents opted not to assail
the fact appearing therein that petitioner suffered a net loss in 1990 in the same way that
it refused to controvert the same fact established by petitioner's other documentary exhibits.

In any event, the Decision in CTA Case No. 4897 is not the sole basis of petitioner's case. It is
merely one more bit of information showing the stark truth: petitioner did not use its 1989
refund to pay its taxes for 1990.

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
petitioner has established its claim. Petitioner 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.
Page 9 of 49

Substantial justice, equity and fair play are on the side of petitioner. 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.

WHEREFORE, the Petition is hereby GRANTED and the assailed Decision and Resolution of
the Court of Appeals REVERSED and SET ASIDE. The Commissioner of Internal Revenue is
ordered to refund to petitioner the amount of P112,491 as excess creditable taxes paid in 1989.
No costs.1wphi1.nt

SO ORDERED.

SECOND DIVISION
[G.R. No. 112024. January 28, 1999]

PHILIPPINE BANK OF COMMUNICATIONS, petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF APPEALS,
respondents.
D E C I S I O N
QUISUMBING, J.:

SYNOPSIS

Petitioner, Philippine Bank of Communications, on August 7, 1987, requested the
Commissioner of Internal Revenue (CIR) for a tax credit of P5,016,954.00 representing the
overpayment of taxes in the first and second quarters of 1985. On July 25, 1988, it filed a
claim for refund of creditable taxes withheld by their lessees from property rentals in 1985 for
P282,795.50 and in 1986 for P234,077.69. Pending investigation by the CIR, petitioner
instituted a petition for review on Nov. 18, 1988 before the Court of Tax Appeals (CTA). In
1993, the CTA rendered a decision denying the request for a tax refund or credit in the amount
of P5,299,749.95 on the ground that it was filed beyond the two-year reglementary period.
The petitioners claim for refund in 1986 was likewise denied on the assumption that it was
automatically credited by PBCom against its tax payment in the succeeding year. These
pronouncements by the CTA were affirmed in toto by the CA. Hence, this petition. Petitioner
argues that its claim for refund tax credits are not yet barred by prescription relying on the
applicability of Revenue Memorandum Circular No. 7-85 stating that overpaid income taxes
are not covered by the two-year prescriptive period under the Tax Code and that taxpayers
may claim refund or tax credits within (ten) 10 years under Art. 1414 of the Civil Code.

The Supreme Court ruled that when the Acting Commissioner of Internal Revenue issued
RMC 7-85, changing the prescriptive period of two years to ten years on claims of excess
quarterly income tax payments, such circular created a clear inconsistency with the provision
of Sec. 230 of the 1977 NIRC. In so doing, the BIR did not simply interpret the law; rather it
legislated guidelines contrary to the statute passed by Congress. It bears repeating that
Revenue memorandum-circulars are considered administrative rulings (in the sense of more
specific and less general interpretations of tax laws) which are issued from time to time by the
Commissioner of Internal Revenue. It is widely accepted that the interpretation placed upon a
statute by the executive officers, whose duty is to enforce it, is entitled to great 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.

SYLLABUS

1. TAXATION; GENERAL PRINCIPLES; BASIS AND PURPOSE; GENERATE FUNDS
FOR THE STATE TO FINANCE THE NEEDS OF THE CITIZENRY AND ADVANCE THE
COMMON WEAL. Basic is the principle that taxes are the lifeblood of the nation.
The primary purpose is to generate funds for the State to finance the needs of the citizenry and
to advance the common weal. Due process of law under the Constitution does not require
judicial proceedings in tax cases. This must necessarily be so because it is upon taxation that
the government chiefly relies to obtain the means to carry on its operations and it is of utmost
importance that the modes adopted to enforce the collection of taxes levied should be
summary and interfered with as little as possible.

Page 10 of 49
2. ID.; PAYMENT; REFUND ON OVERPAYMENT; PRESCRIPTIVE PERIOD THEREOF.
From the same perspective, claims for refund or tax credit should be exercised within the
time fixed by law because the BIR being an administrative body enforced to collect taxes, its
functions should not be unduly delayed or hampered by incidental matters. Section 230 of the
National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of 1997) provides for
the prescriptive period for filing a court proceeding for the recovery of tax erroneously or
illegally collected. The rule states that the taxpayer may file a claim for refund or credit with
the Commissioner of Internal Revenue, with two (2) years after payment of tax, before any
suit in CTA is commenced. The two-year prescriptive period provided, should be computed
from the time of filing the Adjustment Return and final payment of the tax for the year.

3. ADMINISTRATIVE LAW; ADMINISTRATIVE BODIES; CIRCULARS AND
ISSUANCES; SHOULD NOT RUN AGAINST THE STATUTE PASSED BY CONGRESS.
When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the
prescriptive period of two to ten years on claims of excess quarterly income tax payments,
such circular created a clear inconsistency with the provision of Sec. 230 of 1977 NLRC. In
so doing, the BIR did not simply interpret the law; rather it legislated guidelines contrary to
the statute passed by Congress. It bears repeating that Revenue memorandum-circulars are
considered administrative rulings 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.

4. ID.; COMMISSIONER OF INTERNAL REVENUE; ERRORS IN ADMINISTRATIVE
INTERPRETATION; CANNOT PUT THE STATE IN ESTOPPEL. Fundamental is the rule
that the State cannot be put in estoppel by the mistakes or errors of its officials or agents. As
pointed out by the respondent courts, the nullification of RMC No. 7-85 issued by the Acting
Commissioner of Internal Revenue is an administrative interpretation which is not in harmony
with Sec. 230 of 1977 NIRC, for being contrary to the express provision of a statute. Hence,
his interpretation could not be given weight for to do so would, in effect, amend the statute.

5. ID.; ADMINISTRATIVE BODIES; ADMINISTRATIVE DECISIONS; DO NOT FORM
PART OF THE LEGAL SYSTEM. Article 8 of the Civil Code recognizes judicial
decisions, applying or interpreting statutes as part of the legal system of the country. But
administrative decisions do not enjoy that level of recognition. A memorandum-circular of a
bureau head could not operate to vest a taxpayer with a shield against judicial action. For
there are no vested rights to speak of respecting a wrong construction of the law by the
administrative officials and such wrong interpretation could not place the Government in
estoppel to correct or overrule the same. Moreover, the non-retroactivity of rulings by the
Commissioner of Internal Revenue is not applicable in this case because the nullity of RMC
No. 7-85 was declared by respondent courts and not by the Commissioner of Internal
Revenue.

6. TAXATION; PAYMENT; CLAIM FOR REFUND; CONSTRUED IN STRICTISSIMI
JURIS AGAINST THE TAXPAYER. As repeatedly held by this Court, a claim for refund is
in the nature of a claim for exemption and should be construed in strictissimi juris against the
taxpayer.

7. ID.; NATIONAL INTERNAL REVENUE CODE, INCOME TAX; EXCESS OF THE
TOTAL QUARTERLY PAYMENTS THEREOF IS EITHER REFUNDED OR CREDITED
AGAINST THE ESTIMATED QUARTERLY INCOME TAX LIABILITIES FOR THE
SUCCEEDING TAXABLE YEAR. Sec. 69 of the 1977 NIRC (now Sec. 76 of the 1997
NIRC) provides that any excess of the total quarterly payments over the actual income tax
computed in the adjustment or final corporate income tax return, shall either (a) be refunded to
the corporation, or (b) may be credited against the estimated quarterly income tax liabilities
for the quarters of the succeeding taxable year.

8. ID.; ID.; ID.; ID.; REMEDIES ARE IN THE ALTERNATIVE AND THE CHOICE OF
ONE PRECLUDES THE OTHER. The corporation must signify in its annual corporate
adjustment return (by marking the option box provided in the BIR form) its intention, whether
to request for a refund or claim for an automatic tax credit for the succeeding taxable year. To
ease the administration of tax collection, these remedies are in the alternative, and the choice
of one precludes the other.

9. REMEDIAL LAW; EVIDENCE; FINDINGS OF FACT OF QUASI-JUDICIAL BODIES;
ACCORDED GREAT WEIGHT. That the petitioner opted for an automatic tax credit in
Page 11 of 49
accordance with Sec. 69 of the 1977 NIRC, as specified in its 1986 Final Adjusted Income Tax
Return, is a finding of fact which we must respect. Moreover, the 1987 annual corporate tax
return of the petitioner was not offered as evidence to controvert said fact. Thus, we are bound
by the findings of fact by respondent courts, there being no showing of gross error or abuse on
their part to disturb out reliance thereon.


This petition for review assails the Resolution[1] of the Court of Appeals dated September 22,
1993, affirming the Decision[2] and Resolution[3] of the Court of Tax Appeals which denied
the claims of the petitioner for tax refund and tax credits, and disposing as follows:

IN VIEW OF ALL THE FOREGOING, the instant petition for review is DENIED due
course. The Decision of the Court of Tax Appeals dated May 20, 1993 and its resolution dated
July 20, 1993, are hereby AFFIRMED in toto.

SO ORDERED.[4]

The Court of Tax Appeals earlier ruled as follows:

WHEREFORE, petitioners claim for refund/tax credit of overpaid income tax for 1985 in
the amount of P5,299,749.95 is hereby denied for having been filed beyond the reglementary
period. The 1986 claim for refund amounting to P234,077.69 is likewise denied since
petitioner has opted and in all likelihood automatically credited the same to the succeeding
year. The petition for review is dismissed for lack of merit.

SO ORDERED.[5]

The facts on record show the antecedent circumstances pertinent to this case.

Petitioner, Philippine Bank of Communications (PBCom), a commercial banking corporation
duly organized under Philippine laws, filed its quarterly income tax returns for the first and
second quarters of 1985, reported profits, and paid the total income tax of P5,016,954.00. The
taxes due were settled by applying PBComs tax credit memos and accordingly, the Bureau
of Internal Revenue (BIR) issued Tax Debit Memo Nos. 0746-85 and 0747-85 for
P3,401,701.00 and P1, 615,253.00, respectively.

Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax
Returns for the year-ended December 31, 1985, it declared a net loss of P25,317,228.00,
thereby showing no income tax liability. For the succeeding year, ending December 31, 1986,
the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable
for the year.

But during these two years, PBCom earned rental income from leased properties. The lessees
withheld and remitted to the BIR withholding creditable taxes of P282,795.50 in 1985 and
P234,077.69 in 1986.

On August 7, 1987, petitioner requested the Commissioner of Internal Revenue, among others,
for a tax credit of P5,016,954.00 representing the overpayment of taxes in the first and second
quarters of 1985.

Thereafter, on July 25, 1988, petitioner filed a claim for refund of creditable taxes withheld by
their lessees from property rentals in 1985 for P282,795.50 and in 1986 for P234,077.69.

Pending the investigation of the respondent Commissioner of Internal Revenue, petitioner
instituted a Petition for Review on November 18, 1988 before the Court of Tax Appeals
(CTA). The petition was docketed as CTA Case No. 4309 entitled: Philippine Bank of
Communications vs. Commissioner of Internal Revenue.

The losses petitioner incurred as per the summary of petitioners claims for refund and tax
credit for 1985 and 1986, filed before the Court of Tax Appeals, are as follows:

1985
1986
Net Income (Loss) (P25,317,228.00) (P14,129,602.00)
Tax Due
NIL
NIL
Quarterly tax
Page 12 of 49
Payments Made 5,016,954.00
---Tax Withheld at Source 282,795.50 234,077.69
Excess Tax Payments
P5,299,749.50* ==============
P234,077.69 ==============

*CTAs decision reflects PBComs 1985 tax claim as P5,299,749.95. A forty-five centavo
difference was noted.

On May 20, 1993, the CTA rendered a decision which, as stated on the outset, denied the
request of petitioner for a tax refund or credit in the sum amount of P5,299,749.95, on the
ground that it was filed beyond the two-year reglementary period provided for by law. The
petitioners claim for refund in 1986 amounting to P234,077.69 was likewise denied on the
assumption that it was automatically credited by PBCom against its tax payment in the
succeeding year.

On June 22, 1993, petitioner filed a Motion for Reconsideration of the CTAs decision but
the same was denied due course for lack of merit.[6]

Thereafter, PBCom filed a petition for review of said decision and resolution of the CTA with
the Court of Appeals. However on September 22, 1993, the Court of Appeals affirmed in toto
the CTAs resolution dated July 20, 1993. Hence this petition now before us.

The issues raised by the petitioner are:

I. Whether taxpayer PBCom -- which relied in good faith on the formal assurances of BIR in
RMC No. 7-85 and did not immediately file with the CTA a petition for review asking for the
refund/tax credit of its 1985-86 excess quarterly income tax payments -- can be prejudiced by
the subsequent BIR rejection, applied retroactively, of its assurances in RMC No. 7-85 that the
prescriptive period for the refund/tax credit of excess quarterly income tax payments is not
two years but ten (10).[7]

II. Whether the Court of Appeals seriously erred in affirming the CTA decision which denied
PBComs claim for the refund of P234,077.69 income tax overpaid in 1986 on the mere
speculation, without proof, that there were taxes due in 1987 and that PBCom availed of tax-
crediting that year.[8]

Simply stated, the main question is: Whether or not the Court of Appeals erred in denying the
plea for tax refund or tax credits on the ground of prescription, despite petitioners reliance
on RMC No. 7-85, changing the prescriptive period of two years to ten years?

Petitioner argues that its claims for refund and tax credits are not yet barred by prescription
relying on the applicability of Revenue Memorandum Circular No. 7-85 issued on April 1,
1985. The circular states that overpaid income taxes are not covered by the two-year
prescriptive period under the tax Code and that taxpayers may claim refund or tax credits for
the excess quarterly income tax with the BIR within ten (10) years under Article 1144 of the
Civil Code. The pertinent portions of the circular reads:

REVENUE MEMORANDUM CIRCULAR NO. 7-85

SUBJECT: PROCESSING OF REFUND OR TAX CREDIT OF EXCESS
CORPORATE INCOME TAX RESULTING FROM THE FILING OF THE FINAL
ADJUSTMENT RETURN

TO: All Internal Revenue Officers and Others Concerned

Sections 85 and 86 of the National Internal Revenue Code provide:

x x x x x x x x x

The foregoing provisions are implemented by Section 7 of Revenue Regulations Nos. 10-77
which provide:

x x x x x x x x x

It has been observed, however, that because of the excess tax payments, corporations file
claims for recovery of overpaid income tax with the Court of Tax Appeals within the two-year
period from the date of payment, in accordance with Sections 292 and 295 of the National
Page 13 of 49
Internal Revenue Code. It is obvious that the filing of the case in court is to preserve the
judicial right of the corporation to claim the refund or tax credit.

It should be noted, however, that this is not a case of erroneously or illegally paid tax under
the provisions of Sections 292 and 295 of the Tax Code.

In the above provision of the Regulations the corporation may request for the refund of the
overpaid income tax or claim for automatic tax credit. To insure prompt action on corporate
annual income tax returns showing refundable amounts arising from overpaid quarterly
income taxes, this Office has promulgated Revenue Memorandum Order No. 32-76 dated June
11, 1976, containing the procedure in processing said returns. Under these procedures, the
returns are merely pre-audited which consist mainly of checking mathematical accuracy of the
figures of the return. After which, the refund or tax credit is granted, and, this procedure was
adopted to facilitate immediate action on cases like this.

In this regard, therefore, there is no need to file petitions for review in the Court of Tax
Appeals in order to preserve the right to claim refund or tax credit within the two-year period.
As already stated, actions hereon by the Bureau are immediate after only a cursory pre-audit of
the income tax returns. Moreover, a taxpayer may recover from the Bureau of Internal
Revenue excess income tax paid under the provisions of Section 86 of the Tax Code within 10
years from the date of payment considering that it is an obligation created by law (Article
1144 of the Civil Code).[9] (Emphasis supplied.)

Petitioner argues that the government is barred from asserting a position contrary to its
declared circular if it would result to injustice to taxpayers. Citing ABS-CBN Broadcasting
Corporation vs. Court of Tax Appeals[10] petitioner claims that rulings or circulars
promulgated by the Commissioner of Internal Revenue have no retroactive effect if it would
be prejudicial to taxpayers. In ABS-CBN case, the Court held that the government is
precluded from adopting a position inconsistent with one previously taken where injustice
would result therefrom or where there has been a misrepresentation to the taxpayer.

Petitioner contends that Sec. 246 of the National Internal Revenue Code explicitly provides for
this rule as follows:

Sec. 246. Non-retroactivity of rulings-- Any revocation, modification or reversal of any of
the rules and regulations promulgated in accordance with the preceding section or any of the
rulings or circulars promulgated by the Commissioner shall not be given retroactive
application if the revocation, modification, or reversal will be prejudicial to the taxpayers
except in the following cases:

a) where the taxpayer deliberately misstates or omits material facts from his return or in
any document required of him by the Bureau of Internal Revenue;

b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based;

c) where the taxpayer acted in bad faith.

Respondent Commissioner of Internal Revenue, through the Solicitor General, argues that the
two-year prescriptive period for filing tax cases in court concerning income tax payments of
Corporations is reckoned from the date of filing the Final Adjusted Income Tax Return, which
is generally done on April 15 following the close of the calendar year. As precedents,
respondent Commissioner cited cases which adhered to this principle, to wit: ACCRA
Investments Corp. vs. Court of Appeals, et al.,[11] and Commissioner of Internal Revenue vs.
TMX Sales, Inc., et al..[12] Respondent Commissioner also states that since the Final Adjusted
Income Tax Return of the petitioner for the taxable year 1985 was supposed to be filed on
April 15, 1986, the latter had only until April 15, 1988 to seek relief from the court. Further,
respondent Commissioner stresses that when the petitioner filed the case before the CTA on
November 18, 1988, the same was filed beyond the time fixed by law, and such failure is fatal
to petitioners cause of action.

After a careful study of the records and applicable jurisprudence on the matter, we find that,
contrary to the petitioners contention, the relaxation of revenue regulations by RMC 7-85 is
not warranted as it disregards the two-year prescriptive period set by law.

Basic is the principle that taxes are the lifeblood of the nation. The primary purpose is to
generate funds for the State to finance the needs of the citizenry and to advance the common
weal.[13] Due process of law under the Constitution does not require judicial proceedings in
Page 14 of 49
tax cases. This must necessarily be so because it is upon taxation that the government chiefly
relies to obtain the means to carry on its operations and it is of utmost importance that the
modes adopted to enforce the collection of taxes levied should be summary and interfered with
as little as possible.[14]

From the same perspective, claims for refund or tax credit should be exercised within the time
fixed by law because the BIR being an administrative body enforced to collect taxes, its
functions should not be unduly delayed or hampered by incidental matters.

Section 230 of the National Internal Revenue Code (NIRC) of 1977 (now Sec. 229, NIRC of
1997) provides for the prescriptive period for filing a court proceeding for the recovery of tax
erroneously or illegally collected, viz.:

Sec. 230. Recovery of tax erroneously or illegally collected. -- No suit or proceeding shall
be maintained in any court for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed
to have been collected without authority, or of any sum alleged to have been excessive or in
any manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax,
penalty, or sum has been paid under protest or duress.

In any case, no such suit or proceeding shall be begun after the expiration of two years from
the date of payment of the tax or penalty regardless of any supervening cause that may arise
after payment; Provided however, That the Commissioner may, even without a written claim
therefor, refund or credit any tax, where on the face of the return upon which payment was
made, such payment appears clearly to have been erroneously paid. (Italics supplied)

The rule states that the taxpayer may file a claim for refund or credit with the Commissioner
of Internal Revenue, within two (2) years after payment of tax, before any suit in CTA is
commenced. The two-year prescriptive period provided, should be computed from the time of
filing the Adjustment Return and final payment of the tax for the year.

In Commissioner of Internal Revenue vs. Philippine American Life Insurance Co.,[15] this
Court explained the application of Sec. 230 of 1977 NIRC, as follows:

Clearly, the prescriptive period of two years should commence to run only from the time
that the refund is ascertained, which can only be determined after a final adjustment return is
accomplished. In the present case, this date is April 16, 1984, and two years from this date
would be April 16, 1986. x x x As we have earlier said in the TMX Sales case, Sections
68,[16] 69,[17] and 70[18] on Quarterly Corporate Income Tax Payment and Section 321
should be considered in conjunction with it.[19]

When the Acting Commissioner of Internal Revenue issued RMC 7-85, changing the
prescriptive period of two years to ten years on claims of excess quarterly income tax
payments, such circular created a clear inconsistency with the provision of Sec. 230 of 1977
NIRC. In so doing, the BIR did not simply interpret the law; rather it legislated guidelines
contrary to the statute passed by Congress.

It bears repeating that Revenue memorandum-circulars are considered administrative rulings
(in the sense of more specific and less general interpretations of tax laws) which are issued
from time to time by the Commissioner of Internal Revenue. It is widely accepted that the
interpretation placed upon a statute by the executive officers, whose duty is to enforce it, is
entitled to great respect by the courts. Nevertheless, such interpretation is not conclusive and
will be ignored if judicially found to be erroneous.[20] Thus, courts will not countenance
administrative issuances that override, instead of remaining consistent and in harmony with,
the law they seek to apply and implement.[21]

In the case of People vs. Lim,[22] it was held that rules and regulations issued by
administrative officials to implement a law cannot go beyond the terms and provisions of the
latter.

Appellant contends that Section 2 of FAO No. 37-1 is void because it is not only
inconsistent with but is contrary to the provisions and spirit of Act. No. 4003 as amended,
because whereas the prohibition prescribed in said Fisheries Act was for any single period of
time not exceeding five years duration, FAO No. 37-1 fixed no period, that is to say, it
establishes an absolute ban for all time. This discrepancy between Act No. 4003 and FAO No.
37-1 was probably due to an oversight on the part of Secretary of Agriculture and Natural
Resources. Of course, in case of discrepancy, the basic Act prevails, for the reason that the
Page 15 of 49
regulation or rule issued to implement a law cannot go beyond the terms and provisions of the
latter. x x x In this connection, the attention of the technical men in the offices of Department
Heads who draft rules and regulation is called to the importance and necessity of closely
following the terms and provisions of the law which they intended to implement, this to avoid
any possible misunderstanding or confusion as in the present case.[23]

Further, fundamental is the rule that the State cannot be put in estoppel by the mistakes or
errors of its officials or agents.[24] As pointed out by the respondent courts, the nullification
of RMC No. 7-85 issued by the Acting Commissioner of Internal Revenue is an administrative
interpretation which is not in harmony with Sec. 230 of 1977 NIRC, for being contrary to the
express provision of a statute. Hence, his interpretation could not be given weight for to do so
would, in effect, amend the statute.

As aptly stated by respondent Court of Appeals:

It is likewise argued that the Commissioner of Internal Revenue, after promulgating RMC
No. 7-85, is estopped by the principle of non-retroactivity of BIR rulings. Again We do not
agree. The Memorandum Circular, stating that a taxpayer may recover the excess income tax
paid within 10 years from date of payment because this is an obligation created by law, was
issued by the Acting Commissioner of Internal Revenue. On the other hand, the decision,
stating that the taxpayer should still file a claim for a refund or tax credit and the
corresponding petition for review within the two-year prescription period, and that the
lengthening of the period of limitation on refund from two to ten years would be adverse to
public policy and run counter to the positive mandate of Sec. 230, NIRC, - was the ruling and
judicial interpretation of the Court of Tax Appeals. Estoppel has no application in the case at
bar because it was not the Commissioner of Internal Revenue who denied petitioners claim
of refund or tax credit. Rather, it was the Court of Tax Appeals who denied (albeit correctly)
the claim and in effect, ruled that the RMC No. 7-85 issued by the Commissioner of Internal
Revenue is an administrative interpretation which is out of harmony with or contrary to the
express provision of a statute (specifically Sec. 230, NIRC), hence, cannot be given weight for
to do so would in effect amend the statute.[25]

Article 8 of the Civil Code[26] recognizes judicial decisions, applying or interpreting statutes
as part of the legal system of the country. But administrative decisions do not enjoy that level
of recognition. A memorandum-circular of a bureau head could not operate to vest a taxpayer
with a shield against judicial action. For there are no vested rights to speak of respecting a
wrong construction of the law by the administrative officials and such wrong interpretation
could not place the Government in estoppel to correct or overrule the same.[27] Moreover, the
non-retroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this
case because the nullity of RMC No. 7-85 was declared by respondent courts and not by the
Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this
Court, a claim for refund is in the nature of a claim for exemption and should be construed in
strictissimi juris against the taxpayer.[28]
On the second issue, the petitioner alleges that the Court of Appeals seriously erred in
affirming CTAs decision denying its claim for refund of P 234,077.69 (tax overpaid in
1986), based on mere speculation, without proof, that PBCom availed of the automatic tax
credit in 1987.

Sec. 69 of the 1977 NIRC[29] (now Sec. 76 of the 1997 NIRC) provides that any excess of the
total quarterly payments over the actual income tax computed in the adjustment or final
corporate income tax return, shall either (a) be refunded to the corporation, or (b) may be
credited against the estimated quarterly income tax liabilities for the quarters of the succeeding
taxable year.

The corporation must signify in its annual corporate adjustment return (by marking the option
box provided in the BIR form) its intention, whether to request for a refund or claim for an
automatic tax credit for the succeeding taxable year. To ease the administration of tax
collection, these remedies are in the alternative, and the choice of one precludes the other.

As stated by respondent Court of Appeals:

Finally, as to the claimed refund of income tax over-paid in 1986 - the Court of Tax
Appeals, after examining the adjusted final corporate annual income tax return for taxable year
1986, found out that petitioner opted to apply for automatic tax credit. This was the basis used
(vis-avis the fact that the 1987 annual corporate tax return was not offered by the petitioner as
evidence) by the CTA in concluding that petitioner had indeed availed of and applied the
automatic tax credit to the succeeding year, hence it can no longer ask for refund, as to [sic]
the two remedies of refund and tax credit are alternative.[30]
Page 16 of 49

That the petitioner opted for an automatic tax credit in accordance with Sec. 69 of the 1977
NIRC, as specified in its 1986 Final Adjusted Income Tax Return, is a finding of fact which
we must respect. Moreover, the 1987 annual corporate tax return of the petitioner was not
offered as evidence to controvert said fact. Thus, we are bound by the findings of fact by
respondent courts, there being no showing of gross error or abuse on their part to disturb our
reliance thereon.[31]

WHEREFORE, the petition is hereby DENIED. The decision of the Court of Appeals
appealed from is AFFIRMED, with COSTS against the petitioner.
SO ORDERED.
EN BANC
G.R. No. 76778 June 6, 1990
FRANCISCO I. CHAVEZ, petitioner, vs. JAIME B. ONGPIN, in his capacity as Minister of
Finance and FIDELINA CRUZ, in her capacity as Acting Municipal Treasurer of the
Municipality of Las Pias, respondents, REALTY OWNERS ASSOCIATION OF THE
PHILIPPINES, INC., petitioner-intervenor.

MEDIALDEA, J.:

The petition seeks to declare unconstitutional Executive Order No. 73 dated November 25,
1986, which We quote in full, as follows (78 O.G. 5861):

EXECUTIVE ORDER No. 73

PROVIDING FOR THE COLLECTION OF REAL PROPERTY TAXES BASED ON THE
1984 REAL PROPERTY VALUES, AS PROVIDED FOR UNDER SECTION 21 OF THE
REAL PROPERTY TAX CODE, AS AMENDED

WHEREAS, the collection of real property taxes is still based on the 1978 revision of property
values;

WHEREAS, the latest general revision of real property assessments completed in 1984 has
rendered the 1978 revised values obsolete;

WHEREAS, the collection of real property taxes based on the 1984 real property values was
deferred to take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local
government units of an additional source of revenue;

WHEREAS, there is an urgent need for local governments to augment their financial resources
to meet the rising cost of rendering effective services to the people;

NOW, THEREFORE, I. CORAZON C. AQUINO, President of the Philippines, do hereby
order:

SECTION 1. Real property values as of December 31, 1984 as determined by the local
assessors during the latest general revision of assessments shall take effect beginning January
1, 1987 for purposes of real property tax collection.

SEC. 2. The Minister of Finance shall promulgate the necessary rules and regulations to
implement this Executive Order.

SEC. 3. Executive Order No. 1019, dated April 18, 1985, is hereby repealed.

SEC. 4. All laws, orders, issuances, and rules and regulations or parts thereof inconsistent with
this Executive Order are hereby repealed or modified accordingly.

SEC. 5. This Executive Order shall take effect immediately.

On March 31, 1987, Memorandum Order No. 77 was issued suspending the implementation of
Executive Order No. 73 until June 30, 1987.

The petitioner, Francisco I. Chavez, 1 is a taxpayer and an owner of three parcels of land. He
alleges the following: that Executive Order No. 73 accelerated the application of the general
revision of assessments to January 1, 1987 thereby mandating an excessive increase in real
property taxes by 100% to 400% on improvements, and up to 100% on land; that any increase
in the value of real property brought about by the revision of real property values and
assessments would necessarily lead to a proportionate increase in real property taxes; that
Page 17 of 49
sheer oppression is the result of increasing real property taxes at a period of time when harsh
economic conditions prevail; and that the increase in the market values of real property as
reflected in the schedule of values was brought about only by inflation and economic
recession.

The intervenor Realty Owners Association of the Philippines, Inc. (ROAP), which is the
national association of owners-lessors, joins Chavez in his petition to declare unconstitutional
Executive Order No. 73, but additionally alleges the following: that Presidential Decree No.
464 is unconstitutional insofar as it imposes an additional one percent (1%) tax on all property
owners to raise funds for education, as real property tax is admittedly a local tax for local
governments; that the General Revision of Assessments does not meet the requirements of due
process as regards publication, notice of hearing, opportunity to be heard and insofar as it
authorizes "replacement cost" of buildings (improvements) which is not provided in
Presidential Decree No. 464, but only in an administrative regulation of the Department of
Finance; and that the Joint Local Assessment/Treasury Regulations No. 2-86 2 is even more
oppressive and unconstitutional as it imposes successive increase of 150% over the 1986 tax.

The Office of the Solicitor General argues against the petition.

The petition is not impressed with merit.

Petitioner Chavez and intervenor ROAP question the constitutionality of Executive Order No.
73 insofar as the revision of the assessments and the effectivity thereof are concerned. It
should be emphasized that Executive Order No. 73 merely directs, in Section 1 thereof, that:

SECTION 1. Real property values as of December 31, 1984 as determined by the local
assessors during the latest general revision of assessments shall take effect beginning January
1, 1987 for purposes of real property tax collection. (emphasis supplied)

The general revision of assessments completed in 1984 is based on Section 21 of Presidential
Decree No. 464 which provides, as follows:

SEC. 21. General Revision of Assessments. Beginning with the assessor shall make a
calendar year 1978, the provincial or city general revision of real property assessments in the
province or city to take effect January 1, 1979, and once every five years thereafter: Provided;
however, That if property values in a province or city, or in any municipality, have greatly
changed since the last general revision, the provincial or city assesor may, with the approval of
the Secretary of Finance or upon bis direction, undertake a general revision of assessments in
the province or city, or in any municipality before the fifth year from the effectivity of the last
general revision.

Thus, We agree with the Office of the Solicitor General that the attack on Executive Order No.
73 has no legal basis as the general revision of assessments is a continuing process mandated
by Section 21 of Presidential Decree No. 464. If at all, it is Presidential Decree No. 464 which
should be challenged as constitutionally infirm. However, Chavez failed to raise any objection
against said decree. It was ROAP which questioned the constitutionality thereof. Furthermore,
Presidential Decree No. 464 furnishes the procedure by which a tax assessment may be
questioned:

SEC. 30. Local Board of Assessment Appeals. Any owner who is not satisfied with the
action of the provincial or city assessor in the assessment of his property may, within sixty
days from the date of receipt by him of the written notice of assessment as provided in this
Code, appeal to the Board of Assessment Appeals of the province or city, by filing with it a
petition under oath using the form prescribed for the purpose, together with copies of the tax
declarations and such affidavit or documents submitted in support of the appeal.

xxx xxx xxx

SEC. 34. Action by the Local Board of assessment Appeals. The Local Board of
Assessment Appeals shall decide the appeal within one hundred and twenty days from the date
of receipt of such appeal. The decision rendered must be based on substantial evidence
presented at the hearing or at least contained in the record and disclosed to the parties or such
relevant evidence as a reasonable mind might accept as adequate to support the conclusion.

In the exercise of its appellate jurisdiction, the Board shall have the power to summon
witnesses, administer oaths, conduct ocular inspection, take depositions, and issue subpoena
and subpoena duces tecum. The proceedings of the Board shall be conducted solely for the
purpose of ascertaining the truth without-necessarily adhering to technical rules applicable in
Page 18 of 49
judicial proceedings.

The Secretary of the Board shall furnish the property owner and the Provincial or City
Assessor with a copy each of the decision of the Board. In case the provincial or city assessor
concurs in the revision or the assessment, it shall be his duty to notify the property owner of
such fact using the form prescribed for the purpose. The owner or administrator of the
property or the assessor who is not satisfied with the decision of the Board of Assessment
Appeals, may, within thirty days after receipt of the decision of the local Board, appeal to the
Central Board of Assessment Appeals by filing his appeal under oath with the Secretary of the
proper provincial or city Board of Assessment Appeals using the prescribed form stating
therein the grounds and the reasons for the appeal, and attaching thereto any evidence
pertinent to the case. A copy of the appeal should be also furnished the Central Board of
Assessment Appeals, through its Chairman, by the appellant.

Within ten (10) days from receipt of the appeal, the Secretary of the Board of Assessment
Appeals concerned shall forward the same and all papers related thereto, to the Central Board
of Assessment Appeals through the Chairman thereof.

xxx xxx xxx

SEC. 36. Scope of Powers and Functions. The Central Board of Assessment Appeals shall
have jurisdiction over appealed assessment cases decided by the Local Board of Assessment
Appeals. The said Board shall decide cases brought on appeal within twelve (12) months from
the date of receipt, which decision shall become final and executory after the lapse of fifteen
(15) days from the date of receipt of a copy of the decision by the appellant.

In the exercise of its appellate jurisdiction, the Central Board of Assessment Appeals, or upon
express authority, the Hearing Commissioner, shall have the power to summon witnesses,
administer oaths, take depositions, and issue subpoenas and subpoenas duces tecum.

The Central Board of assessment Appeals shall adopt and promulgate rules of procedure
relative to the conduct of its business.

Simply stated, within sixty days from the date of receipt of the, written notice of assessment,
any owner who doubts the assessment of his property, may appeal to the Local Board of
Assessment Appeals. In case the, owner or administrator of the property or the assessor is not
satisfied with the decision of the Local Board of Assessment Appeals, he may, within thirty
days from the receipt of the decision, appeal to the Central Board of Assessment Appeals. The
decision of the Central Board of Assessment Appeals shall become final and executory after
the lapse of fifteen days from the date of receipt of the decision.

Chavez argues further that the unreasonable increase in real property taxes brought about by
Executive Order No. 73 amounts to a confiscation of property repugnant to the constitutional
guarantee of due process, invoking the cases of Ermita-Malate Hotel, et al. v. Mayor of Manila
(G.R. No. L-24693, July 31, 1967, 20 SCRA 849) and Sison v. Ancheta, et al. (G.R. No.
59431, July 25, 1984, 130 SCRA 654).

The reliance on these two cases is certainly misplaced because the due process requirement
called for therein applies to the "power to tax." Executive Order No. 73 does not impose new
taxes nor increase taxes.

Indeed, the government recognized the financial burden to the taxpayers that will result from
an increase in real property taxes. Hence, Executive Order No. 1019 was issued on April 18,
1985, deferring the implementation of the increase in real property taxes resulting from the
revised real property assessments, from January 1, 1985 to January 1, 1988. Section 5 thereof
is quoted herein as follows:

SEC. 5. The increase in real property taxes resulting from the revised real property
assessments as provided for under Section 21 of Presidential Decree No. 464, as amended by
Presidential Decree No. 1621, shall be collected beginning January 1, 1988 instead of January
1, 1985 in order to enable the Ministry of Finance and the Ministry of Local Government to
establish the new systems of tax collection and assessment provided herein and in order to
alleviate the condition of the people, including real property owners, as a result of temporary
economic difficulties. (emphasis supplied)

The issuance of Executive Order No. 73 which changed the date of implementation of the
increase in real property taxes from January 1, 1988 to January 1, 1987 and therefore repealed
Executive Order No. 1019, also finds ample justification in its "whereas' clauses, as follows:
Page 19 of 49

WHEREAS, the collection of real property taxes based on the 1984 real property values was
deferred to take effect on January 1, 1988 instead of January 1, 1985, thus depriving the local
government units of an additional source of revenue;

WHEREAS, there is an urgent need for local governments to augment their financial resources
to meet the rising cost of rendering effective services to the people; (emphasis supplied)

xxx xxx xxx

The other allegation of ROAP that Presidential Decree No. 464 is unconstitutional, is not
proper to be resolved in the present petition. As stated at the outset, the issue here is limited to
the constitutionality of Executive Order No. 73. Intervention is not an independent proceeding,
but an ancillary and supplemental one which, in the nature of things, unless otherwise
provided for by legislation (or Rules of Court), must be in subordination to the main
proceeding, and it may be laid down as a general rule that an intervention is limited to the field
of litigation open to the original parties (59 Am. Jur. 950. Garcia, etc., et al. v. David, et al., 67
Phil. 279).

We agree with the observation of the Office of the Solicitor General that without Executive
Order No. 73, the basis for collection of real property taxes win still be the 1978 revision of
property values. Certainly, to continue collecting real property taxes based on valuations
arrived at several years ago, in disregard of the increases in the value of real properties that
have occurred since then, is not in consonance with a sound tax system. Fiscal adequacy,
which is one of the characteristics of a sound tax system, requires that sources of revenues
must be adequate to meet government expenditures and their variations.

ACCORDINGLY, the petition and the petition-in-intervention are hereby DISMISSED.

SO ORDERED.

[G.R. No. 125704. August 28, 1998]
PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, COURT OF APPEALS, and THE COURT OF TAX APPEALS, respondents.
D E C I S I O N
ROMERO, J.:

Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on
April 8, 1996 in CA-G.R. SP No. 36975[1] affirming the Court of Tax Appeals decision in
CTA Case No. 4872 dated March 16, 1995[2] ordering it to pay the amount of
P110,677,668.52 as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd
quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to
Sections 248 and 249 of the Tax Code of 1977.

The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax
liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in
the total amount of P123,821,982.52 computed as follows:

PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL
EXCISE

TAX DUE

2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91
3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60
4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88
------------------- ----------------- ----------------- -------------------
--
47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39
1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25
2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88
43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13
90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52
========== ========== ===========
===========[3]

In a letter dated August 20, 1992,[4] Philex protested the demand for payment of the tax
liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid for
Page 20 of 49
the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore, these
claims for tax credit/refund should be applied against the tax liabilities, citing our ruling in
Commissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc.[5]

In reply, the BIR, in a letter dated September 7, 1992,[6] found no merit in Philexs position.
Since these pending claims have not yet been established or determined with certainty, it
follows that no legal compensation can take place. Hence, he BIR reiterated its demand that
Philex settle the amount plus interest within 30 days from the receipt of the letter.

In view of the BIRs denial of the offsetting of Philexs claim for VAT input credit/refund
against its exercise tax obligation, Philex raised the issue to the Court of Tax Appeals on
November 6, 1992.[7] In the course of the proceedings, the BIR issued a Tax Credit Certificate
SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of Philex
of P123,821,982.52; effectively lowered the latters tax obligation of P110,677,688.52.

Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining
balance of P110,677,688.52 plus interest, elucidating its reason, to wit:

Thus, for legal compensation to take place, both obligations must be liquidated and
demandable. Liquidated debts are those where the exact amount has already been
determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259).
In the instant case, the claims of the Petitioner for VAT refund is still pending litigation, and
still has to be determined by this Court (C.T.A. Case No. 4707). A fortiori, the liquidated debt
of the Petitioner to the government cannot, therefore, be set-off against the unliquidated claim
which Petitioner conceived to exist in its favor (see Compaia General de Tabacos vs. French
and Unson, No. 14027, November 8, 1918, 39 Phil. 34).[8]

Moreover, the Court of Tax Appeals ruled that taxes cannot be subject to set-off on
compensation since claim for taxes is not a debt or contract.[9] The dispositive portion of
the CTA decision[10] provides:

In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and
Petitioner is hereby ORDERED to PAY the Respondent the amount of P110,677,668.52
representing excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter
of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Section 248
and 249 of the Tax Code, as amended.

Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed as
CA-G.R. CV No. 36975.[11] Nonetheless, on April 8, 1996, the Court of Appeals affirmed the
Court of Tax Appeals observation. The pertinent portion of which reads:[12]

WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the
decision dated March 16, 1995 is AFFIRMED.

Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution
dated July 11, 1996.[13]

However, a few days after the denial of its motion for reconsideration, Philex was able to
obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992
and 1994, computed as follows:[14]

Period Covered By Tax Credit Certificate Date Of Issue Amount
Claims For Vat Number
refund/credit
1994 (2nd Quarter) 007730 11 July 1996
P25,317,534.01

1994 (4th Quarter) 007731 11 July 1996
P21,791,020.61

1989 007732 11 July 1996 P37,322,799.19

1990-1991 007751 16 July 1996
P84,662,787.46

1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95

In view of the grant of its VAT input credit/refund, Philex now contends that the same should,
Page 21 of 49
ipso jure, off-set its excise tax liabilities[15] since both had already become due and
demandable, as well as fully liquidated;[16] hence, legal compensation can properly take
place.

We see no merit in this contention.

In several instances prior to the instant case, we have already made the pronouncement that
taxes cannot be subject to compensation for the simple reason that the government and the
taxpayer are not creditors and debtors of each other.[17] There is a material distinction
between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes
are due to the Government in its sovereign capacity.[18] We find no cogent reason to deviate
from the aforementioned distinction.

Prescinding from this premise, in Francia v. Intermediate Appellate Court,[19] we
categorically held that taxes cannot be subject to set-off or compensation, thus:

We have consistently ruled that there can be no off-setting of taxes against the claims that
the taxpayer may have against the government. A person cannot refuse to pay a tax on the
ground that the government owes him an amount equal to or greater than the tax being
collected. The collection of tax cannot await the results of a lawsuit against the
government.

The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v.
Commission on Audit,[20] which reiterated that:

x x x a taxpayer may not offset taxes due from the claims that he may have against the
government. Taxes cannot be the subject of compensation because the government and
taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such
a debt, demand, contract or judgment as is allowed to be set-off.

Further, Philexs reliance on our holding in Commissioner of Internal Revenue v. Itogon-
Suyoc Mines, Inc., wherein we ruled that a pending refund may be set off against an existing
tax liability even though the refund has not yet been approved by the Commissioner,[21] is no
longer without any support in statutory law.

It is important to note that the premise of our ruling in the aforementioned case was anchored
on Section 51(d) of the National Revenue Code of 1939. However, when the National Internal
Revenue Code of 1977 was enacted, the same provision upon which the Itogon-Suyoc
pronouncement was based was omitted.[22] Accordingly, the doctrine enunciated in Itogon-
Suyoc cannot be invoked by Philex.

Despite the foregoing rulings clearly adverse to Philexs position, it asserts that the
imposition of surcharge and interest for the non-payment of the excise taxes within the time
prescribed was unjustified. Philex posits the theory that it had no obligation to pay the excise
liabilities within the prescribed period since, after all, it still has pending claims for VAT input
credit/refund with BIR.[23]

We fail to see the logic of Philexs claim for this is an outright disregard of the basic
principle in tax law that taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance.[24] Evidently, to countenance Philexs whimsical reason
would render ineffective our tax collection system. Too simplistic, it finds no support in law
or in jurisprudence.

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground
that it has a pending tax claim for refund or credit against the government which has not yet
been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory
rather than a matter of bargain.[25] Hence, a tax does not depend upon the consent of the
taxpayer.[26] If any payer can defer the payment of taxes by raising the defense that it still has
a pending claim for refund or credit, this would adversely affect the government revenue
system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a
claim against the government or that the collection of the tax is contingent on the result of the
lawsuit it filed against the government.[27] Moreover, Philex's theory that would
automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to
confusion and abuse, depriving the government of authority over the manner by which
taxpayers credit and offset their tax liabilities.

Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the
government is immaterial for the imposition of charges and penalties prescribed under Section
Page 22 of 49
248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory and the BIR
is not vested with any authority to waive the collection thereof.[28] The same cannot be
condoned for flimsy reasons,[29] similar to the one advanced by Philex in justifying its non-
payment of its tax liabilities.

Finally, Philex asserts that the BIR violated Section 106(e)[30] of the National Internal
Revenue Code of 1977, which requires the refund of input taxes within 60 days,[31] when it
took five years for the latter to grant its tax claim for VAT input credit/refund.[32]

In this regard, we agree with Philex. While there is no dispute that a claimant has the burden
of proof to establish the factual basis of his or her claim for tax credit or refund,[33] however,
once the claimant has submitted all the required documents, it is the function of the BIR to
assess these documents with purposeful dispatch. After all, since taxpayers owe honesty to
government it is but just that government render fair service to the taxpayers.[34]

In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of
these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more
diligent and judicious with their duty, it could have granted the refund earlier. We need not
remind the BIR that simple justice requires the speedy refund of wrongly-held taxes.[35] Fair
dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of
its function. As aptly held in Roxas v. Court of Tax Appeals:[36]

"The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collectot kill the 'hen that lays the golden
egg.' And, in the order to maintain the general public's trust and confidence in the Government
this power must be used justly and not treacherously."

Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it
is a settled rule that in the performance of governmental function, the State is not bound by the
neglect of its agents and officers. Nowhere is this more true than in the field of taxation.[37]
Again, while we understand Philex's predicament, it must be stressed that the same is not valid
reason for the non- payment of its tax liabilities.

To be sure, this is not state that the taxpayer is devoid of remedy against public servants or
employees especially BIR examiners who, in investigating tax claims are seen to drag their
feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claims for refund, the
latter can seek judicial remedy before the Court of Tax Appeals in the manner prescribed by
law.[38] Second, if the inaction can be characterized as willful neglect of duty, then recourse
under the Civil Code and the Tax Code can also be availed of.

Article 27 of the Civil Code provides:

"Art. 27. Any person suffering material or moral loss because a public servant or employee
refuses or neglects, without just cause, to perform his official duty may file an action for
damages and other relief against the latter, without prejudice to any disciplinary action that
may be taken."

More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states:

"xxx xxx xxx

(c) wilfully neglecting to give receipts, as by law required for any sum collected in the
performance of duty or wilfully neglecting to perform, any other duties enjoined by law."

Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in
the performance of official duties.[39] In no uncertain terms must we stress that every public
employee or servant must strive to render service to the people with utmost diligence and
efficiency. Insolence and delay have no place in government service. The BIR, being the
government collecting arm, must and should do no less. It simply cannot be apathetic and
laggard in rendering service to the taxpayer if it wishes to remain true to its mission of
hastening the country's development. We take judicial notice of the taxpayer's generally
negative perception towards the BIR; hence, it is up to the latter to prove its detractors wrong.

In sum, while we can never condone the BIR's apparent callousness in performing its duties,
still, the same cannot justify Philex's non-payment of its tax liabilities. The adage "no one
should take the law into his own hands" should have guided Philex's action.

Page 23 of 49
WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The
assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED.
SO ORDERED.
ROMEO P. GEROCHI, KATULONG NG BAYAN (KB) and ENVIRONMENTALIST
CONSUMERS NETWORK, INC. (ECN), Petitioners, -versus- DEPARTMENT OF
ENERGY (DOE), ENERGY REGULATORY COMMISSION (ERC), NATIONAL POWER
CORPORATION (NPC), POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT
GROUP (PSALM Corp.), STRATEGIC POWER UTILITIES GROUP (SPUG), and PANAY
ELECTRIC COMPANY INC. (PECO),
Respondents.
G.R. No. 159796
DECISION
NACHURA, J.:
Petitioners Romeo P. Gerochi, Katulong Ng Bayan (KB), and Environmentalist
Consumers Network, Inc. (ECN) (petitioners), come before this Court in this original action
praying that Section 34 of Republic Act (RA) 9136, otherwise known as the Electric Power
Industry Reform Act of 2001 (EPIRA), imposing the Universal Charge,[1] and Rule 18 of
the Rules and Regulations (IRR)[2] which seeks to implement the said imposition, be declared
unconstitutional. Petitioners also pray that the Universal Charge imposed upon the consumers
be refunded and that a preliminary injunction and/or temporary restraining order (TRO) be
issued directing the respondents to refrain from implementing, charging, and collecting the
said charge.[3] The assailed provision of law reads:

SECTION 34. Universal Charge. Within one (1) year from the effectivity of this Act, a
universal charge to be determined, fixed and approved by the ERC, shall be imposed on all
electricity end-users for the following purposes:

(a) Payment for the stranded debts[4] in excess of the amount assumed by the National
Government and stranded contract costs of NPC[5] and as well as qualified stranded contract
costs of distribution utilities resulting from the restructuring of the industry;

(b) Missionary electrification;[6]

(c) The equalization of the taxes and royalties applied to indigenous or renewable sources of
energy vis--vis imported energy fuels;

(d) An environmental charge equivalent to one-fourth of one centavo per kilowatt-hour
(P0.0025/kWh), which shall accrue to an environmental fund to be used solely for watershed
rehabilitation and management. Said fund shall be managed by NPC under existing
arrangements; and

(e) A charge to account for all forms of cross-subsidies for a period not exceeding three (3)
years. The universal charge shall be a non-bypassable charge which shall be passed on and
collected from all end-users on a monthly basis by the distribution utilities. Collections by the
distribution utilities and the TRANSCO in any given month shall be remitted to the PSALM
Corp. on or before the fifteenth (15th) of the succeeding month, net of any amount due to the
distribution utility. Any end-user or self-generating entity not connected to a distribution utility
shall remit its corresponding universal charge directly to the TRANSCO. The PSALM Corp.,
as administrator of the fund, shall create a Special Trust Fund which shall be disbursed only
for the purposes specified herein in an open and transparent manner. All amount collected for
the universal charge shall be distributed to the respective beneficiaries within a reasonable
period to be provided by the ERC.
The Facts
Congress enacted the EPIRA on June 8, 2001; on June 26, 2001, it took effect.[7] On April 5,
2002, respondent National Power Corporation-Strategic Power Utilities Group[8] (NPC-
SPUG) filed with respondent Energy Regulatory Commission (ERC) a petition for the
availment from the Universal Charge of its share for Missionary Electrification, docketed as
ERC Case No. 2002-165.[9]

On May 7, 2002, NPC filed another petition with ERC, docketed as ERC Case No. 2002-
194, praying that the proposed share from the Universal Charge for the Environmental charge
of P0.0025 per kilowatt-hour (/kWh), or a total of P119,488,847.59, be approved for
withdrawal from the Special Trust Fund (STF) managed by respondent Power Sector
Assets and

Liabilities Management Group (PSALM)[10] for the rehabilitation and management of
watershed areas.[11]

Page 24 of 49
On December 20, 2002, the ERC issued an Order[12] in ERC Case No. 2002-165
provisionally approving the computed amount of P0.0168/kWh as the share of the NPC-SPUG
from the Universal Charge for Missionary Electrification and authorizing the National
Transmission Corporation (TRANSCO) and Distribution Utilities to collect the same from its
end-users on a monthly basis.

On June 26, 2003, the ERC rendered its Decision[13] (for ERC Case No. 2002-165)
modifying its Order of December 20, 2002, thus:

WHEREFORE, the foregoing premises considered, the provisional authority granted to
petitioner National Power Corporation-Strategic Power Utilities Group (NPC-SPUG) in the
Order dated December 20, 2002 is hereby modified to the effect that an additional amount of
P0.0205 per kilowatt-hour should be added to the P0.0168 per kilowatt-hour provisionally
authorized by the Commission in the said Order. Accordingly, a total amount of P0.0373 per
kilowatt-hour is hereby APPROVED for withdrawal from the Special Trust Fund managed by
PSALM as its share from the Universal Charge for Missionary Electrification (UC-ME)
effective on the following billing cycles:

(a) June 26-July 25, 2003 for National Transmission Corporation (TRANSCO); and
(b) July 2003 for Distribution Utilities (Dus).

Relative thereto, TRANSCO and Dus are directed to collect the UC-ME in the amount of
P0.0373 per kilowatt-hour and remit the same to PSALM on or before the 15th day of the
succeeding month.

In the meantime, NPC-SPUG is directed to submit, not later than April 30, 2004, a detailed
report to include Audited Financial Statements and physical status (percentage of completion)
of the projects using the prescribed format.

Let copies of this Order be furnished petitioner NPC-SPUG and all distribution utilities (Dus).

SO ORDERED.
On August 13, 2003, NPC-SPUG filed a Motion for Reconsideration asking the ERC,
among others,[14] to set aside the above-mentioned Decision, which the ERC granted in its
Order dated October 7, 2003, disposing:

WHEREFORE, the foregoing premises considered, the Motion for
Reconsideration filed by petitioner National Power Corporation-Small Power Utilities
Group (NPC-SPUG) is hereby GRANTED. Accordingly, the Decision dated June 26, 2003 is
hereby modified accordingly.

Relative thereto, NPC-SPUG is directed to submit a quarterly report on the following:

1. Projects for CY 2002 undertaken;
2. Location
3. Actual amount utilized to complete the project;
4. Period of completion;
5. Start of Operation; and
6. Explanation of the reallocation of UC-ME funds, if any.

SO ORDERED.[15]
Meanwhile, on April 2, 2003, ERC decided ERC Case No. 2002-194, authorizing the
NPC to draw up to P70,000,000.00 from PSALM for its 2003 Watershed Rehabilitation
Budget subject to the availability of funds for the Environmental Fund component of the
Universal Charge.[16]

On the basis of the said ERC decisions, respondent Panay Electric Company, Inc.
(PECO) charged petitioner Romeo P. Gerochi and all other

end-users with the Universal Charge as reflected in their respective electric bills starting from
the month of July 2003.[17]

Hence, this original action.

Petitioners submit that the assailed provision of law and its IRR which sought to
implement the same are unconstitutional on the following grounds:

1) The universal charge provided for under Sec. 34 of the EPIRA and sought to be
Page 25 of 49
implemented under Sec. 2, Rule 18 of the IRR of the said law is a tax which is to be collected
from all electric end-users and self-generating entities. The power to tax is strictly a legislative
function and as such, the delegation of said power to any executive or administrative agency
like the ERC is unconstitutional, giving the same unlimited authority. The assailed provision
clearly provides that the Universal Charge is to be determined, fixed and approved by the
ERC, hence leaving to the latter complete discretionary legislative authority.

2) The ERC is also empowered to approve and determine where the funds collected should
be used.

3) The imposition of the Universal Charge on all end-users is oppressive and confiscatory
and amounts to taxation without representation as the consumers were not given a chance to
be heard and represented.[18]
Petitioners contend that the Universal Charge has the characteristics of a tax and is collected to
fund the operations of the NPC. They argue that the cases[19] invoked by the respondents
clearly show the regulatory purpose of the charges imposed therein, which is not so in the case
at bench. In said cases, the respective funds[20] were created in order to balance and stabilize
the prices of oil and sugar, and to act as buffer to counteract the changes and adjustments in
prices, peso devaluation, and other variables which cannot be adequately and timely monitored
by the legislature. Thus, there was a need to delegate powers to administrative bodies.[21]
Petitioners posit that the Universal Charge is imposed not for a similar purpose.

On the other hand, respondent PSALM through the Office of the Government Corporate
Counsel (OGCC) contends that unlike a tax which is imposed to provide income for public
purposes, such as support of the government, administration of the law, or payment of public
expenses, the assailed Universal Charge is levied for a specific regulatory purpose, which is to
ensure the viability of the country's electric power industry. Thus, it is exacted by the State in
the exercise of its inherent police power. On this premise, PSALM submits that there is no
undue delegation of legislative power to the ERC since the latter merely exercises a limited
authority or discretion as to the execution and implementation of the provisions of the
EPIRA.[22]

Respondents Department of Energy (DOE), ERC, and NPC, through the Office of the
Solicitor General (OSG), share the same view that the Universal Charge is not a tax because it
is levied for a specific regulatory purpose, which is to ensure the viability of the country's
electric power industry, and is, therefore, an exaction in the exercise of the State's police
power. Respondents further contend that said Universal Charge does not possess the essential
characteristics of a tax, that its imposition would redound to the benefit of the electric power
industry and not to the public, and that its rate is uniformly levied on electricity end-users,
unlike a tax which is imposed based on the individual taxpayer's ability to pay. Moreover,
respondents deny that there is undue delegation of legislative power to the ERC since the
EPIRA sets forth sufficient determinable standards which would guide the ERC in the exercise
of the powers granted to it. Lastly, respondents argue that the imposition of the Universal
Charge is not oppressive and confiscatory since it is an exercise of the police power of the
State and it complies with the requirements of due process.[23]

On its part, respondent PECO argues that it is duty-bound to collect and remit the
amount pertaining to the Missionary Electrification and Environmental Fund components of
the Universal Charge, pursuant to Sec. 34 of the EPIRA and the Decisions in ERC Case Nos.
2002-194 and 2002-165. Otherwise, PECO could be held liable under Sec. 46[24] of the
EPIRA, which imposes fines and penalties for any violation of its provisions or its IRR.[25]
The Issues
The ultimate issues in the case at bar are:

1) Whether or not, the Universal Charge imposed under Sec. 34 of the EPIRA is a tax; and

2) Whether or not there is undue delegation of legislative power to tax on the part of the
ERC.[26]
Before we discuss the issues, the Court shall first deal with an obvious procedural lapse.

Petitioners filed before us an original action particularly denominated as a Complaint assailing
the constitutionality of Sec. 34 of the EPIRA imposing the Universal Charge and Rule 18 of
the EPIRA's IRR. No doubt, petitioners have locus standi. They impugn the constitutionality
of Sec. 34 of the EPIRA because they sustained a direct injury as a result of the imposition of
the Universal Charge as reflected in their electric bills.

However, petitioners violated the doctrine of hierarchy of courts when they filed this
Complaint directly with us. Furthermore, the Complaint is bereft of any allegation of
Page 26 of 49
grave abuse of discretion on the part of the ERC or any of the public respondents, in order for
the Court to consider it as a petition for certiorari or prohibition.

Article VIII, Section 5(1) and (2) of the 1987 Constitution[27] categorically provides that:

SECTION 5. The Supreme Court shall have the following powers:

1. Exercise original jurisdiction over cases affecting ambassadors, other public ministers
and consuls, and over petitions for certiorari, prohibition, mandamus, quo warranto, and
habeas corpus.
2. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the rules
of court may provide, final judgments and orders of lower courts in:

(a) All cases in which the constitutionality or validity of any treaty, international or executive
agreement, law, presidential decree, proclamation, order, instruction, ordinance, or regulation
is in question.
But this Court's jurisdiction to issue writs of certiorari, prohibition, mandamus, quo warranto,
and habeas corpus, while concurrent with that of the regional trial courts and the Court of
Appeals, does not give litigants unrestrained freedom of choice of forum from which to seek
such relief.[28] It has long been established that this Court will not entertain direct resort to it
unless the redress desired cannot be obtained in the appropriate courts, or where exceptional
and compelling circumstances justify availment of a remedy within and call for the exercise of
our primary jurisdiction.[29] This circumstance alone warrants the outright dismissal of the
present action.

This procedural infirmity notwithstanding, we opt to resolve the constitutional issue raised
herein. We are aware that if the constitutionality of Sec. 34 of the EPIRA is not resolved now,
the issue will certainly resurface in the near future, resulting in a repeat of this litigation, and
probably involving the same parties. In the public interest and to avoid unnecessary delay, this
Court renders its ruling now.
The instant complaint is bereft of merit.
The First Issue
To resolve the first issue, it is necessary to distinguish the States power of taxation from the
police power.

The power to tax is an incident of sovereignty and is unlimited in its range,
acknowledging in its very nature no limits, so that security against its abuse is to be found only
in the responsibility of the legislature which imposes the tax on the constituency that is to pay
it.[30] It is based on the principle that taxes are the lifeblood of the government, and their
prompt and certain availability is an imperious need.[31] Thus, the theory behind the exercise
of the power to tax emanates from necessity; without taxes, government cannot fulfill its
mandate of promoting the general welfare and well-being of the people.[32]

On the other hand, police power is the power of the state to promote public welfare by
restraining and regulating the use of liberty and property.[33] It is the most pervasive, the least
limitable, and the most demanding of the three fundamental powers of the State. The
justification is found in the Latin maxims salus populi est suprema lex (the welfare of the
people is the supreme law) and sic utere tuo ut alienum non laedas (so use your property as not
to injure the property of others). As an inherent attribute of sovereignty which virtually
extends to all public needs, police power grants a wide panoply of instruments through which
the State, as parens patriae, gives effect to a host of its regulatory powers.[34] We have held
that the power to "regulate" means the power to protect, foster, promote, preserve, and control,
with due regard for the interests, first and foremost, of the public, then of the utility and of its
patrons.[35]

The conservative and pivotal distinction between these two powers rests in the purpose for
which the charge is made. If generation of revenue is the primary purpose and regulation is
merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that
revenue is incidentally raised does not make the imposition a tax.[36]

In exacting the assailed Universal Charge through Sec. 34 of the EPIRA, the State's
police power, particularly its regulatory dimension, is invoked. Such can be deduced from Sec.
34 which enumerates the purposes for which the Universal Charge is imposed[37] and which
can be amply discerned as regulatory in character. The EPIRA resonates such regulatory
purposes, thus:

SECTION 2. Declaration of Policy. It is hereby declared the policy of the State:

Page 27 of 49
(a) To ensure and accelerate the total electrification of the country;
(b) To ensure the quality, reliability, security and affordability of the supply of electric power;
(c) To ensure transparent and reasonable prices of electricity in a regime of free and fair
competition and full public accountability to achieve greater operational and economic
efficiency and enhance the competitiveness of Philippine products in the global market;
(d) To enhance the inflow of private capital and broaden the ownership base of the power
generation, transmission and distribution sectors;
(e) To ensure fair and non-discriminatory treatment of public and private sector entities in the
process of restructuring the electric power industry;
(f) To protect the public interest as it is affected by the rates and services of electric utilities
and other providers of electric power;
(g) To assure socially and environmentally compatible energy sources and infrastructure;
(h) To promote the utilization of indigenous and new and renewable energy resources in
power generation in order to reduce dependence on imported energy;
(i) To provide for an orderly and transparent privatization of the assets and liabilities of the
National Power Corporation (NPC);
(j) To establish a strong and purely independent regulatory body and system to ensure
consumer protection and enhance the competitive operation of the electricity market; and
(k) To encourage the efficient use of energy and other modalities of demand side
management.
From the aforementioned purposes, it can be gleaned that the assailed Universal Charge
is not a tax, but an exaction in the exercise of the State's police power. Public welfare is surely
promoted.
Moreover, it is a well-established doctrine that the taxing power may be used as an
implement of police power.[38] In Valmonte v. Energy Regulatory Board, et al.[39] and in
Gaston v. Republic Planters Bank,[40] this Court held that the Oil Price Stabilization Fund
(OPSF) and the Sugar Stabilization Fund (SSF) were exactions made in the exercise of the
police power. The doctrine was reiterated in Osmea v. Orbos[41] with respect to the OPSF.
Thus, we disagree with petitioners that the instant case is different from the aforementioned
cases. With the Universal Charge, a Special Trust Fund (STF) is also created under the
administration of PSALM.[42] The STF has some notable characteristics similar to the OPSF
and the SSF, viz.:

1) In the implementation of stranded cost recovery, the ERC shall conduct a review to
determine whether there is under-recovery or over recovery and adjust (true-up) the level of
the stranded cost recovery charge. In case of an over-recovery, the ERC shall ensure that any
excess amount shall be remitted to the STF. A separate account shall be created for these
amounts which shall be held in trust for any future claims of distribution utilities for stranded
cost recovery. At the end of the stranded cost recovery period, any remaining amount in this
account shall be used to reduce the electricity rates to the end-users.[43]

2) With respect to the assailed Universal Charge, if the total amount collected for the same
is greater than the actual availments against it, the PSALM shall retain the balance within the
STF to pay for periods where a shortfall occurs.[44]

3) Upon expiration of the term of PSALM, the administration of the STF shall be
transferred to the DOF or any of the DOF attached agencies as designated by the DOF
Secretary.[45]

The OSG is in point when it asseverates:

Evidently, the establishment and maintenance of the Special Trust Fund, under the last
paragraph of Section 34, R.A. No. 9136, is well within the pervasive and non-waivable power
and responsibility of the government to secure the physical and economic survival and well-
being of the community, that comprehensive sovereign authority we designate as the police
power of the State.[46]
This feature of the Universal Charge further boosts the position that the same is an
exaction imposed primarily in pursuit of the State's police objectives. The STF reasonably
serves and assures the attainment and perpetuity of the purposes for which the Universal
Charge is imposed, i.e., to ensure the viability of the country's electric power industry.

The Second Issue

The principle of separation of powers ordains that each of the three branches of government
has exclusive cognizance of and is supreme in matters falling within its own constitutionally
allocated sphere. A logical corollary to the doctrine of separation of powers is the principle of
non-delegation of powers, as expressed in the Latin maxim potestas delegata non delegari
potest (what has been delegated cannot be delegated). This is based on the ethical principle
Page 28 of 49
that such delegated power constitutes not only a right but a duty to be performed by the
delegate through the instrumentality of his own judgment and not through the intervening
mind of another. [47]

In the face of the increasing complexity of modern life, delegation of legislative power to
various specialized administrative agencies is allowed as an exception to this principle.[48]
Given the volume and variety of interactions in today's society, it is doubtful if the legislature
can promulgate laws that will deal adequately with and respond promptly to the minutiae of
everyday life. Hence, the need to delegate to administrative bodies - the principal agencies
tasked to execute laws in their specialized fields - the authority to promulgate rules and
regulations to implement a given statute and effectuate its policies. All that is required for the
valid exercise of this power of subordinate legislation is that the regulation be germane to the
objects and purposes of the law and that the regulation be not in contradiction to, but in
conformity with, the standards prescribed by the law. These requirements are denominated as
the completeness test and the sufficient standard test.

Under the first test, the law must be complete in all its terms and conditions when it
leaves the legislature such that when it reaches the delegate, the only thing he will have to do
is to enforce it. The second test mandates adequate guidelines or limitations in the law to
determine the boundaries of the delegate's authority and prevent the delegation from running
riot.[49]
The Court finds that the EPIRA, read and appreciated in its entirety, in relation to Sec. 34
thereof, is complete in all its essential terms and conditions, and that it contains sufficient
standards.
Although Sec. 34 of the EPIRA merely provides that within one (1) year from the
effectivity thereof, a Universal Charge to be determined, fixed and approved by the ERC, shall
be imposed on all electricity end-users, and therefore, does not state the specific amount to
be paid as Universal Charge, the amount nevertheless is made certain by the legislative
parameters provided in the law itself. For one, Sec. 43(b)(ii) of the EPIRA provides:


SECTION 43. Functions of the ERC. The ERC shall promote competition, encourage
market development, ensure customer choice and penalize abuse of market power in the
restructured electricity industry. In appropriate cases, the ERC is authorized to issue cease and
desist order after due notice and hearing. Towards this end, it shall be responsible for the
following key functions in the restructured industry:

x x x x

(b) Within six (6) months from the effectivity of this Act, promulgate and enforce, in
accordance with law, a National Grid Code and a Distribution Code which shall include, but
not limited to the following:

x x x x

(ii) Financial capability standards for the generating companies, the TRANSCO,
distribution utilities and suppliers: Provided, That in the formulation of the financial capability
standards, the nature and function of the entity shall be considered: Provided, further, That
such standards are set to ensure that the electric power industry participants meet the minimum
financial standards to protect the public interest. Determine, fix, and approve, after due notice
and public hearings the universal charge, to be imposed on all electricity end-users pursuant to
Section 34 hereof;
Moreover, contrary to the petitioners contention, the ERC does not enjoy a wide
latitude of discretion in the determination of the Universal Charge. Sec. 51(d) and (e) of the
EPIRA[50] clearly provides:

SECTION 51. Powers. The PSALM Corp. shall, in the performance of its functions and for
the attainment of its objective, have the following powers:

x x x x

(d) To calculate the amount of the stranded debts and stranded contract costs of NPC which
shall form the basis for ERC in the determination of the universal charge;

(e) To liquidate the NPC stranded contract costs, utilizing the proceeds from sales and other
property contributed to it, including the proceeds from the universal charge.
Thus, the law is complete and passes the first test for valid delegation of legislative power.
As to the second test, this Court had, in the past, accepted as sufficient standards the
Page 29 of 49
following: "interest of law and order;"[51] "adequate and efficient instruction;"[52] "public
interest;"[53] "justice and equity;"[54] "public convenience and welfare;"[55] "simplicity,
economy and efficiency;"[56] "standardization and regulation of medical education;"[57] and
"fair and equitable employment practices."[58] Provisions of the EPIRA such as, among
others, to ensure the total electrification of the country and the quality, reliability, security
and affordability of the supply of electric power[59] and watershed rehabilitation and
management[60] meet the requirements for valid delegation, as they provide the limitations
on the ERCs power to formulate the IRR. These are sufficient standards.

It may be noted that this is not the first time that the ERC's conferred powers were
challenged. In Freedom from Debt Coalition v. Energy Regulatory Commission,[61] the Court
had occasion to say:
In determining the extent of powers possessed by the ERC, the provisions of the EPIRA
must not be read in separate parts. Rather, the law must be read in its entirety, because a statute
is passed as a whole, and is animated by one general purpose and intent. Its meaning cannot to
be extracted from any single part thereof but from a general consideration of the statute as a
whole. Considering the intent of Congress in enacting the EPIRA and reading the statute in its
entirety, it is plain to see that the law has expanded the jurisdiction of the regulatory body, the
ERC in this case, to enable the latter to implement the reforms sought to be accomplished by
the EPIRA. When the legislators decided to broaden the jurisdiction of the ERC, they did not
intend to abolish or reduce the powers already conferred upon ERC's predecessors. To sustain
the view that the ERC possesses only the powers and functions listed under Section 43 of the
EPIRA is to frustrate the objectives of the law.
In his Concurring and Dissenting Opinion[62] in the same case, then Associate Justice,
now Chief Justice, Reynato S. Puno described the immensity of police power in relation to the
delegation of powers to the ERC and its regulatory functions over electric power as a vital
public utility, to wit:
Over the years, however, the range of police power was no longer limited to the preservation
of public health, safety and morals, which used to be the primary social interests in earlier
times. Police power now requires the State to "assume an affirmative duty to eliminate the
excesses and injustices that are the concomitants of an unrestrained industrial economy."
Police power is now exerted "to further the public welfare a concept as vast as the good of
society itself." Hence, "police power is but another name for the governmental authority to
further the welfare of society that is the basic end of all government." When police power is
delegated to administrative bodies with regulatory functions, its exercise should be given a
wide latitude. Police power takes on an even broader dimension in developing countries such
as ours, where the State must take a more active role in balancing the many conflicting
interests in society. The Questioned Order was issued by the ERC, acting as an agent of the
State in the exercise of police power. We should have exceptionally good grounds to curtail its
exercise. This approach is more compelling in the field of rate-regulation of electric power
rates. Electric power generation and distribution is a traditional instrument of economic
growth that affects not only a few but the entire nation. It is an important factor in encouraging
investment and promoting business. The engines of progress may come to a screeching halt if
the delivery of electric power is impaired. Billions of pesos would be lost as a result of power
outages or unreliable electric power services. The State thru the ERC should be able to
exercise its police power with great flexibility, when the need arises.
This was reiterated in National Association of Electricity Consumers for Reforms v.
Energy Regulatory Commission[63] where the Court held that the ERC, as regulator, should
have sufficient power to respond in real time to changes wrought by multifarious factors
affecting public utilities.
From the foregoing disquisitions, we therefore hold that there is no undue delegation of
legislative power to the ERC.
Petitioners failed to pursue in their Memorandum the contention in the Complaint that the
imposition of the Universal Charge on all end-users is oppressive and confiscatory, and
amounts to taxation without representation. Hence, such contention is deemed waived or
abandoned per Resolution[64] of August 3, 2004.[65] Moreover, the determination of whether
or not a tax is excessive, oppressive or confiscatory is an issue which essentially involves
questions of fact, and thus, this Court is precluded from reviewing the same.[66]
As a penultimate statement, it may be well to recall what this Court said of EPIRA:
One of the landmark pieces of legislation enacted by Congress in recent years is the
EPIRA. It established a new policy, legal structure and regulatory framework for the electric
power industry. The new thrust is to tap private capital for the expansion and improvement of
the industry as the large government debt and the highly capital-intensive character of the
industry itself have long been acknowledged as the critical constraints to the program. To
attract private investment, largely foreign, the jaded structure of the industry had to be
addressed. While the generation and transmission sectors were centralized and monopolistic,
the distribution side was fragmented with over 130 utilities, mostly small and uneconomic.
The pervasive flaws have caused a low utilization of existing generation capacity; extremely
Page 30 of 49
high and uncompetitive power rates; poor quality of service to consumers; dismal to
forgettable performance of the government power sector; high system losses; and an inability
to develop a clear strategy for overcoming these shortcomings.
Thus, the EPIRA provides a framework for the restructuring of the industry, including
the privatization of the assets of the National Power Corporation (NPC), the transition to a
competitive structure, and the delineation of the roles of various government agencies and the
private entities. The law ordains the division of the industry into four (4) distinct sectors,
namely: generation, transmission, distribution and supply.
Corollarily, the NPC generating plants have to privatized and its transmission business spun
off and privatized thereafter.[67]
Finally, every law has in its favor the presumption of constitutionality, and to justify its
nullification, there must be a clear and unequivocal breach of the Constitution and not one that
is doubtful, speculative, or argumentative.[68] Indubitably, petitioners failed to overcome this
presumption in favor of the EPIRA. We find no clear violation of the Constitution which
would warrant a pronouncement that Sec. 34 of the EPIRA and Rule 18 of its IRR are
unconstitutional and void.

WHEREFORE, the instant case is hereby DISMISSED for lack of merit.
SO ORDERED.

G.R. No. L-25043 April 26, 1968
ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective
behalf and as judicial co-guardians of JOSE ROXAS, petitioners, vs.
COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE,
respondents.

BENGZON, J.P., J.:
Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their
grandchildren by hereditary succession the following properties:

(1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of
Nasugbu, Batangas province;

(2) A residential house and lot located at Wright St., Malate, Manila; and

(3) Shares of stocks in different corporations.

To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo
Roxas and Jose Roxas, formed a partnership called Roxas y Compania.

AGRICULTURAL LANDS

At the conclusion of the Second World War, the tenants who have all been tilling the lands in
Nasugbu for generations expressed their desire to purchase from Roxas y Cia. the parcels
which they actually occupied. For its part, the Government, in consonance with the
constitutional mandate to acquire big landed estates and apportion them among landless
tenants-farmers, persuaded the Roxas brothers to part with their landholdings. Conferences
were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to
sell 13,500 hectares to the Government for distribution to actual occupants for a price of
P2,079,048.47 plus P300,000.00 for survey and subdivision expenses.

It turned out however that the Government did not have funds to cover the purchase price, and
so a special arrangement was made for the Rehabilitation Finance Corporation to advance to
Roxas y Cia. the amount of P1,500,000.00 as loan. Collateral for such loan were the lands
proposed to be sold to the farmers. Under the arrangement, Roxas y Cia. allowed the farmers
to buy the lands for the same price but by installment, and contracted with the Rehabilitation
Finance Corporation to pay its loan from the proceeds of the yearly amortizations paid by the
farmers.

In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of
P42,480.83 and P29,500.71. Fifty percent of said net gain was reported for income tax
purposes as gain on the sale of capital asset held for more than one year pursuant to Section 34
of the Tax Code.

RESIDENTIAL HOUSE
During their bachelor days the Roxas brothers lived in the residential house at Wright St.,
Malate, Manila, which they inherited from their grandparents. After Antonio and Eduardo got
married, they resided somewhere else leaving only Jose in the old house. In fairness to his
Page 31 of 49
brothers, Jose paid to Roxas y Cia. rentals for the house in the sum of P8,000.00 a year.

ASSESSMENTS
On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the
payment of real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise
penalty for late payment, and P150.00 tax for dealers of securities for 1952 plus P10.00
compromise penalty for late payment. The assessment for real estate dealer's tax was based on
the fact that Roxas y Cia. received house rentals from Jose Roxas in the amount of P8,000.00.
Pursuant to Sec. 194 of the Tax Code, an owner of a real estate who derives a yearly rental
income therefrom in the amount of P3,000.00 or more is considered a real estate dealer and is
liable to pay the corresponding fixed tax.

The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of
securities against Roxas y Cia., on the fact that said partnership made profits from the
purchase and sale of securities.

In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas
Brothers for the years 1953 and 1955, as follows:

1953 1955
Antonio Roxas P7,010.00 P5,813.00
Eduardo Roxas 7,281.00 5,828.00
Jose Roxas 6,323.00 5,588.00
The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the
unreported 50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu
farm lands to the tenants, and the disallowance of deductions from gross income of various
business expenses and contributions claimed by Roxas y Cia. and the Roxas brothers. For the
reason that Roxas y Cia. subdivided its Nasugbu farm lands and sold them to the farmers on
installment, the Commissioner considered the partnership as engaged in the business of real
estate, hence, 100% of the profits derived therefrom was taxed.

The following deductions were disallowed:

ROXAS Y CIA.:
1953
Tickets for Banquet in honor of
S. Osmea P 40.00
Gifts of San Miguel beer 28.00
Contributions to
Philippine Air Force Chapel
100.00
Manila Police Trust Fund
150.00
Philippines Herald's fund for Manila's neediest families
100.00
1955
Contributions to Contribution to
Our Lady of Fatima Chapel, FEU 50.00
ANTONIO ROXAS:
1953
Contributions to
Pasay City Firemen Christmas Fund
25.00
Pasay City Police Dept. X'mas fund
50.00
1955
Contributions to
Baguio City Police Christmas fund
25.00
Pasay City Firemen Christmas fund
25.00
Pasay City Police Christmas fund
50.00
EDUARDO ROXAS:
1953
Contributions to
Hijas de Jesus' Retiro de Manresa
450.00
Page 32 of 49
Philippines Herald's fund for Manila's neediest families
100.00
1955
Contributions to Philippines
Herald's fund for Manila's
neediest families 120.00
JOSE ROXAS:
1955
Contributions to Philippines
Herald's fund for Manila's
neediest families 120.00
The Roxas brothers protested the assessment but inasmuch as said protest was denied, they
instituted an appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court heard the
appeal and rendered judgment on July 31, 1965 sustaining the assessment except the demand
for the payment of the fixed tax on dealer of securities and the disallowance of the deductions
for contributions to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de Manresa.
The Tax Court's judgment reads:

WHEREFORE, the decision appealed from is hereby affirmed with respect to petitioners
Antonio Roxas, Eduardo Roxas, and Jose Roxas who are hereby ordered to pay the respondent
Commissioner of Internal Revenue the amounts of P12,808.00, P12,887.00 and P11,857.00,
respectively, as deficiency income taxes for the years 1953 and 1955, plus 5% surcharge and
1% monthly interest as provided for in Sec. 51(a) of the Revenue Code; and modified with
respect to the partnership Roxas y Cia. in the sense that it should pay only P150.00, as real
estate dealer's tax. With costs against petitioners.

Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner
of Internal Revenue did not appeal.

The issues:

(1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100%
taxable?

(2) Are the deductions for business expenses and contributions deductible?

(3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers?

The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a real
estate dealer because it engaged in the business of selling real estate. The business activity
alluded to was the act of subdividing the Nasugbu farm lands and selling them to the farmers-
occupants on installment. To bolster his stand on the point, he cites one of the purposes of
Roxas y Cia. as contained in its articles of partnership, quoted below:

4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer a
ella en el futuro, alquilandoles por los plazos y demas condiciones, estime convenientes y
vendiendo aquellas que a juicio de sus gerentes no deben conservarse;

The above-quoted purpose notwithstanding, the proposition of the Commissioner of Internal
Revenue cannot be favorably accepted by Us in this isolated transaction with its peculiar
circumstances in spite of the fact that there were hundreds of vendees. Although they paid for
their respective holdings in installment for a period of ten years, it would nevertheless not
make the vendor Roxas y Cia. a real estate dealer during the ten-year amortization period.

It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who
tilled them for generations was not only in consonance with, but more in obedience to the
request and pursuant to the policy of our Government to allocate lands to the landless. It was
the bounden duty of the Government to pay the agreed compensation after it had persuaded
Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among the farmers at
very reasonable terms and prices. However, the Government could not comply with its duty
for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's burden, went out of
its way and sold lands directly to the farmers in the same way and under the same terms as
would have been the case had the Government done it itself. For this magnanimous act, the
municipal council of Nasugbu passed a resolution expressing the people's gratitude.

The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden
Page 33 of 49
egg". And, in order to maintain the general public's trust and confidence in the Government
this power must be used justly and not treacherously. It does not conform with Our sense of
justice in the instant case for the Government to persuade the taxpayer to lend it a helping
hand and later on to penalize him for duly answering the urgent call.

In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence,
pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the
gain derived from the sale thereof is capital gain, taxable only to the extent of 50%.

DISALLOWED DEDUCTIONS

Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet
given in honor of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various
persons. The deduction were claimed as representation expenses. Representation expenses are
deductible from gross income as expenditures incurred in carrying on a trade or business under
Section 30(a) of the Tax Code provided the taxpayer proves that they are reasonable in
amount, ordinary and necessary, and incurred in connection with his business. In the case at
bar, the evidence does not show such link between the expenses and the business of Roxas y
Cia. The findings of the Court of Tax Appeals must therefore be sustained.

The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City
Firemen, and Baguio City Police Christmas funds, Manila Police Trust Fund, Philippines
Herald's fund for Manila's neediest families and Our Lady of Fatima chapel at Far Eastern
University.

The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and
Baguio City Police are not deductible for the reason that the Christmas funds were not spent
for public purposes but as Christmas gifts to the families of the members of said entities.
Under Section 39(h), a contribution to a government entity is deductible when used
exclusively for public purposes. For this reason, the disallowance must be sustained. On the
other hand, the contribution to the Manila Police trust fund is an allowable deduction for said
trust fund belongs to the Manila Police, a government entity, intended to be used exclusively
for its public functions.

The contributions to the Philippines Herald's fund for Manila's neediest families were
disallowed on the ground that the Philippines Herald is not a corporation or an association
contemplated in Section 30 (h) of the Tax Code. It should be noted however that the
contributions were not made to the Philippines Herald but to a group of civic spirited citizens
organized by the Philippines Herald solely for charitable purposes. There is no question that
the members of this group of citizens do not receive profits, for all the funds they raised were
for Manila's neediest families. Such a group of citizens may be classified as an association
organized exclusively for charitable purposes mentioned in Section 30(h) of the Tax Code.

Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of
Fatima chapel at the Far Eastern University on the ground that the said university gives
dividends to its stockholders. Located within the premises of the university, the chapel in
question has not been shown to belong to the Catholic Church or any religious organization.
On the other hand, the lower court found that it belongs to the Far Eastern University,
contributions to which are not deductible under Section 30(h) of the Tax Code for the reason
that the net income of said university injures to the benefit of its stockholders. The
disallowance should be sustained.

Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it,
because although it earned a rental income of P8,000.00 per annum in 1952, said rental
income came from Jose Roxas, one of the partners. Section 194 of the Tax Code, in
considering as real estate dealers owners of real estate receiving rentals of at least P3,000.00 a
year, does not provide any qualification as to the persons paying the rentals. The law, which
states: 1wph1.t

. . . "Real estate dealer" includes any person engaged in the business of buying, selling,
exchanging, leasing or renting property on his own account as principal and holding himself
out as a full or part-time dealer in real estate or as an owner of rental property or properties
rented or offered to rent for an aggregate amount of three thousand pesos or more a year: . . .
(Emphasis supplied) .

is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or, this
point is sustained.1wph1.t

Page 34 of 49
To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas
and Jose Roxas. For 1955 they are liable to pay deficiency income tax in the sum of P109.00,
P91.00 and P49.00, respectively, computed as follows: *

ANTONIO ROXAS
Net income per return P315,476.59
Add: 1/3 share, profits in Roxas y Cia. P 153,249.15
Less amount declared 146,135.46
Amount understated
P 7,113.69
Contributions disallowed 115.00

P 7,228.69
Less 1/3 share of contributions amounting to P21,126.06 disallowed from partnership but
allowed to partners 7,042.02 186.67
Net income per review

P315,663.26
Less: Exemptions
4,200.00
Net taxable income
P311,463.26
Tax due 154,169.00
Tax paid 154,060.00
Deficiency
P 109.00
==========
EDUARDO ROXAS
Net income per return
P 304,166.92
Add: 1/3 share, profits in Roxas y Cia P 153,249.15
Less profits declared 146,052.58
Amount understated
P 7,196.57
Less 1/3 share in contributions amounting to P21,126.06 disallowed from partnership but
allowed to partners 7,042.02 155.55
Net income per review

P304,322.47
Less: Exemptions
4,800.00
Net taxable income
P299,592.47
Tax Due P147,250.00
Tax paid 147,159.00
Deficiency
P91.00
===========
JOSE ROXAS
Net income per return
P222,681.76
Add: 1/3 share, profits in Roxas y Cia. P153,429.15
Less amount reported 146,135.46
Amount understated
7,113.69
Less 1/3 share of contributions disallowed from partnership but allowed as deductions to
partners 7,042.02 71.67
Net income per review

P222,753.43
Less: Exemption
1,800.00
Net income subject to tax
P220,953.43
Tax due P102,763.00
Tax paid 102,714.00
Deficiency
P 49.00
Page 35 of 49
===========
WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered to pay
the sum of P150.00 as real estate dealer's fixed tax for 1952, and Antonio Roxas, Eduardo
Roxas and Jose Roxas are ordered to pay the respective sums of P109.00, P91.00 and P49.00
as their individual deficiency income tax all corresponding for the year 1955. No costs. So
ordered.


PHILIPPINE HEALTH CARE G.R. No. 167330
PROVIDERS, INC., Petitioner :- v e r s u s - CHICO-
NAZARIO,* LEONARDO-DE CASTRO and BERSAMIN, JJ.** COMMISSIONER
OF INTERNAL REVENUE, Respondent.
CORONA, J.:

ARTICLE II
Declaration of Principles and State Policies

Section 15. The State shall protect and promote the right to health of the people and instill
health consciousness among them.

ARTICLE XIII
Social Justice and Human Rights
Section 11. The State shall adopt an integrated and comprehensive approach to health
development which shall endeavor to make essential goods, health and other social services
available to all the people at affordable cost. There shall be priority for the needs of the
underprivileged sick, elderly, disabled, women, and children. The State shall endeavor to
provide free medical care to paupers.[1]
For resolution are a motion for reconsideration and supplemental motion for reconsideration
dated July 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care
Providers, Inc.[2]

We recall the facts of this case, as follows:

Petitioner is a domestic corporation whose primary purpose is [t]o establish, maintain,
conduct and operate a prepaid group practice health care delivery system or a health
maintenance organization to take care of the sick and disabled persons enrolled in the health
care plan and to provide for the administrative, legal, and financial responsibilities of the
organization. Individuals enrolled in its health care programs pay an annual membership fee
and are entitled to various preventive, diagnostic and curative medical services provided by its
duly licensed physicians, specialists and other professional technical staff participating in the
group practice health delivery system at a hospital or clinic owned, operated or accredited by
it.

xxx xxx xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a
formal demand letter and the corresponding assessment notices demanding the payment of
deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the
total amount of P224,702,641.18. xxxx

The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners
health care agreement with the members of its health care program pursuant to Section 185 of
the 1997 Tax Code xxxx

xxx xxx xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not
act on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA)
seeking the cancellation of the deficiency VAT and DST assessments.

On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read:

WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY
GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting to
P22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until
fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus
20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly,
VAT Ruling No. [231]-88 is declared void and without force and effect. The 1996 and 1997
Page 36 of 49
deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE.
Respondent is ORDERED to DESIST from collecting the said DST deficiency tax.

SO ORDERED.

Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled
the DST assessment. He claimed that petitioners health care agreement was a contract of
insurance subject to DST under Section 185 of the 1997 Tax Code.

On August 16, 2004, the CA rendered its decision. It held that petitioners health care
agreement was in the nature of a non-life insurance contract subject to DST.

WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax
Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary
stamp tax assessment and ordered petitioner to desist from collecting the same is REVERSED
and SET ASIDE.

Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as
deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for
late payment and 20% interest per annum from January 27, 2000, pursuant to Sections 248 and
249 of the Tax Code, until the same shall have been fully paid.

SO ORDERED.

Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case.

xxx xxx xxx


In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs
decision. We held that petitioners health care agreement during the pertinent period was in
the nature of non-life insurance which is a contract of indemnity, citing Blue Cross Healthcare,
Inc. v. Olivares[3] and Philamcare Health Systems, Inc. v. CA.[4] We also ruled that
petitioners contention that it is a health maintenance organization (HMO) and not an
insurance company is irrelevant because contracts between companies like petitioner and the
beneficiaries under their plans are treated as insurance contracts. Moreover, DST is not a tax
on the business transacted but an excise on the privilege, opportunity or facility offered at
exchanges for the transaction of the business.

Unable to accept our verdict, petitioner filed the present motion for reconsideration and
supplemental motion for reconsideration, asserting the following arguments:

(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only
on a company engaged in the business of fidelity bonds and other insurance policies.
Petitioner, as an HMO, is a service provider, not an insurance company.

(b) The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in
effect the CAs disposition that health care services are not in the nature of an insurance
business.

(c) Section 185 should be strictly construed.

(d) Legislative intent to exclude health care agreements from items subject to DST is clear,
especially in the light of the amendments made in the DST law in 2002.

(e) Assuming arguendo that petitioners agreements are contracts of indemnity, they are
not those contemplated under Section 185.

(f) Assuming arguendo that petitioners agreements are akin to health insurance, health
insurance is not covered by Section 185.

(g) The agreements do not fall under the phrase other branch of insurance mentioned
in Section 185.

(h) The June 12, 2008 decision should only apply prospectively.

(i) Petitioner availed of the tax amnesty benefits under RA[5] 9480 for the taxable year
2005 and all prior years. Therefore, the questioned assessments on the DST are now rendered
Page 37 of 49
moot and academic.[6]

Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their
memoranda on June 8, 2009.

In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax
amnesty under RA 9480[7] (also known as the Tax Amnesty Act of 2007) by fully paying
the amount of P5,127,149.08 representing 5% of its net worth as of the year ending December
31, 2005.[8]

We find merit in petitioners motion for reconsideration.

Petitioner was formally registered and incorporated with the Securities and Exchange
Commission on June 30, 1987.[9] It is engaged in the dispensation of the following medical
services to individuals who enter into health care agreements with it:

Preventive medical services such as periodic monitoring of health problems, family planning
counseling, consultation and advices on diet, exercise and other healthy habits, and
immunization;

Diagnostic medical services such as routine physical examinations, x-rays, urinalysis,
fecalysis, complete blood count, and the like and

Curative medical services which pertain to the performing of other remedial and therapeutic
processes in the event of an injury or sickness on the part of the enrolled member.[10]

Individuals enrolled in its health care program pay an annual membership fee. Membership is
on a year-to-year basis. The medical services are dispensed to enrolled members in a hospital
or clinic owned, operated or accredited by petitioner, through physicians, medical and dental
practitioners under contract with it. It negotiates with such health care practitioners regarding
payment schemes, financing and other procedures for the delivery of health services. Except
in cases of emergency, the professional services are to be provided only by petitioner's
physicians, i.e. those directly employed by it[11] or whose services are contracted by it.[12]
Petitioner also provides hospital services such as room and board accommodation, laboratory
services, operating rooms, x-ray facilities and general nursing care.[13] If and when a member
avails of the benefits under the agreement, petitioner pays the participating physicians and
other health care providers for the services rendered, at pre-agreed rates.[14]

To avail of petitioners health care programs, the individual members are required to sign
and execute a standard health care agreement embodying the terms and conditions for the
provision of the health care services. The same agreement contains the various health care
services that can be engaged by the enrolled member, i.e., preventive, diagnostic and curative
medical services. Except for the curative aspect of the medical service offered, the enrolled
member may actually make use of the health care services being offered by petitioner at any
time.


HEALTH MAINTENANCE ORGANIZATIONS ARE NOT ENGAGED IN THE
INSURANCE BUSINESS

We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an
insurer because its agreements are treated as insurance contracts and the DST is not a tax on
the business but an excise on the privilege, opportunity or facility used in the transaction of the
business.[15]

Petitioner, however, submits that it is of critical importance to characterize the business it is
engaged in, that is, to determine whether it is an HMO or an insurance company, as this
distinction is indispensable in turn to the issue of whether or not it is liable for DST on its
health care agreements.[16]

A second hard look at the relevant law and jurisprudence convinces the Court that the
arguments of petitioner are meritorious.

Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:

Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made
or renewed by any person, association or company or corporation transacting the business of
Page 38 of 49
accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all
bonds, undertakings, or recognizances, conditioned for the performance of the duties of any
office or position, for the doing or not doing of anything therein specified, and on all
obligations guaranteeing the validity or legality of any bond or other obligations issued by any
province, city, municipality, or other public body or organization, and on all obligations
guaranteeing the title to any real estate, or guaranteeing any mercantile credits, which may be
made or renewed by any such person, company or corporation, there shall be collected a
documentary stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), or fractional part
thereof, of the premium charged. (Emphasis supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of
a statute shall be considered surplusage or superfluous, meaningless, void and insignificant.
To this end, a construction which renders every word operative is preferred over that which
makes some words idle and nugatory.[17] This principle is expressed in the maxim Ut magis
valeat quam pereat, that is, we choose the interpretation which gives effect to the whole of the
statute its every word.[18]

From the language of Section 185, it is evident that two requisites must concur before the DST
can apply, namely: (1) the document must be a policy of insurance or an obligation in the
nature of indemnity and (2) the maker should be transacting the business of accident, fidelity,
employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other
branch of insurance (except life, marine, inland, and fire insurance).

Petitioner is admittedly an HMO. Under RA 7875 (or The National Health Insurance Act of
1995), an HMO is an entity that provides, offers or arranges for coverage of designated
health services needed by plan members for a fixed prepaid premium.[19] The payments do
not vary with the extent, frequency or type of services provided.

The question is: was petitioner, as an HMO, engaged in the business of insurance during the
pertinent taxable years? We rule that it was not.

Section 2 (2) of PD[20] 1460 (otherwise known as the Insurance Code) enumerates what
constitutes doing an insurance business or transacting an insurance business:

a) making or proposing to make, as insurer, any insurance contract;

b) making or proposing to make, as surety, any contract of suretyship as a vocation
and not as merely incidental to any other legitimate business or activity of the surety;

c) doing any kind of business, including a reinsurance business, specifically
recognized as constituting the doing of an insurance business within the meaning of this Code;

d) doing or proposing to do any business in substance equivalent to any of the
foregoing in a manner designed to evade the provisions of this Code.

In the application of the provisions of this Code, the fact that no profit is derived from the
making of insurance contracts, agreements or transactions or that no separate or direct
consideration is received therefore, shall not be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an insurance business.


Various courts in the United States, whose jurisprudence has a persuasive effect on our
decisions,[21] have determined that HMOs are not in the insurance business. One test that
they have applied is whether the assumption of risk and indemnification of loss (which are
elements of an insurance business) are the principal object and purpose of the organization or
whether they are merely incidental to its business. If these are the principal objectives, the
business is that of insurance. But if they are merely incidental and service is the principal
purpose, then the business is not insurance.

Applying the principal object and purpose test,[22] there is significant American case law
supporting the argument that a corporation (such as an HMO, whether or not organized for
profit), whose main object is to provide the members of a group with health services, is not
engaged in the insurance business.

The rule was enunciated in Jordan v. Group Health Association[23] wherein the Court of
Appeals of the District of Columbia Circuit held that Group Health Association should not be
considered as engaged in insurance activities since it was created primarily for the distribution
Page 39 of 49
of health care services rather than the assumption of insurance risk.

xxx Although Group Healths activities may be considered in one aspect as creating security
against loss from illness or accident more truly they constitute the quantity purchase of well-
rounded, continuous medical service by its members. xxx The functions of such an
organization are not identical with those of insurance or indemnity companies. The latter are
concerned primarily, if not exclusively, with risk and the consequences of its descent, not with
service, or its extension in kind, quantity or distribution; with the unusual occurrence, not the
daily routine of living. Hazard is predominant. On the other hand, the cooperative is concerned
principally with getting service rendered to its members and doing so at lower prices made
possible by quantity purchasing and economies in operation. Its primary purpose is to reduce
the cost rather than the risk of medical care; to broaden the service to the individual in kind
and quantity; to enlarge the number receiving it; to regularize it as an everyday incident of
living, like purchasing food and clothing or oil and gas, rather than merely protecting against
the financial loss caused by extraordinary and unusual occurrences, such as death, disaster at
sea, fire and tornado. It is, in this instance, to take care of colds, ordinary aches and pains,
minor ills and all the temporary bodily discomforts as well as the more serious and unusual
illness. To summarize, the distinctive features of the cooperative are the rendering of service,
its extension, the bringing of physician and patient together, the preventive features, the
regularization of service as well as payment, the substantial reduction in cost by quantity
purchasing in short, getting the medical job done and paid for; not, except incidentally to these
features, the indemnification for cost after the services is rendered. Except the last, these are
not distinctive or generally characteristic of the insurance arrangement. There is, therefore, a
substantial difference between contracting in this way for the rendering of service, even on the
contingency that it be needed, and contracting merely to stand its cost when or after it is
rendered.

That an incidental element of risk distribution or assumption may be present should not
outweigh all other factors. If attention is focused only on that feature, the line between
insurance or indemnity and other types of legal arrangement and economic function becomes
faint, if not extinct. This is especially true when the contract is for the sale of goods or services
on contingency. But obviously it was not the purpose of the insurance statutes to regulate all
arrangements for assumption or distribution of risk. That view would cause them to engulf
practically all contracts, particularly conditional sales and contingent service agreements. The
fallacy is in looking only at the risk element, to the exclusion of all others present or their
subordination to it. The question turns, not on whether risk is involved or assumed, but on
whether that or something else to which it is related in the particular plan is its principal object
purpose.[24] (Emphasis supplied)


In California Physicians Service v. Garrison,[25] the California court felt that, after
scrutinizing the plan of operation as a whole of the corporation, it was service rather than
indemnity which stood as its principal purpose.

There is another and more compelling reason for holding that the service is not engaged in the
insurance business. Absence or presence of assumption of risk or peril is not the sole test to be
applied in determining its status. The question, more broadly, is whether, looking at the plan of
operation as a whole, service rather than indemnity is its principal object and
purpose. Certainly the objects and purposes of the corporation organized and maintained by
the California physicians have a wide scope in the field of social service. Probably there is no
more impelling need than that of adequate medical care on a voluntary, low-cost basis for
persons of small income. The medical profession unitedly is endeavoring to meet that need.
Unquestionably this is service of a high order and not indemnity.[26] (Emphasis
supplied)


American courts have pointed out that the main difference between an HMO and an insurance
company is that HMOs undertake to provide or arrange for the provision of medical services
through participating physicians while insurance companies simply undertake to indemnify the
insured for medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic
Associates, P.A. v. Horizon Blue Cross and Blue Shield of New Jersey[27] is clear on this
point:

The basic distinction between medical service corporations and ordinary health and accident
insurers is that the former undertake to provide prepaid medical services through participating
physicians, thus relieving subscribers of any further financial burden, while the latter only
undertake to indemnify an insured for medical expenses up to, but not beyond, the schedule of
rates contained in the policy.
Page 40 of 49

xxx xxx xxx
The primary purpose of a medical service corporation, however, is an undertaking to provide
physicians who will render services to subscribers on a prepaid basis. Hence, if there are no
physicians participating in the medical service corporations plan, not only will the
subscribers be deprived of the protection which they might reasonably have expected would
be provided, but the corporation will, in effect, be doing business solely as a health and
accident indemnity insurer without having qualified as such and rendering itself subject to the
more stringent financial requirements of the General Insurance Laws.

A participating provider of health care services is one who agrees in writing to render health
care services to or for persons covered by a contract issued by health service corporation in
return for which the health service corporation agrees to make payment directly to the
participating provider.[28] (Emphasis supplied)

Consequently, the mere presence of risk would be insufficient to override the primary purpose
of the business to provide medical services as needed, with payment made directly to the
provider of these services.[29] In short, even if petitioner assumes the risk of paying the cost
of these services even if significantly more than what the member has prepaid, it nevertheless
cannot be considered as being engaged in the insurance business.

By the same token, any indemnification resulting from the payment for services rendered in
case of emergency by non-participating health providers would still be incidental to
petitioners purpose of providing and arranging for health care services and does not
transform it into an insurer. To fulfill its obligations to its members under the agreements,
petitioner is required to set up a system and the facilities for the delivery of such medical
services. This indubitably shows that indemnification is not its sole object.

In fact, a substantial portion of petitioners services covers preventive and diagnostic
medical services intended to keep members from developing medical conditions or
diseases.[30] As an HMO, it is its obligation to maintain the good health of its members.
Accordingly, its health care programs are designed to prevent or to minimize the possibility of
any assumption of risk on its part. Thus, its undertaking under its agreements is not to
indemnify its members against any loss or damage arising from a medical condition but, on
the contrary, to provide the health and medical services needed to prevent such loss or
damage.[31]

Overall, petitioner appears to provide insurance-type benefits to its members (with respect to
its curative medical services), but these are incidental to the principal activity of providing
them medical care. The insurance-like aspect of petitioners business is miniscule
compared to its noninsurance activities. Therefore, since it substantially provides health care
services rather than insurance services, it cannot be considered as being in the insurance
business.

It is important to emphasize that, in adopting the principal purpose test used in the above-
quoted U.S. cases, we are not saying that petitioners operations are identical in every
respect to those of the HMOs or health providers which were parties to those cases. What we
are stating is that, for the purpose of determining what doing an insurance business
means, we have to scrutinize the operations of the business as a whole and not its mere
components. This is of course only prudent and appropriate, taking into account the
burdensome and strict laws, rules and regulations applicable to insurers and other entities
engaged in the insurance business. Moreover, we are also not unmindful that there are other
American authorities who have found particular HMOs to be actually engaged in insurance
activities.[32]

Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is
evident from the fact that it is not supervised by the Insurance Commission but by the
Department of Health.[33] In fact, in a letter dated September 3, 2000, the Insurance
Commissioner confirmed that petitioner is not engaged in the insurance business. This
determination of the commissioner must be accorded great weight. It is well-settled that the
interpretation of an administrative agency which is tasked to implement a statute is accorded
great respect and ordinarily controls the interpretation of laws by the courts. The reason
behind this rule was explained in Nestle Philippines, Inc. v. Court of Appeals:[34]

The rationale for this rule relates not only to the emergence of the multifarious needs of a
modern or modernizing society and the establishment of diverse administrative agencies for
addressing and satisfying those needs; it also relates to the accumulation of experience and
growth of specialized capabilities by the administrative agency charged with implementing a
Page 41 of 49
particular statute. In Asturias Sugar Central, Inc. vs. Commissioner of Customs,[35] the Court
stressed that executive officials are presumed to have familiarized themselves with all the
considerations pertinent to the meaning and purpose of the law, and to have formed an
independent, conscientious and competent expert opinion thereon. The courts give much
weight to the government agency officials charged with the implementation of the law, their
competence, expertness, experience and informed judgment, and the fact that they frequently
are the drafters of the law they interpret.[36]

A HEALTH CARE AGREEMENT IS NOT AN INSURANCE CONTRACT
CONTEMPLATED UNDER SECTION 185 OF THE NIRC OF 1997

Section 185 states that DST is imposed on all policies of insurance or obligations of the
nature of indemnity for loss, damage, or liability. In our decision dated June 12, 2008,
we ruled that petitioners health care agreements are contracts of indemnity and are therefore
insurance contracts:

It is incorrect to say that the health care agreement is not based on loss or damage because,
under the said agreement, petitioner assumes the liability and indemnifies its member for
hospital, medical and related expenses (such as professional fees of physicians). The term
"loss or damage" is broad enough to cover the monetary expense or liability a member will
incur in case of illness or injury.
Under the health care agreement, the rendition of hospital, medical and professional services
to the member in case of sickness, injury or emergency or his availment of so-called "out-
patient services" (including physical examination, x-ray and laboratory tests, medical
consultations, vaccine administration and family planning counseling) is the contingent event
which gives rise to liability on the part of the member. In case of exposure of the member to
liability, he would be entitled to indemnification by petitioner.

Furthermore, the fact that petitioner must relieve its member from liability by paying for
expenses arising from the stipulated contingencies belies its claim that its services are prepaid.
The expenses to be incurred by each member cannot be predicted beforehand, if they can be
predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they
are significantly and substantially more than what the member has "prepaid." Petitioner does
not bear the costs alone but distributes or spreads them out among a large group of persons
bearing a similar risk, that is, among all the other members of the health care program. This is
insurance.[37]
We reconsider. We shall quote once again the pertinent portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of
insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made
or renewed by any person, association or company or corporation transacting the business of
accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic
sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), xxxx
(Emphasis supplied)

In construing this provision, we should be guided by the principle that tax statutes are strictly
construed against the taxing authority.[38] This is because taxation is a destructive power
which interferes with the personal and property rights of the people and takes from them a
portion of their property for the support of the government.[39] Hence, tax laws may not be
extended by implication beyond the clear import of their language, nor their operation
enlarged so as to embrace matters not specifically provided.[40]

We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care
agreement is in the nature of non-life insurance, which is primarily a contract of indemnity.
However, those cases did not involve the interpretation of a tax provision. Instead, they dealt
with the liability of a health service provider to a member under the terms of their health care
agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of the
member and strictly against the HMO. For this reason, we reconsider our ruling that Blue
Cross and Philamcare are applicable here.

Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby
one undertakes for a consideration to indemnify another against loss, damage or liability
arising from an unknown or contingent event. An insurance contract exists where the
following elements concur:

1. The insured has an insurable interest;

2. The insured is subject to a risk of loss by the happening of the designed peril;

Page 42 of 49
3. The insurer assumes the risk;

4. Such assumption of risk is part of a general scheme to distribute actual losses among a
large group of persons bearing a similar risk and

5. In consideration of the insurers promise, the insured pays a premium.[41]

Do the agreements between petitioner and its members possess all these elements? They do
not.

First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a
contract contains all the elements of an insurance contract, if its primary purpose is the
rendering of service, it is not a contract of insurance:

It does not necessarily follow however, that a contract containing all the four elements
mentioned above would be an insurance contract. The primary purpose of the parties in
making the contract may negate the existence of an insurance contract. For example, a law
firm which enters into contracts with clients whereby in consideration of periodical payments,
it promises to represent such clients in all suits for or against them, is not engaged in the
insurance business. Its contracts are simply for the purpose of rendering personal services. On
the other hand, a contract by which a corporation, in consideration of a stipulated amount,
agrees at its own expense to defend a physician against all suits for damages for malpractice is
one of insurance, and the corporation will be deemed as engaged in the business of insurance.
Unlike the lawyers retainer contract, the essential purpose of such a contract is not to render
personal services, but to indemnify against loss and damage resulting from the defense of
actions for malpractice.[42] (Emphasis supplied)


Second. Not all the necessary elements of a contract of insurance are present in petitioners
agreements. To begin with, there is no loss, damage or liability on the part of the member that
should be indemnified by petitioner as an HMO. Under the agreement, the member pays
petitioner a predetermined consideration in exchange for the hospital, medical and
professional services rendered by the petitioners physician or affiliated physician to him. In
case of availment by a member of the benefits under the agreement, petitioner does not
reimburse or indemnify the member as the latter does not pay any third party. Instead, it is the
petitioner who pays the participating physicians and other health care providers for the
services rendered at pre-agreed rates. The member does not make any such payment.


In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability
on the part of the member to any third party-provider of medical services which might in turn
necessitate indemnification from petitioner. The terms indemnify or indemnity
presuppose that a liability or claim has already been incurred. There is no indemnity precisely
because the member merely avails of medical services to be paid or already paid in advance at
a pre-agreed price under the agreements.

Third. According to the agreement, a member can take advantage of the bulk of the benefits
anytime, e.g. laboratory services, x-ray, routine annual physical examination and
consultations, vaccine administration as well as family planning counseling, even in the
absence of any peril, loss or damage on his or her part.

Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives
care from a non-participating physician or hospital. However, this is only a very minor part of
the list of services available. The assumption of the expense by petitioner is not confined to
the happening of a contingency but includes incidents even in the absence of illness or injury.

In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,[43] although
the health care contracts called for the defendant to partially reimburse a subscriber for
treatment received from a non-designated doctor, this did not make defendant an insurer.
Citing Jordan, the Court determined that the primary activity of the defendant (was) the
provision of podiatric services to subscribers in consideration of prepayment for such
services.[44] Since indemnity of the insured was not the focal point of the agreement but
the extension of medical services to the member at an affordable cost, it did not partake of the
nature of a contract of insurance.

Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true
that risk alone is sufficient to establish it. Almost anyone who undertakes a contractual
obligation always bears a certain degree of financial risk. Consequently, there is a need to
Page 43 of 49
distinguish prepaid service contracts (like those of petitioner) from the usual insurance
contracts.
Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health
services: the risk that it might fail to earn a reasonable return on its investment. But it is not
the risk of the type peculiar only to insurance companies. Insurance risk, also known as
actuarial risk, is the risk that the cost of insurance claims might be higher than the premiums
paid. The amount of premium is calculated on the basis of assumptions made relative to the
insured.[45]

However, assuming that petitioners commitment to provide medical services to its members
can be construed as an acceptance of the risk that it will shell out more than the prepaid fees, it
still will not qualify as an insurance contract because petitioners objective is to provide
medical services at reduced cost, not to distribute risk like an insurer.

In sum, an examination of petitioners agreements with its members leads us to conclude that
it is not an insurance contract within the context of our Insurance Code.


THERE WAS NO LEGISLATIVE INTENT TO IMPOSE DST ON HEALTH CARE
AGREEMENTS OF HMOS

Furthermore, militating in convincing fashion against the imposition of DST on
petitioners health care agreements under Section 185 of the NIRC of 1997 is the
provisions legislative history. The text of Section 185 came into U.S. law as early as 1904
when HMOs and health care agreements were not even in existence in this jurisdiction. It was
imposed under Section 116, Article XI of Act No. 1189 (otherwise known as the Internal
Revenue Law of 1904)[46] enacted on July 2, 1904 and became effective on August 1,
1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction
of the pertinent portion of Section 116, to wit:

ARTICLE XI
Stamp Taxes on Specified Objects

Section 116. There shall be levied, collected, and paid for and in respect to the several bonds,
debentures, or certificates of stock and indebtedness, and other documents, instruments,
matters, and things mentioned and described in this section, or for or in respect to the vellum,
parchment, or paper upon which such instrument, matters, or things or any of them shall be
written or printed by any person or persons who shall make, sign, or issue the same, on and
after January first, nineteen hundred and five, the several taxes following:

xxx xxx xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for
loss, damage, or liability made or renewed by any person, association, company, or
corporation transacting the business of accident, fidelity, employers liability, plate glass,
steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life,
marine, inland, and fire insurance) xxxx (Emphasis supplied)

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising
and consolidating the laws relating to internal revenue. The aforecited pertinent portion of
Section 116, Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article
III of Act No. 2339. The very detailed and exclusive enumeration of items subject to DST was
thus retained.

On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced
as Section 1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment
on March 10, 1917, the pertinent DST provision became Section 1449 (l) of Act No. 2711,
otherwise known as the Administrative Code of 1917.

Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of
1939), which codified all the internal revenue laws of the Philippines. In an amendment
introduced by RA 40 on October 1, 1946, the DST rate was increased but the provision
remained substantially the same.

Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced
in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11,
1978 and October 10, 1984 respectively, the DST rate was again increased.

Page 44 of 49
Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC
of 1977 was renumbered as Section 198. And under Section 23 of EO[47] 273 dated July 25,
1987, it was again renumbered and became Section 185.

On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with
respect to the rate of tax.

Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or
the NIRC of 1997), the subject legal provision was retained as the present Section 185. In
2004, amendments to the DST provisions were introduced by RA 9243[48] but Section 185
was untouched.
On the other hand, the concept of an HMO was introduced in the Philippines with the
formation of Bancom Health Care Corporation in 1974. The same pioneer HMO was later
reorganized and renamed Integrated Health Care Services, Inc. (or Intercare). However, there
are those who claim that Health Maintenance, Inc. is the HMO industry pioneer, having set
foot in the Philippines as early as 1965 and having been formally incorporated in 1991.
Afterwards, HMOs proliferated quickly and currently, there are 36 registered HMOs with a
total enrollment of more than 2 million.[49]

We can clearly see from these two histories (of the DST on the one hand and HMOs on the
other) that when the law imposing the DST was first passed, HMOs were yet unknown in the
Philippines. However, when the various amendments to the DST law were enacted, they were
already in existence in the Philippines and the term had in fact already been defined by RA
7875. If it had been the intent of the legislature to impose DST on health care agreements, it
could have done so in clear and categorical terms. It had many opportunities to do so. But it
did not. The fact that the NIRC contained no specific provision on the DST liability of health
care agreements of HMOs at a time they were already known as such, belies any legislative
intent to impose it on them. As a matter of fact, petitioner was assessed its DST liability only
on January 27, 2000, after more than a decade in the business as an HMO.[50]

Considering that Section 185 did not change since 1904 (except for the rate of tax), it would
be safe to say that health care agreements were never, at any time, recognized as insurance
contracts or deemed engaged in the business of insurance within the context of the provision.


THE POWER TO TAX IS NOT
THE POWER TO DESTROY

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its
range, acknowledging in its very nature no limits, so that security against its abuse is to be
found only in the responsibility of the legislature which imposes the tax on the constituency
who is to pay it.[51] So potent indeed is the power that it was once opined that the power to
tax involves the power to destroy.[52]

Petitioner claims that the assessed DST to date which amounts to P376 million[53] is
way beyond its net worth of P259 million.[54] Respondent never disputed these assertions.
Given the realities on the ground, imposing the DST on petitioner would be highly oppressive.
It is not the purpose of the government to throttle private business. On the contrary, the
government ought to encourage private enterprise.[55] Petitioner, just like any concern
organized for a lawful economic activity, has a right to maintain a legitimate business.[56] As
aptly held in Roxas, et al. v. CTA, et al.:[57]

The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden
egg.[58]

Legitimate enterprises enjoy the constitutional protection not to be taxed out of
existence. Incurring losses because of a tax imposition may be an acceptable consequence but
killing the business of an entity is another matter and should not be allowed. It is counter-
productive and ultimately subversive of the nations thrust towards a better economy which
will ultimately benefit the majority of our people.[59]


PETITIONERS TAX LIABILITY
WAS EXTINGUISHED UNDER
THE PROVISIONS OF RA 9840

Page 45 of 49
Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996
and 1997 became moot and academic[60] when it availed of the tax amnesty under RA 9480
on December 10, 2007. It paid P5,127,149.08 representing 5% of its net worth as of the year
ended December 31, 2005 and complied with all requirements of the tax amnesty. Under
Section 6(a) of RA 9480, it is entitled to immunity from payment of taxes as well as additions
thereto, and the appurtenant civil, criminal or administrative penalties under the 1997 NIRC,
as amended, arising from the failure to pay any and all internal revenue taxes for taxable year
2005 and prior years.[61]

Far from disagreeing with petitioner, respondent manifested in its memorandum:

Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity
from payment of the tax involved, including the civil, criminal, or administrative penalties
provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years.

In view of petitioners availment of the benefits of [RA 9840], and without conceding the
merits of this case as discussed above, respondent concedes that such tax amnesty extinguishes
the tax liabilities of petitioner. This admission, however, is not meant to preclude a revocation
of the amnesty granted in case it is found to have been granted under circumstances amounting
to tax fraud under Section 10 of said amnesty law.[62] (Emphasis supplied)

Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty
program under RA 9480.[63] There is no other conclusion to draw than that petitioners
liability for DST for the taxable years 1996 and 1997 was totally extinguished by its availment
of the tax amnesty under RA 9480.


IS THE COURT BOUND BY A MINUTE RESOLUTION IN ANOTHER CASE?

Petitioner raises another interesting issue in its motion for reconsideration: whether this
Court is bound by the ruling of the CA[64] in CIR v. Philippine National Bank[65] that a
health care agreement of Philamcare Health Systems is not an insurance contract for purposes
of the DST.

In support of its argument, petitioner cites the August 29, 2001 minute resolution of this
Court dismissing the appeal in Philippine National Bank (G.R. No. 148680).[66] Petitioner
argues that the dismissal of G.R. No. 148680 by minute resolution was a judgment on the
merits; hence, the Court should apply the CA ruling there that a health care agreement is not
an insurance contract.

It is true that, although contained in a minute resolution, our dismissal of the petition
was a disposition of the merits of the case. When we dismissed the petition, we effectively
affirmed the CA ruling being questioned. As a result, our ruling in that case has already
become final.[67] When a minute resolution denies or dismisses a petition for failure to
comply with formal and substantive requirements, the challenged decision, together with its
findings of fact and legal conclusions, are deemed sustained.[68] But what is its effect on other
cases?

With respect to the same subject matter and the same issues concerning the same parties, it
constitutes res judicata.[69] However, if other parties or another subject matter (even with the
same parties and issues) is involved, the minute resolution is not binding precedent. Thus, in
CIR v. Baier-Nickel,[70] the Court noted that a previous case, CIR v. Baier-Nickel[71]
involving the same parties and the same issues, was previously disposed of by the Court thru a
minute resolution dated February 17, 2003 sustaining the ruling of the CA. Nonetheless, the
Court ruled that the previous case ha(d) no bearing on the latter case because the two
cases involved different subject matters as they were concerned with the taxable income of
different taxable years.[72]

Besides, there are substantial, not simply formal, distinctions between a minute
resolution and a decision. The constitutional requirement under the first paragraph of Section
14, Article VIII of the Constitution that the facts and the law on which the judgment is based
must be expressed clearly and distinctly applies only to decisions, not to minute resolutions. A
minute resolution is signed only by the clerk of court by authority of the justices, unlike a
decision. It does not require the certification of the Chief Justice. Moreover, unlike decisions,
minute resolutions are not published in the Philippine Reports. Finally, the proviso of Section
4(3) of Article VIII speaks of a decision.[73] Indeed, as a rule, this Court lays down doctrines
or principles of law which constitute binding precedent in a decision duly signed by the
members of the Court and certified by the Chief Justice.
Page 46 of 49

Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners
liability for DST on its health care agreement was not the subject matter of G.R. No. 148680,
petitioner cannot successfully invoke the minute resolution in that case (which is not even
binding precedent) in its favor. Nonetheless, in view of the reasons already discussed, this
does not detract in any way from the fact that petitioners health care agreements are not
subject to DST.
A FINAL NOTE


Taking into account that health care agreements are clearly not within the ambit of Section
185 of the NIRC and there was never any legislative intent to impose the same on HMOs like
petitioner, the same should not be arbitrarily and unjustly included in its coverage.

It is a matter of common knowledge that there is a great social need for adequate medical
services at a cost which the average wage earner can afford. HMOs arrange, organize and
manage health care treatment in the furtherance of the goal of providing a more efficient and
inexpensive health care system made possible by quantity purchasing of services and
economies of scale. They offer advantages over the pay-for-service system (wherein
individuals are charged a fee each time they receive medical services), including the ability to
control costs. They protect their members from exposure to the high cost of hospitalization
and other medical expenses brought about by a fluctuating economy. Accordingly, they play
an important role in society as partners of the State in achieving its constitutional mandate of
providing its citizens with affordable health services.

The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.[74] Its
imposition will elevate the cost of health care services. This will in turn necessitate an increase
in the membership fees, resulting in either placing health services beyond the reach of the
ordinary wage earner or driving the industry to the ground. At the end of the day, neither side
wins, considering the indispensability of the services offered by HMOs.

WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision
of the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED and SET ASIDE. The 1996
and 1997 deficiency DST assessment against petitioner is hereby CANCELLED and SET
ASIDE. Respondent is ordered to desist from collecting the said tax.
No costs. SO ORDERED.

G.R. No. L-23771 August 4, 1988
THE COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.LINGAYEN GULF
ELECTRIC POWER CO., INC. and THE COURT OF TAX APPEALS, respondents.

SARMIENTO, J.:
This is an appeal from the decision * of the Court of Tax Appeals (C.T.A., for brevity) dated
September 15, 1964 in C.T.A. Cases Nos. 581 and 1302, which were jointly heard upon
agreement of the parties, absolving the respondent taxpayer from liability for the deficiency
percentage, franchise, and fixed taxes and surcharge assessed against it in the sums of
P19,293.41 and P3,616.86 for the years 1946 to 1954 and 1959 to 1961, respectively.

The respondent taxpayer, Lingayen Gulf Electric Power Co., Inc., operates an electric power
plant serving the adjoining municipalities of Lingayen and Binmaley, both in the province of
Pangasinan, pursuant to the municipal franchise granted it by their respective municipal
councils, under Resolution Nos. 14 and 25 of June 29 and July 2, 1946, respectively. Section
10 of these franchises provide that:

...The said grantee in consideration of the franchise hereby granted, shall pay quarterly into the
Provincial Treasury of Pangasinan, one per centum of the gross earnings obtained thru this
privilege during the first twenty years and two per centum during the remaining fifteen years
of the life of said franchise.

On February 24, 1948, the President of the Philippines approved the franchises granted to the
private respondent.

On November 21, 1955, the Bureau of Internal Revenue (BIR) assessed against and demanded
from the private respondent the total amount of P19,293.41 representing deficiency franchise
taxes and surcharges for the years 1946 to 1954 applying the franchise tax rate of 5% on gross
receipts from March 1, 1948 to December 31, 1954 as prescribed in Section 259 of the
National Internal Revenue Code, instead of the lower rates as provided in the municipal
franchises. On September 29, 1956, the private respondent requested for a reinvestigation of
Page 47 of 49
the case on the ground that instead of incurring a deficiency liability, it made an overpayment
of the franchise tax. On April 30, 1957, the BIR through its regional director, denied the
private respondent's request for reinvestigation and reiterated the demand for payment of the
same. In its letters dated July 2, and August 9, 1958 to the petitioner Commissioner, the
private respondent protested the said assessment and requested for a conference with a view to
settling the liability amicably. In his letters dated July 25 and August 28, 1958, the
Commissioner denied the request of the private respondent. Thus, the appeal to the respondent
Court of Tax Appeals on September 19, 1958, docketed as C.T.A. Case No. 581.

In a letter dated August 21, 1962, the Commissioner demanded from the private respondent
the payment of P3,616.86 representing deficiency franchise tax and surcharges for the years
1959 to 1961 again applying the franchise tax rate of 5% on gross receipts as prescribed in
Section 259 of the National Internal Revenue Code. In a letter dated October 5, 1962, the
private respondent protested the assessment and requested reconsideration thereof The same
was denied on November 9, 1962. Thus, the appeal to the respondent Court of Appeals on
November 29, 1962, docketed as C.T.A. No. 1302.

Pending the hearing of the said cases, Republic Act (R.A.) No. 3843 was passed on June 22, 1
963, granting to the private respondent a legislative franchise for the operation of the electric
light, heat, and power system in the same municipalities of Pangasinan. Section 4 thereof
provides that:

In consideration of the franchise and rights hereby granted, the grantee shall pay into the
Internal Revenue office of each Municipality in which it is supplying electric current to the
public under this franchise, a tax equal to two per centum of the gross receipts from electric
current sold or supplied under this franchise. Said tax shall be due and payable quarterly and
shall be in lieu of any and all taxes and/or licenses of any kind, nature or description levied,
established, or collected by any authority whatsoever, municipal, provincial or national, now
or in the future, on its poles, wires, insulator ... and on its franchise, rights, privileges, receipts,
revenues and profits, from which taxes and/or licenses, the grantee is hereby expressly
exempted and effective further upon the date the original franchise was granted, no other tax
and/or licenses other than the franchise tax of two per centum on the gross receipts as provided
for in the original franchise shall be collected, any provision of law to the contrary
notwithstanding.

On September 15, 1964, the respondent court ruled that the provisions of R.A. No. 3843
should apply and accordingly dismissed the claim of the Commissioner of Internal Revenue.
The said ruling is now the subject of the petition at bar.

The issues raised for resolution are:

1. Whether or not the 5% franchise tax prescribed in Section 259 of the National
Internal Revenue Code assessed against the private respondent on its gross receipts realized
before the effectivity of R.A- No. 3843 is collectible.

2. Whether or not Section 4 of R.A. No. 3843 is unconstitutional for being violative of
the "uniformity and equality of taxation" clause of the Constitution.

3. If the abovementioned Section 4 of R.A. No. 3843 is valid, whether or not it could
be given retroactive effect so as to render uncollectible the taxes in question which were
assessed before its enactment.

4. Whether or not the respondent taxpayer is liable for the fixed and deficiency
percentage taxes in the amount of P3,025.96 for the period from January 1, 1946 to February
29, 1948, the period before the approval of its municipal franchises.

The first issue raised by the petitioner before us is whether or not the five percent (5%)
franchise tax prescribed in Section 259 of the National Internal Revenue Code
(Commonwealth Act No. 466 as amended by R.A. No. 39) assessed against the private
respondent on its gross receipts realized before the effectivity of R.A- No. 3843 is collectible.
It is the contention of the petitioner Commissioner of Internal Revenue that the private
respondent should have been held liable for the 5% franchise tax on gross receipts prescribed
in Section 259 of the Tax Code, instead of the lower franchise tax rates provided in the
municipal franchises (1% of gross earnings for the first twenty years and 2% for the remaining
fifteen years of the life of the franchises) because Section 259 of the Tax Code, as amended by
RA No. 39 of October 1, 1946, applied to existing and future franchises. The franchises of the
private respondent were already in existence at the time of the adoption of the said
amendment, since the franchises were accepted on March 1, 1948 after approval by the
Page 48 of 49
President of the Philippines on February 24, 1948. The private respondent's original franchises
did not contain the proviso that the tax provided therein "shall be in lieu of all taxes;"
moreover, the franchises contained a reservation clause that they shag be subject to
amendment, alteration, or repeal, but even in the absence of such cause, the power of the
Legislature to alter, amend, or repeal any franchise is always deemed reserved. The franchise
of the private respondent have been modified or amended by Section 259 of the Tax Code, the
petitioner submits.

We find no merit in petitioner's contention. R.A. No. 3843 granted the private respondent a
legislative franchise in June, 1963, amending, altering, or even repealing the original
municipal franchises, and providing that the private respondent should pay only a 2%
franchise tax on its gross receipts, "in lieu of any and all taxes and/or licenses of any kind,
nature or description levied, established, or collected by any authority whatsoever, municipal,
provincial, or national, now or in the future ... and effective further upon the date the original
franchise was granted, no other tax and/or licenses other than the franchise tax of two per
centum on the gross receipts ... shall be collected, any provision of law to the contrary
notwithstanding." Thus, by virtue of R.A- No. 3843, the private respondent was liable to pay
only the 2% franchise tax, effective from the date the original municipal franchise was
granted.

On the question as to whether or not Section 4 of R.A. No. 3843 is unconstitutional for being
violative of the "uniformity and equality of taxation" clause of the Constitution, and, if
adjudged valid, whether or not it should be given retroactive effect, the petitioner submits that
the said law is unconstitutional insofar as it provides for the payment by the private respondent
of a franchise tax of 2% of its gross receipts, while other taxpayers similarly situated were
subject to the 5% franchise tax imposed in Section 259 of the Tax Code, thereby
discriminatory and violative of the rule on uniformity and equality of taxation.

A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found. Uniformity means that all property belonging to the same class shall be
taxed alike The Legislature has the inherent power not only to select the subjects of taxation
but to grant exemptions. Tax exemptions have never been deemed violative of the equal
protection clause. 1 It is true that the private respondents municipal franchises were obtained
under Act No. 667 2 of the Philippine Commission, but these original franchises have been
replaced by a new legislative franchise, i.e. R.A. No. 3843. As correctly held by the
respondent court, the latter was granted subject to the terms and conditions established in Act
No. 3636, 3 as amended by C.A. No. 132. These conditions Identify the private respondent's
power plant as falling within that class of power plants created by Act No. 3636, as amended.
The benefits of the tax reduction provided by law (Act No. 3636 as amended by C.A. No. 132
and R.A. No. 3843) apply to the respondent's power plant and others circumscribed within this
class. R.A-No. 3843 merely transferred the petitioner's power plant from that class provided
for in Act No. 667, as amended, to which it belonged until the approval of R.A- No. 3843, and
placed it within the class falling under Act No. 3636, as amended. Thus, it only effected the
transfer of a taxable property from one class to another.

We do not have the authority to inquire into the wisdom of such act. Furthermore, the 5%
franchise tax rate provided in Section 259 of the Tax Code was never intended to have a
universal application. 4 We note that the said Section 259 of the Tax Code expressly allows the
payment of taxes at rates lower than 5% when the charter granting the franchise of a grantee,
like the one granted to the private respondent under Section 4 of R.A. No. 3843, precludes the
imposition of a higher tax. R.A. No. 3843 did not only fix and specify a franchise tax of 2% on
its gross receipts, but made it "in lieu of any and all taxes, all laws to the contrary
notwithstanding," thus, leaving no room for doubt regarding the legislative intent. "Charters or
special laws granted and enacted by the Legislature are in the nature of private contracts. They
do not constitute a part of the machinery of the general government. They are usually adopted
after careful consideration of the private rights in relation with resultant benefits to the State ...
in passing a special charter the attention of the Legislature is directed to the facts and
circumstances which the act or charter is intended to meet. The Legislature consider (sic) and
make (sic) provision for all the circumstances of a particular case." 5 In view of the foregoing,
we find no reason to disturb the respondent court's ruling upholding the constitutionality of the
law in question.

Given its validity, should the said law be applied retroactively so as to render uncollectible the
taxes in question which were assessed before its enactment? The question of whether a statute
operates retrospectively or only prospectively depends on the legislative intent. In the instant
case, Act No. 3843 provides that "effective ... upon the date the original franchise was granted,
no other tax and/or licenses other than the franchise tax of two per centum on the gross
receipts ... shall be collected, any provision to the contrary notwithstanding." Republic Act No.
Page 49 of 49
3843 therefore specifically provided for the retroactive effect of the law.

The last issue to be resolved is whether or not the private respondent is liable for the fixed and
deficiency percentage taxes in the amount of P3,025.96 (i.e. for the period from January 1,
1946 to February 29, 1948) before the approval of its municipal franchises. As aforestated, the
franchises were approved by the President only on February 24, 1948. Therefore, before the
said date, the private respondent was liable for the payment of percentage and fixed taxes as
seller of light, heat, and power which as the petitioner claims, amounted to P3,025.96. The
legislative franchise (R.A. No. 3843) exempted the grantee from all kinds of taxes other than
the 2% tax from the date the original franchise was granted. The exemption, therefore, did not
cover the period before the franchise was granted, i.e. before February 24, 1948. However, as
pointed out by the respondent court in its findings, during the period covered by the instant
case, that is from January 1, 1946 to December 31, 1961, the private respondent paid the
amount of P34,184.36, which was very much more than the amount rightfully due from it.
Hence, the private respondent should no longer be made to pay for the deficiency tax in the
amount of P3,025.98 for the period from January 1, 1946 to February 29, 1948.

WHEREFORE, the appealed decision of the respondent Court of Tax Appeals is hereby
AFFIRMED. No pronouncement as to costs. SO ORDERED.