G.R. No.

L-17725 February 28, 1962

REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,

vs.
MAMBULAO LUMBER COMPANY, ET AL., defendants-appellants.

Office of the Solicitor General for plaintiff-appellee.

Arthur Tordesillas for defendants-appellants.

BARRERA, J.:

From the decision of the Court of First Instance of Manila (in Civil Case No. 34100) ordering it to pay to
plaintiff Republic of the Philippines the sum of P4,802.37 with 6% interest thereon from the date of the
filing of the complaint until fully paid, plus costs, defendant Mambulao Lumber Company interposed the
present appeal.1

The facts of the case are briefly stated in the decision of the trial court, to wit: .

The facts of this case are not contested and may be briefly summarized as follows: (a) under the
first cause of action, for forest charges covering the period from September 10, 1952 to May 24,
1953, defendants admitted that they have a liability of P587.37, which liability is covered by a
bond executed by defendant General Insurance & Surety Corporation for Mambulao Lumber
Company, jointly and severally in character, on July 29, 1953, in favor of herein plaintiff; (b)
under the second cause of action, both defendants admitted a joint and several liability in favor of
plaintiff in the sum of P296.70, also covered by a bond dated November 27, 1953; and (c) under
the third cause of action, both defendants admitted a joint and several liability in favor of plaintiff
for P3,928.30, also covered by a bond dated July 20, 1954. These three liabilities aggregate to
P4,802.37. If the liability of defendants in favor of plaintiff in the amount already mentioned is
admitted, then what is the defense interposed by the defendants? The defense presented by the
defendants is quite unusual in more ways than one. It appears from Exh. 3 that from July 31, 1948
to December 29, 1956, defendant Mambulao Lumber Company paid to the Republic of the
Philippines P8,200.52 for 'reforestation charges' and for the period commencing from April 30,
1947 to June 24, 1948, said defendant paid P927.08 to the Republic of the Philippines for
'reforestation charges'. These reforestation were paid to the plaintiff in pursuance of Section 1 of
Republic Act 115 which provides that there shall be collected, in addition to the regular forest
charges provided under Section 264 of Commonwealth Act 466 known as the National Internal
Revenue Code, the amount of P0.50 on each cubic meter of timber... cut out and removed from
any public forest for commercial purposes. The amount collected shall be expended by the director
of forestry, with the approval of the secretary of agriculture and commerce, for reforestation and
afforestation of watersheds, denuded areas ... and other public forest lands, which upon
investigation, are found needing reforestation or afforestation .... The total amount of the
reforestation charges paid by Mambulao Lumber Company is P9,127.50, and it is the contention
of the defendant Mambulao Lumber Company that since the Republic of the Philippines has not
made use of those reforestation charges collected from it for reforesting the denuded area of the
land covered by its license, the Republic of the Philippines should refund said amount, or, if it
cannot be refunded, at least it should be compensated with what Mambulao Lumber Company
owed the Republic of the Philippines for reforestation charges. In line with this thought, defendant
Mambulao Lumber Company wrote the director of forestry, on February 21, 1957 letter Exh. 1, in
paragraph 4 of which said defendant requested "that our account with your bureau be credited with
all the reforestation charges that you have imposed on us from July 1, 1947 to June 14, 1956,
amounting to around P2,988.62 ...". This letter of defendant Mambulao Lumber Company was
answered by the director of forestry on March 12, 1957, marked Exh. 2, in which the director of
forestry quoted an opinion of the secretary of justice, to the effect that he has no discretion to
extend the time for paying the reforestation charges and also explained why not all denuded areas
are being reforested.
The only issue to be resolved in this appeal is whether the sum of P9,127.50 paid by defendant-appellant
company to plaintiff-appellee as reforestation charges from 1947 to 1956 may be set off or applied to the
payment of the sum of P4,802.37 as forest charges due and owing from appellant to appellee. It is
appellant's contention that said sum of P9,127.50, not having been used in the reforestation of the area
covered by its license, the same is refundable to it or may be applied in compensation of said sum of
P4,802.37 due from it as forest charges.1äwphï1.ñët

We find appellant's claim devoid of any merit. Section 1 of Republic Act No. 115, provides:

SECTION 1. There shall be collected, in addition to the regular forest charges provided for under
Section two hundred and sixty-four of Commonwealth Act Numbered Four Hundred Sixty-six,
known as the National Internal Revenue Code, the amount of fifty centavos on each cubic meter of
timber for the first and second groups and forty centavos for the third and fourth groups cut out
and removed from any public forest for commercial purposes. The amount collected shall be
expended by the Director of Forestry, with the approval of the Secretary of Agriculture and
Natural Resources (commerce), for reforestation and afforestation of watersheds, denuded areas
and cogon and open lands within forest reserves, communal forest, national parks, timber lands,
sand dunes, and other public forest lands, which upon investigation, are found needing
reforestation or afforestation, or needing to be under forest cover for the growing of economic
trees for timber, tanning, oils, gums, and other minor forest products or medicinal plants, or for
watersheds protection, or for prevention of erosion and floods and preparation of necessary plans
and estimate of costs and for reconnaisance survey of public forest lands and for such other
expenses as may be deemed necessary for the proper carrying out of the purposes of this Act.

All revenues collected by virtue of, and pursuant to, the provisions of the preceding paragraph and
from the sale of barks, medical plants and other products derived from plantations as herein
provided shall constitute a fund to be known as Reforestation Fund, to be expended exclusively in
carrying out the purposes provided for under this Act. All provincial or city treasurers and their
deputies shall act as agents of the Director of Forestry for the collection of the revenues or
incomes derived from the provisions of this Act. (Emphasis supplied.)

Under this provision, it seems quite clear that the amount collected as reforestation charges from a timber
licenses or concessionaire shall constitute a fund to be known as the Reforestation Fund, and that the same
shall be expended by the Director of Forestry, with the approval of the Secretary of Agriculture and Natural
Resources for the reforestation or afforestation, among others, of denuded areas which, upon investigation,
are found to be needing reforestation or afforestation. Note that there is nothing in the law which requires
that the amount collected as reforestation charges should be used exclusively for the reforestation of the
area covered by the license of a licensee or concessionaire, and that if not so used, the same should be
refunded to him. Observe too, that the licensee's area may or may not be reforested at all, depending on
whether the investigation thereof by the Director of Forestry shows that said area needs reforestation. The
conclusion seems to be that the amount paid by a licensee as reforestation charges is in the nature of a tax
which forms a part of the Reforestation Fund, payable by him irrespective of whether the area covered by
his license is reforested or not. Said fund, as the law expressly provides, shall be expended in carrying out
the purposes provided for thereunder, namely, the reforestation or afforestation, among others, of denuded
areas needing reforestation or afforestation.

Appellant maintains that the principle of a compensation in Article 1278 of the new Civil Code 2 is
applicable, such that the sum of P9,127.50 paid by it as reforestation charges may compensate its
indebtedness to appellee in the sum of P4,802.37 as forest charges. But in the view we take of this case,
appellant and appellee are not mutually creditors and debtors of each other. Consequently, the law on
compensation is inapplicable. On this point, the trial court correctly observed: .

Under Article 1278, NCC, compensation should take place when two persons in their own right
are creditors and debtors of each other. With respect to the forest charges which the defendant
Mambulao Lumber Company has paid to the government, they are in the coffers of the
 government as taxes collected, and the government does not owe anything, crystal clear that the
Republic of the Philippines and the Mambulao Lumber Company are not creditors and debtors of
each other, because compensation refers to mutual debts. ..

And the weight of authority is to the effect that internal revenue taxes, such as the forest charges in
question, can be the subject of set-off or compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state or municipality to one who is
liable to the state or municipality for taxes. Neither are they a proper subject of recoupment since
they do not arise out of the contract or transaction sued on. ... (80 C.J.S. 73-74. ) .

The general rule, based on grounds of public policy is well-settled that no set-off is admissible
against demands for taxes levied for general or local governmental purposes. The reason on which
the general rule is based, is that taxes are not in the nature of contracts between the party and party
but grow out of a duty to, and are the positive acts of the government, to the making and enforcing
of which, the personal consent of individual taxpayers is not required. ... If the taxpayer can
properly refuse to pay his tax when called upon by the Collector, because he has a claim against
the governmental body which is not included in the tax levy, it is plain that some legitimate and
necessary expenditure must be curtailed. If the taxpayer's claim is disputed, the collection of the
tax must await and abide the result of a lawsuit, and meanwhile the financial affairs of the
government will be thrown into great confusion. (47 Am. Jur. 766-767.)

WHEREFORE, the judgment of the trial court appealed from is hereby affirmed in all respects, with costs
against the defendant-appellant. So ordered.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes, Dizon and De
Leon, JJ., concur.

ENGRACIO FRANCIA, petitioner,

vs.
INTERMEDIATE APPELLATE COURT and HO FERNANDEZ, respondents.

GUTIERREZ, JR., J.:

The petitioner invokes legal and equitable grounds to reverse the questioned decision of the Intermediate
Appellate Court, to set aside the auction sale of his property which took place on December 5, 1977, and to
allow him to recover a 203 square meter lot which was, sold at public auction to Ho Fernandez and ordered
titled in the latter's name.

The antecedent facts are as follows:

Engracio Francia is the registered owner of a residential lot and a two-story house built upon it situated at
Barrio San Isidro, now District of Sta. Clara, Pasay City, Metro Manila. The lot, with an area of about 328
square meters, is described and covered by Transfer Certificate of Title No. 4739 (37795) of the Registry of
Deeds of Pasay City.

On October 15, 1977, a 125 square meter portion of Francia's property was expropriated by the Republic of
the Philippines for the sum of P4,116.00 representing the estimated amount equivalent to the assessed value
of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed to pay his real estate taxes. Thus, on December 5, 1977, his
property was sold at public auction by the City Treasurer of Pasay City pursuant to Section 73 of
Presidential Decree No. 464 known as the Real Property Tax Code in order to satisfy a tax delinquency of
P2,400.00. Ho Fernandez was the highest bidder for the property.

Francia was not present during the auction sale since he was in Iligan City at that time helping his uncle
ship bananas.

On March 3, 1979, Francia received a notice of hearing of LRC Case No. 1593-P "In re: Petition for Entry
of New Certificate of Title" filed by Ho Fernandez, seeking the cancellation of TCT No. 4739 (37795) and
the issuance in his name of a new certificate of title. Upon verification through his lawyer, Francia
discovered that a Final Bill of Sale had been issued in favor of Ho Fernandez by the City Treasurer on
December 11, 1978. The auction sale and the final bill of sale were both annotated at the back of TCT No.
4739 (37795) by the Register of Deeds.

On March 20, 1979, Francia filed a complaint to annul the auction sale. He later amended his complaint on
January 24, 1980.

On April 23, 1981, the lower court rendered a decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered dismissing the

amended complaint and ordering:

(a) The Register of Deeds of Pasay City to issue a new Transfer

Certificate of Title in favor of the defendant Ho Fernandez over the
parcel of land including the improvements thereon, subject to whatever
encumbrances appearing at the back of TCT No. 4739 (37795) and
ordering the same TCT No. 4739 (37795) cancelled.

(b) The plaintiff to pay defendant Ho Fernandez the sum of P1,000.00

as attorney's fees. (p. 30, Record on Appeal)

The Intermediate Appellate Court affirmed the decision of the lower court in toto.

Hence, this petition for review.

Francia prefaced his arguments with the following assignments of grave errors of law:

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE ERROR OF LAW

IN NOT HOLDING PETITIONER'S OBLIGATION TO PAY P2,400.00 FOR SUPPOSED TAX
DELINQUENCY WAS SET-OFF BY THE AMOUNT OF P4,116.00 WHICH THE GOVERNMENT IS
INDEBTED TO THE FORMER.

II

RESPONDENT INTERMEDIATE APPELLATE COURT COMMITTED A GRAVE AND SERIOUS

ERROR IN NOT HOLDING THAT PETITIONER WAS NOT PROPERLY AND DULY NOTIFIED
THAT AN AUCTION SALE OF HIS PROPERTY WAS TO TAKE PLACE ON DECEMBER 5, 1977
TO SATISFY AN ALLEGED TAX DELINQUENCY OF P2,400.00.

III
RESPONDENT INTERMEDIATE APPELLATE COURT FURTHER COMMITTED A SERIOUS
ERROR AND GRAVE ABUSE OF DISCRETION IN NOT HOLDING THAT THE PRICE OF P2,400.00
PAID BY RESPONTDENT HO FERNANDEZ WAS GROSSLY INADEQUATE AS TO SHOCK ONE'S
CONSCIENCE AMOUNTING TO FRAUD AND A DEPRIVATION OF PROPERTY WITHOUT DUE
PROCESS OF LAW, AND CONSEQUENTLY, THE AUCTION SALE MADE THEREOF IS VOID. (pp.
10, 17, 20-21, Rollo)

We gave due course to the petition for a more thorough inquiry into the petitioner's allegations that his
property was sold at public auction without notice to him and that the price paid for the property was
shockingly inadequate, amounting to fraud and deprivation without due process of law.

A careful review of the case, however, discloses that Mr. Francia brought the problems raised in his
petition upon himself. While we commiserate with him at the loss of his property, the law and the facts
militate against the grant of his petition. We are constrained to dismiss it.

Francia contends that his tax delinquency of P2,400.00 has been extinguished by legal compensation. He
claims that the government owed him P4,116.00 when a portion of his land was expropriated on October
15, 1977. Hence, his tax obligation had been set-off by operation of law as of October 15, 1977.

There is no legal basis for the contention. By legal compensation, obligations of persons, who in their own
right are reciprocally debtors and creditors of each other, are extinguished (Art. 1278, Civil Code). The
circumstances of the case do not satisfy the requirements provided by Article 1279, to wit:

(1) that each one of the obligors be bound principally and that he be at the same time a
principal creditor of the other;

xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx

This principal contention of the petitioner has no merit. 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 a tax cannot await the results of a lawsuit against the government.

In the case of Republic v. Mambulao Lumber Co. (4 SCRA 622), this Court ruled that Internal Revenue
Taxes can not be the subject of set-off or compensation. We stated that:

A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-
off under the statutes of set-off, which are construed uniformly, in the light of public
policy, to exclude the remedy in an action or any indebtedness of the state or municipality
to one who is liable to the state or municipality for taxes. Neither are they a proper
subject of recoupment since they do not arise out of the contract or transaction sued on. ...
(80 C.J.S., 7374). "The general rule based on grounds of public policy is well-settled that
no set-off admissible against demands for taxes levied for general or local governmental
purposes. The reason on which the general rule is based, is that taxes are not in the nature
of contracts between the party and party but grow out of duty to, and are the positive acts
of the government to the making and enforcing of which, the personal consent of
individual taxpayers is not required. ..."
We stated that a taxpayer cannot refuse to pay his tax when called upon by the collector because he has a
claim against the governmental body not included in the tax levy.

This rule was reiterated in the case of Corders v. Gonda (18 SCRA 331) where we stated that: "... internal
revenue taxes can not be the subject of compensation: Reason: government and taxpayer are not mutually
creditors and debtors of each other' under Article 1278 of the Civil Code and a "claim for taxes is not such
a debt, demand, contract or judgment as is allowed to be set-off."

There are other factors which compel us to rule against the petitioner. The tax was due to the city
government while the expropriation was effected by the national government. Moreover, the amount of
P4,116.00 paid by the national government for the 125 square meter portion of his lot was deposited with
the Philippine National Bank long before the sale at public auction of his remaining property. Notice of the
deposit dated September 28, 1977 was received by the petitioner on September 30, 1977. The petitioner
admitted in his testimony that he knew about the P4,116.00 deposited with the bank but he did not
withdraw it. It would have been an easy matter to withdraw P2,400.00 from the deposit so that he could pay
the tax obligation thus aborting the sale at public auction.

Petitioner had one year within which to redeem his property although, as well be shown later, he claimed
that he pocketed the notice of the auction sale without reading it.

Petitioner contends that "the auction sale in question was made without complying with the mandatory
provisions of the statute governing tax sale. No evidence, oral or otherwise, was presented that the
procedure outlined by law on sales of property for tax delinquency was followed. ... Since defendant Ho
Fernandez has the affirmative of this issue, the burden of proof therefore rests upon him to show that
plaintiff was duly and properly notified ... .(Petition for Review, Rollo p. 18; emphasis supplied)

We agree with the petitioner's claim that Ho Fernandez, the purchaser at the auction sale, has the burden of
proof to show that there was compliance with all the prescribed requisites for a tax sale.

The case of Valencia v. Jimenez (11 Phil. 492) laid down the doctrine that:

xxx xxx xxx

... [D]ue process of law to be followed in tax proceedings must be established by proof
and the general rule is that the purchaser of a tax title is bound to take upon himself the
burden of showing the regularity of all proceedings leading up to the sale. (emphasis
supplied)

There is no presumption of the regularity of any administrative action which results in depriving a taxpayer
of his property through a tax sale. (Camo v. Riosa Boyco, 29 Phil. 437); Denoga v. Insular Government, 19
Phil. 261). This is actually an exception to the rule that administrative proceedings are presumed to be
regular.

But even if the burden of proof lies with the purchaser to show that all legal prerequisites have been
complied with, the petitioner can not, however, deny that he did receive the notice for the auction sale. The
records sustain the lower court's finding that:

[T]he plaintiff claimed that it was illegal and irregular. He insisted that he was not
properly notified of the auction sale. Surprisingly, however, he admitted in his testimony
that he received the letter dated November 21, 1977 (Exhibit "I") as shown by his
signature (Exhibit "I-A") thereof. He claimed further that he was not present on
December 5, 1977 the date of the auction sale because he went to Iligan City. As long as
 there was substantial compliance with the requirements of the notice, the validity of the
auction sale can not be assailed ... .

We quote the following testimony of the petitioner on cross-examination, to wit:

Q. My question to you is this letter marked as Exhibit I for Ho

Fernandez notified you that the property in question shall be sold at
public auction to the highest bidder on December 5, 1977 pursuant to
Sec. 74 of PD 464. Will you tell the Court whether you received the
original of this letter?

A. I just signed it because I was not able to read the same. It was just
sent by mail carrier.

Q. So you admit that you received the original of Exhibit I and you
signed upon receipt thereof but you did not read the contents of it?

A. Yes, sir, as I was in a hurry.

Q. After you received that original where did you place it?

A. I placed it in the usual place where I place my mails.

Petitioner, therefore, was notified about the auction sale. It was negligence on his part when he ignored
such notice. By his very own admission that he received the notice, his now coming to court assailing the
validity of the auction sale loses its force.

Petitioner's third assignment of grave error likewise lacks merit. As a general rule, gross inadequacy of
price is not material (De Leon v. Salvador, 36 SCRA 567; Ponce de Leon v. Rehabilitation Finance
Corporation, 36 SCRA 289; Tolentino v. Agcaoili, 91 Phil. 917 Unrep.). See also Barrozo Vda. de Gordon
v. Court of Appeals (109 SCRA 388) we held that "alleged gross inadequacy of price is not material when
the law gives the owner the right to redeem as when a sale is made at public auction, upon the theory that
the lesser the price, the easier it is for the owner to effect redemption." In Velasquez v. Coronel (5 SCRA
985), this Court held:

... [R]espondent treasurer now claims that the prices for which the lands were sold are
unconscionable considering the wide divergence between their assessed values and the
amounts for which they had been actually sold. However, while in ordinary sales for
reasons of equity a transaction may be invalidated on the ground of inadequacy of price,
or when such inadequacy shocks one's conscience as to justify the courts to interfere,
such does not follow when the law gives to the owner the right to redeem, as when a sale
is made at public auction, upon the theory that the lesser the price the easier it is for the
owner to effect the redemption. And so it was aptly said: "When there is the right to
redeem, inadequacy of price should not be material, because the judgment debtor may
reacquire the property or also sell his right to redeem and thus recover the loss he claims
to have suffered by reason of the price obtained at the auction sale."

The reason behind the above rulings is well enunciated in the case of Hilton et. ux. v. De Long, et al. (188
Wash. 162, 61 P. 2d, 1290):

If mere inadequacy of price is held to be a valid objection to a sale for taxes, the
collection of taxes in this manner would be greatly embarrassed, if not rendered
altogether impracticable. In Black on Tax Titles (2nd Ed.) 238, the correct rule is stated
 as follows: "where land is sold for taxes, the inadequacy of the price given is not a valid
objection to the sale." This rule arises from necessity, for, if a fair price for the land were
essential to the sale, it would be useless to offer the property. Indeed, it is notorious that
the prices habitually paid by purchasers at tax sales are grossly out of proportion to the
value of the land. (Rothchild Bros. v. Rollinger, 32 Wash. 307, 73 P. 367, 369).

In this case now before us, we can aptly use the language of McGuire, et al. v. Bean, et al. (267 P. 555):

Like most cases of this character there is here a certain element of hardship from which
we would be glad to relieve, but do so would unsettle long-established rules and lead to
uncertainty and difficulty in the collection of taxes which are the life blood of the state.
We are convinced that the present rules are just, and that they bring hardship only to
those who have invited it by their own neglect.

We are inclined to believe the petitioner's claim that the value of the lot has greatly appreciated in value.
Precisely because of the widening of Buendia Avenue in Pasay City, which necessitated the expropriation
of adjoining areas, real estate values have gone up in the area. However, the price quoted by the petitioner
for a 203 square meter lot appears quite exaggerated. At any rate, the foregoing reasons which answer the
petitioner's claims lead us to deny the petition.

And finally, even if we are inclined to give relief to the petitioner on equitable grounds, there are no strong
considerations of substantial justice in his favor. Mr. Francia failed to pay his taxes for 14 years from 1963
up to the date of the auction sale. He claims to have pocketed the notice of sale without reading it which, if
true, is still an act of inexplicable negligence. He did not withdraw from the expropriation payment
deposited with the Philippine National Bank an amount sufficient to pay for the back taxes. The petitioner
did not pay attention to another notice sent by the City Treasurer on November 3, 1978, during the period
of redemption, regarding his tax delinquency. There is furthermore no showing of bad faith or collusion in
the purchase of the property by Mr. Fernandez. The petitioner has no standing to invoke equity in his
attempt to regain the property by belatedly asking for the annulment of the sale.

WHEREFORE, IN VIEW OF THE FOREGOING, the petition for review is DISMISSED. The decision of
the respondent court is affirmed.

SO ORDERED.

G.R. No. L-18994 June 29, 1963

MELECIO R. DOMINGO, as Commissioner of Internal Revenue, petitioner,

vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte,
and SIMEONA K. PRICE, as Administratrix of the Intestate Estate of the late Walter Scott Price,
respondents.

Office of the Solicitor General and Atty. G. H. Mantolino for petitioner.

Benedicto and Martinez for respondents.

LABRADOR, J.:

This is a petition for certiorari and mandamus against the Judge of the Court of First Instance of Leyte,
Ron. Lorenzo C. Garlitos, presiding, seeking to annul certain orders of the court and for an order in this
Court directing the respondent court below to execute the judgment in favor of the Government against the
estate of Walter Scott Price for internal revenue taxes.
It appears that in Melecio R. Domingo vs. Hon. Judge S. C. Moscoso, G.R. No. L-14674, January 30, 1960,
this Court declared as final and executory the order for the payment by the estate of the estate and
inheritance taxes, charges and penalties, amounting to P40,058.55, issued by the Court of First Instance of
Leyte in, special proceedings No. 14 entitled "In the matter of the Intestate Estate of the Late Walter Scott
Price." In order to enforce the claims against the estate the fiscal presented a petition dated June 21, 1961,
to the court below for the execution of the judgment. The petition was, however, denied by the court which
held that the execution is not justifiable as the Government is indebted to the estate under administration in
the amount of P262,200. The orders of the court below dated August 20, 1960 and September 28, 1960,
respectively, are as follows:

Atty. Benedicto submitted a copy of the contract between Mrs. Simeona K. Price, Administratrix
of the estate of her late husband Walter Scott Price and Director Zoilo Castrillo of the Bureau of
Lands dated September 19, 1956 and acknowledged before Notary Public Salvador V. Esguerra,
legal adviser in Malacañang to Executive Secretary De Leon dated December 14, 1956, the note of
His Excellency, Pres. Carlos P. Garcia, to Director Castrillo dated August 2, 1958, directing the
latter to pay to Mrs. Price the sum ofP368,140.00, and an extract of page 765 of Republic Act No.
2700 appropriating the sum of P262.200.00 for the payment to the Leyte Cadastral Survey, Inc.,
represented by the administratrix Simeona K. Price, as directed in the above note of the President.
Considering these facts, the Court orders that the payment of inheritance taxes in the sum of
P40,058.55 due the Collector of Internal Revenue as ordered paid by this Court on July 5, 1960 in
accordance with the order of the Supreme Court promulgated July 30, 1960 in G.R. No. L-14674,
be deducted from the amount of P262,200.00 due and payable to the Administratrix Simeona K.
Price, in this estate, the balance to be paid by the Government to her without further delay. (Order
of August 20, 1960)

The Court has nothing further to add to its order dated August 20, 1960 and it orders that the
payment of the claim of the Collector of Internal Revenue be deferred until the Government shall
have paid its accounts to the administratrix herein amounting to P262,200.00. It may not be amiss
to repeat that it is only fair for the Government, as a debtor, to its accounts to its citizens-creditors
before it can insist in the prompt payment of the latter's account to it, specially taking into
consideration that the amount due to the Government draws interests while the credit due to the
present state does not accrue any interest. (Order of September 28, 1960)

The petition to set aside the above orders of the court below and for the execution of the claim of the
Government against the estate must be denied for lack of merit. The ordinary procedure by which to settle
claims of indebtedness against the estate of a deceased person, as an inheritance tax, is for the claimant to
present a claim before the probate court so that said court may order the administrator to pay the amount
thereof. To such effect is the decision of this Court in Aldamiz vs. Judge of the Court of First Instance of
Mindoro, G.R. No. L-2360, Dec. 29, 1949, thus:

. . . a writ of execution is not the proper procedure allowed by the Rules of Court for the payment
of debts and expenses of administration. The proper procedure is for the court to order the sale of
personal estate or the sale or mortgage of real property of the deceased and all debts or expenses of
administrator and with the written notice to all the heirs legatees and devisees residing in the
Philippines, according to Rule 89, section 3, and Rule 90, section 2. And when sale or mortgage of
real estate is to be made, the regulations contained in Rule 90, section 7, should be complied
with.1äwphï1.ñët

Execution may issue only where the devisees, legatees or heirs have entered into possession of
their respective portions in the estate prior to settlement and payment of the debts and expenses of
administration and it is later ascertained that there are such debts and expenses to be paid, in which
case "the court having jurisdiction of the estate may, by order for that purpose, after hearing, settle
the amount of their several liabilities, and order how much and in what manner each person shall
contribute, and may issue execution if circumstances require" (Rule 89, section 6; see also Rule
74, Section 4; Emphasis supplied.) And this is not the instant case.
The legal basis for such a procedure is the fact that in the testate or intestate proceedings to settle the estate
of a deceased person, the properties belonging to the estate are under the jurisdiction of the court and such
jurisdiction continues until said properties have been distributed among the heirs entitled thereto. During
the pendency of the proceedings all the estate is in custodia legis and the proper procedure is not to allow
the sheriff, in case of the court judgment, to seize the properties but to ask the court for an order to require
the administrator to pay the amount due from the estate and required to be paid.

Another ground for denying the petition of the provincial fiscal is the fact that the court having jurisdiction
of the estate had found that the claim of the estate against the Government has been recognized and an
amount of P262,200 has already been appropriated for the purpose by a corresponding law (Rep. Act No.
2700). Under the above circumstances, both the claim of the Government for inheritance taxes and the
claim of the intestate for services rendered have already become overdue and demandable is well as fully
liquidated. Compensation, therefore, takes place by operation of law, in accordance with the provisions of
Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the concurrent amount, thus:

ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes
effect by operation of law, and extinguished both debts to the concurrent amount, eventhough the
creditors and debtors are not aware of the compensation.

It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes against the estate
of the deceased Walter Scott Price. Furthermore, the petition for certiorari and mandamus is not the proper
remedy for the petitioner. Appeal is the remedy.

The petition is, therefore, dismissed, without costs

G.R. No. L-15778 April 23, 1962

TAN TIONG BIO, ET AL., petitioners,

vs.
COMMISSIONER OF INTERNAL REVENUE, respondent.

Sycip, Salazar and Associates for petitioners.

Office of the Solicitor General for respondent.

BAUTISTA ANGELO, J.:

On October 19, 1946, the Central Syndicate, a corporation organized under the laws of the Philippines, thru
its General Manager, David Sycip, sent a letter to the Collector of Internal Revenue advising the latter that
it purchased from Dee Hong Lue the entire stock of surplus properties which the said Dee Hong Lue had
bought from the Foreign Liquidation Commission and that as it assumed Dee Hong Lue's obligation to pay
the 3-1/2% sales tax on said surplus goods, it was remitting the sum of P43,750.00 in his behalf as deposit
to answer for the payment of said sales tax with the understanding that it would later be adjusted after the
determination of the exact consideration of the sale.

On January 31, 1948, the syndicate again wrote the Collector requesting the refund of P1,103.28
representing alleged excess payment of sales tax due to the adjustment and reduction of the purchase price
in the amount of P31,522.18. Said letter was referred to an agent for verification and report. On September
18, 1951, after a thorough investigation of the facts and circumstances surrounding the transaction, the
agent reported (1) that Dee Hong Lue purchased the surplus goods as trustee for the Central Syndicate
which was in the process of organization at the time of the bidding; (2) that it was the representatives of the
Central Syndicate that removed the surplus goods from their base at Leyte on February 21, 1947; (3) that
the syndicate must have realized a gross profit of 18.8% from its sales thereof; and (4) that if the sales tax
were to be assessed on its gross sales it would still be liable for the amount of P33,797.88 as deficiency
sales tax and surcharge in addition to the amount of P43,750.00 which the corporation had deposited in the
name of Dee Hong Lue as estimated sales tax due from the latter.

Based on the above findings of the agent in charge of the investigation, the Collector decided that the
Central Syndicate was the importer and original seller of the surplus goods in question and, therefore, the
one liable to pay the sales tax. Accordingly, on January 4, 1952, the Collector assessed against the
syndicate the amount of P33,797.88 and P300.00 as deficiency sales tax, inclusive of the 25% surcharge
and compromise penalty, respectively, and on the same date, in a separate letter, he denied the request of
the syndicate for the refund of the sum of P1,103.28.

On September 8, 1954, the Central Syndicate elevated the case to the Court of Tax Appeals questioning the
ruling of the Collector which denies its claim for refund as well as the assessment made against it of the
sum of P33,797.88, plus the sum of P300.00 as compromise penalty, as stated above. The Collector filed
his answer thereto wherein he reiterated his ruling and prayed that the Central Syndicate be ordered to pay
the deficiency sales tax and surcharge as demanded in his letters dated January 4, 1952 and August 5, 1954.
On October 28, 1954, the syndicate filed a motion requesting that the issue of prescription it has raised
against the collection of the tax be first determined as a preliminary question, but action thereon was
deferred by the Court of Tax Appeals until after the trial of the case on the merits.

On November 5, 1954, the Collector filed a motion requiring the syndicate to file a bond to guarantee the
payment of the tax assessed against it which motion was denied by the Court of Tax Appeals on the ground
that cannot be legally done it appearing that the syndicate is already a non-existing entity due to the
expiration of its corporate existence. In view of this development, the Collector filed a motion to dismiss
the appeal on the ground of lack of personality on the part of the syndicate, which met an opposition on the
part of the latter, but on January 25, 1955, the Court of Tax Appeals issued a resolution dismissing the
appeal primarily on the ground that the Central Syndicate has no personality to maintain the action then
pending before it. From this order the syndicate appealed to the Supreme Court wherein it intimated that
the appeal should not be dismissed because it could be substituted by its successors-in-interest, to wit: Tan
Tiong Bio, Yu Khe Thai, Alfonso Sycip, Dee Hong Lue, Lim Shui Ty, Sy Seng Tong, Sy En, Co Giap and
David Sycip. And taking cue from this suggestion, this Court ruled against the dismissal and held: "The
resolution appealed from is set aside and the respondent court is ordered to permit the substitution of the
officers and directors of the defunct Central Syndicate as appellants, and to proceed with the hearing of the
appeal upon its merits." In permitting the substitution, this Court labored under the premise that said
officers and directors "may be held personally liable for the unpaid deficiency assessments made by the
Collector of Internal Revenue against the defunct syndicate."

After trial, the Court of Tax Appeals rendered decision the dispositive part of which reads as follows:

WHEREFORE, in view of the foregoing considerations, the decision of the Collector of Internal
Revenue appealed from is hereby affirmed, except with regard to the imposition of the
compromise penalty of P300.00 the collection of which is unauthorized and illegal in the absence
of a compromise agreement between the parties. (Collector of Internal Revenue vs. University of
Sto. Tomas, G. R. No. L-11274, November 28, 1958; Collector of Internal Revenue vs. Bautista &
Tan, G.R. No. L-12250, May 27, 1959.) .

The petitioners Tan Tiong Bio, Yu Khe Thai, Lim Shui Ty, Alfonso Sycip, Sy En alias Sy Seng
Sui, Dee Hong Lue, and Sy Seng Tong, who appear in the Articles of Incorporation of the Central
Syndicate Annex A (pp. 60-66, CTA rec.) as incorporators and directors of the corporation, the
second named being in addition its President and the seventh its Treasurer, are hereby ordered to
pay jointly and severally, to the Collector of Internal Revenue, the sum of P33,797.88 as
deficiency sales tax and surcharge on the surplus goods purchased by them from the Foreign
Liquidation Commission on July 5, 1946, from which they realized an estimated gross sales of
P1,447,551.65, with costs. ..
Petitioners interposed the present appeal.

The important issues to be determined in this appeal are: (1) whether the importer of the surplus goods in
question the sale of which is subject to the present tax liability is Dee Hong Lue or the Central Syndicate
who has been substituted by the present petitioners; (2) whether the deficiency sales tax which is now
sought to be collected has already prescribed; and (3) the Central Syndicate having already been dissolved
because of the expiration of its corporate existence, whether the sales tax in question can be enforced
against its successors-in-interest who are the present petitioners.

1. Petitioners contend that the Central Syndicate cannot be held liable for the deficiency sales tax in
question because it is not the importer of the surplus goods purchased from the Foreign Liquidation
Commission for the reason that said surplus goods were purchased by Dee Hong Lue as shown by the
contract executed between him and the Foreign Liquidation Commission and the fact that the Central
Syndicate only purchased the same from Dee Hong Lue and not from the Foreign Liquidation Commission
as shown by Exhibit 13.

This contention cannot be sustained. As correctly observed by the Court of Tax Appeals, the overwhelming
evidence presented by the Collector points to the conclusion that Dee Hong Lue purchased the surplus
goods in question not for himself but for the Central Syndicate which was then in the process of
incorporation such that the deed of sale Exhibit 13 which purports to show that Dee Hong Lue sold said
goods to the syndicate for a consideration of P1,250,000.00 (the same amount paid by Dee Hong Lue to the
Foreign Liquidation Commission) "is but a ruse to evade payment of a greater amount of percentage tax."
The aforesaid conclusion of the lower court was arrived at after a thorough analysis of the evidence on
record, pertinent portion of which we quote hereunder with approval:

Exhibit "38-A" for the respondent (p. 178, BIR rec.) shows that as early as July 23, 1946, or
before the organization and incorporation of Central Syndicate, Mr. David Sycip, who was
subsequently appointed General Manager of the corporation, together with Messrs. Sy En alias Sy
Seng Sui (one of the incorporators of Central Syndicate), Serge Gordeof and Chin Siu Bun (an
employee of the same corporation), for and in the name of Central Syndicate then in the process of
organization, went to Leyte to take over the surplus properties sold by the FLC to Dee Hong Lue,
which the latter held in trust for the corporation. Exhibit 38-A, which is a certificate issued by no
less than David Sycip himself who was subsequently appointed General Manager of the
corporation admits in express terms the following "... the surplus property sold by the Foreign
Liquidation Commission to Dee Hong Lue (and held in trust by the latter for the Syndicate ...."
(Emphasis ours.) We give full weight and credence to the adverse admissions made by David
Sycip against the petitioners as appearing in his certificate Exhibit 38-A (p. 178, BIR rec.)
considering that at the time he made them, he was a person jointly interested with the petitioners
in the transaction over which there was yet no controversy over any sales tax liability. (Secs. 11
and 33, Rule 123, Rules of Court; Clem vs. Forbeso, Tex. Cir App. 10 S.W. 2d 223; Street vs.
Masterson, Tex. Cir. App. 277 S.W. 407.) .

Exhibit '39' for the respondent (pp. 184-187, BIR rec.) which is a letter of Mr. Yu Khe Thai
President, Director and biggest stockholder of Central Syndicate (Exhibit A, pp. 60-65, CTA rec.)
dated September 17, 1946 and addressed to the Commanding General AFWESPAC, Manila,
contains the following categorical admissions which corroborate the admissions made by David
Sycip; that the so-called Leyte 'Mystery Pile' surplus properties were owned by Central Syndicate
by virtue of a purchase from the FLC, effected in the name of Dee Hong Lue on July 5, 1946,
inasmuch as Central Syndicate was then still in the process of organization; that Dee Hong Lue
held the said surplus properties in trust until the mere formal turnover to the corporation on
August 20, 1946, when the corporation had already been organized and incorporated under the
laws of the Philippines; and that on July 23, 1946 viz., twenty-two (22) days before the
incorporation of Central Syndicate on August 15, 1946 'our General Manager, Mr. David Sycip
accompanied by one of our directors, Mr. Sy En, arrived in Leyte to take over the properties.'
Before passing on to the rest of the evidence supporting the finding of respondent, we would like
to call attention to this significant detail. It is stated in the letter, Exhibit 39 (pp. 184-187, BIR
rec.) of Mr. Yu Khe Thai that 'on July 23, 1946, our General Manager, Mr. David Sycip,
accompanied by one of our directors, Mr. Sy En, arrived in Leyte to take over the properties,' We
ask: Why was there such a hurry on the part of the promoters of Central Syndicate in taking over
the surplus properties when the formal agreement, Exhibit 13 (p. 66, BIR rec.), purporting to be a
contract of sale of the 'Mystery Pile' between Dee Hong Lue as vendor, and the Central Syndicate,
as vendee, for the amount of P1,250,000.00, was effected twenty-eight (28) days later viz., on
August 20, 1946? Is this not another clear and unmistakable indication that from the very start, as
is the theory of the respondent, the real purchasers of the 'Mystery Pile' from the FLC and as such
the 'importers' of the goods, were the Central Syndicate and/or the group of big financiers
composing it before said corporation was incorporated on August 15, 1946; and, that Dee Hong
Lue acted merely as agent of these persons when he purchased the pile from the FLC? As a
general rule, one does not exercise all the acts of ownership over a property especially if it
involves a big amount until after the documents evidencing such ownership are fully
accomplished.

Moreover, it appears that on October 3, 1946, Dee Hong Lue was investigated by Major Primitivo
San Agustin, Jr., G-2 of the Philippine Army, because of the discovery of some gun parts found in
his shipment of surplus material from Palo, Leyte.

In his sworn statement, Exhibit 16 (pp. 133-139, BIR rec.) before said officer, Dee Hong Lue
admitted the following: That he paid the FLC the amount of P1,250,000.00 "with the checks of Yu
Khe Thai, maybe also Alfonso Sycip and my checks with many others"; that "at the beginning I
was trying to buy the pile for myself without telling other people and other friends of mine."
"Watkins came to me and he bid for me for P600,000 or P700,000, but later on when the price
went up to P1,250,000, I talked to my friends who said I could get money." "So, I bought it with
their checks and mine" (Exhibit 16-B, p. 138, BIR rec.) and, that after buying the "Mystery Pile",
he (Dee Hong Lue) never inspected the same personally. (p. 141, BIR rec.)

In his affidavit, Exhibit 15 (p. 144, BIR rec.) Dee Hong Lue admitted that of the amount of
P1,250,000.00 which he paid in two installments sometime in July, 1946, to the FLC,
P1,181,250.00 (should be P1,181,000.00) of the amount came from the following: Yu Khe Thai
who advanced to him P250,000.00; Sy Seng Tong — P375,000.00; Alfonso Z. Sycip -
P375,000.00; Tan Tiong Bio - P125,000.00; Robert Dee Se Wee — P25,000.00; and, Jose S. Lim
— P31,000.00 that his understanding with these persons was that should they eventually join him
in Central Syndicate, such advances would be adjusted to constitute their investments; and, that
soon after the "Mystery Pile" was purchased from the FLC, all the above-named persons with the
exception of Robert Dee Se Wee and Jose S. Lim, formed the Central Syndicate and a re-
allocation of shares was made corresponding to the amounts advanced by them.

Added to these, we have before us other documentary evidence for the respondent consisting of
Exhibits 18, 19, 20, 21, 23, 24, 25, 26, 27, 28 and 29 (pp. 85, 88, 92-96, 99-103, 117-128, 119-
120, 121-128, BIR rec.) all tending to prove the same thing - that the Central Syndicate and/or the
group of big financiers composing it and not Dee Hong Lue was the real purchaser (importer) of
the "Mystery Pile" from the FLC; that in the contract of sale between Dee Hong Lue and the FLC
the former acted principally as agent (Article 1930, New Civil Code) of the petitioners Yu Khe
Thai, Sy Seng Tong, Alfonso Z. Sycip and Tan Tiong Bio who advanced the purchased price of
P1,125,000.00 out of the P1,250,000.00 paid to the FLC, Dee Hong Lue being the purchaser in his
own right only with respect to the amount of P69,000.00; and, that the deed, Exhibit 13 (p. 77,
BIR rec.) purporting to show that Dee Hong Lue sold the "Mystery Pile" to the Central Syndicate
for consideration of P1,250.000.00 is but a ruse to evade payment of a greater amount of
percentage tax. 1äwphï1.ñët
To our mind, the deed of sale, Exhibit 13 (p. 66, BIR rec.) as well as the circumstances
surrounding the incorporation of the Central Syndicate, are shrouded with as much mystery as the
so-called "Mystery Pile" subject of the transaction. But, as oil is to water, the truth and underlying
motives behind these transactions have to surface in the end. Petitioners would want us to believe
that Dee Hong Lue bought in his own right and for himself the surplus goods in question for
P1,250,000.00 from the FLC and then, by virtue of a valid contract of sale, Exhibit 13 (p. 66, BIR
rec.) transferred and conveyed the same to the Central Syndicate at cost. If this be so, what need
was there for Dee Hong Lue to agree in the immediate organization and incorporation of the
Central Syndicate with six other capitalists when he could very well have disposed of the surplus
goods to the public in his individual capacity and keep all the profits to himself without sharing
9/10th of it to the other six incorporators and stockholders of the newly incorporated Syndicate.

It appears that Dee Hong Lue "sold" the pile to the Central Syndicate for exactly the same price
barely forty-six (46) days after acquiring it from FLC and exactly five (5) days after the Syndicate
was registered with the Securities and Exchange Commission on August 19, 1946. This is indeed
most unusual for a businessman like Dee Hong Lue who, it is to be presumed, was out to make a
killing when he acquired the surplus goods from the FLC for the staggering amount of
P1,750,000.00 in cash.

Again, why did Dee Hong Lue waste all his time and effort not to say his good connections with
the FLC by acquiring the goods from that agency only to sell it for the same amount to the Central
Syndicate? This would have been understandable if Dee Hong Lue were the biggest and
controlling stockholder of the Syndicate. He could perhaps reason out to himself, "the profits
which I am sacrificing now in this sale to the Syndicate, I will get it anyway in the form of
dividends from it after it shall have disposed of all the "Mystery Pile" to the public.' But then, how
could this be possible when Dee Hong Lue was the smallest subscriber to the capital stock of the
Syndicate? It appears from the Articles of Incorporation that of the authorized capital stock of the
corporation in the amount of P500,000.00, Dee Hong Lue subscribes to only P20,000.00 or 1/25th
of the capital stock authorized and of this amount only P5,000.00 was paid by him at the time of
incorporation. So here is an experienced businessman like Dee Hong Lue who, following the
theory of petitioners' counsel, bought the "'Mystery Pile" for himself for P1,250,000.00 in cash,
and after a few days sold the same at cost to a corporation wherein he owned only 1/25th of the
authorized capital stock and wherein he was not even an officer, thus doling out to the other six
incorporators and stockholders net profits in the sum conservatively estimated by the respondent
to be P206,116.45 out of a total of P229,073.83 which normally could all go to him. We take
judicial notice of the fact that as a result of our immense losses in property throughout the
archipelago the during the Japanese occupation, either through destruction or systematic
commandering by the enemy and our forces, surplus properties commanded a very good price in
the open market after the liberation and that quite a number of surplus dealers made immense
fortunes out of it. We believe the respondent was quite charitable if not more than fair to the
Central Syndicate in computing the profits realized by it in the resale of the "Mystery Pile" to the
public at only 18.8% of the acquisition price.

Now, from the side of the Central Syndicate. This corporation, as its articles of incorporation,
Exhibit A (pp. 60-66, CTA rec.) will show, was incorporated on August 15, 1946 with an
authorized capital stock of P500,000.00 of which P200,000.00 worth was subscribed by seven (7)
persons and P50,000.00 paid-up in cash at the time of incorporation. Five (5) days after its
incorporation, as the Deed of Sale, Exhibit 13 (p. 66, BIR rec.) purports to show, the said
corporation bought from Dee Hong Lue the "Mystery Pile" for P1,250,000.00 in cash. This is
indeed quite phenomenal and fantastic not to say the utmost degree of finance considering that the
corporation had a subscribed capital stock of only P200,000.00 of which only P50,000.00 was
paid-up at the time of incorporation and with not the least proof showing that it never borrowed
money in its own name from outside source to raise the enormous amount allegedly paid to Dee
Hong Lue nor evidence to show that it had by then in so short a time is five (5) days accumulated
a substantial reserve to meet Dee Hong Lue's selling price.
Furthermore, at first blush it would seem quite difficult to understand why the seven (7)
incorporators and stockholders of the Central Syndicate formed a corporation with a subscribed
capital stock of only P200,000.00, and with cash on hand of only P50,000.00 knowing fully well
that there was a transaction awaiting the newly registered corporation involving an outlay of
P1,250,000.00 in cash. We believe this was done after mature deliberation and for some ulterior
motive. As we see it, the only logical answer is that the incorporator wanted to limit whatever civil
liability that might arise in favor of third persons, as the present tax liability has now arisen, up to
the amount of their subscriptions, although the surplus deal they transacted and which we believe
was the only purpose in the incorporation of the Central Syndicate, was very much over and above
their authorized capital. Moreover, by limiting its capital, the corporation was also able to save on
incidental expenses, such as attorney's fee and the filing fee paid to the Securities and Exchange
Commission, which were based on the amount of the authorized capital stock.

Another mystery worth unravelling is what happened to the P1,181,240.00 (should be

P1,181,000.00) which Dee Hong Lue in his affidavit, Exhibit 15 (p. 144, BIR rec.) claims to have
received from Messrs. Uy Khe Thai, Sy Seng Tong, Alfonso Z. Sycip, Tan Tiong Bio (all
incorporators of the Syndicate) and two others as 'advances' with which to pay the FLC. There is
no evidence on record to show that Dee Hong Lue ever returned this amount to those six (6)
persons after he supposedly received P1,250,000.00 from the newly incorporated Syndicate by
virtue of the Deed of Sale, Exhibit 13. This is the explanation that Dee Hong Lue gave in this
regard as appearing in his affidavit, Exhibit 15: "That soon after the above-mentioned property
was purchased, the above parties, with the exception of Robert Dee Se Wee and Jose S. Lim
decided to join the proposed Central Syndicate and a re-allocation of shares was made for the
reason that some of the above parties in turn had to get advances from third parties." If this were
true, why was it that Messrs. Yu Khe Thai, Sy Seng Tong, Alfonso Z. Sycip and Tan Tiong Bio
who advanced P250,000.00; P375,000.00 and P125,000.00 to Dee Hong Lue were made to appear
in the Articles of incorporation of the Central Syndicate as having subscribed to shares worth only
P40,000.00; P30,000.00; P30,000.00 and P20,000.00 and of having paid only P10,000.00,
P7,500.00, P7,500.00, and P5,000.00 on their subscriptions, respectively? Would it not be more in
keeping with corporate practice, following the explanation of Dee Hong Lue, to just credit those
four (4) persons in the corporation with shares worth the amount advanced by them to Dee Hong
Lue?

On the basis of the above figures, the re-allocation of shares in favor of the four (4) incorporators
who advanced enormous sums for the Syndicate seems at first glance to be totally disproportionate
and unfair to them. However, in the final analysis it is not so as we will now show. Immediately
after the incorporation of the Syndicate, as the evidence shows, Dee Hong Lue was made to
execute a deed of transfer under the guise of a contract of sale, conveying full and complete
ownership of the "Mystery Pile" to the newly organized corporation. So we have, on the face of
the Articles of Incorporation and Exhibit 13, a corporation with assets worth only P50,000.00 cash
owning properties worth over a million pesos. Obviously, the incorporators of the Syndicate,
particularly those four who advanced enormous sums to Dee Hong Lue, are not ordinary
businessmen who could easily be taken for a ride. With the precipitated execution of the "Deed of
Sale" by Dee Hong Lue in favor of the Syndicate, transferring and conveying ownership over the
entire pile to the latter, the recoupment of their advances from the newly acquired assets of the
corporation was sufficiently secured, and at the same time, by making the document appear to be a
deed of sale instead of a deed of transfer as it should be under Article 1891 of the New Civil Code,
they have reduced (at least attempted to) their sales tax liability with the argument that Dee Hong
Lue was the original "purchaser" or "importer" of the goods and therefore the taxable sale was that
one made by him to the Syndicate and not the sales made by the latter to the public. After going
over the Articles of Incorporation of the Central Syndicate and the other circumstances of this
case, we draw the conclusion that it was organized just for this particular transaction that its life
span was expressly limited to two (2) years from and after the date of incorporation just to give it
time to dispose of the "Mystery Pile" to the public and then liquidate all its assets among the seven
incorporators-stockholders as in fact it was done on August 15, 1948; that from the very start, the
 seven (7) incorporators had intended it to be a closed corporation without the least intention of
ever selling to other persons the remaining authorized capital stock of P300,000.00 still
unsubscribed; and, that upon its liquidation, the seven (7) incorporators composing it got much
more than their investments including those who advanced P1,181,000.00 to the FLC for the
corporation.

Petitioners would dispute the finding that Dee Hong Lue merely acted as a trustee of the Central Syndicate
when he purchased the surplus goods in question from the Foreign Liquidation Commission on July 5,
1946 considering that on that date the syndicate has not yet been incorporated on the theory that no legal
relation may exist between parties one of whom has yet no legal existence. Technically this may be true,
but the fact remains that it cannot be denied that Dee Hong Lue purchased the goods on behalf of those
who advanced the money for the purchase thereof who later became the incorporators and only
stockholders of the syndicate with the understanding that the amounts they had respectively advanced
would be their investment and would represent their interest in the corporation. And this is further
evidenced by the fact that this purchase made by Dee Hong Lue was later approved and adopted as the act
of the Central Syndicate itself as can be gleaned from the certificate executed by David Sycip, general
manager of said syndicate, on September 16, 1946, wherein he emphasized that the persons named therein
(from whom Dee Hong Lue obtained the money) merely acted on behalf of the syndicate and in fact were
the ones who went to Leyte to take over the aforesaid surplus goods. In any event, even if Dee Hong Lue
may be deemed as the purchaser of the surplus goods in his own right, nevertheless, the corporation still
may be regarded as the importer of the same goods for the reason that Dee Hong Lue transferred to it all his
rights and interests in the contract with the Foreign Liquidation Commission, and it was said corporation
that took delivery thereof from the place where they were stored in Leyte as may be seen from the letter of
Dee Hong Lue to the Foreign Liquidation Commission dated September 2, 1946 and the letter of the
Central Syndicate to the said Commission bearing the same date. Under these facts, it is clear that the
Central Syndicate is the importer of the surplus goods as correctly observed by Judge Umali in his
concurring opinion, from which we quote: .

It is now well settled that a person who bought surplus goods from the Foreign Liquidation
Commission and who removed the goods bought from the U.S. military bases in the Philippines is
considered an importer of such goods and is subject to the sales tax or compensating tax, as the
case may be. (Go Cheng Tee v. Meer, 47 O.G. 269; Saura Import and Export v. Meer, G.R. No. L-
2927, Jan. 26, 1951; P.M.P. Navigation v. Meer, G.R. No. L-4621, March 24, 1953; Soriano y Cia
v. Coll. of Int. Rev., 51 O.G. 4548.) In this case it appearing that the Central Syndicate was the
owner of the 'Mystery Pile' before its removal from Base K and that it was the one which actually
took delivery thereof and removed the same from the U.S. military base, it is the importer within
the meaning of Section 186 of the Revenue Code, as it stood before the enactment of Republic Act
No. 594, and its sales of the surplus goods are the original sales taxable under said section and not
the sale to it by Dee Hong Lue.

2. Since the Central Syndicate, as we have already pointed out, was the importer of the surplus goods in
question, it was its duty under Section 183 of the Internal Revenue Code to file a return of its gross sales
within 20 days after the end of each quarter in order that the office of the internal revenue may assess the
sales tax that may be due thereon, but, as the record shows, the Central Syndicate failed to file any return of
its quarterly sales on the pretext that it was Dee Hong Lue who imported the surplus goods and it merely
purchased them from said importer. This is in fact what the syndicate intended to impress upon the
Collector when it wrote to him its letter of October 19, 1946 informing him that it purchased from Dee
Hong Lue the entire stock of the surplus goods which the latter had bought from the Foreign Liquidation
Commission and was therefore depositing in his name the sum of P43,750.00 to answer for his sales tax
liability, but this letter certainly cannot be considered as a return that may set in operation the application of
the prescriptive period provided for in Section 331 of the Tax Code, for, evidently, said letter if at all could
only be considered as such in behalf of Dee Hong Lue and not in behalf of the Central Syndicate because
such is the only nature and import of the letter. Besides, how can such letter be considered as a return of the
sales of the Central Syndicate when it was only on February 21, 1947 when it removed the surplus goods in
question from their base at Leyte? How can such return inure to the benefit of the syndicate when the same
surplus goods which were removed on said date could not have been sold by the corporation earlier than
the aforesaid date? It is obvious that the letter of October 19, 1946 cannot possibly be considered as a
return filed by the syndicate and so cannot serve as basis for the computation of the prescriptive period of
five years prescribed by law.

Nor can the fact that the Collector did not include in the assessment a surcharge of 50% serve as an
argument that a return had already been filed, for such failure can only mean that an oversight had been
committed in the non-inclusion of said surcharge. The syndicate having failed to file its quarterly returns as
required by Section 183 of the Tax Code, the period that has to be reckoned with is that embodied in
Section 332 of the same Code which provides that in case of failure to file the return the tax may be
assessed within 10 years after discovery of the falsity, fraud or omission of the payment of the proper tax.
Since it appears that the Collector discovered the failure of the syndicate to file the return only on
September 12, 1951 he has therefore up to September 18, 1961 within which to assess or collect the
deficiency tax in question. Consequently the assessment made on January 4, 1952 was made within the
prescribed period.

3. Petitioners argue (1) that the Court of Tax Appeals acted in excess of its jurisdiction in holding them
liable as officers or directors of the defunct Central Syndicate for the tax liability of the latter; (2) that
petitioners cannot be held liable for said tax liability there being no statutory provision in this jurisdiction
authorizing the government to proceed against the stockholders of a defunct corporation as transferees of
the corporate assets upon liquidation; (3) that assuming that the stockholders can be held so liable, they are
only liable to the extent of the benefits derived by them from the corporation and there is no evidence
showing that petitioners had been the beneficiaries of the defunct syndicate; (4) that considering that the
Collector instituted the present action on September 23, 1954 when he filed his answer to the appeal of
petitioners, said action was already barred by prescription pursuant to Sections 77 and 78 of the
Corporation Law which allows corporations to continue as a body corporate only for three years from its
dissolution; and (5) that assuming that petitioners are liable to pay the tax, their liability is not solidary, but
only limited to the benefits derived by them from the corporation.

It should be stated at the outset that it was petitioners themselves who caused their substitution as parties in
the present case, being the successors-in-interest of the defunct syndicate, when they appealed this case to
the Supreme Court for which reason the latter Court declared that "the respondent Court of Tax Appeals
should have allowed the substitution of its former officers and directors is parties-appellants, since they are
proper parties in interest insofar as they may be (and in fact are) held personally liable for the unpaid
deficiency assessments made by the Collector of Internal Revenue against the defunct Syndicate." In fact,
because of this directive their substitution was effected. They cannot, therefore, be now heard to complain
if they are made responsible for the tax liability of the defunct syndicate whose representation they
assumed and whose assets were distributed among them.

In the second place, there is good authority to the effect that the creditor of a dissolved corporation may
follow its assets once they passed into the hands of the stockholders. Thus, recognized are the following
rules in American jurisprudence: The dissolution of a corporation does not extinguish the debts due or
owing to it (Bacon v. Robertson, 18 How. 480, 15 L. Ed., 406; Curron v. State, 16 How. 304, 14 L. Ed.,
705). A creditor of a dissolve corporation may follow its assets, as in the nature of a trust fund, into the
hands of its stockholders (MacWilliams v. Excelsier Coal Co. [1924] 298 Fed. 384). An indebtedness of a
corporation to the federal government for income and excess profit taxes is not extinguished by the
dissolution of the corporation (Quinn v. McLeudon, 152 Ark. 271, 238 S.W., 32). And it has been stated,
with reference to the effect of dissolution upon taxes due from a corporation, "that the hands of the
government cannot, of course, collect taxes from a defunct corporation, it loses thereby none of its rights to
assess taxes which had been due from the corporation, and to collect them from persons, who by reason of
transactions with the corporation, hold property against which the tax can be enforced and that the legal
death of the corporation no more prevents such action than would the physical death of an individual
prevent the government from assessing taxes against him and collecting them from his administrator, who
holds the property which the decedent had formerly possessed" (Wonder Bakeries Co. v. U.S. [1934] Ct.
Cl. 6 F. Supp. 288). Bearing in mind that our corporation law is of American origin, the foregoing
authorities have persuasive effect in considering similar cases in this jurisdiction. This must have been
taken into account when in G.R. No. L-8800 this Court said that petitioners could be held personally liable
for the taxes in question as successors-in-interest of the defunct corporation.

Considering that the Central Syndicate realized from the sale of the surplus goods a net profit of
P229,073.83, and that the sale of said goods was the only transaction undertaken by said syndicate, there
being no evidence to the contrary, the conclusion is that said net profit remained intact and was distributed
among the stockholders when the corporation liquidated and distributed its assets on August 15, 1948,
immediately after the sale of the said surplus goods. Petitioners are therefore the beneficiaries of the
defunct corporation and as such should be held liable to pay the taxes in question. However, there being no
express provision requiring the stockholders of the corporation to be solidarily liable for its debts which
liability must be express and cannot be presumed, petitioners should be held to be liable for the tax in
question only in proportion to their shares in the distribution of the assets of the defunct corporation. The
decision of the trial court should be modified accordingly.

WHEREFORE, with the above modification, we hereby affirm the decision appealed from, with costs
against petitioners.

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
MANUEL B. PINEDA, as one of the heirs of deceased ATANASIO PINEDA, respondent.

Office of the Solicitor General for petitioner.

Manuel B. Pineda for and in his own behalf as respondent.

BENGZON, J.P., J.:

On May 23, 1945 Atanasio Pineda died, survived by his wife, Felicisima Bagtas, and 15 children, the eldest
of whom is Manuel B. Pineda, a lawyer. Estate proceedings were had in the Court of First Instance of
Manila (Case No. 71129) wherein the surviving widow was appointed administratrix. The estate was
divided among and awarded to the heirs and the proceedings terminated on June 8, 1948. Manuel B.
Pineda's share amounted to about P2,500.00.

After the estate proceedings were closed, the Bureau of Internal Revenue investigated the income tax
liability of the estate for the years 1945, 1946, 1947 and 1948 and it found that the corresponding income
tax returns were not filed. Thereupon, the representative of the Collector of Internal Revenue filed said
returns for the estate on the basis of information and data obtained from the aforesaid estate proceedings
and issued an assessment for the following:

1. Deficiency income tax

1945 P135.83
1946 436.95
1947 1,206.91 P1,779.69
Add: 5% surcharge 88.98
1% monthly interest from November 30, 1953
to April 15, 1957 720.77
Compromise for late filing 80.00
Compromise for late payment 40.00
Total amount due
 P2,707.44
===========
P14.50
2. Additional residence tax for 1945
===========
3. Real Estate dealer's tax for the fourth quarter of 1946 P207.50
and the whole year of 1947 ===========

Manuel B. Pineda, who received the assessment, contested the same. Subsequently, he appealed to the
Court of Tax Appeals alleging that he was appealing "only that proportionate part or portion pertaining to
him as one of the heirs."

After hearing the parties, the Court of Tax Appeals rendered judgment reversing the decision of the
Commissioner on the ground that his right to assess and collect the tax has prescribed. The Commissioner
appealed and this Court affirmed the findings of the Tax Court in respect to the assessment for income tax
for the year 1947 but held that the right to assess and collect the taxes for 1945 and 1946 has not
prescribed. For 1945 and 1946 the returns were filed on August 24, 1953; assessments for both taxable
years were made within five years therefrom or on October 19, 1953; and the action to collect the tax was
filed within five years from the latter date, on August 7, 1957. For taxable year 1947, however, the return
was filed on March 1, 1948; the assessment was made on October 19, 1953, more than five years from the
date the return was filed; hence, the right to assess income tax for 1947 had prescribed. Accordingly, We
remanded the case to the Tax Court for further appropriate proceedings. 1

In the Tax Court, the parties submitted the case for decision without additional evidence.

On November 29, 1963 the Court of Tax Appeals rendered judgment holding Manuel B. Pineda liable for
the payment corresponding to his share of the following taxes:

Deficiency income tax

P135.8
1945
3
1946 436.95
Real estate dealer's fixed tax 4th
quarter of 1946 and whole year of
1947 P187.50

The Commissioner of Internal Revenue has appealed to Us and has proposed to hold Manuel B. Pineda
liable for the payment of all the taxes found by the Tax Court to be due from the estate in the total amount
of P760.28 instead of only for the amount of taxes corresponding to his share in the estate.1awphîl.nèt

Manuel B. Pineda opposes the proposition on the ground that as an heir he is liable for unpaid income tax
due the estate only up to the extent of and in proportion to any share he received. He relies on Government
of the Philippine Islands v. Pamintuan2 where We held that "after the partition of an estate, heirs and
distributees are liable individually for the payment of all lawful outstanding claims against the estate in
proportion to the amount or value of the property they have respectively received from the estate."

We hold that the Government can require Manuel B. Pineda to pay the full amount of the taxes assessed.

Pineda is liable for the assessment as an heir and as a holder-transferee of property belonging to the
estate/taxpayer. As an heir he is individually answerable for the part of the tax proportionate to the share he
received from the inheritance. 3 His liability, however, cannot exceed the amount of his share. 4
As a holder of property belonging to the estate, Pineda is liable for he tax up to the amount of the property
in his possession. The reason is that the Government has a lien on the P2,500.00 received by him from the
estate as his share in the inheritance, for unpaid income taxes 4a for which said estate is liable, pursuant to
the last paragraph of Section 315 of the Tax Code, which we quote hereunder:

If any person, corporation, partnership, joint-account (cuenta en participacion), association, or

insurance company liable to pay the income tax, neglects or refuses to pay the same after demand,
the amount shall be a lien in favor of the Government of the Philippines from the time when the
assessment was made by the Commissioner of Internal Revenue until paid with interest, penalties,
and costs that may accrue in addition thereto upon all property and rights to property belonging to
the taxpayer: . . .

By virtue of such lien, the Government has the right to subject the property in Pineda's possession, i.e., the
P2,500.00, to satisfy the income tax assessment in the sum of P760.28. After such payment, Pineda will
have a right of contribution from his co-heirs,5 to achieve an adjustment of the proper share of each heir in
the distributable estate.

All told, the Government has two ways of collecting the tax in question. One, by going after all the heirs
and collecting from each one of them the amount of the tax proportionate to the inheritance received. This
remedy was adopted in Government of the Philippine Islands v. Pamintuan, supra. In said case, the
Government filed an action against all the heirs for the collection of the tax. This action rests on the
concept that hereditary property consists only of that part which remains after the settlement of all lawful
claims against the estate, for the settlement of which the entire estate is first liable.6 The reason why in case
suit is filed against all the heirs the tax due from the estate is levied proportionately against them is to
achieve thereby two results: first, payment of the tax; and second, adjustment of the shares of each heir in
the distributed estate as lessened by the tax.

Another remedy, pursuant to the lien created by Section 315 of the Tax Code upon all property and rights
to property belonging to the taxpayer for unpaid income tax, is by subjecting said property of the estate
which is in the hands of an heir or transferee to the payment of the tax due, the estate. This second remedy
is the very avenue the Government took in this case to collect the tax. The Bureau of Internal Revenue
should be given, in instances like the case at bar, the necessary discretion to avail itself of the most
expeditious way to collect the tax as may be envisioned in the particular provision of the Tax Code above
quoted, because taxes are the lifeblood of government and their prompt and certain availability is an
imperious need.7 And as afore-stated in this case the suit seeks to achieve only one objective: payment of
the tax. The adjustment of the respective shares due to the heirs from the inheritance, as lessened by the tax,
is left to await the suit for contribution by the heir from whom the Government recovered said tax.

WHEREFORE, the decision appealed from is modified. Manuel B. Pineda is hereby ordered to pay to the
Commissioner of Internal Revenue the sum of P760.28 as deficiency income tax for 1945 and 1946, and
real estate dealer's fixed tax for the fourth quarter of 1946 and for the whole year 1947, without prejudice to
his right of contribution for his co-heirs. No costs. So ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ.,
concur.

INDIRECT TAX

G.R. No. 88291 June 8, 1993

ERNESTO M. MACEDA, petitioner,

vs.
HON. CATALINO MACARAIG, JR., in his capacity as Executive Secretary, Office of the President, HON. VICENTE JAYME,
ETC., ET AL., respondents.
Angara, Abello, Concepcion & Cruz for respondent Pilipinas Shell Petroleum Corporation.

Siguion Reyna, Montecillo & Ongsiako for Caltex.

NOCON, J.:

Just like lightning which does strike the same place twice in some instances, this matter of indirect tax exemption of the private
respondent National Power Corporation (NPC) is brought to this Court a second time. Unfazed by the Decision We promulgated
on May 31, 19911 petitioner Ernesto Maceda asks this Court to reconsider said Decision. Lest We be criticized for denying due
process to the petitioner. We have decided to take a second look at the issues. In the process, a hearing was held on July 9, 1992
where all parties presented their respective arguments. Etched in this Court's mind are the paradoxical claims by both petitioner
and private respondents that their respective positions are for the benefit of the Filipino people.

A Chronological review of the relevant NPC laws, specially with respect to its tax exemption provisions, at the risk of being
repetitious is, therefore, in order.

On November 3, 1936, Commonwealth Act No. 120 was enacted creating the National Power Corporation, a public corporation,
mainly to develop hydraulic power from all water sources in the Philippines.2 The sum of P250,000.00 was appropriated out of the
funds in the Philippine Treasury for the purpose of organizing the NPC and conducting its preliminary work.3 The main source of
funds for the NPC was the flotation of bonds in the capital markets4 and these bonds

. . . issued under the authority of this Act shall be exempt from the payment of all taxes by the
Commonwealth of the Philippines, or by any authority, branch, division or political subdivision thereof and
subject to the provisions of the Act of Congress, approved March 24, 1934, otherwise known as the Tydings
McDuffle Law, which facts shall be stated upon the face of said bonds. . . . .5

On June 24, 1938, C.A. No. 344 was enacted increasing to P550,000.00 the funds needed for the initial operations of the NPC
and reiterating the provision of the flotation of bonds as soon as the first construction of any hydraulic power project was to be
decided by the NPC Board.6 The provision on tax exemption in relation to the issuance of the NPC bonds was neither amended
nor deleted.

On September 30, 1939, C.A. No. 495 was enacted removing the provision on the payment of the bond's principal and interest in
"gold coins" but adding that payment could be made in United States dollars.7 The provision on tax exemption in relation to the
issuance of the NPC bonds was neither amended nor deleted.

On June 4, 1949, Republic Act No. 357 was enacted authorizing the President of the Philippines to guarantee, absolutely and
unconditionally, as primary obligor, the payment of any and all NPC loans.8 He was also authorized to contract on behalf of the
NPC with the International Bank for Reconstruction and Development (IBRD) for NPC loans for the accomplishment of NPC's
corporate objectives9 and for the reconstruction and development of the economy of the country. 10 It was expressly stated that:

Any such loan or loans shall be exempt from taxes, duties, fees, imposts, charges, contributions and
restrictions of the Republic of the Philippines, its provinces, cities and municipalities. 11

On the same date, R.A. No. 358 was enacted expressly authorizing the NPC, for the first time, to incur other types of
indebtedness, aside from indebtedness incurred by flotation of bonds. 12 As to the pertinent tax exemption provision, the law
stated as follows:

To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all taxes,
duties, fees, imposts, charges, and restrictions of the Republic of the Philippines, its provinces, cities and
municipalities. 13

On July 10, 1952, R.A. No. 813 was enacted amending R.A. No. 357 in that, aside from the IBRD, the President of the Philippines
was authorized to negotiate, contract and guarantee loans with the Export-Import Bank of of Washigton, D.C., U.S.A., or any other
international financial institution. 14 The tax provision for repayment of these loans, as stated in R.A. No. 357, was not amended.

On June 2, 1954, R.A. No. 987 was enacted specifically to withdraw NPC's tax exemption for real estate taxes. As enacted, the
law states as follows:
 To facilitate payment of its indebtedness, the National Power Corporation shall be exempt from all taxes,
except real property tax, and from all duties, fees, imposts, charges, and restrictions of the Republic of the
Philippines, its provinces, cities, and municipalities.15

On September 8, 1955, R.A. No. 1397 was enacted directing that the NPC projects to be funded by the increased indebtedness
16 should bear the National Economic Council's stamp of approval. The tax exemption provision related to the payment of this
total indebtedness was not amended nor deleted.

On June 13, 1958, R.A. No. 2055 was enacted increasing the total amount of foreign loans NPC was authorized to incur to
US$100,000,000.00 from the US$50,000,000.00 ceiling in R.A. No. 357. 17 The tax provision related to the repayment of these
loans was not amended nor deleted.

On June 13, 1958, R.A. No. 2058 was enacting fixing the corporate life of NPC to December 31, 2000. 18 All laws or provisions of
laws and executive orders contrary to said R.A. No. 2058 were expressly repealed. 19

On June 18, 1960, R.A. No 2641 was enacted converting the NPC from a public corporation into a stock corporation with an
authorized capital stock of P100,000,000.00 divided into 1,000.000 shares having a par value of P100.00 each, with said capital
stock wholly subscribed to by the Government. 20 No tax exemption was incorporated in said Act.

On June 17, 1961, R.A. No. 3043 was enacted increasing the above-mentioned authorized capital stock to P250,000,000.00 with
the increase to be wholly subscribed by the Government. 21 No tax provision was incorporated in said Act.

On June 17, 1967, R.A. No 4897 was enacted. NPC's capital stock was increased again to P300,000,000.00, the increase to be
wholly subscribed by the Government. No tax provision was incorporated in said Act. 22

On September 10, 1971, R.A. No. 6395 was enacted revising the charter of the NPC, C.A. No. 120, as amended. Declared as
primary objectives of the nation were:

Declaration of Policy. — Congress hereby declares that (1) the comprehensive development, utilization and
conservation of Philippine water resources for all beneficial uses, including power generation, and (2) the
total electrification of the Philippines through the development of power from all sources to meet the needs
of industrial development and dispersal and the needs of rural electrification are primary objectives of the
nation which shall be pursued coordinately and supported by all instrumentalities and agencies of the
government, including the financial institutions. 23

Section 4 of C.A. No. 120, was renumbered as Section 8, and divided into sections 8 (a) (Authority to incur Domestic
Indebtedness) and Section 8 (b) (Authority to Incur Foreign Loans).

As to the issuance of bonds by the NPC, Paragraph No. 3 of Section 8(a), states as follows:

The bonds issued under the authority of this subsection shall be exempt from the payment of all taxes by the
Republic of the Philippines, or by any authority, branch, division or political subdivision thereof which facts
shall be stated upon the face of said bonds. . . . 24

As to the foreign loans the NPC was authorized to contract, Paragraph No. 5, Section 8(b), states as follows:

The loans, credits and indebtedness contracted under this subsection and the payment of the principal,
interest and other charges thereon, as well as the importation of machinery, equipment, materials and
supplies by the Corporation, paid from the proceeds of any loan, credit or indebtedeness incurred under this
Act, shall also be exempt from all taxes, fees, imposts, other charges and restrictions, including import
restrictions, by the Republic of the Philippines, or any of its agencies and political subdivisions. 25

A new section was added to the charter, now known as Section 13, R.A. No. 6395, which declares the non-profit character and tax
exemptions of NPC as follows:

The Corporation shall be non-profit and shall devote all its returns from its capital investment, as well as
excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and
obligations and in furtherance and effective implementation of the policy enunciated in Section one of this
Act, the Corporation is hereby declared exempt:

(a) From the payment of all taxes, duties, fees, imposts, charges costs and service fees in any court or
administrative proceedings in which it may be a party, restrictions and duties to the Republic of the
Philippines, its provinces, cities, and municipalities and other government agencies and instrumentalities;
 (b) From all income taxes, franchise taxes and realty taxes to be paid to the National Government, its
provinces, cities, municipalities and other government agencies and instrumentalities;

(c) From all import duties, compensating taxes and advanced sales tax, and wharfage fees on import of
foreign goods required for its operations and projects; and

(d) From all taxes, duties, fees, imposts and all other charges its provinces, cities, municipalities and other
government agencies and instrumentalities, on all petroleum products used by the Corporation in the
generation, transmission, utilization, and sale of electric power. 26

On November 7, 1972, Presidential Decree No. 40 was issued declaring that the electrification of the entire
country was one of the primary concerns of the country. And in connection with this, it was specifically stated
that:

The setting up of transmission line grids and the construction of associated generation facilities in Luzon,
Mindanao and major islands of the country, including the Visayas, shall be the responsibility of the National
Power Corporation (NPC) as the authorized implementing agency of the State. 27

xxx xxx xxx

It is the ultimate objective of the State for the NPC to own and operate as a single integrated system all
generating facilities supplying electric power to the entire area embraced by any grid set up by the NPC. 28

On January 22, 1974, P.D. No. 380 was issued giving extra powers to the NPC to enable it to fulfill its role under aforesaid P.D.
No. 40. Its authorized capital stock was raised to P2,000,000,000.00, 29 its total domestic indebtedness was pegged at a
maximum of P3,000,000,000.00 at any one time, 30 and the NPC was authorized to borrow a total of US$1,000,000,000.00 31 in
foreign loans.

The relevant tax exemption provision for these foreign loans states as follows:

The loans, credits and indebtedness contracted under this subsection and the payment of the principal,
interest and other charges thereon, as well as the importation of machinery, equipment, materials, supplies
and services, by the Corporation, paid from the proceeds of any loan, credit or indebtedness incurred under
this Act, shall also be exempt from all direct and indirect taxes, fees, imposts, other charges and restrictions,
including import restrictions previously and presently imposed, and to be imposed by the Republic of the
Philippines, or any of its agencies and political subdivisions. 32 (Emphasis supplied)

Section 13(a) and 13(d) of R.A. No 6395 were amended to read as follows:

(a) From the payment of all taxes, duties, fees, imposts, charges and restrictions to the Republic of the
Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities
including the taxes, duties, fees, imposts and other charges provided for under the Tariff and Customs Code
of the Philippines, Republic Act Numbered Nineteen Hundred Thirty-Seven, as amended, and as further
amended by Presidential Decree No. 34 dated October 27, 1972, and Presidential Decree No. 69, dated
November 24, 1972, and costs and service fees in any court or administrative proceedings in which it may
be a party;

xxx xxx xxx

(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the Republic
of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities,
on all petroleum products used by the Corporation in the generation, transmission, utilization and sale of
electric power. 33 (Emphasis supplied)

On February 26, 1970, P.D. No. 395 was issued removing certain restrictions in the NPC's sale of electricity to its different
customers. 34 No tax exemption provision was amended, deleted or added.

On July 31, 1975, P.D. No. 758 was issued directing that P200,000,000.00 would be appropriated annually to cover the unpaid
subscription of the Government in the NPC authorized capital stock, which amount would be taken from taxes accruing to the
General Funds of the Government, proceeds from loans, issuance of bonds, treasury bills or notes to be issued by the Secretary
of Finance for this particular purpose. 35

On May 27, 1976 P.D. No. 938 was issued

 (I)n view of the accelerated expansion programs for generation and transmission facilities which includes
nuclear power generation, the present capitalization of National Power Corporation (NPC) and the ceilings
for domestic and foreign borrowings are deemed insufficient; 36

xxx xxx xxx

(I)n the application of the tax exemption provisions of the Revised Charter, the non-profit character of NPC
has not been fully utilized because of restrictive interpretation of the taxing agencies of the government on
said provisions; 37

xxx xxx xxx

(I)n order to effect the accelerated expansion program and attain the declared objective of total electrification
of the country, further amendments of certain sections of Republic Act No. 6395, as amended by
Presidential Decrees Nos. 380, 395 and 758, have become imperative; 38

Thus NPC's capital stock was raised to P8,000,000,000.00, 39 the total domestic indebtedness ceiling was increased to
P12,000,000,000.00, 40 the total foreign loan ceiling was raised to US$4,000,000,000.00 41 and Section 13 of R.A. No. 6395,
was amended to read as follows:

The Corporation shall be non-profit and shall devote all its returns from its capital investment as well as
excess revenues from its operation, for expansion. To enable the Corporation to pay to its indebtedness and
obligations and in furtherance and effective implementation of the policy enunciated in Section one of this
Act, the Corporation, including its subsidiaries, is hereby declared exempt from the payment of all forms of
taxes, duties, fees, imposts as well as costs and service fees including filing fees, appeal bonds,
supersedeas bonds, in any court or administrative proceedings. 42

II

On the other hand, the pertinent tax laws involved in this controversy are P.D. Nos. 882, 1177, 1931 and Executive Order No. 93
(S'86).

On January 30, 1976, P.D. No. 882 was issued withdrawing the tax exemption of NPC with regard to imports as follows:

WHEREAS, importations by certain government agencies, including government-owned or controlled

corporation, are exempt from the payment of customs duties and compensating tax; and

WHEREAS, in order to reduce foreign exchange spending and to protect domestic industries, it is necessary
to restrict and regulate such tax-free importations.

NOW THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue of the powers
vested in me by the Constitution, and do hereby decree and order the following:

Sec. 1. All importations of any government agency, including government-owned or controlled corporations
which are exempt from the payment of customs duties and internal revenue taxes, shall be subject to the
prior approval of an Inter-Agency Committee which shall insure compliance with the following conditions:

(a) That no such article of local manufacture are available in sufficient quantity and comparable quality at
reasonable prices;

(b) That the articles to be imported are directly and actually needed and will be used exclusively by the
grantee of the exemption for its operations and projects or in the conduct of its functions; and

(c) The shipping documents covering the importation are in the name of the grantee to whom the goods
shall be delivered directly by customs authorities.

xxx xxx xxx

Sec. 3. The Committee shall have the power to regulate and control the tax-free importation of government
agencies in accordance with the conditions set forth in Section 1 hereof and the regulations to be
promulgated to implement the provisions of this Decree. Provided, however, That any government agency or
government-owned or controlled corporation, or any local manufacturer or business firm adversely affected
 by any decision or ruling of the Inter-Agency Committee may file an appeal with the Office of the President
within ten days from the date of notice thereof. . . . .

xxx xxx xxx

Sec. 6. . . . . Section 13 of Republic Act No. 6395; . . .. and all similar provisions of all general and special
laws and decrees are hereby amended accordingly.

xxx xxx xxx

On July 30, 1977, P.D. 1177 was issued as it was

. . . declared the policy of the State to formulate and implement a National Budget that is an instrument of
national development, reflective of national objectives, strategies and plans. The budget shall be supportive
of and consistent with the socio-economic development plan and shall be oriented towards the achievement
of explicit objectives and expected results, to ensure that funds are utilized and operations are conducted
effectively, economically and efficiently. The national budget shall be formulated within a context of a
regionalized government structure and of the totality of revenues and other receipts, expenditures and
borrowings of all levels of government-owned or controlled corporations. The budget shall likewise be
prepared within the context of the national long-term plan and of a long-term budget program. 43

In line with such policy, the law decreed that

All units of government, including government-owned or controlled corporations, shall pay income taxes, customs duties and other
taxes and fees are imposed under revenues laws: provided, that organizations otherwise exempted by law from the payment of
such taxes/duties may ask for a subsidy from the General Fund in the exact amount of taxes/duties due: provided, further, that a
procedure shall be established by the Secretary of Finance and the Commissioner of the Budget, whereby such subsidies shall
automatically be considered as both revenue and expenditure of the General Fund. 44

The law also declared that —

[A]ll laws, decrees, executive orders, rules and regulations or parts thereof which are inconsistent with the
provisions of the Decree are hereby repealed and/or modified accordingly. 45

On July 11, 1984, most likely due to the economic morass the Government found itself in after the Aquino assassination, P.D. No.
1931 was issued to reiterate that:

WHEREAS, Presidential Decree No. 1177 has already expressly repealed the grant of tax privileges to any
government-owned or controlled corporation and all other units of government; 46

and since there was a

. . . need for government-owned or controlled corporations and all other units of government enjoying tax
privileges to share in the requirements of development, fiscal or otherwise, by paying the duties, taxes and
other charges due from them. 47

it was decreed that:

Sec. 1. The provisions of special on general law to the contrary notwithstanding, all exemptions from the
payment of duties, taxes, fees, imposts and other charges heretofore granted in favor of government-owned
or controlled corporations including their subsidiaries, are hereby withdrawn.

Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the recommendation of the
Fiscal Incentives Review Board created under Presidential Decree No. 776, is hereby empowered to
restore, partially or totally, the exemptions withdrawn by Section 1 above, any applicable tax and duty, taking
into account, among others, any or all of the following:

1) The effect on the relative price levels;

2) The relative contribution of the corporation to the revenue generation effort;

3) The nature of the activity in which the corporation is engaged in; or

 4) In general the greater national interest to be served.

xxx xxx xxx

Sec. 5. The provisions of Presidential Decree No. 1177 as well as all other laws, decrees, executive orders,
administrative orders, rules, regulations or parts thereof which are inconsistent with this Decree are hereby
repealed, amended or modified accordingly.

On December 17, 1986, E.O. No. 93 (S'86) was issued with a view to correct presidential restoration or grant of tax exemption to
other government and private entities without benefit of review by the Fiscal Incentives Review Board, to wit:

WHEREAS, Presidential Decree Nos. 1931 and 1955 issued on June 11, 1984 and October 14, 1984,
respectively, withdrew the tax and duty exemption privileges, including the preferential tax treatment, of
government and private entities with certain exceptions, in order that the requirements of national economic
development, in terms of fiscals and other resources, may be met more adequately;

xxx xxx xxx

WHEREAS, in addition to those tax and duty exemption privileges were restored by the Fiscal Incentives
Review Board (FIRB), a number of affected entities, government and private, had their tax and duty
exemption privileges restored or granted by Presidential action without benefit or review by the Fiscal
Incentives Review Board (FIRB);

xxx xxx xxx

Since it was decided that:

[A]ssistance to government and private entities may be better provided where necessary by explicit subsidy
and budgetary support rather than tax and duty exemption privileges if only to improve the fiscal monitoring
aspects of government operations.

It was thus ordered that:

Sec. 1. The Provisions of any general or special law to the contrary notwithstanding, all tax and duty
incentives granted to government and private entities are hereby withdrawn, except:

a) those covered by the non-impairment clause of the Constitution;

b) those conferred by effective internation agreement to which the Government of the Republic of the
Philippines is a signatory;

c) those enjoyed by enterprises registered with:

(i) the Board of Investment pursuant to Presidential Decree No. 1789, as amended;

(ii) the Export Processing Zone Authority, pursuant to Presidential Decree No. 66 as
amended;

(iii) the Philippine Veterans Investment Development Corporation Industrial Authority

pursuant to Presidential Decree No. 538, was amended.

d) those enjoyed by the copper mining industry pursuant to the provisions of Letter of Instructions No. 1416;

e) those conferred under the four basic codes namely:

(i) the Tariff and Customs Code, as amended;

(ii) the National Internal Revenue Code, as amended;

(iii) the Local Tax Code, as amended;

 (iv) the Real Property Tax Code, as amended;

f) those approved by the President upon the recommendation of the Fiscal Incentives
Review Board.

Sec. 2. The Fiscal Incentives Review Board created under Presidential Decree No. 776, as amended, is
hereby authorized to:

a) restore tax and/or duty exemptions withdrawn hereunder in whole or in part;

b) revise the scope and coverage of tax and/or duty exemption that may be restored;

c) impose conditions for the restoration of tax and/or duty exemption;

d) prescribe the date of period of effectivity of the restoration of tax and/or duty exemption;

e) formulate and submit to the President for approval, a complete system for the grant of subsidies to
deserving beneficiaries, in lieu of or in combination with the restoration of tax and duty exemptions or
preferential treatment in taxation, indicating the source of funding therefor, eligible beneficiaries and the
terms and conditions for the grant thereof taking into consideration the international commitment of the
Philippines and the necessary precautions such that the grant of subsidies does not become the basis for
countervailing action.

Sec. 3. In the discharge of its authority hereunder, the Fiscal Incentives Review Board shall take into
account any or all of the following considerations:

a) the effect on relative price levels;

b) relative contribution of the beneficiary to the revenue generation effort;

c) nature of the activity the beneficiary is engaged; and

d) in general, the greater national interest to be served.

xxx xxx xxx

Sec. 5. All laws, orders, issuances, rules and regulations or parts thereof inconsistent with this Executive
Order are hereby repealed or modified accordingly.

E.O. No. 93 (S'86) was decreed to be effective 48 upon the promulgation of the rules and regulations, to be issued by the Ministry
of Finance. 49 Said rules and regulations were promulgated and published in the Official Gazette
on February 23, 1987. These became effective on the 15th day after promulgation 50 in the Official Gasetter, 51 which 15th day
was March 10, 1987.

III

Now to some definitions. We refer to the very simplistic approach that all would-be lawyers, learn in their TAXATION I course,
which fro convenient reference, is as follows:

Classifications or kinds of Taxes:

According to Persons who pay or who bear the burden:

a. Direct Tax — the where the person supposed to pay the tax really pays it. WITHOUT transferring the
burden to someone else.

Examples: Individual income tax, corporate income tax, transfer taxes (estate tax, donor's tax), residence
tax, immigration tax

b. Indirect Tax — that where the tax is imposed upon goods BEFORE reaching the consumer who ultimately
pays for it, not as a tax, but as a part of the purchase price.
 Examples: the internal revenue indirect taxes (specific tax, percentage taxes, (VAT) and the tariff and
customs indirect taxes (import duties, special import tax and other dues) 52

IV

To simply matter, the issues raised by petitioner in his motion for reconsideration can be reduced to the following:

(1) What kind of tax exemption privileges did NPC have?

(2) For what periods in time were these privileges being enjoyed?

(3) If there are taxes to be paid, who shall pay for these taxes?

Petitioner contends that P.D. No. 938 repealed the indirect tax exemption of NPC as the phrase "all forms of taxes etc.," in its
section 10, amending Section 13, R.A. No. 6395, as amended by P.D. No. 380, does not expressly include "indirect taxes."

His point is not well-taken.

A chronological review of the NPC laws will show that it has been the lawmaker's intention that the NPC was to be completely tax
exempt from all forms of taxes — direct and indirect.

NPC's tax exemptions at first applied to the bonds it was authorized to float to finance its operations upon its creation by virtue of
C.A. No. 120.

When the NPC was authorized to contract with the IBRD for foreign financing, any loans obtained were to be completely tax
exempt.

After the NPC was authorized to borrow from other sources of funds — aside issuance of bonds — it was again specifically
exempted from all types of taxes "to facilitate payment of its indebtedness." Even when the ceilings for domestic and foreign
borrowings were periodically increased, the tax exemption privileges of the NPC were maintained.

NPC's tax exemption from real estate taxes was, however, specifically withdrawn by Rep. Act No. 987, as above stated. The
exemption was, however, restored by R.A. No. 6395.

Section 13, R.A. No. 6395, was very comprehensive in its enumeration of the tax exemptions allowed NPC. Its section 13(d) is the
starting point of this bone of contention among the parties. For easy reference, it is reproduced as follows:

[T]he Corporation is hereby declared exempt:

xxx xxx xxx

(d) From all taxes, duties, fees, imposts and all other charges imposed by the Republic of the Philippines, its
provinces, cities, municipalities and other government agencies and instrumentalities, on all petroleum
products used by the Corporation in the generation, transmission, utilization, and sale of electric power.

P.D. No. 380 added phrase "directly or indirectly" to said Section 13(d), which now reads as follows:

xxx xxx xxx

(d) From all taxes, duties, fees, imposts, and all other charges imposed directly or indirectly by the Republic
of the Philippines, its provinces, cities, municipalities and other government agencies and instrumentalities,
on all petroleum products used by the Corporation in the generation, transmission, utilization and sale of
electric power. (Emphasis supplied)

Then came P.D. No. 938 which amended Sec. 13(a), (b), (c) and (d) into one very simple paragraph as follows:

The Corporation shall be non-profit and shall devote all its returns from its capital investment as well as
excess revenues from its operation, for expansion. To enable the Corporation to pay its indebtedness and
obligations and in furtherance and effective implementation of the policy enunciated in Section one of this
 Act, the Corporation, including its subsidiaries, is hereby declared exempt from the payment of ALL FORMS
OF taxes, duties, fees, imposts as well as costs and service fees including filing fees, appeal bonds,
supersedeas bonds, in any court or administrative proceedings. (Emphasis supplied)

Petitioner reminds Us that:

[I]t must be borne in mind that Presidential Decree Nos. 380

and 938 were issued by one man, acting as such the Executive and Legislative. 53

xxx xxx xxx

[S]ince both presidential decrees were made by the same person, it would have been very easy for him to
retain the same or similar language used in P.D. No. 380 P.D. No. 938 if his intention were to preserve the
indirect tax exemption of NPC. 54

Actually, P.D. No. 938 attests to the ingenuousness of then President Marcos no matter what his fault were. It should be noted
that section 13, R.A. No. 6395, provided for tax exemptions for the following items:

13(a) : court or administrative proceedings;

13(b) : income, franchise, realty taxes;

13(c) : import of foreign goods required for its operations and projects;

13(d) : petroleum products used in generation of electric power.

P.D. No. 938 lumped up 13(b), 13(c), and 13(d) into the phrase "ALL FORMS OF TAXES, ETC.,", included 13(a) under the "as
well as" clause and added PNOC subsidiaries as qualified for tax exemptions.

This is the only conclusion one can arrive at if he has read all the NPC laws in the order of enactment or issuance as narrated
above in part I hereof. President Marcos must have considered all the NPC statutes from C.A. No. 120 up to its latest
amendments, P.D. No. 380, P.D. No. 395 and P.D. No. 759, AND came up 55 with a very simple Section 13, R.A. No. 6395, as
amended by P.D. No. 938.

One common theme in all these laws is that the NPC must be enable to pay its indebtedness 56 which, as of P.D. No. 938, was
P12 Billion in total domestic indebtedness, at any one time, and U$4 Billion in total foreign loans at any one time. The NPC must
be and has to be exempt from all forms of taxes if this goal is to be achieved.

By virtue of P.D. No. 938 NPC's capital stock was raised to P8 Billion. It must be remembered that to pay the government share in
its capital stock P.D. No. 758 was issued mandating that P200 Million would be appropriated annually to cover the said unpaid
subscription of the Government in NPC's authorized capital stock. And significantly one of the sources of this annual appropriation
of P200 million is TAX MONEY accruing to the General Fund of the Government. It does not stand to reason then that former
President Marcos would order P200 Million to be taken partially or totally from tax money to be used to pay the Government
subscription in the NPC, on one hand, and then order the NPC to pay all its indirect taxes, on the other.

The above conclusion that then President Marcos lumped up Sections 13 (b), 13 (c) and (d) into the phrase "All FORMS OF" is
supported by the fact that he did not do the same for the tax exemption provision for the foreign loans to be incurred.

The tax exemption on foreign loans found in Section 8(b), R.A. No. 6395, reads as follows:

The loans, credits and indebtedness contracted under this subsection and the payment of the principal,
interest and other charges thereon, as well as the importation of machinery, equipment, materials and
supplies by the Corporation, paid from the proceeds of any loan, credit or indebtedness incurred under this
Act, shall also be exempt from all taxes, fees, imposts, other charges and restrictions, including import
restrictions, by the Republic of the Philippines, or any of its agencies and political subdivisions. 57

The same was amended by P.D. No. 380 as follows:

The loans, credits and indebtedness contracted this subsection and the payment of the principal, interest
and other charges thereon, as well as the importation of machinery, equipment, materials, supplies and
services, by the Corporation, paid from the proceeds of any loan, credit or indebtedness incurred under this
Act, shall also be exempt from all direct and indirect taxes, fees, imposts, other charges and restrictions,
 including import restrictions previously and presently imposed, and to be imposed by the Republic of the
Philippines, or any of its agencies and political subdivisions. 58 (Emphasis supplied)

P.D. No. 938 did not amend the same 59 and so the tax exemption provision in Section 8 (b), R.A. No. 6395, as amended by P.D.
No. 380, still stands. Since the subject matter of this particular Section 8 (b) had to do only with loans and machinery imported,
paid for from the proceeds of these foreign loans, THERE WAS NO OTHER SUBJECT MATTER TO LUMP IT UP WITH, and so,
the tax exemption stood as is — with the express mention of "direct
and indirect" tax exemptions. And this "direct and indirect" tax exemption privilege extended to "taxes, fees, imposts, other
charges . . . to be imposed" in the future — surely, an indication that the lawmakers wanted the NPC to be exempt from ALL
FORMS of taxes — direct and indirect.

It is crystal clear, therefore, that NPC had been granted tax exemption privileges for both direct and indirect taxes under P.D. No.
938.

VI

Five (5) years on into the now discredited New Society, the Government decided to rationalize government receipts and
expenditures by formulating and implementing a National Budget. 60 The NPC, being a government owned and controlled
corporation had to be shed off its tax exemption status privileges under P.D. No. 1177. It was, however, allowed to ask for a
subsidy from the General Fund in the exact amount of taxes/duties due.

Actually, much earlier, P.D. No. 882 had already repealed NPC's tax-free importation privileges. It allowed, however, NPC to
appeal said repeal with the Office of the President and to avail of tax-free importation privileges under its Section 1, subject to the
prior approval of an Inter-Agency Committed created by virtue of said P.D. No. 882. It is presumed that the NPC, being the special
creation of the State, was allowed to continue its tax-free importations.

This Court notes that petitioner brought to the attention of this Court, the matter of the abolition of NPC's tax exemption privileges
by P.D. No. 1177 61 only in his Common Reply/Comment to private Respondents' "Opposition" and "Comment" to Motion for
Reconsideration, four (4) months AFTER the motion for Reconsideration had been filed. During oral arguments heard on July 9,
1992, he proceeded to discuss this tax exemption withdrawal as explained by then Secretary of Justice Vicente Abad Santos in
opinion No. 133 (S '77). 62 A careful perusal of petitioner's senate Blue Ribbon Committee Report No. 474, the basis of the
petition at bar, fails to yield any mention of said P.D. No. 1177's effect on NPC's tax exemption privileges. 63 Applying by analogy
Pulido vs. Pablo, 64 the court declares that the matter of P.D. No. 1177 abolishing NPC's tax exemption privileges was not
seasonably invoked 65 by the petitioner.

Be that as it may, the Court still has to discuss the effect of P.D. No. 1177 on the NPC tax exemption privileges as this statute has
been reiterated twice in P.D. No. 1931. The express repeal of tax privileges of any government-owned or controlled corporation
(GOCC). NPC included, was reiterated in the fourth whereas clause of P.D. No. 1931's preamble. The subsidy provided for in
Section 23, P.D. No. 1177, being inconsistent with Section 2, P.D. No. 1931, was deemed repealed as the Fiscal Incentives
Revenue Board was tasked with recommending the partial or total restoration of tax exemptions withdrawn by Section 1, P.D. No.
1931.

The records before Us do not indicate whether or not NPC asked for the subsidy contemplated in Section 23, P.D. No. 1177.
Considering, however, that under Section 16 of P.D. No. 1177, NPC had to submit to the Office of the President its request for the
P200 million mandated by P.D. No. 758 to be appropriated annually by the Government to cover its unpaid subscription to the
NPC authorized capital stock and that under Section 22, of the same P.D. No. NPC had to likewise submit to the Office of the
President its internal operating budget for review due to capital inputs of the government (P.D. No. 758) and to the national
government's guarantee of the domestic and foreign indebtedness of the NPC, it is clear that NPC was covered by P.D. No. 1177.

There is reason to believe that NPC availed of subsidy granted to exempt GOCC's that suddenly found themselves having to pay
taxes. It will be noted that Section 23, P.D. No. 1177, mandated that the Secretary of Finance and the Commissioner of the
Budget had to establish the necessary procedure to accomplish the tax payment/tax subsidy scheme of the Government. In effect,
NPC, did not put any cash to pay any tax as it got from the General Fund the amounts necessary to pay different revenue
collectors for the taxes it had to pay.

In his memorandum filed July 16, 1992, petitioner submits:

[T]hat with the enactment of P.D. No. 1177 on July 30, 1977, the NPC lost all its duty and tax exemptions,
whether direct or indirect. And so there was nothing to be withdrawn or to be restored under P.D. No. 1931,
issued on June 11, 1984. This is evident from sections 1 and 2 of said P.D. No. 1931, which reads:

"Section 1. The provisions of special or general law to the contrary notwithstanding, all
exemptions from the payment of duties, taxes, fees, imports and other charges
heretofore granted in favor of government-owned or controlled corporations including
their subsidiaries are hereby withdrawn."
 Sec. 2. The President of the Philippines and/or the Minister of Finance, upon the
recommendation of the Fiscal Incentives Review Board created under P.D. No. 776, is
hereby empowered to restore partially or totally, the exemptions withdrawn by section
1 above. . . .

Hence, P.D. No. 1931 did not have any effect or did it change NPC's status. Since it had already lost all its
tax exemptions privilege with the issuance of P.D. No. 1177 seven (7) years earlier or on July 30, 1977,
there were no tax exemptions to be withdrawn by section 1 which could later be restored by the Minister of
Finance upon the recommendation of the FIRB under Section 2 of P.D. No. 1931. Consequently, FIRB
resolutions No. 10-85, and 1-86, were all illegally and validly issued since FIRB acted beyond their statutory
authority by creating and not merely restoring the tax exempt status of NPC. The same is true for FIRB Res.
No. 17-87 which restored NPC's tax exemption under E.O. No. 93 which likewise abolished all duties and
tax exemptions but allowed the President upon recommendation of the FIRB to restore those abolished.

The Court disagrees.

Applying by analogy the weight of authority that:

When a revised and consolidated act re-enacts in the same or substantially the same terms the provisions of
the act or acts so revised and consolidated, the revision and consolidation shall be taken to be a
continuation of the former act or acts, although the former act or acts may be expressly repealed by the
revised and consolidated act; and all rights
and liabilities under the former act or acts are preserved and may be enforced. 66

the Court rules that when P.D. No. 1931 basically reenacted in its Section 1 the first half of Section 23, P.D. No. 1177, on
withdrawal of tax exemption privileges of all GOCC's said Section 1, P.D. No. 1931 was deemed to be a continuation of the first
half of Section 23, P.D. No. 1177, although the second half of Section 23, P.D. No. 177, on the subsidy scheme for former tax
exempt GOCCs had been expressly repealed by Section 2 with its institution of the FIRB recommendation of partial/total
restoration of tax exemption privileges.

The NPC tax privileges withdrawn by Section 1. P.D. No. 1931, were, therefore, the same NPC tax exemption privileges
withdrawn by Section 23, P.D. No. 1177. NPC could no longer obtain a subsidy for the taxes it had to pay. It could, however,
under P.D. No. 1931, ask for a total restoration of its tax exemption privileges, which, it did, and the same were granted under
FIRB Resolutions Nos. 10-85 67 and 1-86 68 as approved by the Minister of Finance.

Consequently, contrary to petitioner's submission, FIRB Resolutions Nos. 10-85 and 1-86 were both legally and validly issued by
the FIRB pursuant to P.D. No. 1931. FIRB did not created NPC's tax exemption status but merely restored it. 69

Some quarters have expressed the view that P.D. No. 1931 was illegally issued under the now rather infamous Amendment No. 6
70 as there was no showing that President Marcos' encroachment on legislative prerogatives was justified under the then
prevailing condition that he could legislate "only if the Batasang Pambansa 'failed or was unable to act inadequately on any matter
that in his judgment required immediate action' to meet the 'exigency'. 71

Actually under said Amendment No. 6, then President Marcos could issue decrees not only when the Interim Batasang Pambansa
failed or was unable to act adequately on any matter for any reason that in his (Marcos') judgment required immediate action, but
also when there existed a grave emergency or a threat or thereof. It must be remembered that said Presidential Decree was
issued only around nine (9) months after the Philippines unilaterally declared a moratorium on its foreign debt payments 72 as a
result of the economic crisis triggered by loss of confidence in the government brought about by the Aquino assassination. The
Philippines was then trying to reschedule its debt payments. 73 One of the big borrowers was the NPC 74 which had a US$ 2.1
billion white elephant of a Bataan Nuclear Power Plant on its back. 75 From all indications, it must have been this grave
emergency of a debt rescheduling which compelled Marcos to issue P.D. No. 1931, under his Amendment 6 power. 76

The rule, therefore, that under the 1973 Constitution "no law granting a tax exemption shall be passed without the concurrence of
a majority of all the members of the Batasang Pambansa" 77 does not apply as said P.D. No. 1931 was not passed by the Interim
Batasang Pambansa but by then President Marcos under His Amendment No. 6 power.

P.D. No. 1931 was, therefore, validly issued by then President Marcos under his Amendment No. 6 authority.

Under E.O No. 93 (S'86) NPC's tax exemption privileges were again clipped by, this time, President Aquino. Its section 2 allowed
the NPC to apply for the restoration of its tax exemption privileges. The same was granted under FIRB Resolution No. 17-87 78
dated June 24, 1987 which restored NPC's tax exemption privileges effective, starting March 10, 1987, the date of effectivity of
E.O. No. 93 (S'86).

FIRB Resolution No. 17-87 was approved by the President on October 5, 1987. 79 There is no indication, however, from the
records of the case whether or not similar approvals were given by then President Marcos for FIRB Resolutions Nos. 10-85 and 1-
86. This has led some quarters to believe that a "travesty of justice" might have occurred when the Minister of Finance approved
his own recommendation as Chairman of the Fiscal Incentives Review Board as what happened in Zambales Chromate vs. Court
of Appeals 80 when the Secretary of Agriculture and Natural Resources approved a decision earlier rendered by him when he was
the Director of Mines, 81 and in Anzaldo vs. Clave 82 where Presidential Executive Assistant Clave affirmed, on appeal to
Malacañang, his own decision as Chairman of the Civil Service Commission. 83

Upon deeper analysis, the question arises as to whether one can talk about "due process" being violated when FIRB Resolutions
Nos. 10-85 and 1-86 were approved by the Minister of Finance when the same were recommended by him in his capacity as
Chairman of the Fiscal Incentives Review Board. 84

In Zambales Chromite and Anzaldo, two (2) different parties were involved: mining groups and scientist-doctors, respectively.
Thus, there was a need for procedural due process to be followed.

In the case of the tax exemption restoration of NPC, there is no other comparable entity — not even a single public or private
corporation — whose rights would be violated if NPC's tax exemption privileges were to be restored. While there might have been
a MERALCO before Martial Law, it is of public knowledge that the MERALCO generating plants were sold to the NPC in line with
the State policy that NPC was to be the State implementing arm for the electrification of the entire country. Besides, MERALCO
was limited to Manila and its environs. And as of 1984, there was no more MERALCO — as a producer of electricity — which
could have objected to the restoration of NPC's tax exemption privileges.

It should be noted that NPC was not asking to be granted tax exemption privileges for the first time. It was just asking that its tax
exemption privileges be restored. It is for these reasons that, at least in NPC's case, the recommendation and approval of NPC's
tax exemption privileges under FIRB Resolution Nos. 10-85 and 1-86, done by the same person acting in his dual capacities as
Chairman of the Fiscal Incentives Review Board and Minister of Finance, respectively, do not violate procedural due process.

While as above-mentioned, FIRB Resolution No. 17-87 was approved by President Aquino on October 5, 1987, the view has been
expressed that President Aquino, at least with regard to E.O. 93 (S'86), had no authority to sub-delegate to the FIRB, which was
allegedly not a delegate of the legislature, the power delegated to her thereunder.

A misconception must be cleared up.

When E.O No. 93 (S'86) was issued, President Aquino was exercising both Executive and Legislative powers. Thus, there was no
power delegated to her, rather it was she who was delegating her power. She delegated it to the FIRB, which, for purposes of E.O
No. 93 (S'86), is a delegate of the legislature. Clearly, she was not sub-delegating her power.

And E.O. No. 93 (S'86), as a delegating law, was complete in itself — it set forth the policy to be carried out 85 and it fixed the
standard to which the delegate had to conform in the performance of his functions, 86 both qualities having been enunciated by
this Court in Pelaez vs. Auditor General. 87

Thus, after all has been said, it is clear that the NPC had its tax exemption privileges restored from June 11, 1984 up to the
present.

VII

The next question that projects itself is — who pays the tax?

The answer to the question could be gleamed from the manner by which the Commissaries of the Armed Forces of the Philippines
sell their goods.

By virtue of P.D. No. 83, 88 veterans, members of the Armed of the Philippines, and their defendants but groceries and other
goods free of all taxes and duties if bought from any AFP Commissaries.

In practice, the AFP Commissary suppliers probably treat the unchargeable specific, ad valorem and other taxes on the goods
earmarked for AFP Commissaries as an added cost of operation and distribute it over the total units of goods sold as it would any
other cost. Thus, even the ordinary supermarket buyer probably pays for the specific, ad valorem and other taxes which theses
suppliers do not charge the AFP Commissaries. 89

IN MUCH THE SAME MANNER, it is clear that private respondents-oil companies have to absorb the taxes they add to the
bunker fuel oil they sell to NPC.

It should be stated at this juncture that, as early as May 14, 1954, the Secretary of Justice renders an opinion, 90 wherein he
stated and We quote:

xxx xxx xxx

 Republic Act No. 358 exempts the National Power Corporation from "all taxes, duties, fees, imposts,
charges, and restrictions of the Republic of the Philippines and its provinces, cities, and municipalities." This
exemption is broad enough to include all taxes, whether direct or indirect, which the National Power
Corporation may be required to pay, such as the specific tax on petroleum products. That it is indirect or is of
no amount [should be of no moment], for it is the corporation that ultimately pays it. The view which refuses
to accord the exemption because the tax is first paid by the seller disregards realities and gives more
importance to form than to substance. Equity and law always exalt substance over from.

xxx xxx xxx

Tax exemptions are undoubtedly to be construed strictly but not so grudgingly as knowledge that many
impositions taxpayers have to pay are in the nature of indirect taxes. To limit the exemption granted the
National Power Corporation to direct taxes notwithstanding the general and broad language of the statue will
be to thwrat the legislative intention in giving exemption from all forms of taxes and impositions without
distinguishing between those that are direct and those that are not. (Emphasis supplied)

In view of all the foregoing, the Court rules and declares that the oil companies which supply bunker fuel oil to NPC have to pay
the taxes imposed upon said bunker fuel oil sold to NPC. By the very nature of indirect taxation, the economic burden of such
taxation is expected to be passed on through the channels of commerce to the user or consumer of the goods sold. Because,
however, the NPC has been exempted from both direct and indirect taxation, the NPC must beheld exempted from absorbing the
economic burden of indirect taxation. This means, on the one hand, that the oil companies which wish to sell to NPC absorb all or
part of the economic burden of the taxes previously paid to BIR, which could they shift to NPC if NPC did not enjoy exemption
from indirect taxes. This means also, on the other hand, that the NPC may refuse to pay the part of the "normal" purchase price of
bunker fuel oil which represents all or part of the taxes previously paid by the oil companies to BIR. If NPC nonetheless purchases
such oil from the oil companies — because to do so may be more convenient and ultimately less costly for NPC than NPC itself
importing and hauling and storing the oil from overseas — NPC is entitled to be reimbursed by the BIR for that part of the buying
price of NPC which verifiably represents the tax already paid by the oil company-vendor to the BIR.

It should be noted at this point in time that the whole issue of who WILL pay these indirect taxes HAS BEEN RENDERED moot
and academic by E.O. No. 195 issued on June 16, 1987 by virtue of which the ad valorem tax rate on bunker fuel oil was reduced
to ZERO (0%) PER CENTUM. Said E.O. no. 195 reads as follows:

EXECUTIVE ORDER NO. 195

AMENDING PARAGRAPH (b) OF SECTION 128 OF THE NATIONAL INTERNAL REVENUE CODE, AS
AMENDED BY REVISING THE EXCISE TAX RATES OF CERTAIN PETROLEUM PRODUCTS.

xxx xxx xxx

Sec. 1. Paragraph (b) of Section 128 of the National Internal Revenue Code, as amended, is hereby
amended to read as follows:

Par. (b) — For products subject to ad valorem tax only:

PRODUCT AD VALOREM TAX RATE

1. . . .

2. . . .

3. . . .

4. Fuel oil, commercially known as bunker oil and on similar fuel oils having more or less the same
generating power 0%

xxx xxx xxx

Sec. 3. This Executive Order shall take effect immediately.

Done in the city of Manila, this 17th day of June, in the year of Our Lord, nineteen hundred and eighty-
seven. (Emphasis supplied)
The oil companies can now deliver bunker fuel oil to NPC without having to worry about who is going to bear the economic burden
of the ad valorem taxes. What this Court will now dispose of are petitioner's complaints that some indirect tax money has been
illegally refunded by the Bureau of Internal Revenue to the NPC and that more claims for refunds by the NPC are being processed
for payment by the BIR.

A case in point is the Tax Credit Memo issued by the Bureau of Internal Revenue in favor of the NPC last July 7, 1986 for
P58.020.110.79 which were for "erroneously paid specific and ad valorem taxes during the period from October 31, 1984 to April
27, 1985. 91 Petitioner asks Us to declare this Tax Credit Memo illegal as the PNC did not have indirect tax exemptions with the
enactment of P.D. No. 938. As We have already ruled otherwise, the only questions left are whether NPC Is entitled to a tax
refund for the tax component of the price of the bunker fuel oil purchased from Caltex (Phils.) Inc. and whether the Bureau of
Internal Revenue properly refunded the amount to NPC.

After P.D. No. 1931 was issued on June 11, 1984 withdrawing the
tax exemptions of all GOCCs — NPC included, it was only on May 8, 1985 when the BIR issues its letter authority to the NPC
authorizing it to withdraw tax-free bunker fuel oil from the oil companies pursuant to FIRB Resolution No. 10-85. 92 Since the tax
exemption restoration was retroactive to June 11, 1984 there was a need. therefore, to recover said amount as Caltex (PhiIs.) Inc.
had already paid the BIR the specific and ad valorem taxes on the bunker oil it sold NPC during the period above indicated and
had billed NPC correspondingly. 93 It should be noted that the NPC, in its letter-claim dated September 11, 1985 to the
Commissioner of the Bureau of Internal Revenue DID NOT CATEGORICALLY AND UNEQUIVOCALLY STATE that itself paid the
P58.020,110.79 as part of the bunker fuel oil price it purchased from Caltex (Phils) Inc. 94

The law governing recovery of erroneously or illegally, collected taxes is section 230 of the National Internal Revenue Code of
1977, as amended which reads as follows:

Sec. 230. Recover 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.

xxx xxx xxx

Inasmuch as NPC filled its claim for P58.020,110.79 on September 11, 1985, 95 the Commissioner correctly issued the Tax Credit
Memo in view of NPC's indirect tax exemption.

Petitioner, however, asks Us to restrain the Commissioner from acting favorably on NPC's claim for P410.580,000.00 which
represents specific and ad valorem taxes paid by the oil companies to the BIR from June 11, 1984 to the early part of 1986. 96

A careful examination of petitioner's pleadings and annexes attached thereto does not reveal when the alleged claim for a
P410,580,000.00 tax refund was filed. It is only stated In paragraph No. 2 of the Deed of Assignment 97 executed by and between
NPC and Caltex (Phils.) Inc., as follows:

That the ASSIGNOR(NPC) has a pending tax credit claim with the Bureau of Internal Revenue amounting to
P442,887,716.16. P58.020,110.79 of which is due to Assignor's oil purchases from the Assignee (Caltex
[Phils.] Inc.)

Actually, as the Court sees it, this is a clear case of a "Mexican standoff." We cannot restrain the BIR from refunding said amount
because of Our ruling that NPC has both direct and indirect tax exemption privileges. Neither can We order the BIR to refund said
amount to NPC as there is no pending petition for review on certiorari of a suit for its collection before Us. At any rate, at this point
in time, NPC can no longer file any suit to collect said amount EVEN IF lt has previously filed a claim with the BIR because it is
time-barred under Section 230 of the National Internal Revenue Code of 1977. as amended, which states:

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. . . .
(Emphasis supplied)

The date of the Deed of Assignment is June 6. 1986. Even if We were to assume that payment by NPC for the amount of
P410,580,000.00 had been made on said date. it is clear that more than two (2) years had already elapsed from said date. At the
same time, We should note that there is no legal obstacle to the BIR granting, even without a suit by NPC, the tax credit or refund
claimed by NPC, assuming that NPC's claim had been made seasonably, and assuming the amounts covered had actually been
paid previously by the oil companies to the BIR.

WHEREFORE, in view of all the foregoing, the Motion for Reconsideration of petitioner is hereby DENIED for lack of merit and the
decision of this Court promulgated on May 31, 1991 is hereby AFFIRMED.

SO ORDERED.
G.R. No. L-31092 February 27, 1987

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
JOHN GOTAMCO & SONS, INC. and THE COURT OF TAX APPEALS, respondents.

YAP, J.:

The question involved in this petition is whether respondent John Gotamco & Sons, Inc. should
pay the 3% contractor's tax under Section 191 of the National Internal Revenue Code on the
gross receipts it realized from the construction of the World Health Organization office building in
Manila.

The World Health Organization (WHO for short) is an international organization which has a
regional office in Manila. As an international organization, it enjoys privileges and immunities
which are defined more specifically in the Host Agreement entered into between the Republic of
the Philippines and the said Organization on July 22, 1951. Section 11 of that Agreement
provides, inter alia, that "the Organization, its assets, income and other properties shall be: (a)
exempt from all direct and indirect taxes. It is understood, however, that the Organization will not
claim exemption from taxes which are, in fact, no more than charges for public utility services; . . .

When the WHO decided to construct a building to house its own offices, as well as the other
United Nations offices stationed in Manila, it entered into a further agreement with the
Govermment of the Republic of the Philippines on November 26, 1957. This agreement contained
the following provision (Article III, paragraph 2):

The Organization may import into the country materials and fixtures required for
the construction free from all duties and taxes and agrees not to utilize any
portion of the international reserves of the Government.

Article VIII of the above-mentioned agreement referred to the Host Agreement concluded on July
22, 1951 which granted the Organization exemption from all direct and indirect taxes.

In inviting bids for the construction of the building, the WHO informed the bidders that the building
to be constructed belonged to an international organization with diplomatic status and thus
exempt from the payment of all fees, licenses, and taxes, and that therefore their bids "must take
this into account and should not include items for such taxes, licenses and other payments to
Government agencies."

The construction contract was awarded to respondent John Gotamco & Sons, Inc. (Gotamco for
short) on February 10, 1958 for the stipulated price of P370,000.00, but when the building was
completed the price reached a total of P452,544.00.

Sometime in May 1958, the WHO received an opinion from the Commissioner of the Bureau of
Internal Revenue stating that "as the 3% contractor's tax is an indirect tax on the assets and
income of the Organization, the gross receipts derived by contractors from their contracts with the
WHO for the construction of its new building, are exempt from tax in accordance with . . . the Host
Agreement." Subsequently, however, on June 3, 1958, the Commissioner of Internal Revenue
reversed his opinion and stated that "as the 3% contractor's tax is not a direct nor an indirect tax
on the WHO, but a tax that is primarily due from the contractor, the same is not covered by . . .
the Host Agreement."
On January 2, 1960, the WHO issued a certification state 91 inter alia,:

When the request for bids for the construction of the World Health Organization
office building was called for, contractors were informed that there would be no
taxes or fees levied upon them for their work in connection with the construction
of the building as this will be considered an indirect tax to the Organization
caused by the increase of the contractor's bid in order to cover these taxes. This
was upheld by the Bureau of Internal Revenue and it can be stated that the
contractors submitted their bids in good faith with the exemption in mind.

The undersigned, therefore, certifies that the bid of John Gotamco & Sons, made
under the condition stated above, should be exempted from any taxes in
connection with the construction of the World Health Organization office building.

On January 17, 1961, the Commissioner of Internal Revenue sent a letter of demand to Gotamco
demanding payment of P 16,970.40, representing the 3% contractor's tax plus surcharges on the
gross receipts it received from the WHO in the construction of the latter's building.

Respondent Gotamco appealed the Commissioner's decision to the Court of Tax Appeals, which
after trial rendered a decision, in favor of Gotamco and reversed the Commissioner's decision.
The Court of Tax Appeal's decision is now before us for review on certiorari.

In his first assignment of error, petitioner questions the entitlement of the WHO to tax exemption,
contending that the Host Agreement is null and void, not having been ratified by the Philippine
Senate as required by the Constitution. We find no merit in this contention. While treaties are
required to be ratified by the Senate under the Constitution, less formal types of international
agreements may be entered into by the Chief Executive and become binding without the
concurrence of the legislative body. 1 The Host Agreement comes within the latter category; it is
a valid and binding international agreement even without the concurrence of the Philippine
Senate.

The privileges and immunities granted to the WHO under the Host Agreement have been
recognized by this Court as legally binding on Philippine authorities. 2

Petitioner maintains that even assuming that the Host Agreement granting tax exemption to the
WHO is valid and enforceable, the 3% contractor's tax assessed on Gotamco is not an "indirect
tax" within its purview. Petitioner's position is that the contractor's tax "is in the nature of an excise
tax which is a charge imposed upon the performance of an act, the enjoyment of a privilege or the
engaging in an occupation. . . It is a tax due primarily and directly on the contractor, not on the
owner of the building. Since this tax has no bearing upon the WHO, it cannot be deemed an
indirect taxation upon it."

We agree with the Court of Tax Appeals in rejecting this contention of the petitioner. Said the
respondent court:

In context, direct taxes are those that are demanded from the very person who, it
is intended or desired, should pay them; while indirect taxes are those that are
demanded in the first instance from one person in the expectation and intention
that he can shift the burden to someone else. (Pollock vs. Farmers, L & T Co.,
1957 US 429, 15 S. Ct. 673, 39 Law. Ed. 759.) The contractor's tax is of course
payable by the contractor but in the last analysis it is the owner of the building
that shoulders the burden of the tax because the same is shifted by the
contractor to the owner as a matter of self-preservation. Thus, it is an indirect tax.
And it is an indirect tax on the WHO because, although it is payable by the
 petitioner, the latter can shift its burden on the WHO. In the last analysis it is the
WHO that will pay the tax indirectly through the contractor and it certainly cannot
be said that 'this tax has no bearing upon the World Health Organization.

Petitioner claims that under the authority of the Philippine Acetylene Company versus
Commissioner of Internal Revenue, et al., 3 the 3% contractor's tax fans directly on Gotamco and
cannot be shifted to the WHO. The Court of Tax Appeals, however, held that the said case is not
controlling in this case, since the Host Agreement specifically exempts the WHO from "indirect
taxes." We agree. The Philippine Acetylene case involved a tax on sales of goods which under
the law had to be paid by the manufacturer or producer; the fact that the manufacturer or
producer might have added the amount of the tax to the price of the goods did not make the sales
tax "a tax on the purchaser." The Court held that the sales tax must be paid by the manufacturer
or producer even if the sale is made to tax-exempt entities like the National Power Corporation,
an agency of the Philippine Government, and to the Voice of America, an agency of the United
States Government.

The Host Agreement, in specifically exempting the WHO from "indirect taxes," contemplates
taxes which, although not imposed upon or paid by the Organization directly, form part of the
price paid or to be paid by it. This is made clear in Section 12 of the Host Agreement which
provides:

While the Organization will not, as a general rule, in the case of minor purchases,
claim exemption from excise duties, and from taxes on the sale of movable and
immovable property which form part of the price to be paid, nevertheless, when
the Organization is making important purchases for official use of property on
which such duties and taxes have been charged or are chargeable the
Government of the Republic of the Philippines shall make appropriate
administrative arrangements for the remission or return of the amount of duty or
tax. (Emphasis supplied).

The above-quoted provision, although referring only to purchases made by the WHO, elucidates
the clear intention of the Agreement to exempt the WHO from "indirect" taxation.

The certification issued by the WHO, dated January 20, 1960, sought exemption of the
contractor, Gotamco, from any taxes in connection with the construction of the WHO office
building. The 3% contractor's tax would be within this category and should be viewed as a form of
an "indirect tax" On the Organization, as the payment thereof or its inclusion in the bid price
would have meant an increase in the construction cost of the building.

Accordingly, finding no reversible error committed by the respondent Court of Tax Appeals, the
appealed decision is hereby affirmed.

SO ORDERED.
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
AMERICAN RUBBER COMPANY and COURT OF TAX APPEALS, respondents.

G.R. No. L-19801-03 November 29, 1966

AMERICAN RUBBER COMPANY, petitioner,

vs.
THE COMMISSIONER OF INTERNAL REVENUE, ET AL., respondents.

Nos. L-19667:
Office of the Solicitor General for petitioner.
Ozaeta, Gibbs and Ozaeta for respondents.

Nos. L-19801-03:
Ozaeta, Gibbs and Ozaeta for petitioner.
Office of the Solicitor General for respondents.

REYES, J.B.L., J.:

These cases are brought on appeal from the Court of Tax Appeals by the State (G.R. No. L-19667) as well
as by the American Rubber Company (G.R. Nos. L-19801, 19802, 19803).

The factual background is the same in all four cases, and is not in controversy, having been stipulated
between the parties.

Petitioner, American Rubber Company, a domestic corporation, from January 1, 1955 to December 1,
1958, was engaged in producing rubber from its approximately 900 hectare rubber tree plantation, which it
owned and operated in Latuan, Isabela, City of Basilan. Its products, known in the market as Preserved
Latex, Pale Crepe No. 1, Pale Crepe No. 2, Ribbed Smoked Sheets Nos. 1 and 2, Flat Bark Rubber, 2X
Brown Crepe and 3X Brown Crepe, are turned out in the following manner:

The initial step common to the production of all the foregoing rubber products is tapping, i.e., the collection
of latex (rubber juice) from rubber trees. This is done by the daily cutting, early in the morning, of a spiral
incision in the bark of rubber trees and placing a cup below the lower end of the incision to receive the flow
of latex. The collecting cup is filled after two hours. The tapper then collects the latex into buckets and
carries them to the collecting shed. The tapper subsequently pours the latex collected into big milk cans.
The filled milk cans are then taken in motor vehicles to a coagulating shed, also within the premises of
petitioner's plantation, where the latex is strained into coagulating tanks to remove foreign matter such as
leaves and dirt. After these initial steps, the processes vary in the production of the various rubber products
mentioned above. Said processes are described hereunder.

Preserved Rubber Latex

Fresh latex is diluted with 5 to 5-1/4 ounces of ammonia per gallon of latex. The mixture is thoroughly
stirred and then poured into metal drums. The addition of ammonia preserves the latex in liquid form and
prevents its deterioration or its acquisition of a repulsive smell, and at the same time preserves its uniform
color. Latex which has been thus artificially preserved in its liquid form generally lasts for about a month
without spoiling. On the other hand, fresh latex in its original state lasts for only about two hours, after
which it becomes spoiled.

Petitioner sells preserved latex only upon previous orders of customers who supply empty metal drum
containers.
Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2

To produce Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2, the petitioner adds to the
latex in the coagulating tank about 15 or 16 ounces of glacial acetic acid per gallon of latex. The mixture is
stirred thoroughly. Thereafter aluminum partitions are placed crosswise inside the tank so that the latex will
coagulate into uniform slabs. Acetic acid is added to the latex to hasten coagulation which otherwise takes
place naturally, and to preserve its fresh state and color. The similarity in the production of Pale Crepe Nos.
1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2 ends at the point of removing the coagulum (coagulated
rubber sheets) from the coagulating tanks.

To produce Pale Crepe No. 1, the coagulum is passed through a series of rollers until the desired thickness
is attained, whereupon it is removed to the air-drying house situated inside petitioner's plantation and hung
for a period of about twelve or thirteen days to dry. There are no mechanical driers used; the air-drying is
done naturally. As soon as the Pale Crepe is dried, the sheets are sorted; those which are of uniform pale
color are classified as Pale Crepe No. 2, whereupon they are baled and stored, ready for market.

Ribbed & Smoked Sheets Nos. 1 and 2 are produced practically in the same manner as Pale Crepe, except
that the coagulum is passed only once through a roller provided with ribs after which the flattened and
ribbed coagulum is removed to petitioner's smoke-house where it is hung and cured by exposure to heat and
smoke from wood fires for about six or seven days. The resulting smoked sheets are sorted and classified
dependent upon color and opaqueness into ribbed smoked sheets (RSS) No. 1 and No. 2, baled, and stored
ready for the market. No mechanical equipment is used in generating the smoke in the smoke-house.

The petitioner's rollers are powered by engines although they could be turned by hand as it is done in small
rubber plantations. If Pale Crepe Nos. 1 and 2 and Ribbed Smoked Sheets Nos. 1 and 2 are not air-dried
and smoked they deteriorate, get spoiled, and the color varies.

Flat Bark Rubber

Each morning after a tapper makes a fresh incision in the bark of a rubber tree, he gathers the latex dripping
from the ground around the tree, called "ground rubber", as well as the dried latex from the incisions made
the previous day, called "bark rubber". Ground and bark rubber are not intentionally produced. No
chemicals are added to the latex transformed into ground and bark rubber. This kind of dried latex is
spoiled and has a bad odor.

Ground and bark rubber when gathered in sufficient quantities are passed numerous times through the
rollers or mills until they form a uniform mass or sheet which, finally is called Flat Bark Rubber. No
chemical is used to coagulate the dried ground and bark rubber because they are already coagulated. They
are formed into sheets by means only of pressure of the mills or rollers through which they are passed. Flat
Bark Rubber commands the lowest prices in the rubber market.

3X Brown Crepe

Every morning, before a fresh incision is made in the bark of the rubber trees, the tapper collects not only
ground and bark rubber but removes and collects the latex in the cups, known as "cup rubber". The cup
rubber coagulates and dries through natural processes and, when gathered in sufficient quantities, is milled
and rolled through a series of rollers until by force of pressure it is formed into a mass of the desired
thickness called "3X Brown Crepe." Like ground and bark rubber, no chemicals are added to cup rubber to
produce 3X Brown Crepe. Cup rubber in its original form, like ground and bark rubber, is spoiled and has a
bad odor.

2X Brown Crepe
2X Brown Crepe is obtained by milling or rolling the excess pieces of coagulated rubber latex which had
been cut or trimmed from the from the ribbed smoked sheets No. 2 into a uniform mass. 2X Brown Crepe
is produced in the same manner as the other sheets of crepe rubber, i.e., without the addition of any
chemicals.

Petitioner during the said period sold its foregoing rubber products locally and as prescribed by the
respondent's regulations declared same for tax purposes which respondent accordingly assessed. Petitioner
paid, under protest, the corresponding sales taxes thereon claiming exemption therefrom under Section 188
(b) of the National Internal Revenue Code.

The following sales taxes on the aforementioned rubber products were paid under protest —

From Jan. 1, 1955 to Dec. 31, 1956 P83,193.48

From Jan. 1, 1957 to June 30, 1957 P20,504.99

From July 1, 1957 to Dec. 31, 1958 P52,378.90

It is further stipulated that the sales tax collected from petitioner American Rubber Company on the local
sales of its rubber products, following Internal Revenue General Circulars Nos. 431 and 440, had been
separately itemized and billed by petitioner Company in the invoices issued to the customers, that paid both
the value of the rubber articles and the separately itemized sales tax, from January 1, 1955 to August 2,
1957.

After paying under protest, the petitioner claimed refund of the sales taxes paid by it on the ground that
under section 188, paragraph b, of the Internal Revenue Code, as amended, 1 its rubber products were
agricultural products exempt from sales tax, and upon refusal of the Commissioner of Internal Revenue,
brought the case on appeal to the Court of Tax Appeals (C.T.A. Nos. 356, 440,, 632). The respondent
Commissioner interposed defenses, denying that petitioner's products were agricultural ones within the
exemption; claiming that there had been no exhaustion of administrative remedies; and argued that the sales
tax having been passed to the buyers during the period that elapsed from January 1, 1955 to August 2,
1957, the petitioner did not have personality to demand, sue for and recover the aforesaid sales taxes, plus
interest.

In its decision, now under appeal, the Tax Court held Preserved Latex, Flat Bark Rubber, and 3X Brown
Crepe to be agricultural products, "because the labor employed in the processing thereof is agricultural
labor", and hence, the sales of such products were exempt from sales tax, but declared Pale Crepe No. 1,
Ribbed Smoked Sheets Nos. 1 and 3, as well as 2X Brown Crepe (which is obtained from rolling excess
pieces of Smoked Sheets) to be manufactured products, sales of which were subject to the tax. It overruled
the defense of non-exhaustion of administrative remedies and upheld the Revenue Commissioner's stand
that petitioner Company was not entitled to recover the sales tax that had been separately billed to its
customers, and paid by the latter. Hence, it dismissed the appeal in C.T.A. Nos. 356 and 440 and ordered
respondent Commissioner to refund only P3,916.49 without interest, or costs.

Both parties then duly appealed to this.

The issues posed on these appeals are:

(1) Whether the plaintiff's rubber products above described should be considered agricultural or
manufactured for purposes of their subjection to the sales tax;
 (2) Whether plaintiff is or is not entitled to recover the sales tax paid by it, but passed on to and
paid by the buyers of its products; and

(3) Whether plaintiff is or is not entitled to interest on the sales tax paid by it under protest, in case
recovery thereof is allowed.

The first issue, in our opinion, is governed by the principles laid down by this Court in Philippine Packing
Corporation vs. Collector of Internal Revenue, 100 Phil. 545 et seq. We there ruled that the exemption from
sales tax established in section 188 (b) of the Internal Revenue Tax Code in favor of sales of agricultural
products, whether in their original form or not, made by the producer or owner of the land where produced
is not taken away merely because the produce undergoes processing at the hand of said producer or owner
for the purpose of working his product into a more convenient and valuable form suited to meet the demand
of an expanded market; that the exemption was not designed in favor of the small agricultural producer,
already exempted by the subsequent paragraphs of the same section 188, but that said exemption is not
incompatible with large scale agricultural production that incidentally required resort to preservative
processes designed to increase or prolong marketability of the product.

In the case before us, the parties have stipulated that fresh latex directly obtained from the rubber tree,
which is clearly an agricultural product, becomes spoiled after only two hours. It has, therefore, a severely
limited marketability. The addition of ammonia prevents its deterioration for about a month, and we see no
reason why this preservative process should wrest away from the preserved latex the protective mantle of
the tax exemption.

Taking also into account the great distance that separates the plaintiff's plantation from the main rubber
processing centers in Japan, the United States and Europe, and the difficulty in handling products in liquid
form, it can be discerned without difficulty that preserved, latex, with its 30-day spoilage limit, is still
severely handicapped for export and dollar earning purposes.

To overcome these shortcomings, and extend its useful life almost indefinitely, it becomes necessary to
separate and solidify the rubber granules diffused in the latex, and hence, according to the stipulation of
facts and the evidence, acetic acid is added to hasten coagulation. There is nothing on record to show that
the acetic acid in way produces anything that was not originally in the source, the liquid latex. The
coagulum is then rolled and compacted and afterwards air dried to make Pale Crepe(1 and 2), or else cured
and smoked to produce rubber sheets. Once again we see nothing in this processing to alter the agricultural
nature of the result; what takes place is merely an accelerated coagulation and dessication that would
naturally occur anyway, only within a longer period of time, coupled with greater spoilage of the product.

Thus the operations carried out by plaintiff appear to be purely preservative in nature, made necessary, by
its production of fresh rubber latex in a large scale. they are purely incidental to the latter, just as the
canning of skinned and cored pineapples in syrup was held to be incidental to the large-scale cultivation of
the fruit in the Philippine Packing Corporation case (ante). Being necessary to suit the product to the
demands of the market, the operations in both cases should lead to the same result, non-taxability of the
sales of the respective agricultural products. In not so holding, the Tax Court was in error.

Even less justifiable is the position taken by the Revenue Commissioner in his appeal against the finding of
the Tax Court that Flat Bark 3X Brown Crepe rubber are agricultural products. According to the record,
these sheets result from the drippings and waste rubber that have dried naturally, that are rolled and
compacted into the desired thickness, without any other processing.

As to 2X Brown Crepe which is compacted out of the trimmings and waste left over from the production of
ribbed smoked sheets, no reason is seen why it should be treated differently from the ribbed smoked sheets
themselves.
In his appeal, the Revenue Commissioner contends that all of plaintiff's products should be deemed
manufactured articles, on the strength of section 194 (n) of the Revenue Code defining a "manufacturer" as

every person who by physical or chemical process alters the exterior texture or form or inner
substances of any raw material or manufactured or partially manufactured product in such manner
as to prepare it for a special use or uses to which it could not have been put to in its original
condition, or who . . . alters the quality of any such raw material . . . as to reduce it to marketable
shape . . . .

But, as pointed out in the Philippine Packing Corporation case, this definition is not applicable to the
exemption of agricultural products, "whether in their original form or not". The use of this last phrase in the
statute clearly indicates that the agricultural product may be altered in texture or form without being
divested of the exemption (cas cit. 100 Phil., p. 548). The exception would be sales of agricultural products
while Republic Act No. 1612 was in effect because under this Act the freedom from sales tax became
restricted to agricultural products "in their original form" only. So that plaintiff's sales from August 24,
1956 (approval of Republic Act 1612) to June 22, 1957 (when Republic Act 1856 became effective and
restored the exemption to agricultural products "whether in their original form or not") became properly
taxable. Under paragraphs (A)2 and B(4) of the additional stipulation of facts (CTA Rec. pp. 261-262, G.R.
L-19801), the sales tax properly collected during this period of plaintiff's transactions amounted to
P18,187.19 from August 24 to December 31, 1956; and P18,888.28 from January 1 to June 21, 1957, or a
total of P37,075.47. This last amount is, therefore non-recoverable.2

The second issue in this appeal concerns the holding of the Court of Tax Appeals that the plaintiff
Company is not entitled to recover the sales tax paid by it from January, 1955 to August 2, 1957, because
during that period the plaintiff had separately invoiced and billed the corresponding sales tax to the buyers
of its products. In so holding, the Tax Court relied on our decisions in Medina vs. City of Baguio, 91 Phil.
854; Mendoza, Santos & Co. vs. Municipality of Meycawayan, L-6069-6070, April 30, 1954 (94 Phil.
1047); and Zosimo Rojas & Bros. vs. City of Cavite, L-10730, May 27, 1958.

The basic ruling is that of Medina vs. City of Baguio, supra, where this Court affirmed the ruling of the
court of First Instance to the effect that —

"The amount collected from the theatergoers as additional price of admission tickets is not the
property of plaintiffs or any of them. It is paid by the public. If anybody has the right to claim it, it
is those who paid it. Only owners of property has the right to claim said property. The cine owner
acted as mere agents of the city in collecting additional price charged in the sale of admission
tickets." (Medina vs. City of Baguio, 91 Phil. 854) (Emphasis supplied)

We agree with the plaintiff-appellant that the Medina ruling is not applicable to the present case, since the
municipal taxes therein imposed were taxes on the admission tickets sold, so that, in effect, they were
levies upon the theatergoers who bought them; so much so that (as the decision expressly ruled) the tax was
collected by the theater owners as agents of the respective municipal treasurers. This does not obtain in the
case at bar. The Medina ruling was merely followed in Rojas & Bros. vs. Cavite, supra; and in Mendoza,
Santos & Co. vs. Municipality of Meycawayan, 94 Phil. 1047.

By contrast with the municipal taxes involved in the preceding cases, the sales tax is by law imposed
directly, not on the thing sold, but on the act (sale) of the manufacturer, producer or importer (Op. of the
Secretary of Justice, June 15, 1946; 47 C.J.S., p. 1141), who is exclusively made liable for its timely
payment. There is no proof that the tax paid by plaintiff is the very money paid by its customers. Where the
tax money paid by the plaintiff came from is really no concern of the Government, but solely a matter
between the plaintiff and its customers. Anyway, once recovered, the plaintiff must hold the refund taxes in
trust for the individual purchasers who advanced payment thereof, and whose names must appear in
plaintiff's records.
Moreover, the separate billing of the sales tax in appellant's invoices was a direct result of the respondent
Commissioner's General Circular No. 440, providing that —

if a manufacturer, producer, or importer, in fixing the gross selling price of an article sold by him,
has included an amount intended to cover the sales tax in the gross selling price of the article, the
sales tax shall be based on the gross selling price less the amount intended to cover the tax, if the
same is billed to the purchaser as a separate item in the invoice. . . . (Emphasis supplied)

In other words, the separate itemization of the sales tax in the invoices was permitted to avoid the taxpayer
being compelled to pay a sales tax on the tax itself. It does not seem either just or proper that a step
suggested by the Internal Revenue authorities themselves to protect the taxpayer from paying a double tax
should now be used to block his action to recover taxes collected without legal sanction.

Finally, a more important reason that militates against extensive and indiscriminate application of the
Medina vs. City of Baguio ruling is that it would tend to perpetuate illegal taxation; for the individual
customers to whom the tax is ultimately shifted will ordinarily not care to sue for its recovery, in view of
the small amount paid by each and the high cost of litigation for the reclaiming of an illegal tax. In so far,
therefore, as it favors the imposition, collection and retention of illegal taxes, and encourages a multiplicity
of suits, the Tax Court's ruling under appeal violates morals and public policy.

The plaintiff Company also urges that the refund of the taxes should include interest thereon. While this
Court has allowed recovery of interest in some cases, it has done so only in cases of patent arbitrariness on
the part of the Revenue authorities; and in this instance we agree with the Tax Court that no such patent
arbitrariness has been shown.

IN VIEW OF THE FOREGOING, the decision of the Court of Tax Appeals is affirmed in Case G.R. No.
L-19667 and modified in cases G.R. Nos. L-19801, L-19802 and L-19803, by declaring the sales taxes
therein involved to have been improperly denied levied and collected and ordering respondent
Commissioner of Internal Revenue to refund the same, except the taxes corresponding to the period from
August 24, 1956 to June 22, 1957, during which Republic Act No. 1612 was in force. The amount of
P37,075.47 paid by the taxpayer for this period is hereby declared properly collected and not refundable.
Without special pronouncement as to costs
PHILIPPINE ACETYLENE CO., INC., petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Ponce Enrile, Siguion Reyna, Montecillo and Belo, for petitioner.

Office of the Solicitor General for respondents.

CASTRO, J.:

The petitioner is a corporation engaged in the manufacture and sale of oxygen and acetylene gases. During
the period from June 2, 1953 to June 30, 1958, it made various sales of its products to the National Power
Corporation, an agency of the Philippine Government, and to the Voice of America an agency of the United
States Government. The sales to the NPC amounted to P145,866.70, while those to the VOA amounted to
P1,683, on account of which the respondent Commission of Internal Revenue assessed against, and
demanded from, the petitioner the payment of P12,910.60 as deficiency sales tax and surcharge, pursuant to
the following-provisions of the National Internal Revenue Code:

Sec. 186. Percentage tax on sales of other articles.—There shall be levied, assessed and collected
once only on every original sale, barter, exchange, and similar transaction either for nominal or
valuable considerations, intended to transfer ownership of, or title to, the articles not enumerated
in sections one hundred and eighty-four and one hundred and eighty-five a tax equivalent to seven
per centum of the gross selling price or gross value in money of the articles so sold, bartered
exchanged, or transferred, such tax to be paid by the manufacturer or producer: . . . .

Sec. 183. Payment of percentage taxes.—(a) In general.—It shall be the duty of every person
conducting business on which a percentage tax is imposed under this Title, to make a true and
complete return of the amount of his, her, or its gross monthly sales, receipts or earnings, or gross
value of output actually removed from the factory or mill warehouse and within twenty days after
the end of each month, pay the tax due thereon: Provided, That any person retiring from a business
subject to the percentage tax shall notify the nearest internal revenue officer thereof, file his return
or declaration and pay the tax due thereon within twenty days after closing his business.

If the percentage tax on any business is not paid within the time specified above, the amount of the
tax shall be increased by twenty-five per centum, the increment to be a part of the tax.

The petitioner denied liability for the payment of the tax on the ground that both the NPC and the VOA are
exempt from taxation. It asked for a reconsideration of the assessment and, failing to secure one, appealed
to the Court of Tax Appeals.

The court ruled that the tax on the sale of articles or goods in section 186 of the Code is a tax on the
manufacturer and not on the buyer with the result that the "petitioner Philippine Acetylene Company, the
manufacturer or producer of oxygen and acetylene gases sold to the National Power Corporation, cannot
claim exemption from the payment of sales tax simply because its buyer — the National Power
Corporation — is exempt from the payment of all taxes." With respect to the sales made to the VOA, the
court held that goods purchased by the American Government or its agencies from manufacturers or
producers are exempt from the payment of the sales tax under the agreement between the Government of
the Philippines and that of the United States, provided the purchases are supported by certificates of
exemption, and since purchases amounting to only P558, out of a total of P1,683, were not covered by
certificates of exemption, only the sales in the sum of P558 were subject to the payment of tax.
Accordingly, the assessment was revised and the petitioner's liability was reduced from P12,910.60, as
assessed by the respondent commission, to P12,812.16. 1

The petitioner appealed to this Court. Its position is that it is not liable for the payment of tax on the sales it
made to the NPC and the VOA because both entities are exempt from taxation.
 I

The NPC enjoys tax exemption by virtue of an act2 of Congress which provides as follows:

Sec. 2. To facilitate the payment of its indebtedness, the National Power Corporation shall be
exempt from all taxes, except real property tax, and from all duties, fees, imposts, charges, and
restrictions of the Republic of the Philippines, its provinces, cities and municipalities.

It is contended that the immunity thus given to the NPC would be impaired by the imposition of a tax on
sales made to it because while the tax is paid by the manufacturer or producer, the tax is ultimately shifted
by the latter to the former. The petitioner invokes in support of its position a 1954 opinion of the Secretary
of Justice which ruled that the NPC is exempt from the payment of all taxes "whether direct or indirect."

We begin with an analysis of the nature of the percentage (sales) tax imposed by section 186 of the Code. Is
it a tax on the producer or on the purchaser? Statutes of the type under consideration, which impose a tax
on sales, have been described as "act[s] with schizophrenic symptoms," 3 as they apparently have two faces
— one that of a vendor tax, the other, a vendee tax. Fortunately for us the provisions of the Code throw
some light on the problem. The Code states that the sales tax "shall be paid by the manufacturer or
producer,"4 who must "make a true and complete return of the amount of his, her or its gross monthly sales,
receipts or earnings or gross value of output actually removed from the factory or mill warehouse and
within twenty days after the end of each month, pay the tax due thereon." 5

But it is argued that a sales tax is ultimately passed on to the purchaser, and that, so far as the purchaser is
an entity like the NPC which is exempt from the payment of "all taxes, except real property tax," the tax
cannot be collected from sales.

Many years ago, Mr. Justice Oliver Wendell Holmes expressed dissatisfaction with the use of the phrase
"pass the tax on." Writing the opinion of the U.S. Supreme Court in Lash's Products v. United States,6 he
said: "The phrase 'passed the tax on' is inaccurate, as obviously the tax is laid and remains on the
manufacturer and on him alone. The purchaser does not really pay the tax. He pays or may pay the seller
more for the goods because of the seller's obligation, but that is all. . . . The price is the sum total paid for
the goods. The amount added because of the tax is paid to get the goods and for nothing else. Therefore it is
part of the price . . .".

It may indeed be that the incidence of the tax ultimately settles on the purchaser, but it is not for that reason
alone that one may validly argue that it is a tax on the purchaser. The exemption granted to the NPC may
be likened to the immunity of the Federal Government from state taxation and vice versa in the federal
system of government of the United States. In the early case of Panhandle Oil Co. v. Mississippi7 the
doctrine of intergovernment mental tax immunity was held as prohibiting the imposition of a tax on sales of
gasoline made to the Federal Government. Said the Supreme court of the United States:

A charge at the prescribed. rate is made on account of every gallon acquired by the United States.
It is immaterial that the seller and not the purchaser is required to report and make payment to the
state. Sale and purchase constitute a transaction by which the tax is measured and on which the
burden rests. . . . The necessary operation of these enactments when so construed is directly to
retard, impede and burden the exertion by the United States, of its constitutional powers to operate
the fleet and hospital. . . . To use the number of gallons sold the United States as a measure of the
privilege tax is in substance and legal effect to tax the sale. . . . And that is to tax the United States
— to exact tribute on its transactions and apply the same to the support of the state.1äwphï1.ñët

Justice Holmes did not agree. In a powerful dissent joined by Justices Brandeis and Stone, he said:

If the plaintiff in error had paid the tax and added it to the price the government would have
nothing to say. It could take the gasoline or leave it but it could not require the seller to abate his
 charge even if it had been arbitrarily increased in the hope of getting more from the government
than could be got from the public at large. . . . It does not appear that the government would have
refused to pay a price that included the tax if demanded, but if the government had refused it
would not have exonerated the seller. . . .

. . . I am not aware that the President, the Members of the Congress, the Judiciary or to come
nearer to the case at hand, the Coast Guard or the officials of the Veterans' Hospital [to which the
sales were made], because they are instrumentalities of government and cannot function naked and
unfed, hitherto have been held entitled to have their bills for food and clothing cut down so far as
their butchers and tailors have been taxed on their sales; and I had not supposed that the butchers
and tailors could omit from their tax returns all receipts from the large class of customers to which
I have referred. The question of interference with Government, I repeat, is one of reasonableness
and degree and it seems to me that the interference in this case is too remote.

But time was not long in coming to confirm the soundness of Holmes' position. Soon it became obvious
that to test the constitutionality of a statute by determining the party on which the legal incidence of the tax
fell was an unsatisfactory way of doing things. The fall of the bastion was signalled by Chief Justice
Hughes' statement in James v. Dravo Constructing Co.8 that "These cases [referring to Panhandle and
Indian Motorcycle Co. v. United States, 283 U.S. 570 (1931)] have been distinguished and must be deemed
to be limited to their particular facts."

In 1941, Alabama v. King & Boozer9 held that the constitutional immunity of the United States from state
taxation was not infringed by the imposition of a state sales tax with which the seller was chargeable but
which he was required to collect from the buyer, in respect of materials purchased by a contractor with the
United States on a cost-plus basis for use in carrying out its contract, despite the fact that the economic
burden of the tax was borne by the United States.

The asserted right of the one to be free of taxation by the other does not spell immunity from
paying the added costs, attributable to the taxation of those who furnish supplies to the
Government and who have been granted no tax immunity. So far as a different view has prevailed,
see Panhandle Oil Co. v. Mississippi and Graves v. Texas Co., supra, we think it no longer
tenable.

Further inroads into the doctrine of Panhandle were made in 1943 when the U.S. Supreme Court held that
immunity from state regulation in the performance of governmental functions by Federal officers and
agencies did not extend to those who merely contracted to furnish supplies or render services to the
government even though as a result of an increase in the price of such supplies or services attributable to
the state regulation, its ultimate effect may be to impose an additional economic burden on the
Government.10

But if a complete turnabout from the rule announced in Panhandle was yet to be made, it was so made in
1952 in Esso Standard Oil v. Evans11 which held that a contractor is not exempt from the payment of a
state privilege tax on the business of storing gasoline simply because the Federal Government with which it
has a contract for the storage of gasoline is immune from state taxation.

This tax was imposed because Esso stored gasoline. It is not . . . based on the worth of the
government property. Instead, the amount collected is graduated in accordance with the exercise
of Esso's privilege to engage in such operations; so it is not "on" the federal property. . . . Federal
ownership of the fuel will not immunize such a private contractor from the tax on storage. It may
generally, as it did here, burden the United States financially. But since James vs. Dravo
Contracting Co., 302 U.S. 134, 151, 82 L. ed. 155, 167, 58 S. Ct. 208, 114 ALR 318, this has been
no fatal flaw. . . . 12
We have determined the current status of the doctrine of intergovernmental tax immunity in the United
States, by showing the drift of the decisions following announcement of the original rule, to point up the
that fact that even in those cases where exemption from tax was sought on the ground of state immunity,
the attempt has not met with success.

As Thomas Reed Powell noted in 1945 in reviewing the development of the doctrine:

Since the Dravo case settled that it does not matter that the economic burden of the gross receipts
tax may be shifted to the Government, it could hardly matter that the shift comes about by explicit
agreement covering taxes rather than by being absorbed in a higher contract price by bidders for a
contract. The situation differed from that in the Panhandle and similar cases in that they involved
but two parties whereas here the transaction was tripartite. These cases are condemned in so far as
they rested on the economic ground of the ultimate incidence of the burden being on the
Government, but this condemnation still leaves open the question whether either the state or the
United States when acting in governmental matters may be made legally liable to the other for a
tax imposed on it as vendee.

The carefully chosen language of the Chief Justice keeps these cases from foreclosing the issue. . .
. Yet at the time it would have been a rash man who would find in this a dictum that a sales tax
clearly on the Government as purchaser is invalid or a dictum that Congress may immunize its
contractors.13

If a claim of exemption from sales tax based on state immunity cannot command assent, much less can a
claim resting on statutory grant.

It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the tax
becomes a part of the price which the purchaser must pay. It does not matter that an additional amount is
billed as tax to the purchaser. The method of listing the price and the tax separately and defining taxable
gross receipts as the amount received less the amount of the tax added, merely avoids payment by the seller
of a tax on the amount of the tax. The effect is still the same, namely, that the purchaser does not pay the
tax. He pays or may pay the seller more for the goods because of the seller's obligation, but that is all and
the amount added because of the tax is paid to get the goods and for nothing else. 14

But the tax burden may not even be shifted to the purchaser at all. A decision to absorb the burden of the
tax is largely a matter of economics.15 Then it can no longer be contended that a sales tax is a tax on the
purchaser.

We therefore hold that the tax imposed by section 186 of the National Internal Revenue Code is a tax on
the manufacturer or producer and not a tax on the purchaser except probably in a very remote and
inconsequential sense. Accordingly its levy on the sales made to tax-exempt entities like the NPC is
permissible.

II

This conclusion should dispose of the same issue with respect to sales made to the VOA, except that a
claim is here made that the exemption of such sales from taxation rests on stronger grounds. Even the Court
of Tax Appeals appears to share this view as is evident from the following portion of its decision:

With regard to petitioner's sales to the Voice of America, it appears that the petitioner and the
respondent are in agreement that the Voice of America is an agency of the United States
Government and as such, all goods purchased locally by it directly from manufacturers or
producers are exempt from the payment of the sales tax under the provisions of the agreement
between the Government of the Philippines and the Government of the United States, (See
Commonwealth Act No. 733) provided such purchases are supported by serially numbered
 Certificates of Tax Exemption issued by the vendee-agency, as required by General Circular No.
V-41, dated October 16, 1947. . . .

The circular referred to reads:

Goods purchased locally by U.S. civilian agencies directly from manufacturers, producers or
importers shall be exempt from the sales tax.

It was issued purportedly to implement the Agreement between the Republic of the Philippines and the
United States of America Concerning Military Bases,16 but we find nothing in the language of the
Agreement to warrant the general exemption granted by that circular.

The pertinent provisions of the Agreement read:

ARTICLE V. — Exemption from Customs and Other Duties

No import, excise, consumption or other tax, duty or impost shall be charged on material,
equipment, supplies or goods, including food stores and clothing, for exclusive use in the
construction, maintenance, operation or defense of the bases, consigned to, or destined for, the
United States authorities and certified by them to be for such purposes.

ARTICLE XVIII.—Sales and Services Within the Bases

1. It is mutually agreed that the United States Shall have the right to establish on bases, free of all
licenses; fees; sales, excise or other taxes, or imposts; Government agencies, including
concessions, such as sales commissaries and post exchanges, messes and social clubs, for the
exclusive use of the United States military forces and authorized civilian personnel and their
families. The merchandise or services sold or dispensed by such agencies shall be free of all taxes,
duties and inspection by the Philippine authorities. . . .

Thus only sales made "for exclusive use in the construction, maintenance, operation or defense of the
bases," in a word, only sales to the quartermaster, are exempt under article V from taxation. Sales of goods
to any other party even if it be an agency of the United States, such as the VOA, or even to the
quartermaster but for a different purpose, are not free from the payment of the tax.

On the other hand, article XVIII exempts from the payment of the tax sales made within the base by (not
sales to) commissaries and the like in recognition of the principle that a sales tax is a tax on the seller and
not on the purchaser.

It is a familiar learning in the American law of taxation that tax exemption must be strictly construed and
that the exemption will not be held to be conferred unless the terms under which it is granted clearly and
distinctly show that such was the intention of the parties.17 Hence, in so far as the circular of the Bureau of
Internal Revenue would give the tax exemptions in the Agreement an expansive construction it is void.

We hold, therefore, that sales to the VOA are subject to the payment of percentage taxes under section 186
of the Code. The petitioner is thus liable for P12,910.60, computed as follows:

Sales to NPC P145,866.70

Sales to VOA P 1,683.00

Total sales subject to tax

 P147,549.70

7% sales tax due thereon P 10,328.48

Add: 25% surcharge P 2,582.12

Total amount due and collectible P 12,910.60

Accordingly, the decision a quo is modified by ordering the petitioner to pay to the respondent Commission
the amount of P12,910.60 as sales tax and surcharge, with costs against the petitioner.

Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Sanchez, Angeles and Fernando, JJ., concur.
Concepcion, C.J., and Dizon, J., took no part.