G.R. No. 188497 February 19, 2014 COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. PILIPINAS SHELL PETROLEUM CORPORATION, Respondent. RESOLUTION VILLARAMA, JR., J.: For resolution are the Motion for Reconsideration dated May 22, 2012 and Supplemental Motion for Reconsideration dated December 12, 2012 filed by Pilipinas Shell Petroleum Corporation (respondent). As directed, the Solicitor General on behalf of petitioner Commissioner of Internal Revenue filed their Comment, to which respondent filed its Reply. In our Decision promulgated on April 25, 2012, we ruled that the Court of Tax Appeals (CTA) erred in granting respondent's claim for tax refund because the latter failed to establish a tax exemption in its favor under Section 135(a) of the National Internal Revenue Code of 1997 (NIRC). WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated March 25, 2009 and Resolution dated June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB No. 415 are hereby REVERSED and SET ASIDE. The claims for tax refund or credit filed by respondent Pilipinas Shell Petroleum Corporation are DENIED for lack of basis. No pronouncement as to costs. SO ORDERED.1 Respondent argues that a plain reading of Section 135 of the NIRC reveals that it is the petroleum products sold to international carriers which are exempt from excise tax for which reason no excise taxes are deemed to have been due in the first place. It points out that excise tax being an indirect tax, Section 135 in relation to Section 148 should be interpreted as referring to a tax exemption from the point of production and removal from the place of production considering that it is only at that point that an excise tax is imposed. The situation is unlike the value-added tax (VAT) which is imposed at every point of turnover – from production to wholesale, to retail and to end-consumer. Respondent thus concludes that exemption could only refer to the imposition of the tax on the statutory seller, in this case the respondent. This is because when a tax paid by the statutory seller is passed on to the buyer it is no longer in the nature of a tax but an added cost to the purchase price of the product sold. Respondent also contends that our ruling that Section 135 only prohibits local petroleum manufacturers like respondent from shifting the burden of excise tax to international carriers has adverse economic impact as it severely curtails the domestic oil industry. Requiring local petroleum manufacturers to absorb the tax burden in the sale of its products to international carriers is contrary to the State’s policy of "protecting gasoline dealers and distributors from unfair and onerous trade conditions," and places them at a competitive disadvantage since foreign oil producers, particularly those whose governments with which we have entered into bilateral service agreements, are not subject to excise tax for the same transaction. Respondent fears this could lead to cessation of supply of petroleum products to international carriers, retrenchment of employees of domestic manufacturers/producers to prevent further losses, or worse, shutting down of their production of jet A-1 fuel and aviation gas due to unprofitability of sustaining operations. Under this scenario, participation of Filipino capital, management and labor in the domestic oil industry is effectively diminished. Lastly, respondent asserts that the imposition by the Philippine Government of excise tax on petroleum products sold to international carriers is in violation of the Chicago Convention on International Aviation ("Chicago Convention") to which it is a signatory, as well as other international agreements (the Republic of the Philippines’ air transport agreements with the United States of America, Netherlands, Belgium and Japan). In his Comment, the Solicitor General underscores the statutory basis of this Court’s ruling that the exemption under Section 135 does not attach to the products. Citing Exxonmobil Petroleum & Chemical Holdings, Inc.-Philippine Branch v. Commissioner of Internal Revenue,2 which held that the excise tax, when passed on to the purchaser, becomes part of the purchase price, the Solicitor General claims this refutes respondent’s theory that the exemption attaches to the petroleum product itself and not to the purchaser for it would have been erroneous for the seller to pay the excise tax and inequitable to pass it on to the purchaser if the excise tax exemption attaches to the product. As to respondent’s reliance in the cases of Silkair (Singapore) Pte. Ltd. v. Commissioner of Internal Revenue3 and Exxonmobil Petroleum & Chemical Holdings, Inc.-Philippine Branch v. Commissioner of Internal Revenue,4 the Solicitor General points out that there was no pronouncement in these cases that petroleum manufacturers selling petroleum products to international carriers are exempt from paying excise taxes. In fact, Exxonmobil even cited the case of Philippine Acetylene Co, Inc. v. Commissioner of Internal Revenue.5 Further, the ruling in Maceda v. Macaraig, Jr.6 which confirms that Section 135 does not intend to exempt manufacturers or producers of petroleum products from the payment of excise tax. The Court will now address the principal arguments proffered by respondent: (1) Section 135 intended the tax exemption to apply to petroleum products at the point of production; (2) Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue and Maceda v. Macaraig, Jr. are inapplicable in the light of previous rulings of the Bureau of Internal Revenue (BIR) and the CTA that the excise tax on petroleum products sold to international carriers for use or consumption outside the Philippines attaches to the article when sold to said international carriers, as it is the article which is exempt from the tax, not the international carrier; and (3) the Decision of this Court will not only have adverse impact on the domestic oil industry but is also in violation of international agreements on aviation. Under Section 129 of the NIRC, excise taxes are those applied to goods manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things imported. Excise taxes as used in our Tax Code fall under two types – (1) specific tax which is based on weight or volume capacity and other physical unit of measurement, and (2) ad valorem tax which is based on selling price or other specified value of the goods. Aviation fuel is subject to specific tax under Section 148 (g) which attaches to said product "as soon as they are in existence as such." On this point, the clarification made by our esteemed colleague, Associate Justice Lucas P. Bersamin regarding the traditional meaning of excise tax adopted in our Decision, is welltaken. The transformation undergone by the term "excise tax" from its traditional concept up to its current definition in our Tax Code was explained in the case of Petron Corporation v. Tiangco,7 as follows: Admittedly, the proffered definition of an excise tax as "a tax upon the performance, carrying on, or exercise of some right, privilege, activity, calling or occupation" derives from the compendium American Jurisprudence, popularly referred to as Am Jur and has been cited in previous decisions of this Court, including those cited by Petron itself. Such a definition would not have been inconsistent with previous incarnations of our Tax Code, such as the NIRC of 1939, as amended, or the NIRC of 1977 because in those laws the term "excise tax" was not used at all. In contrast, the nomenclature used in those prior laws in referring to taxes imposed on specific articles was "specific tax." Yet beginning with the National Internal Revenue Code of 1986, as amended, the term "excise taxes" was used and defined as applicable "to goods manufactured or produced in the Philippines… and to things imported." This definition was carried over into the present NIRC of 1997. Further, these two latest codes categorize two different kinds of excise taxes: "specific tax" which is imposed and based on weight or volume capacity or any other physical unit of measurement; and "ad valorem tax" which is imposed and based on the selling price or other specified value of the goods. In other words, the meaning of "excise tax" has undergone a transformation, morphing from the Am Jur definition to its current signification which is a tax on certain specified goods or articles. The change in perspective brought forth by the use of the term "excise tax" in a different connotation was not lost on the departed author Jose Nolledo as he accorded divergent treatments in his 1973 and 1994 commentaries on our tax laws. Writing in 1973, and essentially alluding to the Am Jur definition of "excise tax," Nolledo observed: Are specific taxes, taxes on property or excise taxes – In the case of Meralco v. Trinidad ([G.R.] 16738, 1925) it was held that specific taxes are property taxes, a ruling which seems to be erroneous. Specific taxes are truly excise taxes for the fact that the value of the property taxed is taken into account will not change the nature of the tax. It is correct to say that specific taxes are taxes on the privilege to import, manufacture and remove from storage certain articles specified by law. In contrast, after the tax code was amended to classify specific taxes as a subset of excise taxes, Nolledo, in his 1994 commentaries, wrote: 1. Excise taxes, as used in the Tax Code, refers to taxes applicable to certain specified goods or articles manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things imported into the Philippines. They are either specific or ad valorem. 2. Nature of excise taxes. – They are imposed directly on certain specified goods. (infra) They are, therefore, taxes on property. (see Medina vs. City of Baguio, 91 Phil. 854.) A tax is not excise where it does not subject directly the produce or goods to tax but indirectly as an incident to, or in connection with, the business to be taxed. In their 2004 commentaries, De Leon and De Leon restate the Am Jur definition of excise tax, and observe that the term is "synonymous with ‘privilege tax’ and [both terms] are often used interchangeably." At the same time, they offer a caveat that "[e]xcise tax, as [defined by Am Jur], is not to be confused with excise tax imposed [by the NIRC] on certain specified articles manufactured or produced in, or imported into, the Philippines, ‘for domestic sale or consumption or for any other disposition.’" It is evident that Am Jur aside, the current definition of an excise tax is that of a tax levied on a specific article, rather than one "upon the performance, carrying on, or the exercise of an activity." This current definition was already in place when the Code was enacted in 1991, and we can only presume that it was what the Congress had intended as it specified that local government units could not impose "excise taxes on articles enumerated under the [NIRC]." This prohibition must pertain to the same kind of excise taxes as imposed by the NIRC, and not those previously defined "excise taxes" which were not integrated or denominated as such in our present tax law.8 (Emphasis supplied.) That excise tax as presently understood is a tax on property has no bearing at all on the issue of respondent’s entitlement to refund. Nor does the nature of excise tax as an indirect tax supports respondent’s postulation that the tax exemption provided in Sec. 135 attaches to the petroleum products themselves and consequently the domestic petroleum manufacturer is not liable for the payment of excise tax at the point of production. As already discussed in our Decision, to which Justice Bersamin concurs, "the accrual and payment of the excise tax on the goods enumerated under Title VI of the NIRC prior to their removal at the place of production are absolute and admit of no exception." This also underscores the fact that the exemption from payment of excise tax is conferred on international carriers who purchased the petroleum products of respondent. On the basis of Philippine Acetylene, we held that a tax exemption being enjoyed by the buyer cannot be the basis of a claim for tax exemption by the manufacturer or seller of the goods for any tax due to it as the manufacturer or seller. The excise tax imposed on petroleum products under Section 148 is the direct liability of the manufacturer who cannot thus invoke the excise tax exemption granted to its buyers who are international carriers. And following our pronouncement in Maceda v. Macarig, Jr. we further ruled that Section 135(a) should be construed as prohibiting the shifting of the burden of the excise tax to the international carriers who buy petroleum products from the local manufacturers. Said international carriers are thus allowed to purchase the petroleum products without the excise tax component which otherwise would have been added to the cost or price fixed by the local manufacturers or distributors/sellers. Excise tax on aviation fuel used for international flights is practically nil as most countries are signatories to the 1944 Chicago Convention on International Aviation (Chicago Convention). Article 249 of the Convention has been interpreted to prohibit taxation of aircraft fuel consumed for international transport. Taxation of international air travel is presently at such low level that there has been an intensified debate on whether these should be increased to "finance development rather than simply to augment national tax revenue" considering the "cross-border environmental damage" caused by aircraft emissions that contribute to global warming, not to mention noise pollution and congestion at airports).10 Mutual exemptions given under bilateral air service agreements are seen as main legal obstacles to the imposition of indirect taxes on aviation fuel. In response to present realities, the International Civil Aviation Organization (ICAO) has adopted policies on charges and emission-related taxes and charges.11 Section 135(a) of the NIRC and earlier amendments to the Tax Code represent our Governments’ compliance with the Chicago Convention, its subsequent resolutions/annexes, and the air transport agreements entered into by the Philippine Government with various countries. The rationale for exemption of fuel from national and local taxes was expressed by ICAO as follows: ...The Council in 1951 adopted a Resolution and Recommendation on the taxation of fuel, a Resolution on the taxation of income and of aircraft, and a Resolution on taxes related to the sale or use of international air transport (cf. Doc 7145) which were further amended and amplified by the policy statements in Doc 8632 published in 1966. The Resolutions and Recommendation concerned were designed to recognize the uniqueness of civil aviation and the need to accord tax exempt status to certain aspects of the operations of international air transport and were adopted because multiple taxation on the aircraft, fuel, technical supplies and the income of international air transport, as well as taxes on its sale and use, were considered as major obstacles to the further development of international air transport. Non-observance of the principle of reciprocal exemption envisaged in these policies was also seen as risking retaliatory action with adverse repercussions on international air transport which plays a major role in the development and expansion of international trade and travel.12 In the 6th Meeting of the Worldwide Air Transport Conference (ATCONF) held on March 18-22, 2013 at Montreal, among matters agreed upon was that "the proliferation of various taxes and duties on air transport could have negative impact on the sustainable development of air transport and on consumers." Confirming that ICAO’s policies on taxation remain valid, the Conference recommended that "ICAO promote more vigorously its policies and with industry stakeholders to develop analysis and guidance to States on the impact of taxes and other levies on air transport."13 Even as said conference was being held, on March 7, 2013, President Benigno Aquino III has signed into law Republic Act (R.A.) No. 1037814 granting tax incentives to foreign carriers which include exemption from the 12% value-added tax (VAT) and 2.5% gross Philippine billings tax (GPBT). GPBT is a form of income tax applied to international airlines or shipping companies. The law, based on reciprocal grant of similar tax exemptions to Philippine carriers, is expected to increase foreign tourist arrivals in the country. Indeed, the avowed purpose of a tax exemption is always "some public benefit or interest, which the law-making body considers sufficient to offset the monetary loss entailed in the grant of the exemption."15 The exemption from excise tax of aviation fuel purchased by international carriers for consumption outside the Philippines fulfills a treaty obligation pursuant to which our Government supports the promotion and expansion of international travel through avoidance of multiple taxation and ensuring the viability and safety of international air travel. In recent years, developing economies such as ours focused more serious attention to significant gains for business and tourism sectors as well. Even without such recent incidental benefit, States had long accepted the need for international cooperation in maintaining a capital intensive, labor intensive and fuel intensive airline industry, and recognized the major role of international air transport in the development of international trade and travel. Under the basic international law principle of pacta sunt servanda, we have the duty to fulfill our treaty obligations in good faith. This entails harmonization of national legislation with treaty provisions. In this case, Sec. 135(a) of the NIRC embodies our compliance with our undertakings under the Chicago Convention and various bilateral air service agreements not to impose excise tax on aviation fuel purchased by international carriers from domestic manufacturers or suppliers. In our Decision in this case, we interpreted Section 135 (a) as prohibiting domestic manufacturer or producer to pass on to international carriers the excise tax it had paid on petroleum products upon their removal from the place of production, pursuant to Article 148 and pertinent BIR regulations. Ruling on respondent’s claim for tax refund of such paid excise taxes on petroleum products sold to tax-exempt international carriers, we found no basis in the Tax Code and jurisprudence to grant the refund of an "erroneously or illegally paid" tax. Justice Bersamin argues that "(T)he shifting of the tax burden by manufacturers-sellers is a business prerogative resulting from the collective impact of market forces," and that it is "erroneous to construe Section 135(a) only as a prohibition against the shifting by the manufacturers-sellers of petroleum products of the tax burden to international carriers, for such construction will deprive the manufacturerssellers of their business prerogative to determine the prices at which they can sell their products." We maintain that Section 135 (a), in fulfillment of international agreement and practice to exempt aviation fuel from excise tax and other impositions, prohibits the passing of the excise tax to international carriers who buys petroleum products from local manufacturers/sellers such as respondent. However, we agree that there is a need to reexamine the effect of denying the domestic manufacturers/sellers’ claim for refund of the excise taxes they already paid on petroleum products sold to international carriers, and its serious implications on our Government’s commitment to the goals and objectives of the Chicago Convention. The Chicago Convention, which established the legal framework for international civil aviation, did not deal comprehensively with tax matters. Article 24 (a) of the Convention simply provides that fuel and lubricating oils on board an aircraft of a Contracting State, on arrival in the territory of another Contracting State and retained on board on leaving the territory of that State, shall be exempt from customs duty, inspection fees or similar national or local duties and charges. Subsequently, the exemption of airlines from national taxes and customs duties on spare parts and fuel has become a standard element of bilateral air service agreements (ASAs) between individual countries. The importance of exemption from aviation fuel tax was underscored in the following observation made by a British author16 in a paper assessing the debate on using tax to control aviation emissions and the obstacles to introducing excise duty on aviation fuel, thus: Without any international agreement on taxing fuel, it is highly likely that moves to impose duty on international flights, either at a domestic or European level, would encourage 'tankering': carriers filling their aircraft as full as possible whenever they landed outside the EU to avoid paying tax.1âwphi1 Clearly this would be entirely counterproductive. Aircraft would be travelling further than necessary to fill up in low-tax jurisdictions; in addition they would be burning up more fuel when carrying the extra weight of a full fuel tank. With the prospect of declining sales of aviation jet fuel sales to international carriers on account of major domestic oil companies' unwillingness to shoulder the burden of excise tax, or of petroleum products being sold to said carriers by local manufacturers or sellers at still high prices , the practice of "tankering" would not be discouraged. This scenario does not augur well for the Philippines' growing economy and the booming tourism industry. Worse, our Government would be risking retaliatory action under several bilateral agreements with various countries. Evidently, construction of the tax exemption provision in question should give primary consideration to its broad implications on our commitment under international agreements. In view of the foregoing reasons, we find merit in respondent's motion for reconsideration. We therefore hold that respondent, as the statutory taxpayer who is directly liable to pay the excise tax on its petroleum products, is entitled to a refund or credit of the excise taxes it paid for petroleum products sold to international carriers, the latter having been granted exemption from the payment of said excise tax under Sec. 135 (a) of the NIRC. WHEREFORE, the Court hereby resolves to: (1) GRANT the original and supplemental motions for reconsideration filed by respondent Pilipinas Shell Petroleum Corporation; and (2) AFFIRM the Decision dated March 25, 2009 and Resolution dated June 24, 2009 of the Court of Tax Appeals En Banc in CT A EB No. 415; and DIRECT petitioner Commissioner of Internal Revenue to refund or to issue a tax credit certificate to Pilipinas Shell Petroleum Corporation in the amount of J195,014,283.00 representing the excise taxes it paid on petroleum products sold to international carriers from October 2001 to June 2002. SO ORDERED. G.R. No. 188497 February 19, 2014 COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. PILIPINAS SHELL PETROLEUM CORPORATION, Respondent. SEPARATE OPINION BERSAMIN, J.: In essence, the Resolution written for the Court by my esteemed colleague, Justice Martin S. Villarama, Jr., maintains that the exemption from payment of the excise tax under Section 135(a) of the National Internal Revenue Code (NIRC) is conferred on the international carriers; and that, accordingly, and in fulfillment of international agreement and practice to exempt aviation fuel from the excise tax and other impositions, Section 135(a) of the NIRC prohibits the passing of the excise tax to international carriers purchasing petroleum products from local manufacturers/sellers. Hence, he finds merit in the Motion for Reconsideration filed by Pilipinas Shell Petroleum Corporation (Pilipinas Shell), and rules that Pilipinas Shell, as the statutory taxpayer directly liable to pay the excise tax on its petroleum products, is entitled to the refund or credit of the excise taxes it paid on the petroleum products sold to international carriers, the latter having been granted exemption from the payment of such taxes under Section 135(a) of the NIRC. I CONCUR in the result. I write this separate opinion only to explain that I hold a different view on the proper interpretation of the excise tax exemption under Section 135(a) of the NIRC. I hold that the excise tax exemption under Section 135(a) of the NIRC is conferred on the petroleum products on which the excise tax is levied in the first place in view of its nature as a tax on property, the liability for the payment of which is statutorily imposed on the domestic petroleum manufacturer. I submit the following disquisition in support of this separate opinion. The issue raised here was whether the manufacturer was entitled to claim the refund of the excise taxes paid on the petroleum products sold to international carriers exempt under Section 135(a) of the NIRC. We ruled in the negative, and held that the exemption from the excise tax under Section 135(a) of the NIRC was conferred on the international carriers to whom the petroleum products were sold. In the decision promulgated onn April 25, 2012,1 the Court granted the petition for review on certiorari filed by the Commissioner of Internal Revenue (CIR), and disposed thusly: WHEREFORE, the petition for review on certiorari is GRANTED. The Decision dated March 25, 2009 and Resolution dated June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB No. 415 are hereby REVERSED and SET ASIDE. The claims for tax refund or credit filed by respondent Pilipinas Shell Petroleum Corporation are DENIED for lack of basis. No pronouncement as to costs. SO ORDERED.2 We thereby agreed with the position of the Solicitor General that Section 135(a) of the NIRC must be construed only as a prohibition for the manufacturer-seller of the petroleum products from shifting the tax burden to the international carriers by incorporating the previously-paid excise tax in the selling price. As a consequence, the manufacturer-seller could not invoke the exemption from the excise tax granted to international carriers. Concluding, we said: – Respondent’s locally manufactured petroleum products are clearly subject to excise tax under Sec. 148. Hence, its claim for tax refund may not be predicated on Sec. 229 of the NIRC allowing a refund of erroneous or excess payment of tax. Respondent’s claim is premised on what it determined as a tax exemption "attaching to the goods themselves," which must be based on a statute granting tax exemption, or "the result of legislative grace." Such a claim is to be construed strictissimi juris against the taxpayer, meaning that the claim cannot be made to rest on vague inference. Where the rule of strict interpretation against the taxpayer is applicable as the claim for refund partakes of the nature of an exemption, the claimant must show that he clearly falls under the exempting statute. The exemption from excise tax payment on petroleum products under Sec. 135 (a) is conferred on international carriers who purchased the same for their use or consumption outside the Philippines. The only condition set by law is for these petroleum products to be stored in a bonded storage tank and may be disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner.3 xxxx Because an excise tax is a tax on the manufacturer and not on the purchaser, and there being no express grant under the NIRC of exemption from payment of excise tax to local manufacturers of petroleum products sold to international carriers, and absent any provision in the Code authorizing the refund or crediting of such excise taxes paid, the Court holds that Sec. 135 (a) should be construed as prohibiting the shifting of the burden of the excise tax to the international carriers who buys petroleum products from the local manufacturers. Said provision thus merely allows the international carriers to purchase petroleum products without the excise tax component as an added cost in the price fixed by the manufacturers or distributors/sellers. Consequently, the oil companies which sold such petroleum products to international carriers are not entitled to a refund of excise taxes previously paid on the goods.4 In its Motion for Reconsideration filed on May 23, 2012, Pilipinas Shell principally contends that the Court has erred in its interpretation of Section 135(a) of the 1997 NIRC; that Section 135(a) of the NIRC categorically exempts from the excise tax the petroleum products sold to international carriers of Philippine or foreign registry for their use or consumption outside the Philippines;5 that no excise tax should be imposed on the petroleum products, whether in the hands of the qualified international carriers or in the hands of the manufacturer-seller;6 that although it is the manufacturer, producer or importer who is generally liable for the excise tax when the goods or articles are subject to the excise tax, no tax should accordingly be collected from the manufacturer, producer or importer in instances when the goods or articles themselves are not subject to the excise tax;7 and that as a consequence any excise tax paid in advance on products that are exempt under the law should be considered erroneously paid and subject of refund.8 Pilipinas Shell further contends that the Court’s decision, which effectively prohibits petroleum manufacturers from passing on the burden of the excise tax, defeats the rationale behind the grant of the exemption;9 and that without the benefit of a refund or the ability to pass on the burden of the excise tax to the international carriers, the excise tax will constitute an additional production cost that ultimately increases the selling price of the petroleum products.10 The CIR counters that the decision has clearly set forth that the excise tax exemption under Section 135(a) of the NIRC does not attach to the products; that Pilipinas Shell’s reliance on the Silkair rulings is misplaced considering that the Court made no pronouncement therein that the manufacturers selling petroleum products to international carriers were exempt from paying the taxes; that the rulings that are more appropriate are those in Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue11 and Maceda v. Macaraig, Jr.,12 whereby the Court confirmed the obvious intent of Section 135 of the NIRC to grant the excise tax exemption to the international carriers or agencies as the buyers of petroleum products; and that this intention is further supported by the requirement that the petroleum manufacturer must pay the excise tax in advance without regard to whether or not the petroleum purchaser is qualified for exemption under Section 135 of the NIRC. In its Supplemental Motion for Reconsideration, Pilipinas Shell reiterates that what is being exempted under Section 135 of the NIRC is the petroleum product that is sold to international carriers; that the exemption is not given to the producer or the buyer but to the product itself considering that the excise taxes, according to the NIRC, are taxes applicable to certain specific goods or articles for domestic sale or consumption or for any other disposition, whether manufactured in or imported into the Philippines; that the excise tax that is passed on to the buyer is no longer in the nature of a tax but of an added cost to the purchase price of the product sold; that what is contemplated under Section 135 of the NIRC is an exemption from the excise tax, not an exemption from the burden to shoulder the tax; and that inasmuch as the exemption can refer only to the imposition of the tax on the statutory seller, like Pilipinas Shell, a contrary interpretation renders Section 135 of the NIRC nugatory because the NIRC does not impose the excise tax on subsequent holders of the product like the international carriers. As I earlier said, I agree to GRANT Pilipinas Shell’s motions for reconsideration. Excise tax is essentially a tax on goods, products or articles Taxes are classified, according to subject matter or object, into three groups, to wit: (1) personal, capitation or poll taxes; (2) property taxes; and (3) excise or license taxes. Personal, capitation or poll taxes are fixed amounts imposed upon residents or persons of a certain class without regard to their property or business, an example of which is the basic community tax.13 Property taxes are assessed on property or things of a certain class, whether real or personal, in proportion to their value or other reasonable method of apportionment, such as the real estate tax.14 Excise or license taxes are imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation, profession or business.15 Income tax, value-added tax, estate and donor’s tax fall under the third group. Excise tax, as a classification of tax according to object, must not be confused with the excise tax under Title VI of the NIRC. The term "excise tax" under Title VI of the 1997 NIRC derives its definition from the 1986 NIRC,16 and relates to taxes applied to goods manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things imported.17 In contrast, an excise tax that is imposed directly on certain specified goods – goods manufactured or produced in the Philippines, or things imported – is undoubtedly a tax on property.18 The payment of excise taxes is the direct liability of the manufacturer or producer The production, manufacture or importation of the goods belonging to any of the categories enumerated in Title VI of the NIRC (i.e., alcohol products, tobacco products, petroleum products, automobiles and non-essential goods, mineral products) are not the sole determinants for the proper levy of the excise tax. It is further required that the goods be manufactured, produced or imported for domestic sale, consumption or any other disposition.19 The accrual of the tax liability is, therefore, contingent on the production, manufacture or importation of the taxable goods and the intention of the manufacturer, producer or importer to have the goods locally sold or consumed or disposed in any other manner. This is the reason why the accrual and liability for the payment of the excise tax are imposed directly on the manufacturer or producer of the taxable goods,20 and arise before the removal of the goods from the place of their production.21 The manufacturer’s or producer’s direct liability to pay the excise taxes similarly operates although the goods produced or manufactured within the country are intended for export and are "actually exported without returning to the Philippines, whether so exported in their original state or as ingredients or parts of any manufactured goods or products." This is implied from the grant of a tax credit or refund to the manufacturer or producer by Section 130(4)(D) of the NIRC, thereby presupposing that the excise tax corresponding to the goods exported were previously paid. Section 130(4)(D) reads: xxxx (D) Credit for Excise Tax on Goods Actually Exported. - When goods locally produced or manufactured are removed and actually exported without returning to the Philippines, whether so exported in their original state or as ingredients or parts of any manufactured goods or products, any excise tax paid thereon shall be credited or refunded upon submission of the proof of actual exportation and upon receipt of the corresponding foreign exchange payment: Provided, That the excise tax on mineral products, except coal and coke, imposed under Section 151 shall not be creditable or refundable even if the mineral products are actually exported. (Emphasis supplied.) Simply stated, the accrual and payment of the excise tax under Title VI of the NIRC materially rest on the fact of actual production, manufacture or importation of the taxable goods in the Philippines and on their presumed or intended domestic sale, consumption or disposition. Considering that the excise tax attaches to the goods upon the accrual of the manufacturer’s direct liability for its payment, the subsequent sale, consumption or other disposition of the goods becomes relevant only to determine whether any exemption or tax relief may be granted thereafter. The actual sale, consumption or disposition of the taxable goods confirms the proper tax treatment of goods previously subjected to the excise tax Conformably with the foregoing discussion, the accrual and payment of the excise tax on the goods enumerated under Title VI of the NIRC prior to their removal from the place of production are absolute and admit of no exception. As earlier mentioned, even locally manufactured goods intended for export cannot escape the imposition and payment of the excise tax, subject to a future claim for tax credit or refund once proof of actual exportation has been submitted to the Commissioner of Internal Revenue (CIR).22 Verily, it is the actual sale, consumption or disposition of the taxable goods that confirms the proper tax treatment of goods previously subjected to the excise tax. If any of the goods enumerated under Title VI of the NIRC are manufactured or produced in the Philippines and eventually sold, consumed, or disposed of in any other manner domestically, therefore, there can be no claim for any tax relief inasmuch as the excise tax was properly levied and collected from the manufacturer-seller. Here, the point of interest is the proper tax treatment of the petroleum products sold by Pilipinas Shell to various international carriers. An international carrier is engaged in international transportation or contract of carriage between places in different territorial jurisdictions.23 Pertinent is Section 135(a) of the NIRC, which provides: SEC. 135. Petroleum Products Sold to International Carriers and Exempt Entities or Agencies. - Petroleum products sold to the following are exempt from excise tax: (a) International carriers of Philippine or foreign registry on their use or consumption outside the Philippines: Provided, That the petroleum products sold to these international carriers shall be stored in a bonded storage tank and may be disposed of only in accordance with the rules and regulations to be prescribed by the Secretary of Finance, upon recommendation of the Commissioner; x x x xxxx As the taxpayer statutorily and directly liable for the accrual and payment of the excise tax on the petroleum products it manufactured and it intended for future domestic sale or consumption, Pilipinas Shell paid the corresponding excise taxes prior to the removal of the goods from the place of production. However, upon the sale of the petroleum products to the international carriers, the goods became exempt from the excise tax by the express provision of Section 135(a) of the NIRC. In the latter instance, the fact of sale to the international carriers of the petroleum products previously subjected to the excise tax confirms the proper tax treatment of the goods as exempt from the excise tax. It is worthy to note that Section 135(a) of the NIRC is a product of the 1944 Convention of International Civil Aviation, otherwise known as the Chicago Convention, of which the Philippines is a Member State. Article 24(a) of the Chicago Convention provides – Article 24 Customs duty (a) Aircraft on a flight to, from, or across the territory of another contracting State shall be admitted temporarily free of duty, subject to the customs regulations of the State. Fuel, lubricating oils, spare parts, regular equipment and aircraft stores on board an aircraft of a contracting State, on arrival in the territory of another contracting State and retained on board on leaving the territory of that State shall be exempt from customs duty, inspection fees or similar national or local duties and charges. This exemption shall not apply to any quantities or articles unloaded, except in accordance with the customs regulations of the State, which may require that they shall be kept under customs supervision. x x x (Bold emphasis supplied.) This provision was extended by the ICAO Council in its 1999 Resolution, which stated that "fuel … taken on board for consumption" by an aircraft from a contracting state in the territory of another contracting State departing for the territory of any other State must be exempt from all customs or other duties. The Resolution broadly interpreted the scope of the Article 24 prohibition to include "import, export, excise, sales, consumption and internal duties and taxes of all kinds levied upon . . . fuel."24 Given the nature of the excise tax on petroleum products as a tax on property, the tax exemption espoused by Article 24(a) of the Chicago Convention, as now embodied in Section 135(a) of the NIRC, is clearly conferred on the aviation fuel or petroleum product onboard international carriers. Consequently, the manufacturer’s or producer’s sale of the petroleum products to international carriers for their use or consumption outside the Philippines operates to bring the tax exemption of the petroleum products into full force and effect. Pilipinas Shell, the statutory taxpayer, is the proper party to claim the refund of the excise taxes paid on petroleum products sold to international carriers The excise taxes are of the nature of indirect taxes, the liability for the payment of which may fall on a person other than whoever actually bears the burden of the tax.25 In Commissioner of Internal Revenue v. Philippine Long Distance Telephone Company,26 the Court has discussed the nature of indirect taxes in the following manner: [I]ndirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else. Stated elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser, as part of the price of goods sold or services rendered.27 In another ruling, the Court has observed: Accordingly, the party liable for the tax can shift the burden to another, as part of the purchase price of the goods or services. Although the manufacturer/seller is the one who is statutorily liable for the tax, it is the buyer who actually shoulders or bears the burden of the tax, albeit not in the nature of a tax, but part of the purchase price or the cost of the goods or services sold.28 Accordingly, the option of shifting the burden to pay the excise tax rests on the statutory taxpayer, which is the manufacturer or producer in the case of the excise taxes imposed on the petroleum products. Regardless of who shoulders the burden of tax payment, however, the Court has ruled as early as in the 1960s that the proper party to question or to seek a refund of an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same, even if he shifts the burden thereof to another.29 The Court has explained: In Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue, the Court held that the sales tax is imposed on the manufacturer or producer and not on the purchaser, "except probably in a very remote and inconsequential sense." Discussing the "passing on" of the sales tax to the purchaser, the Court therein cited Justice Oliver Wendell Holmes’ opinion in Lash’s Products v. United States wherein 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. x x x 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 x x x." Proceeding from this discussion, the Court went on to state: 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. x x x 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. 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. Then it can no longer be contended that a sales tax is a tax on the purchaser.30 The Silkair rulings involving the excise taxes on the petroleum products sold to international carriers firmly hold that the proper party to claim the refund of excise taxes paid is the manufacturer-seller. In the February 2008 Silkair ruling,31 the Court declared: The proper party to question, or seek a refund of, an indirect tax is the statutory taxpayer, the person on whom the tax is imposed by law and who paid the same even if he shifts the burden thereof to another. Section 130 (A) (2) of the NIRC provides that "[u]nless otherwise specifically allowed, the return shall be filed and the excise tax paid by the manufacturer or producer before removal of domestic products from place of production." Thus, Petron Corporation, not Silkair, is the statutory taxpayer which is entitled to claim a refund based on Section 135 of the NIRC of 1997 and Article 4(2) of the Air Transport Agreement between RP and Singapore. Even if Petron Corporation passed on to Silkair the burden of the tax, the additional amount billed to Silkair for jet fuel is not a tax but part of the price which Silkair had to pay as a purchaser In the November 2008 Silkair ruling,32 the Court reiterated: Section 129 of the NIRC provides that excise taxes refer to taxes imposed on specified goods manufactured or produced in the Philippines for domestic sale or consumption or for any other disposition and to things imported. The excise taxes are collected from manufacturers or producers before removal of the domestic products from the place of production. Although excise taxes can be considered as taxes on production, they are really taxes on property as they are imposed on certain specified goods. Section 148(g) of the NIRC provides that there shall be collected on aviation jet fuel an excise tax of ₱3.67 per liter of volume capacity. Since the tax imposed is based on volume capacity, the tax is referred to as "specific tax." However, excise tax, whether classified as specific or ad valorem tax, is basically an indirect tax imposed on the consumption of a specified list of goods or products. The tax is directly levied on the manufacturer upon removal of the taxable goods from the place of production but in reality, the tax is passed on to the end consumer as part of the selling price of the goods sold xxxx When Petron removes its petroleum products from its refinery in Limay, Bataan, it pays the excise tax due on the petroleum products thus removed. Petron, as manufacturer or producer, is the person liable for the payment of the excise tax as shown in the Excise Tax Returns filed with the BIR. Stated otherwise, Petron is the taxpayer that is primarily, directly and legally liable for the payment of the excise taxes. However, since an excise tax is an indirect tax, Petron can transfer to its customers the amount of the excise tax paid by treating it as part of the cost of the goods and tacking it on to the selling price. As correctly observed by the CTA, this Court held in Philippine Acetylene Co., Inc. v. Commissioner of Internal Revenue: It may indeed be that the economic burden of the tax finally falls on the purchaser; when it does the tax becomes part of the price which the purchaser must pay. Even if the consumers or purchasers ultimately pay for the tax, they are not considered the taxpayers. The fact that Petron, on whom the excise tax is imposed, can shift the tax burden to its purchasers does not make the latter the taxpayers and the former the withholding agent. Petitioner, as the purchaser and end-consumer, ultimately bears the tax burden, but this does not transform petitioner's status into a statutory taxpayer. In the refund of indirect taxes, the statutory taxpayer is the proper party who can claim the refund. Section 204(c) of the NIRC provides: Sec. 204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit Taxes. The Commissioner may – xxxx (b) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after the payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund. (Emphasis and underscoring supplied) The person entitled to claim a tax refund is the statutory taxpayer. Section 22(N) of the NIRC defines a taxpayer as "any person subject to tax." In Commissioner of Internal Revenue v. Procter and Gamble Phil. Mfg. Corp., the Court ruled that: A "person liable for tax" has been held to be a "person subject to tax" and properly considered a "taxpayer." The terms "liable for tax" and "subject to tax" both connote a legal obligation or duty to pay a tax. The excise tax is due from the manufacturers of the petroleum products and is paid upon removal of the products from their refineries. Even before the aviation jet fuel is purchased from Petron, the excise tax is already paid by Petron. Petron, being the manufacturer, is the "person subject to tax." In this case, Petron, which paid the excise tax upon removal of the products from its Bataan refinery, is the "person liable for tax." Petitioner is neither a "person liable for tax" nor "a person subject to tax." There is also no legal duty on the part of petitioner to pay the excise tax; hence, petitioner cannot be considered the taxpayer. Even if the tax is shifted by Petron to its customers and even if the tax is billed as a separate item in the aviation delivery receipts and invoices issued to its customers, Petron remains the taxpayer because the excise tax is imposed directly on Petron as the manufacturer. Hence, Petron, as the statutory taxpayer, is the proper party that can claim the refund of the excise taxes paid to the BIR.33 It is noteworthy that the foregoing pronouncements were applied in two more Silkair cases34 involving the same parties and the same cause of action but pertaining to different periods of taxation. The shifting of the tax burden by manufacturers-sellers is a business prerogative resulting from the collective impact of market forces. Such forces include government impositions like the excise tax. Hence, the additional amount billed to the purchaser as part of the price the purchaser pays for the goods acquired cannot be solely attributed to the effect of the tax liability imposed on the manufacture-seller. It is erroneous to construe Section 135(a) only as a prohibition against the shifting by the manufacturers-sellers of petroleum products of the tax burden to international carriers, for such construction will deprive the manufacturers-sellers of their business prerogative to determine the prices at which they can sell their products. Section 135(a) of the NIRC cannot be further construed as granting the excise tax exemption to the international carrier to whom the petroleum products are sold considering that the international carrier has not been subjected to excise tax at the outset. To reiterate, the excise tax is levied on the petroleum products because it is a tax on property. Levy is the act of imposition by the Legislature such as by its enactment of a law.35 The law enacted here is the NIRC whereby the excise tax is imposed on the petroleum products, the liability for the payment of which is further statutorily imposed on the domestic petroleum manufacturer. Accordingly, the exemption must be allowed to the petroleum products because it is on them that the tax is imposed. The tax status of an international carrier to whom the petroleum products are sold is not based on exemption; rather, it is based on the absence of a law imposing the excise tax on it. This further supports the position that the burden passed on by the domestic petroleum manufacturer is not anymore in the nature of a tax – although resulting from the previously-paid excise tax – but as an additional cost component in the selling price. Consequently, the purchaser of the petroleum products to whom the burden of the excise tax has been shifted, not being the statutory taxpayer, cannot claim a refund of the excise tax paid by the manufacturer or producer. Applying the foregoing, the Court concludes that: (1) the exemption under Section 135(a) of the NIRC is conferred on the petroleum products on which the excise tax was levied in the first place; (2) Pilipinas Shell, being the manufacturer or producer of petroleum products, was the statutory taxpayer of the excise tax imposed on the petroleum products; (3) as the statutory taxpayer, Pilipinas Shell’s liability to pay the excise tax accrued as soon as the petroleum products came into existence, and Pilipinas Shell accordingly paid its excise tax liability prior to its sale or disposition of the taxable goods to third parties, a fact not disputed by the CIR; and (3) Pilipinas Shell’s sale of the petroleum products to international carriers for their use or consumption outside the Philippines confirmed the proper tax treatment of the subject goods as exempt from the excise tax.1âwphi1 Under the circumstances, therefore, Pilipinas Shell erroneously paid the excise taxes on its petroleum products sold to international carriers, and was entitled to claim the refund of the excise taxes paid in accordance with prevailing jurisprudence and Section 204(C) of the NIRC, viz: Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit Taxes. – The Commissioner may – x x x xxxx (C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and, in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed unless the taxpayer files in writing with the Commissioner a claim for credit or refund within two (2) years after payment of the tax or penalty: Provided, however, That a return filed showing an overpayment shall be considered as a written claim for credit or refund. IN VIEW OF THE FOREGOING, I VOTE TO GRANT the Motion for Reconsideration and Supplemental Motion for Reconsideration of Pilipinas Shell Petroleum Corporation and, accordingly: (a) TO AFFIRM the decision dated March 25, 2009 and resolution dated June 24, 2009 of the Court of Tax Appeals En Banc in CTA EB No. 415; and (b) TO DIRECT petitioner Commissioner of Internal Revenue to refund or to issue a tax credit certificate to Pilipinas Shell Petroleum Corporation in the amount of ₱95,014,283.00 representing the excise taxes it paid on the petroleum products sold to international carriers in the period from October 2001 to June 2002. LUCAS P. BERSAMIN Associate Justice ANGELES UNIVERSITY FOUNDATION, Petitioner, - versus CITY OF ANGELES, JULIET G. QUINSAAT, in her capacity as G.R. No. 189999 Present: LEONARDO-DE CASTRO,J.,* Acting Chairperson, BERSAMIN, VILLARAMA, JR., PEREZ,** and PERLAS-BERNABE,*** JJ. Treasurer of Angeles City and ENGR. DONATO N. DIZON, in his capacity as Acting Angeles City Building Official, Respondents. Promulgated: June 27, 2012 DECISION VILLARAMA, JR., J.: Before us is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, which seeks to reverse and set aside the Decision dated July 28, 2009 and Resolution dated October 12, 2009 of the Court of Appeals (CA) in CA-G.R. CV No. 90591. The CA reversed the Decision dated September 21, 2007 of the Regional Trial Court of Angeles City, Branch 57 in Civil Case No. 12995 declaring petitioner exempt from the payment of building permit and other fees and ordering respondents to refund the same with interest at the legal rate. The factual antecedents: Petitioner Angeles University Foundation (AUF) is an educational institution established on May 25, 1962 and was converted into a non-stock, non-profit education foundation under the provisions of Republic Act (R.A.) No. 6055 on December 4, 1975. Sometime in August 2005, petitioner filed with the Office of the City Building Official an application for a building permit for the construction of an 11-storey building of the Angeles University Foundation Medical Center in its main campus located at MacArthur Highway, Angeles City, Pampanga. Said office issued a Building Permit Fee Assessment in the amount of P126,839.20. An Order of Payment was also issued by the City Planning and Development Office, Zoning Administration Unit requiring petitioner to pay the sum of P238,741.64 as Locational Clearance Fee. In separate letters dated November 15, 2005 addressed to respondents City Treasurer Juliet G. Quinsaat and Acting City Building Official Donato N. Dizon, petitioner claimed that it is exempt from the payment of the building permit and locational clearance fees, citing legal opinions rendered by the Department of Justice (DOJ). Petitioner also reminded the respondents that they have previously issued building permits acknowledging such exemption from payment of building permit fees on the construction of petitioners 4-storey AUF Information Technology Center building and the AUF Professional Schools building on July 27, 2000 and March 15, 2004, respectively. Respondent City Treasurer referred the matter to the Bureau of Local Government Finance (BLGF) of the Department of Finance, which in turn endorsed the query to the DOJ. Then Justice Secretary Raul M. Gonzalez, in his letterreply dated December 6, 2005, cited previous issuances of his office (Opinion No. 157, s. 1981 and Opinion No. 147, s. 1982) declaring petitioner to be exempt from the payment of building permit fees. Under the 1st Indorsement dated January 6, 2006, BLGF reiterated the aforesaid opinion of the DOJ stating further that xxx the Department of Finance, thru this Bureau, has no authority to review the resolution or the decision of the DOJ. Petitioner wrote the respondents reiterating its request to reverse the disputed assessments and invoking the DOJ legal opinions which have been affirmed by Secretary Gonzalez. Despite petitioners plea, however, respondents refused to issue the building permits for the construction of the AUF Medical Center in the main campus and renovation of a school building located at Marisol Village. Petitioner then appealed the matter to City Mayor Carmelo F. Lazatin but no written response was received by petitioner. Consequently, petitioner paid under protest the following: Medical Center (new construction) Building Permit and Electrical Fee P 217,475.20 Locational Clearance Fee 283,741.64 Fire Code Fee 144,690.00 Total - P 645,906.84 School Building (renovation) Building Permit and Electrical Fee P 37,857.20 Locational Clearance Fee 6,000.57 Fire Code Fee 5,967.74 Total - P 49,825.51 Petitioner likewise paid the following sums as required by the City Assessors Office: Real Property Tax Basic Fee P 86,531.10 SEF 43,274.54 Locational Clearance Fee 1,125.00 Total P130,930.64 [GRAND TOTAL - P 826,662.99] By reason of the above payments, petitioner was issued the corresponding Building Permit, Wiring Permit, Electrical Permit and Sanitary Building Permit. On June 9, 2006, petitioner formally requested the respondents to refund the fees it paid under protest. Under letters dated June 15, 2006 and August 7, 2006, respondent City Treasurer denied the claim for refund. On August 31, 2006, petitioner filed a Complaint before the trial court seeking the refund of P826,662.99 plus interest at the rate of 12% per annum, and also praying for the award of attorneys fees in the amount of P300,000.00 and litigation expenses. In its Answer, respondents asserted that the claim of petitioner cannot be granted because its structures are not among those mentioned in Sec. 209 of the National Building Code as exempted from the building permit fee. Respondents argued that R.A. No. 6055 should be considered repealed on the basis of Sec. 2104 of the National Building Code. Since the disputed assessments are regulatory in nature, they are not taxes from which petitioner is exempt. As to the real property taxes imposed on petitioners property located in Marisol Village, respondents pointed out that said premises will be used as a school dormitory which cannot be considered as a use exclusively for educational activities. Petitioner countered that the subject building permit are being collected on the basis of Art. 244 of the Implementing Rules and Regulations of the Local Government Code, which impositions are really taxes considering that they are provided under the chapter on Local Government Taxation in reference to the revenue raising power of local government units (LGUs). Moreover, petitioner contended that, as held in Philippine Airlines, Inc. v. Edu, fees may be regarded as taxes depending on the purpose of its exaction. In any case, petitioner pointed out that the Local Government Code of 1991 provides in Sec. 193 that non-stock and non-profit educational institutions like petitioner retained the tax exemptions or incentives which have been granted to them. Under Sec. 8 of R.A. No. 6055 and applicable jurisprudence and DOJ rulings, petitioner is clearly exempt from the payment of building permit fees. On September 21, 2007, the trial court rendered judgment in favor of the petitioner and against the respondents. The dispositive portion of the trial courts decision reads: WHEREFORE, premises considered, judgment is rendered as follows: a. Plaintiff is exempt from the payment of building permit and other fees Ordering the Defendants to refund the total amount of Eight Hundred Twenty Six Thousand Six Hundred Sixty Two Pesos and 99/100 Centavos (P826,662.99) plus legal interest thereon at the rate of twelve percent (12%) per annum commencing on the date of extra-judicial demand or June 14, 2006, until the aforesaid amount is fully paid. b. Finding the Defendants liable for attorneys fees in the amount of Seventy Thousand Pesos (Php70,000.00), plus litigation expenses. c. Ordering the Defendants to pay the costs of the suit. SO ORDERED. Respondents appealed to the CA which reversed the trial court, holding that while petitioner is a tax-free entity, it is not exempt from the payment of regulatory fees. The CA noted that under R.A. No. 6055, petitioner was granted exemption only from income tax derived from its educational activities and real property used exclusively for educational purposes. Regardless of the repealing clause in the National Building Code, the CA held that petitioner is still not exempt because a building permit cannot be considered as the other charges mentioned in Sec. 8 of R.A. No. 6055 which refers to impositions in the nature of tax, import duties, assessments and other collections for revenue purposes, following the ejusdem generisrule. The CA further stated that petitioner has not shown that the fees collected were excessive and more than the cost of surveillance, inspection and regulation. And while petitioner may be exempt from the payment of real property tax, petitioner in this case merely alleged that the subject property is to be used actually, directly and exclusively for educational purposes, declaring merely that such premises is intended to house the sports and other facilities of the university but by reason of the occupancy of informal settlers on the area, it cannot yet utilize the same for its intended use. Thus, the CA concluded that petitioner is not entitled to the refund of building permit and related fees, as well as real property tax it paid under protest. Petitioner filed a motion for reconsideration which was denied by the CA. Hence, this petition raising the following grounds: THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORDANCE WITH LAW AND THE APPLICABLE DECISIONS OF THE HONORABLE COURT AND HAS DEPARTED FROM THE ACCEPTED AND USUAL COURSE OF JUDICIAL PROCEEDINGS NECESSITATING THE HONORABLE COURTS EXERCISE OF ITS POWER OF SUPERVISION CONSIDERING THAT: I. IN REVERSING THE TRIAL COURTS DECISION DATED 21 SEPTEMBER 2007, THE COURT OF APPEALS EFFECTIVELY WITHDREW THE PRIVILEGE OF EXEMPTION GRANTED TO NONSTOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS BY VIRTUE OF RA 6055 WHICH WITHDRAWAL IS BEYOND THE AUTHORITY OF THE COURT OF APPEALS TO DO. A. INDEED, RA 6055 REMAINS VALID AND IS IN FULL FORCE AND EFFECT. HENCE, THE COURT OF APPEALS ERRED WHEN IT RULED IN THE QUESTIONED DECISION THAT NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS ARE NOT EXEMPT. B. THE COURT OF APPEALS APPLICATION OF THE PRINCIPLE OF EJUSDEM GENERIS IN RULING IN THE QUESTIONED DECISION THAT THE TERM OTHER CHARGES IMPOSED BY THE GOVERNMENT UNDER SECTION 8 OF RA 6055 DOES NOT INCLUDE BUILDING PERMIT AND OTHER RELATED FEES AND/OR CHARGES IS BASED ON ITS ERRONEOUS AND UNWARRANTED ASSUMPTION THAT THE TAXES, IMPORT DUTIES AND ASSESSMENTS AS PART OF THE PRIVILEGE OF EXEMPTION GRANTED TO NON-STOCK, NON-PROFIT EDUCATIONAL FOUNDATIONS ARE LIMITED TO COLLECTIONS FOR REVENUE PURPOSES. C. EVEN ASSUMING THAT THE BUILDING PERMIT AND OTHER RELATED FEES AND/OR CHARGES ARE NOT INCLUDED IN THE TERM OTHER CHARGES IMPOSED BY THE GOVERNMENT UNDER SECTION 8 OF RA 6055, ITS IMPOSITION IS GENERALLY A TAX MEASURE AND THEREFORE, STILL COVERED UNDER THE PRIVILEGE OF EXEMPTION. II. THE COURT OF APPEALS DENIAL OF PETITIONER AUFS EXEMPTION FROM REAL PROPERTY TAXES CONTAINED IN ITS QUESTIONED DECISION AND QUESTIONED RESOLUTION IS CONTRARY TO APPLICABLE LAW AND JURISPRUDENCE. Petitioner stresses that the tax exemption granted to educational stock corporations which have converted into non-profit foundations was broadened to include any other charges imposed by the Government as one of the incentives for such conversion. These incentives necessarily included exemption from payment of building permit and related fees as otherwise there would have been no incentives for educational foundations if the privilege were only limited to exemption from taxation, which is already provided under the Constitution. Petitioner further contends that this Court has consistently held in several cases that the primary purpose of the exaction determines its nature. Thus, a charge of a fixed sum which bears no relation to the cost of inspection and which is payable into the general revenue of the state is a tax rather than an exercise of the police power. The standard set by law in the determination of the amount that may be imposed as license fees is such that is commensurate with the cost of regulation, inspection and licensing. But in this case, the amount representing the building permit and related fees and/or charges is such an exorbitant amount as to warrant a valid imposition; such amount exceeds the probable cost of regulation. Even with the alleged criteria submitted by the respondents (e.g., character of occupancy or use of building/structure, cost of construction, floor area and height), and the construction by petitioner of an 11-storey building, the costs of inspection will not amount to P645,906.84, presumably for the salary of inspectors or employees, the expenses of transportation for inspection and the preparation and reproduction of documents. Petitioner thus concludes that the disputed fees are substantially and mainly for purposes of revenue rather than regulation, so that even these fees cannot be deemed charges mentioned in Sec. 8 of R.A. No. 6055, they should properly be treated as tax from which petitioner is exempt. In their Comment, respondents maintain that petitioner is not exempt from the payment of building permit and related fees since the only exemptions provided in the National Building Code are public buildings and traditional indigenous family dwellings. Inclusio unius est exclusio alterius. Because the law did not include petitioners buildings from those structures exempt from the payment of building permit fee, it is therefore subject to the regulatory fees imposed under the National Building Code. Respondents assert that the CA correctly distinguished a building permit fee from those other charges mentioned in Sec. 8 of R.A. No. 6055. As stated by petitioner itself, charges refer to pecuniary liability, as rents, and fees against persons or property. Respondents point out that a building permit is classified under the term fee. A fee is generally imposed to cover the cost of regulation as activity or privilege and is essentially derived from the exercise of police power; on the other hand, impositions for services rendered by the local government units or for conveniences furnished, are referred to as service charges. Respondents also disagreed with petitioners contention that the fees imposed and collected are exorbitant and exceeded the probable expenses of regulation. These fees are based on computations and assessments made by the responsible officials of the City Engineers Office in accordance with the Schedule of Fees and criteria provided in the National Building Code. The bases of assessment cited by petitioner (e.g. salary of employees, expenses of transportation and preparation and reproduction of documents) refer to charges and fees on business and occupation under Sec. 147 of the Local Government Code, which do not apply to building permit fees. The parameters set by the National Building Code can be considered as complying with the reasonable cost of regulation in the assessment and collection of building permit fees. Respondents likewise contend that the presumption of regularity in the performance of official duty applies in this case. Petitioner should have presented evidence to prove its allegations that the amounts collected are exorbitant or unreasonable. For resolution are the following issues: (1) whether petitioner is exempt from the payment of building permit and related fees imposed under the National Building Code; and (2) whether the parcel of land owned by petitioner which has been assessed for real property tax is likewise exempt. R.A. No. 6055 granted tax exemptions to educational institutions like petitioner which converted to non-stock, non-profit educational foundations. Section 8 of said law provides: SECTION 8. The Foundation shall be exempt from the payment of all taxes, import duties, assessments, and other charges imposed by the Government onall income derived from or property, real or personal, used exclusively for the educational activities of the Foundation.(Emphasis supplied.) On February 19, 1977, Presidential Decree (P.D.) No. 1096 was issued adopting the National Building Code of the Philippines. The said Code requires every person, firm or corporation, including any agency or instrumentality of the government to obtain a building permit for any construction, alteration or repair of any building or structure.Building permit refers to a document issued by the Building Official x x x to an owner/applicant to proceed with the construction, installation, addition, alteration, renovation, conversion, repair, moving, demolition or other work activity of a specific project/building/structure or portions thereof after the accompanying principal plans, specifications and other pertinent documents with the duly notarized application are found satisfactory and substantially conforming with the National Building Code of the Philippines x x x and its Implementing Rules and Regulations (IRR). Building permit fees refers to the basic permit fee and other charges imposed under the National Building Code. Exempted from the payment of building permit fees are: (1) public buildings and (2) traditional indigenous family dwellings. Not being expressly included in the enumeration of structures to which the building permit fees do not apply, petitioners claim for exemption rests solely on its interpretation of the term other charges imposed by the National Government in the tax exemption clause of R.A. No. 6055. A charge is broadly defined as the price of, or rate for, something, while the word fee pertains to a charge fixed by law for services of public officers or for use of a privilege under control of government. As used in the Local Government Code of 1991 (R.A. No. 7160), charges refers to pecuniary liability, as rents or fees against persons or property, while fee means a charge fixed by law or ordinance for the regulation or inspection of a business or activity. That charges in its ordinary meaning appears to be a general term which could cover a specific fee does not support petitioners position that building permit fees are among those other charges from which it was expressly exempted. Note that the other charges mentioned in Sec. 8 of R.A. No. 6055 is qualified by the words imposed by the Government on all x x x property used exclusively for the educational activities of the foundation. Building permit fees are not impositions on property but on the activity subject of government regulation. While it may be argued that the fees relate to particular properties, i.e., buildings and structures, they are actually imposed on certain activities the owner may conduct either to build such structures or to repair, alter, renovate or demolish the same. This is evident from the following provisions of the National Building Code: Section 102. Declaration of Policy It is hereby declared to be the policy of the State to safeguard life, health, property, and public welfare, consistent with theprinciples of sound environmental management and control; and tothis end, make it the purpose of this Code to provide for allbuildings and structures, a framework of minimum standards and requirements to regulate and control their location, site, design quality of materials, construction, use, occupancy, and maintenance. Section 103. Scope and Application (a) The provisions of this Code shall apply to the design,location, sitting, construction, alteration, repair,conversion, use, occupancy, maintenance, moving, demolitionof, and addition to public and private buildings andstructures, except traditional indigenous family dwellingsas defined herein. xxxx Section 301. Building Permits No person, firm or corporation, including any agency orinstrumentality of the government shall erect, construct, alter, repair, move, convert or demolish any building or structure or causethe same to be done without first obtaining a building permittherefor from the Building Official assigned in the place where thesubject building is located or the building work is to be done. (Italics supplied.) That a building permit fee is a regulatory imposition is highlighted by the fact that in processing an application for a building permit, the Building Official shall see to it that the applicant satisfies and conforms with approved standard requirements on zoning and land use, lines and grades, structural design, sanitary and sewerage, environmental health, electrical and mechanical safety as well as with other rules and regulations implementing the National Building Code. Thus, ancillary permits such as electrical permit, sanitary permit and zoning clearance must also be secured and the corresponding fees paid before a building permit may be issued. And as can be gleaned from the implementing rules and regulations of the National Building Code, clearances from various government authorities exercising and enforcing regulatory functions affecting buildings/structures, like local government units, may be further required before a building permit may be issued. Since building permit fees are not charges on property, they are not impositions from which petitioner is exempt. As to petitioners argument that the building permit fees collected by respondents are in reality taxes because the primary purpose is to raise revenues for the local government unit, the same does not hold water. A charge of a fixed sum which bears no relation at all to the cost of inspection and regulation may be held to be a tax rather than an exercise of the police power. In this case, the Secretary of Public Works and Highways who is mandated to prescribe and fix the amount of fees and other charges that the Building Official shall collect in connection with the performance of regulatory functions, has promulgated and issued the Implementing Rules and Regulations which provide for the bases of assessment of such fees, as follows: 1. Character of occupancy or use of building 2. Cost of construction 10,000/sq.m (A,B,C,D,E,G,H,I), 8,000 (F), 6,000 (J) 3. Floor area 4. Height Petitioner failed to demonstrate that the above bases of assessment were arbitrarily determined or unrelated to the activity being regulated. Neither has petitioner adduced evidence to show that the rates of building permit fees imposed and collected by the respondents were unreasonable or in excess of the cost of regulation and inspection. In Chevron Philippines, Inc. v. Bases Conversion Development Authority, this Court explained: In distinguishing tax and regulation as a form of police power, the determining factor is the purpose of the implemented measure. If the purpose is primarily to raise revenue, then it will be deemed a tax even though the measure results in some form of regulation. On the other hand, if the purpose is primarily to regulate, then it is deemed a regulation and an exercise of the police power of the state, even though incidentally, revenue is generated. Thus, in Gerochi v. Department of Energy, the Court stated: The conservative and pivotal distinction between these two (2) powers rests in the purpose for which the charge is made. If generation of revenue is the primary purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the primary purpose, the fact that revenue is incidentally raised does not make the imposition a tax. (Emphasis supplied.) Concededly, in the case of building permit fees imposed by the National Government under the National Building Code, revenue is incidentally generated for the benefit of local government units. Thus: Section 208. Fees Every Building Official shall keep a permanent record and accurate account of all fees and other charges fixed and authorized by the Secretary to be collected and received under this Code. Subject to existing budgetary, accounting and auditing rules and regulations, the Building Official is hereby authorized to retain not more than twenty percent of his collection for the operating expenses of his office. The remaining eighty percent shall be deposited with the provincial, city or municipal treasurer and shall accrue to the General Fund of the province, city or municipality concerned. Petitioners reliance on Sec. 193 of the Local Government Code of 1991 is likewise misplaced. Said provision states: SECTION 193. Withdrawal of Tax Exemption Privileges. -- Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including governmentowned or controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. (Emphasis supplied.) Considering that exemption from payment of regulatory fees was not among those incentives granted to petitioner under R.A. No. 6055, there is no such incentive that is retained under the Local Government Code of 1991. Consequently, no reversible error was committed by the CA in ruling that petitioner is liable to pay the subject building permit and related fees. Now, on petitioners claim that it is exempted from the payment of real property tax assessed against its real property presently occupied by informal settlers. Section 28(3), Article VI of the 1987 Constitution provides: xxxx (3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation. x x x x (Emphasis supplied.) Section 234(b) of the Local Government Code of 1991 implements the foregoing constitutional provision by declaring that -SECTION 234. Exemptions from Real Property Tax. The following are exempted from payment of the real property tax: xxxx (b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes; x x x x (Emphasis supplied.) In Lung Center of the Philippines v. Quezon City, this Court held that only portions of the hospital actually, directly and exclusively used for charitable purposes are exempt from real property taxes, while those portions leased to private entities and individuals are not exempt from such taxes. We explained the condition for the tax exemption privilege of charitable and educational institutions, as follows: Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable purposes. Exclusive is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and exclusively is defined, in a manner to exclude; as enjoying a privilege exclusively. If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation. The words dominant use or principal use cannot be substituted for the words used exclusively without doing violence to the Constitutions and the law. Solely is synonymous with exclusively. What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes. (Emphasis and underscoring supplied.) Petitioner failed to discharge its burden to prove that its real property is actually, directly and exclusively used for educational purposes. While there is no allegation or proof that petitioner leases the land to its present occupants, still there is no compliance with the constitutional and statutory requirement that said real property is actually, directly and exclusively used for educational purposes. The respondents correctly assessed the land for real property taxes for the taxable period during which the land is not being devoted solely to petitioners educational activities. Accordingly, the CA did not err in ruling that petitioner is likewise not entitled to a refund of the real property tax it paid under protest. WHEREFORE, the petition is DENIED. The Decision dated July 28, 2009 and Resolution dated October 12, 2009 of the Court of Appeals in CA-G.R. CV No. 90591 are AFFIRMED. No pronouncement as to costs. G.R. No. L-67649 June 28, 1988 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: I 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 thegeneral 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. Fernan (Chairman), Feliciano, Bidin and Cortes, JJ., concur. [G.R. No. 125704. August 28, 1998] PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF TAX APPEALS, respondents. DECISION ROMERO, J.: Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on April 8, 1996 in CA-G.R. SP No. 36975 affirming the Court of Tax Appeals decision in CTA Case No. 4872 dated March 16, 1995 ordering it to pay the amount of P110,677,668.52 as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977. The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the total amount of P123,821,982.52 computed as follows: PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE TAX DUE 2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91 3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60 4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88 ------------------- ----------------- ----------------- -------------------47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39 1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25 2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88 43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13 90,325,895.64 22,581,473.91 10,914,612.97 123,821,982.52 ========== ========== =========== =========== In a letter dated August 20, 1992, Philex protested the demand for payment of the tax liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore, these claims for tax credit/refund should be applied against the tax liabilities, citing our ruling in Commissioner of Internal Revenue v. ItogonSuyoc Mines, Inc. In reply, the BIR, in a letter dated September 7, 1992, found no merit in Philexs position. Since these pending claims have not yet been established or determined with certainty, it follows that no legal compensation can take place. Hence, he BIR reiterated its demand that Philex settle the amount plus interest within 30 days from the receipt of the letter. In view of the BIRs denial of the offsetting of Philexs claim for VAT input credit/refund against its exercise tax obligation, Philex raised the issue to the Court of Tax Appeals on November 6, 1992. In the course of the proceedings, the BIR issued a Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of Philex of P123,821,982.52; effectively lowered the latters tax obligation of P110,677,688.52. Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit: Thus, for legal compensation to take place, both obligations must be liquidated and demandable. Liquidated debts are those where the exact amount has already been determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In the instant case, the claims of the Petitioner for VAT refund is still pending litigation, and still has to be determined by this Court (C.T.A. Case No. 4707). A fortiori, the liquidated debt of the Petitioner to the government cannot, therefore, be set-off against the unliquidated claim which Petitioner conceived to exist in its favor (see Compaia General de Tabacos vs. French and Unson, No. 14027, November 8, 1918, 39 Phil. 34). Moreover, the Court of Tax Appeals ruled that taxes cannot be subject to set-off on compensation since claim for taxes is not a debt or contract. The dispositive portion of the CTA decision provides: In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and Petitioner is hereby ORDERED to PAY the Respondent the amount of P110,677,668.52 representing excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Section 248 and 249 of the Tax Code, as amended. Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed as CA-G.R. CV No. 36975. Nonetheless, on April 8, 1996, the Court of Appeals affirmed the Court of Tax Appeals observation. The pertinent portion of which reads: WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the decision dated March 16, 1995 is AFFIRMED. Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution dated July 11, 1996. However, a few days after the denial of its motion for reconsideration, Philex was able to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and 1994, computed as follows: Period Covered By Tax Credit Certificate Date Of Issue Amount Claims For Vat Number refund/credit 1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01 1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61 1989 007732 11 July 1996 P37,322,799.19 1990-1991 007751 16 July 1996 P84,662,787.46 1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95 In view of the grant of its VAT input credit/refund, Philex now contends that the same should, ipso jure, off-set its excise tax liabilities since both had already become due and demandable, as well as fully liquidated; hence, legal compensation can properly take place. We see no merit in this contention. In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. We find no cogent reason to deviate from the aforementioned distinction. Prescinding from this premise, in Francia v. Intermediate Appellate Court, we categorically held that taxes cannot be subject to set-off or compensation, thus: We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of tax cannot await the results of a lawsuit against the government. The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on Audit, which reiterated that: x x x a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off. Further, Philexs reliance on our holding in Commissioner of Internal Revenue v. ItogonSuyoc Mines, Inc., wherein we ruled that a pending refund may be set off against an existing tax liability even though the refund has not yet been approved by the Commissioner, is no longer without any support in statutory law. It is important to note that the premise of our ruling in the aforementioned case was anchored on Section 51(d) of the National Revenue Code of 1939. However, when the National Internal Revenue Code of 1977 was enacted, the same provision upon which the Itogon-Suyoc pronouncement was based was omitted. Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex. Despite the foregoing rulings clearly adverse to Philexs position, it asserts that the imposition of surcharge and interest for the non-payment of the excise taxes within the time prescribed was unjustified. Philex posits the theory that it had no obligation to pay the excise liabilities within the prescribed period since, after all, it still has pending claims for VAT input credit/refund with BIR. We fail to see the logic of Philexs claim for this is an outright disregard of the basic principle in tax law that taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. Evidently, to countenance Philexs whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence. To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any payer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the collection of the tax is contingent on the result of the lawsuit it filed against the government. Moreover, Philex's theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax liabilities. Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the government is immaterial for the imposition of charges and penalties prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory and the BIR is not vested with any authority to waive the collection thereof. The same cannot be condoned for flimsy reasons, similar to the one advanced by Philex in justifying its nonpayment of its tax liabilities. Finally, Philex asserts that the BIR violated Section 106(e) of the National Internal Revenue Code of 1977, which requires the refund of input taxes within 60 days,when it took five years for the latter to grant its tax claim for VAT input credit/refund. In this regard, we agree with Philex. While there is no dispute that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund, however, once the claimant has submitted all the required documents, it is the function of the BIR to assess these documents with purposeful dispatch. After all, since taxpayers owe honesty to government it is but just that government render fair service to the taxpayers. In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more diligent and judicious with their duty, it could have granted the refund earlier. We need not remind the BIR that simple justice requires the speedy refund of wrongly-held taxes. Fair dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of its function. As aptly held in Roxas v. Court of Tax Appeals: "The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collectot kill the 'hen that lays the golden egg.' And, in the order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously." Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is a settled rule that in the performance of governmental function, the State is not bound by the neglect of its agents and officers. Nowhere is this more true than in the field of taxation. Again, while we understand Philex's predicament, it must be stressed that the same is not valid reason for the nonpayment of its tax liabilities. To be sure, this is not state that the taxpayer is devoid of remedy against public servants or employees especially BIR examiners who, in investigating tax claims are seen to drag their feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claims for refund, the latter can seek judicial remedy before the Court of Tax Appeals in the manner prescribed by law. Second, if the inaction can be characterized as willful neglect of duty, then recourse under the Civil Code and the Tax Code can also be availed of. Article 27 of the Civil Code provides: "Art. 27. Any person suffering material or moral loss because a public servant or employee refuses or neglects, without just cause, to perform his official duty may file an action for damages and other relief against the latter, without prejudice to any disciplinary action that may be taken." More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states: "xxx xxx xxx (c) wilfully neglecting to give receipts, as by law required for any sum collected in the performance of duty or wilfully neglecting to perform, any other duties enjoined by law." Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in the performance of official duties. In no uncertain terms must we stress that every public employee or servant must strive to render service to the people with utmost diligence and efficiency. Insolence and delay have no place in government service. The BIR, being the government collecting arm, must and should do no less. It simply cannot be apathetic and laggard in rendering service to the taxpayer if it wishes to remain true to its mission of hastening the country's development. We take judicial notice of the taxpayer's generally negative perception towards the BIR; hence, it is up to the latter to prove its detractors wrong. In sum, while we can never condone the BIR's apparent callousness in performing its duties, still, the same cannot justify Philex's nonpayment of its tax liabilities. The adage "no one should take the law into his own hands" should have guided Philex's action. WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED. SO ORDERED. Narvasa, C.J., (Chairman), Kapunan and Purisima, JJ., concur. 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. L14674, 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 mayissue 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. Padilla, Bautista Angelo, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur. Bengzon, C.J., took no part. Applicable Quarter[/]Year Date Filed/Paid Amount of Tax 3rd Qtr 2000 November 29, 2000 P 395,165.00 Annual ITR 2000 April 16, 2001 381,893.59 1st Qtr 2001 May 30, 2001 522,465.39 2nd Qtr 2001 August 29, 2001 1,033,423.34 3rd Qtr 2001 November 29, 2001 765,021.28 Annual ITR 2001 April 15, 2002 328,193.93 1st Qtr 2002 May 30, 2002 594,850.13 2nd Qtr 2002 August 29, 2002 1,164,664.11 TOTAL P 5,185,676.77 11 G.R. No. 169507 AIR CANADA, Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, Respondent. DECISION LEONEN, J.: An offline international air carrier selling passage tickets in the Philippines, through a general sales agent, is a resident foreign corporation doing business in the Philippines. As such, it is taxable under Section 28(A)(l), and not Section 28(A)(3) of the 1997 National Internal Revenue Code, subject to any applicable tax treaty to which the Philippines is a signatory. Pursuant to Article 8 of the Republic of the Philippines-Canada Tax Treaty, Air Canada may only be imposed a maximum tax of 1 ½% of its gross revenues earned from the sale of its tickets in the Philippines. This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the Court of Tax Appeals En Banc, which in turn affirmed the December 22, 2004 Decision3 and April 8, 2005 Resolution4 of the Court of Tax Appeals First Division denying Air Canada’s claim for refund. Air Canada is a "foreign corporation organized and existing under the laws of Canada[.]"5 On April 24, 2000, it was granted an authority to operate as an offline carrier by the Civil Aeronautics Board, subject to certain conditions, which authority would expire on April 24, 2005.6 "As an off-line carrier, [Air Canada] does not have flights originating from or coming to the Philippines [and does not] operate any airplane [in] the Philippines[.]"7 On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp. (Aerotel) as its general sales agent in the Philippines.8 Aerotel "sells [Air Canada’s] passage documents in the Philippines."9 For the period ranging from the third quarter of 2000 to the second quarter of 2002, Air Canada, through Aerotel, filed quarterly and annual income tax returns and paid the income tax on Gross Philippine Billings in the total amount of ₱5,185,676.77,10 detailed as follows: 1âwphi1 On November 28, 2002, Air Canada filed a written claim for refund of alleged erroneously paid income taxes amounting to ₱5,185,676.77 before the Bureau of Internal Revenue,12 Revenue District Office No. 47-East Makati.13 It found basis from the revised definition14 of Gross Philippine Billings under Section 28(A)(3)(a) of the 1997 National Internal Revenue Code: SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. .... (3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and onehalf percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined hereunder: (a) International Air Carrier. - ‘Gross Philippine Billings’ refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings. (Emphasis supplied) To prevent the running of the prescriptive period, Air Canada filed a Petition for Review before the Court of Tax Appeals on November 29, 2002.15 The case was docketed as C.T.A. Case No. 6572.16 On December 22, 2004, the Court of Tax Appeals First Division rendered its Decision denying the Petition for Review and, hence, the claim for refund.17 It found that Air Canada was engaged in business in the Philippines through a local agent that sells airline tickets on its behalf. As such, it should be taxed as a resident foreign corporation at the regular rate of 32%.18 Further, according to the Court of Tax Appeals First Division, Air Canada was deemed to have established a "permanent establishment"19 in the Philippines under Article V(2)(i) of the Republic of the Philippines-Canada Tax Treaty20 by the appointment of the local sales agent, "in which [the] petitioner uses its premises as an outlet where sales of [airline] tickets are made[.]"21 Air Canada seasonably filed a Motion for Reconsideration, but the Motion was denied in the Court of Tax Appeals First Division’s Resolution dated April 8, 2005 for lack of merit.22 The First Division held that while Air Canada was not liable for tax on its Gross Philippine Billings under Section 28(A)(3), it was nevertheless liable to pay the 32% corporate income tax on income derived from the sale of airline tickets within the Philippines pursuant to Section 28(A)(1).23 On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En Banc.24 The appeal was docketed as CTA EB No. 86.25 In the Decision dated August 26, 2005, the Court of Tax Appeals En Banc affirmed the findings of the First Division.26 The En Banc ruled that Air Canada is subject to tax as a resident foreign corporation doing business in the Philippines since it sold airline tickets in the Philippines.27 The Court of Tax Appeals En Banc disposed thus: WHEREFORE, premises considered, the instant petition is hereby DENIED DUE COURSE, and accordingly,DISMISSED for lack of merit.28 Hence, this Petition for Review29 was filed. The issues for our consideration are: First, whether petitioner Air Canada, as an offline international carrier selling passage documents through a general sales agent in the Philippines, is a resident foreign corporation within the meaning of Section 28(A)(1) of the 1997 National Internal Revenue Code; Second, whether petitioner Air Canada is subject to the 2½% tax on Gross Philippine Billings pursuant to Section 28(A)(3). If not, whether an offline international carrier selling passage documents through a general sales agent can be subject to the regular corporate income tax of 32%30 on taxable income pursuant to Section 28(A)(1); Third, whether the Republic of the PhilippinesCanada Tax Treaty applies, specifically: a. Whether the Republic of the PhilippinesCanada Tax Treaty is enforceable; b. Whether the appointment of a local general sales agent in the Philippines falls under the definition of "permanent establishment" under Article V(2)(i) of the Republic of the PhilippinesCanada Tax Treaty; and Lastly, whether petitioner Air Canada is entitled to the refund of ₱5,185,676.77 pertaining allegedly to erroneously paid tax on Gross Philippine Billings from the third quarter of 2000 to the second quarter of 2002. Petitioner claims that the general provision imposing the regular corporate income tax on resident foreign corporations provided under Section 28(A)(1) of the 1997 National Internal Revenue Code does not apply to "international carriers,"31 which are especially classified and taxed under Section 28(A)(3).32 It adds that the fact that it is no longer subject to Gross Philippine Billings tax as ruled in the assailed Court of Tax Appeals Decision "does not render it ipso facto subject to 32% income tax on taxable income as a resident foreign corporation."33Petitioner argues that to impose the 32% regular corporate income tax on its income would violate the Philippine government’s covenant under Article VIII of the Republic of the Philippines-Canada Tax Treaty not to impose a tax higher than 1½% of the carrier’s gross revenue derived from sources within the Philippines.34 It would also allegedly result in "inequitable tax treatment of on-line and off-line international air carriers[.]"35 Also, petitioner states that the income it derived from the sale of airline tickets in the Philippines was income from services and not income from sales of personal property.36 Petitioner cites the deliberations of the Bicameral Conference Committee on House Bill No. 9077 (which eventually became the 1997 National Internal Revenue Code), particularly Senator Juan Ponce Enrile’s statement,37 to reveal the "legislative intent to treat the revenue derived from air carriage as income from services, and that the carriage of passenger or cargo as the activity that generates the income."38 Accordingly, applying the principle on the situs of taxation in taxation of services, petitioner claims that its income derived "from services rendered outside the Philippines [was] not subject to Philippine income taxation."39 Petitioner further contends that by the appointment of Aerotel as its general sales agent, petitioner cannot be considered to have a "permanent establishment"40 in the Philippines pursuant to Article V(6) of the Republic of the Philippines-Canada Tax Treaty.41 It points out that Aerotel is an "independent general sales agent that acts as such for . . . other international airline companies in the ordinary course of its business."42 Aerotel sells passage tickets on behalf of petitioner and receives a commission for its services.43 Petitioner states that even the Bureau of Internal Revenue—through VAT Ruling No. 003-04 dated February 14, 2004— has conceded that an offline international air carrier, having no flight operations to and from the Philippines, is not deemed engaged in business in the Philippines by merely appointing a general sales agent.44 Finally, petitioner maintains that its "claim for refund of erroneously paid Gross Philippine Billings cannot be denied on the ground that [it] is subject to income tax under Section 28 (A) (1)"45 since it has not been assessed at all by the Bureau of Internal Revenue for any income tax liability.46 On the other hand, respondent maintains that petitioner is subject to the 32% corporate income tax as a resident foreign corporation doing business in the Philippines. Petitioner’s total payment of ₱5,185,676.77 allegedly shows that petitioner was earning a sizable income from the sale of its plane tickets within the Philippines during the relevant period.47 Respondent further points out that this court in Commissioner of Internal Revenue v. American Airlines, Inc.,48 which in turn cited the cases involving the British Overseas Airways Corporation and Air India, had already settled that "foreign airline companies which sold tickets in the Philippines through their local agents . . . [are] considered resident foreign corporations engaged in trade or business in the country."49 It also cites Revenue Regulations No. 6-78 dated April 25, 1978, which defined the phrase "doing business in the Philippines" as including "regular sale of tickets in the Philippines by offline international airlines either by themselves or through their agents."50 Respondent further contends that petitioner is not entitled to its claim for refund because the amount of ₱5,185,676.77 it paid as tax from the third quarter of 2000 to the second quarter of 2001 was still short of the 32% income tax due for the period.51 Petitioner cannot allegedly claim good faith in its failure to pay the right amount of tax since the National Internal Revenue Code became operative on January 1, 1998 and by 2000, petitioner should have already been aware of the implications of Section 28(A)(3) and the decided cases of this court’s ruling on the taxability of offline international carriers selling passage tickets in the Philippines.52 I At the outset, we affirm the Court of Tax Appeals’ ruling that petitioner, as an offline international carrier with no landing rights in the Philippines, is not liable to tax on Gross Philippine Billings under Section 28(A)(3) of the 1997 National Internal Revenue Code: SEC. 28. Rates of Income Tax on Foreign Corporations. – (A) Tax on Resident Foreign Corporations. .... (3) International Carrier. - An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2%) on its ‘Gross Philippine Billings’ as defined hereunder: (a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document: Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of Gross Philippine Billings. (Emphasis supplied) Under the foregoing provision, the tax attaches only when the carriage of persons, excess baggage, cargo, and mail originated from the Philippines in a continuous and uninterrupted flight, regardless of where the passage documents were sold. Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross Philippine Billings tax. II Petitioner, an offline carrier, is a resident foreign corporation for income tax purposes. Petitioner falls within the definition of resident foreign corporation under Section 28(A)(1) of the 1997 National Internal Revenue Code, thus, it may be subject to 32%53 tax on its taxable income: SEC. 28. Rates of Income Tax on Foreign Corporations. (A) Tax on Resident Foreign Corporations. (1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%54). (Emphasis supplied) The definition of "resident foreign corporation" has not substantially changed throughout the amendments of the National Internal Revenue Code. All versions refer to "a foreign corporation engaged in trade or business within the Philippines." Commonwealth Act No. 466, known as the National Internal Revenue Code and approved on June 15, 1939, defined "resident foreign corporation" as applying to "a foreign corporation engaged in trade or business within the Philippines or having an office or place of business therein."55 Section 24(b)(2) of the National Internal Revenue Code, as amended by Republic Act No. 6110, approved on August 4, 1969, reads: Sec. 24. Rates of tax on corporations. — . . . (b) Tax on foreign corporations. — . . . (2) Resident corporations. — A corporation organized, authorized, or existing under the laws of any foreign country, except a foreign life insurance company, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income received in the preceding taxable year from all sources within the Philippines.56 (Emphasis supplied) Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain sections of the 1939 National Internal Revenue Code. Section 24(b)(2) on foreign resident corporations was amended, but it still provides that "[a] corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be taxable as provided in subsection (a) of this section upon the total net income received in the preceding taxable year from all sources within the Philippines[.]"57 As early as 1987, this court in Commissioner of Internal Revenue v. British Overseas Airways Corporation58declared British Overseas Airways Corporation, an international air carrier with no landing rights in the Philippines, as a resident foreign corporation engaged in business in the Philippines through its local sales agent that sold and issued tickets for the airline company.59 This court discussed that: There is no specific criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case must be judged in the light of its peculiar environmental circumstances. The term implies acontinuity of commercial dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or for the purpose and object of the business organization. "In order that a foreign corporation may be regarded as doing business within a State, there must be continuity of conduct and intention to establish a continuous business, such as the appointment of a local agent, and not one of a temporary character.["] BOAC, during the periods covered by the subject-assessments, maintained a general sales agent in the Philippines. That general sales agent, from 1959 to 1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the whole trip into series of trips — each trip in the series corresponding to a different airline company; (3) receiving the fare from the whole trip; and (4) consequently allocating to the various airline companies on the basis of their participation in the services rendered through the mode of interline settlement as prescribed by Article VI of the Resolution No. 850 of the IATA Agreement." Those activities were in exercise of the functions which are normally incident to, and are in progressive pursuit of, the purpose and object of its organization as an international air carrier. In fact, the regular sale of tickets, its main activity, is the very lifeblood of the airline business, the generation of sales being the paramount objective. There should be no doubt then that BOAC was "engaged in" business in the Philippines through a local agent during the period covered by the assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net income received in the preceding taxable year from all sources within the Philippines.60 (Emphasis supplied, citations omitted) Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance with its definition of "doing business" with regard to foreign corporations. Section 3(d) of the law enumerates the activities that constitute doing business: d. the phrase "doing business" shall include soliciting orders, service contracts, opening offices, whether called "liaison" offices or branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization: Provided, however, That the phrase "doing business" shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account[.]61 (Emphasis supplied) While Section 3(d) above states that "appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account" is not considered as "doing business," the Implementing Rules and Regulations of Republic Act No. 7042 clarifies that "doing business" includes "appointing representatives or distributors, operating under full control of the foreign corporation, domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty (180) days or more[.]"62 An offline carrier is "any foreign air carrier not certificated by the [Civil Aeronautics] Board, but who maintains office or who has designated or appointed agents or employees in the Philippines, who sells or offers for sale any air transportation in behalf of said foreign air carrier and/or others, or negotiate for, or holds itself out by solicitation, advertisement, or otherwise sells, provides, furnishes, contracts, or arranges for such transportation."63 "Anyone desiring to engage in the activities of an off-line carrier [must] apply to the [Civil Aeronautics] Board for such authority."64 Each offline carrier must file with the Civil Aeronautics Board a monthly report containing information on the tickets sold, such as the origin and destination of the passengers, carriers involved, and commissions received.65 Petitioner is undoubtedly "doing business" or "engaged in trade or business" in the Philippines. Aerotel performs acts or works or exercises functions that are incidental and beneficial to the purpose of petitioner’s business. The activities of Aerotel bring direct receipts or profits to petitioner.66 There is nothing on record to show that Aerotel solicited orders alone and for its own account and without interference from, let alone direction of, petitioner. On the contrary, Aerotel cannot "enter into any contract on behalf of [petitioner Air Canada] without the express written consent of [the latter,]"67 and it must perform its functions according to the standards required by petitioner.68 Through Aerotel, petitioner is able to engage in an economic activity in the Philippines. Further, petitioner was issued by the Civil Aeronautics Board an authority to operate as an offline carrier in the Philippines for a period of five years, or from April 24, 2000 until April 24, 2005.69 Petitioner is, therefore, a resident foreign corporation that is taxable on its income derived from sources within the Philippines. Petitioner’s income from sale of airline tickets, through Aerotel, is income realized from the pursuit of its business activities in the Philippines. III However, the application of the regular 32% tax rate under Section 28(A)(1) of the 1997 National Internal Revenue Code must consider the existence of an effective tax treaty between the Philippines and the home country of the foreign air carrier. In the earlier case of South African Airways v. Commissioner of Internal Revenue,70 this court held that Section 28(A)(3)(a) does not categorically exempt all international air carriers from the coverage of Section 28(A)(1). Thus, if Section 28(A)(3)(a) is applicable to a taxpayer, then the general rule under Section 28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does not apply, an international air carrier would be liable for the tax under Section 28(A)(1).71 This court in South African Airways declared that the correct interpretation of these provisions is that: "international air carrier[s] maintain[ing] flights to and from the Philippines . . . shall be taxed at the rate of 2½% of its Gross Philippine Billings[;] while international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country [like sale of airline tickets] will be taxed at the rate of 32% of such [taxable] income."72 In this case, there is a tax treaty that must be taken into consideration to determine the proper tax rate. A tax treaty is an agreement entered into between sovereign states "for purposes of eliminating double taxation on income and capital, preventing fiscal evasion, promoting mutual trade and investment, and according fair and equitable tax treatment to foreign residents or nationals."73 Commissioner of Internal Revenue v. S.C. Johnson and Son, Inc.74 explained the purpose of a tax treaty: The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination ofinternational juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate.75 (Emphasis in the original, citations omitted) Observance of any treaty obligation binding upon the government of the Philippines is anchored on the constitutional provision that the Philippines "adopts the generally accepted principles of international law as part of the law of the land[.]"76 Pacta sunt servanda is a fundamental international law principle that requires agreeing parties to comply with their treaty obligations in good faith.77 Hence, the application of the provisions of the National Internal Revenue Code must be subject to the provisions of tax treaties entered into by the Philippines with foreign countries. In Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,78 this court stressed the binding effects of tax treaties. It dealt with the issue of "whether the failure to strictly comply with [Revenue Memorandum Order] RMO No. 1-200079 will deprive persons or corporations of the benefit of a tax treaty."80 Upholding the tax treaty over the administrative issuance, this court reasoned thus: Our Constitution provides for adherence to the general principles of international law as part of the law of the land. The time-honored international principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement. Every treaty in force is binding upon the parties, and obligations under the treaty must be performed by them in good faith. More importantly, treaties have the force and effect of law in this jurisdiction. Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions." CIR v. S.C. Johnson and Son, Inc.further clarifies that "tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate." Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of international juridical double taxation, which is why they are also known as double tax treaty or double tax agreements. "A state that has contracted valid international obligations is bound to make in its legislations those modifications that may be necessary to ensure the fulfillment of the obligations undertaken." Thus, laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled thereto. The BIR must not impose additional requirements that would negate the availment of the reliefs provided for under international agreements. More so, when the RPGermany Tax Treaty does not provide for any prerequisite for the availment of the benefits under said agreement. .... Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief. The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000. Logically, noncompliance with tax treaties has negative implications on international relations, and unduly discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-2000 involve an administrative procedure, these may be remedied through other system management processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance requiring prior application for tax treaty relief.81 (Emphasis supplied, citations omitted) On March 11, 1976, the representatives82 for the government of the Republic of the Philippines and for the government of Canada signed the Convention between the Philippines and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (Republic of the Philippines-Canada Tax Treaty). This treaty entered into force on December 21, 1977. Article V83 of the Republic of the PhilippinesCanada Tax Treaty defines "permanent establishment" as a "fixed place of business in which the business of the enterprise is wholly or partly carried on."84 Even though there is no fixed place of business, an enterprise of a Contracting State is deemed to have a permanent establishment in the other Contracting State if under certain conditions there is a person acting for it. Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty states that "[a] person acting in a Contracting State on behalf of an enterprise of the other Contracting State (other than an agent of independent status to whom paragraph 6 applies) shall be deemed to be a permanent establishment in the firstmentioned State if . . . he has and habitually exercises in that State an authority to conclude contracts on behalf of the enterprise, unless his activities are limited to the purchase of goods or merchandise for that enterprise[.]" The provision seems to refer to one who would be considered an agent under Article 186885 of the Civil Code of the Philippines. On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting State shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other State through a broker, general commission agent or any other agent of an independent status, where such persons are acting in the ordinary course of their business." Considering Article XV86 of the same Treaty, which covers dependent personal services, the term "dependent" would imply a relationship between the principal and the agent that is akin to an employer-employee relationship. Thus, an agent may be considered to be dependent on the principal where the latter exercises comprehensive control and detailed instructions over the means and results of the activities of the agent.87 Section 3 of Republic Act No. 776, as amended, also known as The Civil Aeronautics Act of the Philippines, defines a general sales agent as "a person, not a bonafide employee of an air carrier, who pursuant to an authority from an airline, by itself or through an agent, sells or offers for sale any air transportation, or negotiates for, or holds himself out by solicitation, advertisement or otherwise as one who sells, provides, furnishes, contracts or arranges for, such air transportation."88 General sales agents and their property, property rights, equipment, facilities, and franchise are subject to the regulation and control of the Civil Aeronautics Board.89 A permit or authorization issued by the Civil Aeronautics Board is required before a general sales agent may engage in such an activity.90 Through the appointment of Aerotel as its local sales agent, petitioner is deemed to have created a "permanent establishment" in the Philippines as defined under the Republic of the Philippines-Canada Tax Treaty. Petitioner appointed Aerotel as its passenger general sales agent to perform the sale of transportation on petitioner and handle reservations, appointment, and supervision of International Air Transport Associationapproved and petitioner-approved sales agents, including the following services: ARTICLE 7 GSA SERVICES The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the following services: a) Be the fiduciary of AC and in such capacity act solely and entirely for the benefit of AC in every matter relating to this Agreement; .... c) Promotion of passenger transportation on AC; .... e) Without the need for endorsement by AC, arrange for the reissuance, in the Territory of the GSA [Philippines], of traffic documents issued by AC outside the said territory of the GSA [Philippines], as required by the passenger(s); .... h) Distribution among passenger sales agents and display of timetables, fare sheets, tariffs and publicity material provided by AC in accordance with the reasonable requirements of AC; .... j) Distribution of official press releases provided by AC to media and reference of any press or public relations inquiries to AC; .... o) Submission for AC’s approval, of an annual written sales plan on or before a date to be determined by AC and in a form acceptable to AC; .... q) Submission of proposals for AC’s approval of passenger sales agent incentive plans at a reasonable time in advance of proposed implementation. r) Provision of assistance on request, in its relations with Governmental and other authorities, offices and agencies in the Territory [Philippines]. .... u) Follow AC guidelines for the handling of baggage claims and customer complaints and, unless otherwise stated in the guidelines, refer all such claims and complaints to AC.91 Under the terms of the Passenger General Sales Agency Agreement, Aerotel will "provide at its own expense and acceptable to [petitioner Air Canada], adequate and suitable premises, qualified staff, equipment, documentation, facilities and supervision and in consideration of the remuneration and expenses payable[,] [will] defray all costs and expenses of and incidental to the Agency."92 "[I]t is the sole employer of its employees and . . . is responsible for [their] actions . . . or those of any subcontractor."93 In remuneration for its services, Aerotel would be paid by petitioner a commission on sales of transportation plus override commission on flown revenues.94 Aerotel would also be reimbursed "for all authorized expenses supported by original supplier invoices."95 Aerotel is required to keep "separate books and records of account, including supporting documents, regarding all transactions at, through or in any way connected with [petitioner Air Canada] business."96 "If representing more than one carrier, [Aerotel must] represent all carriers in an unbiased way."97 Aerotel cannot "accept additional appointments as General Sales Agent of any other carrier without the prior written consent of [petitioner Air Canada]."98 The Passenger General Sales Agency Agreement "may be terminated by either party without cause upon [no] less than 60 days’ prior notice in writing[.]"99 In case of breach of any provisions of the Agreement, petitioner may require Aerotel "to cure the breach in 30 days failing which [petitioner Air Canada] may terminate [the] Agreement[.]"100 The following terms are indicative of Aerotel’s dependent status: First, Aerotel must give petitioner written notice "within 7 days of the date [it] acquires or takes control of another entity or merges with or is acquired or controlled by another person or entity[.]"101 Except with the written consent of petitioner, Aerotel must not acquire a substantial interest in the ownership, management, or profits of a passenger sales agent affiliated with the International Air Transport Association or a non-affiliated passenger sales agent nor shall an affiliated passenger sales agent acquire a substantial interest in Aerotel as to influence its commercial policy and/or management decisions.102 Aerotel must also provide petitioner "with a report on any interests held by [it], its owners, directors, officers, employees and their immediate families in companies and other entities in the aviation industry or . . . industries related to it[.]"103 Petitioner may require that any interest be divested within a set period of time.104 Second, in carrying out the services, Aerotel cannot enter into any contract on behalf of petitioner without the express written consent of the latter;105 it must act according to the standards required by petitioner;106 "follow the terms and provisions of the [petitioner Air Canada] GSA Manual [and all] written instructions of [petitioner Air Canada;]"107 and "[i]n the absence of an applicable provision in the Manual or instructions, [Aerotel must] carry out its functions in accordance with [its own] standard practices and procedures[.]"108 Third, Aerotel must only "issue traffic documents approved by [petitioner Air Canada] for all transportation over [its] services[.]"109 All use of petitioner’s name, logo, and marks must be with the written consent of petitioner and according to petitioner’s corporate standards and guidelines set out in the Manual.110 Fourth, all claims, liabilities, fines, and expenses arising from or in connection with the transportation sold by Aerotel are for the account of petitioner, except in the case of negligence of Aerotel.111 Aerotel is a dependent agent of petitioner pursuant to the terms of the Passenger General Sales Agency Agreement executed between the parties. It has the authority or power to conclude contracts or bind petitioner to contracts entered into in the Philippines. A third-party liability on contracts of Aerotel is to petitioner as the principal, and not to Aerotel, and liability to such third party is enforceable against petitioner. While Aerotel maintains a certain independence and its activities may not be devoted wholly to petitioner, nonetheless, when representing petitioner pursuant to the Agreement, it must carry out its functions solely for the benefit of petitioner and according to the latter’s Manual and written instructions. Aerotel is required to submit its annual sales plan for petitioner’s approval. In essence, Aerotel extends to the Philippines the transportation business of petitioner. It is a conduit or outlet through which petitioner’s airline tickets are sold.112 Under Article VII (Business Profits) of the Republic of the Philippines-Canada Tax Treaty, the "business profits" of an enterprise of a Contracting State is "taxable only in that State[,] unless the enterprise carries on business in the other Contracting State through a permanent establishment[.]"113 Thus, income attributable to Aerotel or from business activities effected by petitioner through Aerotel may be taxed in the Philippines. However, pursuant to the last paragraph114 of Article VII in relation to Article VIII115 (Shipping and Air Transport) of the same Treaty, the tax imposed on income derived from the operation of ships or aircraft in international traffic should not exceed 1½% of gross revenues derived from Philippine sources. IV While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) of the 1997 National Internal Revenue Code on its taxable income116 from sale of airline tickets in the Philippines, it could only be taxed at a maximum of 1½% of gross revenues, pursuant to Article VIII of the Republic of the PhilippinesCanada Tax Treaty that applies to petitioner as a "foreign corporation organized and existing under the laws of Canada[.]"117 Tax treaties form part of the law of the land,118 and jurisprudence has applied the statutory construction principle that specific laws prevail over general ones.119 The Republic of the Philippines-Canada Tax Treaty was ratified on December 21, 1977 and became valid and effective on that date. On the other hand, the applicable provisions120 relating to the taxability of resident foreign corporations and the rate of such tax found in the National Internal Revenue Code became effective on January 1, 1998.121 Ordinarily, the later provision governs over the earlier one.122 In this case, however, the provisions of the Republic of the Philippines-Canada Tax Treaty are more specific than the provisions found in the National Internal Revenue Code. These rules of interpretation apply even though one of the sources is a treaty and not simply a statute. Article VII, Section 21 of the Constitution provides: SECTION 21. No treaty or international agreement shall be valid and effective unless concurred in by at least two-thirds of all the Members of the Senate. This provision states the second of two ways through which international obligations become binding. Article II, Section 2 of the Constitution deals with international obligations that are incorporated, while Article VII, Section 21 deals with international obligations that become binding through ratification. "Valid and effective" means that treaty provisions that define rights and duties as well as definite prestations have effects equivalent to a statute. Thus, these specific treaty provisions may amend statutory provisions. Statutory provisions may also amend these types of treaty obligations. We only deal here with bilateral treaty state obligations that are not international obligations erga omnes. We are also not required to rule in this case on the effect of international customary norms especially those with jus cogens character. The second paragraph of Article VIII states that "profits from sources within a Contracting State derived by an enterprise of the other Contracting State from the operation of ships or aircraft in international traffic may be taxed in the first-mentioned State but the tax so charged shall not exceed the lesser of a) one and onehalf per cent of the gross revenues derived from sources in that State; and b) the lowest rate of Philippine tax imposed on such profits derived by an enterprise of a third State." The Agreement between the government of the Republic of the Philippines and the government of Canada on Air Transport, entered into on January 14, 1997, reiterates the effectivity of Article VIII of the Republic of the PhilippinesCanada Tax Treaty: ARTICLE XVI (Taxation) The Contracting Parties shall act in accordance with the provisions of Article VIII of the Convention between the Philippines and Canada for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed at Manila on March 31, 1976 and entered into force on December 21, 1977, and any amendments thereto, in respect of the operation of aircraft in international traffic.123 Petitioner’s income from sale of ticket for international carriage of passenger is income derived from international operation of aircraft. The sale of tickets is closely related to the international operation of aircraft that it is considered incidental thereto. "[B]y reason of our bilateral negotiations with [Canada], we have agreed to have our right to tax limited to a certain extent[.]"124 Thus, we are bound to extend to a Canadian air carrier doing business in the Philippines through a local sales agent the benefit of a lower tax equivalent to 1½% on business profits derived from sale of international air transportation. V Finally, we reject petitioner’s contention that the Court of Tax Appeals erred in denying its claim for refund of erroneously paid Gross Philippine Billings tax on the ground that it is subject to income tax under Section 28(A)(1) of the National Internal Revenue Code because (a) it has not been assessed at all by the Bureau of Internal Revenue for any income tax liability;125 and (b) internal revenue taxes cannot be the subject of set-off or compensation,126 citing Republic v. Mambulao Lumber Co., et al.127 and Francia v. Intermediate Appellate Court.128 In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal Revenue,129 we have ruled that "[i]n an action for the refund of taxes allegedly erroneously paid, the Court of Tax Appeals may determine whether there are taxes that should have been paid in lieu of the taxes paid."130 The determination of the proper category of tax that should have been paid is incidental and necessary to resolve the issue of whether a refund should be granted.131Thus: Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject it to 6% capital gains tax or other taxes at the first instance. The Court of Tax Appeals has no power to make an assessment. As earlier established, the Court of Tax Appeals has no assessment powers. In stating that petitioner’s transactions are subject to capital gains tax, however, the Court of Tax Appeals was not making an assessment. It was merely determining the proper category of tax that petitioner should have paid, in view of its claim that it erroneously imposed upon itself and paid the 5% final tax imposed upon PEZA-registered enterprises. The determination of the proper category of tax that petitioner should have paid is an incidental matter necessary for the resolution of the principal issue, which is whether petitioner was entitled to a refund. The issue of petitioner’s claim for tax refund is intertwined with the issue of the proper taxes that are due from petitioner. A claim for tax refund carries the assumption that the tax returns filed were correct. If the tax return filed was not proper, the correctness of the amount paid and, therefore, the claim for refund become questionable. In that case, the court must determine if a taxpayer claiming refund of erroneously paid taxes is more properly liable for taxes other than that paid. In South African Airways v. Commissioner of Internal Revenue, South African Airways claimed for refund of its erroneously paid 2½% taxes on its gross Philippine billings. This court did not immediately grant South African’s claim for refund. This is because although this court found that South African Airways was not subject to the 2½% tax on its gross Philippine billings, this court also found that it was subject to 32% tax on its taxable income. In this case, petitioner’s claim that it erroneously paid the 5% final tax is an admission that the quarterly tax return it filed in 2000 was improper. Hence, to determine if petitioner was entitled to the refund being claimed, the Court of Tax Appeals has the duty to determine if petitioner was indeed not liable for the 5% final tax and, instead, liable for taxes other than the 5% final tax. As in South African Airways, petitioner’s request for refund can neither be granted nor denied outright without such determination. If the taxpayer is found liable for taxes other than the erroneously paid 5% final tax, the amount of the taxpayer’s liability should be computed and deducted from the refundable amount. Any liability in excess of the refundable amount, however, may not be collected in a case involving solely the issue of the taxpayer’s entitlement to refund. The question of tax deficiency is distinct and unrelated to the question of petitioner’s entitlement to refund. Tax deficiencies should be subject to assessment procedures and the rules of prescription. The court cannot be expected to perform the BIR’s duties whenever it fails to do so either through neglect or oversight. Neither can court processes be used as a tool to circumvent laws protecting the rights of taxpayers.132 Hence, the Court of Tax Appeals properly denied petitioner’s claim for refund of allegedly erroneously paid tax on its Gross Philippine Billings, on the ground that it was liable instead for the regular 32% tax on its taxable income received from sources within the Philippines. Its determination of petitioner’s liability for the 32% regular income tax was made merely for the purpose of ascertaining petitioner’s entitlement to a tax refund and not for imposing any deficiency tax. In this regard, the matter of set-off raised by petitioner is not an issue. Besides, the cases cited are based on different circumstances. In both cited cases,133 the taxpayer claimed that his (its) tax liability was off-set by his (its) claim against the government. Specifically, in Republic v. Mambulao Lumber Co., et al., Mambulao Lumber contended that the amounts it paid to the government as reforestation charges from 1947 to 1956, not having been used in the reforestation of the area covered by its license, may be set off or applied to the payment of forest charges still due and owing from it.134Rejecting Mambulao’s claim of legal compensation, this court ruled: [A]ppellant 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 to defendant Mambulao Lumber Company. So, it is 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 not 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.)135 (Emphasis supplied) In Francia, this court did not allow legal compensation since not all requisites of legal compensation provided under Article 1279 were present.136 In that case, a portion of Francia’s property in Pasay was expropriated by the national government,137 which did not immediately pay Francia. In the meantime, he failed to pay the real property tax due on his remaining property to the local government of Pasay, which later on would auction the property on account of such delinquency.138 He then moved to set aside the auction sale and argued, among others, that his real property tax delinquency was extinguished by legal compensation on account of his unpaid claim against the national government.139 This court ruled against Francia: 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. .... 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 ₱4,116.00 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 ₱4,116.00 deposited with the bank but he did not withdraw it. It would have been an easy matter to withdraw ₱2,400.00 from the deposit so that he could pay the tax obligation thus aborting the sale at public auction.140 The ruling in Francia was applied to the subsequent cases of Caltex Philippines, Inc. v. Commission on Audit141and Philex Mining Corporation v. Commissioner of Internal Revenue.142 In Caltex, this court reiterated: [A] taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.143(Citations omitted) Philex Mining ruled that "[t]here is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity."144 Rejecting Philex Mining’s assertion that the imposition of surcharge and interest was unjustified because it had no obligation to pay the excise tax liabilities within the prescribed period since, after all, it still had pending claims for VAT input credit/refund with the Bureau of Internal Revenue, this court explained: To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. Hence, a tax does not depend upon the consent of the taxpayer. If any tax payer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the collection of the tax is contingent on the result of the lawsuit it filed against the government. Moreover, Philex’s theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax liabilities.145 (Citations omitted) In sum, the rulings in those cases were to the effect that the taxpayer cannot simply refuse to pay tax on the ground that the tax liabilities were off-set against any alleged claim the taxpayer may have against the government. Such would merely be in keeping with the basic policy on prompt collection of taxes as the lifeblood of the government.1âwphi1 Here, what is involved is a denial of a taxpayer’s refund claim on account of the Court of Tax Appeals’ finding of its liability for another tax in lieu of the Gross Philippine Billings tax that was allegedly erroneously paid. Squarely applicable is South African Airways where this court rejected similar arguments on the denial of claim for tax refund: Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted the offsetting of a tax refund with a tax deficiency in this wise: Further, it is also worth noting that the Court of Tax Appeals erred in denying petitioner’s supplemental motion for reconsideration alleging bringing to said court’s attention the existence of the deficiency income and business tax assessment against Citytrust. The fact of such deficiency assessment is intimately related to and inextricably intertwined with the right of respondent bank to claim for a tax refund for the same year. To award such refund despite the existence of that deficiency assessment is an absurdity and a polarity in conceptual effects. Herein private respondent cannot be entitled to refund and at the same time be liable for a tax deficiency assessment for the same year. The grant of a refund is founded on the assumption that the tax return is valid, that is, the facts stated therein are true and correct. The deficiency assessment, although not yet final, created a doubt as to and constitutes a challenge against the truth and accuracy of the facts stated in said return which, by itself and without unquestionable evidence, cannot be the basis for the grant of the refund. Section 82, Chapter IX of the National Internal Revenue Code of 1977, which was the applicable law when the claim of Citytrust was filed, provides that "(w)hen an assessment is made in case of any list, statement, or return, which in the opinion of the Commissioner of Internal Revenue was false or fraudulent or contained any understatement or undervaluation, no tax collected under such assessment shall be recovered by any suits unless it is proved that the said list, statement, or return was not false nor fraudulent and did not contain any understatement or undervaluation; but this provision shall not apply to statements or returns made or to be made in good faith regarding annual depreciation of oil or gas wells and mines." Moreover, to grant the refund without determination of the proper assessment and the tax due would inevitably result in multiplicity of proceedings or suits. If the deficiency assessment should subsequently be upheld, the Government will be forced to institute anew a proceeding for the recovery of erroneously refunded taxes which recourse must be filed within the prescriptive period of ten years after discovery of the falsity, fraud or omission in the false or fraudulent return involved. This would necessarily require and entail additional efforts and expenses on the part of the Government, impose a burden on and a drain of government funds, and impede or delay the collection of much-needed revenue for governmental operations. Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically necessary and legally appropriate that the issue of the deficiency tax assessment against Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in a single proceeding the true and correct amount of tax due or refundable. In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be only just and fair that the taxpayer and the Government alike be given equal opportunities to avail of remedies under the law to defeat each other’s claim and to determine all matters of dispute between them in one single case. It is important to note that in determining whether or not petitioner is entitled to the refund of the amount paid, it would [be] necessary to determine how much the Government is entitled to collect as taxes. This would necessarily include the determination of the correct liability of the taxpayer and, certainly, a determination of this case would constituteres judicata on both parties as to all the matters subject thereof or necessarily involved therein. Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the 1997 NIRC. The above pronouncements are, therefore, still applicable today. Here, petitioner's similar tax refund claim assumes that the tax return that it filed was correct. Given, however, the finding of the CTA that petitioner, although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under Sec. 28(A)(l), the correctness of the return filed by petitioner is now put in doubt. As such, we cannot grant the prayer for a refund.146 (Emphasis supplied, citation omitted) In the subsequent case of United Airlines, Inc. v. Commissioner of Internal Revenue, 147 this court upheld the denial of the claim for refund based on the Court of Tax Appeals' finding that the taxpayer had, through erroneous deductions on its gross income, underpaid its Gross Philippine Billing tax on cargo revenues for 1999, and the amount of underpayment was even greater than the refund sought for erroneously paid Gross Philippine Billings tax on passenger revenues for the same taxable period.148 In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner was computed at the rate of 1 ½%of its gross revenues amounting to P345,711,806.08149 from the third quarter of 2000 to the second quarter of 2002. It is quite apparent that the tax imposable under Section 28(A)(l) of the 1997 National Internal Revenue Code [32% of t.axable income, that is, gross income less deductions] will exceed the maximum ceiling of 1 ½% of gross revenues as decreed in Article VIII of the Republic of the Philippines-Canada Tax Treaty. Hence, no refund is forthcoming. WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005 and Resolution dated April 8, 2005 of the Court of Tax Appeals En Banc are AFFIRMED. SO ORDERED. FIRST DIVISION [G.R. No. 148191. November 25, 2003] COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SOLIDBANK CORPORATION, respondent. DECISION PANGANIBAN, J.: Under the Tax Code, the earnings of banks from passive income are subject to a twenty percent final withholding tax (20% FWT). This tax is withheld at source and is thus not actually and physically received by the banks, because it is paid directly to the government by the entities from which the banks derived the income. Apart from the 20% FWT, banks are also subject to a five percent gross receipts tax (5% GRT) which is imposed by the Tax Code on their gross receipts, including the passive income. Since the 20% FWT is constructively received by the banks and forms part of their gross receipts or earnings, it follows that it is subject to the 5% GRT. After all, the amount withheld is paid to the government on their behalf, in satisfaction of their withholding taxes. That they do not actually receive the amount does not alter the fact that it is remitted for their benefit in satisfaction of their tax obligations. Stated otherwise, the fact is that if there were no withholding tax system in place in this country, this 20 percent portion of the passive income of banks would actually be paid to the banks and then remitted by them to the government in payment of their income tax. The institution of the withholding tax system does not alter the fact that the 20 percent portion of their passive income constitutes part of their actual earnings, except that it is paid directly to the government on their behalf in satisfaction of the 20 percent final income tax due on their passive incomes. The Case Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to annul the July 18, 2000 Decision and the May 8, 2001 Resolution of the Court of Appeals (CA) in CA-GR SP No. 54599. The decretal portion of the assailed Decision reads as follows: WHEREFORE, we AFFIRM in toto the assailed decision and resolution of the Court of Tax Appeals. The challenged Resolution denied petitioners Motion for Reconsideration. The Facts Quoting petitioner, the CA summarized the facts of this case as follows: For the calendar year 1995, [respondent] seasonably filed its Quarterly Percentage Tax Returns reflecting gross receipts (pertaining to 5% [Gross Receipts Tax] rate) in the total amount of P1,474,691,693.44 with corresponding gross receipts tax payments in the sum of P73,734,584.60, broken down as follows: Period Covered Gross Receipts Gross Receipts Tax January to March 1994 P 188,406,061.95 P 9,420,303.10 April to June 1994 370,913,832.70 18,545,691.63 July to September 1994 481,501,838.98 24,075,091.95 October to December 1994 433,869,959.81 21,693,497.98 Total P 1,474,691,693.44 P 73,734,584.60 [Respondent] alleges that the total gross receipts in the amount of P1,474,691,693.44 included the sum of P350,807,875.15 representing gross receipts from passive income which was already subjected to 20% final withholding tax. On January 30, 1996, [the Court of Tax Appeals] rendered a decision in CTA Case No. 4720 entitled Asian Bank Corporation vs. Commissioner of Internal Revenue[,] wherein it was held that the 20% final withholding tax on [a] banks interest income should not form part of its taxable gross receipts for purposes of computing the gross receipts tax. On June 19, 1997, on the strength of the aforementioned decision, [respondent] filed with the Bureau of Internal Revenue [BIR] a letter-request for the refund or issuance of [a] tax credit certificate in the aggregate amount of P3,508,078.75, representing allegedly overpaid gross receipts tax for the year 1995, computed as follows: Gross Receipts Subjected to the Final Tax Derived from Passive [Income] P 350,807,875.15 Multiply by Final Tax rate 20% 20% Final Tax Withheld at Source P 70,161,575.03 Multiply by [Gross Receipts Tax] rate 5% Overpaid [Gross Receipts Tax] P 3,508,078.75 Without waiting for an action from the [petitioner], [respondent] on the same day filed [a] petition for review [with the Court of Tax Appeals] in order to toll the running of the twoyear prescriptive period to judicially claim for the refund of [any] overpaid internal revenue tax[,] pursuant to Section 230 [now 229] of the Tax Code [also National Internal Revenue Code] x x x. xxxxxxxxx After trial on the merits, the [Court of Tax Appeals], on August 6, 1999, rendered its decision ordering x x x petitioner to refund in favor of x x x respondent the reduced amount of P1,555,749.65 as overpaid [gross receipts tax] for the year 1995. The legal issue x x x was resolved by the [Court of Tax Appeals], with Hon. Amancio Q. Saga dissenting, on the strength of its earlier pronouncement in x x x Asian Bank Corporation vs. Commissioner of Internal Revenue x x x, wherein it was held that the 20% [final withholding tax] on [a] banks interest income should not form part of its taxable gross receipts for purposes of computing the [gross receipts tax]. Ruling of the CA The CA held that the 20% FWT on a banks interest income did not form part of the taxable gross receipts in computing the 5% GRT, because the FWT was not actually received by the bank but was directly remitted to the government. The appellate court curtly said that while the Tax Code does not specifically state any exemption, x x x the statute must receive a sensible construction such as will give effect to the legislative intention, and so as to avoid an unjust or absurd conclusion. Hence, this appeal. Issue Petitioner raises this lone issue for our consideration: Whether or not the 20% final withholding tax on [a] banks interest income forms part of the taxable gross receipts in computing the 5% gross receipts tax. The Courts Ruling The Petition is meritorious. Sole Issue: Whether the 20% FWT Forms Part of the Taxable Gross Receipts Petitioner claims that although the 20% FWT on respondents interest income was not actually received by respondent because it was remitted directly to the government, the fact that the amount redounded to the banks benefit makes it part of the taxable gross receipts in computing the 5% GRT. Respondent, on the other hand, maintains that the CA correctly ruled otherwise. We agree with petitioner. In fact, the same issue has been raised recently in China Banking Corporation v. CA, where this Court held that the amount of interest income withheld in payment of the 20% FWT forms part of gross receipts in computing for the GRT on banks. The FWT and the GRT: Two Different Taxes The 5% GRT is imposed by Section 119 of the Tax Code, which provides: SEC. 119. Tax on banks and non-bank financial intermediaries. There shall be collected a tax on gross receipts derived from sources within the Philippines by all banks and non-bank financial intermediaries in accordance with the following schedule: (a) On interest, commissions and discounts from lending activities as well as income from financial leasing, on the basis of remaining maturities of instruments from which such receipts are derived. Short-term maturity not in excess of two (2) years5% Medium-term maturity over two (2) years but not exceeding four (4) years....3% Long-term maturity: (i) Over four (4) years but not exceeding seven (7) years1% (ii) Over seven (7) years..0% (b) On dividends...0% (c) On royalties, rentals of property, real or personal, profits from exchange and all other items treated as gross income under Section 28 of this Code.................................................................... 5% Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction as short, medium or long term and the correct rate of tax shall be applied accordingly. Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar banking activities. The 5% GRT is included under Title V. Other Percentage Taxes of the Tax Code and is not subject to withholding. The banks and non-bank financial intermediaries liable therefor shall, under Section 125(a)(1), file quarterly returns on the amount of gross receipts and pay the taxes due thereon within twenty (20) days after the end of each taxable quarter. The 20% FWT, on the other hand, falls under Section 24(e)(1) of Title II. Tax on Income. It is a tax on passive income, deducted and withheld at source by the payorcorporation and/or person as withholding agent pursuant to Section 50, and paid in the same manner and subject to the same conditions as provided for in Section 51. A perusal of these provisions clearly shows that two types of taxes are involved in the present controversy: (1) the GRT, which is a percentage tax; and (2) the FWT, which is an income tax. As a bank, petitioner is covered by both taxes. A percentage tax is a national tax measured by a certain percentage of the gross selling price or gross value in money of goods sold, bartered or imported; or of the gross receipts or earnings derived by any person engaged in the sale of services. It is not subject to withholding. An income tax, on the other hand, is a national tax imposed on the net or the gross income realized in a taxable year. It is subject to withholding. In a withholding tax system, the payee is the taxpayer, the person on whom the tax is imposed; the payor, a separate entity, acts as no more than an agent of the government for the collection of the tax in order to ensure its payment. Obviously, this amount that is used to settle the tax liability is deemed sourced from the proceeds constitutive of the tax base. These proceeds are either actual or constructive. Both parties herein agree that there is no actual receipt by the bank of the amount withheld. What needs to be determined is if there is constructive receipt thereof. Since the payee -- not the payor -- is the real taxpayer, the rule on constructive receipt can be easily rationalized, if not made clearly manifest. Constructive Receipt Versus Actual Receipt Applying Section 7 of Revenue Regulations (RR) No. 17-84, petitioner contends that there is constructive receipt of the interest on deposits and yield on deposit substitutes. Respondent, however, claims that even if there is, it is Section 4(e) of RR 12-80 that nevertheless governs the situation. Section 7 of RR 17-84 states: SEC. 7. Nature and Treatment of Interest on Deposits and Yield on Deposit Substitutes. (a) The interest earned on Philippine Currency bank deposits and yield from deposit substitutes subjected to the withholding taxes in accordance with these regulations need not be included in the gross income in computing the depositors/investors income tax liability in accordance with the provision of Section 29(b), (c) and (d) of the National Internal Revenue Code, as amended. (b) Only interest paid or accrued on bank deposits, or yield from deposit substitutes declared for purposes of imposing the withholding taxes in accordance with these regulations shall be allowed as interest expense deductible for purposes of computing taxable net income of the payor. (c) If the recipient of the above-mentioned items of income are financial institutions, the same shall be included as part of the tax base upon which the gross receipt[s] tax is imposed. Section 4(e) of RR 12-80, on the other hand, states that the tax rates to be imposed on the gross receipts of banks, non-bank financial intermediaries, financing companies, and other non-bank financial intermediaries not performing quasi-banking activities shall be based on all items of income actually received. This provision reads: SEC. 4. x x x x x x x x x (e) Gross receipts tax on banks, non-bank financial intermediaries, financing companies, and other non-bank financial intermediaries not performing quasi-banking activities. The rates of tax to be imposed on the gross receipts of such financial institutions shall be based on all items of income actually received. Mere accrual shall not be considered, but once payment is received on such accrual or in cases of prepayment, then the amount actually received shall be included in the tax base of such financial institutions, as provided hereunder x x x. Respondent argues that the above-quoted provision is plain and clear: since there is no actual receipt, the FWT is not to be included in the tax base for computing the GRT. There is supposedly no pecuniary benefit or advantage accruing to the bank from the FWT, because the income is subjected to a tax burden immediately upon receipt through the withholding process. Moreover, the earlier RR 12-80 covered matters not falling under the later RR 17-84. We are not persuaded. By analogy, we apply to the receipt of income the rules on actual and constructive possession provided in Articles 531 and 532 of our Civil Code. Under Article 531: Possession is acquired by the material occupation of a thing or the exercise of a right, or by the fact that it is subject to the action of our will, or by the proper acts and legal formalities established for acquiring such right. Article 532 states: Possession may be acquired by the same person who is to enjoy it, by his legal representative, by his agent, or by any person without any power whatever; but in the last case, the possession shall not be considered as acquired until the person in whose name the act of possession was executed has ratified the same, without prejudice to the juridical consequences of negotiorum gestio in a proper case. The last means of acquiring possession under Article 531 refers to juridical acts -- the acquisition of possession by sufficient title to which the law gives the force of acts of possession. Respondent argues that only items of income actually received should be included in its gross receipts. It claims that since the amount had already been withheld at source, it did not have actual receipt thereof. We clarify. Article 531 of the Civil Code clearly provides that the acquisition of the right of possession is through the proper acts and legal formalities established therefor. The withholding process is one such act. There may not be actual receipt of the income withheld; however, as provided for in Article 532, possession by any person without any power whatsoever shall be considered as acquired when ratified by the person in whose name the act of possession is executed. In our withholding tax system, possession is acquired by the payor as the withholding agent of the government, because the taxpayer ratifies the very act of possession for the government. There is thus constructive receipt. The processes of bookkeeping and accounting for interest on deposits and yield on deposit substitutes that are subjected to FWT are indeed -- for legal purposes -- tantamount to delivery, receipt or remittance. Besides, respondent itself admits that its income is subjected to a tax burden immediately upon receipt, although it claims that it derives no pecuniary benefit or advantage through the withholding process. There being constructive receipt of such income -- part of which is withheld -- RR 17-84 applies, and that income is included as part of the tax base upon which the GRT is imposed. RR 12-80 Superseded by RR 17-84 We now come to the effect of the revenue regulations on interest income constructively received. In general, rules and regulations issued by administrative or executive officers pursuant to the procedure or authority conferred by law upon the administrative agency have the force and effect, or partake of the nature, of a statute. The reason is that statutes express the policies, purposes, objectives, remedies and sanctions intended by the legislature in general terms. The details and manner of carrying them out are oftentimes left to the administrative agency entrusted with their enforcement. In the present case, it is the finance secretary who promulgates the revenue regulations, upon recommendation of the BIR commissioner. These regulations are the consequences of a delegated power to issue legal provisions that have the effect of law. A revenue regulation is binding on the courts as long as the procedure fixed for its promulgation is followed. Even if the courts may not be in agreement with its stated policy or innate wisdom, it is nonetheless valid, provided that its scope is within the statutory authority or standard granted by the legislature. Specifically, the regulation must (1) be germane to the object and purpose of the law; (2) not contradict, but conform to, the standards the law prescribes; and (3) be issued for the sole purpose of carrying into effect the general provisions of our tax laws. In the present case, there is no question about the regularity in the performance of official duty. What needs to be determined is whether RR 12-80 has been repealed by RR 17-84. A repeal may be express or implied. It is express when there is a declaration in a regulation -usually in its repealing clause -- that another regulation, identified by its number or title, is repealed. All others are implied repeals. An example of the latter is a general provision that predicates the intended repeal on a substantial conflict between the existing and the prior regulations. As stated in Section 11 of RR 17-84, all regulations, rules, orders or portions thereof that are inconsistent with the provisions of the said RR are thereby repealed. This declaration proceeds on the premise that RR 17-84 clearly reveals such an intention on the part of the Department of Finance. Otherwise, later RRs are to be construed as a continuation of, and not a substitute for, earlier RRs; and will continue to speak, so far as the subject matter is the same, from the time of the first promulgation. There are two well-settled categories of implied repeals: (1) in case the provisions are in irreconcilable conflict, the later regulation, to the extent of the conflict, constitutes an implied repeal of an earlier one; and (2) if the later regulation covers the whole subject of an earlier one and is clearly intended as a substitute, it will similarly operate as a repeal of the earlier one. There is no implied repeal of an earlier RR by the mere fact that its subject matter is related to a later RR, which may simply be a cumulation or continuation of the earlier one. Where a part of an earlier regulation embracing the same subject as a later one may not be enforced without nullifying the pertinent provision of the latter, the earlier regulation is deemed impliedly amended or modified to the extent of the repugnancy. The unaffected provisions or portions of the earlier regulation remain in force, while its omitted portions are deemed repealed. An exception therein that is amended by its subsequent elimination shall now cease to be so and instead be included within the scope of the general rule. Section 4(e) of the earlier RR 12-80 provides that only items of income actually received shall be included in the tax base for computing the GRT, but Section 7(c) of the later RR 17-84 makes no such distinction and provides that all interests earned shall be included. The exception having been eliminated, the clear intent is that the later RR 17-84 includes the exception within the scope of the general rule. Repeals by implication are not favored and will not be indulged, unless it is manifest that the administrative agency intended them. As a regulation is presumed to have been made with deliberation and full knowledge of all existing rules on the subject, it may reasonably be concluded that its promulgation was not intended to interfere with or abrogate any earlier rule relating to the same subject, unless it is either repugnant to or fully inclusive of the subject matter of an earlier one, or unless the reason for the earlier one is beyond peradventure removed. Every effort must be exerted to make all regulations stand -- and a later rule will not operate as a repeal of an earlier one, if by any reasonable construction, the two can be reconciled. RR 12-80 imposes the GRT only on all items of income actually received, as opposed to their mere accrual, while RR 17-84 includes all interest income in computing the GRT. RR 12-80 is superseded by the later rule, because Section 4(e) thereof is not restated in RR 17-84. Clearly therefore, as petitioner correctly states, this particular provision was impliedly repealed when the later regulations took effect. Reconciling the Two Regulations Granting that the two regulations can be reconciled, respondents reliance on Section 4(e) of RR 12-80 is misplaced and deceptive. The accrual referred to therein should not be equated with the determination of the amount to be used as tax base in computing the GRT. Such accrual merely refers to an accounting method that recognizes income as earned although not received, and expenses as incurred although not yet paid. Accrual should not be confused with the concept of constructive possession or receipt as earlier discussed. Petitioner correctly points out that income that is merely accrued -- earned, but not yet received -- does not form part of the taxable gross receipts; income that has been received, albeit constructively, does. The word actually, used confusingly in Section 4(e), will be clearer if removed entirely. Besides, if actually is that important, accrual should have been eliminated for being a mere surplusage. The inclusion of accrual stresses the fact that Section 4(e) does not distinguish between actual and constructive receipt. It merely focuses on the method of accounting known as the accrual system. Under this system, income is accrued or earned in the year in which the taxpayers right thereto becomes fixed and definite, even though it may not be actually received until a later year; while a deduction for a liability is to be accrued or incurred and taken when the liability becomes fixed and certain, even though it may not be actually paid until later. Under any system of accounting, no duty or liability to pay an income tax upon a transaction arises until the taxable year in which the event constituting the condition precedent occurs. The liability to pay a tax may thus arise at a certain time and the tax paid within another given time. In reconciling these two regulations, the earlier one includes in the tax base for GRT all income, whether actually or constructively received, while the later one includes specifically interest income. In computing the income tax liability, the only exception cited in the later regulations is the exclusion from gross income of interest income, which is already subjected to withholding. This exception, however, refers to a different tax altogether. To extend mischievously such exception to the GRT will certainly lead to results not contemplated by the legislators and the administrative body promulgating the regulations. Manila Jockey Club Inapplicable In Commissioner of Internal Revenue v. Manila Jockey Club, we held that the term gross receipts shall not include money which, although delivered, has been especially earmarked by law or regulation for some person other than the taxpayer. To begin, we have to nuance the definition of gross receipts to determine what it is exactly. In this regard, we note that US cases have persuasive effect in our jurisdiction, because Philippine income tax law is patterned after its US counterpart. [G]ross receipts with respect to any period means the sum of: (a) The total amount received or accrued during such period from the sale, exchange, or other disposition of x x x other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business, and (b) The gross income, attributable to a trade or business, regularly carried on by the taxpayer, received or accrued during such period x x x. x x x [B]y gross earnings from operations x x x was intended all operations xxx including incidental, subordinate, and subsidiary operations, as well as principal operations. When we speak of the gross earnings of a person or corporation, we mean the entire earnings or receipts of such person or corporation from the business or operations to which we refer. From these cases, gross receipts refer to the total, as opposed to the net, income. These are therefore the total receipts before any deduction for the expenses of management. Websters New International Dictionary, in fact, defines gross as whole or entire. Statutes taxing the gross receipts, earnings, or income of particular corporations are found in many jurisdictions. Tax thereon is generally held to be within the power of a state to impose; or constitutional, unless it interferes with interstate commerce or violates the requirement as to uniformity of taxation. Moreover, we have emphasized that the BIR has consistently ruled that gross receipts does not admit of any deduction. Following the principle of legislative approval by reenactment, this interpretation has been adopted by the legislature throughout the various reenactments of then Section 119 of the Tax Code. Given that a tax is imposed upon total receipts and not upon net earnings, shall the income withheld be included in the tax base upon which such tax is imposed? In other words, shall interest income constructively received still be included in the tax base for computing the GRT? We rule in the affirmative. Manila Jockey Club does not apply to this case. Earmarking is not the same as withholding. Amounts earmarked do not form part of gross receipts, because, although delivered or received, these are by law or regulation reserved for some person other than the taxpayer. On the contrary, amounts withheld form part of gross receipts, because these are in constructive possession and not subject to any reservation, the withholding agent being merely a conduit in the collection process. The Manila Jockey Club had to deliver to the Board on Races, horse owners and jockeys amounts that never became the property of the race track. Unlike these amounts, the interest income that had been withheld for the government became property of the financial institutions upon constructive possession thereof. Possession was indeed acquired, since it was ratified by the financial institutions in whose name the act of possession had been executed. The money indeed belonged to the taxpayers; merely holding it in trust was not enough. The government subsequently becomes the owner of the money when the financial institutions pay the FWT to extinguish their obligation to the government. As this Court has held before, this is the consideration for the transfer of ownership of the FWT from these institutions to the government. It is ownership that determines whether interest income forms part of taxable gross receipts. Being originally owned by these financial institutions as part of their interest income, the FWT should form part of their taxable gross receipts. Besides, these amounts withheld are in payment of an income tax liability, which is different from a percentage tax liability. Commissioner of Internal Revenue v. Tours Specialists, Inc. aptly held thus: x x x [G]ross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayers benefit; and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code. In the construction and interpretation of tax statutes and of statutes in general, the primary consideration is to ascertain and give effect to the intention of the legislature. We ought to impute to the lawmaking body the intent to obey the constitutional mandate, as long as its enactments fairly admit of such construction. In fact, x x x no tax can be levied without express authority of law, but the statutes are to receive a reasonable construction with a view to carrying out their purpose and intent. Looking again into Sections 24(e)(1) and 119 of the Tax Code, we find that the first imposes an income tax; the second, a percentage tax. The legislature clearly intended two different taxes. The FWT is a tax on passive income, while the GRT is on business. The withholding of one is not equivalent to the payment of the other. Non-Exemption of FWT from GRT: Neither Unjust nor Absurd Taxing the people and their property is essential to the very existence of government. Certainly, one of the highest attributes of sovereignty is the power of taxation, which may legitimately be exercised on the objects to which it is applicable to the utmost extent as the government may choose. Being an incident of sovereignty, such power is coextensive with that to which it is an incident. The interest on deposits and yield on deposit substitutes of financial institutions, on the one hand, and their business as such, on the other, are the two objects over which the State has chosen to extend its sovereign power. Those not so chosen are, upon the soundest principles, exempt from taxation. While courts will not enlarge by construction the governments power of taxation, neither will they place upon tax laws so loose a construction as to permit evasions, merely on the basis of fanciful and insubstantial distinctions. When the legislature imposes a tax on income and another on business, the imposition must be respected. The Tax Code should be so construed, if need be, as to avoid empty declarations or possibilities of crafty tax evasion schemes. We have consistently ruled thus: x x x [I]t is upon taxation that the [g]overnment chiefly relies to obtain the means to carry on its operations, and it is of the utmost importance that the modes adopted to enforce the collection of the taxes levied should be summary and interfered with as little as possible. x x x. Any delay in the proceedings of the officers, upon whom the duty is devolved of collecting the taxes, may derange the operations of government, and thereby cause serious detriment to the public. No government could exist if all litigants were permitted to delay the collection of its taxes. A taxing act will be construed, and the intent and meaning of the legislature ascertained, from its language. Its clarity and implied intent must exist to uphold the taxes as against a taxpayer in whose favor doubts will be resolved. No such doubts exist with respect to the Tax Code, because the income and percentage taxes we have cited earlier have been imposed in clear and express language for that purpose. This Court has steadfastly adhered to the doctrine that its first and fundamental duty is the application of the law according to its express terms -- construction and interpretation being called for only when such literal application is impossible or inadequate without them. In Quijano v. Development Bank of the Philippines, we stressed as follows: No process of interpretation or construction need be resorted to where a provision of law peremptorily calls for application.  A literal application of any part of a statute is to be rejected if it will operate unjustly, lead to absurd results, or contradict the evident meaning of the statute taken as a whole. Unlike the CA, we find that the literal application of the aforesaid sections of the Tax Code and its implementing regulations does not operate unjustly or contradict the evident meaning of the statute taken as a whole. Neither does it lead to absurd results. Indeed, our courts are not to give words meanings that would lead to absurd or unreasonable consequences. We have repeatedly held thus: x x x [S]tatutes should receive a sensible construction, such as will give effect to the legislative intention and so as to avoid an unjust or an absurd conclusion. While it is true that the contemporaneous construction placed upon a statute by executive officers whose duty is to enforce it should be given great weight by the courts, still if such construction is so erroneous, x x x the same must be declared as null and void. It does not even matter that the CTA, like in China Banking Corporation, relied erroneously on Manila Jockey Club. Under our tax system, the CTA acts as a highly specialized body specifically created for the purpose of reviewing tax cases. Because of its recognized expertise, its findings of fact will ordinarily not be reviewed, absent any showing of gross error or abuse on its part. Such findings are binding on the Court and, absent strong reasons for us to delve into facts, only questions of law are open for determination. Respondent claims that it is entitled to a refund on the basis of excess GRT payments. We disagree. Tax refunds are in the nature of tax exemptions. Such exemptions are strictly construed against the taxpayer, being highly disfavored and almost said to be odious to the law. Hence, those who claim to be exempt from the payment of a particular tax must do so under clear and unmistakable terms found in the statute. They must be able to point to some positive provision, not merely a vague implication, of the law creating that right. The right of taxation will not be surrendered, except in words too plain to be mistaken. The reason is that the State cannot strip itself of this highest attribute of sovereignty -- its most essential power of taxation -- by vague or ambiguous language. Since tax refunds are in the nature of tax exemptions, these are deemed to be in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. No less than our 1987 Constitution provides for the mechanism for granting tax exemptions. They certainly cannot be granted by implication or mere administrative regulation. Thus, when an exemption is claimed, it must indubitably be shown to exist, for every presumption is against it, and a well-founded doubt is fatal to the claim. In the instant case, respondent has not been able to satisfactorily show that its FWT on interest income is exempt from the GRT. Like China Banking Corporation, its argument creates a tax exemption where none exists. No exemptions are normally allowed when a GRT is imposed. It is precisely designed to maintain simplicity in the tax collection effort of the government and to assure its steady source of revenue even during an economic slump. No Double Taxation We have repeatedly said that the two taxes, subject of this litigation, are different from each other. The basis of their imposition may be the same, but their natures are different, thus leading us to a final point. Is there double taxation? The Court finds none. Double taxation means taxing the same property twice when it should be taxed only once; that is, x x x taxing the same person twice by the same jurisdiction for the same thing. It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as direct duplicate taxation, the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character. First, the taxes herein are imposed on two different subject matters. The subject matter of the FWT is the passive income generated in the form of interest on deposits and yield on deposit substitutes, while the subject matter of the GRT is the privilege of engaging in the business of banking. A tax based on receipts is a tax on business rather than on the property; hence, it is an excise rather than a property tax. It is not an income tax, unlike the FWT. In fact, we have already held that one can be taxed for engaging in business and further taxed differently for the income derived therefrom. Akin to our ruling in Velilla v. Posadas, these two taxes are entirely distinct and are assessed under different provisions. Second, although both taxes are national in scope because they are imposed by the same taxing authority -- the national government under the Tax Code -- and operate within the same Philippine jurisdiction for the same purpose of raising revenues, the taxing periods they affect are different. The FWT is deducted and withheld as soon as the income is earned, and is paid after every calendar quarter in which it is earned. On the other hand, the GRT is neither deducted nor withheld, but is paid only after every taxable quarter in which it is earned. Third, these two taxes are of different kinds or characters. The FWT is an income tax subject to withholding, while the GRT is a percentage tax not subject to withholding. In short, there is no double taxation, because there is no taxing twice, by the same taxing authority, within the same jurisdiction, for the same purpose, in different taxing periods, some of the property in the territory. Subjecting interest income to a 20% FWT and including it in the computation of the 5% GRT is clearly not double taxation. WHEREFORE, the Petition is GRANTED. The assailed Decision and Resolution of the Court of Appeals are hereby REVERSED and SET ASIDE. No costs. SO ORDERED. Davide, Jr., C.J., (Chairman), Ynares-Santiago, Carpio, and Azcuna, JJ., concur. G.R. No. 180651 July 30, 2014 NURSERY CARE CORPORATION; SHOEMART, INC.; STAR APPLIANCE CENTER, INC.; H&B, INC.; SUPPLIES STATION, INC.; and HARDWARE WORKSHOP, INC., Petitioners, vs. ANTHONY ACEVEDO, in his capacity as THE TREASURER OF MANILA; and THE CITY OF MANILA, Respondents. DECISION BERSAMIN, J.: The issue here concerns double taxation. There is double taxation when the same taxpayer is taxed twice when he should be taxed only once for the same purpose by the same taxing authority within the same jurisdiction during the same taxing period, and the taxes are of the same kind or character. Double taxation is obnoxious. Section 21. Tax on Business Subject to the Excise, Value-Added or Percentage Taxes under the NIRC - On any of the following businesses and articles of commerce subject to the excise, value-added or percentage taxes under the National Internal Revenue Code, hereinafter referred to as NIRC, as amended, a tax of FIFTY PERCENT (50%) OF ONE PERCENT (1%) per annum on the gross sales or receipts of the preceding calendar year is hereby imposed: A) On person who sells goods and services in the course of trade or businesses; x x x PROVIDED, that all registered businesses in the City of Manila already paying the aforementioned tax shall be exempted from payment thereof. To comply with the City of Manila’s assessmentof taxes under Section 21, supra, the petitioners paid under protest the following amounts corresponding to the first quarter of 1999,5 to wit: The Case (a) Nursery Care Corporation ₱595,190.25 Under review are the resolution promulgated in CA-G.R. SP No. 72191 on June 18, 2007,1 whereby the Court of Appeals (CA) denied petitioners' appeal for lack of jurisdiction; and the resolution promulgated on November 14, 2007,2 whereby the CA denied their motion for reconsideration for its lack of merit. (b) Shoemart Incorporated ₱3,283,520.14 Antecedents (f) Hardware Work Shop, Inc. ₱609,953.24 The City of Manila assessed and collected taxes from the individual petitioners pursuant to Section 15 (Tax on Wholesalers, Distributors, or Dealers) and Section 17 (Tax on Retailers) of the Revenue Code of Manila.3 At the same time, the City of Manila imposed additional taxes upon the petitioners pursuant to Section 21 ofthe Revenue Code of Manila,4 as amended, as a condition for the renewal of their respective business licenses for the year 1999. Section 21 of the Revenue Code of Manila stated: By letter dated March 1, 1999, the petitioners formally requested the Office of the City Treasurer for the tax credit or refund of the local business taxes paid under protest.6 However, then City Treasurer Anthony Acevedo (Acevedo) denied the request through his letter of March 10, 1999.7 (c) Star Appliance Center ₱236,084.03 (d) H & B, Inc. ₱1,271,118.74 (e) Supplies Station, Inc. ₱239,501.25 On April 8, 1999, the petitioners, through their representative, Cecilia R. Patricio, sought the reconsideration of the denial of their request.8 Still, the City Treasurer did not reconsider.9 In the meanwhile, Liberty Toledo succeeded Acevedo as the City Treasurer of Manila.10 On April 29, 1999, the petitioners filed their respective petitions for certiorariin the Regional Trial Court (RTC) in Manila. The petitions, docketed as Civil Cases Nos. 99-93668 to 9993673,11 were initially raffled to different branches, but were soon consolidated in Branch 34.12 After the presiding judge of Branch 34 voluntarily inhibited himself, the consolidated cases were transferred to Branch 23,13 but were again re-raffled to Branch 19 upon the designation of Branch 23 as a special drugs court.14 The parties agreed on and jointly submitted the following issues for the consideration and resolution of the RTC, namely: (a) Whether or not the collection of taxes under Section 21 of Ordinance No. 7794, as amended, constitutes double taxation. (b) Whether or not the failure of the petitioners to avail of the statutorily provided remedy for their tax protest on the ground of unconstitutionality, illegality and oppressiveness under Section 187 of the Local Government Code renders the present action dismissible for non-exhaustion of administrative remedy.15 Decision of the RTC On April 26, 2002, the RTC rendered its decision, holding thusly: The Court perceives of no instance of the constitutionally proscribed double taxation, in the strict, narrow or obnoxious sense, imposed upon the petitioners under Section 15 and 17, on the one hand, and under Section 21, on the other, of the questioned Ordinance. The tax imposed under Section 15 and 17, as against that imposed under Section 21, are levied against different tax objects or subject matter. The tax under Section 15 is imposed upon wholesalers, distributors or dealers, while that under Section 17 is imposedupon retailers. In short, taxes imposed under Section 15 and 17 is a tax on the business of wholesalers, distributors, dealers and retailers. On the other hand, the tax imposed upon herein petitioners under Section 21 is not a tax against the business of the petitioners (as wholesalers, distributors, dealers or retailers)but is rather a tax against consumers or end-users of the articles sold by petitioners. This is plain from a reading of the modifying paragraph of Section 21 which says: "The tax shall be payable by the person paying for the services rendered and shall be paid to the person rendering the services who is required to collect and pay the tax within twenty (20) days after the end of each quarter." (Underscoring supplied) In effect, the petitioners only act as the collection or withholding agent of the City while the ones actually paying the tax are the consumers or end-users of the articles being sold by petitioners. The taxes imposed under Sec. 21 represent additional amounts added by the business establishment to the basic prices of its goods and services which are paid by the end-users to the businesses. It is actually not taxes on the business of petitioners but on the consumers. Hence, there is no double taxation in the narrow, strict or obnoxious sense,involved in the imposition of taxes by the City of Manila under Sections 15, 17 and 21 of the questioned Ordinance. This in effect resolves infavor of the constitutionality of the assailed sections of Ordinance No. 7807 of the City of Manila. Petitioners, likewise, pray the Court to direct respondents to cease and desist from implementing Section 21 of the questioned Ordinance. That the Court cannot do, without doing away with the mandatory provisions of Section 187 of the Local Government Code which distinctly commands that an appeal questioning the constitutionality or legality of a tax ordinance shall not have the effectof suspending the effectivity of the ordinance and the accrual and payment of the tax, fee or charge levied therein. This is so because an ordinance carries with it the presumption of validity. xxx With the foregoing findings, petitioners’ prayer for the refund of the amounts paid by them under protest must, likewise, fail. Wherefore, the petitions are dismissed. Without pronouncement as to costs. SO ORDERED.16 The petitioners appealed to the CA.17 Section 2,Rule 50 of the 1997 Rules on Civil Procedure which states: "Sec. 2. Dismissal of improper appeal to the Court of Appeals. – An appeal under Rule 41 taken from the Regional Trial Court to the Court of Appeals raising only questions of law shall be dismissed, issues purely of law not being reviewable by said court. similarly, an appeal by notice of appeal instead of by petition for review from the appellate judgment of a Regional Trial Court shall be dismissed. An appeal erroneously taken tothe Court of Appeals shall not be transferred to the appropriate court but shall be dismissed outright. WHEREFORE, the foregoing considered, the appeal is DISMISSED. Ruling of the CA SO ORDERED.18 On June 18, 2007, the CA deniedthe petitioners’ appeal, ruling as follows: The six (6) cases were consolidated on a common question of fact and law, that is, whether the act ofthe City Treasurer of Manila of assessing and collecting business taxes under Section 21of Ordinance 7807, on top of other business taxes alsoassessed and collected under the previous sections of the same ordinance is a violation of the provisions of Section 143 of the Local Government Code. Clearly, the disposition of the present appeal in these consolidated cases does not necessitate the calibration of the whole evidence as there is no question or doubt as to the truth or the falsehood of the facts obtaining herein, as both parties agree thereon. The present case involves a question of law that would not lend itself to an examination or evaluation by this Court of the probative value of the evidence presented. Thus the Court is constrained todismiss the instant petition for lack of jurisdiction under The petitioners moved for reconsideration, but the CA denied their motion through the resolution promulgated on November 14, 2007.19 Issues The petitioners now appeal, raising the following grounds, to wit: A. THE COURT OF APPEALS, IN DISMISSING THE APPEAL OF THE PETITIONERS AND DENYING THEIR MOTION FOR RECONSIDERATION, ERRED INRULING THAT THE ISSUE INVOLVED IS A PURELY LEGAL QUESTION. B. THE COURT OF APPEALS ERRED IN NOT REVERSING THE DECISION OF BRANCH 19 OF THE REGIONAL TRIAL COURT OF MANILA DATED 26 APRIL 2002 DENYING PETITIONERS’ PRAYER FOR REFUND OF THE AMOUNTS PAID BY THEM UNDER PROTEST AND DISMISSING THE PETITION FOR CERTIORARI FILED BY THE PETITIONERS. appeal is brought to the CA on questions of fact, of law, or mixed questions of fact and law.22 The third mode of appeal is elevated to the Supreme Court only on questions of law.23 C. THE COURT OF APPEALS ERRED IN NOT RULING THAT THE ACT OF THE CITY TREASURER OF MANILA IN IMPOSING, ASSESSING AND COLLECTING THE ADDITIONAL BUSINESS TAX UNDER SECTION 21 OFORDINANCE NO. 7794, AS AMENDED BY ORDINANCE NO. 7807, ALSO KNOWN AS THE REVENUE CODE OF THE CITY OFMANILA, IS CONSTITUTIVE OF DOUBLE TAXATION AND VIOLATIVE OF THE LOCAL GOVERNMENT CODE OF 1991.20 The main issues for resolution are, therefore, (1) whether or not the CA properly denied due course to the appeal for raising pure questions of law; and (2) whether or not the petitioners were entitled to the tax credit or tax refund for the taxes paid under Section 21, supra. Ruling The appeal is meritorious. 1. The CA did not err in dismissing the appeal; but the rules should be liberally applied for the sake of justice and equity The Rules of Courtprovides three modes of appeal from the decisions and final orders of the RTC, namely: (1) ordinary appeal or appeal by writ of error under Rule 41, where the decisionsand final orders were rendered in civil or criminal actions by the RTC in the exercise of original jurisdiction; (2) petition for review under Rule 42, where the decisions and final orders were rendered by the RTC in the exerciseof appellate jurisdiction; and (3) petition for review on certiorarito the Supreme Court under Rule 45.21 The first mode of appeal is taken to the CA on questions of fact, or mixed questions of fact and law. The second mode of The distinction between a question oflaw and a question of fact is well established. On the one hand, a question of law ariseswhen there is doubt as to what the law is on a certain state of facts; on the other, there is a question of fact when the doubt arises asto the truth or falsity of the alleged facts.24 According to Leoncio v. De Vera:25 x x x For a question to beone of law, the same must not involve an examination of the probative value ofthe evidence presented by the litigants or any of them. The resolution of the issue must restsolely on what the law provides on the given set of circumstances. Once it is clear that the issue invites a review of the evidence presented, the question posed is one of fact. Thus, the test of whether a question isone of law or offact is not the appellation given to such question by the party raising the same; rather, it is whether the appellate court can determine the issue raised without reviewing or evaluating the evidence, in which case, it is a question oflaw; otherwise it is a question of fact.26 The nature of the issues to be raised on appeal can be gleaned from the appellant’s notice of appeal filed in the trial court, and from the appellant’s brief submitted to the appellate court.27 In this case, the petitioners filed a notice of appeal in which they contended that the April 26, 2002 decision and the order of July 17, 2002 issued by the RTC denying their consolidated motion for reconsideration were contrary to the facts and law obtaining in the consolidated cases.28 In their consolidated memorandum filed in the CA, they essentially assailed the RTC’s ruling that the taxes imposed on and collected from the petitioners under Section 21 of the Revenue Code of Manila constituted double taxation in the strict, narrow or obnoxious sense. Considered together, therefore, the notice of appeal and consolidated memorandum evidently did notraise issues that required the reevaluation of evidence or the relevance of surrounding circumstances. The CA rightly concluded that the petitioners thereby raised only a question of law. The dismissal of their appeal was proper, strictly speaking, because Section 2, Rule 50 of the Rules of Court provides that an appeal from the RTC to the CA raising only questions of law shall be dismissed; and that an appeal erroneously taken to the CA shall be outrightly dismissed.29 2. Collection of taxes pursuant to Section 21 of the Revenue Code of Manila constituted double taxation The foregoing notwithstanding, the Court, given the circumstances obtaining herein and in light of jurisprudence promulgated subsequent to the filing of the petition, deems it fitting and proper to adopt a liberal approach in order to render a justand speedy disposition of the substantive issue at hand. Hence, we resolve, bearing inmind the following pronouncement in Go v. Chaves:30 Our rules of procedure are designed to facilitate the orderly disposition of cases and permit the prompt disposition of unmeritorious cases which clog the court dockets and do little more than waste the courts’ time. These technical and procedural rules, however, are intended to ensure, rather than suppress, substantial justice. A deviation from their rigid enforcement may thus be allowed, as petitioners should be given the fullest opportunity to establish the merits of their case, rather than lose their property on mere technicalities. We held in Ong Lim Sing, Jr. v. FEB Leasing and Finance Corporation that: Courts have the prerogative to relax procedural rules of even the most mandatory character, mindful of the duty to reconcile both the need to speedily put an end to litigation and the parties' right to due process.In numerous cases, this Court has allowed liberal construction of the rules when to do so would serve the demands of substantial justice and equity. The petitioners point out that although Section 21 of the Revenue Code of Manila was not itself unconstitutional or invalid, its enforcement against the petitioners constituted double taxation because the local business taxes under Section 15 and Section 17 of the Revenue Code of Manila were already being paid by them.31 They contend that the proviso in Section 21 exempted all registered businesses in the City of Manila from paying the tax imposed under Section 21;32 and that the exemption was more in accord with Section 143 of the Local Government Code,33 the law that vested in the municipal and city governments the power to impose business taxes. The respondents counter, however, that double taxation did not occur from the imposition and collection of the tax pursuant to Section 21 of the Revenue Code of Manila;34 that the taxes imposed pursuant to Section 21 were in the concept of indirect taxes upon the consumers of the goods and services sold by a business establishment;35 and that the petitioners did not exhaust their administrative remedies by first appealing to the Secretary of Justice to challenge the constitutionalityor legality of the tax ordinance.36 In resolving the issue of double taxation involving Section 21 of the Revenue Code of Manila, the Court is mindful of the ruling in City of Manila v. Coca-Cola Bottlers Philippines, Inc.,37 which has been reiterated in Swedish Match Philippines, Inc. v. The Treasurer of the City of Manila.38 In the latter, the Court has held: x x x [T]he issue of double taxation is not novel, as it has already been settled by this Court in The City of Manila v. Coca-Cola Bottlers Philippines, Inc.,in this wise: Petitioners obstinately ignore the exempting proviso in Section 21 of Tax Ordinance No. 7794, to their own detriment.1âwphi1 Said exempting proviso was precisely included in said section so as to avoid double taxation. Double taxation means taxingthe same property twice when it should be taxed only once; that is, "taxing the same person twice by the same jurisdictionfor the same thing." It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as "direct duplicate taxation," the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and the taxes must be of the same kind or character. Using the aforementioned test, the Court finds that there is indeed double taxation if respondent is subjected to the taxes under both Sections 14 and 21 of Tax Ordinance No. 7794, since these are being imposed: (1) on the same subject matter – the privilege of doing business in the City of Manila; (2) for the same purpose – to make persons conducting business within the City of Manila contribute tocity revenues; (3) by the same taxing authority – petitioner Cityof Manila; (4) within the same taxing jurisdiction – within the territorial jurisdiction of the City of Manila; (5) for the same taxing periods – per calendar year; and (6) of the same kind or character – a local business tax imposed on gross sales or receipts of the business. The distinction petitioners attempt to make between the taxes under Sections 14 and 21 of Tax Ordinance No. 7794 is specious. The Court revisits Section 143 of the LGC, the very source of the power of municipalities and cities to impose a local business tax, and to which any local business tax imposed by petitioner City of Manila must conform. It is apparent from a perusal thereof that when a municipality or city has already imposed a business tax on manufacturers, etc.of liquors, distilled spirits, wines, and any other article of commerce, pursuant to Section 143(a) of the LGC, said municipality or city may no longer subject the same manufacturers, etc.to a business tax under Section 143(h) of the same Code. Section 143(h) may be imposed only on businesses that are subject to excise tax, VAT, or percentagetax under the NIRC, and that are "not otherwise specified in preceding paragraphs." In the same way, businesses such as respondent’s, already subject to a local business tax under Section 14 of Tax Ordinance No. 7794 [which is based on Section 143(a) of the LGC], can no longer be made liable for local business tax under Section 21 of the same Tax Ordinance [which is based on Section 143(h) of the LGC]. Based on the foregoing reasons, petitioner should not have been subjected to taxes under Section 21 of the ManilaRevenue Code for the fourth quarter of 2001, considering thatit had already been paying local business tax under Section 14 of the same ordinance. xxxx Accordingly, respondent’s assessment under both Sections 14 and 21 had no basis. Petitioner is indeed liable to pay business taxes to the City of Manila; nevertheless, considering that the former has already paid these taxes under Section 14 of the Manila Revenue Code, it is exempt from the same payments under Section 21 of the same code. Hence, payments made under Section 21 must be refunded in favor of petitioner. It is undisputed thatpetitioner paid business taxes based on Sections 14 and 21 for the fourth quarter of 2001 in the total amount of ₱470,932.21. Therefore, it is entitled to a refund of ₱164,552.04 corresponding to the payment under Section 21 of the Manila Revenue Code. On the basis of the rulings in Coca-Cola Bottlers Philippines, Inc. and Swedish Match Philippines, Inc., the Court now holds that all the elements of double taxation concurred upon the Cityof Manila’s assessment on and collection from the petitioners of taxes for the first quarter of 1999 pursuant to Section 21 of the Revenue Code of Manila. Firstly, because Section 21 of the Revenue Code of Manila imposed the tax on a person who sold goods and services in the course of trade or business based on a certain percentage ofhis gross sales or receipts in the preceding calendar year, while Section 15 and Section 17 likewise imposed the tax on a person who sold goods and services in the course of trade or business but only identified such person with particularity, namely, the wholesaler, distributor or dealer (Section 15), and the retailer (Section 17), all the taxes – being imposed on the privilege of doing business in the City of Manila in order to make the taxpayers contributeto the city’s revenues – were imposed on the same subject matter and for the same purpose. Secondly, the taxes were imposed by the same taxing authority (the City of Manila) and within the same jurisdiction in the same taxing period (i.e., per calendar year). Thirdly, the taxes were all in the nature of local business taxes. We note that although Coca-Cola Bottlers Philippines, Inc. and Swedish Match Philippines, Inc. involved Section 21 vis-à-vis Section 14 (Tax on Manufacturers, Assemblers and Other Processors)39 of the Revenue Code of Manila, the legal principlesenunciated therein should similarly apply because Section 15 (Tax on Wholesalers, Distributors, or Dealers)and Section 17 (Tax on Retailers) of the Revenue Code of Manila imposed the same nature of tax as that imposed under Section 14, i.e., local business tax, albeit on a different subject matter or group of taxpayers. In fine, the imposition of the tax under Section 21 of the Revenue Code of Manila constituted double taxation, and the taxes collected pursuant thereto must be refunded. WHEREFORE, the Court GRANTS the petition for review on certiorari; REVERSES and SETS ASIDE the resolutions promulgated on June 18, 2007 and November 14, 2007 in CA-G.R. SP No. 72191; and DIRECTS the City of Manila to refund the payments made by the petitioners of the taxes assessed and collected for the first quarter of 1999 pursuant to Section 21 of the Revenue Code of Manila. No pronouncement on costs of suit. SO ORDERED. G.R. No. 127105 June 25, 1999 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. S.C. JOHNSON AND SON, INC., and COURT OF APPEALS, respondents. GONZAGA-REYES, J.: This is a petition for review on certiorari under Rule 45 of the Rules of Court seeking to set aside the decision of the Court of Appeals dated November 7, 1996 in CA-GR SP No. 40802 affirming the decision of the Court of Tax Appeals in CTA Case No. 5136. The antecedent facts as found by the Court of Tax Appeals are not disputed, to wit: [Respondent], a domestic corporation organized and operating under the Philippine laws, entered into a license agreement with SC Johnson and Son, United States of America (USA), a non-resident foreign corporation based in the U.S.A. pursuant to which the [respondent] was granted the right to use the trademark, patents and technology owned by the latter including the right to manufacture, package and distribute the products covered by the Agreement and secure assistance in management, marketing and production from SC Johnson and Son, U. S. A. The said License Agreement was duly registered with the Technology Transfer Board of the Bureau of Patents, Trade Marks and Technology Transfer under Certificate of Registration No. 8064 (Exh. "A"). For the use of the trademark or technology, [respondent] was obliged to pay SC Johnson and Son, USA royalties based on a percentage of net sales and subjected the same to 25% withholding tax on royalty payments which [respondent] paid for the period covering July 1992 to May 1993 in the total amount of P1,603,443.00 (Exhs. "B" to "L" and submarkings). On October 29, 1993, [respondent] filed with the International Tax Affairs Division (ITAD) of the BIR a claim for refund of overpaid withholding tax on royalties arguing that, "the antecedent facts attending [respondent's] case fall squarely within the same circumstances under which said MacGeorge and Gillete rulings were issued. Since the agreement was approved by the Technology Transfer Board, the preferential tax rate of 10% should apply to the [respondent]. We therefore submit that royalties paid by the [respondent] to SC Johnson and Son, USA is only subject to 10% withholding tax pursuant to the most-favored nation clause of the RP-US Tax Treaty [Article 13 Paragraph 2 (b) (iii)] in relation to the RP-West Germany Tax Treaty [Article 12 (2) (b)]" (Petition for Review [filed with the Court of Appeals], par. 12). [Respondent's] claim for there fund of P963,266.00 was computed as follows: Gross 25% 10% Month/ Royalty Withholding Withholding Year Fee Tax Paid Tax Balance ——— ——— ——— ——— ——— July 1992 559,878 55,988 83,982 August 567,935 85,190 139,970 141,984 56,794 September 595,956 59,596 89,393 148,989 October 634,405 63,441 95,161 158,601 November 620,885 62,089 93,133 155,221 December 383,276 57,491 95,819 36,328 Jan 1993 602,451 68,245 102,368 170,630 February 565,845 56,585 84,877 141,461 March 547,253 82,088 136,813 54,725 April 660,810 99,122 165,203 66,081 May 603,076 90,461 150,769 60,308 ———— ———— ——— ———— P6,421,770 P1,605,443 P963,2661 P642,177 ======== ======== ======== ======== The Commissioner did not act on said claim for refund. Private respondent S.C. Johnson & Son, Inc. (S.C. Johnson) then filed a petition for review before the Court of Tax Appeals (CTA) where the case was docketed as CTA Case No. 5136, to claim a refund of the overpaid withholding tax on royalty payments from July 1992 to May 1993. On May 7, 1996, the Court of Tax Appeals rendered its decision in favor of S.C. Johnson and ordered the Commissioner of Internal Revenue to issue a tax credit certificate in the amount of P963,266.00 representing overpaid withholding tax on royalty payments, beginning July, 1992 to May, 1993.2 The Commissioner of Internal Revenue thus filed a petition for review with the Court of Appeals which rendered the decision subject of this appeal on November 7, 1996 finding no merit in the petition and affirming in toto the CTA ruling.3 This petition for review was filed by the Commissioner of Internal Revenue raising the following issue: THE COURT OF APPEALS ERRED IN RULING THAT SC JOHNSON AND SON, USA IS ENTITLED TO THE "MOST FAVORED NATION" TAX RATE OF 10% ON ROYALTIES AS PROVIDED IN THE RP-US TAX TREATY IN RELATION TO THE RP-WEST GERMANY TAX TREATY. Petitioner contends that under Article 13(2) (b) (iii) of the RP-US Tax Treaty, which is known as the "most favored nation" clause, the lowest rate of the Philippine tax at 10% may be imposed on royalties derived by a resident of the United States from sources within the Philippines only if the circumstances of the resident of the United States are similar to those of the resident of West Germany. Since the RP-US Tax Treaty contains no "matching credit" provision as that provided under Article 24 of the RP-West Germany Tax Treaty, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Even assuming that the phrase "paid under similar circumstances" refers to the payment of royalties, and not taxes, as held by the Court of Appeals, still, the "most favored nation" clause cannot be invoked for the reason that when a tax treaty contemplates circumstances attendant to the payment of a tax, or royalty remittances for that matter, these must necessarily refer to circumstances that are taxrelated. Finally, petitioner argues that since S.C. Johnson's invocation of the "most favored nation" clause is in the nature of a claim for exemption from the application of the regular tax rate of 25% for royalties, the provisions of the treaty must be construed strictly against it. In its Comment, private respondent S.C. Johnson avers that the instant petition should be denied (1) because it contains a defective certification against forum shopping as required under SC Circular No. 28-91, that is, the certification was not executed by the petitioner herself but by her counsel; and (2) that the "most favored nation" clause under the RP-US Tax Treaty refers to royalties paid under similar circumstances as those royalties subject to tax in other treaties; that the phrase "paid under similar circumstances" does not refer to payment of the tax but to the subject matter of the tax, that is, royalties, because the "most favored nation" clause is intended to allow the taxpayer in one state to avail of more liberal provisions contained in another tax treaty wherein the country of residence of such taxpayer is also a party thereto, subject to the basic condition that the subject matter of taxation in that other tax treaty is the same as that in the original tax treaty under which the taxpayer is liable; thus, the RP-US Tax Treaty speaks of "royalties of the same kind paid under similar circumstances". S.C. Johnson also contends that the Commissioner is estopped from insisting on her interpretation that the phrase "paid under similar circumstances" refers to the manner in which the tax is paid, for the reason that said interpretation is embodied in Revenue Memorandum Circular ("RMC") 3992 which was already abandoned by the Commissioner's predecessor in 1993; and was expressly revoked in BIR Ruling No. 052-95 which stated that royalties paid to an American licensor are subject only to 10% withholding tax pursuant to Art 13(2)(b)(iii) of the RP-US Tax Treaty in relation to the RP-West Germany Tax Treaty. Said ruling should be given retroactive effect except if such is prejudicial to the taxpayer pursuant to Section 246 of the National Internal Revenue Code. Petitioner filed Reply alleging that the fact that the certification against forum shopping was signed by petitioner's counsel is not a fatal defect as to warrant the dismissal of this petition since Circular No. 28-91 applies only to original actions and not to appeals, as in the instant case. Moreover, the requirement that the certification should be signed by petitioner and not by counsel does not apply to petitioner who has only the Office of the Solicitor General as statutory counsel. Petitioner reiterates that even if the phrase "paid under similar circumstances" embodied in the most favored nation clause of the RP-US Tax Treaty refers to the payment of royalties and not taxes, still the presence or absence of a "matching credit" provision in the said RP-US Tax Treaty would constitute a material circumstance to such payment and would be determinative of the said clause's application.1âwphi1.nêt We address first the objection raised by private respondent that the certification against forum shopping was not executed by the petitioner herself but by her counsel, the Office of the Solicitor General (O.S.G.) through one of its Solicitors, Atty. Tomas M. Navarro. SC Circular No. 28-91 provides: SUBJECT: ADDITIONAL REQUISITES FOR PETITIONS FILED WITH THE SUPREME COURT AND THE COURT OF APPEALS TO PREVENT FORUM SHOPPING OR MULTIPLE FILING OF PETITIONS AND COMPLAINTS TO: xxx xxx xxx The attention of the Court has been called to the filing of multiple petitions and complaints involving the same issues in the Supreme Court, the Court of Appeals or other tribunals or agencies, with the result that said courts, tribunals or agencies have to resolve the same issues. (1) To avoid the foregoing, in every petition filed with the Supreme Court or the Court of Appeals, the petitioner aside from complying with pertinent provisions of the Rules of Court and existing circulars, must certify under oath to all of the following facts or undertakings: (a) he has not theretofore commenced any other action or proceeding involving the same issues in the Supreme Court, the Court of Appeals, or any tribunal or agency; . . . (2) Any violation of this revised Circular will entail the following sanctions: (a) it shall be a cause for the summary dismissal of the multiple petitions or complaints; . . . The circular expressly requires that a certificate of non-forum shopping should be attached to petitions filed before this Court and the Court of Appeals. Petitioner's allegation that Circular No. 28-91 applies only to original actions and not to appeals as in the instant case is not supported by the text nor by the obvious intent of the Circular which is to prevent multiple petitions that will result in the same issue being resolved by different courts. Anent the requirement that the party, not counsel, must certify under oath that he has not commenced any other action involving the same issues in this Court or the Court of Appeals or any other tribunal or agency, we are inclined to accept petitioner's submission that since the OSG is the only lawyer for the petitioner, which is a government agency mandated under Section 35, Chapter 12, title III, Book IV of the 1987 Administrative Code4 to be represented only by the Solicitor General, the certification executed by the OSG in this case constitutes substantial compliance with Circular No. 28-91. With respect to the merits of this petition, the main point of contention in this appeal is the interpretation of Article 13 (2) (b) (iii) of the RPUS Tax Treaty regarding the rate of tax to be imposed by the Philippines upon royalties received by a non-resident foreign corporation. The provision states insofar as pertinent that — 1) Royalties derived by a resident of one of the Contracting States from sources within the other Contracting State may be taxed by both Contracting States. 2) However, the tax imposed by that Contracting State shall not exceed. a) In the case of the United States, 15 percent of the gross amount of the royalties, and b) In the case of the Philippines, the least of: (i) 25 percent of the gross amount of the royalties; (ii) 15 percent of the gross amount of the royalties, where the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; and (iii) the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third State. xxx xxx xxx (emphasis supplied) Respondent S. C. Johnson and Son, Inc. claims that on the basis of the quoted provision, it is entitled to the concessional tax rate of 10 percent on royalties based on Article 12 (2) (b) of the RP-Germany Tax Treaty which provides: (2) However, such royalties may also be taxed in the Contracting State in which they arise, and according to the law of that State, but the tax so charged shall not exceed: xxx xxx xxx b) 10 percent of the gross amount of royalties arising from the use of, or the right to use, any patent, trademark, design or model, plan, secret formula or process, or from the use of or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience. For as long as the transfer of technology, under Philippine law, is subject to approval, the limitation of the tax rate mentioned under b) shall, in the case of royalties arising in the Republic of the Philippines, only apply if the contract giving rise to such royalties has been approved by the Philippine competent authorities. Unlike the RP-US Tax Treaty, the RP-Germany Tax Treaty allows a tax credit of 20 percent of the gross amount of such royalties against German income and corporation tax for the taxes payable in the Philippines on such royalties where the tax rate is reduced to 10 or 15 percent under such treaty. Article 24 of the RP-Germany Tax Treaty states — 1) Tax shall be determined in the case of a resident of the Federal Republic of Germany as follows: xxx xxx xxx b) Subject to the provisions of German tax law regarding credit for foreign tax, there shall be allowed as a credit against German income and corporation tax payable in respect of the following items of income arising in the Republic of the Philippines, the tax paid under the laws of the Philippines in accordance with this Agreement on: xxx xxx xxx dd) royalties, as defined in paragraph 3 of Article 12; xxx xxx xxx c) For the purpose of the credit referred in subparagraph; b) the Philippine tax shall be deemed to be xxx xxx xxx cc) in the case of royalties for which the tax is reduced to 10 or 15 per cent according to paragraph 2 of Article 12, 20 percent of the gross amount of such royalties. xxx xxx xxx According to petitioner, the taxes upon royalties under the RP-US Tax Treaty are not paid under circumstances similar to those in the RP-West Germany Tax Treaty since there is no provision for a 20 percent matching credit in the former convention and private respondent cannot invoke the concessional tax rate on the strength of the most favored nation clause in the RP-US Tax Treaty. Petitioner's position is explained thus: Under the foregoing provision of the RP-West Germany Tax Treaty, the Philippine tax paid on income from sources within the Philippines is allowed as a credit against German income and corporation tax on the same income. In the case of royalties for which the tax is reduced to 10 or 15 percent according to paragraph 2 of Article 12 of the RP-West Germany Tax Treaty, the credit shall be 20% of the gross amount of such royalty. To illustrate, the royalty income of a German resident from sources within the Philippines arising from the use of, or the right to use, any patent, trade mark, design or model, plan, secret formula or process, is taxed at 10% of the gross amount of said royalty under certain conditions. The rate of 10% is imposed if credit against the German income and corporation tax on said royalty is allowed in favor of the German resident. That means the rate of 10% is granted to the German taxpayer if he is similarly granted a credit against the income and corporation tax of West Germany. The clear intent of the "matching credit" is to soften the impact of double taxation by different jurisdictions. The RP-US Tax Treaty contains no similar "matching credit" as that provided under the RP-West Germany Tax Treaty. Hence, the tax on royalties under the RP-US Tax Treaty is not paid under similar circumstances as those obtaining in the RP-West Germany Tax Treaty. Therefore, the "most favored nation" clause in the RPWest Germany Tax Treaty cannot be availed of in interpreting the provisions of the RP-US Tax Treaty.5 The petition is meritorious. We are unable to sustain the position of the Court of Tax Appeals, which was upheld by the Court of Appeals, that the phrase "paid under similar circumstances in Article 13 (2) (b), (iii) of the RP-US Tax Treaty should be interpreted to refer to payment of royalty, and not to the payment of the tax, for the reason that the phrase "paid under similar circumstances" is followed by the phrase "to a resident of a third state". The respondent court held that "Words are to be understood in the context in which they are used", and since what is paid to a resident of a third state is not a tax but a royalty "logic instructs" that the treaty provision in question should refer to royalties of the same kind paid under similar circumstances. The above construction is based principally on syntax or sentence structure but fails to take into account the purpose animating the treaty provisions in point. To begin with, we are not aware of any law or rule pertinent to the payment of royalties, and none has been brought to our attention, which provides for the payment of royalties under dissimilar circumstances. The tax rates on royalties and the circumstances of payment thereof are the same for all the recipients of such royalties and there is no disparity based on nationality in the circumstances of such payment.6 On the other hand, a cursory reading of the various tax treaties will show that there is no similarity in the provisions on relief from or avoidance of double taxation7 as this is a matter of negotiation between the contracting parties.8 As will be shown later, this dissimilarity is true particularly in the treaties between the Philippines and the United States and between the Philippines and West Germany. The RP-US Tax Treaty is just one of a number of bilateral treaties which the Philippines has entered into for the avoidance of double taxation.9 The purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. 10 More precisely, the tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. 11 The apparent rationale for doing away with double taxation is of encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. 12 Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate. 13 Double taxation usually takes place when a person is resident of a contracting state and derives income from, or owns capital in, the other contracting state and both states impose tax on that income or capital. In order to eliminate double taxation, a tax treaty resorts to several methods. First, it sets out the respective rights to tax of the state of source or situs and of the state of residence with regard to certain classes of income or capital. In some cases, an exclusive right to tax is conferred on one of the contracting states; however, for other items of income or capital, both states are given the right to tax, although the amount of tax that may be imposed by the state of source is limited. 14 The second method for the elimination of double taxation applies whenever the state of source is given a full or limited right to tax together with the state of residence. In this case, the treaties make it incumbent upon the state of residence to allow relief in order to avoid double taxation. There are two methods of relief — the exemption method and the credit method. In the exemption method, the income or capital which is taxable in the state of source or situs is exempted in the state of residence, although in some instances it may be taken into account in determining the rate of tax applicable to the taxpayer's remaining income or capital. On the other hand, in the credit method, although the income or capital which is taxed in the state of source is still taxable in the state of residence, the tax paid in the former is credited against the tax levied in the latter. The basic difference between the two methods is that in the exemption method, the focus is on the income or capital itself, whereas the credit method focuses upon the tax. In negotiating tax treaties, the underlying rationale for reducing the tax rate is that the Philippines will give up a part of the tax in the expectation that the tax given up for this particular investment is not taxed by the other country. 16 Thus the petitioner correctly opined that the phrase "royalties paid under similar circumstances" in the most favored nation clause of the US-RP Tax Treaty necessarily contemplated "circumstances that are taxrelated". In the case at bar, the state of source is the Philippines because the royalties are paid for the right to use property or rights, i.e. trademarks, patents and technology, located within the Philippines. 17 The United States is the state of residence since the taxpayer, S. C. Johnson and Son, U. S. A., is based there. Under the RP-US Tax Treaty, the state of residence and the state of source are both permitted to tax the royalties, with a restraint on the tax that may be collected by the state of source. 18 Furthermore, the method employed to give relief from double taxation is the allowance of a tax credit to citizens or residents of the United States (in an appropriate amount based upon the taxes paid or accrued to the Philippines) against the United States tax, but such amount shall not exceed the limitations provided by United States law for the taxable year. 19 Under Article 13 thereof, the Philippines may impose one of three rates — 25 percent of the gross amount of the royalties; 15 percent when the royalties are paid by a corporation registered with the Philippine Board of Investments and engaged in preferred areas of activities; or the lowest rate of Philippine tax that may be imposed on royalties of the same kind paid under similar circumstances to a resident of a third state. Given the purpose underlying tax treaties and the rationale for the most favored nation clause, the concessional tax rate of 10 percent provided for in the RP-Germany Tax Treaty should apply only if the taxes imposed upon royalties in the RP-US Tax Treaty and in the RPGermany Tax Treaty are paid under similar circumstances. This would mean that private respondent must prove that the RP-US Tax Treaty grants similar tax reliefs to residents of the United States in respect of the taxes imposable upon royalties earned from sources within the Philippines as those allowed to their German counterparts under the RP-Germany Tax Treaty. The RP-US and the RP-West Germany Tax Treaties do not contain similar provisions on tax crediting. Article 24 of the RP-Germany Tax Treaty, supra, expressly allows crediting against German income and corporation tax of 20% of the gross amount of royalties paid under the law of the Philippines. On the other hand, Article 23 of the RP-US Tax Treaty, which is the counterpart provision with respect to relief for double taxation, does not provide for similar crediting of 20% of the gross amount of royalties paid. Said Article 23 reads: Article 23 Relief from double taxation Double taxation of income shall be avoided in the following manner: 1) In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle thereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to the Philippines and, in the case of a United States corporation owning at least 10 percent of the voting stock of a Philippine corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of taxes paid or accrued to the Philippines by the Philippine corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid or accrued to the Philippines, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within the Philippines or on income from sources outside the United States) provided by United States law for the taxable year. . . . The reason for construing the phrase "paid under similar circumstances" as used in Article 13 (2) (b) (iii) of the RP-US Tax Treaty as referring to taxes is anchored upon a logical reading of the text in the light of the fundamental purpose of such treaty which is to grant an incentive to the foreign investor by lowering the tax and at the same time crediting against the domestic tax abroad a figure higher than what was collected in the Philippines. In one case, the Supreme Court pointed out that laws are not just mere compositions, but have ends to be achieved and that the general purpose is a more important aid to the meaning of a law than any rule which grammar may lay down. 20 It is the duty of the courts to look to the object to be accomplished, the evils to be remedied, or the purpose to be subserved, and should give the law a reasonable or liberal construction which will best effectuate its purpose. 21 The Vienna Convention on the Law of Treaties states that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. 22 As stated earlier, the ultimate reason for avoiding double taxation is to encourage foreign investors to invest in the Philippines — a crucial economic goal for developing countries. 23 The goal of double taxation conventions would be thwarted if such treaties did not provide for effective measures to minimize, if not completely eliminate, the tax burden laid upon the income or capital of the investor. Thus, if the rates of tax are lowered by the state of source, in this case, by the Philippines, there should be a concomitant commitment on the part of the state of residence to grant some form of tax relief, whether this be in the form of a tax credit or exemption. 24 Otherwise, the tax which could have been collected by the Philippine government will simply be collected by another state, defeating the object of the tax treaty since the tax burden imposed upon the investor would remain unrelieved. If the state of residence does not grant some form of tax relief to the investor, no benefit would redound to the Philippines, i.e., increased investment resulting from a favorable tax regime, should it impose a lower tax rate on the royalty earnings of the investor, and it would be better to impose the regular rate rather than lose muchneeded revenues to another country. At the same time, the intention behind the adoption of the provision on "relief from double taxation" in the two tax treaties in question should be considered in light of the purpose behind the most favored nation clause. The purpose of a most favored nation clause is to grant to the contracting party treatment not less favorable than that which has been or may be granted to the "most favored" among other countries. 25 The most favored nation clause is intended to establish the principle of equality of international treatment by providing that the citizens or subjects of the contracting nations may enjoy the privileges accorded by either party to those of the most favored nation. 26 The essence of the principle is to allow the taxpayer in one state to avail of more liberal provisions granted in another tax treaty to which the country of residence of such taxpayer is also a party provided that the subject matter of taxation, in this case royalty income, is the same as that in the tax treaty under which the taxpayer is liable. Both Article 13 of the RP-US Tax Treaty and Article 12 (2) (b) of the RP-West Germany Tax Treaty, above-quoted, speaks of tax on royalties for the use of trademark, patent, and technology. The entitlement of the 10% rate by U.S. firms despite the absence of a matching credit (20% for royalties) would derogate from the design behind the most grant equality of international treatment since the tax burden laid upon the income of the investor is not the same in the two countries. The similarity in the circumstances of payment of taxes is a condition for the enjoyment of most favored nation treatment precisely to underscore the need for equality of treatment. We accordingly agree with petitioner that since the RP-US Tax Treaty does not give a matching tax credit of 20 percent for the taxes paid to the Philippines on royalties as allowed under the RP-West Germany Tax Treaty, private respondent cannot be deemed entitled to the 10 percent rate granted under the latter treaty for the reason that there is no payment of taxes on royalties under similar circumstances. It bears stress that tax refunds are in the nature of tax exemptions. As such they are regarded as in derogation of sovereign authority and to be construed strictissimi juris against the person or entity claiming the exemption. 27 The burden of proof is upon him who claims the exemption in his favor and he must be able to justify his claim by the clearest grant of organic or statute law. 28 Private respondent is claiming for a refund of the alleged overpayment of tax on royalties; however, there is nothing on record to support a claim that the tax on royalties under the RPUS Tax Treaty is paid under similar circumstances as the tax on royalties under the RP-West Germany Tax Treaty. WHEREFORE, for all the foregoing, the instant petition is GRANTED. The decision dated May 7, 1996 of the Court of Tax Appeals and the decision dated November 7, 1996 of the Court of Appeals are hereby SET ASIDE. SO ORDERED. G.R. No. 188550 August 19, 2013 DEUTSCHE BANK AG MANILA BRANCH, PETITIONER, vs. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. DECISION SERENO, CJ.: This is a Petition for Review1 filed by Deutsche Bank AG Manila Branch (petitioner) under Rule 45 of the 1997 Rules of Civil Procedure assailing the Court of Tax Appeals En Banc (CTA En Banc) Decision2 dated 29 May 2009 and Resolution3 dated 1 July 2009 in C.T.A. EB No. 456. THE FACTS issuance of its tax credit certificate for the amount of PHP 22,562,851.17 representing the alleged excess BPRT paid on branch profits remittance to DB Germany. THE CTA SECOND DIVISION RULING8 After trial on the merits, the CTA Second Division found that petitioner indeed paid the total amount of PHP 67,688,553.51 representing the 15% BPRT on its RBU profits amounting to PHP 451,257,023.29 for 2002 and prior taxable years. Records also disclose that for the year 2003, petitioner remitted to DB Germany the amount of EURO 5,174,847.38 (or PHP 330,175,961.88 at the exchange rate of PHP 63.804:1 EURO), which is net of the 15% BPRT. In accordance with Section 28(A)(5)4 of the National Internal Revenue Code (NIRC) of 1997, petitioner withheld and remitted to respondent on 21 October 2003 the amount of PHP 67,688,553.51, which represented the fifteen percent (15%) branch profit remittance tax (BPRT) on its regular banking unit (RBU) net income remitted to Deutsche Bank Germany (DB Germany) for 2002 and prior taxable years.5 However, the claim of petitioner for a refund was denied on the ground that the application for a tax treaty relief was not filed with ITAD prior to the payment by the former of its BPRT and actual remittance of its branch profits to DB Germany, or prior to its availment of the preferential rate of ten percent (10%) under the RP-Germany Tax Treaty provision. The court a quo held that petitioner violated the fifteen (15) day period mandated under Section III paragraph (2) of Revenue Memorandum Order (RMO) No. 1-2000. Believing that it made an overpayment of the BPRT, petitioner filed with the BIR Large Taxpayers Assessment and Investigation Division on 4 October 2005 an administrative claim for refund or issuance of its tax credit certificate in the total amount of PHP 22,562,851.17. On the same date, petitioner requested from the International Tax Affairs Division (ITAD) a confirmation of its entitlement to the preferential tax rate of 10% under the RP-Germany Tax Treaty.6 Further, the CTA Second Division relied on Mirant (Philippines) Operations Corporation (formerly Southern Energy Asia-Pacific Operations [Phils.], Inc.) v. Commissioner of Internal Revenue9 (Mirant) where the CTA En Banc ruled that before the benefits of the tax treaty may be extended to a foreign corporation wishing to avail itself thereof, the latter should first invoke the provisions of the tax treaty and prove that they indeed apply to the corporation. Alleging the inaction of the BIR on its administrative claim, petitioner filed a Petition for Review7 with the CTA on 18 October 2005. Petitioner reiterated its claim for the refund or THE CTA EN BANC RULING10 The CTA En Banc affirmed the CTA Second Division’s Decision dated 29 August 2008 and Resolution dated 14 January 2009. Citing Mirant, the CTA En Banc held that a ruling from the ITAD of the BIR must be secured prior to the availment of a preferential tax rate under a tax treaty. Applying the principle of stare decisis et non quieta movere, the CTA En Banc took into consideration that this Court had denied the Petition in G.R. No. 168531 filed by Mirant for failure to sufficiently show any reversible error in the assailed judgment.11 The CTA En Banc ruled that once a case has been decided in one way, any other case involving exactly the same point at issue should be decided in the same manner. The court likewise ruled that the 15-day rule for tax treaty relief application under RMO No. 12000 cannot be relaxed for petitioner, unlike in CBK Power Company Limited v. Commissioner of Internal Revenue.12 In that case, the rule was relaxed and the claim for refund of excess final withholding taxes was partially granted. While it issued a ruling to CBK Power Company Limited after the payment of withholding taxes, the ITAD did not issue any ruling to petitioner even if it filed a request for confirmation on 4 October 2005 that the remittance of branch profits to DB Germany is subject to a preferential tax rate of 10% pursuant to Article 10 of the RP-Germany Tax Treaty. ISSUE This Court is now confronted with the issue of whether the failure to strictly comply with RMO No. 1-2000 will deprive persons or corporations of the benefit of a tax treaty. THE COURT’S RULING The Petition is meritorious. Under Section 28(A)(5) of the NIRC, any profit remitted to its head office shall be subject to a tax of 15% based on the total profits applied for or earmarked for remittance without any deduction of the tax component. However, petitioner invokes paragraph 6, Article 10 of the RP-Germany Tax Treaty, which provides that where a resident of the Federal Republic of Germany has a branch in the Republic of the Philippines, this branch may be subjected to the branch profits remittance tax withheld at source in accordance with Philippine law but shall not exceed 10% of the gross amount of the profits remitted by that branch to the head office. By virtue of the RP-Germany Tax Treaty, we are bound to extend to a branch in the Philippines, remitting to its head office in Germany, the benefit of a preferential rate equivalent to 10% BPRT. On the other hand, the BIR issued RMO No. 12000, which requires that any availment of the tax treaty relief must be preceded by an application with ITAD at least 15 days before the transaction. The Order was issued to streamline the processing of the application of tax treaty relief in order to improve efficiency and service to the taxpayers. Further, it also aims to prevent the consequences of an erroneous interpretation and/or application of the treaty provisions (i.e., filing a claim for a tax refund/credit for the overpayment of taxes or for deficiency tax liabilities for underpayment).13 The crux of the controversy lies in the implementation of RMO No. 1-2000. Petitioner argues that, considering that it has met all the conditions under Article 10 of the RP-Germany Tax Treaty, the CTA erred in denying its claim solely on the basis of RMO No. 1-2000. The filing of a tax treaty relief application is not a condition precedent to the availment of a preferential tax rate. Further, petitioner posits that, contrary to the ruling of the CTA, Mirant is not a binding judicial precedent to deny a claim for refund solely on the basis of noncompliance with RMO No. 12000. Respondent counters that the requirement of prior application under RMO No. 1-2000 is mandatory in character. RMO No. 1-2000 was issued pursuant to the unquestioned authority of the Secretary of Finance to promulgate rules and regulations for the effective implementation of the NIRC. Thus, courts cannot ignore administrative issuances which partakes the nature of a statute and have in their favor a presumption of legality. The CTA ruled that prior application for a tax treaty relief is mandatory, and noncompliance with this prerequisite is fatal to the taxpayer’s availment of the preferential tax rate. We disagree. A minute resolution is not a binding precedent At the outset, this Court’s minute resolution on Mirant is not a binding precedent. The Court has clarified this matter in Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue14 as follows: It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition of the merits of the case. When we dismissed the petition, we effectively affirmed the CA ruling being questioned. As a result, our ruling in that case has already become final. When a minute resolution denies or dismisses a petition for failure to comply with formal and substantive requirements, the challenged decision, together with its findings of fact and legal conclusions, are deemed sustained. But what is its effect on other cases? previously disposed of by the Court thru a minute resolution dated February 17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case "ha(d) no bearing" on the latter case because the two cases involved different subject matters as they were concerned with the taxable income of different taxable years. Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of the Constitution that the facts and the law on which the judgment is based must be expressed clearly and distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed only by the clerk of court by authority of the justices, unlike a decision. It does not require the certification of the Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a decision. Indeed, as a rule, this Court lays down doctrines or principles of law which constitute binding precedent in a decision duly signed by the members of the Court and certified by the Chief Justice. (Emphasis supplied) Even if we had affirmed the CTA in Mirant, the doctrine laid down in that Decision cannot bind this Court in cases of a similar nature. There are differences in parties, taxes, taxable periods, and treaties involved; more importantly, the disposition of that case was made only through a minute resolution. Tax Treaty vs. RMO No. 1-2000 With respect to the same subject matter and the same issues concerning the same parties, it constitutes res judicata. However, if other parties or another subject matter (even with the same parties and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v. Baier-Nickel, the Court noted that a previous case, CIR v. Baier-Nickel involving the same parties and the same issues, was Our Constitution provides for adherence to the general principles of international law as part of the law of the land.15 The time-honored international principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of the states that enter into the agreement. Every treaty in force is binding upon the parties, and obligations under the treaty must be performed by them in good faith.16 More importantly, treaties have the force and effect of law in this jurisdiction.17 Tax treaties are entered into "to reconcile the national fiscal legislations of the contracting parties and, in turn, help the taxpayer avoid simultaneous taxations in two different jurisdictions."18 CIR v. S.C. Johnson and Son, Inc. further clarifies that "tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods. The apparent rationale for doing away with double taxation is to encourage the free flow of goods and services and the movement of capital, technology and persons between countries, conditions deemed vital in creating robust and dynamic economies. Foreign investments will only thrive in a fairly predictable and reasonable international investment climate and the protection against double taxation is crucial in creating such a climate."19 Simply put, tax treaties are entered into to minimize, if not eliminate the harshness of international juridical double taxation, which is why they are also known as double tax treaty or double tax agreements. "A state that has contracted valid international obligations is bound to make in its legislations those modifications that may be necessary to ensure the fulfillment of the obligations undertaken."20 Thus, laws and issuances must ensure that the reliefs granted under tax treaties are accorded to the parties entitled thereto. The BIR must not impose additional requirements that would negate the availment of the reliefs provided for under international agreements. More so, when the RP-Germany Tax Treaty does not provide for any prerequisite for the availment of the benefits under said agreement. Likewise, it must be stressed that there is nothing in RMO No. 1-2000 which would indicate a deprivation of entitlement to a tax treaty relief for failure to comply with the 15day period. We recognize the clear intention of the BIR in implementing RMO No. 1-2000, but the CTA’s outright denial of a tax treaty relief for failure to strictly comply with the prescribed period is not in harmony with the objectives of the contracting state to ensure that the benefits granted under tax treaties are enjoyed by duly entitled persons or corporations. Bearing in mind the rationale of tax treaties, the period of application for the availment of tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief. The obligation to comply with a tax treaty must take precedence over the objective of RMO No. 1-2000.1âwphi1 Logically, noncompliance with tax treaties has negative implications on international relations, and unduly discourages foreign investors. While the consequences sought to be prevented by RMO No. 1-2000 involve an administrative procedure, these may be remedied through other system management processes, e.g., the imposition of a fine or penalty. But we cannot totally deprive those who are entitled to the benefit of a treaty for failure to strictly comply with an administrative issuance requiring prior application for tax treaty relief. Prior Application vs. Claim for Refund Again, RMO No. 1-2000 was implemented to obviate any erroneous interpretation and/or application of the treaty provisions. The objective of the BIR is to forestall assessments against corporations who erroneously availed themselves of the benefits of the tax treaty but are not legally entitled thereto, as well as to save such investors from the tedious process of claims for a refund due to an inaccurate application of the tax treaty provisions. However, as earlier discussed, noncompliance with the 15-day period for prior application should not operate to automatically divest entitlement to the tax treaty relief especially in claims for refund. The underlying principle of prior application with the BIR becomes moot in refund cases, such as the present case, where the very basis of the claim is erroneous or there is excessive payment arising from non-availment of a tax treaty relief at the first instance. In this case, petitioner should not be faulted for not complying with RMO No. 1-2000 prior to the transaction. It could not have applied for a tax treaty relief within the period prescribed, or 15 days prior to the payment of its BPRT, precisely because it erroneously paid the BPRT not on the basis of the preferential tax rate under the RP-Germany Tax Treaty, but on the regular rate as prescribed by the NIRC. Hence, the prior application requirement becomes illogical. Therefore, the fact that petitioner invoked the provisions of the RP-Germany Tax Treaty when it requested for a confirmation from the ITAD before filing an administrative claim for a refund should be deemed substantial compliance with RMO No. 1-2000. Corollary thereto, Section 22921 of the NIRC provides the taxpayer a remedy for tax recovery when there has been an erroneous payment of tax.1âwphi1 The outright denial of petitioner’s claim for a refund, on the sole ground of failure to apply for a tax treaty relief prior to the payment of the BPRT, would defeat the purpose of Section 229. Petitioner is entitled to a refund It is significant to emphasize that petitioner applied – though belatedly – for a tax treaty relief, in substantial compliance with RMO No. 1-2000. A ruling by the BIR would have confirmed whether petitioner was entitled to the lower rate of 10% BPRT pursuant to the RPGermany Tax Treaty. Nevertheless, even without the BIR ruling, the CTA Second Division found as follows: Based on the evidence presented, both documentary and testimonial, petitioner was able to establish the following facts: a. That petitioner is a branch office in the Philippines of Deutsche Bank AG, a corporation organized and existing under the laws of the Federal Republic of Germany; b. That on October 21, 2003, it filed its Monthly Remittance Return of Final Income Taxes Withheld under BIR Form No. 1601-F and remitted the amount of ₱67,688,553.51 as branch profits remittance tax with the BIR; and c. That on October 29, 2003, the Bangko Sentral ng Pilipinas having issued a clearance, petitioner remitted to Frankfurt Head Office the amount of EUR5,174,847.38 (or ₱330,175,961.88 at 63.804 Peso/Euro) representing its 2002 profits remittance.22 The amount of PHP 67,688,553.51 paid by petitioner represented the 15% BPRT on its RBU net income, due for remittance to DB Germany amounting to PHP 451,257,023.29 for 2002 and prior taxable years.23 Likewise, both the administrative and the judicial actions were filed within the two-year prescriptive period pursuant to Section 229 of the NIRC.24 Clearly, there is no reason to deprive petitioner of the benefit of a preferential tax rate of 10% BPRT in accordance with the RP-Germany Tax Treaty. Petitioner is liable to pay only the amount of PHP 45,125,702.34 on its RBU net income amounting to PHP 451,257,023.29 for 2002 and prior taxable years, applying the 10% BPRT. Thus, it is proper to grant petitioner a refund ofthe difference between the PHP 67,688,553.51 (15% BPRT) and PHP 45,125,702.34 (10% BPRT) or a total of PHP 22,562,851.17. WHEREFORE, premises considered, the instant Petition is GRANTED. Accordingly, the Court of Tax Appeals En Banc Decision dated 29 May 2009 and Resolution dated 1 July 2009 are REVERSED and SET ASIDE. A new one is hereby entered ordering respondent Commissioner of Internal Revenue to refund or issue a tax credit certificate in favor of petitioner Deutsche Bank AG Manila Branch the amount of TWENTY TWO MILLION FIVE HUNDRED SIXTY TWO THOUSAND EIGHT HUNDRED FIFTY ONE PESOS AND SEVENTEEN CENTAVOS (PHP 22,562,851.17), Philippine currency, representing the erroneously paid BPRT for 2002 and prior taxable years. SO ORDERED.