SUPREME COURT DECIDED CASES ON
TAXATION (2017)
Submitted by:
GRACE S. MANAGUIT
Submitted to:
ATTY. SA ADUDDIN L. MACARAMBON
G.R. NO.
205652
193625
201665/201668
185420
198146
220835
197526/199676-77
183408
201530/201680-81
182582
210251
222743
215383
215705-07
203514
201326
CASE
Procter & Gamble Asia Vs.
Commissioner of Internal Revenue
Aichi Forging Company of Asia, Inc.
Vs. Court of Tax Appeals - En Banc
and
Commissioner of
Internal
Revenue
Edison
(Bataan)
Cogeneration
Corporation Vs. Commissioner of
Internal Revenue/Republic of the
Philippines represented by the
Commissioner of Internal Revenue
Vs. Edison (Bataan) Cogeneration
Corporation
Lanao Del Norte Electric Cooperative,
Inc. as represented by its General
Manager Engr. Resnol C. Torres Vs.
Provincial Government of Lanao Del
Norte, et al.
Power Sector Asset and Liabilities
Management
Corporation
Vs.
Commissioner of Internal Revenue
Commissioner of Internal Revenue
Vs. Systems Technology Institute, Inc.
CE
Luzon
Geothermal
Power
Company, Inc. Vs. Commissioner of
Internal Revenue/Republic of the
Philippines represented by Bureau of
Internal Revenue Vs. CE Luzon
Geothermal Power Company, Inc.
Commissioner of Internal Revenue
Vs. Lancaster Philippines, Inc.
Asia Trust Development Bank, Inc.
Vs.
Commissioner
of
Internal
Revenue/Commissioner of Internal
Revenue Vs. Asia Trust Development
Bank, Inc.
Metropolitan Bank & Trust Company
Vs. The Commissioner of Internal
Revenue
Secretary of Finance Cesar V.
Purisima and Commissioner of
Internal Revenue Kim S. JacintoHenares Vs. Philippine Tobacco
Institute, Inc.
Medicard Philippines, Inc. Vs.
Commissioner of Internal Revenue
Hon. Kim S. Jacinto-Henares, in her
official capacity as Commissioner of
the Bureau of Internal Revenue Vs. St.
Paul College of Makati
Commissioner of Internal Revenue
and Commissioner of Customs Vs.
Philippine Airlines, Inc.
Commissioner of Internal Revenue
Vs. St. Luke's Medical Center, Inc.
Sitel Philippines Corporation Vs.
Commissioner of Internal Revenue
DATE
September
6, 2017
August
2017
30,
August
2017
30,
August
2017
29,
August
2017
8,
July
2017
26,
July
2017
26,
July
2017
12,
April
2017
19,
April
2017
17,
April
2017
17,
April 5, 2017
March
2017
8,
February 22,
2017
February 13,
2017
February 8,
2017
193381
184450/
184508/
184538/ 185234
Commissioner of Internal Revenue
Vs. Apo Cement Corporation
Jaime N. Soriano, et al. Vs. Secretary
of Finance and the Commissioner of
Internal Revenue/Senator Manuel A.
Roxas Vs. Margarito B. Teves and
Lilian B. Hefti/Trade Union Congress
of the Philippines (TUCP) represented
by its President, Democrito T.
Mendoza Vs. Margarito B. Teves, in
his capacity as Secretary of the
Department of Finance and Lilian B.
Hefti, in her capacity as Commissioner
of
the
Bureau
of
Internal
Revenue/Senator Francis Joseph G.
Escudero, et al. Vs. Trade Union
Congress of the Philippines (TUCP)
represented
by
its
President,
Democrito T. Mendoza Vs. Margarito
B. Teves, in his capacity as Secretary
of the Department of Finance and
Lilian B. Hefti, in her capacity as
Commissioner of the Bureau of
Internal Revenue
February 8,
2017
January 24,
2017
SECOND DIVISION
G.R. No. 205652, September 06, 2017
PROCTER & GAMBLE ASIA PTE LTD., Petitioner, v. COMMISSIONER OF INTERNAL
REVENUE, Respondent.
DECISION
CAGUIOA, J.:
Before the Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court
filed by petitioner Procter & Gamble Asia Pte Ltd. (P&G) against the Commissioner of
Internal Revenue (CIR) seeking the reversal of the Decision2 dated September 21, 2012
and Resolution3 dated January 30, 2013 of the Court of Tax Appeals (CTA) En Banc in
C.T.A. EB Case No. 742. The CTA En Banc affirmed the CTA Special Second Division's
dismissal of P&G's claim for refund of unutilized input value-added tax (VAT) attributable
to its zero-rated sales covering the first and second quarters of calendar year 2005, for
being prematurely filed.
Facts
P&G is a foreign corporation duly organized and existing under the laws of Singapore and
is maintaining a Regional Operating Headquarter in the Philippines. 4 It provides
management, marketing, technical and financial advisory, and other qualified services to
related companies as specified by its Certificate of Registration and License issued by
the Securities and Exchange Commission.5 It is a VAT-registered taxpayer and is covered
by Bureau of Internal Revenue (BIR) Certificate of Registration No. 9RC0000071787. 6
P&G filed its Monthly VAT Declarations and Quarterly VAT Returns on the following
dates:
VAT
RETURN/DECLARATION
DATE
(ORIGINAL)
FILED DATE
(AMENDED)
January (Monthly)
February 21, 2005
February (Monthly)
March 18, 2005
Ending March (Quarterly)
April 25, 2005
April (Monthly)
May 20, 2005
May (Monthly)
June 21, 2005
Ending June (Quarterly)
July 26, 20057
FILED
March 19, 2007
March 20, 20078
On March 22, 2007 and May 2, 2007, P&G filed applications and letters addressed to the
BIR Revenue District Office (RDO) No. 49, requesting the refund or issuance of tax credit
certificates (TCCs) of its input VAT attributable to its zero-rated sales covering the taxable
periods of January 2005 to March 2005, and April 2005 to June 2005. 9
On March 28, 2007, P&G filed a petition for review with the CTA seeking the refund or
issuance of TCC in the amount of P23,090,729.17 representing input VAT paid on goods
or services attributable to its zero-rated sales for the first quarter of taxable year 2005.
The
case
was
docketed
as
CTA
Case
No.
7581. 10
On June 8, 2007, P&G filed with the CTA another judicial claim for refund or issuance of
TCC in the amount of P19,006,753.58 representing its unutilized input VAT paid on goods
and services attributable to its zero-rated sales for the second quarter of taxable year
2005.
The
case
was
docketed
as
CTA
Case
No.
7639.11
On July 30, 2007, the CTA Division granted P&G's Motion to Consolidate CTA Case No.
7581 with 7639, inasmuch as the two cases involve the same parties and common
questions
of
law
and/or
facts.12
Proceedings ensued before the CTA Division. P&G presented testimonial and voluminous
documentary evidence to prove its entitlement to the amount claimed for VAT refund. The
CIR, on the other hand, submitted the case for decision based on the pleadings, as the
claim for refund was still pending before the BIR RDO No. 40.13
Meanwhile, on October 6, 2010, while P&G's claim for refund or tax credit was pending
before the CTA Division, this Court promulgated Commissioner of Internal Revenue
v. Aichi Forging Company of Asia, Inc.14 (Aichi). In that case, the Court held that
compliance with the 120-day period granted to the CIR, within which to act on an
administrative claim for refund or credit of unutilized input VAT, as provided under Section
112(C) of the National Internal Revenue Code of 1997 (NIRC), as amended, is mandatory
and
jurisdictional
in
filing
an
appeal
with
the
CTA.
In a Decision15 dated November 17, 2010, the CTA Division dismissed P&G's judicial
claim,
for
having
been
prematurely
filed.16
Citing Aichi, the CTA Division held that the CIR is granted by law a period of 120 days to
act on the administrative claim for refund.17 Upon denial of the claim, or after the
expiration of the 120-day period without action by the CIR, only then may the taxpayerclaimant seek judicial recourse to appeal the CIR's action or inaction on a refund/tax credit
claim, within a period of 30 days.18 According to the CTA Division, P&G failed to observe
the 120-day period granted to the CIR.19 Its judicial claims were prematurely filed with the
CTA on March 28, 2007 (CTA Case No. 7581) and June 8, 2007 (CTA Case No. 7639),
or only six (6) days and thirty-seven (37) days, respectively, from the filing of the
applications at the administrative level.20 Thus, the CTA Division ruled that inasmuch as
P&G's petitions were prematurely filed, it did not acquire jurisdiction over the same. 21
P&G moved for reconsideration but this was denied by the CTA Division in its
Resolution22 dated
March
9,
2011.
Aggrieved, P&G elevated the matter to the CTA En Banc insisting, among others, that the
Court's
ruling
in Aichi should
not
be
given
a
retroactive
effect.23
On September 21, 2012, the CTA En Banc rendered the assailed Decision affirming in
toto the CTA Division's Decision and Resolution. It agreed with the CTA Division in
applying the ruling in Aichi which warranted the dismissal of P&G's judicial claim for
refund
on
the
ground
of
prematurity.
P&G moved for reconsideration,24 but the same was denied by the Court En Banc for lack
of
merit.25
In the meantime, on February 12, 2013, this Court decided the consolidated cases
of Commissioner of Internal Revenue v. San Roque Power Corporation, Taganito Mining
Corporation v. Commissioner of Internal Revenue, and Philex Mining Corporation v.
Commissioner of Internal Revenue26(San Roque), where the Court recognized BIR
Ruling No. DA-489-03 as an exception to the mandatory and jurisdictional nature of the
120-day
waiting
period.
On March 27, 2013, P&G filed the present petition.27
Issue
Culled from the submissions of the parties, the singular issue for this Court's resolution is
whether the CTA En Banc erred in dismissing P&G's judicial claims for refund on the
ground
of
prematurity.
P&G avers that its judicial claims for tax refund/credit was filed with the CTA Division on
March 28, 2007 and June 8, 2007, after the issuance of BIR Ruling No.DA-489-03 on
December 10, 2003, but before the adoption of the Aichi doctrine on October 6, 2010.
Accordingly, pursuant to the Court's ruling in San Roque, its judicial claims with the CTA
was
deemed
timely
filed.28 .
P&G further contends that the CTA En Banc gravely erred in applying the Aichi doctrine
retroactively. According to P&G, the retroactive application of Aichi amounts to a denial
of its constitutional right to due process and unjust enrichment of the CIR.29
Lastly, P&G claims that assuming, without conceding, that its judicial claims were
prematurely filed, its failure to observe the 120-day period was not jurisdictional but
violates only the rule on exhaustion of administrative remedies, which was deemed
waived when the CIR did not file a motion to dismiss and opted to actively participate at
the
trial.30
The CIR, on the other hand, insists that the plain language of Section 112(C) of the NIRC,
as amended, demands mandatory compliance with the 120+30-day rule; and P&G cannot
claim reliance in good faith with BIR Ruling No. DA-489-03 to shield the filing of its judicial
claims from the vice of prematurity.31
The Court's Ruling
The
Court
finds
the
petition
meritorious.
Exception to the mandatory and jurisdictional 120+30-day periods under Section
112(C)
of
the
NIRC
Section 112 of the NIRC, as amended, provides for the rules on claiming refunds or tax
credits of unutilized input VAT, the pertinent portions of which read as follows:
SEC.
112. Refunds
or
Tax
Credits
of
Input
Tax.
—
(A) Zero-rated or Effectively Zero-rated Sales. — Any VAT-registered person, whose
sales are zero-rated or effectively zero-rated may, within two (2) years after the close of
the taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales, except
transitional input tax, to the extent that such input tax has not been applied against output
tax:
x
x
x
x
x
x
x
(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. — In proper
cases, the Commissioner shall grant a refund or issue the tax credit certificate for
creditable input taxes within one hundred twenty (120) days from the date of
submission of complete documents in support of the application filed in
accordance
with
Subsection
(A)
hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the
part of the Commissioner to act on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty-day period, appeal the decision or
the unacted claim with the Court of Tax Appeals. (Emphasis supplied)
Based on the plain language of the foregoing provision, the CIR is given 120 days within
which to grant or deny a claim for refund. Upon receipt of CIR's decision or ruling denying
the said claim, or upon the expiration of the 120-day period without action from the CIR,
the taxpayer has 30 days within which to file a petition for review with the CTA.
In Aichi, the Court ruled that compliance with the 120+30-day periods is mandatory and
jurisdictional and is fatal to the filing of a judicial claim with the CTA.
Subsequently, however, in San Roque, while the Court reiterated the mandatory and
jurisdictional nature of the 120+30-day periods, it recognized as an exception BIR Ruling
No. DA-489-03, issued prior to the promulgation of Aichi, where the BIR expressly
allowed the filing of judicial claims with the CTA even before the lapse of the 120-day
period. The Court held that BIR Ruling No. DA-489-03 furnishes a valid basis to hold the
CIR in estoppel because the CIR had misled taxpayers into filing judicial claims with the
CTA even before the lapse of the 120-day period:
There is no dispute that the 120-day period is mandatory and jurisdictional, and that the
CTA does not acquire jurisdiction over a judicial claim that is filed before the expiration of
the 120-day period. There are, however, two exceptions to this rule. The first exception
is if the Commissioner, through a specific ruling, misleads a particular taxpayer to
prematurely file a judicial claim with the CTA. Such specific ruling is applicable only to
such particular taxpayer. The second exception is where the Commissioner, through
a general interpretative rule issued under Section 4 of the Tax Code, misleads all
taxpayers into filing prematurely judicial claims with the CTA. In these cases, the
Commissioner cannot be allowed to later on question the CTA's assumption of
jurisdiction over such claim since equitable estoppel has set in as expressly
authorized
under
Section
246
of
the
Tax
Code.
x
x
x
x
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a
query made, not by a particular taxpayer, but by a government agency tasked with
processing tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit
and Drawback Center of the Department of Finance. This government agency is also
the addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this
government agency mentions in its query to the Commissioner the administrative claim
of Lazi Bay Resources Development, Inc., the agency was in fact asking the
Commissioner what to do in cases like the tax claim of Lazi Bay Resources Development,
Inc., where the taxpayer did not wait for the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule.
Thus, all taxpayers can rely on BIR Ruling No. DA-489-03 from the time of its
issuance on 10 December 2003 up to its reversal by this Court in Aichi on 6 October
2010, where this Court held that the 120+30 day periods are mandatory and
jurisdictional.32 (Emphasis supplied)
In Visayas Geothermal Power Company v. Commissioner of Internal Revenue,33 the
Court came up with an outline summarizing the pronouncements in San Roque, to wit:
For clarity and guidance, the Court deems it proper to outline the rules laid down in San
Roque with regard to claims for refund or tax credit of unutilized creditable input VAT.
They are as follows:
1. When to file an administrative claim with the CIR:
a. General
rule
Section
112(A)
and Mirant,
Within 2 years from the close of the taxable quarter when the sales
were made. .
b. Exception
- Atlas
Within 2 years from the date of payment of the output VAT, if the
administrative claim was filed from June 8, 2007 (promulgation
of Atlas) to September 12, 2008 (promulgation of Mirant).
2. When to file a judicial claim with the CTA:
a. General rule - Section 112(D); not Section 229
i.
Within 30 days from the full or partial denial of the
administrative claim by the CIR; or
ii.
Within 30 days from the expiration of the 120-day period
provided to the CIR to decide on the claim. This is
mandatory and jurisdictional beginning January 1, 1998
(effectivity of 1997 NIRC).
b. Exception - BIR Ruling No. DA-489-03
The judicial claim need not await the expiration of the 120day period, if such was filed from December 10, 2003
(issuance of BIR Ruling No. DA-489-03) to October 6, 2010
(promulgation oi Aichi).34 (Emphasis and underscoring
supplied)
In this case, records show that P&G filed its judicial claims for refund on March 28, 2007
and June 8, 2007, respectively, or after the issuance of BIR Ruling No. DA-489-03, but
before the date when Aichi was promulgated. Thus, even though P&G filed its judicial
claim without waiting for the expiration of the 120-day mandatory period, the CTA may
still take cognizance of the case because the claim was filed within the excepted period
stated in San Roque. In other words, P&G's judicial claims were deemed timely filed and
should
not
have
been
dismissed
by
the
CTA.
Application
and
validity
of
BIR
Ruling
No.
DA-489-03
The CIR, however, argues that BIR Ruling No. DA-489-03 was already repealed and
superseded on November 1, 2005 by Revenue Regulation No. 16-2005 (RR 16-2005),
which echoed the mandatory and jurisdictional nature of the 120-day period under Section
112(C) of the NIRC. Thus, P&G cannot rely, in good faith, on BIR Ruling No. DA-489-03
because its judicial claims were filed in March and June 2007 or after RR 16-2005 took
effect.35 In other words, it is the CIR's position that reliance on BIR Ruling No. DA-489-03
should only be permissible from the date of its issuance, on December 10, 2003, until
October
31,
2005,
or
prior
to
the
effectivity
of
RR
16-2005.
The
Court
disagrees.
This issue was also raised by the CIR in Commissioner of Internal Revenue v. Deutsche
Knowledge Services, Pte. Ltd.,36 where the Court reiterated that all taxpayers may rely
upon BIR Ruling No. DA-489-03, as a general interpretative rule, from the time of its
issuance on December 10, 2003 until its effective reversal by the Court in Aichi.37 The
Court further held that while RR 16-2005 may have re-established the necessity of the
120-day period, taxpayers cannot be faulted for still relying on BIR Ruling No. DA-489-03
even after the issuance of RR 16-2005 because the issue on the mandatory compliance
of the 120-day period was only brought before the Court and resolved with finality
in Aichi.38
Accordingly, in consonance with the doctrine laid down in San Roque, the Court finds that
P&G's judicial claims were timely filed and should be given due course and consideration
by
the
CTA.
WHEREFORE, premises considered, the instant petition for review is hereby GRANTED.
The Decision dated September 21, 2012 and the Resolution dated January 30, 2013 of
the CTA En Banc in C.T.A. EB Case No. 742 are hereby REVERSED AND SET ASIDE.
Accordingly, CTA Case Nos. 7581 and 7639 are REINSTATED and REMANDED to the
CTA Special Second Division for the proper determination of the refundable amount due
to
petitioner
Procter
&
Gamble
Asia
Pte
Ltd.,
if
any.
SO ORDERED.
THIRD DIVISION
G.R. No. 193625, August 30, 2017
AICHI FORGING COMPANY OF ASIA, INC., Petitioner, v. COURT OF TAX APPEALS
- EN BANC AND COMMISSIONER OF INTERNAL REVENUE, Respondents.
DECISION
MARTIRES, J.:
The Commissioner of Internal Revenue (CIR) is given 120 days to decide1 an
administrative claim for refund/credit of unutilized or unapplied input Value Added Tax
(VAT) attributable to zero-rated sales. In case of a decision rendered or inaction after the
120-day period, the taxpayer may institute a judicial claim by filing an appeal before the
Court of Tax Appeals (CTA) within 30 days from the decision or inaction. 2 Both 120- and
30-day periods are mandatory and jurisdictional.3 An appeal taken prior to the expiration
of the 120-day period without a decision or action of the Commissioner is premature and,
thus, without a cause of action. Accordingly, the appeal must be dismissed for lack of
jurisdiction.
The Case
Before the Court is a special civil action for certiorari under Rule 65 of the Rules of Court
filed by petitioner Aichi Forging Company of Asia, Inc. (AICHI) seeking the reversal and
setting aside of the 18 February 2010 Decision4 and 20 July 2010 Resolution5 of the CTA
En Banc in CTA-EB Case No. 519, which affirmed the 20 March 2009 Decision and 29
July 2009 Resolution of the CTA Second Division (CTA Division) in CTA Case No. 6540
that partially granted the claim of AICHI for tax refund/credit of unutilized or unapplied
input VAT attributable to zero-rated sales.
The Antecedents
AICHI is a domestic corporation duly organized and existing under the laws of the
Philippines, and is principally engaged in the manufacture, production, and processing of
all kinds of steel and steel byproducts, such as closed impression die steel forgings and
all automotive steel parts. It is duly registered with the Bureau of Internal Revenue (BIR)
as a VAT taxpayer and with the Board of Investments (BOI) as an expanding producer of
closed
impression
die
steel
forgings.
On 26 September 2002, AICHI filed with the BIR District Office in San Pedro, Laguna, a
written claim for refund and/or tax credit of its unutilized input VAT credits for the third and
fourth quarters of 2000 and the four taxable quarters of 2001. AICHI sought the tax
refund/credit of input VAT for the said taxable quarters in the total sum of
P18,030,547.776 representing VAT payments on importation of capital goods and
domestic
purchases
of
goods
and
services.7
As respondent CIR failed to act on the refund claim, and in order to toll the running of the
prescriptive period provided under Sections 229 and 112 (D) of the National Internal
Revenue Code (Tax Code), AICHI filed, on 30 September 2002, a Petition for Review
before the CTA Division.8
The Issues
The issue for resolution before the court was whether AICHI was entitled to a refund or
issuance of a tax credit certificate of unutilized input VAT attributable to zero-rated sales
and unutilized input tax on importation of capital goods for the period 1 July 2000 to 31
December 2001 (or six consecutive taxable quarters). Corollary thereto was the issue on
whether the administrative claim (refund claim with the BIR) and judicial claim (Petition
for Review with the CTA) were filed within the statutory periods for filing the claims.
The Proceedings before the CTA Division
After finding that both the administrative and judicial claims were filed within the statutory
two-year prescriptive period,9 the CTA Division partially granted the refund claim of
AICHI.
The CTA Division denied AICID's refund claim with respect to its purchase of capital
goods for the period 1 July 2000 to 31 December 2001 because of the latter's failure to
show that the goods purchased formed part of its Property, Plant and Equipment Account
and that they were subjected to depreciation allowance. As to the claim for refund of input
VAT attributable to zero-rated sales, the CTA only partially granted the claim due to lack
of evidence to substantiate the zero-rating of AICID's sales. In particular, the CTA denied
VAT zero-rating on the sales to BOI-registered enterprises on account of non-submission
of the required BOI Certification.10 The dispositive portion of the decision11 partially
granting the refund claim reads as follows:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the Petition for Review is hereby PARTIALLY
GRANTED. Accordingly, Respondent Commissioner of Internal Revenue is
hereby ORDERED TO REFUND or TO ISSUE A TAX CREDIT CERTIFICATE in favor
of petitioner the reduced amount of SIX MILLION NINE HUNDRED NINETY ONE
THOUSAND
THREE
HUNDRED
TWENTY
and
40/100
PESOS
(P6,991,320.40), representing unutilized input VAT attributable to zero-rated sales for the
period covering July 1, 2000 to December 31, 2001.12
Only the CIR moved for reconsideration13 of the said decision. The CTA Division denied
the motion,14 hence, the appeal by the CIR to the CTA En Banc.
The Proceedings before the CTA En Banc
The CIR questioned the partial grant of the refund claim in favor of AICHI. It claimed that
the court did not acquire jurisdiction over the refund claim in view of AICHI's failure to
observe the 30-day period to claim refund/tax credit as specified in Sec. 112 of the Tax
Code, i.e., appeal to the CTA may be filed within 30 days from receipt of the decision
denying the claim or after expiration of 120 days (denial by inaction). With the filing of the
administrative claim on 26 September 2002, the CIR had until 20 January 2003 to act on
the matter; and if it failed to do so, AICHI had the right to elevate the case before the CTA
within 30 days from 20 January 2003, or on or before 20 February 2003. However, AICHI
filed its Petition for Review on 30 September 2002, or before the 30-day period of appeal
had commenced. According to the CIR, this period is jurisdictional, thus, AICHI's failure
to observe it resulted in the CTA not acquiring jurisdiction over its appeal. 15
The CTA En Banc was not persuaded. The court ruled that the law does not prohibit the
simultaneous filing of the administrative and judicial claims for refund. 16 It further declared
that what is controlling is that both claims for refund are filed within the two-year
prescriptive period.17 In sum, the CTA En Banc affirmed the assailed decision and
resolution of the CTA Division, disposing as follows:chanRoblesvirtualLawlibrary
WHEREFORE, the instant Petition for Review is hereby DISMISSED for lack of merit.
Accordingly, the March 20, 2009 Decision and July 29, 2009 Resolution of the CTA
Former Second Division in CTA Case No. 6540 entitled, "Aichi Forging Company of Asia,
Inc. vs. Commissioner of Internal Revenue" are hereby AFFIRMED in toto.18
This time, both the CIR and AICHI separately filed motions for reconsideration of the CTA
En Banc decision. In the assailed resolution of the CTA En Banc, the court
ruled:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, there having no new matters or issues advanced
by the petitioner-CIR in its Motion which may compel this Court to reverse, modify or
amend the March 20, 2009 Decision of the CTA En Banc, petitioner's "Motion for
Reconsideration" is hereby DENIED for lack of merit. On the other hand, respondentAICHI's (sic) Motion for Reconsideration is hereby DENIED for being filed out of time.19
On 24 September 2010, or sixty days from receipt of the said resolution, AICHI, through
a new counsel, filed the instant petition alleging grave abuse of discretion amounting to
lack or excess of jurisdiction on the part of the CTA En Banc when it issued the assailed
decision and resolution.
The Present Petition for Certiorari
To support its petition, AICHI raised the following grounds:chanRoblesvirtualLawlibrary
A. PETITIONER'S MOTION FOR RECONSIDERATION (of the Decision promulgated
on
18
February
2010)
WAS
FILED
ON
TIME;
B. ASSUMING FOR THE SAKE OF ARGUMENT THAT THE SAID MOTION WAS
FILED OUT OF TIME, IN THE INTEREST OF SUBSTANTIAL JUSTICE, AND DUE TO
GROSS NEGLIGENCE OF PETITIONER'S FORMER COUNSEL, THE HONORABLE
COURT OF TAX APPEALS EN BANC SHOULD HAVE CONSIDERED PETITIONER'S
MOTION
FOR
RECONSIDERATION;
C. PETITIONER IS ENTITLED TO THE CLAIMED REFUND AS EVIDENCED BY THE
CERTIFICATION ISSUED BY THE BOARD OF INVESTMENTS.20
Citing Section 1, Rule 15 of A.M. No. 05-11-07-CTA or the Revised Rules of the Court of
Tax Appeals (Revised CTA Rules),21 AICHI claims that it has fifteen (15) days from
receipt of the questioned decision of the CTA En Banc within which to file a motion for
reconsideration. Considering that it received the 18 February 2010 Decision of the
CTA En Banc on 25 February 2010, and that it filed the Motion for Reconsideration on 12
March 2010, AICHI asserts that the filing of the said motion was made within the
prescriptive
period
provided
in
the
law.22
AICHI also ascribes gross negligence on the part of its former counsel when it repeatedly
failed to avail of the remedies under the law after obtaining unfavorable decisions and/or
resolutions of the CTA, to wit: (1) failure to file a motion for reconsideration or new trial
from the decision of the CTA Division partially denying AICHI's claim for refund; and (2)
failure to appeal to the Supreme Court after receiving the resolution of the CTA En Banc
denying AICHI's motion for reconsideration of the decision of the CTA En Banc. Such
gross negligence of the former counsel, AICHI claims, does not bind the latter and, thus,
its motion for reconsideration of the decision of the CTA En Banc ought to have been
considered
by
the
latter.23
Finally, AICHI argues that it is entitled to the refund of unutilized input VAT because its
sales to Asian Transmission Corporation and Honda Philippines are qualified for zerorating, the latter being a HOI-registered enterprise, as evidenced by a Certification issued
by the BOI. Said certification was attached by AICHI in its motion for reconsideration from
the
CTA
En
Banc
decision.24
Without giving it due course, we required the respondents to submit their comment to the
said petition.25
The Arguments of the CIR
In its Comment,26 the CIR anchored its opposition to the petition on the following
arguments:chanRoblesvirtualLawlibrary
I.
PETITIONER
FAILED
TO
AVAIL
OF
THE
PROPER
REMEDY.
II. THE CTA EN BANC DID NOT ERR WHEN IT DENIED PETITIONER'S MOTION FOR
RECONSIDERATION.
III. PETITIONER IS NOT ENTITLED TO ITS CLAIM FOR REFUND.27
The CIR maintains that under Republic Act No. 9282 (R.A. No. 9282) 28 and the Revised
CTA Rules,29 an aggrieved party may appeal a decision or ruling of the CTA En Banc by
filing a verified petition for review under Rule 45 of the Rules of Court. Conformably
thereto, the petitioner should have filed a petition for review on certiorari under Rule 45
instead of a special civil action for certiorari under Rule 65. Being procedurally flawed, the
instant
petition
must
be
dismissed
outright. 30
As to the timeliness of the motion for reconsideration, the CIR contends that the petitioner
had mistakenly reckoned the counting of the 15-day period to file the motion for
reconsideration from the receipt of the decision of the CTA En Banc. The CIR maintains
that the reckoning point should be the petitioner's receipt of the decision of the CTA
Division. Considering that no such motion for reconsideration within the 15-day period
was filed by the petitioner before the CTA Division, the CIR concludes that the petitioner's
right to question the decision of the CTA Division had already lapsed and, accordingly,
the petitioner may no longer move for a reconsideration of a decision which it never
questioned.31
Anent petitioner AICHI's entitlement to the claim for refund, the CIR contends that the BOI
Certification, which was attached to the petitioner's Motion for Reconsideration, dated 12
March 2010, should not be considered at all as it was presented only during appeal
(before the CTA En Banc). In any event, the certification does not prove AICHI's claim for
refund. In said certification, it is required by the terms and conditions that AICHI must
comply with the production schedule of 3,900 metric tons or the peso equivalent of
P257,400,000.00. However, this data is not verifiable from the petitioner's Quarterly VAT
Returns or from the testimonies of its witness. The CIR, thus, submits that the
noncompliance with the BOI terms and conditions further warrants the denial of AICHI's
claim for refund.32
The Issues
Based on the opposing contentions of the parties, the issues for resolution are the
following: (1) whether AICHI availed of the correct remedy; (2) whether AICHI can still
question the CTA Division ruling; and (3) whether AICHI sufficiently proved its entitlement
to the refund or tax credit.
The Court's Ruling
We deny the petition.
I.
The
CTA
had
no
jurisdiction
over
the
judicial
claim.
AICHI's judicial claim was filed prematurely and, thus, without cause of action.
First, we invoke the age-old rule that when a case is on appeal, the Court has the authority
to review matters not specifically raised or assigned as error if their consideration is
necessary in reaching a just conclusion of the case.33 Guided by this principle, we shall
discuss the timeliness of AICHI's judicial claim, although not raised by the parties in the
present petition, in order to determine whether the CTA validly acquired jurisdiction over
it. The matter of jurisdiction cannot be waived because it is conferred by law and is not
dependent on the consent or objection or the acts or omissions of the parties or any one
of them.34 In addition, courts have the power to motu proprio dismiss an action over which
it has no jurisdiction. The grounds for motu proprio dismissal by the court are provided in
Rule 9, Section 1 of the Revised Rules of Court, to wit:chanRoblesvirtualLawlibrary
SECTION 1. Defenses and objections not pleaded - Defenses and objections not pleaded
either in a motion to dismiss or in the answer are deemed waived. However, when it
appears from the pleadings or the evidence on record that the court has no jurisdiction
over the subject matter, that there is another action pending between the same parties
for the same cause, or that the action is barred by a prior judgment or by statute of
limitations, the court shall dismiss the claim. (emphasis supplied)
On the judicial claim for refund or tax credit of AICHI, the CTA did not validly acquire
jurisdiction over such judicial claim because the appeal before the court was made
prematurely. When the CTA acts without jurisdiction, its decision is void. Consequently,
the answer to the second issue, i.e., whether AICHI can still question the CTA ruling,
becomes
irrelevant.
The present case stemmed from a claim for refund or tax credit of alleged unutilized input
VAT attributable to zero-rated sales and unutilized input VAT on the purchase of capital
goods for the third and fourth quarters of 2000 and the four taxable quarters of 2001. The
refund or tax credit of input taxes corresponding to the six taxable quarters were combined
into one administrative claim filed before the BIR on 26 September 2002. On the other
hand, the judicial claim was filed before the CTA, through a petition for review, on 30
September 2002, or a mere four days after the administrative claim was filed. It is not
disputed that the administrative claim was not acted upon by the BIR.
Convinced that the judicial claim of AICHI was properly made, the CTA Division took
cognizance of the case and proceeded with trial on the merits. Among the issues
presented by the parties was the timeliness of both the administrative and judicial claims
of AICHI. In its decision, the CTA Division categorically found that both the dates of filing
the administrative claim and judicial claim were within the two-year prescriptive period
reckoned from the close of each of the taxable quarters from the third quarter of 2000 up
to the last quarter of 2001, to wit:chanRoblesvirtualLawlibrary
Reckoning
Expiry date of Date of filing of
point
of
Year Quarter
prescriptive
administrative
counting the
period
claim
2-year period
Date
filing
judicial
claim
of
of
2000 3rd
September 30, September 30, September
2000
2002
2002
26, September
30, 2002
4th
December 31, December 31, September
2000
2002
2002
26, September
30, 2002
March 31, 2001
March
2003
31, September
2002
26, September
30, 2002
2nd
June 30, 2001
June 30, 2003
September
2002
26, September
30, 2002
3rd
September 30, September 30, September
2001
2003
2002
26, September
30, 2002
4th
December 31, December 31, September
2001
2003
2002
26, September
30, 2002
2001 1st
The relevant provisions of the 1997 Tax Code35 at the time AICHI filed its claim for refund
or credit of unutilized input tax reads:chanRoblesvirtualLawlibrary
SEC.
112. Refunds
or
Tax
Credits
of
Input
Tax.
(A) Zero-rated or Effectively Zero-rated Sales.- Any VAT-registered person, whose sales
are zero-rated or effectively zero-rated may, within two (2) years after the close of the
taxable quarter when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to such sales, except
transitional input tax, to the extent that such input tax has not been applied against output
tax:
x
x
x
(B) Capital Goods. A VAT-registered person may apply for the issuance of a tax credit
certificate or refund of input taxes paid on capital goods imported or locally purchased, to
the extent that such input taxes have not been applied against output taxes.
The application may be made only within two (2) years after the close of the taxable
quarter
when
the
importation
or
purchase
was
made.
x
x
x
x
(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper
cases, the Commissioner shall grant a refund or issue the tax credit certificate for
creditable input taxes within one hundred twenty (120) days from the date of
submission of complete documents in support of the application filed in accordance
with
Subsections
(A)
and
(B)
hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on
the part of the Commissioner to act on the application within the period prescribed
above, the taxpayer affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one hundred twenty-day
period, appeal the decision or the unacted claim with the Court of Tax Appeals.
(emphasis supplied)
The law contemplates two kinds of refundable amounts: (1) unutilized input tax paid on
capital goods purchased, and (2) unutilized input tax attributable to zero-rated sales. The
claim for tax refund or credit is initially filed before the CIR who is vested with the power
and primary with jurisdiction to decide on refunds of taxes, fees or other charges, and
penalties imposed in relation thereto.36 In every case, the filing of the administrative claim
should be done within two years. However, the reckoning point of counting such twoyear period varies according to the kind of input tax subject matter of the claim. For the
input tax paid on capital goods, the counting of the two-year period starts from the close
of the taxable quarter when the purchase was made; whereas, for input tax attributable
to zero-rated sale, from the close of the taxable quarter when such zero-rated sale was
made (not
when
the
purchase
was
made).
From the submission of the complete documents to support the claim, the CIR has a
period of one hundred twenty (120) days to decide on the claim. If the CIR decides within
the 120-day period, the taxpayer may initiate a judicial claim by filing within 30 days an
appeal before the CTA. If there is no decision within the 120-day period, the CIR's inaction
shall be deemed a denial of the application.37 In the latter case, the taxpayer may institute
the judicial claim, also by an appeal, within 30 days before the CTA.
Generally, the 120-day waiting period is both mandatory and jurisdictional.
In a long line of cases,38 the Court had interpreted the 120-day period as both mandatory
and jurisdictional such that the taxpayer is forced to await the expiration of the period
before initiating an appeal before the CTA. This must be so because prior to the expiration
of the period, the CIR still has the statutory authority to render a decision. If there is no
decision and the period has not yet expired, there is no reason to complain of in the
meantime. Otherwise stated, there is no cause of action yet as would justify a resort to
the
court.
A premature invocation of the court's jurisdiction is fatally defective and is susceptible to
dismissal for want of jurisdiction. Such is the very essence of the doctrine of exhaustion
of administrative remedies under which the court cannot take cognizance of a case unless
all available remedies in the administrative level are first utilized. Whenever granted by
law a specific period of time to act, an administrative officer must be given the full benefit
of such period. Administrative remedies are exhausted upon the full expiration of the
period
without
any
action.
The first test case regarding the mandatory and jurisdictional nature of the 120+30-day
waiting periods39 provided in Section 112 (D)40 of the 1997 Tax Code is CIR v. Aichi
Forging Company of Asia, Inc. (Aichi), G.R. No. 184823, 6 October 2010.41 In that
landmark case, the Court rejected as without legal basis the assertion of the respondent
taxpayer that the non observance of the 120-day period is not fatal to the filing of a judicial
claim as long as both the administrative and the judicial claims are filed within the twoyear prescriptive period. The Court explained that Section 112 (D) contemplated two
scenarios: (1) a decision is made before the expiration of the 120-day period; and (2) no
decision after such 120-day period. In either instance, the appeal with the CTA can only
be made within 30 days after the decision or inaction. Emphatically, Aichi announced that
the 120-day period is crucial in filing an appeal with the CTA.
The exception: Judicial claims filed from 10 December 2003 up to 6 October 2010
Nonetheless, in the subsequent landmark decision of CIR v. San Roque Power
Corporation, Taganito Mining Corporation v. CIR, and Philex Mining Corporation v. CIR
(San Roque),42 the Court recognized an instance when a prematurely filed appeal may
be validly taken cognizance of by the CTA. San Roque relaxed the strict compliance with
the 120-day mandatory and jurisdictional period, specifically for Taganito Mining
Corporation, in view of BIR Ruling No. DA-489-03, dated 10 December 2003, which
expressly declared that the "taxpayer-claimant need not wait for the lapse of the 120-day
period before it could seek judicial relief with the CTA by way of petition for review."
Pertinently, the prematurely filed appeal of San Roque Power Corporation before the CTA
was dismissed because it came before the issuance of BIR Ruling No. DA-489-03. On
the other hand, Taganito Mining Corporation's appeal was allowed because it was
taken after the
issuance
of
said
BIR
Ruling.43
Subsequently, in Taganito Mining Corporation v. CIR,44 the Court reconciled the doctrines
in San Roque and the 2010 Aichi case by enunciating that during the window period from
10 December 2003 (issuance of BIR Ruling No. DA-489-03) to 6 October 2010 (date of
promulgation of Aichi), taxpayer-claimants need not observe the stringent 120-day
period. We said Reconciling the pronouncements in the Aichi and San Roque cases, the rule must
therefore be that during the period December 10, 2003 (when BIR Ruling No. DA-489-03
was issued) to October 6, 2010 (when the Aichi case was promulgated), taxpayersclaimants need not observe the 120-day period before it could file a judicial claim for
refund of excess input VAT before the CTA. Before and after the aforementioned period
(i.e., December 10, 2003 to October 6, 2010), the observance of the 120- day period
is mandatory and jurisdictional to the filing of such claim. (emphasis supplied)
Here, it is not disputed that AICHI had timely filed its administrative claim for refund or tax
credit before the BIR. The records show that the claim for refund/tax credit of input taxes
covering the six separate taxable periods from the 3rd Quarter of 2000 up to the 4th
Quarter of 2001 was made on 26 September 2002. Both the CTA Division and CTA En
Banc correctly ruled that it fell within the two-year statute of limitations. However, its
judicial claim was filed a mere four days later on 30 September 2002, or before the
window period when the taxpayers need not observe the 120-day mandatory and
jurisdictional
period.
Consequently,
the
general
rule
applies.
AICHI is similarly situated as San Roque Power Corporation in San Roque - both filed
their appeals to the CTA without waiting for the 120-day period to lapse and before the
aforesaid window period. As in San Roque, AICHI failed to comply with the mandatory
120-day waiting period, thus, the CTA ought to have dismissed the appeal for lack of
jurisdiction.
The
judicial
claim
need
not
fall
within
the
2-year
period.
Both the CTA Division and CTA En Banc were convinced that a simultaneous filing of the
administrative and judicial claims is permissible so long as the two claims fall within the
two-year
prescriptive
period.
We
do
not
agree.
Aichi already settled the matter concerning the proper interpretation of the phrase "within
two (2) years x x x apply for the issuance of a tax credit certificate or refund" found in
Section 112 (D) of the 1997 Tax Code. Aichi clarified that the phrase refers to applications
for refund/credit filed with the CIR and not to appeals made to the CTA. All that is required
under the law is that the appeal to the CTA is brought within 30 days from either decision
or
inaction.
Under the foregoing interpretation, there may be two possible scenarios when an appeal
to the CTA is considered fatally defective even when initiated within the two-year
prescriptive period: first, when there is no decision and the appeal is taken prior to the
lapse of the 120-day mandatory period,45except only the appeal within the window period
from 10 December 2003 to 6 October 2010;46 second, the appeal is taken beyond 30
days from either decision or inaction "deemed a denial." 47 In contrast, an
appeal outside the 2-year period is not legally infirm for as long as it is taken within 30
days from the decision or inaction on the administrative claim that must have been
initiated within the 2-year prescriptive period. In other words, the appeal to the CTA is
always initiated within 30 days from decision or inaction regardless whether the date of
its
filing
is
within
or
outside
the
2-year
period
of
limitation.
To repeat, except only to the extent allowed by the window period, there is no legal basis
for the insistence that the simultaneous filing of both administrative and judicial claims
(pursuant to Section 112 of the Tax Code) is pennissible for as long as both fall within the
2-year
prescriptive
period.
Existing
jurisprudence
involving
petitioner
Aichi
There are two other cases involving AICHI wherein we resolved the same issue on the
timeliness of the judicial claims before the CTA - the first is the landmark case
of Aichi (hereinafter 2010 Aichi); and the second is Commissioner v. Aichi Forging
Company
of
Asia,
Inc. (2014
Aichi),48 promulgated
in
2014.
Worth mentioning is the predominantly striking similarities between the two cases: (1)
both involved applications for refund/tax credit of unutilized input VAT under Section 112
of the Tax Code; (2) the administrative claims were timely filed before the CIR; (3) the
judicial claims before the CTA were premature;49 and (4) the judicial claims were filed
after 10 December 2003, or the date of the issuance ofBIR Ruling No. DA-489-03.50 Yet,
the Court arrived at divergent conclusions on the application of the 120-day period in 2010 Aichi, the Court applied the strict compliance with the mandatory 120-day waiting
period; whereas, in 2014 Aichi, the premature filing was allowed following the exception
laid down in San Roque (2013). Thus, the Court denied the judicial claim in 2010
Aichi due to the CTA's lack of jurisdiction over it, but sustained such jurisdiction in 2014
Aichi.
We
clarify.
In 2010 Aichi, the Court passed upon the timeliness of the judicial claim with the
CTA without considering BIR Ruling No. DA-489-03. The reason is simple: none of the
parties, especially Aichi, had raised the matter on the effect of the said BIR Ruling. It is
reasonable to think that Aichi saw no need to present the issue since the CTA already
gave due course to its petition and the Commissioner questioned, on motion for
reconsideration, the simultaneous filing of both the administrative and judicial claims only
after the CTA First Division partially ruled in favor of Aichi. The CTA First Division denied
the motion holding that the law does not prohibit the simultaneous filing of the
administrative and judicial claims for refund. The CTA En Banc subsequently sustained
the CTA First Division, although we dismissed such reasoning in view of the clear
wordings
of
Section
112.
It was only in the 2013 case of San Roque that BIR Ruling No. DA-489-03 was raised for
the first time and, thus, the Court was presented a clear opportunity to discuss its legal
effect. The doctrine on the exception to the strict application of the 120-day period laid
down in San Roque became the controlling law that was followed in numerous
subsequent cases, one of which is 2014 Aichi. Thus, even though the appeal with the
CTA in 2010 Aichi fell within the window period, the exception could not be applied as this
was first recognized only in 2013 when San Roque was promulgated. On the other hand,
it
is
different
in 2014
Aichi as
it
must
yield
to San
Roque.
The present case, just like 2014 Aichi, is very much similar to 2010 Aichi, with the only
notable distinction being the date of filing of the appeal with the CTA. As stated previously,
the appeal in this case came before the window period. However, such distinction is not
significant as our conclusions here and in 2010 Aichi are the same, that is, the CTA did
not acquire jurisdiction in view of the mandatory and jurisdictional nature of the 120-day
waiting
period.
Considering our holding that the CTA did not acquire jurisdiction over the appeal of AICHI,
the decision partially granting the refund claim must therefore be set aside as a void
judgment.
The rule is that where there is want of jurisdiction over a subject matter, the judgment is
rendered null and void.51 A void judgment is in legal effect no judgment, by which no rights
are divested, from which no right can be obtained, which neither binds nor bars anyone,
and under which all acts performed and all claims flowing out are void. 52 We quote our
pronouncement in Canero v. University of the Philippines:53
A void judgment is not entitled to the respect accorded to a valid judgment, but may be
entirely disregarded or declared inoperative by any tribunal in which effect is sought to be
given to it. It has no legal or binding effect or efficacy for any purpose or at any place. It
cannot affect, impair or create rights. It is not entitled to enforcement and is, ordinarily, no
protection to those who seek to enforce. In other words, a void judgment is regarded as
a nullity, and the situation is the same as it would be if there was no judgment.
Since the judgment of the CTA Division is void, it becomes futile for any of the parties to
question it. It, therefore, does not matter whether AICHI had timely filed a motion for
reconsideration to question either the decision of the CTA En Banc or the CTA Division.
II.
The petitioner adopted the wrong remedy in assailing the decision of the CTA En
Banc.
We agree with the CIR that the filing of the present Petition for Certiorari under Rule 65
of the 1997 Rules of Court is procedurally flawed. What the petitioner should have done
to question the decision of the CTA En Banc was to file before this Court a petition for
review under Rule 45 of the same Rules of Court. This is in conformity with Section 11 of
R.A. No. 9282, the pertinent text reproduced here:chanRoblesvirtualLawlibrary
SECTION 11. Section 18 of the same Act is hereby amended as follows:
SEC. 18. Appeal to the Court ofTax Appeals En Banc. - No civil proceeding involving
matter arising under the National Internal Revenue Code, the Tariff and Customs Code
or the Local Government Code shall be maintained, except as herein provided, until and
unless an appeal has been previously filed with the CTA and disposed of in accordance
with
the
provisions
of
this
Act.
A party adversely affected by a resolution of a Division of the CTA on a motion for
reconsideration or new trial, may file a petition for review with the CTA en banc.
SEC. 19. Review by Certiorari. - A party adversely affected by a decision or ruling of the
CTA en banc may file with the Supreme Court a verified petition for review on certiorari
pursuant to Rule 45 of the 1997 Rules of Civil Procedure.
Likewise,
Section
1,
Rule
provides:chanRoblesvirtualLawlibrary
RULE16
16
the
Revised
CTA
Rules
APPEAL
SECTION 1. Appeal to Supreme Court by petition for review on certiorari.- A party
adversely affected by a decision or ruling of the Court en banc may appeal therefrom by
filing with the Supreme Court a verified petition for review on certiorari within fifteen days
from receipt of a copy of the decision or resolution, as provided in Rule 45 of the Rules of
Court. If such party has filed a motion for reconsideration or for new trial, the period herein
fixed shall run from the party's receipt of a copy of the resolution denying tl1e motion for
reconsideration or for new trial.
A petition for certiorari under Rule 65 of the Rules of Court is a special civil action that
may be resorted to only in the absence of appeal or any plain, speedy and adequate
remedy
in
the
ordinary
course
of
law.54
In this case, there is a plain, speedy and adequate remedy that is available appeal by
certiorari under Rule 45. Appeal is available because the 20 July 2010 Resolution of the
CTA En Banc was a final disposition as it denied AICHI's full claim for refund or tax credit
of creditable input taxes. The proper remedy to obtain a reversal of judgment on the
merits, final order or resolution is appeal. AICHI's resort to certiorari proceedings under
Rule 65 is, therefore, erroneous and it deserves nothing less than an outright dismissal.
In several cases, the Court had allowed the liberal application of the Rules of Court. Thus,
we treated as appeal by certiorari under Rule 45 what otherwise was denominated or
styled as a petition for certiorari under Rule 65, provided the petition must have been filed
within the reglementary period of 15 days from receipt of the assailed decision or
resolution. Outside of this circumstance, there should be a strong and justifiable reason
for a departure from the established rule of procedure. As the Court had held, it is only
for the most persuasive of reasons can such rules be relaxed to relieve a litigant of an
injustice not commensurate with the degree of his thoughtlessness in not complying with
the
procedure
prescribed.55
Here, the petition was filed on the 60th day following the receipt of the assailed resolution
of the CTA En Banc, or outside of the 15-day period of appeal by certiorari under Rule 45
but within the 60-day period for filing a petition for certiorari under Rule 65. Unfortunately,
petitioner AICHI had not demonstrated any justifiable reason for us to relax the rules and
disregard the procedural infirmity of its adopted remedy. What the petitioner merely did
was invoke substantial justice by ascribing gross negligence on the part of its previous
counsel. It cites its previous counsel's failure to file a motion for reconsideration of the
CTA Division's ruling partially denying its claim for refund, and to promptly file an appeal
before this Court from the denial of its motion for reconsideration assailing the decision
of
the
CTA
En
Banc.
We
are
not
persuaded.
The well-settled rule is that negligence and mistakes of counsel bind the client. The
exception is when the negligence of counsel is so gross as to constitute a violation of the
due process rights of the client56 Even so, it must be convincingly shown that the client
was so maliciously deprived of information that he or she could not have acted to protect
his
or
her
interests.57 In Bejarasco,
Jr.
v.
People,58 this
court
reiterated:chanRoblesvirtualLawlibrary
For the exception to apply . . . the gross negligence should not be accompanied by the
client's own negligence or malice, considering that the client has the duty to be vigilant in
respect of his interests by keeping himself up-to-date on the status of the case. Failing in
this duty, the client should suffer whatever adverse judgment is rendered against him.
If indeed the petitioner was earnest in recovering the full amount of its refund claim, it
could have avoided the negative consequences of the failure to move for dismissal from
the CTA Division's partial denial of its claim by simply making a follow-up from its lawyer
regarding the status of its case. Worse, it committed the same mistake again by staying
passive even after denial of its motion for reconsideration from the decision of the CTA
En Banc. Party-litigants share in the responsibility of prosecuting their complaints with
assiduousness and should not be expected to simply sit back, relax, and await a favorable
outcome.59 Absent any other compelling reasons, we cannot apply the exception to the
rule that the negligence of counsel binds the client so as to excuse the wrongful resort to
a petition for certiorari instead of an appeal. Besides, AICHI's citation of the negligence
of counsel was meant for the CTA to grant its motion for reconsideration, not for this Court
to give due course to the present petition. Thus, there is no cogent justification for granting
to the petitioner the preferential treatment of a liberal application of the rules.
It must be emphasized, however, that the outright dismissal of the petition for being the
wrong remedy does not mean that the CTA decision and resolution stand. As discussed,
the decision of the CTA Division is null and void; therefore, no right can be obtained from
it or that all claims flowing out of it is void.
Epilogue
Petitioner AICHI came to this court expecting a reversal of the partial denial of its claim
for refund/credit so that it could recover more in addition to what it had been allowed by
the CTA. Regrettably, AICHI comes out empty-handed in our judgment. We could not rule
on the jurisdiction of the CTA any other way. The law and jurisprudence speak loud and
clear.
Our
solemn
duty
is
to
obey
it.
All told, the CTA has no jurisdiction over AICHI's judicial claim considering that its Petition
for Review was filed prematurely, or without cause of action for failure to exhaust the
administrative remedies provided under Section 112 (D) of the Tax Code, as amended.
In addition, AICHI availed of the wrong remedy. Likewise, we find no need to pass upon
the issue on whether petitioner AICHI had substantiated its claim for refund or tax credit.
Indisputably,
we
must
deny
AICHI's
claim
for
refund.
WHEREFORE, for lack of jurisdiction, the 20 March 2009 Decision and 29 July 2009
Resolution of the Court of Tax Appeals Second Division in CTA Case No. 6540, and the
18 February 2010 Decision and 20 July 2010 Resolution of the Court of Tax Appeals En
Banc in CTA-EB Case No. 519 are hereby VACATED and SET ASIDE.
Consequently,
SO ORDERED.
the
petition
before
this
Court
is DENIED.
No
costs.
FIRST DIVISION
G.R. No. 201665, August 30, 2017
EDISON
(BATAAN)
CORPORATION, Petitioner, v. COMMISSIONER
REVENUE, Respondent.
G.R.
No.
201668,
OF
August
COGENERATION
INTERNAL
30,
2017
REPUBLIC OF THE PHILIPPINES, REPRESENTED BY THE COMMISSIONER OF
INTERNAL
REVENUE, Petitioner, v. EDISON
(BATAAN)
COGENERATION
CORPORATION, Respondent.
DECISION
DEL CASTILLO, J.:[*]
The findings and conclusions of the tax court are accorded great weight because of its
expertise on the subject.1
Before us are consolidated Petitions for Review on Certiorari2 under Rule 45 of the Rules
of Court assailing the January 30, 2012 Decision3 and the April 17, 2012 Resolution4 of
the Court of Tax Appeals (CTA) in CTA EB Case Nos. 766 and 769.
Factual Antecedents
On February 2, 2004, Edison (Bataan) Cogeneration Corporation [EBCC] received from
the Commissioner of Internal Revenue (CIR) a Formal Letter of Demand and Final
Assessment Notice dated January 23, 2004 assessing EBCC of deficiency income tax,
Value Added Tax (VAT), withholding tax on compensation, Expanded Withholding Tax
(EWT) and Final Withholding Tax (FWT) for taxable year 2000 in the total amount of
P84,868,390.16, broken down as follows:
Deficiency Tax Amount
Income
Tax
Value-Added
Tax
Withholding Tax on Compensation
Expanded
Withholding
Tax
Final
Withholding
Tax
TOTAL
P65,571,268.01
168,866.15
128,087.84
79,066.13
18,921,102.03
P84,868 390.165
On March 3, 2004, EBCC filed with the CIR a letter-protest dated March 2, 2004 and
furnished the CIR with the required documents.6
Due to the inaction of the CIR, EBCC elevated the matter to the CTA via a Petition for
Review, docketed as CTA Case No. 7104 and raffled to the Second Division of the CTA.
While the case was pending, EBCC availed itself of the Tax Amnesty Program under
Republic Act (RA) No. 9480.7 Thus, in a November 7, 2008 Resolution, the CTA Second
Division deemed the Petition partially withdrawn and the case closed and terminated with
regard to EBCC's deficiency income tax and VAT for the year 2000.8
On March 18, 2009, the CTA Second Division issued a Resolution setting aside the
assessments against EBCC for deficiency income tax and VAT for the taxable year 2000
in view of its availment of the Tax Amnesty Program.9
Ruling of the Court of Tax Appeals Former Second Division
On November 30, 2010, the CTA Former Second Division rendered a Decision 10 partly
granting the Petition. After reviewing the evidence on record, the CTA Former Second
Division found EBCC to have paid the correct amount of EWT and withholding tax on
compensation of its employees.11 Thus, the CTA Former Second Division cancelled and
set aside the assessments for the deficiency EWT and the deficiency withholding tax on
compensation.12 As to the deficiency FWT, the CTA Former Second Division found EBCC
liable to pay FWT in a reduced amount of P2,232,146.91.13 The CTA Former Second
Division agreed with EBCC that it was not liable for the deficiency FWT assessment of
P7,707,504.96 on interest payments on loan agreements with Ogden Power International
Holdings, Inc. (Ogden) for taxable year 2000 since its liability for interest payment became
due and demandable only on June 1, 2002.14 Likewise cancelled and set aside were the
deficiency tax assessments on loan interest payment of EBCC to Philippine National Bank
and Security Bank Corporation in the amounts of P346,988.77 and P387,411.46,
respectively, as these had already been remitted by EBCC.15 Thus:
WHEREFORE, premises considered, the instant Petition for Review is hereby PARTLY
GRANTED. Accordingly, the assessments for deficiency withholding tax on
compensation in the amount of P128,087.84 and expanded withholding tax in the amount
of P79,066.13 for taxable year 2000 are hereby CANCELLED and SET ASIDE.
As regards the deficiency final withholding tax assessment against petitioner for taxable
year 2000, the same is hereby AFFIRMED, with modification. Accordingly, petitioner is
hereby ORDERED TO PAY respondent Commissioner of Internal Revenue the amount
of TWO MILLION TWO HUNDRED THIRTY TWO [THOUSAND] ONE HUNDRED
FORTY SIX AND 91/100 (P2,232,146.91), representing deficiency final withholding tax,
computed, as follows:
FWT Due per
Assessment
P10,227,622.72
Less:
P734,400.23
Substantiated
FWT
on
interest
on
syndicated
loans
FWT
on 7,707,504.96 8,441,905.19
interest
on
foreign loan
from Ogden
Basic
deficiency
FWT
P 1,785,717.53
Add:
25%
Surcharge
446,429.38
Total
Deficiency
FWT
P2,232,146.91
In addition, petitioner is ordered to pay:
1) deficiency interest at the rate of twenty percent (20%) per annum on the basic
deficiency final withholding tax of P1,785,717.53 computed from January 25, 2001 until
full payment thereof: pursuant to Section 249(B) of the NIRC of 1997, as amended; and
2) delinquency interest at the rate of twenty percent (20%) per annum on the total
deficiency final withholding tax of P2,232,146.91, and on the deficiency interest which
have accrued as afore-stated in paragraph 1 hereof, computed from January 23, 2004
until full payment thereof, pursuant to Section 249(C) of the NIRC of 1997 as amended.
SO ORDERED.16
The CIR filed a Motion for Reconsideration while EBCC filed a Motion for Partial
Reconsideration and/or Clarification.17
On April 7, 2011, the CTA Former Second Division issued a Resolution 18 denying both
Motions.19
Both parties appealed to the CTA En Banc.
Ruling of the Court of Tax Appeals En Banc
On January 30, 2012, the CTA En Banc denied both appeals. It sustained the findings of
the CTA Former Second Division that the assessment over EBCC's FWT on interest
payments arising from its loan from Ogden was without basis as EBCC had no obligation
to withhold any taxes on the interest payment for the year 2000. 20 Under Revenue
Regulation (RR) No. 02-98, the obligation to withhold only accrues when the loan is paid
or becomes payable or when it becomes due, demandable or legally enforceable,
whichever comes first.21 In this case, the obligation to withhold the interest over the loan
only commenced on June 1, 2002.22 As to the alleged interest payments on the
syndicated loans in dollars, the CTA En Banc noted that EBCC failed to present sufficient
evidence to prove the remittance of its payment.23 Thus, the CTA En Banc adopted the
computation of the CTA Former Second Division.24
On April 17, 2012, the CTA En Banc denied the CIR’s Motion for Reconsideration and
EBCC's Motion for Partial Reconsideration.25
Issues
Hence, the instant consolidated Petitions under Rule 45 of the Rules of Court, with the
following issues:
G.R. No. 201665
I.
Whether the CTA En Banc erred in not recognizing [the CIR's] judicial admission that she
reduced her assessment for deficiency FWT for taxable year 2000 from
[P]10,227,622[.]72 to [P]7,384,922.52.
II.
Whether [EBCC] is raising a question of fact before the Honorable Court. 26
G.R. No. 201668
I.
Whether x x x EBCC is liable for deficiency final withholding tax for the year 2000.
II.
Whether x x x Revenue Regulation No. 12-01 should be applied in this case.27
G.R. No. 201665
EBCC's Arguments
EBCC insists that it was not liable for any deficiency taxes for the year 2000 since it had
already remitted the amount of P2,842,630.20 as payment for its FWT for 2000, and that
no proof of such payment was necessary considering the CIR's admission in her
Memorandum28 that the original assessment of P10,227,622.72 was reduced to
P7,384,992.52.29
The CIR's Arguments
The CIR, however, denies that she made any judicial admission of payment and
maintains that in the absence of evidence of payment, EBCC was liable to pay the
deficiency assessment as the party who alleges payment bears the burden of proving the
same.30 Moreover, the CIR claims that the issue raised by EBCC is a question of fact,
which is not allowed in a Petition for Review on Certiorari under Rule 45 of the Rules of
Court.31
G.R. No. 201668
The CIR's Arguments
As to the cancellation of the assessments against EBCC's FWT on its intercorporate loan
from Ogden, the CIR argues that the assessment enjoys the presumption of validity and
may only be disproved by evidence to the contrary.32 The CIR contends that EBCC was
liable to pay the interest from the date of the execution of the contract on January 5, 2000,
not from the date of the first payment on June 1, 2002, as the loan agreement clearly
indicated that the interest was to be paid separately from the principal.33 In addition, the
CIR calls for the retroactive application of RR No. 12-01,34 which provides that the
withholding of final tax commences "at the time an income payment is paid or payable, or
the income payment is accrued or recorded as an expense or asset, whichever is
applicable in the payor's book, whichever comes first," on the ground that EBCC omitted
a material fact and acted in bad faith when it refused to present documents on its interest
payments to show the exact date of payment.35 In fact, based on the loan agreement, the
CIR claims that the payment for the first interest period was due on January 4, 2001, not
June 1, 2002.36
EBCC's Arguments
EBCC, on the other hand, asserts that it was not required to withhold FWT at the end of
taxable year 2000 as the interest payment became due and demandable only on June 1,
2002.37 And even if the first payment were due on January 4, 2001, such fact would not
give rise to any liability for FWT in the year 2000 under RR No. 02-98.38 As to the
retroactive application of RR No. 12-01, EBCC contends that this is the first time that such
issue was brought up as it was not raised before the CTA. 39 In addition, to allow the
retroactive application of the RR No. 12-01 would be a clear violation of EBCC's right to
due process as the Formal Letter of Demand was issued pursuant to the provisions of
RR No. 02-98.40 Lastly, EBCC also points out that the issues of whether EBCC withheld
certain facts or whether it acted in bad faith are factual in nature, which are not allowed
in a Petition under Rule 45 of the Rules of Court.41
Our Ruling
The Petitions lack merit.
G.R. No. 201665
The CIR made no judicial admission that EBCC remitted the amount of
P2,842,630.20 as payment for its FWT for the year 2000.
Section 4 of Rule 129 of the Rules of Court states:
SEC. 4. Judicial Admissions. - An admission, verbal or written, made by a party in the
course of the proceedings in the same case, does not require proof. The admission may
be contradicted only by showing that it was made through palpable mistake or that no
such admission was made.
In this case, EBCC claims that the CTA En Banc erred in failing to consider the judicial
admission made by the CIR in her Memorandum that EBCC remitted FWT in the amount
of P2,842,630.20.
We do not agree.
A careful reading of the Memorandum reveals that the alleged remittance of the amount
of P2,842,630.20 was based on a Memorandum Report prepared by the revenue officers
recommending the denial of EBCC's protest, which was issued prior to EBCC's filing of
its Petition for Review before the CTA. In fact, there was no mention of such remittance
in the Joint Stipulations of Facts and Issues by the parties and in the Answer filed by the
CIR. Thus, we find no error on the part of the CTA En Banc in not considering such
statement as a judicial admission.
Besides, the CTA Former Second Division, in its April 7, 2011 Resolution already
explained how it computed EBCC's deficiency FWT, to wit:
It must be emphasized that the assessment for deficiency FWT against [EBCC] in the
amount of P10,227,622.72 is composed of FWT on Interest Payments on Syndicated
Loan in Dollars in the amount of P2,520,117.76 and FWT on Interest on Loan Agreement
with Ogden Power International Holdings, Inc. (Ogden) in the amount of P7,707,504.96.
Since [EBCC] presented documentary evidence in support of its Petition for Review
assailing respondent's assessments, the Court considered said documentary evidence in
deciding the instant case. In other words, the Court did not consider outright the alleged
withholding remittances of P12,842,630.20 as a deduction to [EBCC's] FWT liability, but
first examined the supporting documents presented by [EBCC].
At the risk of being repetitive, although we found that [EBCC] is not liable to pay FWT on
interest payment on loan from Ogden in the amount of P7,707,504.96; however, as
regards the deficiency assessment of FWT on Interest Payments on Syndicated Loan in
Dollars, in the amount of P2,520,117.76, the Court found that petitioner failed to present
proof of withholding and/or remittance of FWT on its interest payments to UCPB and Sung
Hung Kai Bank. Likewise, BIR Forms No. 2306 (Certificates of Final Income Tax
Withheld), pertaining to petitioner's alleged interest payments to First Metro Investment
Corporation and United Overseas Bank/Westmont Bank, were not considered by the
Court for reasons stated in our Decision dated November 30, 2010.
Therefore, [EBCC's] contention that the amount of P2,842,630.20 should still be deducted
from the deficiency assessment, as found by this Court in the amount of P1,785,717.53
is misplaced. As heretofore discussed, out of P2,520,117.76 deficiency FWT assessment
on Interest Paid on Syndicated Loan in US Dollars, [EBCC] was able to substantiate FWT
remittance in the total amount of P734,400.23 only. Thus, we found [EBCC] liable to pay
basic deficiency FWT for the year 2000 in the amount of P1,785,717.53. 42
Moreover, considering that EBCC filed the Petition for Review before the CTA to question
the deficiency tax assessment issued by the CIR, it was incumbent upon EBCC to prove
that the deficiency tax assessment bad no legal or factual basis or that it had already paid
or remitted the deficiency tax assessment as it is the taxpayer that has the burden of proof
to impugn the validity and correctness of the disputed deficiency tax assessment. 43 In
addition, it is a basic rule in evidence that the person who alleges payment has the burden
of proving that payment has indeed been made.44 More so, in cases filed before the CTA,
which are litigated de novo, party-litigants must prove every minute aspect of their case.45
G.R. No. 201668
RR No.02-98 provides that the term payable refers to the date the obligation
becomes due, demandable or legally enforceable.
Section 2.57.4 of Revenue Regulations No. 2-98 provides:
SEC. 2.57.4. Time of Withholding. - The obligation of the payor to deduct and withhold
the tax under Section 2.57 of these regulations arises at the time an income is paid or
payable, whichever comes first, the term 'payable' refers to the date the obligation
becomes due, demandable or legally enforceable.
In this case, the CIR insists that EBCC was liable to pay the interest from the date of the
execution of the contract on January 5, 2000, not from the date of the first payment on
June 1, 2002.
We are not convinced.
EBCC's loan agreement with Ogden stated that:
3. Repayment and Interest
3.1 The BORROWER shall repay the Loan to the LENDER (or as it may in writing direct)
in sixteen (16) consecutive semi-annual [installments] of US DOLLARS EIGHT
HUNDRED and EIGHTY ONE THOUSAND and TWO HUNDRED and FIFTY
(US$881,250.00) commencing on 1 June 2002 and thereafter on June 1 and December
1 of each year.
3.2 Interest shall accrue on the Loan from the date hereof until the date of repayment at
a rate equal to the 90-day LIBOR rate plus 2.5%, subject to review every 90 days.
3.3 Notwithstanding the provisions of Clause 3.2 above, if the BORROWER fails to make
payment of an amount due on a payment date, the BORROWER shall pay additional
interest on such past due and unpaid amount from the due date until the date of payment
at the rate of ½% per month.
3.4 The interest payable to the LENDER shall be exclusive of withholding tax and/or any
other similar taxes which shall be to the account of the BORROWER. Every payment to
the LENDER hereunder shall be net of any present or future tax assessment or other
governmental charge imposed by any taxing authority of any jurisdiction. 46
Clearly, EBCC's liability for interest payment became due and demandable starting June
1, 2002. And considering that under RR No. 02-98, the obligation of EBCC to deduct or
withhold tax arises at the time an income is paid or payable, whichever comes first, and
considering further that under the said RR, the term "payable" refers to the date the
obligation becomes due, demandable or legally enforceable, we find no error on the part
of the CTA En Banc in ruling that EBCC had no obligation to withhold any taxes on the
interest payment for the year 2000 as the obligation to withhold only commenced on June
1, 2002, and thus cancelling the assessment for deficiency FWT on interest payments
arising from EBCC's loan from Ogden.
Neither do we find any reason for the retroactive application of RR No. 12-01, which
provides that the withholding of final tax commences "at the time an income payment is
paid or payable, or the income payment is accrued or recorded as an expense or asset,
whichever is applicable in the payor's book, whichever comes first." To begin with, this
issue was never raised before the CTA. Thus, we cannot rule on this matter now. It is a
settled rule that issues not raised below cannot be pleaded for the first time on appeal
because a party is not allowed to change his theory on appeal; to do so would be unfair
to the other party and offensive to rules of fair play, justice and due process. 47
Moreover, as aptly pointed out by EBCC, whether it omitted to state a material fact or
acted in bad faith in failing to present documents on its interest payments to show the
exact date of payment is a factual issue, which is not allowed under Rule 45.
In any case, even if the first payment was due on January 4, 2001 as claimed by the CIR,
EBCC would still not be liable, as the tax assessment pertained to taxable year 2000 and
not 2001.
All told, we find no reason to reverse the January 30, 2012 Decision and the April 17,
2012 Resolution of the CTA in CTA EB Case Nos. 766 and 769.
We need not belabor that "findings and conclusions of the CTA are accorded the highest
respect and will not be lightly set aside because by [its] very nature x x x, it is dedicated
exclusively to the resolution of tax problems and has accordingly developed an expertise
on the subject."48
WHEREFORE, the Petitions are herebyDENIED. The assailed January 30, 2012
Decision and the April 17, 2012 Resolution of the Court of Tax Appeals in CTA EB Case
Nos. 766 and 769 are hereby AFFIRMED.
SO ORDERED
EN BANC
G.R. No. 185420, August 29, 2017
LANAO DEL NORTE ELECTRIC COOPERATIVE, INC., AS REPRESENTED BY ITS
GENERAL MANAGER ENGR. RESNOL C. TORRES, Petitioner, v. PROVINCIAL
GOVERNMENT OF LANAO DEL NORTE, AS REPRESENTED BY ITS GOVERNOR
HON. MOHAMAD KHALID Q. DIMAPORO AND ITS PROVINCIAL TREASURER,
MILDRED J. HINGCO, PROVINCIAL ASSESSOR, NATIONAL ELECTRIFICATION
ADMINISTRATION (NEA), AS REPRESENTED BY ITS ADMINISTRATOR HON.
EDITA S. BUENO, POWER SECTOR ASSETS AND LIABILITIES MANAGEMENT
(PSALM), AS REPRESENTED BY ITS PRESIDENT AND CEO HON. JOSE C.
IBAZETA, DEPARTMENT OF ENERGY (DOE), AS REPRESENTED BY ITS
SECRETARY HON. ANGELO T. REYES, THE COMMISSION ON AUDIT (COA), AS
REPRESENTED BY ITS CHAIRMAN HON. REYNALDO A. VILLAR, Respondents.
DECISION
VELASCO JR., J.:
Nature of the Case
Before this Court is a Petition for Prohibition and Mandamus under Rule 65 of the Rules
of Court, with prayer for injunctive relief to enjoin and prevent the respondent Provincial
Government of Lanao del Norte (PGLN) from levying and auctioning off all the assets,
properties, and equipment of petitioner Lanao del Norte Electric Cooperative, Inc.
(LANECO) to satisfy its unpaid real property taxes.
Factual Antecedents
Pursuant to Republic Act (R.A.) No. 6038, otherwise known as the National Electrification
Administration Act, LANECO was granted a franchise on January 8, 1972 to distribute
electricity over the municipalities of Linamon, Kauswagan, Bacolod, Maigo, Kolambugan,
Tubod, Baroy, Lala, Salvador, Kapatagan, Sapad, Magsaysay, and Karomatan. 1 On
December 14, 1995, the NEA expanded the coverage of LANECO's franchise by
including barangays Abaga, Maria Cristina, and Nangka, all in the municipality of Balo-i,
Lanao
del
Norte.2
In order to finance its operations, LANECO contracted several loans from respondent
National Electrification Administration (NEA) from 1972 until 1991, secured by real estate
mortgage contracts over its properties.3 The NEA also gave LANECO grants and
subsidies from 1996 to 2006 to fund its various rural electrification programs in the
countryside.4 LANECO's total loans from the NEA amounted to P117,645,358.00, a
substantial
portion
of
which,
however,
had
already
been
paid. 5
Upon the enactment of R.A. No. 9136, or the Electric Power Industry Reform Act of 2001,
respondent Power Sector Assets and Liabilities Management (PSALM) assumed
LANECO's loan balance of P32,507,813.70 to the NEA pursuant to Section 60 6 thereof.7
Meanwhile, Congress enacted R.A. No. 7160, otherwise known as the Local Government
Code of 1991 (LGC), which conferred power to local government units (LGUs) to impose
taxes on real properties located within their territories.8 Thus, on January 7, 1993, and in
accordance with Sections 2329 and 23310 of the LGC, the Sangguniang Panlalawigan of
the PGLN enacted Provincial Tax Ordinance No. 1, Series of 1993, entitled "An Ordinance
Adopting the Provincial Revenue Code of the Province of Lanao del Norte pursuant to the
Provisions of Republic Act No. 7160, otherwise known as the Local Government Code of
1991"
(Provincial
Revenue
Code).11
On January 26, 2006, LANECO received a letter from respondent Provincial Treasurer of
the PGLN, demanding payment of P22,841,842.60 representing real property taxes
assessed against the cooperative for the municipalities of Bacolod, Baroy, Kolambugan,
Balo-i, Kapatagan, Magsaysay, Maigo, and Tubod for the period of 1995 to 2005. The
Provincial Treasurer sent additional billings to LANECO on July 28, 2006, this time for
payment of its real property taxes for the municipalities of Kauswagan, Lala, Salvador,
and Kolambugan, in the amount of P8,270,469.04. 12 In a letter dated September 26,
2006, the Provincial Treasurer made a final demand for the payment of the aforestated
amounts, thus:chanRoblesvirtualLawlibrary
xxxx
To avoid publication and/or Advertisement of Public Auction of all your delinquent real
properties in the province in a newspaper of general circulation, please cause the
payment of your real property taxes' obligations to this Office within fifteen (15) days upon
receipt of this FINAL DEMAND.13
On several occasions, LANECO allegedly requested the PGLN for the original or a
certified true copy of the Provincial Revenue Code to be used by the Energy Regulatory
Commission (ERC) as basis to allow LANECO to pay its real property taxes and
subsequently pass it on to its member-consumers, but the PGLN supposedly refused to
do
so.14
Aggrieved, LANECO questioned the validity of the real property tax assessments and the
Provincial Revenue Code in a Petition for Declaratory Relief with Preliminary Prohibitory
Injunction,15 docketed as Special Civil Action No. 003-07-2006 before the Regional Trial
Court
(RTC)
of
Lanao
del
Norte,
Branch
7.
However, on ex-parte motion16 by LANECO, the case was dismissed as the parties
agreed to resolve the issues before the Bureau of Local Government Finance, instead of
pursuing
court
action.
Nevertheless, the PGLN continued to demand payment from LANECO through a
letter17 dated June 19, 2008. LANECO reiterated its claim that it attempted to secure an
original or certified true copy of the Provincial Revenue Code for submission to the ERC
on several occasions but was unable to do so.18 On November 12, 2008, it requested for
a certified true copy of the ordinance from the Office of the Municipal Assessor of the
Municipality of Kolambugan. The latter, however, simply referred the request to the
Sangguninang Panlalawigan. The Sangguniang Panlalawigan, in turn, issued a
certification19 on November 25, 2008 stating that its Legislative Building was gutted by
fire, including all the records/documents of its offices, on December 7, 2003.
Hence, LANECO filed the present petition on December 5, 2008 to raise the issue of
whether or not respondent PGLN is acting in excess of its authority amounting to grave
abuse of discretion and want of jurisdiction in enforcing the collection of unpaid real
property tax through administrative action, i.e., levy and auction of its assets, instead of
through judicial action. LANECO theorizes that the PGLN's recourse through
administrative action by levying on its real property allegedly violates Section 60 of R.A.
No. 9136 and Executive Order No. (EO) 119, series of 2002. 20 Nevertheless, on
December 8, 2008, LANECO's counsel discovered that the PGLN issued another Notice
of Delinquency of Delinquent Properties of Lanao del Norte Electric Cooperative and
caused its publication on the December 1, 2008 issue of Gold Star Daily21
The Petition
While LANECO does not dispute its liability to pay real property taxes to the PGLN, it
argues that the PGLN will commit grave abuse of discretion amounting to lack or excess
of jurisdiction if it resorts to administrative action through levy to enforce the payment of
unpaid real property taxes. Instead, the petition proposes that the PGLN has another
remedy of filing a collection case against LANECO under Section 60 of R.A. No. 9136. It
also asserts that it is prohibited from disposing, transferring, and conveying its assets,
properties, and the management and control of electric cooperatives while under the
rehabilitation
and
modernization
program.
LANECO further claims that the PGLN should be prohibited from auctioning off its assets,
otherwise, it would violate the constitutional rights of the national agencies to enter into a
contract. It also avers that the PGLN gravely abused its discretion in refusing to provide
the original or a certified true copy of the Provincial Revenue Code to allow LANECO to
determine the correctness of its assessment and its demand letter.
Incidents
that
transpired
after
the
filing
of
the
petition
On December 9, 2008, LANECO filed a Petition22 for Declaratory Relief with prayer for
the issuance of a TRO and/or preliminary prohibitory injunction against the PGLN before
the RTC of Tubod, Branch 7, assailing the validity and constitutionality of the
franchise tax provisions of the Provincial Revenue Code contained in Sections 84
to 87 thereof. The said case was entitled "LANECO versus The Sangguniang
Panlalawigan of Lanao del Norte, et. al." and docketed as Special Civil Case No. 01207-2008. The trial court granted the preliminary prohibitory injunction prayed for therein
in
an
Order
dated
July
29,
2009.23
In the interim, LANECO filed before this Court three Urgent Ex-Parte Motions24 or the
issuance of a TRO on the following dates: 1) December 5, 2008; 2) December 15, 2008;
and 3) January 22, 2009. In a Resolution dated March 24, 2009, LANECO's 3rd Urgent
Ex-Parte Motion for the Issuance of a Temporary Restraining Order was denied by this
Court
for
lack
of
merit.
On April 3, 2009, LANECO learned that the PGLN, through its Provincial Treasurer,
issued a Memorandum dated March 30, 2009, directing the Municipal Treasurers of
Baroy, Kolambugan, Bacolod, Kapatagan, Magsaysay, Maigo, Lala, and Tubod to issue
warrants of levy on its properties thereat.25 Consequently, on April 7, 2009, LANECO
received the warrants of levy from the Municipality of Tubod for deficient real property tax
amounting to P10,066,234.48. LANECO thereafter received warrants of levy of its real
property from the Municipality of Baroy on April 17, 2009 for deficient real property tax
amounting
to
P3,260,452.58.
Thus, on August 14, 2009, LANECO filed yet another Petition26 for Prohibition with prayer
for the issuance of a TRO and/or preliminary prohibitory injunction against the PLGN,
including the Provincial Treasurer and its deputized municipal treasurers, with the RTC
of Tubod, Branch 7. Docketed as Special Civil Case No. 015-07-2009, LANECO prayed
for the annulment of the provisions imposing real property tax in the Provincial
Revenue Code, and for the court to prohibit the PGLN from continuously
implementing the real property tax provisions of the Provincial Revenue Code, and
collecting
real
property
tax
from
it.
In a Decision27 dated May 11, 2010, the trial court in Special Civil Case No. 012-072008 declared the Provincial Revenue Code invalid, unconstitutional, and
ineffective:chanRoblesvirtualLawlibrary
WHEREFORE, in the light of the foregoing consideration, and the evidence of petitioner
preponderates on its side, by application of pertinent laws and jurisprudence, the Court
Orders the 1993 Provincial Revenue Code of Lanao del Norte, as invalid, unconstitutional,
non-existing. The Court issues a permanent injunction against the respondents Local
Government of Lanao del Norte and [Provincial] Treasurer in assessment, imposition, and
collection
of
the
franchise
tax
against
petitioner.
SO ORDERED.28
On the other hand, in a Decision29 promulgated on May 17, 2010, the RTC
resolved Special Civil Case No. 015-07-2009 in favor of LANECO in this
wise:chanRoblesvirtualLawlibrary
WHEREFORE, in the light of the foregoing consideration, and by preponderance of
evidence in favor of petitioner, the Court renders judgment directing the respondent Office
of Provincial Treasurer of Lanao del Norte, at the instance of the incumbent Provincial
Treasurer, Mildred J. Hingco, her deputized municipal treasurers in Lanao del Norte, and
respondent Office of Provincial Assessor of Lanao del Norte, and respondent Office of
Provincial Assessor of Lanao del Norte, through Rogelio Aguaviva, Provincial Assessor,
and his deputized municipal assessors, to cease and desist in the furtherance of the
assessment, imposition and collection of the real property taxes vis-[a]-vis petitioner on
the ground that on May 11, 2010, this Court, in the action for [Declaratory] Relief, Special
Civil Case No. 012-07-2008 ,[ ]declared as invalid, and unconstitutional and ineffective
the 1993 Revenue Code of Lanao del Norte, of which the provisions of collection,
imposition and assessment of real property taxes are found therein.
The Court also cancels the warrants of levy issued by the respondent Office of the
Provincial Treasurer of Lanao del Norte, as well as the annotations of the levy on the tax
declarations and certificates of titles (sic) of the levied real properties, by respondent
Office of Provincial Assessor of Lanao del Norte and its deputized municipal assessors
in the same province and the Register of Deeds of Lanao del Norte. The preliminary
prohibitory injunction issued by the Court on September 3, [2009], is ordered declared
permanent
injunction
(sic).
No
costs
to
the
proceedings.
SO ORDERED.30
The ruling was arrived at in view of the declaration in Special Civil Case No. 012-07-2008
that the Provincial Revenue Code is invalid and unconstitutional. Consequently, the court
ordered the cancellation of the warrants of levy issued against LANECO and directed the
Provincial Treasurer and her deputized municipal treasurers, the Provincial Assessor, and
his assessors, to cease and desist from assessing, imposing, and collecting real property
taxes
on
LANECO.
On January 10, 2011, the PGLN filed a Manifestation and Motion, 31 informing this Court
that LANECO filed a Petition for Declaratory Relief and Injunction, 32 with prayer for the
issuance of a writ of preliminary prohibitory injunction, before the RTC of Tubod, Branch
7, docketed as Special Civil Case No. 020-07-2010. This petition questions Provincial
Ordinance No. 001-2006, otherwise known as "An Ordinance Enacting the Provincial
Revenue Code of Lanao del Norte of 2006," on the ground that the said tax ordinance is
unconstitutional, invalid, and ineffective for failure to comply with the required public
hearings,
consultations,
and
publication.
To date, the Court is only apprised of the pendency of three other cases between the
parties: 1) Special Civil Case No. 012-07-2008, 2) Special Civil Case No. 015-07-2009,
and c) Special Civil Case No. 020-07-2010. The PGLN manifested that Special Civil Case
Nos. 012-07-2008 and 015-07-2009 are still pending appeal before the CA as of January
10,
Respondents'
2011.
comments
to
the
petition
Pursuant to this Court's directive in its Resolution dated December 16, 2008, respondents
filed
their
respective
comments
to
the
petition.
Respondents NEA, DOE, and COA filed a consolidated Comment, alleging that LANECO
is guilty of forum shopping for filing several petitions before the RTC, aside from the
present petition, which all raised similar issues pertaining to the validity of the Provincial
Revenue Code of the PGLN. They reject LANECO's argument that the non-impairment
clause of the Constitution was violated with the imposition of real property taxes on it by
the PGLN. They also assert that LANECO failed to exhaust available administrative
remedies when it directly resorted to filing the present petition before this Court instead
of filing the correct petition before the ERC. Nevertheless, they implore this Court to
exercise caution so as not to defeat the state policies under Presidential Decree No. (PD)
269, R.A. No. 9136, EO 119, and their respective implementing rules and regulations. 33
In their Comment, the PGLN and its officers denied the allegations in the petition, stating
that their actions do not contradict the policies of the National Government since they are
merely employing the administrative remedy of levy of real properties under Section 256
of the LGC. They also assert that LANECO is not without any remedy since it may still
redeem the properties by remitting payment of the real property taxes due. They argue
that the levy was only limited to LANECO's delinquent properties. 34
The PGLN and its officers also claim that Section 60 of R.A. No. 9136 is inapplicable to
unpaid real property taxes since it merely refers to financial obligations in form of debts
of electric cooperatives to NEA and other government agencies. Moreover, they assert
that the levy does not automatically transfer ownership of the subject properties. Finally,
they maintain that LANECO violated the rule on forum shopping for filing the present
petition
and
other
cases
before
the
RTC.
As for the comment of respondent PSALM, it agreed with LANECO that the warrant of
levy issued by the PGLN should be quashed on the ground that it emanated from an
invalid assessment since LANECO was not informed in writing of the law and the facts
upon which the tax assessment was made. It also claims that the first lien of the National
Government, through the NEA, prevails over the local government's levy. 35
Subsequently, LANECO filed a Reply and Manifestation (with Leave of Court) 36 dated
March 12, 2009 and a Consolidated Reply37 dated March 16, 2010, essentially refuting
the allegations made by respondents in their respective memoranda, wherein they each
reiterated their positions.
The Issues
The parties, in the main, raise the following issues for the resolution of this Court:
1. Whether or not the filing of the instant petition constitutes forum shopping;
2. Whether or not the rule on exhaustion of administrative remedy applies;
3. Whether or not the PGLN gravely abused its discretion when it levied on the real
properties of LANECO to enforce payment of unpaid real property taxes, in violation of
Section
60
of
R.A.
No.
9136
and
EO
119;
and
4. Whether or not the PGLN would commit grave abuse of discretion amounting to lack
or excess of jurisdiction if it proceeds to auction the delinquent real properties of LANECO.
The Court's Ruling
At the outset, We note that the petition is replete with procedural infirmities that would
warrant
the
outright
dismissal
of
the
case.
Violation
of
the
principle
of
hierarchy
of
courts
It is an established rule that while this Court, the CA and the Regional Trial Courts
exercise concurrent jurisdiction to issue writs of certiorari, prohibition, mandamus, quo
warranto, habeas corpus and injunction, such concurrence in jurisdiction does not give
petitioners unbridled freedom of choice of court forum.38 In Belmonte v. Office of the
Deputy Ombudsman for the Military and other Law Enforcement Offices, Office of the
Ombudsman,39 the Court had the occasion to explain the rationale behind this
rule:chanRoblesvirtualLawlibrary
Even in the absence of such provision, the petition is also dismissible because it simply
ignored the doctrine of hierarchy of courts. True, the Court, the CA and the RTC have
original concurrent jurisdiction to issue writs of certiorari, prohibition and
mandamus. The concurrence of jurisdiction, however, does not grant the party
seeking any of the extraordinary writs the absolute freedom to file a petition in any
court of his choice. The petitioner has not advanced any special or important
reason which would allow a direct resort to this Court. Under the Rules of Court, a
party may directly appeal to this Court only on pure questions of law. In the case at bench,
there are certainly factual issues as Vivas is questioning the findings of the investigating
team.
Strict observance of the policy of judicial hierarchy demands that where the
issuance of the extraordinary writs is also within the competence of the CA or the
RTC, the special action for the obtainment of such writ must be presented to either
court. As a rule, the Court will not entertain direct resort to it unless the redress desired
cannot be obtained in the appropriate lower courts; or where exceptional and compelling
circumstances, such as cases of national interest and with serious implications, justify the
availment of the extraordinary remedy of writ of certiorari, prohibition, or mandamus
calling for the exercise of its primary jurisdiction. The judicial policy must be observed to
prevent an imposition on the precious time and attention of the Court.40 (Emphasis in the
original)
Accordingly, a direct invocation of the Supreme Court's original jurisdiction to issue these
writs should be allowed only when there are special and important reasons therefor,
clearly and specifically set out in the petition. This is an established policy necessary to
prevent inordinate demands upon the Court's time and attention which are better devoted
to those matters within its exclusive jurisdiction, and to prevent further overcrowding of
the Court's docket.41 These exceptional circumstances, as will be shown hereunder, do
not
obtain
in
the
extant
case.
For one, LANECO's proffered justifications of its direct resort to this Court - that the same
was warranted under Section 7842 of R.A. No. 9163, and that it is the most speedy and
adequate remedy available to it - do not persuade. While Section 78, indeed, vests the
Supreme Court with authority to restrain or enjoin the implementation of the provisions of
the law, it does not necessarily mean that all cases involving electric cooperatives should
be filed thereat. Certainly, this case does not involve questions on the implementation of
R.A.
No.
9136,
which
makes
Section
78
thereof
inapplicable.
As for the claim that direct resort to this Court is the most speedy and adequate remedy
available to the LANECO, the same is belied by the fact that LANECO had previously
filed several cases before the RTC, questioning the PGLN's right to assess it with both
real property and franchise taxes. LANECO's act of filing these cases before the RTC
betrays its cognizance of the RTC's power to settle questions regarding the rights of local
government units to impose and collect real property tax from electric cooperatives.
LANECO
is
guilty
of
forum
shopping
Forum shopping is the act of a litigant who repetitively availed of several judicial remedies
in different courts, simultaneously or successively, all substantially founded on the same
transactions and the same essential facts and circumstances, and all raising substantially
the same issues, either pending in or already resolved adversely by some other court, to
increase his chances of obtaining a favorable decision if not in one court, then in
another.43 It can be committed in tliree ways: (1) by filing multiple cases based on the
same cause of action and with the same prayer, the previous case not having been
resolved yet (where the ground for dismissal is litis pendentia); (2) by filing multiple cases
based on the same cause of action and the same prayer, the previous case having been
finally resolved (where the ground for dismissal is res judicata); and (3) by filing multiple
cases based on the same cause of action, but with different prayers (splitting
causes of action, where the ground for dismissal is also either litis pendentia or res
judicata)44 If the forum shopping is not willful and deliberate, the subsequent cases shall
be dismissed without prejudice on one of the two grounds mentioned above. But if the
forum shopping is willful and deliberate, both (or all, if there are more than two)
actions
shall
be
dismissed
with
prejudice.45
The test to determine the existence of forum shopping is whether the elements of litis
pendentia are present, or whether a final judgment in one case amounts to res judicata in
the other. Thus, there is forum shopping when the following elements are present,
namely: (a) identity of parties, or at least such parties as represent the same interests in
both actions; (b) identity of rights asserted and reliefs prayed for, the relief being founded
on the same facts; and (c) the identity of the two preceding particulars, such that any
judgment rendered in the other action will, regardless of which party is successful, amount
to res
judicata in
the
action
under
consideration.
Herein, LANECO argues that it did not commit forum shopping since the case before Us
prays for the issuance of a writ of prohibition against the PGLN for levying on its real
properties due to the deficient real property taxes assessed against it, while Special Civil
Case No. 015-07-2009 allegedly prays for the prohibition on the part of the PGLN from
continuously implementing the real property tax provisions of its Provincial Revenue Code
and,
concomitantly,
from
collecting
real
property
taxes
from
it.
This
argument
is
utterly
bereft
of
merit.
There is no dispute that there is identity of parties, subject matter, and reliefs prayed for
between the present petition and Special Civil Case No. 015-07-2009. Similar to Special
Civil Case No. 015-07-2009, LANECO questions before Us the propriety of the
assessment for real property tax against it. Ineluctably, LANECO bases its claims in both
cases on a single cause of action: that the PGLN has no authority to assess and collect
from it, and conversely, LANECO had no obligation to pay real property tax to the PGLN.
The similarities in the reliefs prayed for herein and in Special Civil Case No. 015-07-2009
are likewise clearly evident. In Special Civil Case No. 015-07-2009, LANECO prayed to
enjoin the Provincial and Municipal Treasurers of the PGLN from assessing and collecting
real property tax from it and to annul the real property tax provisions of the Provincial
Revenue Code. Notably, the trial court, in Special Civil Case No. 015-07-2009, issued a
permanent injunction a) directing the Provincial Treasurer to cease and desist in
assessing, imposing, and collecting real property taxes from LANECO, and b) cancelling
the warrants of levy issued and the annotations of the levy made on the tax declarations
and certificates of title of its properties. Meanwhile, in the present case, LANECO prayed
for the annulment of the PGLN's assessment, demand letter, notice of publication, and
auction of the machineries, equipment, buildings and infrastructure for allegedly violating
LANECO's right to due process in failing to furnish it with a copy of the Provincial Revenue
Code. The Court is now being asked to grant substantially similar reliefs as those that
have already been granted by the trial court, creating the possibility of conflicting
decisions.
Without a doubt, LANECO is guilty of forum shopping. Its deliberate act of filing multiple
cases before several fora is clearly intended to secure a positive outcome in its favor.
This intention is made all the more evident by LANECO's subsequent filing of Special
Civil Case No. 015-07-2009, after this Court had not immediately issued a preliminary
prohibitory
injunction
or
TRO
in
its
favor.
The Provincial Government of Lanao del Norte did not commit grave abuse of
discretion
in
levying
on
the
real
properties
of
LANECO
While LANECO does not dispute its liability to the PGLN for real property tax, it
nevertheless advances that its properties cannot be the subject of an administrative
action thru levy pursuant to Section 60 of R.A. No. 9136, which purportedly prohibits
electric cooperatives from disposing, transferring, and conveying its assets and properties
within the period of the rehabilitation and modernization program. In support of its
position, LANECO refers to Sections 1 to 5, Rule 31 of the Implementing Rules and
Regulations (TRR) of R.A. No. 9136, as well as the pertinent provisions of EO 119. These
provisions respectively state:chanRoblesvirtualLawlibrary
Section 60. Debts of Electric Cooperatives. - Upon the effectivity of this Act, all
outstanding financial obligations of electric cooperatives to NEA and other government
agencies incurred for the purpose of financing the rural electrification program shall be
assumed by the PSALM Corp. The ERC shall ensure a reduction in the rates of electric
cooperatives commensurate with the resulting savings due to the removal of the
amortization payments of their loans. Within five (5) years from the condonation of debt,
any electric cooperative which shall transfer ownership or control of its assets, franchise
or operations thereof shall repay PSALM Corp. the total debts including accrued interests
thereon.
xxxx
RULE
31.
DEBTS
Section
OF
ELECTRIC
1.
COOPERATIVES
Guiding
(ECs)
Principle.
Pursuant to Section 60 of the Act, all outstanding financial obligations of ECs to NEA and
other government agencies incurred for the purpose of financing the Rural Electrification
Program shall be assumed by the PSALM in accordance with the program approved by
the
President
of
the
Philippines.
Section
2.
Scope.
This Rule shall cover all outstanding financial obligations by the ECs to NEA and other
government agencies, incurred as of 26 June 2001 for the purpose of financing the Rural
Electrification Program. Financial obligation shall refer to the indebtedness, whether
through regular or restructured loans, liabilities, or amounts payable by the ECs to NEA
and other government agencies as of 26 June 2001, to finance their rural electrification
projects, subject to the terms and conditions of duly-executed loan and mortgage
contracts between NEA and/or other government agencies, as creditors and the ECs, as
debtors/borrowers.
Section
3.
Condonation
of
Debts
of
ECs.
From the effectivity of the Act, all outstanding financial obligations of ECs to NEA and
other government agencies incurred for the purpose of financing the Rural Electrification
Program shall be assumed by the PSALM in accordance with the program approved by
the President of the Philippines within one (1) year from the effectivity of the Act which
shall be implemented and completed within three (3) years from the effectivity of the Act.
These debts shall include all outstanding financial obligations incurred by the ECs for the
purpose of financing the Rural Electrification Program, exclusively utilized for capital
expenditures for the acquisition or construction, operation and maintenance, and/or
expansion and rehabilitation of distribution, generation and Subtransmission
Assets/facilities and pre-operating expenses for newly-established ECs: Provided,
however, That such outstanding financial obligations shall include interest, surcharges
and penalties on ECs' Rural Electrification Loans, released from NEA and other
government agencies to ECs as of 26 June 2001; duly booked by NEA, validated by CO
A,
and
confirmed
by
the
ECs.
Section
4.
Assumption
of
EC
Loans
by
PSALM.
PSALM shall assume all outstanding financial obligations of the ECs to NEA and other
government agencies incurred for the purpose of financing the Rural Electrification
Program; such outstanding financial obligations of the ECs involving "Rural Electrification
Loans" shall be determined in accordance with the program approved by the President of
the Philippines. Correspondingly, having assumed the ECs' obligations, the PSALM shall
repay NEA and the other government agencies, in accordance with a prescribed
amortization
schedule
agreed
between
the
parties.
The outstanding financial obligations from other government agencies referred to in
Section 60 of the Act shall include loans contracted from the following: x x x
Provided, however, That such loans were contracted in accordance with NEA policies
and with prior NEA authorization, except for loans transferred to APT, now PMO.
Section 5. Transfer of Ownership or Control of Assets, Franchise or Operation.
Within five (5) years from the completed Condonation of debt, any EC which shall transfer
ownership or Control of its assets, franchise or operations shall repay PSALM the total
debts, including accrued interest thereon: Provided, however, That the ECs may enter
into loan or financing agreements to allow flexibility in sourcing funds and improvement
and management system for needed rehabilitation and modernization programs:
Provided, further, That it does not involve permanent transfer or Control of the assets,
franchise and operations: Provided, finally, That DOF and NEA shall jointly issue the
necessary guidelines to protect the member-consumers of the ECs involved.
x
EXECUTIVE
RESTRUCTURING
x
x
ORDER
PROGRAM
FOR
x
NO.
119
ELECTRIC
COOPERATIVES
xxxx
SECTION 2. COVERAGE. As specified under Section 60 of EPIRA, the Program for
PSALM to assume the outstanding financial obligations incurred by ECs covers only
those obligations incurred for the purpose of financing the Rural Electrification Program.
The Implementing Rules and Regulations of EPIRA, as approved by JCPC and
promulgated by DOE, defines "Financing for Rural Electrification" as referring to loans
and grants extended to ECs, for the construction or acquisition, operation and
maintenance of distribution, generation, and subtransmission facilities for the purpose of
supplying electric service, and those loans for the restoration, upgrading and expansion
of such facilities, in areas which are considered rural at the time of the grant of such loans
(hereinafter
referred
to
as
"Rural
Electrification
Loans").
Thus,
the
Program
shall
comprise
the
following:
a. Financial, institutional, technical and managerial restructuring of ECs, pursuant to
Section
58
of
EPIRA;
b. Assumption by PSALM of Rural Electrification Loans, pursuant to Section 60 of EPIRA;
c. Amortization of payments to NEA and/or other government creditor agencies for Rural
Electrification Loans assumed by PSALM, pursuant to Section 60 of EPIRA; and
d. Reorganization of NEA to enable it to perform its additional mandates under Section
58 of EPIRA, and in accordance with Section 5(a)(5) of Presidential Decree No. 269, as
amended by Presidential Decree No. 1645.
xxxx
SECTION 7. ASSUMPTION AND PAYMENT BY PSALM OF RURAL
ELECTRIFICATION LOANS. Pursuant to Section 60 of EPIRA, PSALM shall assume all
Rural Electrification Loans upon compliance by the concerned EC with Section 5 of this
Executive Order, and thereupon, such EC shall cease to be a debtor of NEA or of other
creditor
government
agencies.
Thereafter, PSALM and NEA or other creditor government agencies shall enter into
contracts and/or agreements, necessary and proper, to undertake the payment of the
assumed Rural Electrification Loans through an amortization schedule to be agreed upon
between PSALM on the one hand, and NEA or other creditor government agencies, on
the other. Where necessary, such contracts and/or agreements may include mutual
stipulations on the modification and/or amendments of existing contracts of mortgage and
other security between ECs and NEA or other creditor government agencies. Provided,
however, That any such contracts of mortgage and other security with respect to the Rural
Electrification Loans assumed by PSALM shall not be released by NEA and/or other
creditor government agencies without the written consent of PSALM. (Emphases
supplied)
xxxx
LANECO additionally cites certain provisions of a Contract dated October 3, 2003
executed between NEA and PSALM, which purportedly establishes the obligation of
PSALM to assume the financial obligations of electric cooperatives to the NEA which had
been incurred to finance rural electrification programs. Based on these suppositions,
LANECO posits that the prohibition imposed on electric cooperatives to dispose of its
assets "extends to Local Government Units in enforcing collection of real property tax by
way
of
Administrative
Action
through
levy
on
property."46
This
conclusion
finds
no
support
in
law.
Contrary to LANECO's stand, the provisions of law cited do not prohibit local government
units from resorting to the administrative remedy of levy on real property. Nothing in the
aforecited provisions withdrew the remedy of tax collection by administrative action from
the LGUs. Instead, these provisions merely ascribe limitations on, and lay down the
consequences of, any voluntary transfer and disposition of assets by the electric
cooperatives themselves. They do not limit the LGUs' remedies against electric
cooperatives to judicial actions in collecting real property taxes. To adopt LANECO's
position would be reading into the clear provisions of R.A. No. 9136 more than what it
actually provides. The elementary rule in statutory construction is that if a statute is clear,
plain and free from ambiguity, it must be given its literal meaning and applied without
attempted
interpretation.47
Furthermore, LANECO failed to establish how the administrative remedy of levy on real
properties will impair the rights of NEA and PSALM. Instead, it merely reiterated its
argument that R.A. No. 9136 prohibits the disposition of its assets and properties during
the period of rehabilitation and modernization program. In fact, it failed to differentiate
how exclusive resort to judicial action as opposed to the administrative remedy of levy
would be a better option to preserve the rights of NEA and PSALM. It is the option of the
LGU
to
choose
which
remedy
to
avail.
We likewise do not find merit in LANECO's argument that the levy caused by the PGLN
upon its real properties impairs the government contracts entered into by NEA and
PSALM and violates the constitutional right of national agencies to enter into a contract.
These issues have been similarly raised, and resolved, before this Court in Philippine
Rural Electric Cooperatives Association, Inc. (PHILRECA) v. The Secretary, Department
of Interior and Local Government, and the Secretary, Department of
Finance:chanRoblesvirtualLawlibrary
It is ingrained in jurisprudence that the constitutional prohibition on the impairment of the
obligation of contracts does not prohibit every change in existing laws. To fall within the
prohibition, the change must not only impair the obligation of the existing contract, but the
impairment must be substantial. What constitutes substantial impairment was explained
by this Court in Clemons v. Noting:chanRoblesvirtualLawlibrary
A law which changes the terms of a legal contract between parties, either in the time or
mode of performance, or imposes new conditions, or dispenses with those expressed, or
authorizes for its satisfaction something different from that provided in its terms, is law
which impairs the obligation of a contract and is therefore null and void.
Moreover, to constitute impairment, the law must affect a change in the rights of the
parties with reference to each other and not with respect to nonparties.48 (Emphasis and underscoring supplied)
It bears to stress that, regardless of whether the mortgages constituted on LANECO's
properties constitute as lien thereon, these cannot defeat the right of the PGLN to make
those properties answerable for delinquent real property taxes, since local government
taxes serve as superior lien over the property subject of the tax, as clearly laid out in
Section 257 of the LGC:chanRoblesvirtualLawlibrary
SECTION 257. Local Governments Lien. - The basic real property tax and any other tax
levied under this Title constitutes a lien on the property subject to tax, superior to all liens,
charges or encumbrances in favor of any person, irrespective of the owner or possessor
thereof, enforceable by administrative or judicial action, and may only be extinguished
upon payment of the tax and the related interests and expenses.
The PGLN, therefore, is well within its right to assess LANECO with real property taxes,
and to exercise its remedies under Section 256 49 of the LGC for the collection thereof,
including by administrative action thru levy on its real properties. Accordingly, We find no
cogent reason to rule that the PGLN committed grave abuse of discretion in resorting to
the administrative remedy of levy as to warrant the issuance of a writ of prohibition.
IN VIEW OF THE FOREGOING, the petition is DISMISSED for lack of merit.
SO ORDERED.
EN BANC
G.R. No. 198146, August 08, 2017
POWER
SECTOR
ASSETS
AND
CORPORATION, Petitioner, v. COMMISSIONER
LIABILITIES
MANAGEMENT
OF
INTERNAL, Respondent.
DECISION
CARPIO, J.:
The Case
This petition for review1 assails the 27 September 2010 Decision2 and the 3 August 2011
Resolution3 of the Court of Appeals in CA-G.R. SP No. 108156. The Court of Appeals
nullified the Decisions dated 13 March 2008 and 14 January 2009 of the Secretary of
Justice in OSJ Case No. 2007-3 for lack of jurisdiction.
The Facts
Petitioner Power Sector Assets and Liabilities Management Corporation (PSALM) is a
government-owned and controlled corporation created under Republic Act No. 9136 (RA
9136), also known as the Electric Power Industry Reform Act of 2001 (EPIRA). 4 Section
50 of RA 9136 states that the principal purpose of PSALM is to manage the orderly sale,
disposition, and privatization of the National Power Corporation (NPC) generation assets,
real estate and other disposable assets, and Independent Power Producer (IPP)
contracts with the objective of liquidating all NPC financial obligations and stranded
contract costs in an optimal manner.
PSALM conducted public biddings for the privatization of the Pantabangan-Masiway
Hydroelectric Power Plant (Pantabangan-Masiway Plant) and Magat Hydroelectric Power
Plant (Magat Plant) on 8 September 2006 and 14 December 2006, respectively. First Gen
Hydropower Corporation with its $129 Million bid and SN Aboitiz Power Corporation with
its $530 Million bid were the winning bidders for the Pantabangan-Masiway Plant and
Magat Plant, respectively.
On 28 August 2007, the NPC received a letter5 dated 14 August 2007 from the Bureau of
Internal Revenue (BIR) demanding immediate payment of P3,813,080,472 6 deficiency
value-added tax (VAT) for the sale of the Pantabangan-Masiway Plant and Magat Plant.
The NPC indorsed BIR's demand letter to PSALM.
On 30 August 2007, the BIR, NPC, and PSALM executed a Memorandum of Agreement
(MOA),7 wherein they agreed that:
A) NPC/PSALM shall remit under protest to the BIR the amount of Php 3,813,080,472.00,
representing basic VAT as shown in the BIR letter dated August 14, 2007, upon execution
of this Memorandum of Agreement (MOA).
B) This remittance shall be without prejudice to the outcome of the resolution of the Issues
before the appropriate courts or body.
C) NPC/PSALM and BIR mutually undertake to seek final resolution of the Issues by the
appropriate courts or body.
D) BIR shall waive any and all interests and surcharges on the aforesaid BIR letter, except
when the case is elevated by the BIR before an appellate court.
E) Nothing contained in this MOA shall be claimed or construed to be an admission
against interest as to any party or evidence of any liability or wrongdoing whatsoever nor
an abandonment of any position taken by NPC/PSALM in connection with the Issues.
F) Each Party to this MOA hereto expressly represents that the authorized signatory
hereto has the legal authority to bind [the] party to all the terms of this MOA.
G) Any resolution by the appropriate courts or body in favor of the BIR, other than a
decision by the Supreme Court, shall not constitute as precedent and sufficient legal basis
as to the taxability of NPC/PSALM's transactions pursuant to the privatization of NPC's
assets as mandated by the EPIRA Law.
H) Any resolution in favor of NPC/PSALM by any appropriate court or body shall be
immediately executory without necessity of notice or demand from NPC/PSALM. A ruling
from the Department of Justice (DOJ) that is favorable to NPC/PSALM shall be
tantamount to the filing of an application for refund (in cash)/tax credit certificate (TCC),
at the option of NPC/PSALM. BIR undertakes to immediately process and approve the
application, and release the tax refund/TCC within fifteen (15) working days from issuance
of the DOJ ruling that is favorable to NPC/PSALM.
I) Either party has the right to appeal any adverse decision against it before any
appropriate court or body.
J) In the event of failure by the BIR to fulfill the undertaking referred to in (H) above,
NPC/PSALM shall assign to DOF its right to the refund of the subject remittance, and the
DOF shall offset such amount against any liability of NPC/PSALM to the National
Government pursuant to the objectives of the EPIRA on the application of the privatization
proceeds.8 In compliance with the MOA, PSALM remitted under protest to the BIR the
amount of P3,813,080,472, representing the total basic VAT due.
On 21 September 2007, PSALM filed with the Department of Justice (DOJ) a petition for
the adjudication of the dispute with the BIR to resolve the issue of whether the sale of the
power plants should be subject to VAT. The case was docketed as OSJ Case No. 20073.
On 13 March 2008, the DOJ ruled in favor of PSALM, thus:
In cases involving purely question[s] of law, such as in the instant case, between and
among the government-owned and controlled corporation and government bureau, the
issue is best settled in this Department. In the final analysis, there is but one party in
interest, the Government itself in this litigation.
xxxx
The instant petition is an original petition involving only [a] question of law on whether or
not the sale of the Pantabangan-Masiway and Magat Power Plants to private entities
under the mandate of the EPIRA is subject to VAT. It is to be stressed that this is not an
appeal from the decision of the Commissioner of Internal Revenue involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, or other matters
arising under the National Internal Revenue Code or other law.
xxxx
Moreover, it must be noted that respondent already invoked this Office's jurisdiction over
it by praying in respondent's Motion for Extension of Time to File Comment (On
Petitioner's Petition dated 21 September 2007) and later, Omnibus Motion To Lift Order
dated 22 October 2007 and To Admit Attached Comment. The Court has held that the
filing of motions seeking affirmative relief, such as, to admit answer, for additional time to
answer, for reconsideration of a default judgment, and to lift order of default with motion
for reconsideration, are considered voluntary submission to the jurisdiction of the court.
Having sought this Office to grant extension of time to file answer or comment to the
instant petition, thereby submitting to the jurisdiction of this Court [sic], respondent cannot
now repudiate the very same authority it sought.
xxxx
When petitioner was created under Section 49 of R.A. No. 9136, for the principal purpose
to manage the orderly sale, disposition, and privatization of NPC generation assets, real
estate and other disposable assets, IPP contracts with the objective of liquidating all NPC
financial obligations and stranded contract costs in an optimal manner, there was, by
operation of law, the transfer of ownership of NPC assets. Such transfer of ownership
was not carried out in the ordinary course of transfer which must be accorded with the
required elements present for a valid transfer, but in this case, in accordance with the
mandate of the law, that is, EPIRA. Thus, respondent cannot assert that it was NPC who
was the actual seller of the Pantabangan-Masiway and Magat Power Plants, because at
the time of selling the aforesaid power plants, the owner then was already the petitioner
and not the NPC. Consequently, petitioner cannot also be considered a successor-ininterest of NPC.
Since it was petitioner who sold the Pantabangan-Masiway and Magat Power Plants and
not the NPC, through a competitive and public bidding to the private entities, Section
24(A) of R.A. No. 9337 cannot be applied to the instant case. Neither the grant of
exemption and revocation of the tax exemption accorded to the NPC, be also affected to
petitioner.
xxxx
Clearly, the disposition of Pantabangan-Masiway and Magat Power Plants was not in the
regular conduct or pursuit of a commercial or an economic activity, but was effected by
the mandate of the EPIRA upon petitioner to direct the orderly sale, disposition, and
privatization of NPC generation assets, real estate and other disposable assets, and IPP
contracts, and afterward, to liquidate the outstanding obligations of the NPC.
xxxx
Verily, to subject the sale of generation assets in accordance with a privatization plan
submitted to and approved by the President, which is a one time sale, to VAT would run
counter to the purpose of obtaining optimal proceeds since potential bidders would
necessarily have to take into account such extra cost of VAT.
WHEREFORE, premises considered, the imposition by respondent Bureau of Internal
Revenue of deficiency Value-Added Tax in the amount of P3,813,080,472.00 on the
privatization sale of the Pantabangan-Masiway and Magat Power Plants, done in
accordance with the mandate of the Electric Power Industry Reform Act of 2001, is hereby
declared NULL and VOID. Respondent is directed to refund the amount of
P3,813,080,472.00 remitted under protest by petitioner to respondent.9
The BIR moved for reconsideration, alleging that the DOJ had no jurisdiction since the
dispute involved tax laws administered by the BIR and therefore within the jurisdiction of
the Court of Tax Appeals (CTA). Furthermore, the BIR stated that the sale of the subject
power plants by PSALM to private entities is in the course of trade or business, as
contemplated under Section 105 of the National Internal Revenue Code (NIRC) of 1997,
which covers incidental transactions. Thus, the sale is subject to VAT. On 14 January
2009, the DOJ denied BIR's Motion for Reconsideration.10
On 7 April 2009,11 the BIR Commissioner (Commissioner of Internal Revenue) filed with
the Court of Appeals a petition for certiorari, seeking to set aside the DOJ's decision for
lack of jurisdiction. In a Resolution dated 23 April 2009, the Court of Appeals dismissed
the petition for failure to attach the relevant pleadings and documents. 12 Upon motion for
reconsideration, the Court of Appeals reinstated the petition in its Resolution dated 10
July 2009.13
The Ruling of the Court of Appeals
The Court of Appeals held that the petition filed by PSALM with the DOJ was really a
protest against the assessment of deficiency VAT, which under Section 204 14 of the NIRC
of 1997 is within the authority of the Commissioner of Internal Revenue (CIR) to resolve.
In fact, PSALM's objective in filing the petition was to recover the P3,813,080,472 VAT
which was allegedly assessed erroneously and which PSALM paid under protest to the
BIR.
Quoting paragraph H15 of the MOA among the BIR, NPC, and PSALM, the Court of
Appeals stated that the parties in effect agreed to consider a DOJ ruling favorable to
PSALM as the latter's application for refund.
Citing Section 416 of the NIRC of 1997, as amended by Section 3 of Republic Act No.
8424 (RA 8424)17 and Section 718 of Republic Act No. 9282 (RA 9282),19 the Court of
Appeals ruled that the CIR is the proper body to resolve cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed
in relation thereto, or other matters arising under the NIRC or other laws administered by
the BIR. The Court of Appeals stressed that jurisdiction is conferred by law or by the
Constitution; the parties, such as in this case, cannot agree or stipulate on it by conferring
jurisdiction in a body that has none. Jurisdiction over the person can be waived but not
the jurisdiction over the subject matter which is neither subject to agreement nor conferred
by consent of the parties. The Court of Appeals held that the DOJ Secretary erred in ruling
that the CIR is estopped from assailing the jurisdiction of the DOJ after having agreed to
submit to its jurisdiction. As a general rule, estoppel does not confer jurisdiction over a
cause of action to a tribunal where none, by law, exists.
In conclusion, the Court of Appeals found that the DOJ Secretary gravely abused his
discretion amounting to lack of jurisdiction when he assumed jurisdiction over OSJ Case
No. 2007-3. The dispositive portion of the Court of Appeals' 27 September 2010 Decision
reads:
WHEREFORE, premises considered, we hereby GRANT the petition. Accordingly: (1) the
[D]ecision dated March 13, 2008, and the Decision dated January 14, 2009 both issued
by the public respondent Secretary of Justice in [OSJ Case No.] 2007-3 are declared
NULL and VOID for having been issued without jurisdiction.
No costs.
SO ORDERED.20
PSALM moved for reconsideration, which the Court of Appeals denied in its 3 August
2011 Resolution. Hence, this petition.
The Issues
Petitioner PSALM raises the following issues:
I. DID THE COURT OF APPEALS MISAPPLY THE LAW IN GIVING DUE COURSE TO
THE PETITION FOR CERTIORARI IN CA-G.R. SP NO. 108156?
II. DID THE SECRETARY OF JUSTICE ACT IN ACCORDANCE WITH THE LAW IN
ASSUMING JURISDICTION AND SETTLING THE DISPUTE BY AND BETWEEN THE
BIR AND PSALM?
III. DID THE SECRETARY OF JUSTICE ACT IN ACCORDANCE WITH THE LAW AND
JURISPRUDENCE IN RENDERING JUDGMENT THAT THERE SHOULD BE NO VAT
ON THE PRIVATIZATION, SALE OR DISPOSAL OF GENERATION ASSETS?
IV. DOES PUBLIC RESPONDENT DESERVE THE RELIEF OF CERTIORARI?21
The Ruling of the Court
We find the petition meritorious.
I. Whether the Secretary of Justice has jurisdiction over the case.
The primary issue in this case is whether the DOJ Secretary has jurisdiction over OSJ
Case No. 2007-3 which involves the resolution of whether the sale of the PantabanganMasiway Plant and Magat Plant is subject to VAT.
We agree with the Court of Appeals that jurisdiction over the subject matter is vested by
the Constitution or by law, and not by the parties to an action. 22 Jurisdiction cannot be
conferred by consent or acquiescence of the parties23 or by erroneous belief of the court,
quasi-judicial office or government agency that it exists.
However, contrary to the ruling of the Court of Appeals, we find that the DOJ is vested by
law with jurisdiction over this case. This case involves a dispute between PSALM and
NPC, which are both wholly government- owned corporations, and the BIR, a
government office, over the imposition of VAT on the sale of the two power plants.
There is no question that original jurisdiction is with the CIR, who issues the preliminary
and the final tax assessments. However, if the government entity disputes the tax
assessment, the dispute is already between the BIR (represented by the CIR) and
another government entity, in this case, the petitioner PSALM. Under Presidential
Decree No. 24224(PD 242), all disputes and claims solely between government
agencies and offices, including government-owned or controlled corporations,
shall be administratively settled or adjudicated by the Secretary of Justice, the
Solicitor General, or the Government Corporate Counsel, depending on the issues
and government agencies involved. As regards cases involving only questions of law,
it is the Secretary of Justice who has jurisdiction. Sections 1, 2, and 3 of PD 242 read:
Section 1. Provisions of law to the contrary notwithstanding, all disputes, claims
and controversies solely between or among the departments, bureaus, offices,
agencies and instrumentalities of the National Government, including
constitutional offices or agencies, arising from the interpretation and application
of statutes, contracts or agreements, shall henceforth be administratively settled
or adjudicated as provided hereinafter: Provided, That, this shall not apply to cases
already pending in court at the time of the effectivity of this decree.
Section 2. In all cases involving only questions of law, the same shall be submitted
to and settled or adjudicated by the Secretary of Justice, as Attorney General and ex
officio adviser of all government owned or controlled corporations and entities, in
consonance with Section 83 of the Revised Administrative Code. His ruling or
determination of the question in each case shall be conclusive and binding upon
all the parties concerned.
Section 3. Cases involving mixed questions of law and of fact or only factual
issues shall be submitted to and settled or adjudicated by:
(a) The Solicitor General, with respect to disputes or claims [or] controversies between or
among the departments, bureaus, offices and other agencies of the National Government;
(b) The Government Corporate Counsel, with respect to disputes or claims or
controversies between or among the government-owned or controlled corporations or
entities being served by the Office of the Government Corporate Counsel; and
(c) The Secretary of Justice, with respect to all other disputes or claims or controversies
which do not fall under the categories mentioned in paragraphs (a) and (b). (Emphasis
supplied)
The use of the word "shall" in a statute connotes a mandatory order or an imperative
obligation.25 Its use rendered the provisions mandatory and not merely permissive, and
unless PD 242 is declared unconstitutional, its provisions must be followed. The use of
the word "shall" means that administrative settlement or adjudication of disputes and
claims between government agencies and offices, including government-owned or
controlled corporations, is not merely permissive but mandatory and imperative. Thus,
under PD 242, it is mandatory that disputes and claims "solely" between government
agencies and offices, including government-owned or controlled corporations, involving
only questions of law, be submitted to and settled or adjudicated by the Secretary of
Justice.
The law is clear and covers "all disputes, claims and controversies solely between
or among the departments, bureaus, offices, agencies and instrumentalities of the
National Government, including constitutional offices or agencies arising from the
interpretation and application of statutes, contracts or agreements." When the law
says "all disputes, claims and controversies solely" among government agencies, the law
means all, without exception. Only those cases already pending in court at the time of
the effectivity of PD 242 are not covered by the law.
The purpose of PD 242 is to provide for a speedy and efficient administrative
settlement or adjudication of disputes between government offices or agencies
under the Executive branch, as well as to filter cases to lessen the clogged dockets
of the courts. As explained by the Court in Philippine Veterans Investment Development
Corp. (PHIVIDEC) v. Judge Velez:26
Contrary to the opinion of the lower court, P.D. No. 242 is not unconstitutional. It does not
diminish the jurisdiction of [the] courts but only prescribes an administrative procedure for
the settlement of certain types of disputes between or among departments, bureaus,
offices, agencies, and instrumentalities of the National Government, including
government-owned or controlled corporations, so that they need not always repair to the
courts for the settlement of controversies arising from the interpretation and application
of statutes, contracts or agreements. The procedure is not much different, and no less
desirable, than the arbitration procedures provided in Republic Act No. 876 (Arbitration
Law) and in Section 26, R.A. 6715 (The Labor Code). It is an alternative to, or a substitute
for, traditional litigation in court with the added advantage of avoiding the delays,
vexations and expense of court proceedings. Or, as P.D. No. 242 itself explains, its
purpose is "the elimination of needless clogging of court dockets to prevent the waste of
time and energies not only of the government lawyers but also of the courts, and
eliminates expenses incurred in the filing and prosecution of judicial actions. 27
PD 242 is only applicable to disputes, claims, and controversiessolely between or among
the departments, bureaus, offices, agencies and instrumentalities of the National
Government, including government-owned or controlled corporations, and where no
private party is involved. In other words, PD 242 will only apply when all the parties
involved are purely government offices and government-owned or controlled
corporations.28 Since this case is a dispute between PSALM and NPC, both
government-owned and controlled corporations, and the BIR, a National Government
office, PD 242 clearly applies and the Secretary of Justice has jurisdiction over this case.
In fact, the MOA executed by the BIR, NPC, and PSALM explicitly provides that "[a] ruling
from the Department of Justice (DOJ) that is favorable to NPC/PSALM shall be
tantamount to the filing of an application for refund (in cash)/tax credit certificate (TCC),
at the option of NPC/PSALM."29 Such provision indicates that the BIR and petitioner
PSALM and the NPC acknowledged that the Secretary of Justice indeed has jurisdiction
to resolve their dispute.
This case is different from the case of Philippine National Oil Company v. Court of
Appeals,30 (PNOC v. CA) which involves not only the BIR (a government bureau) and the
PNOC and PNB (both government owned or controlled corporations), but also respondent
Tirso Savellano, a private citizen. Clearly, PD 242 is not applicable to the case of PNOC
v. CA. Even the ponencia in PNOC v. CA stated that the dispute in that case is not
covered by PD 242, thus:
Even if, for the sake of argument, that P.D. No. 242 should prevail over Rep. Act No.
1125, the present dispute would still not be covered by P.D. No. .242. Section 1 of P.D.
No. 242 explicitly provides that only disputes, claims and controversies solely between or
among departments, bureaus, offices, agencies, and instrumentalities of the National
Government, including constitutional offices or agencies, as well as government-owned
and controlled corporations, shall be administratively settled or adjudicated. While the
BIR is obviously a government bureau, and both PNOC and PNB are governmentowned and controlled corporations, respondent Savellano is a private citizen. His
standing in the controversy could not be lightly brushed aside. It was private respondent
Savellano who gave the BIR the information that resulted in the investigation of PNOC
and PNB; who requested the BIR Commissioner to reconsider the compromise
agreement in question; and who initiated the CTA Case No. 4249 by filing a Petition for
Review.31 (Emphasis supplied)
In contrast, since this case is a disputesolely between PSALM and NPC, both
government-owned and controlled corporations, and the BIR, a National Government
office, PD 242 clearly applies and the Secretary of Justice has jurisdiction over this case.
It is only proper that intra-governmental disputes be settled administratively since
the opposing government offices, agencies and instrumentalities are all under the
President's executive control and supervision. Section 17, Article VII of the
Constitution states unequivocally that: "The President shall have control of all the
executive departments, bureaus and offices. He shall ensure that the laws be faithfully
executed." In Carpio v. Executive Secretary,32 the Court expounded on the President's
control over all the executive departments, bureaus and offices, thus:
This presidential power of control over the executive branch of government extends over
all executive officers from Cabinet Secretary to the lowliest clerk and has been held by
us, in the landmark case of Mondano vs. Silvosa, to mean "the power of [the President]
to alter or modify or nullify or set aside what a subordinate officer had done in the
performance of his duties and to substitute the judgment of the former with that of the
latter." It is said to be at the very "heart of the meaning of Chief Executive."
Equally well accepted, as a corollary rule to the control powers of the President, is the
"Doctrine of Qualified Political Agency." As the President cannot be expected to exercise
his control powers all at the same time and in person, he will have to delegate some of
them to his Cabinet members.
Under this doctrine, which recognizes the establishment of a single executive, "all
executive and administrative organizations are adjuncts of the Executive Department, the
heads of the various executive departments are assistants and agents of the Chief
Executive, and, except in cases where the Chief Executive is required by the Constitution
or law to act in person on the exigencies of the situation demand that he act personally,
the multifarious executive and administrative functions of the Chief Executive are
performed by and through the executive departments, and the acts of the Secretaries of
such departments, performed and promulgated in the regular course of business, are,
unless disapproved or reprobated by the Chief Executive presumptively the acts of the
Chief Executive."
Thus, and in short, "the President's power of control is directly exercised by him over the
members of the Cabinet who, in turn, and by his authority, control the bureaus and other
offices under their respective jurisdictions in the executive department." 33
This power of control vested by the Constitution in the President cannot be diminished by
law. As held in Rufino v. Endriga,34 Congress cannot by law deprive the President of his
power of control, thus:
The Legislature cannot validly enact a law that puts a government office in the Executive
branch outside the control of the President in the guise of insulating that office from politics
or making it independent.If the office is part of the Executive branch, it must remain
subject to the control of the President. Otherwise, the Legislature can deprive the
President of his constitutional power of control over "all the executive x x x
offices." If the Legislature can do this with the Executive branch, then the
Legislature can also deal a similar blow to the Judicial branch by enacting a law
putting decisions of certain lower courts beyond the review power of the Supreme
Court. This will destroy the system of checks and balances finely structured in the 1987
Constitution among the Executive, Legislative, and Judicial branches. 35 (Emphasis
supplied)
Clearly, the President's constitutional power of control over all the executive departments,
bureaus and offices cannot be curtailed or diminished by law. "Since the Constitution has
given the President the power of control, with all its awesome implications, it is the
Constitution alone which can curtail such power."36This constitutional power of control
of the President cannot be diminished by the CTA. Thus, if two executive offices or
agencies cannot agree, it is only proper and logical that the President, as the sole
Executive who under the Constitution has control over both offices or agencies in
dispute, should resolve the dispute instead of the courts. The judiciary should not
intrude in this executive function of determining which is correct between the
opposing government offices or agencies, which are both under the sole control
of the President. Under his constitutional power of control, the President decides
the dispute between the two executive offices. The judiciary cannot substitute its
decision over that of the President. Only after the President has decided or settled the
dispute can the courts' jurisdiction be invoked. Until such time, the judiciary should not
interfere since the issue is not yet ripe for judicial adjudication. Otherwise, the judiciary
would infringe on the President's exercise of his constitutional power of control over all
the executive departments, bureaus, and offices.
Furthermore, under the doctrine of exhaustion of administrative remedies, it is
mandated that where a remedy before an administrative body is provided by
statute, relief must be sought by exhausting this remedy prior to bringing an action
in court in order to give the administrative body every opportunity to decide a
matter that comes within its jurisdiction.37 A litigant cannot go to court without first
pursuing his administrative remedies; otherwise, his action is premature and his case is
not ripe for judicial determination.38 PD 242 (now Chapter 14, Book IV of Executive Order
No. 292), provides for such administrative remedy. Thus, only after the President has
decided the dispute between government offices and agencies can the losing party resort
to the courts, if it so desires. Otherwise, a resort to the courts would be premature for
failure to exhaust administrative remedies. Non-observance of the doctrine of exhaustion
of administrative remedies would result in lack of cause of action,39 which is one of the
grounds for the dismissal of a complaint.
The rationale of the doctrine of exhaustion. of administrative remedies was aptly
explained by the Court in Universal Robina Corp. (Corn Division) v. Laguna Lake
Development Authority:40
The doctrine of exhaustion of administrative remedies is a cornerstone of our judicial
system. The thrust of the rule is that courts must allow administrative agencies to carry
out their functions and discharge their responsibilities within the specialized areas of their
respective competence. The rationale for this doctrine is obvious. It entails lesser
expenses and provides for the speedier resolution of the controversies. Comity and
convenience also impel courts of justice to shy away from a dispute until the system of
administrative redress has been completed.41
In requiring parties to exhaust administrative remedies before pursuing action in a court,
the doctrine prevents overworked courts from considering issues when remedies are
available through administrative channels.42 Furthermore, the doctrine endorses a more
economical and less formal means of resolving disputes,43 and promotes efficiency since
disputes and claims are generally resolved more quickly and economically through
administrative proceedings rather than through court litigations.44
The Court of Appeals ruled that under the 1997 NIRC, the dispute between the parties is
within the authority of the CIR to resolve. Section 4 of the 1997 NIRC reads:
SEC 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases.- The
power to interpret the provisions of this Code and other tax laws shall be under the
exclusive and original jurisdiction of the Commissioner, subject to review by the
Secretary of Finance.
The power to decide disputed assessments, refunds in internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other matters arising under this
Code or other laws or portions thereof administered by the Bureau of Internal Revenue is
vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of
Tax Appeals. (Emphasis supplied)
The first paragraph of Section 4 of the 1997 NIRC provides that the power of the CIR to
interpret the NIRC provisions and other tax laws issubject to review by the Secretary
of Finance, who is the alter ego of the President. Thus, the constitutional power of
control of the President over all the executive departments, bureaus, and offices 45 is still
preserved. The President's power of control, which cannot be limited or withdrawn by
Congress, means the power of the President to alter, modify, nullify, or set aside the
judgment or action of a subordinate in the performance of his duties. 46
The second paragraph of Section 4 of the 1997 NIRC, providing for the exclusive
appellate jurisdiction of the CTA as regards the CIR's decisions on matters involving
disputed assessments, refunds in internal revenue taxes, fees or other charges, penalties
imposed in relation thereto, or other matters arising under NIRC, is in conflict with PD
242. Under PD 242,all disputes and claims solely between government agencies and
offices, including government-owned or controlled corporations, shall be administratively
settled or adjudicated by the Secretary of Justice, the Solicitor General, or the
Government Corporate Counsel, depending on the issues and government agencies
involved.
To harmonize Section 4 of the 1997 NIRC with PD 242, the following interpretation should
be adopted: (1) As regards private entities and the BIR, the power to decide disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the NIRC or other laws administered by
the BIR is vested in the CIR subject to the exclusive appellate jurisdiction of the CTA, in
accordance with Section 4 of the NIRC; and (2) Where the disputing parties areall public
entities (covers disputes between the BIR and other government entities), the case shall
be governed y PD 242.
Furthermore, it should be noted that the 1997 NIRC is a general law governing the
imposition of national internal revenue taxes, fees, and charges. 47On the other hand,
PD 242 is a special law that applies only to disputes involving solely government
offices, agencies, or instrumentalities. The difference between a special law and a
general law was clarified in Vinzons-Chato v. Fortune Tobacco Corporation:48
A general statute is one which embraces a class of subjects or places and does not omit
any subject or place naturally belonging to such class. A special statute, as the term is
generally understood, is one which relates to particular persons or things of a class or to
a particular portion or section of the state only.
A general law and a special law on the same subject are statutes in pari materia and
should, accordingly, be read together and harmonized, if possible, with a view to giving
effect to both. The rule is that where there are two acts, one of which is special and
particular and the other general which, if standing alone, would include the same matter
and thus conflict with the special act, the special law must prevail since it evinces the
legislative intent more clearly than that of a general statute and must not be taken as
intended to affect the more particular and specific provisions of the earlier act, unless it is
absolutely necessary so to construe it in order to give its words any meaning at all.
The circumstance that the special law is passed before or after the general act does not
change the principle. Where the special law is later, it will be regarded as an exception
to, or a qualification of, the prior general act; and where the general act is later, the special
statute will be construed as remaining an exception to its terms, unless repealed
expressly or by necessary implication.49
Thus, even if the 1997 NIRC, a general statute, is a later act, PD 242, which is a
special law, will still prevail and is treated as an exception to the terms of the 1997
NIRC with regard solely to intra-governmental disputes. PD 242 is a special law while
the 1997 NIRC is a general law, insofar as disputes solely between or among government
agencies are concerned. Necessarily, such disputes must be resolved under PD 242 and
not under the NIRC, precisely because PD 242 specifically mandates the settlement of
such disputes in accordance with PD 242. PD 242 is a valid law prescribing the procedure
for administrative settlement or adjudication of disputes among government offices,
agencies, and instrumentalities under the executive control and supervision of the
President.50
Even the BIR, through its authorized representative, then OIC Commissioner of Internal
Revenue Lilian B. Hefti, acknowledged in the MOA executed by the BIR, NPC, and
PSALM, that the Secretary of Justice has jurisdiction to resolve its dispute with petitioner
PSALM and the NPC. This is clear from the provision in the MOA which states:
H) Any resolution in favor of NPC/PSALM by any appropriate court or body shall be
immediately executory without necessity of notice or demand from NPC/PSALM. A ruling
from the Department of Justice (DOJ) that is favorable to NPC/PSALM shall be
tantamount to the filing of an application for refund (in cash)/tax credit certificate
(TCC), at the option of NPC/PSALM. BIR undertakes to immediately process and
approve the application, and release the tax refund/TCC within fifteen (15) working
days from issuance of the DOJ ruling that is favorable to NPC/PSALM. (Emphasis
supplied)
PD 242 is now embodied in Chapter 14, Book IV of Executive Order No. 292 (EO 292),
otherwise known as the Administrative Code of 1987, which took effect on 24 November
1989.51 The pertinent provisions read:
Chapter
14Offices and Corporations
Controversies
Among
Government
SEC. 66. How Settled. - All disputes, claims and controversies, solely between or among
the departments, bureaus, offices, agencies and instrumentalities of the National
Government, including government owned or controlled corporations, such as those
arising from the interpretation and application of statutes, contracts or agreements, shall
be administratively settled or adjudicated in the manner provided in this Chapter. This
Chapter shall, however, not apply to disputes involving the Congress, the Supreme Court,
the Constitutional Commissions, and local governments.
SEC. 67. Disputes Involving Questions of Law. - All cases involving only questions of law
shall be submitted to and settled or adjudicated by the Secretary of Justice as AttorneyGeneral of the National Government and as ex officio legal adviser of all governmentowned or controlled corporations. His ruling or decision thereon shall be conclusive and
binding on all the parties concerned.
SEC. 68. Disputes Involving Questions of Fact and Law.- Cases involving mixed
questions of law and of fact or only factual issues shall be submitted to and settled or
adjudicated by:
(1) The Solicitor General, if the dispute, claim or controversy involves only departments,
bureaus, offices and other agencies of the National Government as well as governmentowned or controlled corporations or entities of whom he is the principal law officer or
general counsel; and
(2) The Secretary of Justice, in all other cases not falling under paragraph (1).
SEC. 69. Arbitration. - The determination of factual issues may be referred to an
arbitration panel composed of one representative each of the parties involved and
presided over by a representative of the Secretary of Justice or the Solicitor General, as
the case may be.
SEC. 70. Appeals. - The decision of the Secretary of Justice as well as that of the Solicitor
General, when approved by the Secretary of Justice, shall be final and binding upon the
parties involved. Appeals may, however, be taken to the President where the amount of
the claim or the value of the property exceeds one million pesos. The decision of the
President shall be final.
SEC. 71. Rules and Regulations. - The Secretary of Justice shall promulgate the rules
and regulations necessary to carry out the provisions of this Chapter.
Since the amount involved in this case is more than one million pesos, the DOJ
Secretary's decision may be appealed to the Office of the President in accordance with
Section 70, Chapter 14, Book IV of EO 292 and Section 552 of PD 242. If the appeal to
the Office of the President is denied, the aggrieved party can still appeal to the Court of
Appeals under Section 1, Rule 43 of the 1997 Rules of Civil Procedure. 53 However, in
order not to further delay the disposition of this case, the Court resolves to decide the
substantive issue raised in the petition.54
II. Whether the sale of the power plants is subject to VAT.
To resolve the issue of whether the sale of the Pantabangan-Masiway and Magat Power
Plants by petitioner PSALM to private entities is subject to VAT, the Court must determine
whether the sale is "in the course of trade or business" as contemplated under Section
105 of the NIRC, which reads:
SEC 105. Persons Liable. - Any person who, in the course of trade or business, sells,
barters, exchanges, leases goods or properties, renders services, and any person
who imports goods shall be subject to the value-added tax (VAT) imposed in
Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on
to the buyer, transferee or lessee of the goods, properties or services. This rule shall
likewise apply to existing contracts of sale or lease of goods, properties or services at the
time of the effectivity of Republic Act 7716.
The phrase 'in the course of trade or business' means the regular conduct or
pursuit of a commercial or an economic activity, including transactions incidental
thereto, by any person regardless of whether or not the person engaged therein is
a nonstock, nonprofit private organization (irrespective of the disposition of its net
income and whether or not it sells exclusively to members or their guests), or
government entity.
The rule of regularity, to the contrary notwithstanding, services as defined in this Code
rendered in the Philippines by nonresident foreign persons shall be considered as being
rendered in the course of trade or business. (Emphasis supplied)
Under Section 50 of the EPIRA law, PSALM's principal purpose is to manage the orderly
sale, disposition, and privatization of the NPC generation assets, real estate and other
disposable assets, and IPP contracts with the objective of liquidating all NPC financial
obligations and stranded contract costs in an optimal manner.
PSALM asserts that the privatization of NPC assets, such as the sale of the PantabanganMasiway and Magat Power Plants, is pursuant to PSALM's mandate under the EPIRA
law and is not conducted in the course of trade or business. PSALM cited the 13 May
2002 BIR Ruling No. 020-02, that PSALM's sale of assets is not conducted in pursuit of
any commercial or profitable activity as to fall within the ambit of a VAT-able transaction
under Sections 105 and 106 of the NIRC. The pertinent portion of the ruling adverted to
states:
2. Privatization of assets by PSALM is not subject to VAT
Pursuant to Section 105 in relation to Section 106, both of the Tax Code of 1997, a valueadded tax equivalent to ten percent (10%) of the gross selling price or gross value in
money of the goods, is collected from any person, who, in the course of trade or business,
sells, barters, exchanges, leases goods or properties, which tax shall be paid by the seller
or transferor.
The phrase "in the course of trade or business" means the regular conduct or pursuit of
a commercial activity, including transactions incidental thereto.
Since the disposition or sale of the assets is a consequence of PSALM's mandate to
ensure the orderly sale or disposition of the property and thereafter to liquidate the
outstanding loans and obligations of NPC, utilizing the proceeds from sales and other
property contributed to it, including the proceeds from the Universal Charge, and not
conducted in pursuit of any commercial or profitable activity, including transactions
incidental thereto, the same will be considered an isolated transaction, which will
therefore not be subject to VAT. (BIR Ruling No. 113-98 dated July 23,
1998)55 (Emphasis supplied)
On the other hand, the CIR argues that the previous exemption of NPC from VAT under
Section 13 of Republic Act No. 639556 (RA 6395) was expressly repealed by Section 24
of Republic Act No. 933757 (RA 9337), which reads:
SEC. 24. Repealing Clause. - The following laws or provisions of laws are hereby
repealed and the persons and/or transactions affected herein are made subject to the
value-added tax subject to the provisions of Title IV of the National Internal Revenue Code
of 1997, as amended:
(A) Section 13 of R.A. No. 6395 on the exemption from value-added tax of National Power
Corporation (NPC);
(B) Section 6, fifth paragraph of R.A. No. 9136 on the zero VAT rate imposed on the sale
of generated power by generation companies; and
(C) All other laws, acts, decrees, executive orders, issuances and rules and regulations
or parts thereof which are contrary to and inconsistent with any provisions of this Act are
hereby repealed, amended or modified accordingly.
As a consequence, the CIR posits that the VAT exemption accorded to PSALM under
BIR Ruling No. 020-02 is also deemed revoked since PSALM is a successor-in-interest
of NPC. Furthermore, the CIR avers that prior to the sale, NPC still owned the power
plants and not PSALM, which is just considered as the trustee of the NPC properties.
Thus, the sale made by NPC or its successors-in-interest of its power plants should be
subject to the 10% VAT beginning 1 November 2005 and 12% VAT beginning 1 February
2007.
We do not agree with the CIR's position, which is anchored on the wrong premise that
PSALM is a successor-in-interest of NPC. PSALM is not a successor-in-interest of NPC.
Under its charter, NPC is mandated to "undertake the development of hydroelectric
generation of power and the production of electricity from nuclear, geothermal and other
sources, as well as the transmission of electric power on a nationwide basis." 58 With the
passage of the EPIRA law which restructured the electric power industry into generation,
transmission, distribution, and supply sectors, the NPC is now primarily mandated to
perform missionary electrification function through the Small Power Utilities Group
(SPUG) and is responsible for providing power generation and associated power delivery
systems in areas that are not connected to the transmission system.59 On the other hand,
PSALM, a government-owned and controlled corporation, was created under the EPIRA
law to manage the orderly sale and privatization of NPC assets with the objective of
liquidating all of NPC's financial obligations in an optimal manner. Clearly, NPC and
PSALM have different functions.Since PSALM is not a successor-in-interest of NPC,
the repeal by RA 9337 of NPC's VAT exemption does not affect PSALM.
In any event, even if PSALM is deemed a successor-in-interest of NPC, still the sale of
the power plants is not "in the course of trade or business" as contemplated under Section
105 of the NIRC, and thus, not subject to VAT.The sale of the power plants is not in
pursuit of a commercial or economic activity but a governmental function
mandated by law to privatize NPC generation assets. PSALM was created primarily
to liquidate all NPC financial obligations and stranded contract costs in an optimal
manner. The purpose and objective of PSALM are explicitly stated in Section 50 of the
EPIRA law, thus:
SEC. 50. Purpose and Objective, Domicile and Term of Existence. - The principal
purpose of the PSALM Corp. is to manage the orderly sale, disposition, and
privatization of NPC generation assets, real estate and other disposable assets,
and IPP contracts with the objective of liquidating all NPC financial obligations and
stranded contract costs in an optimal manner.
The PSALM Corp. shall have its principal office and place of business within Metro Manila.
The PSALM Corp. shall exist for a period of twenty-five (25) years from the effectivity of
this Act, unless otherwise provided by law, and all assets held by it, all moneys and
properties belonging to it, and all its liabilities outstanding upon the expiration of its term
of existence shall revert to and be assumed by the National Government. (Emphasis
supplied)
PSALM is limited to selling only NPC assets and IPP contracts of NPC. The sale of NPC
assets by PSALM is not "in the course of trade or business" but purely for the specific
purpose of privatizing NPC assets in order to liquidate all NPC financial obligations.
PSALM is tasked to sell and privatize the NPC assets within the term of its
existence.60 The EPIRA law even requires PSALM to submit a plan for the endorsement
by the Joint Congressional Power Commission and the approval of the President of the
total privatization of the NPC assets and IPP contracts. Section 47 of the EPIRA law
provides:
SEC 47. NPC Privatization. - Except for the assets of SPUG, the generation assets, real
estate, and other disposable assets as well as IPP contracts of NPC shall be privatized
in accordance with this Act. Within six (6) months from the effectivity of this Act, the
PSALM Corp. shall submit a plan for the endorsement by the Joint Congressional Power
Commission and the approval of the President of the Philippines, on the total privatization
of the generation assets, real estate, other disposable assets as well as existing IPP
contracts of NPC and thereafter, implement the same, in accordance with the following
guidelines, except as provided for in Paragraph (f) herein:
(a) The privatization value to the National Government of the NPC generation assets, real
estate, other disposable assets as well as IPP contracts shall be optimized;
(b) The participation by Filipino citizens and corporations in the purchase of NPC assets
shall be encouraged.
In the case of foreign investors, at least seventy-five percent (75%) of the funds used to
acquire NPC-generation assets and IPP contracts shall be inwardly remitted and
registered with the Bangko Sentral ng Pilipinas;
(c) The NPC plants and/or its IPP contracts assigned to IPP Administrators, its related
assets and assigned liabilities, if any, shall be grouped in a manner which shall promote
the viability of the resulting generation companies (gencos), ensure economic efficiency,
encourage competition, foster reasonable electricity rates and create market appeal to
optimize returns to the government from the sale and disposition of such assets in a
manner consistent with the objectives of this Act. In the grouping of the generation assets
and IPP contracts of NPC, the following criteria shall be considered:
(1) A sufficient scale of operations and balance sheet strength to promote the financial
viability
of
the
restructured
units;
(2) Broad geographical groupings to ensure efficiency of operations but without the
formation of
regional companies or consolidation of market
power;
(3) Portfolio of plants and IPP contracts to achieve management and operational synergy
without dominating any part of the market or the load curve; and
(4) Such other factors as may be deemed beneficial to the best interest of the National
Government while ensuring attractiveness to potential investors.
(d) All assets of NPC shall be sold in open and transparent manner through public bidding,
and the same shall apply to the disposition of IPP contracts;
(e) In cases of transfer of possession, control, operation or privatization of multi-purpose
hydro facilities, safeguards shall be prescribed to ensure that the national government
may direct water usage in cases of shortage to protect potable water, irrigation, and all
other requirements imbued with public interest;
(f) The Agus and Pulangi complexes in Mindanao shall be excluded from an1ong the
generation companies that will be initially privatized. Their ownership shall be transferred
to the PSALM Corp. and both shall continue to be operated by the NPC. Said complexes
may be privatized not earlier than ten (10) years from the effectivity of this Act, and, except
for Agus III, shall not be subject to Build-Operate-Transfer (B-O-T), Build-RehabilitateOperate-Transfer (B-R-O-T) and other variations thereof pursuant to Republic Act No.
6957, as amended by Republic Act No. 7718. The privatization of Agus and Pulangi
complexes shall be left to the discretion of PSALM Corp. in consultation with Congress;
(g) The steamfield assets and generating plants of each geothermal complex shall not be
sold separately. They shall be combined and each geothermal complex shall be sold as
one package through public bidding. The geothermal complexes covered by this
requirement include, but are not limited to, Tiwi-Makban, Leyte A and B (Tongonan),
Palinpinon, and Mt. Apo;
(h) The ownership of the Caliraya-Botokan-Kalayaan (CBK) pump storage complex shall
be transferred to the PSALM Corporation;
(i) Not later than three (3) years from the effectivity of this Act, and in no case later than
the initial implementation of open access, at least seventy percent (70%) of the total
capacity of generating assets of NPC and of the total capacity of the power plants under
contract with NPC located in Luzon and Visayas shall have been privatized: Provided,
That any unsold capacity shall be privatized not later than eight (8) years from the
effectivity of this Act; and
(j) NPC may generate and sell electricity only from the undisposed generating assets and
IPP contracts of PSALM Corp. and shall not incur any new obligations to purchase power
through bilateral contracts with generation companies or other suppliers.
Thus, it is very clear that the sale of the power plants was an exercise of a
governmental function mandated by law for the primary purpose of privatizing NPC
assets in accordance with the guidelines imposed by the EPIRA law.
In the 2006 case of Commissioner of Internal Revenue v. Magsaysay Lines, Inc.
(Magsaysay),61 the Court ruled that the sale of the vessels of the National Development
Company (NDC) to Magsaysay Lines, Inc. is not subject to VAT since it was not in the
course of trade or business, as it was involuntary and made pursuant to the government's
policy of privatization. The Court cited the CTA ruling that the phrase "course of business"
or "doing business" connotes regularity of activity. Thus, since the sale of the vessels was
an isolated transaction, made pursuant to the government's privatization policy, and
which transaction could no longer be repeated or carried on with regularity, such sale was
not in the course of trade or business and was not subject to VAT.
Similarly, the sale of the power plants in this case is not subject to VAT since the sale
was made pursuant to PSALM's mandate to privatize NPC assets, and was not
undertaken in the course of trade or business. In selling the power plants, PSALM was
merely exercising a governmental function for which it was created under the EPIRA law.
The CIR argues that the Magsaysay case, which involved the sale in 1988 of NDC
vessels, is not applicable in this case since it was decided under the 1986 NIRC. The CIR
maintains that under Section 105 of the 1997 NIRC, which amended Section 99 62 of the
1986 NIRC, the phrase "in the course of trade or business" was expanded, and now
covers incidental transactions. Since NPC still owns the power plants and PSALM may
only be considered as trustee of the NPC assets, the sale of the power plants is
considered an incidental transaction which is subject to VAT.
We disagree with the CIR's position. PSALM owned the power plants which were sold.
PSALM's ownership of the NPC assets is clearly stated under Sections 49, 51, and 55 of
the EPIRA law. The pertinent provisions read:
SEC. 49. Creation of Power Sector Assets and Liabilities Management Corporation.
- There is hereby created a government-owned and -controlled corporation to be
known as the "Power Sector Assets and Liabilities Management Corporation,"
hereinafter referred to as "PSALM Corp.," which shall take ownership of all existing
NPC generation assets, liabilities, IPP contracts, real estate and all other
disposable assets. All outstanding obligations of the NPC arising from loans, issuances
of bonds, securities and other instruments of indebtedness shall be transferred to and
assumed by the PSALM Corp. within one hundred eighty (180) days from the approval of
this Act.
SEC 51. Powers. - The Corporation shall, in the performance of its functions and for the
attainment of its objectives, have the following powers:
(a) To formulate and implement a program for the sale and privatization of the NPC assets
and IPP contracts and the liquidation of the NPC debts and stranded costs, such
liquidation to be completed within the term of existence of the PSALM Corp.;
(b) To take title to and possession of, administer and conserve the assets
transferred to it; to sell or dispose of the same at such price and under such terms and
conditions as it may deem necessary or proper, subject to applicable laws, rules and
regulations;
xxxx
SEC. 55. Property of PSALM Corp.-The following funds, assets, contributions and
other property shall constitute the property of PSALM Corp.:
(a) The generation assets, real estate, IPP contracts, other disposable assets of
NPC, proceeds from the sale or disposition of such assets and residual assets from B-OT, R-O-T, and other variations thereof;
(b) Transfers from the National Government;
(c) Proceeds from loans incurred to restructure or refinance NPC's transferred
liabilities: Provided, however, That all borrowings shall be fully paid for by the end of the
life of the PSALM Corp.;
(d) Proceeds from the universal charge allocated for stranded contract costs and the
stranded debts of the NPC;
(e) Net profit of NPC;
(f) Net profit of TRANSCO;
(g) Official assistance, grants, and donations from external sources; and
(h) Other sources of funds as may be determined by PSALM Corp. necessary for the
above-mentioned purposes. (Emphasis supplied)
Under the EPIRA law, the ownership of the generation assets, real estate, IPP contracts,
and other disposable assets of the NPC was transferred to PSALM. Clearly, PSALM is
not a mere trustee of the NPC assets but is the owner thereof. Precisely, PSALM, as the
owner of the NPC assets, is the government entity tasked under the EPIRA law to
privatize such NPC assets.
In the more recent case of Mindanao II Geothermal Partnership v. Commissioner of
Internal Revenue (Mindanao 11)63 which was decided under the 1997 NIRC, the Court
held that the sale of a fully depreciated vehicle that had been used in Mindanao II's
business was subject to VAT, even if such sale may be considered isolated. The Court
ruled that it does not follow that an isolated transaction cannot be an incidental transaction
for VAT purposes. The Court then cited Section 105 of the 1997 NIRC which shows that
a transaction "in the course of trade or business" includes "transactions incidental
thereto." Thus, the Court held that the sale of the vehicle is an incidental transaction made
in the course of Mindanao II's business which should be subject to VAT.
The CIR alleges that the sale made by NPC and/or its successors-in interest of the power
plants is an incidental transaction which should be subject to VAT. This is erroneous. As
previously discussed, the power plants are already owned by PSALM, not NPC. Under
the EPIRA law, the ownership of these power plants was transferred to PSALM for sale,
disposition, and privatization in order to liquidate all NPC financial obligations. Unlike
the Mindanao II case, the power plants in this case were not previously used in PSALM's
business. The power plants, which were previously owned by NPC were transferred to
PSALM for the specific purpose of privatizing such assets. The sale of the power plants
cannot be considered as an incidental transaction made in the course of NPC's or
PSALM's business. Therefore, the sale of the power plants should not be subject to VAT.
Hence, we agree with the Decisions dated 13 March 2008 and 14 January 2009 of the
Secretary of Justice in OSJ Case No. 2007-3 that it was erroneous for the BIR to hold
PSALM liable for deficiency VAT in the amount of P3,813,080,472 for the sale of the
Pantabangan-Masiway and Magat Power Plants. The P3,813,080,472 deficiency VAT
remitted by PSALM under protest should therefore be refunded to PSALM.
However, to give effect to Section 70, Chapter 14, Book IV of the Administrative Code of
1987 on appeals from decisions of the Secretary of Justice, the BIR is given an
opportunity to appeal the Decisions dated 13 March 2008 and 14 January 2009 of the
Secretary of Justice to the Office of the President within 10 days from finality of this
Decision.64
WHEREFORE, we GRANT the petition. We SET ASIDE the 27 September 2010
Decision and the 3 August 2011 Resolution of the Court of Appeals in CA-G.R. SP No.
108156. The Decisions dated 13 March 2008 and 14 January 2009 of the Secretary of
Justice in OSJ Case No. 2007-3 are REINSTATED. No costs.
SO ORDERED
FIRST DIVISION
July 26, 2017
G.R. No. 220835
COMMISSIONER
OF
INTERNAL
vs.
SYSTEMS TECHNOLOGY INSTITUTE, INC., Respondent
REVENUE, Petitioner
DECISION
CAGUIOA, J.:
Before the Court is a petition for review on certiorari1 under Rule 45 of the Rules of Court
filed by petitioner Commissioner of Internal Revenue (CIR), assailing the Decision 2 dated
March 24, 2015 and Resolution3 dated September 2, 2015 of the Court of Tax Appeals
(CTA) En Banc in CTA EB No. 1050. The CTA En Banc affirmed the Decision dated April
17, 2013 and the Resolution dated July 17, 2013 of the CTA Second Division, which
granted the petition for review filed by respondent Systems Technology Institute, Inc.
(STI) and cancelled the assessments against STI for deficiency income tax, deficiency
expanded withholding tax (EWT), and deficiency value-added tax (VAT) for fiscal year
ending March 31, 2003.4
Facts
The facts of this case, as presented by the CTA En Banc, are as follows:
STI filed its Amended Annual Income Tax Return for fiscal year 2003 on August 15, 2003;
its Quarterly VAT Returns on July 23, 2002, October 25, 2002, January 24, 2003, and
May 23, 2003; and its Bureau of Internal Revenue (BIR) Form 1601E for EWT from May
10, 2002 to April 15, 2003.5
On May 30, 2006, STI's Amiel C. Sangalang signed a Waiver of the Defense of
Prescription Under the Statute of Limitations of the National Internal Revenue Code
(NIRC), with the proviso that the assessment and collection of taxes of fiscal year 2003
shall come "no later than December 31, 2006." 6 On June 2, 2006, the waiver was
accepted by Virgilio R. Cembrano, Large Taxpayers District Officer of Makati and was
notarized on even date.7
On December 12, 2006, another waiver was executed extending the period to assess
and collect the assessed taxes to March 31, 2007.8 It was also signed by Sangalang and
accepted by Cembrano and notarized on the same date.9 A third waiver was executed by
the same signatories extending further the period to June 30, 2007. 10
On June 28, 2007, STI received a Formal Assessment Notice from the CIR, assessing
STI for deficiency income tax, VAT and EWT for fiscal year 2003, in the aggregate amount
of ₱161,835,737.98.11
On July 25, 2007, STI filed a request for reconsideration/reinvestigation dated July 23,
2007.12
On September 11, 2009, STI received from the CIR the Final Decision on Disputed
Assessment (FDDA) dated August 17, 2009 finding STI liable for deficiency income tax,
VAT and EWT in the lesser amount of ₱124,257,764.20.13
On October 12, 2009, STI appealed the FDDA by filing a petition for review with the
CTA.14 The case was docketed as CTA Case No. 7984 and was heard by the CTA
Second Division.15
On April 17, 2013, the CTA Second Division promulgated its Decision denying the
assessment on the ground of prescription, the dispositive portion of which reads as
follows:
WHEREFORE, premises considered, the instant Petition for Review is hereby
GRANTED. Accordingly, the assessments against petitioner for deficiency income tax,
deficiency expanded withholding tax, and deficiency value-added tax for fiscal year
ending March 31, 2003 are hereby CANCELLED and SET ASIDE on the ground of
prescription.16
The CTA Division found the waivers executed by STI defective for failing to strictly comply
with the requirements provided by Revenue Memorandum Order (RMO) No. 20-90 issued
on April 4, 1990 and Revenue Delegation Authority Order (RDAO) No. 05-01 issued on
August 2, 2001. Consequently, the periods for the CIR to assess or collect internal
revenue taxes were never extended; and the subject assessment for deficiency income
tax, VAT and EWT against STI, which the CIR issued beyond the three-year prescriptive
period provided by law, was already barred by prescription.17
On May 9, 2013, the CIR filed a motion for reconsideration, but this was denied by the
CTA Division in its Resolution dated July 17, 2013.18
Undaunted, the CIR appealed to the CTA En Banc.19
In the assailed Decision, 20 the CTA En Banc denied the CIR's petition for lack of merit.
The CTA En Banc affirmed the Decision and Resolution of the CTA Division, reiterating
that the requirements for the execution of a waiver must be strictly complied with;
otherwise, the waiver will be rendered defective and the period to assess or collect taxes
will not be extended. It further held that the execution of a waiver did not bar STI from
questioning the validity thereof or invoking the defense of prescription. 21
On September 2, 2015, the CTA En Banc issued the assailed Resolution22 denying the
CIR's motion for reconsideration for lack of merit.
Hence, the instant petition raising the following issue:
WHETHER OR NOT PRESCRIPTION HAD SET IN AGAINST THE ASSESSMENTS
FOR DEFICIENCY INCOME TAX, DEFICIENCY VAT AND DEFICIENCY EXPANDED
WITHHOLDING TAX.23
The CIR asserts that prescription had not set in on the subject assessments because the
waivers executed by the parties are valid.24 It also claims that STI' s active participation
in the administrative investigation by filing a request for reinvestigation, which resulted in
a reduced assessment, amounts to estoppel that prescription can no longer be
invoked.25 To support its contention, the CIR cites the case of Rizal Commercial Banking
Corporation v. Commissioner of Internal Revenue,26 where the Court considered the
taxpayer's partial payment of the revised assessment as an implied admission of the
validity of the waivers.27
For its part, STI contends that the requisites under RMO No. 20-90 are mandatory and
no less than this Court has affirmed that the failure to comply therewith results in the
nullity of the waiver and consequently, the assessments.28 Tested against these
requisites and settled jurisprudence, the subject waivers are defective and invalid and,
thus, did not extend the period to assess.29
STI further claims, that contrary to the CIR's insistence, it is not estopped from invoking
the defense of prescription because: (1) STI did not admit the validity or correctness of
the deficiency assessments; (2) it did not receive or accept any benefit from the execution
of the waivers since it continued to dispute the assessment; and (3) STI did not, in any
way, lead the CIR to believe that the waivers were valid.30
Finally, STI avers that the doctrine in RCBC does not apply to this case because the
estoppel upheld in said case arose from the act of payment, which is not obtaining in the
instant case.31
The Court's Ruling
The petition lacks merit.
The
Waivers
of
Statute
Limitations,
being
defective
invalid,
did
not
extend
the
period
to
issue
the
assessments.
Thus,
the
right
of
government
to
assess
or
collect
alleged
deficiency
taxes
is
barred by prescription.
of
and
CIR's
subject
the
the
already
Section 203 of the NIRC of 1997, as amended, limits the CIR's period to assess and
collect internal revenue taxes to three (3) years counted from the last day prescribed by
law for the filing of the return or from the day the return was filed, whichever comes
later.32 Thus, assessments issued after the expiration of such period are no longer valid
and effective.33
In SMI-Ed Philippines Technology, Inc. v. Commissioner of Internal Revenue,34 the Court
explained the primary reason behind the prescriptive period on the CIR's right to assess
or collect internal revenue taxes: that is, to safeguard the interests of taxpayers from
unreasonable investigation.35 Accordingly, the government must assess internal revenue
taxes on time so as not to extend indefinitely the period of assessment and deprive the
taxpayer of the assurance that it will no longer be subjected to further investigation for
taxes after the expiration of a reasonable period of time. 36
In this regard, the CTA Division found that the last day for the CIR to issue an assessment
on STI's income tax for fiscal year ending March 31, 2003 was on August 15, 2006; while
the latest date for the CIR to assess STI of EWT for the fiscal year ending March 31, 2003
was on April 17, 2006; and the latest date for the CIR to assess STI of deficiency VAT
for the four quarters of the same fiscal year was on May 25, 2006.37 Clearly, on the basis
of these dates, the final assessment notice dated June 16, 2007, 38 assessing STI for
deficiency income tax, VAT and EWT for fiscal year 2003, in the aggregate amount of
₱l61,835,737.98, which STI received on June 28, 2007, 39 was issued beyond the threeyear prescriptive period.
However, the CIR maintains that prescription had not set in because the parties validly
executed a waiver of statute of limitations under Section 222(b) of the NIRC, as amended.
Said provision reads:
SEC. 222. Exceptions as to Period of Limitation of Assessment and Collection of Taxes. xxxx
(b) If before the expiration of the time prescribed in Section 203 for the assessment of the
tax, both the Commissioner and the taxpayer have agreed in writing to its assessment
after such time, the tax may be assessed within the period agreed upon. The period so
agreed upon may be extended by subsequent written agreement made before the
expiration of the period previously agreed upon.
xxxx
To implement the foregoing provisions, the BIR issued RMO 20-90 and RDAO 05-01,
outlining the procedures for the proper execution of a valid waiver, viz.:
1. The waiver must be in the proper form prescribed by RMO 20- 90. The phrase "but not
after __________ 19 _",which indicates the expiry date of the period agreed upon to
assess/collect the tax after the regular three-year period of prescription, should be filled
up.
2. The waiver must be signed by the taxpayer himself or his duly authorized
representative. In the case of a corporation, the waiver must be signed by any of its
responsible officials. In case the authority is delegated by the taxpayer to a
representative, such delegation should be in writing and duly notarized.
3. The waiver should be duly notarized.
4. The CIR or the revenue official authorized by him must sign the waiver indicating that
the BIR has accepted and agreed to the waiver.1âwphi1 The date of such acceptance by
the BIR should be indicated. However, before signing the waiver, the CIR or the revenue
official authorized by him must make sure that the waiver is in the prescribed form, duly
notarized, and executed by the taxpayer or his duly authorized representative.
5. Both the date of execution by the taxpayer and date of acceptance by the Bureau
should be before the expiration of the period of prescription or before the lapse of the
period agreed upon in case a subsequent agreement is executed.
6. The waiver must be executed in three copies, the original copy to be attached to the
docket of the case, the second copy for the taxpayer and the third copy for the Office
accepting the waiver. The fact of receipt by the taxpayer of his/her file copy must be
indicated in the original copy to show that the taxpayer was notified of the acceptance of
the BIR and the perfection of the agreement.40
These requirements are mandatory and must strictly be followed. To be sure; in a number
of cases, this Court did not hesitate to strike down waivers which failed to strictly comply
with the provisions of RMO 20-90 and RDAO 05-01.
In Philippine Journalists, Inc. v. Commissioner of Internal Revenue,41 the Court declared
the waiver invalid because: (1) it did not specify the date within which the BIR may assess
and collect revenue taxes, such that the waiver became unlimited in time; (2) it was signed
only by a revenue district officer, and not the CIR; (3) there was no date of acceptance;
and (4) the taxpayer was not furnished a copy of the waiver.42
In Commissioner of Internal Revenue v. FMF Development Corporation,43 the waiver was
found defective and thus did not validly extend the original three-year prescriptive period
because: (1) it was not proven that the taxpayer was furnished a copy of the waiver; (2)
it was signed only by a revenue district officer, and not the CIR as mandated by law; and
(3) it did not contain the date of acceptance by the CIR, which is necessary to determine
whether the waiver was validly accepted before the expiration of the original three-year
period.44
In another case,45 the waivers executed by the taxpayer's accountant were found
defective for the following reasons: (1) the waivers were executed without the notarized
written authority of the taxpayer's representative to sign the waiver on its behalf; (2) the
waivers failed to indicate the date of acceptance; and (3) the fact of receipt by the taxpayer
of its file copy was not indicated in the original copies of the waivers.46
In Commissioner of Internal Revenue v. The Stanley Works Sales (Phils.), Inc., 47 the
Court nullified the waivers because the following requisites were absent: (1) conformity
of either the CIR or a duly authorized representative; (2) date of acceptance showing that
both parties had agreed on the waiver before the expiration of the prescriptive period; and
(3) proof that the taxpayer was furnished a copy of the waiver.48
The Court also invalidated the waivers executed by the taxpayer in the case
o.f Commissioner of Internal Revenue v. Standard Chartered Bank,49 because: (1) they
were signed by Assistant Commissioner-Large Taxpayers Service and not by the CIR;
(2) the date of acceptance was not shown; (3) they did not specify the kind and amount
of the tax due; and (4) the waivers speak of a request for extension of time within which
to present additional documents and not for reinvestigation and/or reconsideration of the
pending internal revenue case as required under RMO No. 20-90.50
Tested against the requirements of RMO 20-90 and relevant jurisprudence, the Court
cannot but agree with the CTA's finding that the waivers subject of this case suffer from
the following defects:
1. At the time when the first waiver took effect, on June 2, 2006, the period for the CIR to
assess STI for deficiency EWT and deficiency VAT for fiscal year ending March 31, 2003,
had already prescribed. To recall, the CIR only had until April 17, 2006 (for EWT) and
May 25, 2006 (for VAT), to issue the subject assessments.
2. STI's signatory to the three waivers had no notarized written authority from the
corporation's board of directors. It bears to emphasize that RDAO No. 05-01 mandates
the authorized revenue official to ensure that the waiver is duly accomplished and signed
by the taxpayer or his authorized representative before affixing his signature to signify
acceptance of the same; and in case the authority is delegated by the taxpayer to a
representative, as in this case, the concerned revenue official shall see to it that such
delegation is in writing and duly notarized. The waiver should not be accepted by the
concerned BIR office and official unless notarized.51
3. Similar to Standard Chartered Bank, the waivers in this case did not specify the kind of
tax and the amount of tax due. It is established that a waiver of the statute of limitations
is a bilateral agreement between the taxpayer and the BIR to extend the period to assess
or collect deficiency taxes on a certain date.52 Logically, there can be no agreement if the
kind and amount of the taxes to be assessed or collected were not indicated. Hence,
specific information in the waiver is necessary for its validity.
Verily, considering the foregoing defects in the waivers executed by STI, the periods for
the CIR to assess or collect the alleged deficiency income tax, deficiency EWT and
deficiency VAT were not extended. The assessments subject of this case, which were
issued by the BIR beyond the three-year prescriptive, are therefore considered void and
of no legal effect. Hence, the CT A committed no reversible error in cancelling and setting
aside the subject assessments on the ground of prescription.
STI
is
not
the defense of prescription.
estopped
from
invoking
As regards the CIR's reliance on the case of RCBC and its insistence that STI's request
for reinvestigation, which resulted in a reduced assessment, bars STI from raising the
defense of prescription, the Court finds the same bereft of merit.
As correctly stated by the CTA, RCBC is not on all fours with the instant case. The
estoppel upheld in the said case arose from the taxpayer's act of payment and not on the
reduction in the amount of the assessed taxes. The Court explained that RCBC's partial
payment of the revised assessments effectively belied its insistence that the waivers are
invalid and the assessments were issued beyond the prescriptive period. Here, as no
such payment was made by STI, mere reduction of the amount of the assessment
because of a request for reinvestigation should not bar it from raising the defense of
prescription.
At this juncture, the Court deems it important to reiterate its ruling in Commissioner of
Internal Revenue v. Kudos Metal Corporation,53 that the doctrine of estoppel cannot be
applied as an exception to the statute of limitations on the assessment of taxes
considering that there is a detailed procedure for the proper execution of the waiver, which
the BIR must strictly follow. The BIR cannot hide behind the doctrine of estoppel to cover
its failure to comply with RMO 20-90 and RDAO 05-01, which the BIR itself had issued.
Having caused the defects in the waivers, the BIR must bear the consequence. It cannot
simply shift the blame to the taxpayer.54
WHEREFORE, premises considered, the instant petition for review is
hereby DENIED. The Decision dated March 24, 2015 and the Resolution dated
September 2, 2015 of the Court of Tax Appeals En Banc in CTA EB No. 1050 are
hereby AFFIRMED.
SO ORDERED.
ECOND DIVISION
July 26, 2017
G.R. No. 197526
CE LUZON GEOTHERMAL POWER COMPANY, INC.,
Petitioner
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent
x-----------------------x
G.R. No. 199676-77
REPUBLIC OF THE PHILIPPINES, represented by the
BUREAU OF INTERNAL REVENUE, Petitioner,
vs.
CE LUZON GEOTHERMAL POWER COMPANY, INC.,
Respondent.
DECISION
LEONEN, J.:
The 120-day and 30-day reglementary periods under Section
112(C) of the National Internal Revenue Code are both mandatory
and jurisdictional. Non-compliance with these periods renders a
judicial claim for refund of creditable input tax premature.
Before this Court are two (2) consolidated Petitions for Review
concerning the prescriptive period in filing judicial claims for
unutilized creditable input tax or input Value Added Tax (VAT).
The first Petition,1 docketed as G.R. No. 197526, was filed by
CE Luzon Geothermal Power Company, Inc. (CE Luzon) against the
Commissioner of Internal Revenue. The second Petition,2 docketed
as G.R. Nos. 199676-77, was instituted by the Bureau of Internal
Revenue, on behalf of the Republic of the Philippines, against CE
Luzon.
CE Luzon is a domestic corporation engaged in the energy
industry.3 It owns and operates the CE Luzon Geothermal Power
Plant, which generates power for sale to the Philippine National Oil
Company-Energy Development Corporation by virtue of an energy
conversion agreement.4 CE Luzon is a VAT-registered taxpayer with
Tax Identification Number 003- 924-356-000.5
The sale of generated power by generation companies is a
zero-rated transaction under Section 6 of Republic Act No. 9136.6
In the course of its operations, CE Luzon incurred unutilized
creditable input tax amounting to ₱26,574,388.99 for taxable year
2003.7 This amount was duly reflected in its amended quarterly VAT
returns.8 CE Luzon then filed before the Bureau of Internal Revenue
an administrative claim for refund of its unutilized creditable input tax
as follows:
Quarter
Date of Piling Unutilized Creditable Input Tax
1st
January 20, 2005
[₱]4, 785,234. 70
2nd
March 31, 2005
[₱]4,568,458.49
3rd
June 7, 2005 [₱]7,455,413.97
4th
June 7, 2005 [₱]9, 765,281.83
Total [₱]26,574,388.999
Without waiting for the Commissioner of Internal Revenue to
act on its claim, or for the expiration of 120 days, CE Luzon instituted
before the Court of Tax Appeals a judicial claim for refund of its first
quarter unutilized creditable input tax on March 30, 2005.10 The
petition was docketed as CTA Case No. 7180.11
Meanwhile, on June 24, 2005, CE Luzon received the
Commissioner of Internal Revenue's decision denying its claim for
refund of creditable input tax for the second quarter of 2003.12
On June 30, 2005, CE Luzon filed before the Court of Tax
Appeals a judicial claim for refund of unutilized creditable input tax
for the second to fourth quarters of taxable year 2003.13 The petition
was docketed as CTA Case No. 7279.14
The material dates are summarized below:
Period of
Claim Taxable
Year 2003
Date of Filing
Administrative Claim
of Receipt of
Denial of Claim
Expiration of 120 days
Date
Date of Filing of
Petition for Review
1st quarter January 20, 2005
March 30, 2005
May 20, 2005
2nd quarter May 31, 2005
June 30, 2005
-
June
24,
2005
3rd quarter
30, 2005
June 7, 2005 October 5, 2005
-
June
4th quarter
30, 200515
June 7, 2005 October 5, 2005
-
June
In his Answer,16 the Commissioner of Internal Revenue
asserted, among others, that CE Luzon failed to comply with the
invoicing requirements under the law.17
In the Decision18 dated April 21, 2009, the Court of Tax
Appeals Second Division partially granted CE Luzon's claim for
unutilized creditable input tax. It ruled that both the administrative
and judicial claims of CE Luzon were brought within the two (2)-year
prescriptive period.19 However, the Court of Tax Appeals Second
Division disallowed the amount of ₱3,084,874.35 to be refunded.20
CE Luzon was only able to substantiate ₱22,647,638.47 of its
claim.21 The Court of Tax Appeals Second Division ordered the
Commissioner of Internal Revenue to issue a tax credit certificate or
to refund CE Luzon the amount of ₱22,647,638.47 representing CE
Luzon's creditable input tax for taxable year 2003.22
CE Luzon and the Commissioner of Internal Revenue both
moved for reconsideration.23 In the Resolution24 dated October 19,
2009, the Court of Tax Appeals Second Division denied both motions
for lack of merit.
CE Luzon and the Commissioner of Internal Revenue then
filed their respective Petitions for Review before the Court of Tax
Appeals En Banc. The Petitions were docketed as C.T.A. EB No. 553
and C.T.A. EB No. 554, respectively.25
In the Decision26 dated July 20, 2010, the Court of Tax
Appeals En Banc partially granted CE Luzon's Petition for Review.27
The Court of Tax Appeals En Banc ordered the Commissioner of
Internal Revenue to issue a tax credit certificate or to refund CE
Luzon the amount of ₱23,489,514.64, representing CE Luzon's duly
substantiated creditable input tax for taxable year 2003.28
However, on November 22, 2010, the Court of Tax Appeals
En Banc rendered an Amended Decision,29 setting aside its
Decision dated July 20, 2010.30 The Court of Tax Appeals En Banc
ruled that CE Luzon failed to observe the 120-day period under
Section 112(C) of the National Internal Revenue Code. Hence, it was
barred from claiming a refund of its input VAT for taxable year
2003.31 The Court of Tax Appeals En Banc held that CE Luzon's
judicial claims were prematurely filed.32 CE Luzon should have
waited either for the Commissioner of Internal Revenue to render a
decision or for the 120-day period to expire before instituting its
judicial claim for refund:33
WHEREFORE, premises considered:
1) the Commissioner of Internal Revenue's "Motion for
Reconsideration" is hereby GRANTED. Accordingly, our Decision
dated July 20, 2010 in the above[-]captioned case is hereby
RECALLED and SET ASIDE, and a new one is hereby entered
DISMISSING CE Luzon's Petition for Review in C.T.A. EB No. 553
and GRANTING CIR's Petition for Review in C.T.A. EB No. 554.
Accordingly, the Decision dated April 21, 2009 and Resolution dated
October 19, 2009 rendered by the Former Second Division in C.T.A.
CASE Nos. 7180 and 7279 are hereby REVERSED and SET ASIDE.
2) For being moot and academic, CE LUZON's "Motion for
Partial Reconsideration" is hereby DENIED.
SO ORDERED.34
CE Luzon moved for partial reconsideration.35 On June 27,
2011, the Court of Tax Appeals En Banc rendered a second
Amended Decision,36 partially granting CE Luzon's claim for
unutilized creditable input tax but only for the second quarter of
taxable year 2003 and only up to the extent of ₱3,764,386.47.37 The
Court of Tax Appeals En Banc relied on Commissioner of Internal
Revenue v. Aichi Forging Company of Asia, Inc.38 in partially
granting the petition.
The Court of Tax Appeals En Banc found that CE Luzon's
judicial claim for refund of input tax for the second quarter of 2003
was timely filed.39 However, the Court of Tax Appeals En Banc
disallowed ₱804,072.02 to be refunded because of CE Luzon's noncompliance with the documentation and invoicing requirements:40
WHEREFORE, premises considered, CE Luzon Geothermal
Power Company, Inc.'s "Motion for Reconsideration" is PARTLY
GRANTED. Accordingly, our Amended Decision dated November
22, 2010 only in so far as it dismissed CE Luzon Geothermal Power
Company, Inc.'s 2nd quarter claim, is hereby LIFTED and SET
ASIDE, and another one is hereby entered ordering the
Commissioner of Internal Revenue to REFUND or to ISSUE A TAX
CREDIT CERTIFICATE in favor of CE Luzon Geothermal Power,
Inc. in the reduced amount of THREE MILLION SEVEN HUNDRED
SIXTY FOUR THOUSAND THREE HUNDRED EIGHTY SIX AND
471100 PESOS (P3,764,386.47), representing its unutilized input
VAT for the second quarter of taxable year 2003.
SO ORDERED.41
On September 2, 2011, CE Luzon filed before this Court a
Petition for Review on Certiorari42 challenging the second Amended
Decision dated June 27, 2011 of the Court of Tax Appeals En
Banc.43 The Petition was docketed as G.R. No. 197526.44
On January 27, 2012, the Commissioner of Internal Revenue
filed a Petition for Review on Certiorari45 assailing the second
Amended Decision dated June 27, 2011 and the Resolution dated
December 1, 2011 of the Court of Tax Appeals En Banc46 insofar as
it granted CE Luzon's second quarter claim for refund.47 The Petition
was docketed as G.R. Nos. 199676-77.48
The Commissioner of Internal Revenue filed a Comment on
the Petition for Review49 in G.R. No. 197526 on February 7, 2012.
On April 11, 2012, the Petitions were consolidated.50
In the Resolution dated August 1, 2012, CE Luzon was
required to file a comment on the Petition in G.R. Nos. 199676-77
and a reply to the comment in G.R. No. 197526.51
On November 14, 2012, CE Luzon filed its Comment on the
Petition in G.R. Nos. 199676-7752 and its Reply to the comment on
the Petition in G.R. No. 197526.53
In the Resolution54 dated June 26, 2013, this Court gave due
course to the petitions and required the parties to submit their
respective memoranda. Meanwhile, on July 19, 2013, CE Luzon filed
a Supplement to its Petition.55
The Commissioner of Internal Revenue filed his
Memorandum56 on September 16, 2013 while CE Luzon filed its
Memorandum57 on September 20, 2013.
In its Petition docketed as G.R. No. 197526, CE Luzon asserts
that its judicial claims for refund of input VAT attributable to its zerorated sales were timely filed.58 Relying on Atlas Consolidated Mining
and Development Corporation v. Commissioner of Internal
Revenue,59 CE Luzon argues that the two (2)-year prescriptive
period under Section 229 of the National Internal Revenue Code60
governs both the administrative and judicial claims for refund of
creditable input tax.61 CE Luzon contends that creditable input tax
attributable to zero-rated sales is excessively collected tax.62
CE Luzon asserts that since the prescriptive periods in
Section 112(C) of the National Internal Revenue Code are merely
permissive, it should yield to Section 229.63 Moreover, Section
112(C) does not state that a taxpayer is barred from filing a judicial
claim for non-compliance with the 120-day period.64
CE Luzon emphasizes that the doctrine in Atlas directly
addressed the correlation between Section 229 and Section 112(C)
of the National Internal Revenue Code. Atlas stated that a taxpayer
seeking a refund of input VAT may invoke Section 229 because input
VAT was an "erroneously collected national internal revenue tax."65
CE Luzon points out that Aichi never established a binding rule
regarding the prescriptive periods in filing claims for refund of
creditable input tax.66
Assuming that Aichi correctly interpreted Section 112(C) of
the National Internal Revenue Code, CE Luzon states that it should
not be applied in this case because CE Luzon's claims for refund
were filed before Aichi's promulgation.67 The prevailing rule at the
time when CE Luzon instituted its judicial claim for refund was that
both the administrative and judicial claims should be filed within two
(2) years from the date the tax is paid.68
In any case, CE Luzon argues that the Commissioner of
Internal Revenue is estopped from assailing the timeliness of its
judicial claims.69 The Commissioner of Internal Revenue
categorically stated in several of its rulings that taxpayers need not
wait for the expiration of 120 days before instituting a judicial claim
for refund of creditable input tax.70 CE Luzon relies on the following
Bureau of Internal Revenue issuances: (1) Section 4.104-2,
Revenue Regulations No. 7-95; (2) Revenue Memorandum Circular
No. 42-99; (3) Revenue Memorandum Circular No. 42-2003, as
amended by Revenue Memorandum Circular No. 49-2003; (4)
Revenue Memorandum Circular No. 29-2009; and (5) Bureau of
Internal Revenue Ruling DA-489- 03.71
On the other hand, the Commissioner of Internal Revenue
argues that Sections 112(C) and 229 of the National Internal
Revenue Code need not be harmonized because they are clear and
explicit.72 Laws should only be construed if they are "ambiguous or
doubtful in meaning."73 Section 112(C) clearly provides that in
claims for refund of creditable input tax, taxpayers can only elevate
their judicial claim upon receipt of the decision denying their
administrative claim or upon the lapse of 120 days.74 Moreover, the
tax covered in Section 112 is different from the tax in Section 229.
Section 112(C) covers unutilized input tax. In contrast, Section 229
pertains to national internal revenue tax that is erroneously or illegally
collected.75
The Commissioner of Internal Revenue further contends that
CE Luzon's reliance on Atlas is misplaced.76 Atlas neither directly
nor indirectly raised the issue of prescriptive periods in filing claims
for refund of input VAT. In addition, Atlas was decided under the old
tax code.77 The clear and categorical precedent regarding the issue
of prescriptive periods in refunds of input VAT is Aichi.78
Although the Bureau of Internal Revenue has ruled that
judicial claims for refund of input VAT may be brought within the two
(2)-year period under Section 229, the Commissioner of Internal
Revenue asserts that the State cannot be estopped by the errors or
mistakes of its agents.79 An erroneous construction does not create
a vested right on those who have relied on it. Taxpayers can neither
prevent the correction of the erroneous interpretation nor excuse
themselves from compliance.80
In the Petition docketed as G.R. No. 199676-77, the
Commissioner of Internal Revenue assails the June 27, 2011
Amended Decision and December 1, 2011 Resolution of the Court
of Tax Appeals En Banc insofar as it granted CE Luzon's second
quarter claim for refund of VAT for taxable year 2003.81
According to the Commissioner of Internal Revenue,
taxpayers should comply with the provisions of Sections 236, ll0(A),
113, and 114 of the National Internal Revenue Code when claiming
a refund of unutilizedcreditable input tax. They should also meet the
requirements enumerated under the relevant Bureau of Internal
Revenue regulations. Moreover, it must be proven that the input tax
being claimed is attributable to zero-rated sales.82 The
Commissioner of Internal Revenue asserts that CE Luzon failed to
comply with these requirements.83
On the other hand, CE Luzon argues that the Commissioner
of Internal Revenue is estopped from questioning CE Luzon's noncompliance with the documentation requirements under the law. It
points out that its administrative claim for input VAT for the second
quarter of taxable year 2003 was denied by the Commissioner of
Internal Revenue based on the finding that CE Luzon presumptively
opted to carry over its excess input tax to the succeeding taxable
quarters.84
CE Luzon further contends that non-submission of complete
documents is not fatal to a judicial claim for refund of input tax.85
The Court of Tax Appeals is not bound by the conclusions and
findings of the Bureau of Internal Revenue.86
Finally, CE Luzon asserts that it has proven its entitlement to
a refund of input VAT for the second quarter of 2003.87 First, its
judicial claim for refund was timely filed.88 Second, its sales were
effectively zero-rated transactions under Republic Act No. 9136.89
Third, although it opted to carry over its excess input tax, its actual
claim was deducted from the total excess input VAT and was not part
of what was carried over to the succeeding taxable quarters.90 CE
Luzon adds that the Commissioner of Internal Revenue did not
identify which documents it failed to submit.91
This case presents two (2) issues for resolution:
First, whether CE Luzon Geothermal Power, Inc.'s judicial
claims for refund of input Value Added Tax for taxable year 2003
were filed within the prescriptive period;92 and
Finally, whether CE Luzon Geothermal Power, Inc. is entitled
to the refund of input Value Added Tax for the second quarter of
taxable year 2003.93 Subsumed in this issue is whether it has
substantiated this claim.94
I
Excess input tax or creditable input tax is not an erroneously,
excessively, or illegally collected tax.95 Hence, it is Section 112(C)
and not Section 229 of the National Internal Revenue Code that
governs claims for refund of creditable input tax.
The tax credit system allows a VAT-registered entity to "credit
against or subtract from the VAT charged on its sales or outputs the
VAT paid on its purchases, inputs and imports."96
The VAT paid by a VAT-registered entity on its imports and
purchases of goods and services from another VAT-registered entity
refers to input tax.97 On the other hand, output tax refers to the VAT
due on the sale of goods, properties, or services of a VAT-registered
person.98
Ordinarily, VAT-registered entities are liable to pay excess
output tax if their input tax is less than their output tax at any given
taxable quarter. However, if the input tax is greater than the output
tax, VAT-registered persons can carry over the excess input tax to
the succeeding taxable quarter or quarters.99
Nevertheless, if the excess input tax is attributable to zerorated or effectively zero-rated transactions, the excess input tax can
only be refunded to the taxpayer or credited against the taxpayer's
other national internal revenue tax. Availing any of the two (2) options
entail compliance with the procedure outlined in Section 112,100 not
under Section 229, of the National Internal Revenue Code.
Section 229 of the National Internal Revenue Code, in relation
to Section 204(C), pertains to the recovery of excessively,
erroneously, or illegally collected national internal revenue tax.
Sections 204(C) and 229 provide:
Section 204. Authority of the Commissioner to Compromise,
Abate and Refund or Credit Taxes. - The Commissioner may -
....
(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 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.
....
Section 229. Recovery of Tax Erroneously or Illegally
Collected. - No suit or proceeding shall be maintained in any court
for the recovery of any national internal revenue tax hereafter alleged
to have been erroneously or illegally assessed or collected, or of any
penalty claimed to have been collected without authority, or of any
sum alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained,
whether or not such tax, penalty, or sum has been paid under protest
or duress.
In any case, no such suit or proceeding shall be filed after the
expiration of two (2) years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise after
payment: Provided, however, That the Commissioner may, even
without a written claim therefor, refund or credit any tax, where on
the face of the return upon which payment was made, such payment
appears clearly to have been erroneously paid.
The procedure outlined above provides that a claim for refund
of excessively or erroneously collected taxes should be made within
two (2) years from the date the taxes are paid. Both the
administrative and judicialclaims should be brought within the two
(2)-year prescriptive period. Otherwise, they shall forever be
barred.101 However, Section 229 presupposes that the taxes sought
to be refunded were wrongfully paid.102
It is unnecessary to construe and harmonize Sections 112(C)
and 229 of the National Internal Revenue Code. Excess input tax or
creditable input tax is not an excessively, erroneously, or illegally
collected tax because the taxpayer pays the proper amount of input
tax at the time it is collected.103 That a VAT-registered taxpayer
incurs excess input tax does not mean that it was wrongfully or
erroneously paid. It simply means that the input tax is greater than
the output tax, entitling the taxpayer to carry over the excess input
tax to the succeeding taxable quarters.104 If the excess input tax is
derived from zero-rated or effectively zero-rated transactions, the
taxpayer may either seek a refund of the excess or apply the excess
against its other internal revenue tax.105
The distinction between "excess input tax" and "excessively
collected taxes" can be understood further by examining the
production process vis-a-vis the VAT system. In Commissioner of
Internal Revenue v. San Roque:106
The input VAT is not "excessively" collected as understood
under Section 229 because at the time the input VAT is collected the
amount paid is correct and proper. The input VAT is a tax liability of,
and legally paid by, a VAT-registered seller of goods, properties or
services used as input by another VAT-registered person in the sale
of his own goods, properties, or services. This tax liability is true even
if the seller passes on the input VAT to the buyer as part of the
purchase price. The second VAT-registered person, who is not
legally liable for the input VAT, is the one who applies the input VAT
as credit for his own output VAT. If the input VAT is in fact
"excessively" collected as understood under Section 229, then it is
the first VAT-registered person - the taxpayer who is legally liable
and who is deemed to have legally paid for the input VAT - who can
ask for a tax refund or credit under Section 229 as an ordinary refund
or credit outside of the VAT System. In such event, the second VATregistered taxpayer will have no input VAT to offset against his own
output VAT.
In a claim for refund or credit of "excess" input VAT under
Section 110 (B) and Section 112 (A), the input VAT is not
"excessively" collected as understood under Section 229. At the time
of payment of the input VAT the amount paid is the correct and
proper amount. Under the VAT System, there is no claim or issue
that the input VAT is "excessively" collected, that is, that the input
VAT paid is more than what is legally due. The person legally liable
for the input VAT cannot claim that he overpaid the input VAT by the
mere existence of an "excess" input VAT. The term "excess" input
VAT simply means that the input VAT available as credit exceeds the
output VAT, not that the input VAT is excessively collected because
it is more than what is legally due. Thus, the taxpayer who legally
paid the input VAT cannot claim for refund or credit of the input VAT
as "excessively" collected under Section 229.107 (Citations omitted,
emphasis supplied)
Considering that creditable input tax is not an excessively,
erroneously, or illegally collected tax, Section 112(A) and (C) of the
National Internal Revenue Code govern:
Section 112. Refunds or Tax Credits of Input Tax. -
(A) Zero-rated or Effectively Zero-rated Sales. - Any VATregistered person, whose sales are zero-rated or effectively zerorated may, within two (2) years after the close of the taxable quarter
when the sales were made, apply for the issuance of a tax credit
certificate or refund of creditable input tax due or paid attributable to
such sales, except transitional input tax, to the extent that such input
tax has not been applied against output tax: Provided, however, That
in the case of zero-rated sales under Section 106(A)(2)(a)(l), (2) and
(B) and Section 108 (B)(l) and (2), the acceptable foreign currency
exchange proceeds thereof had been duly accounted for in
accordance with the rules and regulations of the Bangko Sentral ng
Pilipinas (BSP): Provided, further, That where the taxpayer is
engaged in zero-rated or effectively zero-rated sale and also in
taxable or exempt sale of goods or properties or services, and the
amount of creditable input tax due or paid cannot be directly and
entirely attributed to any one of the transactions, it shall be allocated
proportionately on the basis of the volume of sales ...
....
(C) Period within which Refund or Tax Credit of Input Taxes
shall be Made. - In proper cases, the Commissioner shall grant a
refund or issue the tax credit certificate for creditable input taxes
within one hundred twenty (120) days from the date of submission of
complete documents in support of the application filed in accordance
with Subsection (A) hereof.
In case of full or partial denial of the claim for tax refund or tax
credit, or the failure on the part of the Commissioner to act on the
application within the period prescribed above, the taxpayer affected
may, within thirty (30) days from the receipt of the decision denying
the claim or after the expiration of the one hundred twenty dayperiod, appeal the decision or the unacted claim with the Court of
Tax Appeals.
Section l 12(C) of the National Internal Revenue Code
provides two (2) possible scenarios.108 The first is when the
Commissioner of Internal Revenue denies the administrative claim
for refund within 120 days.109 The second is when the
Commissioner of Internal Revenue fails to act within 120 days.110
Taxpayers must await either for the decision of the Commissioner of
Internal Revenue or for the lapse of 120 days before filing their
judicial claims with the Court of Tax Appeals.111 Failure to observe
the 120-day period renders the judicial claim premature.112
CE Luzon's reliance on Atlas is misplaced because Atlas did
not squarely address the issue regarding the prescriptive period in
filing judicial claims for refund of creditable input tax.113 Atlas did not
expressly or impliedly interpret Section 112(C) of the National
Internal Revenue Code.114 The main issue in Atlas was the
reckoning point of the two (2)-year prescriptive period stated in
Section 112(A).115 The interpretation in Atlas was later rectified in
Commissioner of Internal Revenue v. Mirant Pagbilao
Corporation.116
It was Aichi117 that directly tackled and interpreted Section
112(C) of the National Internal Revenue Code. In determining
whether Aichi's judicial claim for refund of creditable input tax was
timely filed, this Court declared:
Section 112 (D) of the NIRC clearly provides that the CIR has
"120 days, from the date of the submission of the complete
documents in support of the application [for tax refund/credit]," within
which to grant or deny the claim. In case of full or partial denial by
the CIR, the taxpayer's recourse is to file an appeal before the CTA
within 30 days from receipt of the decision of the CIR. However, if
after the 120-day period the CIR fails to act on the application for tax
refund/credit, the remedy of the taxpayer is to appeal the inaction of
the CIR to CTA within 30 days.
....
Respondent's assertion that the non-observance of the 120day period is not fatal to the filing of a judicial claim as long as both
the administrative and the judicial claims are filed within the two-year
prescriptive period has no legal basis.
There is nothing in Section 112 of the NIRC to support
respondent's view. Subsection (A) of the said provision states that
"any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two years after the close of the
taxable quarter when the sales were made, apply for the issuance of
a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales." The phrase "within two (2) years ... apply
for the issuance of a tax credit certificate or refund" refers to
applications for refund/credit filed with the CIR and not to appeals
made to the CTA. This is apparent in the first paragraph of
subsection (D) of the same provision, which states that the CIR has
"120 days from the submission of complete documents in support of
the application filed in accordance with Subsections (A) and (B)"
within which to decide on the claim.118
The Aichi doctrine was reiterated by this Court in San
Roque,119 which held that the 120-day and 30-day periods in
Section 112(C) of the National Internal Revenue Code are both
mandatory and jurisdictional.120
In the present case, only CE Luzon's second quarter claim
was filed on time. Its claims for refund of creditable input tax for the
first, third, and fourth quarters of taxable year 2003 were filed
prematurely. It did not wait for the Commissioner of Internal Revenue
to render a decision or for the 120-day period to lapse before
elevating its judicial claim with the Court of Tax Appeals.
However, despite its non-compliance with Section 112(C) of
the National Internal Revenue Code, CE Luzon's judicial claims are
shielded from the vice of prematurity.1âwphi1 It relied on the Bureau
of Internal Revenue Ruling DA-489-03,121 which expressly states
that "a taxpayer-claimant need not wait for the lapse of the 120-day
period before it could seek judicial relief with the [Court of Tax
Appeals] by way of a Petition for Review."122
San Roque exempted taxpayers who had relied on the
Bureau of Internal Revenue Ruling DA-489-03 from the strict
application of Section 112(C) of the National Internal Revenue
Code.123 This Court characterized the Bureau of Internal Revenue
Ruling DA-489-03 as a general interpretative rule,124 which has
"misle[d] all taxpayers into filing prematurely judicial claims with the
C[ourt] [of] T[ax] A[ppeals]."125 Although the Bureau of Internal
Revenue Ruling DA-489-03 is an "erroneous interpretation of the
law,"126 this Court made an exception explaining that "[t]axpayers
should not be prejudiced by an erroneous interpretation by the
Commissioner, particularly on a difficult question of law."127
Taxpayers who have relied on the Bureau of Internal Revenue
Ruling DA-489-03, from its issuance on December 10, 2003 until its
reversal on October 6, 2010 by this Court in Aichi, are, therefore,
shielded from the vice of prematurity.128 CE Luzon may claim the
benefit of the Bureau of Internal Revenue Ruling DA-489-03. Its
judicial claims for refund of creditable input tax for the first, third, and
fourth quarters of 2003 should be considered as timely filed.
However, the case should be remanded to the Court of Tax
Appeals for the proper computation of creditable input tax to which
CE Luzon is entitled.
II
In a Rule 45 Petition, only questions of law may be raised.129
"This Court is not a trier of facts."130 The determination of whether
CE Luzon duly substantiated its claim for refund of creditable input
tax for the second quarter of taxable year 2003 is a factual matter
that is generally beyond the scope of a Petition for Review on
Certiorari. Unless a case falls under any of the exceptions, this Court
will not undertake a factual review and look into the parties' evidence
and weigh them anew.
In the Petition docketed as G.R. Nos. 199676-77, the
Commissioner of Internal Revenue failed to establish that this case
is exempted from the general rule. Hence, this Court will no longer
disturb the Court of Tax Appeals' findings on the matter.
WHEREFORE, the Petition in G.R. No. 197526 is GRANTED
while the Petition in G.R. Nos. 199676-77 is DENIED. The Amended
Decision dated June 27, 2011 of the Court of Tax Appeals En Banc
in C.T.A. EB NO. 554 is REVERSED and SET ASIDE. However, the
case is REMANDED to the Court of Tax Appeals for the
determination and computation of creditable input tax to which CE
Luzon Geothermal Power Company, Inc. is entitled.
SO ORDERED.
SECOND DIVISION
July 12, 2017
G.R. No. 183408
COMMISSIONER OF INTERNAL REVENUE, Petitioner
vs.
LANCASTER PHILIPPINES, INC., Respondent
DECISION
MARTIRES, J.:
This is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court seeking
to reverse and set aside the 30 April 2008 Decision2 and 24 June 2008 Resolution3 of
the Court of Tax Appeals (CTA) En Banc in CTA EB No. 352.
The assailed decision and resolution affirmed the 12 September 2007 Decision4 and 12
December 2007 Resolution5 of the CTA First Division (CTA Division) in CTA Case No.
6753.
THE FACTS
The facts6 are undisputed.
Petitioner Commissioner of Internal Revenue (CIR) is authorized by law, among others,
to investigate or examine and, if necessary, issue assessments for deficiency taxes.
On the other hand, respondent Lancaster Philippines, Inc. (Lancaster) is a domestic
corporation established in 1963 and is engaged in the production, processing, and
marketing of tobacco.
In 1999, the Bureau of Internal Revenue (BIR) issued Letter of Authority (LOA) No.
00012289 authorizing its revenue officers to examine Lancaster's books of accounts and
other accounting records for all internal revenue taxes due from taxable year 1998 to an
unspecified date. The LOA reads:
SEPT. 30 1999
LETTER OF AUTHORITY
LANCASTER PHILS. INC.
11th Flr. Metro Bank Plaza
Makati City
SIRJMADAM/GENTLEMEN:
The bearer(s) hereof RO’s Irene Goze & Rosario Padilla to be Supervise by GH
Catalina_Leny Barrion of the Special Team created pursuant to RSO 770-99 is/are
authorized to examine your books of accounts and other accounting records for a11
internal revenue taxes for the period from example year, 1998 to ______, 19___. He
is/[t]hey are provided with the necessary identification card(s) which shall be presented
to you upon request.
It is requested that all facilities be extended to the Revenue Officer(s) in order to expedite
the examination.
You will be duly informed of the results of the examination upon approval of the report
submitted by the aforementioned Revenue Officer(s).7
After the conduct of an examination pursuant to the LOA, the BIR issued a Preliminary
Assessment Notice (PAN)8 which cited Lancaster for:
1) overstatement of its purchases for the fiscal year April 1998 to March1999; and 2)
noncompliance with the generally accepted accountingprinciple of proper matching of
cost and revenue.9 More concretely, the BIR disallowed the purchases of tobacco from
farmers covered by Purchase Invoice Vouchers (PIVs) for the months of February and
March 1998 as deductions against income for the fiscal year April 1998 to March 1999.
The computation of Lancaster's tax deficiency, with the details of discrepancies, is
reproduced below:
INCOME TAX:
Taxable Income per ITR
-0-
Add: Adjustments-Disallowed purchases 11,496,770.18
Adjusted Taxable Income per Investigation
₱11,496,770.18
INCOME TAX DUE-Basic
April 1 - December 31, 1998
(9/12x ₱l1,496,770.18 x 34%)
₱2,913,676.4
January 1 - March 31, 1999
(3/12x ₱l1,496,770.18 x 33%)
948,483.54
Income tax still due per investigation
₱3,880,159.94
Interest (6/15/99 to 10115/02) .66 2,560,905.56
Compromise Penalty
25,000
TOTAL DEFlCIENCY INCOME TAX
₱6,466,065.50
DETAILS OF DISCREPANCIES
Assessment No. LTAID II-98-00007
A. INCOME TAX (₱3,880,159.94) - Taxpayer's fiscal year covers April 1998 to March
1999. Verification of the books of accounts and pertinent documents disclosed that there
was an overstatement of purchases for the year. Purchase Invoice Vouchers (PIVs) for
February and March 1998 purchases amounting to ₱ll,496,770.18 were included as part
of purchases for taxable year 1998 in violation of Section 45 of the National Internal
Revenue Code in relation to Section 43 of the same and Revenue Regulations No. 2
which states that the Crop-Basis method of reporting income may be used by a farmer
engaged in producing crops which take more than one (1) year from the time of planting
to the time of gathering and disposing of crop, in such a case, the entire cost of producing
the crop must be taken as deduction in the year in which the gross income from the crop
is realized and that the taxable income should be computed upon the basis of the
taxpayer's annual accounting period, (fiscal or calendar year, as the case may be) in
accordance with the method of accounting regularly employed in keeping with the books
of the taxpayer. Furthermore, it did not comply with the generally accepted principle of
proper matching of cost and revenue.10
Lancaster replied11 to the PAN contending, among other things, that for the past
decades, it has used an entire 'tobacco-cropping season' to determine its total purchases
covering a one-year period from 1 October up to 30 September of the followingyear (as
against its fiscal year which is from 1 April up to 31 March of the followingyear); that it has
been adopting the 6~month timing difference to conform to the matching concept (of cost
and revenue); and that this has long been installed as part of the company's system and
consistently applied in its accounting books.12
Invoking the same provisions of the law cited in the assessment, i.e., Sections 4313 and
4514 of the National Internal Revenue Code (NJRC), in conjunction with Section 4515 of
Revenue Regulation No. 2, as amended, Lancaster argued that the February and March
1998 purchases should not have been disallowed. It maintained that the situation of
farmers engaged in producing tobacco, like Lancaster, is unique in that the costs, i.e.,
purchases, are taken as of a different period and posted in the year in which the gross
income from the crop is realized. Lancaster concluded that it correctly posted the subject
purchases in the fiscal year ending March 1999 as it was only in this year that the gross
income from the crop was realized.
Subsequently on 6 November 2002, Lancaster received from the BIR a final assessment
notice (FAN),16 captioned Formal Letter of Demand andAudit Result/Assessment .Notice
LTAID II IT-98-00007, dated 11 October2002, which assessed Lancaster's deficiency
income tax amounting to Pl l,496,770.18, as a consequence of the disallowance of
purchases claimed for the taxable year ending199931. March 1999.
Lancaster duly protested17 the FAN. There being no action taken by the Commissioner
on its protest, Lancaster filed on 21 August 2003 a petition for review18 before the CTA
Division.
The Proceedings before the CTA
In its petition before the CTA Division, Lancaster essentially reiterated its arguments in
the protest against the assessment, maintaining that the tobacco purchases in February
and March 1998 are deductible in its fiscal year ending 31 March 1999.
The issues19 raised by the parties for the resolution of the CTA Division were:
I
WHETHER OR NOT PETITIONER COMPLIED WITH THE GENERALLY ACCEPTED
ACCOUNTING PRINCIPLE OF PROPER MATCHING OF COST AND REVENUE;
II
WHETHER OR NOT THE DEFICIENCY TAX ASSESSMENT AGAINST PETITIONER
FOR THE TAXABLE YEAR 1998 IN THE AGGREGATE AMOUNT OF ₱6,466,065.50
SHOULD BE CANCEILED AND WITHDRAWN BY RESPONDENT.
After trial, the CTA Division granted the petition of Lancaster, disposing as follows;
IN VIEW OF THE FOREGOING, the subject Petition for Review is hereby GRANTED.
Accordingly, respondent is ORDERED to CANCEL and WITHDRAW the deficiency
income tax assessment issued against petitioner under Formal l;etter of Demand and
Audit Result/Assessment Notice No. L TAID II IT-98-00007 dated October 11, 2002, in
the amount of ₱6,466,065.50, covering the fiscal year from April l, 1998 to March 31,
1999.20
The CIR move21 but failed to obtain reconsideration of the CTA Division ruling.22
Aggrieved, the CIR sought recourse23 from the CTA En Banc to seek a reversal of the
decision and the resolution of the CTA Division.
However, the CTA En Banc found no reversible error in the CTA Division's ruling, thus, it
affirmed the cancellation of the assessment against Lancaster. The dispositive portion of
the decision of the CTA En Banc states:
WHEREFORE, premises considered, the present Petition for Review is hereby DENIED
DUE COURSE, and, accordingly DISMISSED for lack of merit.24
The CTA En Banc likewise denied25 the motion for reconsideration from its Decision.
Hence, this petition.
The CIR assigns the following errors as committed by the CTA En Banc:
I.
THE COURT OF TAX APPEALS EN BANC ERRED IN HOLDING THAT PETITIONER'S
REVENUE OFFICERS EXCEEDED THEIR AUTHORITY TO INVESTIGATE THE
PERJOD NOT COVERED BY THEIR LETTER OF AUTHORITY.
II.
THE COURT OF TAX APPEALS EN BANC ERRED IN ORDERING PETITIONER TO
CANCEL AND WITHDRAW THE DEFICIENCY ASSESSMENT ISSUED AGAINST
RESPONDENT.26
THE COURT'S RULING
We deny the petition.
The CTA En Banc did not err when it ruled
that the BIR revenue officers had
exceeded their authority.
To support its first assignment of error, the CIR argues that the revenue officers did not
exceed their authority when, upon examination (of the Lancaster's books of accounts and
other accounting records), they verified that Lancaster made purchases for February and
March of 1998, which purchases were not declared in the latter's fiscal year from 1 April
1997 to 31 March 1998. Additionally, the CIR posits that Lancaster did not raise the issue
on the scope of authority of the revenue examiners at any stage of the proceedings before
the CTA and, consequently, the CTA had no jurisdiction to rule on said issue.
On both counts, the CIR is mistaken.
A. The Jurisdiction of the CTA
Preliminarily, we shall take up the CTA's jurisdiction to rule on the issue of the scope of
authority of the revenue officers to conduct the examination of Lancaster's books of
accounts and accounting records.
The law vesting unto the CTA its jurisdiction is Section 7 of Republic Act No. 1125 (R.A.
No. 1125),27 which in part provides:
Section 7. Jurisdiction. - The Court of Tax Appeals shall exercise exclusive appellate
jurisdiction to review by appeal, as herein provided:
(1) Decisions of the Collector of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties imposed
in relation thereto, or other matters arising under the National Internal Revenue Code or
other law or part of law administered by the Bureau of Internal Revenue; x x x. (emphasis
supplied)
Under the aforecited provision, the jurisdiction of the CTA is not limited only to cases
which involve decisions or inactions of the CIR on matters relating to assessments or
:refunds but also includes other cases arising from the NIRC o:r related laws administered
by the BIR. 28 Thus, for instance, we had once held that the question of whether or not
to impose a deficiency tax assessment comes within the purview of the words
"othermatters arising under the National Internal Revenue Code."[[29]
The jurisdiction of the CTA on such other matters arising under theNIRC was retained
under the amendments introduced by R.A No. 9282.30Under R.A. No. 9282, Section 7
now reads:
Sec. 7. Jurisdiction. - The CTA shall exercise:
a. Exclusive appellate jurisdiction to review by appeal, as herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue or other
laws administered by the Bureau of Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases involving disputed
assessments, refunds of internal revenue taxes, fees or other charges, penalties in
relation thereto, or other matters arising under the National Internal Revenue Code or
other laws administered by the Bureau of Internal Revenue, where the National Internal
Revenue Code provides a specific period of action. in which case the inaction shall be
deemed a denial; x x x." (emphasis supplied)
Is the question on the authority of revenue officers to examine the books and records of
any person cognizable by the CTA?
It must be stressed that the assessment of inten1al revenue taxes is one of the duties of
the BIR. Section 2 of the NIRC states:
Sec. 2. Powers and Duties oftheBureau of Internal Revenue. - The Bureau of Internal
Revenue shall be under the supervision and control of the Department of Fin[:l.11ce and
its powers: and duties shall comprehend the assessment and collection of all national
internal revenue taxes, fees, andcharges, and the enforcement of all forfeitures, penalties,
and fines connected therewith, including the execution of judgments in all cases decided
in its favor by the Court of Tax Appeals and the ordinary courts.
The Bureau shall give effect to and administer the supervisory and police powers
conferred to it by this Code or other laws. (emphasis supplied)
In connection therewith, the CIR may authorize the examination of any taxpayer and
correspondingly make an assessment whenever necessary.31 Thus, to give more teeth
to such power of the CIR, to make an assessment, the NIRC authorizes the CIR to
examine any book, paper, record, or data of any person.32 The powers granted by law
to the CIR are intended, among other things, to determine the liability of any person for
any national internal revenue tax.
It is pursuant to such pertinent provisions of the NIRC conferring the powers to the CIR
that the petitioner (CIR) had, in this case, authorized its revenue officers to conduct an
examination of the books of account and accounting records of Lancaster, and eventually
issue a deficiency assessment against it.
From the foregoing, it is clear that the issue on whether the revenue officers who had
conducted the examination on Lancaster exceeded their authority pursuant to LOA No.
00012289 may be considered as covered by the terms "other matters" under Section 7
of R.A. No. 1125 or its amendment, R.A. No. 9282. The authority to make an examination
or assessment, being a matter provided for by the NIRC, is well within the exclusive and
appellate jurisdiction of the CTA.
On whether the CTA can resolve an issue which was not raised by the parties, we rule in
the affirmative.
Under Section 1, Rule 14 of A.M. No. 05-11-07-CTA, or the Revised Rules of the Court
of Tax Appeals,33 the CT A is not bound by the issues specifically raised by the parties
but may also rule upon related issues necessary to achieve an orderly disposition of the
case. The text of the provision reads:
SECTION 1. Rendition of judgment. - x xx
In deciding the case, the Court may not limit itself to the issues stipulated by the parties
but may also rule upon related issues necessary to achieve an orderly disposition of the
case.
The above section is clearly worded. On the basis thereof, the CTA Division was,
therefore, well within its authority to consider in its decision the question on the scope of
authority of the revenue officers who were named in the LOA even though the parties had
not raised the same in their pleadings or memoranda. The CTA En Banc was likewise
correct in sustaining the CTA Division's view concerning such matter.
B. The Scope of the Authority
of the Examining Officers
In the assailed decision of the CTA Division, the trial court observed that LOA No.
00012289 authorized the BIR officers to examine the books of account of Lancaster for
the taxable year 1998 only or, since Lancaster adopted a fiscal year (FY), for the period
1April1997 to 31March1998. However, the deficiency income tax assessment which the
BIR eventually issued against Lancaster was based on the disallowance of expenses
reported in FY 1999, or for the period 1 April 1998 to 31March1999. The CTA concluded
that the revenue examiners had exceeded their authority when they issued the
assessment against Lancaster and, consequently, declared such assessment to be
without force and effect.
We agree.
The audit process normally commences with the issuance by the CIR of a Letter of
Authority. The LOA gives notice to the taxpayer that it is under investigation for possible
deficiency tax assessment; at the same time it authorizes or empowers a designated
revenue officer to examine, verify, and scrutinize a taxpayer's books and records, in
relation to internal revenue tax liabilities for a particular period.34
In this case, a perusal of LOA No. 00012289 indeed shows that the period of examination
is the taxable year 1998. For better clarity, the pertinent portion of the LOA is again
reproduced, thus:
The bearer(s) hereof x x x is/are authorized to examine your books of accounts and other
accounting records for all internal revenue taxes for the period from taxable year, 1998 to
__, 19_. x x x." (emphasis supplied)
Even though the date after the words "taxable year 1998 to" is unstated, it is not at all
difficult to discern that the period of examination is the whole taxable year 1998. This
means that the examination of Lancaster must cover the FY period from 1April1997 to
31March1998. It could not have contemplated a longer period. The examination for the
full taxable year 1998 only is consistent with the guideline in Revenue Memorandum
Order (RMO) No. 43-90, dated 20 September 1990, that the LOA shall cover a taxable
period not exceeding one taxable year.35 In other words, absent any other valid cause,
the LOA issued in this case is valid in all respects.
Nonetheless, a valid LOA does not necessarily clothe validity to an assessment issued
on it, as when the revenue officers designated in the LOA act in excess or outside of the
authority granted them under said LOA. Recently in CIR v. De La Salle University, Inc.36
we accorded validity to the LOA authorizing the examination of DLSU for "Fiscal Year
Ending 2003and Unverified Prior Years" and correspondingly held the assessment
fortaxable year 2003 as valid because this taxable period is specified in the LOA.
However, we declared void the assessments for taxable years 2001 and 2002 for having
been unspecified on separate LOAs as required under RMO No. 43-90.
Likewise, in the earlier case of CIR v. Sony, Phils., Inc.,37 we affirmed the cancellation of
a deficiency VAT assessment because, while the LOA covered "the period 1997and
unverified prior years, " the said deficiency was arrived at based on the records of a later
year, from January to March 1998, or using the fiscal year which ended on 31March1998.
We explainedthat the CIR knew which period should be covered by the investigation and
that if the CIR wanted or intended the investigation to include the year 1998, it would have
done so by including it in the LOA or by issuing another LOA.38
The present case is no different from Sony in that the subject LOA specified that the
examination should be for the taxable year 1998 only but the subsequent assessment
issued against Lancaster involved disallowed expenses covering the next fiscal year, or
the period ending 31 March 1999. This much is clear from the notice of assessment, the
relevant portion of which we again restate as follows:
1âwphi1
INCOME TAX:
Taxable Income per ITR
-0-
Add: Adjustments-Disallowed purchases 11,496, 770.18
Adjusted Taxable Income per Investigation
₱l 1,496,770.18
INCOME TAX DUE-Basic
April 1 -December 31, 1998
(9/12xPl1,496,770.18 x 34%)
₱2,913,676.4
January 1-March 31, 1999
(3/12xPl1,496,770.18 x 33%)
948,483.54
Income tax still due per investigation
₱3,880,159.94
Interest (6/15/99 to 10/15/02) .66 2,560,905.56
Compromise Penalty
25,000
TOTAL DEFICIENCY INCOME TAX
(emphasis supplied) ₱6,466,065.50
The taxable year covered by the assessment being outside of the period specified in the
LOA in this case, the assessment issued against Lancaster is, therefore, void.
This point alone would have sufficed to invalidate the subject deficiency income tax
assessment, thus, obviating any further necessity to resolve the issue on whether
Lancaster erroneously claimed the February and March 1998 expenses as deductions
against income for FY 1999.
But, as the CTA did, we shall discuss the issue on the disallowance for the proper
guidance not only of the parties, but the bench and the bar as well.
II.
The CTA En Banc correctly sustained the
order cancelling and withdrawing
the deficiency tax assessment.
To recall, the assessment against Lancaster for deficiency income tax stemmed from the
disallowance of its February and March 1998 purchases which Lancaster posted in its
fiscal year ending on 31 March 1999 (FY 1999) instead of the fiscal year ending on
31March1998 (FY 1998).
On the one hand, the BIR insists that the purchases in question should have been
reported in FY 1998 in order to conform to the generally accepted accounting principle of
proper matching of cost and revenue. Thus, when
Lancaster reported the said purchases in FY 1999, this resulted in overstatement of
expenses warranting their disallowance and, by consequence, resulting in the deficiency
in the payment of its income tax for FY 1999.
Upon the other hand, Lancaster justifies the inclusion of the February and March 1998
purchases in its FY 1999 considering that they coincided with its crop year covering the
period of October 1997 to September 1998. Consistent with Revenue Audit Memorandum
(RAM) No. 2-95,39 Lancaster argues that its purchases in February and March 1998 were
properly posted in FY 1999, or the year in which its gross income from the crop was
realized. Lancaster concludes that by doing so, it had complied with the matching concept
that was also relied upon by the BIR in its assessment.
The issue essentially boils down to the proper timing when Lancaster should recognize
its purchases in computing its taxable income. Such issue directly correlates to the fact
that Lancaster's 'crop year ' does not exactly coincide with its fiscal year for tax purposes.
Noticeably, the records of this case are rife with terms and concepts in accounting. As a
science, accounting 40 pervades many aspects of financial planning, forecasting, and
decision making in business. Its reach, however, has also permeated tax practice.
To put it into perspective, although the foundations of accounting were built principally to
analyze finances and assist businesses, many of its principles have since been adopted
for purposes of taxation.41 In our jurisdiction, the concepts in business accounting,
including certain generally accepted accounting principles (GAAP), embedded in the
NIRC comprise the rules on tax accounting.
To be clear, the principles under financial or business accounting, in theory and
application, are not necessarily interchangeable with those in tax accounting. Thus,
although closely related, tax and business accounting had invariably produced concepts
that at some point diverge in understanding or usage. For instance, two of such important
concepts are taxable income and business income (or accounting income). Much of the
difference can be attributed to the distinct purposes or objectives that the concepts of tax
and business accounting are aimed at. Chief Justice Querube Makalintal made an apt
observation on the nature of such difference. In Consolidated Mines, Inc. v. CTA,42he
noted:
While taxable income is based on the method of accounting used by the taxpayer, it will
almost always differ from accounting income. This is so because of a fundamental
difference in the ends the two concepts serve. Accounting attempts to match cost against
revenue. Tax law is aimed at collecting revenue. It is quick to treat an item as income,
slow to recognize deductions or losses. Thus, the tax law will not recognize deductions
for contingent future losses except in very limited situations. Good accounting, on the
other hand, requires their recognition. Once this fundamental difference in approach is
accepted, income tax accounting methods can be understood more easily.43 (emphasis
supplied)
While there may be differences between tax and accounting,44 it cannot be said that the
two mutually exclude each other. As already made clear, tax laws borrowed concepts that
had origins from accounting. In truth, tax cannot do away with accounting. It relies upon
approved accounting methods and practices to effectively carry out its objective of
collecting the proper amount of taxes from the taxpayers. Thus, an important mechanism
established in many tax systems is the requirement for taxpayers to make a return of their
true income.45 Maintaining accounting books and records, among other important
considerations, would in turn assist the taxpayers in complying with their obligation to file
their income tax returns. At the same time, such books and records provide vital
information and possible bases for the government, after appropriate audit, to make an
assessment for deficiency tax whenever so warranted under the circumstances.
The NIRC, just like the tax laws in other jurisdictions, recognizes the important facility
provided by generally accepted accounting principles and methods to the primary aim of
tax laws to collect the correct amount of taxes. The NIRC even devoted a whole chapter
on accounting periods and methods of accounting, some relevant provisions of which we
cite here for more emphasis:
CHAPTER VIII
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING
Sec. 43. General Rule. - The taxable income shall be computed upon the basis of the
taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in
accordance with the method of accounting regularly employed in keeping the books of
such taxpayer; but if no such method of accounting has been so employed, or if the
method employed does not clearly reflect the income, the computation shall be made in
accordance with such method as in the opinion of the Commissioner clearly reflects the
income.
If the taxpayer's annual accounting period is other than a fiscal year, as defined in Section
22(Q), or if the taxpayer has no annual accounting period, or does not keep books, or if
the taxpayer is an individual, the taxable income shall be computed on the basis of the
calendar year.
Sec. 44. Period in which Items of Gross Income Included. - The amount of all items of
gross income shall be included in the gross income for the taxable year in which received
by the taxpayer, unless, under methods of accounting permitted under Section 43, any
such amounts are to be properly accounted for as of a different period.
In the case of the death of a taxpayer, there shall be included in computing taxable income
for the taxable period in which falls the date of his death, amounts accrued up to the date
of his death if not otherwise properly includible in respect of such period or a prior period.
Sec. 45. Period/or which Deductions and Credits Taken. - The deductions provided for in
this Title shall be taken for the taxable year in which 'paid or accrued' or 'paid or incurred,'
dependent upon the method of accounting upon the basis of which the net income is
computed, unless in order to clearly reflect the income, the deductions should be taken
as of a different period. In the case of the death of a taxpayer, there shall be allowed as
deductions for the taxable period in which falls the date of his death, amounts accrued up
to the date of his death if not otherwise properly allowable in respect of such period or a
prior period.
Sec. 46. Change of Accounting Period. - If a taxpayer, other than an individual, changes
his accounting period from fiscal year to calendar year, from calendar year to fiscal year,
or from one fiscal year to another, the net income shall, with the approval of the
Commissioner, be computed on the basis of such new accounting period, subject to the
provisions of Section 47.
xxxx
Sec. 48. Accounting for Long-term Contracts. - Income from long-term contracts shall be
repo1ied for tax purposes in the manner as provided in this Section.
As used herein, the term 'long-term contracts' means building, installation or construction
contracts covering a period in excess of one (1) year.
Persons whose gross income is derived in whole or in part from such contracts shall
report such income upon the basis of percentage of completion.1âwphi1
The return should be accompanied by a return certificate of architects or engineers
showing the percentage of completion during the taxable year of the entire work
performed under contract.
There should be deducted from such gross income all expenditures made during the
taxable year on account of the contract, account being taken of the material and supplies
on hand at the beginning and end of the taxable period for use in connection with the
work under the contract but not yet so applied.
If upon completion of a contract, it is found that the taxable net income arising thereunder
has not been clearly reflected for any year or years, the Commissioner may permit or
require an amended return.
Sec. 49. Installment Basis. -
(A) Sales of Dealers in Personal Property. - Under rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner, a person who
regularly sells or otherwise disposes of personal property on the installment plan may
return as income therefrom in any taxable year that proportion of the installment payments
actually received in that year, which the gross profit realized or to be realized when
payment is completed, bears to the total contract price.
(B) Sales of Realty and Casual Sales of Personality. - In the case (1) of a casual sale or
other casual disposition of personal property (other than 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), for a price exceeding One thousand pesos (₱1,000), or (2) of a sale or other
disposition of real prope1iy, if in either case the initial payments do not exceed twentyfive percent (25%) of the selling price, the income may, under the rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be
returned on the basis and in the manner above prescribed in this Section.
As used in this Section, the term 'initial payments' means the payments received in cash
or property other than evidences of indebtedness of the purchaser during the taxable
period in which the sale or other disposition is made.
(C) Sales of Real Property Considered as Capital Asset by Individuals. - An individual
who sells or disposes of real property, considered as capital asset, and is otherwise
qualified to report the gain therefrom under Subsection (B) may pay the capital gains tax
in installments under rules and regulations to be promulgated by the Secretary of Finance,
upon recommendation of the Commissioner.
(D) Change from Accrual to Installment Basis. - If a taxpayer entitled to the benefits of
Subsection (A) elects for any taxable year to report his taxable income on the installment
basis, then in computing his income for the year of change or any subsequent year,
amounts actually received during any such year on account of sales or other dispositions
of property made in any prior year shall not be excluded." (emphasis in the original)
We now proceed to the matter respecting the accounting method employed by Lancaster.
An accounting method is a "set of rules for determining when and how to report income
and deductions."46 The provisions under Chapter VIII, Title II of the NIRC cited above
enumerate the methods of accounting that the law expressly recognizes, to wit:
(1) Cash basis method;47
(2) Accrual method;48
(3) Installment method;49
(4) Percentage of completion method;50 and
(5) Other accounting methods.
Any of the foregoing methods may be employed by any taxpayer so long as it reflects its
income properly and such method is used regularly. The peculiarities of the business or
occupation engaged in by a taxpayer would largely determine how it would report incomes
and expenses in its accounting books or records. The NIRC does not prescribe a uniform,
or even specific, method of accounting.
Too, other methods approved by the CIR, even when not expressly mentioned in the
NIRC, may be adopted if such method would enable the taxpayer to properly reflect its
income. Section 43 of the NIRC authorizes the CIR to allow the use of a method of
accounting that in its opinion would clearly reflect the income of the taxpayer. An example
of such method not expressly mentioned in the NIRC, but duly approved by the CIR, is
the 'crop method of accounting' authorized under RAM No. 2-95. The pertinent provision
reads:
II. Accounting Methods
xxxx
F. Crop Year Basis is a method applicable only to farmers engaged in the production of
crops which take more than a year from the time of planting to the process of gathering
and disposal. Expenses paid or incurred are deductible in the year the gross income from
the sale of the crops are realized.
The crop method recognizes that the harvesting and selling of crops do not fall within the
same year that they are planted or grown. This method is especially relevant to farmers,
or those engaged in the business of producing crops who, pursuant to RAM No. 2-95,
would then be able to compute their taxable income on the basis of their crop year. On
when to recognize expenses as deductions against income, the governing rule is found
in the second sentence of Subsection F cited above. The rule enjoins the recognition of
the expense (or the deduction of the cost) of crop production in the year that the crops
are sold (when income is realized).
In the present case, we find it wholly justifiable for Lancaster, as a business engaged in
the production and marketing of tobacco, to adopt the crop method of accounting. A
taxpayer is authorized to employ what it finds suitable for its purpose so long as it
consistently does so, and in this case, Lancaster does appear to have utilized the method
regularly for many decades already. Considering that the crop year of Lancaster starts
from October up to September of the following year, it follows that all of its expenses in
the crop production made within the crop year starting from October 1997 to September
1998, including the February and March 1998 purchases covered by purchase invoice
vouchers, are rightfully deductible for income tax purposes in the year when the gross
income from the crops are realized. Pertinently, nothing from the pleadings or memoranda
of the parties, or even from their testimonies before the CT A, would support a finding that
the gross income from the crops (to which the subject expenses refer) was actually
realized by the end of March 1998, or the closing of Lancaster's fiscal year for 1998.
Instead, the records show that the February and March 1998 purchases were recorded
by Lancaster as advances and later taken up as purchases by the close of the crop year
in September 1998, or as stated very clearly above, within the fiscal year 1999.51On this
point, we quote with approval the ruling of the CT A En Banc, thus:
Considering that [Lancaster] is engaged in the production oftobacco, it applied the crop
year basis in determining its total purchases for each fiscal year. Thus, [Lancaster's] total
cost for the production of its crops, which includes its purchases, must be taken as a
deduction in the year in which the gross income is realized. Thus, We agree with the
following ratiocination of the First Division:
Evident from the foregoing, the crop year basis is one unusual method of accounting
wherein the entire cost of producing the crops (including purchases) must be taken as a
deduction in the year in which the gross income from the crop is realized. Since the
petitioner's crop year starts in October and ends in September of the following year, the
same does not coincide with petitioner's fiscal year which starts in April and ends in March
of the following year. However, the law and regulations consider this peculiar situation
and allow the costs to be taken up at the time the gross income from the crop is realized,
as in the instant case.
[Lancaster's] fiscal period is from April 1, 1998 to March 31, 1999. On the other hand, its
crop year is from October 1, 1997 to September 1, 1998. Accordingly, in applying the crop
year method, all the purchases made by the respondent for October 1, 1997 to September
1, 1998 should be deducted from the fiscal year ending March 31, 1999, since it is the
time when the gross income from the crops is realized.52
The matching principle
Both petitioner CIR and respondent Lancaster, it must be noted, rely upon the concept of
matching cost against revenue to buttress their respective theories. Also, both parties cite
RAM 2-95 in referencing the crop method of accounting.
We are tasked to determine which view is legally sound.
In essence, the matching concept, which is one of the generally accepted accounting
principles, directs that the expenses are to be reported in the same period that related
revenues are earned. It attempts to match revenue with expenses that helped earn it.
The CIR posits that Lancaster should not have recognized in FY 1999 the purchases for
February and March 1998.53 Apparent from the reasoning of the CIR is that such
expenses ought to have been deducted in FY 1998, when they were supposed to be paid
or incurred by Lancaster. In other words, the CIR is of the view that the subject purchases
match with revenues in 1998, not in 1999
A reading of RAM No. 2-95, however, clearly evinces that it conforms with the concept
that the expenses paid or incurred be deducted in the year in which gross income from
the sale of the crops is realized. Put in another way, the expenses are matched with the
related incomes which are eventually earned. Nothing from the provision is it strictly
required that for the expense to be deductible, the income to which such expense is
related to be realized in the same year that it is paid or incurred. As noted by the CTA,54
the crop method is an unusual method of accounting, unlike other recognized accounting
methods that, by mandate of Sec. 45 of the NIRC, strictly require expenses be taken in
the same taxable year when the income is 'paid or incurred, ' or 'paid or accrued, '
depending upon the method of accounting employed by the taxpayer.
Even if we were to accept the notion that applying the 1998 purchases as deductions in
the fiscal year 1998 conforms with the generally accepted principle of matching cost
against revenue, the same would still not lend any comfort to the CIR. Revenue
Memorandum Circular (RMC) No. 22-04, entitled "Supplement to Revenue Memorandum
Circular No. 44-2002 on Accounting Methods to be Used by Taxpayers for Internal
Revenue Tax Purposes"55dated 12 April 2004, commands that where there is conflict
between the provisions of the Tax Code (NIRC), including its implementing rules and
regulations, on accounting methods and the generally accepted accounting principles,
the former shall prevail. The relevant portion of RMC 22-04 reads:
II. Provisions of the Tax Code Shall Prevail.
All returns required to be filed by the Tax Code shall be prepared always in conformity
with the provisions of the Tax Code, and the rules and regulations implementing said Tax
Code. Taxability of income and deductibility of expenses shall be determined strictly in
accordance with the provisions of the Tax Code and the rules and regulations issued
implementing said Tax Code. In case of difference between the provisions of the Tax
Code and the rules and regulations implementing the Tax Code, on one hand, and the
general(v accepted accounting principles (GAAP) and the generally accepted accounting
standards (GAAS), on the other hand, the provisions of the Tax Code and the rules and
regulations issued implementing said Tax Code shall prevail. (italics supplied)
RAM No. 2-95 is clear-cut on the rule on when to recognize deductions for taxpayers
using the crop method of accounting. The rule prevails over any GAAP, including the
matching concept as applied in financial or business accounting.
In sum, and considering the foregoing premises, we find no cogent reason to overturn the
assailed decision and resolution of the CT A. As the CTA decreed, Assessment Notice
LTAID II IT-98-00007, dated 11 October 2002, in the amount of ₱6,466,065.50 for
deficiency income tax should be cancelled and set aside. The assessment is void for
being issued without valid authority. Furthermore, there is no legal justification for the
disallowance of Lancaster's expenses for the purchase of tobacco in February and March
1998.
WHEREFORE, the petition is DENIED. The assailed 30 April 2008 Decision and 24 June
2008 Resolution of the Court of Tax Appeals En Banc are AFFIRMED. No cost
SO ORDERED.
FIRST DIVISION
G.R. No. 201530, April 19, 2017
ASIATRUST DEVELOPMENT BANK,
INTERNAL REVENUE, Respondent.
G.R.
INC., Petitioner, v. COMMISSIONER
Nos.
COMMISSIONER
OF
INTERNAL
DEVELOPMENT BANK, INC., Respondent.
OF
201680-81
REVENUE, Petitioner, v. ASIATRUST
DECISION
DEL CASTILLO, J.:
An application for tax abatement is deemed approved only upon the issuance of a
termination
letter
by
the
Bureau
of
Internal
Revenue
(BIR).
These consolidated Petitions for Review on Certiorari1 under Ru1e 45 of the Rules of
Court assail the November 16, 2011 Decision2 and the April 16, 2012 Resolution3 of the
Court of Tax Appeals (CTA) En Banc in CTA EB Case Nos. 614 and 677.
Factual
Antecedents
On separate dates in February 2000, Asiatrust Development Bank, Inc. (Asiatrust)
received from the Commissioner of Internal Revenue (CIR) three Formal Letters of
Demand (FLD) with Assessment Notices4 for deficiency internal revenue taxes in the
amounts of P131,909,161.85, P83,012,265.78, and P144,012,918.42 for fiscal years
ending
June
30,
1996,
1997,
and
1998,
respectively.5
On
March
17,
2000,
Asiatrust
timely
protested
the
assessment
notices. 6
Due to the inaction of the CIR on the protest, Asiatrust filed before the CTA a Petition for
Review7 docketed as CTA Case No. 6209 praying for the cancellation of the tax
assessments for deficiency income tax, documentary stamp tax (DST) - regular, DST industry issue, final withholding tax, expanded withholding tax, and fringe benefits tax
issued
against
it
by
the
CIR.
On December 28, 2001, the CIR issued against Asiatrust new Assessment Notices for
deficiency taxes in the amounts of P112,816,258.73, P53,314,512.72, and
P133,013,458.73, covering the fiscal years ending June 30, 1996, 1997, and 1998,
respectively.8
On the same day, Asiatrust partially paid said deficiency tax assessments thus leaving
the following balances:
Fiscal Year 1996
Documentary Stamp Tax
P 13,497,227.80
Final Withholding Tax - Trust
8,770,265.07
Documentary Stamp Tax - Industry Issue 88,584,931.39
TOTAL
P 110,852,424.26
Fiscal Year 1997
Documentary Stamp Tax
P 10,156,408.63
Documentary Stamp Tax - Industry Issue 39,163,539.57
TOTAL
P 49,319,948.20
Fiscal year 1998
Documentary Stamp Tax
P 20,425,770.07
Final Withholding Tax - Trust
10,183,367.80
Documentary Stamp Tax - Industry Issue 93,430,878.54
P 124,040,016.419
TOTAL
On April 19, 2005, the CIR approved Asiatrust's Offer of Compromise of DST - regular
assessments for the fiscal years ending June 30, 1996, 1997, and 1998. 10
During the trial, Asiatrust manifested that it availed of the Tax Abatement Program for its
deficiency final withholding tax - trust assessments for fiscal years ending June 30, 1996
and 1998; and that on June 29, 2007, it paid the basic taxes in the amounts of
P4,187,683.27 and P6,097,825.03 for the said fiscal years, respectively. 11 Asiatrust also
claimed that on March 6, 2008, it availed of the provisions of Republic Act (RA) No. 9480,
otherwise
known
as
the
Tax
Amnesty
Law
of
2007.12
Ruling
of
the
Court
of
Tax
Appeals
Division
On January 20, 2009, the CTA Division rendered a Decision 13 partially granting the
Petition. The CTA Division declared void the tax assessments for fiscal year ending June
30, 1996 for having been issued beyond the three-year prescriptive period.14 However,
due to the failure of Asiatrust to present documentary and testimonial evidence to prove
its availment of the Tax Abatement Program and the Tax Anmesty Law, the CTA Division
affirmed the deficiency DST - Special Savings Account (SSA) assessments for the fiscal
years ending June 30, 1997 and 1998 and the deficiency DST - Interbank Call Loans
(IBCL) and deficiency final withholding tax - trust assessments for fiscal year ending June
30, 1998, in the total amount of P142,777,785.91.15 Thus:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, the instant Petition for Review is hereby
PARTIALLY GRANTED. Accordingly, Assessment Notices issued against [Asiatrust] for
deficiency documentary stamp, final withholding, expanded withholding, and fringe
benefits tax assessments for the fiscal year ended June 30, 1996 are VOID for being
[issued]
beyond
the
prescriptive
period
allowed
by
law.
The Assessment Notices issued by [CIR] against [Asiatrust] for deficiency income,
documentary stamp - regular, documentary stamp - trust, and fringe benefits tax
assessments for the fiscal years ended June 30, 1997 & 1998 are hereby ordered
CANCELLED and WITHDRAWN. Moreover, [Asiatrust's] deficiency documentary stamp
tax IBCL assessment for the fiscal year ended June 30, 1997 is ordered CANCELLED
and
WITHDRAWN.
However, [Asiatrust's] deficiency documentary stamp tax - Special Savings Account
assessments for the fiscal years ended June 30, 1997 & 1998, and deficiency
documentary stamp tax - IBCL and deficiency final withholding tax - trust assessments
for the fiscal year ended June 30, 1998, in the aggregate amount of P142,777,785.91 are
hereby
AFFIRMED.
The
said
amount
is
broken
down
as
follows:chanRoblesvirtualLawlibrary
Fiscal Year 1997
Documentary Stamp Tax - Industry Issue P 39,163,539.57
Fiscal Year 1998
Final Withholding Tax - Trust
10,183,367.80
Documentary Stamp Tax - Industry Issue 93,430,878.54
Total Deficiency Tax
P 142,777,785.91
SO ORDERED.16
Asiatrust filed a Motion for Reconsideration17 attaching photocopies of its Application for
Abatement Program, BIR Payment Form, BIR Tax Payment Deposit Slip, Improved
Voluntary Assessment Program Application Forms, Tax Amnesty Return, Tax Amnesty
Payment Form, Notice of Availment of Tax Amnesty and Statement of Assets and
Liabilities
and
Networth
(SALN)
as
of
June
30,
2005.
The CIR, on the other hand, filed a Motion for Partial Reconsideration of the assessments
assailing the CTA Division's finding of prescription and cancellation of assessment
notices for deficiency income, DST - regular, DST trust, and fringe benefit tax for fiscal
years
ending
June
30,
1997
and
1998. 18
On July 6, 2009, the CTA Division issued a Resolution19 denying the motion of the CIR
while partially granting the motion of Asiatrust. The CTA Division refused to consider
Asiatrust's availment of the Tax Abatement Program due to its failure to submit a
termination letter from the BIR.20 However, as to Asiatrust's availment of the Tax Amnesty
Law, the CTA Division resolved to set the case for hearing for the presentation of the
originals of the documents attached to Asiatrust's motion for reconsideration. 21
Meanwhile, the CIR appealed the January 20, 2009 Decision and the July 6, 2009
Resolution before the CTA En Banc via a Petition for Review22 docketed as CTA EB No.
508. The CTA En Banc however dismissed the Petition for being premature considering
that the proceedings before the CTA Division was still pending.23
On December 7, 2009, Asiatrust filed a Manifestation 24 informing the CTA Division that
the BIR issued a Certification25 dated August 20, 2009 certifying that Asiatrust paid the
amounts of P4,187,683.27 and P6,097,825.03 at the Development Bank of the
Philippines in connection with the One-Time Administrative Abatement under Revenue
Regulations
(RR)
No.
15-2006.26
On March 16, 2010, the CTA Division rendered an Amended Decision 27 finding that
Asiatrust is entitled to the immunities and privileges granted in the Tax Amnesty
Law.28 However, it reiterated its ruling that in the absence of a termination letter fium the
BIR, it cannot consider Asiatrust's availment of the Tax Abatement Program. 29 Thus, the
CTA Division disposed of the case in this wise:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, [Asiatrust's] Motion for Reconsideration is hereby
PARTIALLY GRANTED and this Court's Decision dated January 20, 2009 is hereby
MODIFIED. Accordingly, the above captioned case as regards [Asiatrust's] liability for
deficiency documentary stamp tax is CLOSED and TERMINATED, subject to the
provisions of R.A. No. 9480. However, [Asiatrust's] liability for deficiency final withholding
tax assessment for fiscal year ended June 30, 1998, subject of this litigation, in the
amount
of
P10,183,367.80,
is
hereby
REAFFIRMED.
SO ORDERED.30
Still unsatisfied, Asiatrust moved for partial reconsideration31 insisting that the
Certification issued by the BIR is sufficient proof of its availment of the Tax Abatement
Program considering that the CIR, despite Asiatrust's request, has not yet issued a
termination letter. Asiatrust attached to the motion photocopies of its letter 32 dated March
17, 2009. requesting the BIR to issue a termination letter, Payment Form33 BIR Tax
Payment Deposit Slips,34 Improved Voluntary Assessment Program (IVAP) Payment
Form,35 and a letter36 dated October 17, 2007 issued by Revenue District Officer (RDO)
Ms.
Clavelina
S.
Nacar.
On July 28, 2010, the CTA Division issued a Resolution37 denying Asiatrust's motion. The
CTA Division maintained that it cannot consider Asiatrust's availment of the Tax
Abatement Program in the absence of a termination letter from the BIR. 38 As to the
Certification issued by BIR, the CTA Division noted that it pertains to fiscal period July 1,
1995
to
June
30,
1996.39
Both
Ruling
parties
of
the
appealed
Court
to
of
Tax
CTA En
Appeals
Banc.
En
Banc
On November 16, 2011, the CTA En Banc denied both appeals. It denied the CIR's
appeal for failure to file a prior motion for reconsideration of the Amended
Decision,40 while it denied Asiatrust's appeal for lack of merit. 41 The CTA En
Banc sustained the ruling of the CTA Division that in the absence of a termination letter,
it cannot be established that Asiatrust validly availed of the Tax Abatement Program.42 As
to the Certification issued by the BIR, the CTA En Banc noted that it only covers the fiscal
year ending June 30, 1996.43 As to the letter issued by RDO Nacar and the various BIR
Tax Payment Deposit Slips, the CTA En Banc pointed out that these have no probative
value because these were not authenticated nor formally offered in evidence and are
mere
photocopies
of
the
purported
documents. 44
On April 16, 2012, the CTA En Banc denied the motions for partial reconsideration of the
CIR and Asiatrust.45
Issues
Hence, the instant consolidated Petitions under Rule 45 of the Rules of Court, with the
following issues:chanRoblesvirtualLawlibrary
G.R. No. 201530
I.
WHETHER X X X THE [CTA] EN BANC ERRED IN FINDING THAT [ASIATRUST] IS
LIABLE FOR DEFICIENCY FINAL WITHHOLDING TAX FOR FISCAL YEAR ENDING
JUNE 30, 1998.
II.
WHETIIER X X X THE ORDER OF THE [CTA] EN BANC FOR PETITIONER TO PAY
AGAIN THE FINAL WITHHOLDING TAX FOR FISCAL YEAR ENDING JUNE 30, 1998
WOULD AMOUNT TO DOUBLE TAXATION.
III.
WHETHER X X X THE [CTA] EN BANC ERRED IN RESOLVING THE ISSUE OF
ALLEGED DEFICIENCY FINAL WITHHOLDING TAX FOR FISCAL YEAR ENDING
JUNE
30,
1998
BASED
ON
MERE
TECHNICALITIES.46
G.R. Nos. 201680-81
I.
WHETHER X X X THE [CTA] EN BANC COMMITTED REVERSIBLE ERROR WHEN IT
DISMISSED [THE CIR'S] PETITION FOR REVIEW ON THE GROUND THAT THE
LATTER ALLEGEDLY FAILED TO COMPLY WITH SECTION 1, RULE 8 OF THE
REVISED RULES OF THE [CTA].
II.
WHETHER X X X THE [CTA] EN BANC COMMITTED REVERSIBLE ERROR WHEN IT
SUSTAINED THE AMENDED DECISION DATED 16 MARCH 2010 OF THE FIRST
DIVISION DECLARING CLOSED AND TERMINATED RESPONDENT'S LIABILITY FOR
DEFICIENCY DOCUMENTARY STAMP TAX FOR TAXABLE YEARS 1997 AND 1998. 47
G.R.
No.
Asiatrust's
201530
Arguments
Asiatrust contends that the CTA En Banc erred in affirming the assessment for deficiency
final withholding tax for fiscal year ending June 30, 1998 considering that it already availed
of the Tax Abatement Program as evidenced by the Certification issued by the BIR the
letter issued by RDO Nacar, and the BIR Tax Payment Deposit Slips. 48 Asiatrust
maintains that the BIR Certification is sufficient proof of its availment of the Tax Abatement
Program considering CIR's unjustifiable refusal to issue a termination letter.49 And
although the letter and the BIR Tax Payment Deposit Slips were not formally offered in
evidence, Asiatrust insists that the CTA En Banc should have relaxed the rules as the
Supreme Court in several cases has relaxed procedural rules in the interest of substantial
justice.50 Moreover, Asiatrust posits that since it already paid the basic taxes, the
affirmance of the deficiency fmal withholding tax assessment for fiscal year ending June
30, 1998 would constitute double taxation as Asiatrust would be made to pay the basic
tax
twice.51
The
CIR's
Arguments
The CIR, however, points out that the BIR Certification relied upon by Asiatrust does not
cover fiscal year ending June 30, 1998.52 And even if the letter issued by RDO Nacar and
the BIR Tax Payment Deposit Slips were admitted in evidence, the result would still be
the same as these are not sufficient to prove that Asiatrust validly availed of the Tax
Abatement
Program.53
G.R.
Nos.
201680-81
The
CIR's
Arguments
The CIR contends that the CTA En Banc erred in dismissing his appeal for failing to file
a motion for reconsideration on the Amended Decision as a perusal of the Amended
Decision shows that it is a mere resolution, modifying the original Decision.54
Furthermore, the CIR claims that Asiatrust is not entitled to a tax amnesty because it
failed to submit its income tax returns (ITRs).55 The CIR likewise imputes bad faith on the
part of Asiatrust in belatedly submitting the documents before the CTA Division.56
Asiatrust's
Arguments
Asiatrust on the other hand argues that the CTA En Banc correctly dismissed the CIR's
appeal for failure to file a motion for reconsideration on the Amended Decision. 57 It asserts
that an amended decision is not a mere resolution but a new decision.58
Asiatrust insists that the CIR can no longer assail the Amended Decision of the CTA
Division before the Court considering the dismissal ofhis appeal for failing to file a motion
for reconsideration on the Amended Decision.59 In any case, Asiatrust claims that the
submission of its ITRs is not required as the Tax Amnesty Law only requires the
submission of a SALN as of December 31, 2005, 60 As to its belated submission of the
documents, Asiatrust contends that recent jurisprudence allows the presentation of
evidence before the CTA En Banc even after trial.61 Thus, it follows that the presentation
of evidence before the CTA Division should likewise be allowed.62
Our Ruling
The
G.R.
Petitions
lack
No.
merit.
201530
An application for tax abatement is considered approved only upon the issuance
of
a
termination
letter.
Section 204(B)63 of the 1997 National Internal Revenue Code (NIRC) empowers the CIR
to
abate
or
cancel
a
tax
liability.
On Septembr 27, 2006 the BIR issued RR No. 15-06 prescribing tho guidelines on the
implementation of the one-time administrative abatement of all penalties/surcharges and
interest on delinquent accounts and assessments (preliminary or final, disputed or not)
as of June 30, 2006. Section 4 of RR No. 15-06 provides:chanRoblesvirtualLawlibrary
SECTION 4. Who May Avail. - Any person/taxpayer, natural or juridical, may settle thru
this abatement program any delinquent account or assessment which has been released
as of June 30, 2006, by paying an amount equal to One Hundred Percent (100%) of the
Basic Tax assessed with the Accredited Agent Bank (AAB) of the Revenue District Office
(RDO)/Large Taxpayers Service (LTS)/Large Taxpayers District Office (LTDO) that has
jurisdiction over the taxpayer. In the absence of an AAB, payment may be made with the
Revenue Collection Officer/Deputized Treasurer of the RDO that has jurisdiction over the
taxpayer. After payment of the basic tax, the assessment for penalties/surcharge and
interest shall be cancelled by the concerned BIR Office following existing rules and
procedures. Thereafter, the docket of the case shall be fmwarded to the Office of the
Commissioner, thru the Deputy Commissioner for Operations Group, for issuance of
Termination Letter.
Based on the guidelines, the last step in the tax abatement process is the issuance of the
termination letter. The presentation of the termination letter is essential as it proves that
the taxpayer's application for tax abatement has been approved. Thus, without a
termination letter, a tax assessment cannot be considered closed and terminated.
In this case, Asiatrust failed to present a termination letter from the BIR. Instead, it
presented a Certification issued by the BIR to prove that it availed of the Tax Abatement
Program
and
paid
the
basic
tax.
It
also
attached
copies
of
its
BIR
'I'ax Payment Deposit Slips and a letter issued by RDO Nacar. These documents,
however, do not prove that Asiatrust's application for tax abatement has been approved.
If at all, these documents only prove Asiatrust's payment of basic taxes, which is not a
ground to consider its deficiency tax assessment closed and terminated.
Since no tennination letter has been issued by the BIR, there is no reason tor the Court
to consider as closed and terminated the tax assessment on Asiatrust's fmal withholding
tax for fiscal year ending June 30, 1998. Asiatrust's application for tax abatement will be
deemed approved only upon the issuance of a termination letter, and only then will the
deficiency tax assessment be considered closed and terminated. However, in case
Asiatrust's application for tax abatement is denied, any payment made by it would be
applied to its out ding tax liability. For this reason, Asiatrust's allegation of double taxation
must
also
fail.
Thus, the Court finds no error on the part of the CTA En Banc in affirming the said tax
assessment.
G.R.
Nos.
201680-81
An appeal to the CTA En Banc must be preceded by the filing of a timely motion
for
reconsideration
or
new
trial
with
the
CTA
Division.
Section 1, Rule 8 of the Revised Rules of the CTA states:chanRoblesvirtualLawlibrary
SECTION 1. Review of cases in the Court en banc. - In cases falling under the exclusive
appellate jurisdiction of the Court en banc, the petition for review of a decision or
resolution of the Court in Division must be preceded by the filing of a timely motion for
reconsideration or new trial With the pivision.
Thus, in order for the CTA En Banc to take cognizance of an appeal via a petition for
review, a timely motion for reconsideration or new trial must first be filed with the CTA
Division that issued the assailed decision or resolution. Failure to do so is a ground for
the dismissal of the appeal as the word "must" indicates that the filing of a prior motion is
mandatory,
and
not
merely
directory.64
The same is true in the case of an amended decision. Section 3, Rule 14 of the same
rules defines an amended decision as "[a]ny action modifying or reversing a decision of
the Court en banc or in Division." As explained in CE Luzon Geothermal Power Company,
Inc. v. Commissioner of Internal Revenue,65 an amended decision is a different decision,
and
thus,
is
a
proper
subject
of
a
motion
for
reconsideration.
In this case, the CIR's failure to move for a reconsideration of the Amended Decision of
the CTA Division is a ground for the dismissal of its Petition for Review before the CTA En
Banc. Thus, the CTA En Banc did not err in denying the CIR's appeal on procedural
grounds.
Due to this procedural lapse, the Amended Decision has attained fmality insofar as the
CIR is concerned. The CIR, therefore, may no longer question the merits of the. case
before this Court. Accordingly, there is no reason for the Court to discuss the other issues
raised
by
the
CIR
As the Court has often held, procedural rules exist to be followed, not to be trifled with,
and thus, may be relaxed only for the most persua.Sive reasons. 66
WHEREFORE, the Petitions are hereby DENIED. The assailed November 16, 2011
Decision and the April 16, 2012 Resolution of the Court of Tax Appeals En Banc in CTA
EB Case Nos. 614 and 677 are hereby AFFIRMED, without prejudice to the action of the
Bureau of Internal Revenue on Asiatrust Development Bank, Inc.'s application for
abatement. The Bureau of Internal Revenue is DIRECTED to act on Asiatrust
Development Bank, Inc.'s applicationfor abatementin view of Section 5, Revenue
Regulations
No.
13-2001.
SO ORDERED.
FIRST DIVISION
April 17, 2017
G.R. No. 182582 *
METROPOLITAN BANK & TRUST COMPANY, Petitioner,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
PERLAS-BERNABE, J.:
Assailed in this petition for review on certiorari 1 is the Decision 2 dated April 21, 2008 of
the Court of Tax Appeals (CTA) En Banc in C.T.A. EB No. 340, which affirmed the
Decision3 dated August 13, 2007 and the Resolution4 dated November 14, 2007 of the
CTA First Division (CTA Division) in CTA Case No. 6765, and consequently, dismissed
petitioner Metropolitan Bank & Trust Company's (Metrobank) claim for refund on the
ground of prescription.
The Facts
On June 5, 1997, Solidbank Corporation (Solidbank) entered into an agreement with
Luzon Hydro Corporation (LHC), whereby the former extended to the latter a foreign
currency denominated loan in the principal amount of US$123,780,000.00 (Agreement).
Pursuant to the Agreement, LHC is bound to shoulder all the corresponding internal
revenue taxes required by law to be deducted or withheld on the said loan, as well as the
filing of tax returns and remittance of the taxes withheld to the Bureau of Internal Revenue
(BIR). On September 1, 2000, Metrobank acquired Solidbank, and consequently,
assumed the latter's rights and obligations under the aforesaid Agreement. 5
On March 2, 2001 and October 31, 2001, LHC paid Metro bank the total amounts of
US$1,538,122.17
6 and US$1,333,268.31, 7 respectively. Pursuant to the Agreement, LHC withheld, and
eventually paid to the BIR, the ten percent (10%) final tax on the interest portions of the
aforesaid payments, on the same months that the respective payments were made to
petitioner. In sum, LHC remitted a total ofUS$106,178.69,8 or its Philippine Peso
equivalent of ₱5,296,773.05,9 as evidenced by LHC's Schedules of Final Tax and
Monthly Remittance Returns for the said months. 10
According to Metrobank, it mistakenly remitted the aforesaid amounts to the BIR as well
when they were inadvertently included in its own Monthly Remittance Returns of Final
Income Taxes Withheld for the months of March 2001 and October 2001. Thus, on
December 27, 2002, it filed a letter to the BIR requesting for the refund thereof. Thereafter
and in view of respondent the Commissioner of Internal Revenue's (CIR) inaction,
Metrobank filed its judicial claim for refund via a petition for review filed before the CTA
on September 10, 2003, docketed as CTA Case No. 6765. 11
In defense, the CIR averred that: (a) the claim for refund is subject to administrative
investigation; (b) Metro bank must prove that there was double payment of the tax sought
to be refunded; (c) such claim must be filed within the prescriptive period laid down by
law; (d) the burden of proof to establish the right to a refund is on the taxpayer; and (e)
claims for tax refunds are in the nature of tax exemptions, and as such, should be
construed strictissimi Juris against the taxpayer. 12
The CTA Division Ruling
In a Decision 13 dated August 13, 2007, the CTA Division denied Metrobank's claims for
refund for lack of merit. 14 It ruled that Metrobank's claim relative to the March 2001 final
tax was filed beyond the two (2)-year prescriptive period. It pointed out that since
Metrobank remitted such payment on April 25, 2001, the latter only had until April 25,
2003 to file its administrative and judicial claim for refunds. In this regard, while Metro
bank filed its administrative claim well within the afore said period, or on December 27,
2002, the judicial claim was filed only on September 10, 2003. Hence, the right to claim
for such refund has prescribed. 15 On the other hand, the CTA Division also denied
Metrobank's claim for refund relative to the October 2001 tax payment for insufficiency of
evidence. 16
Metrobank moved for reconsideration, 17 which was partially granted in a Resolution18
dated November 14, 2007, and thus, was allowed to present further evidence regarding
its claim for refund for the October 2001 final tax. However, the CTA Division affirmed the
denial of the claim relative to its March 2001 final tax on the ground of prescription. 19
Aggrieved, Metrobank filed a petition for partial review20 before the CTA En Banc,
docketed as C.T.A. EB No. 340.
The CTA En Banc Ruling
In a Decision21 dated April 21, 2008, the CTA En Banc affirmed the CTA Division's ruling.
It held that since Metrobank's March 2001 final tax is in the nature of a final withholding
tax, the two (2)-year prescriptive period was correctly reckoned by the CTA Division from
the time the same was paid on April 25, 2001. As such, Metro bank's claim for refund had
already prescribed as it only filed its judicial claim on September 10, 2003. 22
Hence, this petition.
The Issue Before the Court
The issue for the Court's resolution is whether or not the CTA En Banc correctly held that
Metrobank's claim for refund relative to its March 2001 final tax had already prescribed.
The Court's Ruling
The petition is without merit.
Section 204 of the National Internal Revenue Code, as amended, 23 provides the CIR
with, inter alia, the authority to grant tax refunds. Pertinent portions of which read:
Section 204. Authority of the Commissioner to Compromise, Abate and Refund or Credit
Taxes. -The Commissioner may-
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.1âwphi1
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)
In this relation, Section 229 of the same Code provides for the proper procedure in order
to claim for such refunds, to wit:
Section 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or proceeding
shall be maintained in any court for the recovery of any national internal revenue tax
hereafter alleged to have been erroneously or illegally assessed or collected, or of any
penalty claimed to have been collected without authority, or of any sum alleged to have
been excessively or in any manner wrongfully collected, until a claim for refund or credit
has been duly filed with the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been paid under protest or
duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years
from the date of payment of the tax or penalty regardless of any supervening cause that
may arise after payment: Provided, however, That the Commissioner may, even without
a written claim therefor, refund or credit any tax, where on the face of the return upon
which payment was made, such payment appears clearly to have been erroneously paid.
(Emphases and underscoring supplied)
As may be gleaned from the foregoing provisions, a claimant for refund must first file an
administrative claim for refund before the CIR, prior to filing a judicial claim before the
CTA. Notably, both the administrative and judicial claims for refund should be filed within
the two (2)-year prescriptive period indicated therein, and that the claimant is allowed to
file the latter even without waiting for the resolution of the former in order to prevent the
forfeiture of its claim through prescription. In this regard, case law states that "the primary
purpose of filing an administrative claim [is] to serve as a notice of warning to the CIR that
court action would follow unless the tax or penalty alleged to have been collected
erroneously or illegally is refunded. To clarify, Section 229 of the Tax Code - then Section
306 of the old Tax Code - however does not mean that the taxpayer must await the final
resolution of its administrative claim for refund, since doing so would be tantamount to
the taxpayer's forfeiture of its right to seek judicial recourse should the two (2)-year
prescriptive period expire without the appropriate judicial claim being filed."24
In this case, Metrobank insists that the filing of its administrative and judicial claims on
December 27, 2002 and September 10, 2003, respectively, were well-within the two (2)year prescriptive period. Citing ACCRA Investments Corporation v. Court of Appeals,25
CIR v. TMX Sales, Inc.,26 CIR v. Philippine American Life Insurance, Co., 27 and CIR v.
CDCP Mining Corporation, 28 Metrobank contends that the aforesaid prescriptive period
should be reckoned not from April 25, 2001 when it remitted the tax to the BIR, but rather,
from the time it filed its Final Adjustment Return or Annual Income Tax Return for the
taxable year of 2001, or in April 2002, as it was only at that time when its right to a refund
was ascertained. 29
Metrobank's contention cannot be sustained.
As correctly pointed out by the CIR, the cases cited by Metrobank involved corporate
income taxes, in which the corporate taxpayer is required to file and pay income tax on a
quarterly basis, with such payments being subject to an adjustment at the end of the
taxable year. As aptly put in CIR v.TMX Sales, Inc., "payment of quarterly income tax
should only be considered [as] mere installments of the annual tax due. These quarterly
tax payments which are computed based on the cumulative figures of gross receipts and
deductions in order to arrive at a net taxable income, should be treated as advances or
portions of the annual income tax due, to be adjusted at the end of the calendar or fiscal
year. x x x Consequently, the two-year prescriptive period x x x should be computed from
the time of filing of the Adjustment Return or Annual Income Tax Return and final payment
of income tax."30 Verily, since quarterly income tax payments are treated as mere
"advance payments" of the annual corporate income tax, there may arise certain
situations where such "advance payments" would cover more than said corporate
taxpayer's entire income tax liability for a specific taxable year. Thus, it is only logical to
reckon the two (2)-year prescriptive period from the time the Final Adjustment Return or
the Annual Income Tax Return was filed, since it is only at that time that it would be
possible to determine whether the corporate taxpayer had paid an amount exceeding its
annual income tax liability.
On the other hand, the tax involved in this case is a ten percent (10%) final withholding
tax on Metrobank's interest income on its foreign currency denominated loan extended to
LHC. In this regard, Section 2.57 (A) of Revenue Regulations No. 02-9831 explains the
characterization of taxes of this nature, to wit:
Section 2.57. Withholding of Tax at Source
(A) Final Withholding Tax. - Under the final withholding tax system[,] the amount of income
tax withheld by the withholding agent is constituted as a full and final payment of the
income tax due from the payee on the said income. The liability for payment of the tax
rests primarily on the payor as a withholding agent. Thus, in case of his failure to withhold
the tax or in case of under withholding, the deficiency tax shall be collected from the
payor/withholding agent. The payee is not required to file an income tax return for the
particular income.
The finality of the withholding tax is limited only to the payee's income tax liability on the
particular income. It does not extend to the payee's other tax liability on said income, such
as when the said income is further subject to a percentage tax. For example, if a bank
receives income subject to final withholding tax, the same shall be subject to a percentage
tax. (Emphasis and underscoring supplied)
From the foregoing, it may be gleaned that final withholding taxes are considered as full
and final payment of the income tax due, and thus, are not subject to any adjustments.
Thus, the two (2)-year prescriptive period commences to run from the time the refund is
ascertained, i.e., the date such tax was paid, and not upon the discovery by the taxpayer
of the erroneous or excessive payment of taxes. 32
In the case at bar, it is undisputed that Metrobank's final withholding tax liability in March
2001 was remitted to the BIR on April 25, 2001. As such, it only had until April 25, 2003
to file its administrative and judicial claims for refund. However, while Metrobank's
administrative claim was filed on December 27, 2002, its corresponding judicial claim was
only filed on September 10, 2003. Therefore, Metrobank's claim for refund had clearly
prescribed.
Finally, the Court finds untenable Metrobank's resort to the principle of solutio indebiti in
support of its position. 33 In CIR v. Manila Electric Company, 34 the Court rejected the
application of said principle to tax refund cases, viz.:
In this regard, petitioner is misguided when it relied upon the six (6)-year prescriptive
period for initiating an action on the ground of quasi contract or solutio indebiti under
Article 1145 of the New Civil Code. There is solutio indebiti where: (1) payment is made
when there exists no binding relation between the payor, who has no duty to pay, and the
person who received the payment; and (2) the payment is made through mistake, and not
through liberality or some other cause. Here, there is· a binding relation between
petitioner as the taxing authority in this jurisdiction and respondent MERALCO which is
bound under the law to act as a withholding agent of NORD/LB Singapore Branch, the
taxpayer. Hence, the first element of solutio indebiti is lacking. Moreover, such legal
precept is inapplicable to the present case since the Tax Code, a special law, explicitly
provides for a mandatory period for claiming a refund for taxes erroneously paid.
Tax refunds are based on the general premise that taxes have either been erroneously
or excessively paid. Though the Tax Code recognizes the right of taxpayers to request
the return of such excess/erroneous payments from the government, they must do so
within a prescribed period. Further, "a taxpayer must prove not only his entitlement to a
refund, but also his compliance with the procedural due process as nonobservance of the
prescriptive periods within which to file the administrative and the judicial claims would
result in the denial of his claim."35 (Emphasis and underscoring supplied)
In sum, the CT A Division and CT A En Banc correctly ruled that Metrobank's claim for
refund in connection with its final withholding tax incurred in March 2001 should be denied
on the ground of prescription.
WHEREFORE, the petition is DENIED. The Decision dated April 21, 2008 of the Court of
Tax Appeals En Banc in C.T.A. EB No. 340 is hereby AFFIRMED.
SO ORDERED.
Second DIVISION
April 17, 2017
G.R. No. 210251
SECRETARY OF FINANCE CESAR V. PURISIMA and COMMISSIONER OF INTERNAL
REVENUE KIM S. JACINTO-HENARES, Petitioners
vs.
PHILIPPINE TOBACCO INSTITUTE, INC., Respondent
DECISION
CARPIO,, J.:
This is a petition for review on certiorari 1 assailing the Decision2 dated 7 October 2013
of the Regional Trial Court (RTC) of Las Piñas City, Branch 253 in SCA Case No. 130003. The RTC declared null and void certain portions of Revenue Regulations No. 1720123 (RR 17-2012) and Revenue Memorandum Circular No. 90-20124 (RMC 90-2012)
and ordered petitioners to cease and desist from implementing Section 11 of RR 17-2012
and RMC 90-2012 which refer to cigarettes packed by-machine.
The Facts
On 20 December 2012, President Benigno S. Aquino III signed Republic Act No. 103515
(RA 10351), otherwise known as the Sin Tax Reform Law. RA 10351 restructured the
excise tax on alcohol and tobacco products by amending pertinent provisions of Republic
Act No. 8424, 6 known as the Tax Reform Act of 1997 or the National Internal Revenue
Code of 1997 (NIRC).
Section 5 of RA 10351, which amended Section 145(C) of the NIRC, increased the excise
tax rate of cigars and cigarettes and allowed cigarettes packed by machine to be packed
in other packaging combinations of not more than 20. The relevant portions state:
SEC. 5. Section 145 of the National Internal Revenue Code of 1997, as amended by
Republic Act No. 9334, is hereby further amended to read as follows:
SEC. 145. Cigars and Cigarettes. –
xxxx
(C) Cigarettes Packed by Machine.- There shall be levied, assessed and collected on
cigarettes packed by machine a tax at the rates prescribed below:
Effective on January 1, 2013
(1) If the net retail price (excluding the excise tax and the value-added tax) is Eleven
pesos and fifty centavos (₱11.50) and below per pack, the tax shall be Twelve pesos
(₱12.00) per pack; and
(2) If the net retail price (excluding the excise tax and the value-added tax) is more than
Eleven pesos and fifty centavos (₱11.50) per pack, the tax shall be Twenty-five pesos
(₱25.00) per pack.
Effective on January l, 2014
(1) If the net retail price (excluding the excise tax and the value-added tax) is Eleven
pesos and fifty centavos (₱11.50) and below per pack, the tax shall be Seventeen pesos
(₱17.00) per pack; and
(2) If the net retail price (excluding the excise tax and the value-added tax) is more than
Eleven pesos and fifty centavos (₱11.50) per pack, the tax shall be Twenty-seven pesos
(₱27.00) per pack.
Effective on January 1, 2015
(1) If the net retail price (excluding the excise tax and the value-added tax) is Eleven
pesos and fifty centavos (₱11.50) and below per pack, the tax shall be Twenty-one pesos
(₱2 l .00) per pack; and
(2) If the net retail price (excluding the excise tax and the value-added tax) is more than
Eleven pesos and fifty centavos (₱211.50) per pack, the tax shall be Twenty-eight pesos
(₱228.00) per pack.
Effective on January 1, 2016
(1) If the net retail price (excluding the excise tax and the value-added tax) is Ele1·rn
pesos and fifty centavos (₱211.50) and below pet pack, the tax shall be Twenty-five pesos
(₱225.00) per pack; and
(2) If the net retail price (excluding the excise tax and the value-added tax) is more than
Eleven pesos and fifty centavos (₱211.50) per pack, the tax shall be Twenty-nine pesos
(₱229.00) per pack.
Effective on January 1, 2017, the tax on all cigarettes packed by machine shall be Thirty
pesos (₱230.00) per pack.
The rates of tax imposed under this subsection shall be increased by four percent (4%)
every year thereafter effective on January 1, 2018, through revenue regulations issued
by the Secretary of Finance.
Duly registered cigarettes packed by machine shall only be packed in twenties and other
packaging combinations of not more than twenty.
xxxx
On 21 December 2012, the Secretary of Finance, upon the recommendation of the
Commissioner of Internal Revenue (CIR), issued RR 17-2012. Section 11 of RR 17-2012
imposes an excise tax on individual cigarette pouches of 5's and l0's even if they are
bundled or packed in packaging combinations not exceeding 20 cigarettes. The provision
states:
SEC. 11. Revised Provisions for the Manner of Packaging of Cigarettes. - All Cigarettes
whether packed by hand or packed by machine shall only be packed in twenties (20s ),
and through other packaging combinations which shall result to not more than twenty
sticks of cigarettes: Provided, That, in case of cigarettes packed in not more than twenty
sticks, whether in S sticks, 10 sticks and other packaging combinations below 20 sticks,
the net retail price of each individual package of 5s, 10s, etc. shall be the basis of
imposing the tax rate prescribed under the Act.
Pursuant to Section 11ofRR17-2012, the CIR issued RMC 90-2012 dated 27 December
2012. Annex "D-1" of RMC 90-2012 provides for the initial classifications in tabular form,
effective 1 January 2013, of locally manufactured cigarette brands packed by machine
according to the tax rates prescribed under RA 10351 based on the (1) 2010 Bureau of
Internal Revenue (BIR) price survey of these products, and (2) suggested net retail price
declared in the latest sworn statement filed by the local manufacturer or importer. Some
relevant portions provide:
Annex "D-1"
LIST OF LOCALLY MANUFACTURED CIGARETTE BRANDS
AS OF DECEMBER 2012
1. List of brands Based on 2010 BIR Price Survey
BRAND NAMES
Content/Unit
(pack) Net Retail Price
(Based on 2010 BIR Price Survey)
2013 under R.A. No. 1035l
Applicable Excise Tax Rates Effective Jan 1,
A. Cigarettes Packed by Machine
A. I. Net Retail Price (NRP) is Php 11.50 per Pack and below
1. Astro Filter King 20 sticks/pack
10.92 12.00
xxxx
22. Fortune Int'l Extra Filter King 20 sticks/pack
10.84 12.00
23. Fortune Int'l Extra Filter King
(10*s)
10 sticks/pack
6.58
12.00
xxxx
44. Marlboro Filter (2x10's) Flip Top*
45. Marlboro Filter KS (5's)*
10 sticks/pack
8.27
5 sticks/pouch
4.11
20 sticks/pack
10.27 12.00
12.00
12.00
xxxx
61. Miller Filter Silver KS SP
xxxx
63. Miller Filter Silver –(5’s) KS Pouch* 5 sticks/pouch
2.88
12.00
6.25
12.00
xxxx
76. Philip Morris Menthol KS FTB-(10's)*10 sticks/pack
77. Philip Morris Menthol-(5's) 100's 10's Pouch*
5 sticks/pouch
3.84
12.00
xxxx
* NRP is converted into individual package of 5s or 1 Os pursuant to Section 11 of RR
No. 17-2012
PMFTC, Inc., a member of respondent Philippine Tobacco Institute, Inc. (PTI), paid the
excise taxes required under RA 10351, RR 17-2012, and RMC 90-2012 in order to
withdraw cigarettes from its manufacturing facilities. However, on 16 January 2012,
PMFTC wrote the CIR prior to the payment of the excise taxes stating that payment was
being made under protest and without prejudice to its right to question said issuances
through remedies available under the law.
As a consequence, on 26 February 2013, PTI filed a petition7 for declaratory relief with
an application for writ of preliminary injunction with the RTC. PTI sought to have RR 172012 and RMC 90-2012 declared null and void for allegedly violating the Constitution and
imposing tax rates not authorized by RA 103 51. PTI stated that the excise tax rate of
either ₱12 or ₱25 under RA 10351 should be imposed only on cigarettes packed by
machine in packs of 20's or packaging combinations of 20's and should not be imposed
on cigarette pouches of 5's and 10's.
In a Decision dated 7 October 2013, the RTC granted the petition for declaratory relief.
The dispositive portion of the Decision states:
WHEREFORE, premised on the foregoing, the Petition for Declaratory Relief is
GRANTED. The assailed portions of Revenue Regulation 17-2012 and Revenue
Memorandum Circular 90-2012 are declared NULL AND VOID and OF NO FORCE AND
EFFECT. Respondents are to immediately cease and desist from implementing Sec. 11
of Revenue Regulation 17-2012 and Revenue Memorandum Circular 90-2012 insofar as
the cigarettes packed by machine are concerned.
The tax rates imposed by RA No. 10351 should be imposed on the whole packaging
combination of 20's, regardless of whether they are packed by pouches of 2xl0's or 4x5's,
etc.
SO ORDERED.8
Hence, the instant petition filed by the Secretary of Finance and the CIR through the
Office of the Solicitor General.
Meanwhile, in a Resolution dated 9 June 2014, this Court issued a temporary restraining
order against PTI and the RTC. The dispositive portion states:
NOW, THEREFORE, effective immediately and continuing until further orders from this
Court, You, the respondent, the RTC, Br. 253, Las Piñas City, their representatives,
agents or other persons acting on their behalf are hereby RESTRAINED from enforcing
the assailed Decision dated 7 October 2013 of the RTC, Br. 253, Las Piñas City in SCA
Case No. 13-0003.
x x x x9
The Issue
Whether or not the RTC erred in nullifying Section 11of RR17-2012 andAnnex"D-1"of
RMC 90-2012 in imposing excise tax to packaging combinations of 5's, l0's, etc. not
exceeding 20 cigarette sticks packed by machine.
The Court's Ruling
The petition lacks merit.
Petitioners contend that RA10351 imposes the excise tax per pack," regardless of the
content or number of cigarette stick so each pack. Thus, the RTC erred in ruling that
RR17-2012 and RMC 90-2012 have gone beyond the plain meaning of RAl0351.
Petitioners assert that the two regulations merely clarify the tax rates set out in RA10351
but have neither amended nor added any new taxes. Petitioners maintain that the excise
tax rates imposed by RA10351 on cigarettes packed by machine are based on the net
retail price per pack. The pack, therefore, is the unit on which the tax rates are imposed
and is understood to be the packaging unit that reaches the ultimate consumer. Each
pack of 5, 10, or 20 cigarettes is meant to be sold at retail individually. On the other bind,
bundles of smaller packs resulting in 20 cigarettes are meant to be sold whole sale. Thus,
petitioners insist that the excise tax imposable on a bundle of 20 is computed on the net
retail price of each individual pack or pouch of the bundle and not on the bundle as one
unit.
PTI, on the otherhand, contends that RA10351 allows a cigarette manufacturer to adopt
packaging combinations, such as the bundling of four pouches with five sticks per pack
(4x5's),or two pouches of ten sticks per pack (2x10’s),provided that such packaging
combination does not exceed 20 sticks. Thus, individual cigarette pouches of 5's and 10's
bundled together in to a single packaging of not more than 20 sticks are considered as
one pack and should be subjected to excise tax only once. Otherwise, a cigarette pouch
of 5's,for example, will be subjected to an excise tax of ₱48.00 since the BIR Will Impose
An Individual excise tax of ₱12.00 upon each and every pouch of 5's. While the same
brand in a pack of 20's will only be subjected to an excise tax rate of ₱12.00.Thus, PTI
maintainsthatSection11ofRR17-2012andAnnex"D-1"pertaining to Cigarettes Packed by
Machine of RMC90-2012 disregarded the clear provision of RA10351 and imposed excise
tax on each cigarette pouches of 5's and 10's regard less of whether they are packed
together into 20 sticks per pack. As a result, the affected cigarette brands that
Should have been taxed only either ₱12.00 or ₱25.00 per pack are subjected to a different
and higher excise tax rate not provided in RA10351. Further, PTI asserts that petitioners
did not publish or circulate notices of the then proposed RR17 2012 or conduct a hearing
to afford interested parties the opportunity to submit their views prior to the issuance of
RR17-2012 which deprived it of its due process rights.
The pertinent portions of Section145(C) of the NIRC, as amended by Section 5 of
RA10351, state:
SEC. 5 Section 145 of the National Internal Revenue Code of 1997,as amended by
Republic Act No.9334, is hereby further amended to read as follows:
SEC. 145. Cigars and Cigarettes.–
xxxx
(C)Cigarettes Packed by Machine.-There shall believed, assessed and collected on
cigarettes packed by machine a tax at the rates prescribed below:
Effective on January 1, 2013
(1)If the net retail price (excluding the excise tax and the value-added tax) is Eleven pesos
and fifty centavos (₱11.50) and below per pack, the tax shall be Twelve pesos (₱112.00)
per pack; and
(2)If the net retail price (excluding the excise tax and the value-added tax) is more than
Eleven pesos and fifty centavos (₱11.50) per pack, the tax shall be Twenty-five pesos
(₱125.00) per pack.
xxxx
Duly registered cigarettes packed by machine shall only be packed in twenties and other
packaging combinations of not more than twenty.
x x x x (Emphasis supplied)
Section 145(C) of the NIRC is clear that the excise tax on cigarettes packed by machine
is imposed per pack."Per pack"was not given a clear definition by the NIRC. However, a
"pack" would normally refer to a number of individual components packaged as a unit.10
Under the same provision, cigarette manufacturers are permitted to bundle cigarettes
packed by machine in the maximum number of 20 sticks and aside from 20's, the law also
allows packaging combinations of not more than 20's-it can be 4 pouches of 5cigarette
sticks in a pack (4x5's), 2 pouches of 10 cigarette sticks in a pack (2x10's),etc.
Based on this maximum packaging and allowable combinations, the BIR, with RA10351
as basis, issued RR17-2012. Section11of RR17-2012, which provides for the manner of
packaging cigarettes, states:
SEC. 11. Revised Provisions for the Manner of Packaging of Cigarettes.-All Cigarettes
whether packed by hand or packed by machine shall only be packed in twenties (20s),
and through other packaging combinations which shall result to not more than twenty
sticks of cigarettes: Provided, That, in case of cigarettes packed in not more than twenty
sticks,whether in 5 sticks, 10 sticks and other packaging combinations below 20 sticks,
the net retail price of each individual package of 5s,10s, etc. shall be the basis of imposing
the tax rate prescribed under the Act.(Emphasis supplied)
The BIR also released RMC90-2012, specifically Annex "D-1" on Cigarettes Packed by
Machine, in accordance with RA10351 and RR17-2012, showing in tabular form the
different brands of locally-manufactured cigarettes packed by machine with the brand
names, content/unit (pack), net retail price,and the applicable excise tax rates
effective1January 2013.The net retail price of some brand names was converted in to
individual packages of 5's or10's pursuant to Section 11 of RR17-2012.
The RTC, in its Decision dated 7October 2013, ruled in favor of PTI and declared that
RA10351intends to tax the packs of 20's as awhole, regardless of
Whether They Are further repacked by10'sor5's, as long as they total 20sticks in all.Thus,
the tax rate tobe imposed shall only be either for a net retail price of(1)less than
₱11.50,or(2) morethan P11.50,applying the two excise tax rates from 2013 until 2016 as
mentioned under RA10351.
The RTC added" that the fact the law allows' packaging combinations,' as long as they
will not exceed a total of 20 sticks, is indicative of the law makers' foresight that these
combinations shall be sold at retail individually.Yet,the law makers did not specify in the
law that the tax rate shall be imposed on each packaging combination."Thus, the RTC
concluded that the interpretation made by the Secretary of Finance and the CIR has no
basis in the law.
We agree.
In the laws preceding RA10351-RA8240 11 and RA9334,12 both amendments to the
excise tax rates provisions of the NIRC dealing with cigarettes packed by machine, which
took effect in 1997 and 2005, respectively, provided that all" duly registered or existing
brands of cigarettes or new brands there of packed by machine shall only be packed in
twenties."
The confusion set in when RA 10351 amended the NIRC once again in 2012 and
introduced packaging combinations to cigarettes packed by machine, providing that" duly
registered cigarettes packed by machine shall only be packed in twenties and other
packaging combinations of not more than twenty."
Thereafter, RR17 2012 followed, where the BIR, in Section 11, reiterated the provision in
the NIRC that cigarettes shall only be packed in 20's and in other packaging combinations
which shall not exceed 20 sticks. However, the BIR added" xxx That, in case of cigarettes
packed in not more than twenty sticks, whether in 5 sticks, 10 sticks and other packaging
combinations below 20 sticks, the net retail price of each individual package of 5s,10s,etc.
shall be the basis of imposing the tax rate xxx."
The basis of RR17 2012 is RA 10351. RA 10351, in amending Section 145 (C) of the
NIRC provided that "duly registered cigarettes packed by machine shall only be packed
in twenties and other packaging combinations of not more than twenty.' However, now
here is it mentioned that the other packaging combinations of not more than 20 will be
imposed individual tax rates based on its different packages of 5's, 10's,etc. In such a
case, a cigarette pack of 20's will only be subjected to an excise tax rate of P 12.00 per
pack as opposed to packaging combinations of 5's or 10's which will be subjected to a
higher excise tax rate of ₱24.00 for10's and ₱48.00 for 5's.
During the Bicameral Conference Committee on the Disagreeing Provisions of Senate
Bill No.3299 and House Bill No.5727 dealing with the Sin Tax bills of the l5th Congress,
before these bills were enacted into RA10351, our law makers and Kim S.JacintoHenares, the CIR at the time, deliberated on the packaging of cigarettes.
Therelevantexcerptsstate:
Rep. Villafuerte: Just appoint of clarification. The Senate says,' twenties.' Okay, that's
very reasonable. But can twopacks put together in tens, is that prohibited? Because in
rural areas, they don't necessarily have to sell.
The Chairman (Sen.Drilon): Can we ask our resource person, Congressman?
Ms. Jacinto-Henares: No, sir, as long as they take the two ten packs together or four, five
packs together, that is consideredtwenty.
Rep. Villafuerte: Okay. As long as the twenty packs is paid even if they are separable in
packaging for retail purposes, that's allowed. Because I got the impression from some
people that that is being prohibited that's why I sought to clarify.
The Chairman (Sen. Drilon): On record, yes.
xxxx
Sen. Recto: But you could have five, five, five, five and put a tape.
Ms. Jacinto-Henares: Yeah. But it should be taped together.
Sen. Recto: Okay.
Sen. P. Cayetano:Can I ask a question about that? When you say that you can have
numbers divisible, I guess, by five, so you have five, 10, 15, 20, right? So you can have
two or four packaged together for tax purposes.And then for retail purposes, you can
divide that up. Is that what we're saying?
xxxx
Ms.Jacinto-Henares:Yes.
xxxx
Sen.A. Cayetano: Mr. Chair. Mr. Chair. The point is, we're taxing by pack. If they sell less
than 20, that's advantageous to the government. So, if they want to pack it by 10 but not
combine it, we will tax them twice. So, it's good for the government. But if you allow
combinations without limiting it to20, they will pack three of 10’s together and you will be
taxing 30’s and the government will be getting less. So it's an irony that our problem now
with the sin tax is our sin tax.
So, can I propose this wording, In twenties and other packaging combinations not more
than20ornotmorethan20ornotmorethan20sticks.
Ms.Jacinto-Henares:Yes,Sir.13
From the above discussion, it can be gleaned that the lawmakers intended to impose the
excise tax on every pack of cigarettes that come in 20 sticks. Individual pouches or
packaging combinations of 5'sand l0's for retail purposes are allowed and will be
subjected to the same excise tax rate as long as they are bundled together by not more
than 20 sticks. Thus, by issuing Section11of RR17-2012 andAnnex"D-1"on Cigarettes
Packed by Machine of RMC90-2012, the BIR went beyond the express provisions of
RA10351.
It is an elementary rule in administrative law that administrative rules and regulations
enacted by administrative bodies to implement the law which they are entrusted to
enforce have the force of law and are entitled to great weight and respect. However, these
implementations of the law must not override, supplant,or modify the law but must remain
consistent with the law they intend to implement. It is only Congress which has the power
to repeal or amend the law.
In this case, Section 11 of RR17-2012 and Annex"D-1" on Cigarettes Packed by Machine
of RMC90-2012 clearly contravened the provisions of RA10351.1âwphi1 It is a wellsettled principle that are venue regulation cannot amend the law it seeks to implement.
In Commissioner of Internal Revenue v. Seagate Technology (Philippines), 14 we held
that a mere administrative issuance, like a BIR regulation, cannot amend the law; the
former cannot purport to do any more than implement the latter. The courts will not
countenance an administrative regulation that overrides the statute it seeks to implement.
In the present case, area ding of Section 11 of RR17-2012 and Annex"D-1" on Cigarettes
Packed by Machine of RMC 90-2012 reveals that they are not simply regulations to
implement RA10351. They are amendatory provisions which require cigarette
manufacturers to be liable to pay for more tax than the law, RA10351, allows. The BIR,
in issuing these revenue regulations, created an additional tax liability for packaging
combinations smaller than 20 cigarette sticks. In so doing, the BIR amended the law, an
act beyond the power of the BIR to do.
In sum, we agree with the ruling of the RTC that Section 11 of RR17-2012 and Annex"D1" on Cigarettes Packed by Machine of RMC 90-2012 are null and void. Excise tax on
cigarettes packed by machine shall be imposed on the packaging combination of 20
cigarette sticks as a whole and not to individual packaging combinations or pouches of
5's, 10's,etc.
WHEREFORE, we DENY the petition. We AFFIRM the Decision dated 7 October 2013
of the Regional Trial Court of Las Piñas City, Branch253 in SCA Case No.13-0003.
SO ORDERED.
THIRD DIVISION
April 5, 2017
G.R. No. 222743
MEDICARD PHILIPPINES, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DECISION
REYES,, J.:
This appeal by Petition for Review1 seeks to reverse and set aside the Decision2 dated
September 2, 2015 and Resolution3 dated January 29, 2016 of the Court of Tax Appeals
(CTA) en bane in CTA EB No. 1224, affirming with modification the Decision4 dated June
5, 2014 and the Resolution5 dated September 15, 2014.in CTA Case No. 7948 of the
CTA Third Division, ordering petitioner Medicard Philippines, Inc. (MEDICARD), to pay
respondent Commissioner of Internal Revenue (CIR) the deficiency
Value-Added Tax. (VAT) assessment in the aggregate amount of ₱220,234,609.48, plus
20% interest per annum starting January 25, 2007, until fully paid, pursuant to Section
249(c)6 of the National Internal Revenue Code (NIRC) of 1997.
The Facts
MEDICARD is a Health Maintenance Organization (HMO) that provides prepaid health
and medical insurance coverage to its clients. Individuals enrolled in its health care
programs pay an annual membership fee and are entitled to various preventive,
diagnostic and curative medical services provided by duly licensed physicians, specialists
and other professional technical staff participating in the group practice health delivery
system at a hospital or clinic owned, operated or accredited by it.7
MEDICARD filed its First, Second, and Third Quarterly VAT Returns through Electronic
Filing and Payment System (EFPS) on April 20, 2006, July 25, 2006 and October 20,
2006, respectively, and its Fourth Quarterly VAT Return on January 25, 2007.8
Upon finding some discrepancies between MEDICARD's Income Tax Returns (ITR) and
VAT Returns, the CIR informed MEDICARD and issued a Letter Notice (LN) No. 122-VT06-00-00020 dated
September 20, 2007. Subsequently, the CIR also issued a Preliminary Assessment
Notice (PAN) against MEDICARD for deficiency VAT. A Memorandum dated December
10, 2007 was likewise issued recommending the issuance of a Formal Assessment
Notice (FAN) against MEDICARD.9 On. January 4, 2008, MEDICARD received CIR's
FAN dated December' 10, 2007 for alleged deficiency VAT for taxable year 2006 in the
total amount of Pl 96,614,476.69,10 inclusive of penalties. 11
According to the CIR, the taxable base of HMOs for VAT purposes is its gross receipts
without any deduction under Section 4.108.3(k) of Revenue Regulation (RR) No. 162005. Citing Commissioner of Internal Revenue v. Philippine Health Care Providers, Inc.,
12 the CIR argued that since MEDICARD. does not actually provide medical and/or
hospital services, but merely arranges for the same, its services are not VAT exempt.13
MEDICARD argued that: (1) the services it render is not limited merely to arranging for
the provision of medical and/or hospital services by hospitals and/or clinics but include
actual and direct rendition of medical and laboratory services; in fact, its 2006 audited
balance sheet shows that it owns x-ray and laboratory facilities which it used in providing
medical and laboratory services to its members; (2) out of the ₱l .9 Billion membership
fees, ₱319 Million was received from clients that are registered with the Philippine Export
Zone Authority (PEZA) and/or Bureau of Investments; (3) the processing fees amounting
to ₱l 1.5 Million should be excluded from gross receipts because P5.6 Million of which
represent advances for professional fees due from clients which were paid by MEDICARD
while the remainder was already previously subjected to VAT; (4) the professional fees in
the amount of Pl 1 Million should also be excluded because it represents the amount of
medical services actually and directly rendered by MEDICARD and/or its subsidiary
company; and (5) even assuming that it is liable to pay for the VAT, the 12% VAT rate
should not be applied on the entire amount but only for the period when the 12% VAT
rate was already in effect, i.e., on February 1, 2006. It should not also be held liable for
surcharge and deficiency interest because it did not pass on the VAT to its members.14
On February 14, 2008, the CIR issued a Tax Verification Notice authorizing Revenue
Officer Romualdo Plocios to verify the supporting documents of MEDICARD's Protest.
MEDICARD also submitted additional supporting documentary evidence in aid of its
Protest thru a letter dated March 18, 2008.15
On June 19, 2009, MEDICARD received CIR's Final Decision on Disputed Assessment
dated May 15, 2009, denying MEDICARD's protest, to wit:
IN VIEW HEREOF, we deny your letter protest and hereby reiterate in toto assessment
of deficiency [VAT] in total sum of ₱196,614,476.99. It is requested that you pay said
deficiency taxes immediately. Should payment be made later, adjustment has to be made
to impose interest until date of payment. This is olir final decision. If you disagree, you
may take an appeal to the [CTA] within the period provided by law, otherwise, said
assessment shall become final, executory and demandable. 16
On July 20, 2009, MEDICARD proceeded to file a petition for review before the CT A,
reiterating its position before the tax authorities. 17
On June 5, 2014, the CTA Division rendered a Decision18 affirming with modifications
the CIR's deficiency VAT assessment covering taxable year 2006, viz.:
WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR]
against [MEDICARD] covering taxable year 2006 ·is hereby AFFIRMED WITH
MODIFICATIONS. Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of
P223,l 73,208.35, inclusive of the twenty-five percent (25%) surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as amended, computed as follows:
Basic Deficiency VAT
₱l78,538,566.68
Add: 25% Surcharge
44,634,641.67
Total ₱223.173.208.35
In addition, [MEDICARD] is ordered to pay:
a. Deficiency interest at the rate of twenty percent (20%) per annum on the basis
deficiency VAT of Pl 78,538,566.68 computed from January 25, 2007 until full payment
thereof pursuant to Section 249(B) of the NIRC of 1997, as amended; and
b. Delinquency interest at the rate of twenty percent (20%) per annum on the total amount
of ₱223,173,208.35 representing basic deficiency VAT of ₱l78,538,566.68 and· 25%
surcharge of ₱44,634,64 l .67 and on the 20% deficiency interest which have accrued as
afore-stated in (a), computed from June 19, 2009 until full payment thereof pursuant to
Section 249(C) of the NIRC of 1997.
SO ORDERED.19
The CTA Division held that: (1) the determination of deficiency VAT is not limited to the
issuance of Letter of Authority (LOA) alone as the CIR is granted vast powers to perform
examination and assessment functions; (2) in lieu of an LOA, an LN was issued to
MEDICARD informing it· of the discrepancies between its ITRs and VAT Returns and this
procedure is authorized under Revenue Memorandum Order (RMO) No. 30-2003 and 422003; (3) MEDICARD is estopped from questioning the validity of the assessment on the
ground of lack of LOA since the assessment issued against MEDICARD contained the
requisite legal and factual bases that put MEDICARD on notice of the deficiencies and it
in fact availed of the remedies provided by law without questioning the nullity of the
assessment; (4) the amounts that MEDICARD earmarked , and eventually paid to
doctors, hospitals and clinics cannot be excluded from · the computation of its gross
receipts under the provisions of RR No. 4-2007 because the act of earmarking or
allocation is by itself an act of ownership and management over the funds by MEDICARD
which is beyond the contemplation of RR No. 4-2007; (5) MEDICARD's earnings from its
clinics and laboratory facilities cannot be excluded from its gross receipts because the
operation of these clinics and laboratory is merely an incident to MEDICARD's main line
of business as HMO and there is no evidence that MEDICARD segregated the amounts
pertaining to this at the time it received the premium from its members; and (6)
MEDICARD was not able to substantiate the amount pertaining to its January 2006
income and therefore has no basis to impose a 10% VAT rate.20
Undaunted, MEDICARD filed a Motion for Reconsideration but it was denied. Hence,
MEDICARD elevated the matter to the CTA en banc.
In a Decision21 dated September 2, 2015, the CTA en banc partially granted the petition
only insofar as the 10% VAT rate for January 2006 is concerned but sustained the findings
of the CTA Division in all other matters, thus:
WHEREFORE, in view thereof, the instant Petition for Review is hereby PARTIALLY
GRANTED. Accordingly, the Decision date June 5, 2014 is hereby MODIFIED, as follows:
"WHEREFORE, premises considered, the deficiency VAT assessment issued by [CIR]
against
[MEDICARD] covering taxable year 2006 is hereby AFFIRMED WITH MODIFICATIONS.
Accordingly, [MEDICARD] is ordered to pay [CIR] the amount of ₱220,234,609.48,
inclusive of the 25% surcharge imposed under Section 248(A)(3) of the NIRC of 1997, as
amended, computed as follows:
Basic Deficiency VAT
₱76,187,687.58
Add: 25% Surcharge
44,046,921.90
Total ₱220,234.609.48
In addition, [MEDICARD] is ordered to pay:
(a) Deficiency interest at the rate of 20% per annum on the basic deficiency VAT of ₱l
76,187,687.58 computed from January 25, 2007 until full payment thereof pursuant to
Section 249(B) of the NIRC of 1997, as amended; and
(b) Delinquency interest at the rate of 20% per annum on the total amount of
₱220,234,609.48 (representing basic deficiency VAT of ₱l76,187,687.58 and 25%
surcharge of ₱44,046,921.90) and on the deficiency interest which have accrued as
afore-stated in (a), computed from June 19, 2009 until full payment thereof pursuant to
Section 249(C) of the NIRC of 1997, as amended."
SO ORDERED.22
Disagreeing with the CTA en bane's decision, MEDICARD filed a motion for
reconsideration but it was denied.23 Hence, MEDICARD now seeks recourse to this
Court via a petition for review on certiorari.
The Issues
l. WHETHER THE ABSENCE OF THE LOA IS FATAL; and
2. WHETHER THE AMOUNTS THAT MEDICARD EARMARKED AND EVENTUALLY
PAID TO THE MEDICAL SERVICE PROVIDERS SHOULD STILL FORM PART OF ITS
GROSS RECEIPTS FOR VAT PURPOSES.24
Ruling of the Court
The petition is meritorious.
The absence of an LOA violated
MEDICARD's right to due process
An LOA is the authority given to the appropriate revenue officer assigned to perform
assessment functions. It empowers or enables said revenue officer to examine the books
of account and other accounting records of a taxpayer for the purpose of collecting the
correct amount of tax. 25 An LOA is premised on the fact that the examination of a
taxpayer who has already filed his tax returns is a power that statutorily belongs only to
the CIR himself or his duly authorized representatives. Section 6 of the NIRC clearly
provides as follows:
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional
Requirements for Tax Administration and Enforcement. –
(A) Examination of Return and Determination of Tax Due.- After a return has been filed
as required under the provisions of this Code, the Commissioner or his duly authorized
representative may authorize the examinationof any taxpayer and the assessment of the
correct amount of tax: Provided, however, That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer.
x x x x (Emphasis and underlining ours)
Based on the afore-quoted provision, it is clear that unless authorized by the CIR himself
or by his duly authorized representative, through an LOA, an examination of the taxpayer
cannot ordinarily be undertaken. The circumstances contemplated under Section 6 where
the taxpayer may be assessed through best-evidence obtainable, inventory-taking, or
surveillance among others has nothing to do with the LOA. These are simply methods of
examining the taxpayer in order to arrive at .the correct amount of taxes. Hence, unless
undertaken by the CIR himself or his duly authorized representatives, other tax agents
may not validly conduct any of these kinds of examinations without prior authority.
With the advances in information and communication technology, the Bureau of Internal
Revenue (BIR) promulgated RMO No. 30-2003 to lay down the policies and guidelines
once its then incipient centralized Data Warehouse (DW) becomes fully operational in
conjunction with its Reconciliation of Listing for Enforcement System (RELIEF System).26
This system can detect tax leaks by matching the data available under the BIR's
Integrated Tax System (ITS) with data gathered from third-party sources. Through the
consolidation and cross-referencing of third-party information, discrepancy reports on
sales and purchases can be generated to uncover under declared income and over
claimed purchases of Goods and services.
Under this RMO, several offices of the BIR are tasked with specific functions relative to
the RELIEF System, particularly with regard to LNs. Thus, the Systems Operations
Division (SOD) under the Information Systems Group (ISG) is responsible for: (1) coming
up with the List of Taxpayers with discrepancies within the threshold amount set by
management for the issuance of LN and for the system-generated LNs; and (2) sending
the same to the taxpayer and to the Audit Information, Tax Exemption and Incentives
Division (AITEID). After receiving the LNs, the AITEID under the Assessment
Service (AS), in coordination with the concerned offices under the ISG, shall be
responsible for transmitting the LNs to the investigating offices [Revenue District Office
(RDO)/Large Taxpayers District Office (LTDO)/Large Taxpayers Audit and Investigation
Division (LTAID)]. At the level of these investigating offices, the appropriate action on the
LN s issued to taxpayers with RELIEF data discrepancy would be determined.
RMO No. 30-2003 was supplemented by RMO No. 42-2003, which laid down the "nocontact-audit approach" in the CIR's exercise of its ·power to authorize any examination
of taxpayer arid the assessment of the correct amount of tax. The no-contact-audit
approach includes the process of computerized matching of sales and purchases data
contained in the Schedules of Sales and Domestic Purchases and Schedule of
Importation submitted by VAT taxpayers under the RELIEF System pursuant to RR No.
7-95, as amended by RR Nos. 13-97, 7-99 and 8-2002. This may also include the
matching of data from other information or returns filed by the taxpayers with the BIR such
as Alphalist of Payees subject to Final or Creditable Withholding Taxes.
Under this policy, even without conducting a detailed examination of taxpayer's books
and records, if the computerized/manual matching of sales and purchases/expenses
appears to reveal discrepancies, the same shall be communicated to the concerned
taxpayer through the issuance of LN. The LN shall serve as a discrepancy notice to
taxpayer similar to a Notice for Informal Conference to the concerned taxpayer. Thus,
under the RELIEF System, a revenue officer may begin an examination of the taxpayer
even prior to the issuance of an LN or even in the absence of an LOA with the aid of a
computerized/manual matching of taxpayers': documents/records. Accordingly, under the
RELIEF System, the presumption that the tax returns are in accordance with law and are
presumed correct since these are filed under the penalty of perjury27 are easily rebutted
and the taxpayer becomes instantly burdened to explain a purported discrepancy.
Noticeably, both RMO No. 30-2003 and RMO No. 42-2003 are silent on the statutory
requirement of an LOA before any investigation or examination of the taxpayer may be
conducted. As provided in the RMO No. 42-2003, the LN is merely similar to a Notice for
Informal Conference. However, for a Notice of Informal Conference, which generally
precedes the issuance of an assessment notice to be valid, the same presupposes that
the revenue officer who issued the same is properly authorized in the first place.
With this apparent lacuna in the RMOs, in November 2005, RMO No. 30-2003, as
supplemented by RMO No. 42-2003, was amended by RMO No. 32-2005 to fine tune
existing procedures in handing assessments against taxpayers'· issued LNs by
reconciling various revenue issuances which conflict with the NIRC. Among the objectives
in the issuance of RMO No. 32-2005 is to prescribe procedure in the resolution of LN
discrepancies, conversion of LNs to LOAs and assessment and collection of deficiency
taxes.
IV. POLICIES AND GUIDELINES
xxxx
8. In the event a taxpayer who has been issued an LN refutes the discrepancy shown in
the LN, the concerned taxpayer will be given an opportunity to reconcile its records with
those of the BIR within
One Hundred and Twenty (120) days from the date of the issuance of the LN. However,
the subject taxpayer shall no longer be entitled to the abatement of interest and penalties
after the lapse of the sixty (60)-day period from the LN issuance.
9. In case the above discrepancies remained unresolved at the end of the One Hundred
and Twenty (120)-day period, the revenue officer (RO) assigned to handle the LN shall
recommend the issuance of [LOA) to replace the LN. The head of the concerned
investigating office shall submit a summary list of LNs for conversion to LAs (using the
herein prescribed format in Annex "E" hereof) to the OACIR-LTS I ORD for the
preparation of the corresponding LAs with the notation "This LA cancels LN_________
No. "
xxxx
V. PROCEDURES
xxxx
B. At the Regional Office/Large Taxpayers Service
xxxx
7. Evaluate the Summary List of LNs for Conversion to LAs submitted by the RDO x x x
prior to approval.
8. Upon approval of the above list, prepare/accomplish and sign the corresponding LAs.
xxxx
Decision 11 G.R. No. 222743
xxxx
10. Transmit the approved/signed LAs, together with the duly accomplished/approved
Summary List of LNs for conversion to LAs, to the concerned investigating offices for the
encoding of the required information x x x and for service to the concerned taxpayers.
xxxx
C. At the RDO x x x
xxxx
11. If the LN discrepancies remained unresolved within One Hundred and Twenty (120)
days from issuance thereof, prepare a summary list of said LN s for conversion to LAs x
x x.
xxxx
16. Effect the service of the above LAs to the concerned taxpayers.28
In this case, there is no dispute that no LOA was issued prior to the issuance of a PAN
and FAN against MED ICARD. Therefore no LOA was also served on MEDICARD. The
LN that was issued earlier was also not converted into an LOA contrary to the above
quoted provision. Surprisingly, the CIR did not even dispute the applicability of the above
provision of RMO 32-2005 in the present case which is clear and unequivocal on the
necessity of an LOA for the· assessment proceeding to be valid. Hence, the CTA's
disregard of MEDICARD's right to due process warrant the reversal of the assailed
decision and resolution.
In the case of Commissioner of Internal Revenue v. Sony Philippines, Inc. ,29 the Court
said that:
Clearly, there must be a grant of authority before any revenue officer can conduct an
examination or assessment. Equally important is that the revenue officer so authorized
must not go beyond the authority given. In the absence of such an authority, the
assessment or examination is a nullity.30 (Emphasis and underlining ours)
The Court cannot convert the LN into the LOA required under the law even if the same
was issued by the CIR himself. Under RR No. 12-2002, LN is issued to a person found to
have underreported sales/receipts per data generated under the RELIEF system. Upon
receipt of the LN, a taxpayer may avail of the BIR's Voluntary Assessment and Abatement
Program. If a taxpayer fails or refuses to avail of the said program, the BIR may avail of
administrative and criminal .remedies, particularly closure, criminal action, or audit and
investigation. Since the law specifically requires an LOA and RMO No. 32-2005 requires
the conversion of the previously issued LN to an LOA, the absence thereof cannot be
simply swept under the rug, as the CIR would have it. In fact Revenue Memorandum
Circular No. 40-2003 considers an LN as a notice of audit or investigation only for the
purpose of disqualifying the taxpayer from amending his returns.
The following differences between an LOA and LN are crucial. First, an LOA addressed
to a revenue officer is specifically required under the NIRC before an examination of a
taxpayer may be had while an LN is not found in the NIRC and is only for the purpose of
notifying the taxpayer that a discrepancy is found based on the BIR's RELIEF System.
Second, an LOA is valid only for 30 days from date of issue while an LN has no such
limitation. Third, an LOA gives the revenue officer only a period of 10days from receipt of
LOA to conduct his examination of the taxpayer whereas an LN does not contain such a
limitation.31 Simply put, LN is entirely different and serves a different purpose than an
LOA. Due process demands, as recognized under RMO No. 32-2005, that after an LN
has serve its purpose, the revenue officer should have properly secured an LOA before
proceeding with the further examination and assessment of the petitioner. Unfortunarely,
this was not done in this case.
Contrary to the ruling of the CTA en banc, an LOA cannot be dispensed with just because
none of the financial books or records being physically kept by MEDICARD was
examined. To begin with, Section 6 of the NIRC requires an authority from the CIR or
from his duly authorized representatives before an examination "of a taxpayer" may be
made. The requirement of authorization is therefore not dependent on whether the
taxpayer may be required to physically open his books and financial records but only on
whether a taxpayer is being subject to examination.
The BIR's RELIEF System has admittedly made the BIR's assessment and collection
efforts much easier and faster. The ease by which the BIR's revenue generating
objectives is achieved is no excuse however for its non-compliance with the statutory
requirement under Section 6 and with its own administrative issuance. In fact, apart from
being a statutory requirement, an LOA is equally needed even under the BIR's RELIEF
System because the rationale of requirement is the same whether or not the CIR conducts
a physical examination of the taxpayer's records: to prevent undue harassment of a
taxpayer and level the playing field between the government' s vast resources for tax
assessment, collection and enforcement, on one hand, and the solitary taxpayer's dual
need to prosecute its business while at the same time responding to the BIR exercise of
its statutory powers. The balance between these is achieved by ensuring that any
examination of the taxpayer by the BIR' s revenue officers is properly authorized in the
first place by those to whom the discretion to exercise the power of examination is given
by the statute.
That the BIR officials herein were not shown to have acted unreasonably is beside the
point because the issue of their lack of authority was only brought up during the trial of
the case. What is crucial is whether the proceedings that led to the issuance of VAT
deficiency assessment against MEDICARD had the prior approval and authorization from
the CIR or her duly authorized representatives. Not having authority to examine
MEDICARD in the first place, the assessment issued by the CIR is inescapably void.
At any rate, even if it is assumed that the absence of an LOA is not fatal, the Court still
partially finds merit in MEDICARD's substantive arguments.
The amounts earmarked and
eventually paid by MEDICARD to
the medical service providers do not
form part of gross receipts.for VAT
purposes
MEDICARD argues that the CTA en banc seriously erred in affirming the ruling of the CT
A Division that the gross receipts of an HMO for VAT purposes shall be the total amount
of money or its equivalent actually received from members undiminished by any amount
paid or payable to the owners/operators of hospitals, clinics and medical and dental
practitioners. MEDICARD explains that its business as an HMO involves two different
although interrelated contracts. One is between a corporate client and MEDICARD, with
the corporate client's employees being considered as MEDICARD members; and the
other is between the health care institutions/healthcare professionals and MED ICARD.
Under the first, MEDICARD undertakes to make arrangements with healthcare
institutions/healthcare professionals for the coverage of MEDICARD members under
specific health related services for a specified period of time in exchange for payment of
a more or less fixed membership fee. Under its contract with its corporate clients,
MEDICARD expressly provides that 20% of the membership fees per individual,
regardless of the amount involved, already includes the VAT of 10%/20% excluding the
remaining 80o/o because MED ICARD would earmark this latter portion for medical
utilization of its members. Lastly, MEDICARD also assails CIR's inclusion in its gross
receipts of its earnings from medical services which it actually and directly rendered to its
members.
Since an HMO like MEDICARD is primarily engaged m arranging for coverage or
designated managed care services that are needed by plan holders/members for fixed
prepaid membership fees and for a specified period of time, then MEDICARD is
principally engaged in the sale of services. Its VAT base and corresponding liability is,
thus, determined under Section 108(A)32 of the Tax Code, as amended by Republic Act
No. 9337.
Prior to RR No. 16-2005, an HMO, like a pre-need company, is treated for VAT purposes
as a dealer in securities whose gross receipts is the amount actually received as contract
price without allowing any deduction from the gross receipts.33 This restrictive tenor
changed under RR No. 16-2005. Under this RR, an HMO's gross receipts and gross
receipts in general were defined, thus:
Section 4.108-3. xxx
xxxx
HMO's gross receipts shall be the total amount of money or its equivalent representing
the service fee actually or constructively received during the taxable period for the
services performed or to be performed for another person, excluding the value-added tax.
The compensation for their services representing their service fee, is presumed to be the
total amount received as enrollment fee from their members plus other charges received.
Section 4.108-4. x x x. "Gross receipts" refers to the total amount of money or its
equivalent representing the contract price, compensation, service fee, rental or royalty,
including the amount charged for materials supplied with the services and deposits
applied as payments for services rendered, and advance payments actually or
constructively received during the taxable period for the services performed or to be
performed for another person, excluding the VAT. 34
In 2007, the BIR issued RR No. 4-2007 amending portions of RR No. 16-2005, including
the definition of gross receipts in general.35
According to the CTA en banc, the entire amount of membership fees should form part of
MEDICARD's gross receipts because the exclusions to the gross receipts under RR No.
4-2007 does not apply to MEDICARD. What applies to MEDICARD is the definition of
gross receipts of an HMO under RR No. 16-2005 and not the modified definition of gross
receipts in general under the RR No. 4-2007.
The CTA en banc overlooked that the definition of gross receipts under. RR No. 16-2005
merely presumed that the amount received by an HMO as membership fee is the HMO's
compensation for their services. As a mere presumption, an HMO is, thus, allowed to
establish that a portion of the amount it received as membership fee does NOT actually
compensate it but some other person, which in this case are the medical service providers
themselves. It is a well-settled principle of legal hermeneutics that words of a statute will
be interpreted in their natural, plain and ordinary acceptation and signification, unless it
is evident that the legislature intended a technical or special legal meaning to those words.
The Court cannot read the word "presumed" in any other way.
It is notable in this regard that the term gross receipts as elsewhere mentioned as the tax
base under the NIRC does not contain any specific definition.36 Therefore, absent a
statutory definition, this Court has construed the term gross receipts in its plain and
ordinary meaning, that is, gross receipts is understood as comprising the entire receipts
without any deduction.37 Congress, under Section 108, could have simply left the term
gross receipts similarly undefined and its interpretation subjected to ordinary acceptation,.
Instead of doing so, Congress limited the scope of the term gross receipts for VAT
purposes only to the amount that the taxpayer received for the services it performed or to
the amount it received as advance payment for the services it will render in the future for
another person.
In the proceedings ·below, the nature of MEDICARD's business and the extent of the
services it rendered are not seriously disputed. As an HMO, MEDICARD primarily acts
as an intermediary between the purchaser of healthcare services (its members) and the
healthcare providers (the doctors, hospitals and clinics) for a fee. By enrolling
membership with MED ICARD, its members will be able to avail of the pre-arranged
medical services from its accredited healthcare providers without the necessary protocol
of posting cash bonds or deposits prior to being attended to or admitted to hospitals or
clinics, especially during emergencies, at any given time. Apart from this, MEDICARD
may also directly provide medical, hospital and laboratory services, which depends upon
its member's choice.
Thus, in the course of its business as such, MED ICARD members can either avail of
medical services from MEDICARD's accredited healthcare providers or directly from
MEDICARD. In the former, MEDICARD members obviously knew that beyond the
agreement to pre-arrange the healthcare needs of its ·members, MEDICARD would not
actually be providing the actual healthcare service. Thus, based on industry practice,
MEDICARD informs its would-be member beforehand that 80% of the amount would be
earmarked for medical utilization and only the remaining 20% comprises its service fee.
In the latter case, MEDICARD's sale of its services is exempt from VAT under Section
109(G).
The CTA's ruling and CIR's Comment have not pointed to any portion of Section 108 of
the NIRC that would extend the definition of gross receipts even to amounts that do not
only pertain to the services to be performed: by another person, other than the taxpayer,
but even to amounts that were indisputably utilized not by MED ICARD itself but by the
medical service providers.
It is a cardinal rule in statutory construction that no word, clause, sentence, provision or
part of a statute shall be considered surplusage or superfluous, meaningless, void and
insignificant. To this end, a construction which renders every word operative is preferred
over that which makes some words idle and nugatory. This principle is expressed in the
maxim Ut magisvaleat quam pereat, that is, we choose the interpretation which gives
effect to the whole of the statute – it’s every word.
In Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue,38the
Court adopted the principal object and purpose object in determining whether the
MEDICARD therein is engaged in the business of insurance and therefore liable for
documentary stamp tax. The Court held therein that an HMO engaged in preventive,
diagnostic and curative medical services is not engaged in the business of an insurance,
thus:
To summarize, the distinctive features of the cooperative are the rendering of service, its
extension, the bringing of physician and patient together, the preventive features, the
regularization of service as well as payment, the substantial reduction in cost by quantity
purchasing in short, getting the medical job done and paid for; not, except incidentally to
these features, the indemnification for cost after .the services is rendered. Except the last,
these are not distinctive or generally characteristic of the insurance arrangement. There
is, therefore, a substantial difference between contracting in this way for the rendering of
service, even on the contingency that it be needed, and contracting merely to stand its
cost when or after it is rendered.39 (Emphasis ours)
In sum, the Court said that the main difference between an HMO arid an insurance
company is that HMOs undertake to provide or arrange for the provision of medical
services through participating physicians while insurance companies simply undertake to
indemnify the insured for medical expenses incurred up to a pre-agreed limit. In the
present case, the VAT is a tax on the value added by the performance of the service by
the taxpayer. It is, thus, this service and the value charged thereof by the taxpayer that is
taxable under the NIRC.
To be sure, there are pros and cons in subjecting the entire amount of membership fees
to VAT.40 But the Court's task however is not to weigh these policy considerations but to
determine if these considerations in favor of taxation can even be implied from the statute
where the CIR purports to derive her authority. This Court rules that they cannot because
the language of the NIRC is pretty straightforward and clear. As this Court previously
ruled:
What is controlling in this case is the well-settled doctrine of strict interpretation in the
imposition of taxes, not the similar doctrine as applied to tax exemptions. The rule in the
interpretation of tax laws is that a statute will not be construed as imposing a tax unless
it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear
and express words for that purpose. Accordingly, the general rule of requiring adherence
to the letter in construing statutes applies with peculiar strictness to tax laws and the
provisions of a taxing act are not to be extended by implication. In answering the question
of who is subject to tax statutes, it is basic that in case of doubt, such statutes are to be
construed most strongly against the government and in favor of the subjects or citizens
because burdens are not to be imposed nor presumed to be imposed beyond what
statutes expressly and clearly import. As burdens, taxes should not be unduly exacted
nor assumed beyond the plain meaning of the tax laws. 41 (Citation omitted and emphasis
and underlining ours)
For this Court to subject the entire amount of MEDICARD's gross receipts without
exclusion, the authority should have been reasonably founded from the language of the
statute. That language is wanting in this case. In the scheme of judicial tax administration,
the need for certainty and predictability in the implementation of tax laws is crucial. Our
tax authorities fill in the details that Congress may not have the opportunity or competence
to provide. The regulations these authorities issue are relied upon by taxpayers, who are
certain that these will be followed by the courts. Courts, however, will not uphold these
authorities' interpretations when dearly absurd, erroneous or improper.42 The CIR's
interpretation of gross receipts in the present case is patently erroneous for lack of both
textual and non-textual support.
As to the CIR's argument that the act of earmarking or allocation is by itself an act of
ownership and management over the funds, the Court does not agree.1âwphi1 On the
contrary, it is MEDICARD's act of earmarking or allocating 80% of the amount it received
as membership fee at the time of payment that weakens the ownership imputed to it. By
earmarking or allocating 80% of the amount, MEDICARD unequivocally recognizes that
its possession of the funds is not in the concept of owner but as a mere administrator of
the same. For this reason, at most, MEDICARD's right in relation to these amounts is a
mere inchoate owner which would ripen into actual ownership if, and only if, there is
underutilization of the membership fees at the end of the fiscal year. Prior to that, MEDI
CARD is bound to pay from the amounts it had allocated as an administrator once its
members avail of the medical services of MEDICARD's healthcare providers.
Before the Court, the parties were one in submitting the legal issue of whether the
amounts MEDICARD earmarked, corresponding to 80% of its enrollment fees, and paid
to the medical service providers should form part of its gross receipt for VAT purposes,
after having paid the VAT on the amount comprising the 20%. It is significant to note in
this regard that MEDICARD established that upon receipt of payment of membership fee
it actually issued two official receipts, one pertaining to the VAT able portion, representing
compensation for its services, and the other represents the non-vatable portion pertaining
to the amount earmarked for medical utilization.: Therefore, the absence of an actual and
physical segregation of the amounts pertaining to two different kinds · of fees cannot
arbitrarily disqualify MEDICARD from rebutting the presumption under the law and from
proving that indeed services were rendered by its healthcare providers for which it paid
the amount it sought to be excluded from its gross receipts.
With the foregoing discussions on the nullity of the assessment on due process grounds
and violation of the NIRC, on one hand, and the utter lack of legal basis of the CIR's
position on the computation of MEDICARD's gross receipts, the Court finds it
unnecessary, nay useless, to discuss the rest of the parties' arguments and counterarguments.
In fine, the foregoing discussion suffices for the reversal of the assailed decision and
resolution of the CTA en banc grounded as it is on due process violation. The Court
likewise rules that for purposes of determining the VAT liability of an HMO, the amounts
earmarked and actually spent for medical utilization of its members should not be included
in the computation of its gross receipts.
WHEREFORE, in consideration of the foregoing disquisitions, the petition is hereby
GRANTED. The Decision dated September 2, 2015 and Resolution dated January 29,
2016 issued by the Court of Tax Appeals en bane in CTA EB No. 1224 are REVERSED
and SET ASIDE. The definition of gross receipts under Revenue Regulations Nos. 162005 and 4-2007, in relation to Section 108(A) of the National Internal Revenue Code, as
amended by Republic Act No. 9337, for purposes of determining its Value-Added Tax
liability, is hereby declared to EXCLUDE the eighty percent (80%) of the amount of the
contract price earmarked as fiduciary funds for the medical utilization of its members.
Further, the Value-Added Tax deficiency assessment issued against Medicard
Philippines, Inc. is hereby declared unauthorized for having been issued without a Letter
of Authority by the Commissioner of Internal Revenue or his duly authorized
representatives.
SO ORDERED.
SECOND DIVISION
March 8, 2017
G.R. No. 215383
HON. KIM S. JACINTO-HENARES, in her official capacity as COMMISSIONER OF THE
BUREAU OF INTERNAL REVENUE, Petitioner
vs
ST. PAUL COLLEGE OF MAKATI, Respondent
RESOLUTION
CARPIO, J.:
The Case
This petition for review1 assails the Decision dated 25 July 20142 and Joint Resolution
dated 29 October 20143 of the Regional Trial Court, Branch 143, Makati City (RTC), in
Civil Case No. 13-1405, declaring Revenue Memorandum Order (RMO) No. 20-2013
unconstitutional.
The Facts
On 22 July 2013, petitioner Kim S. Jacinto-Henares, acting in her capacity as then
Commissioner of Internal Revenue (CIR), issued RMO No. 20-2013, "Prescribing the
Policies and Guidelines in the Issuance of Tax Exemption Rulings to Qualified Non-Stock,
Non-Profit Corporations and Associations under Section 30 of the National Internal
Revenue Code of 1997, as Amended."
On 29 November 2013, respondent St. Paul College of Makati (SPCM), a non-stock, nonprofit educational institution organized and existing under Philippine laws, filed a Civil
Action to Declare Unconstitutional [Bureau of Internal Revenue] RMO No. 20-2013 with
Prayer for Issuance of Temporary Restraining Order and Writ of Preliminary Injunction4
before the RTC. SPCM alleged that "RMO No. 20-2013 imposes as a prerequisite to the
enjoyment by non-stock, non-profit educational institutions of the privilege of tax
exemption under Sec. 4(3) of Article XIV of the Constitution both a registration and
approval requirement, i.e., that they submit an application for tax exemption to the BIR
subject to approval by CIR in the form of a Tax[]Exemption Ruling (TER) which is valid
for a period of [three] years and subject to renewal."5 According to SPCM, RMO No. 202013 adds a prerequisite to the requirement under Department of Finance Order No. 13787,6 and makes failure to file an annual information return a ground for a non-stock,
nonprofit educational institution to "automatically lose its income tax-exempt status."7
In a Resolution dated 27 December 2013,8 the RTC issued a temporary restraining order
against the implementation of RMO No. 20- 2013. It found that failure of SPCM to comply
with RMO No. 20-2013 would necessarily result to losing its tax-exempt status and cause
irreparable injury.
In a Resolution dated 22 January 2014,9 the RTC granted the writ of preliminary injunction
after finding that RMO No. 20-2013 appears to divest non-stock, non-profit educational
institutions of their tax exemption privilege. Thereafter, the RTC denied the CIR's motion
for reconsideration. On 29 April 2014, SPCM filed a Motion for Judgment on the Pleadings
under Rule 34 of the Rules of Court.
The Ruling of the RTC
In a Decision dated 25 July 2014, the RTC ruled in favor of SPCM and declared RMO No.
20-2013 unconstitutional.1âwphi1 It held that "by imposing the x x x [prerequisites alleged
by SPCM,] and if not complied with by nonstock, non-profit educational institutions, [RMO
No. 20-2013 serves] as diminution of the constitutional privilege, which even Congress
cannot diminish by legislation, and thus more so by the [CIR] who merely exercise[s]
quasi-legislative function."10
The dispositive portion of the Decision reads:
WHEREFORE, in view of all the foregoing, the Court hereby declares BIR RMO No. 202013 as UNCONSTITUTIONAL for being violative of Article XIV, Section 4, paragraph 3.
Consequently, all Revenue Memorandum Orders subsequently issued to implement BIR
RMO No. 20-2013 are declared null and void.
The writ of preliminary injunction issued on 03 February 2014 is hereby made permanent.
SO ORDERED.11
On 18 September 2014, the CIR issued RMO No. 34-2014,12 which clarified certain
provisions of RMO No. 20-2013, as amended by RMO No. 28-2013.13
In a Joint Resolution dated 29 October 2014, the RTC denied the CIR's motion for
reconsideration, to wit:
WHEREFORE, viewed in the light of the foregoing premises, the Motion for
Reconsideration filed by the respondent is hereby DENIED for lack of merit.
Meanwhile, this Court clarifies that the phrase "Revenue Memorandum Order" referred to
in the second sentence of its decision dated July 25, 2014 refers to "issuance/s" of the
respondent which tends to implement RMO 20-2013 for if it is otherwise, said decision
would be useless and would be rendered nugatory.
SO ORDERED.14
Hence, this present petition.
The Issues
The CIR raises the following issues for resolution:
WHETHER THE TRIAL COURT CORRECTLY CONCLUDED THAT RMO [NO.] 20-2013
IMPOSES A PREREQUISITE BEFORE A NONSTOCK, NON-PROFIT EDUCATIONAL
INSTITUTION MAY AVAIL OF THE TAX EXEMPTION UNDER SECTION 4(3), ARTICLE
XIV OF THE CONSTITUTION.
WHETHER THE TRIAL COURT CORRECTLY CONCLUDED THAT RMO NO. 20-2013
ADDS TO THE REQUIREMENT UNDER DEPARTMENT OF FINANCE ORDER NO.
137-87.15
The Ruline of the Court
We deny the petition on the ground of mootness.
We take judicial notice that on 25 July 2016, the present CIR Caesar R. Dulay issued
RMO No. 44-2016, which provides that:
SUBJECT: Amending Revenue Memorandum Order No. 20- 2013, as amended
(Prescribing the Policies and Guidelines in the Issuance of Tax Exemption Rulings to
Qualified Non-Stock, Non-Profit Corporations and Associations under Section 30 of the
National Internal Revenue Code of 1997, as Amended)
In line with the Bureau's commitment to put in proper context the nature and tax status of
non-profit, non-stock educational institutions, this Order is being issued to exclude nonstock, non-profit educational institutions from the coverage of Revenue Memorandum
Order No. 20-2013, as amended.
SECTION 1. Nature of Tax Exemption. --- The tax exemption of non-stock, non-profit
educational institutions is directly conferred by paragraph 3, Section 4, Article XIV of the
1987 Constitution, the pertinent portion of which reads:
"All revenues and assets of non-stock, non-profit educational institutions used actually,
directly and exclusively (or educational purposes shall be exempt from taxes and duties."
This constitutional exemption is reiterated in Section 30 (H) of the 1997 Tax Code, as
amended, which provides as follows:
"Sec. 30. Exempt from Tax on Corporations. - The following organizations shall not be
taxed under this Title in respect to income received by them as such:
xxx
xxx
xxx
(H) A non-stock and non-profit educational institution; x x x."
It is clear and unmistakable from the aforequoted constitutional provision that non-stock,
non-profit educational institutions are constitutionally exempt from tax on all revenues
derived in pursuance of its purpose as an educational institution and used actually,
directly and exclusively for educational purposes. This constitutional exemption gives the
non-stock, non-profit educational institutions a distinct character. And for the
constitutional exemption to be enjoyed, jurisprudence and tax rulings affirm the doctrinal
rule that there are only two requisites: (1) The school must be non-stock and non-profit;
and (2) The income is actually, directly and exclusively used for educational purposes.
There are no other conditions and limitations.
In this light, the constitutional conferral of tax exemption upon non-stock and non-profit
educational institutions should not be implemented or interpreted in such a manner that
will defeat or diminish the intent and language of the Constitution.
SECTION 2. Application for Tax Exemption. --- Non-stock, nonprofit educational
institutions shall file their respective Applications for Tax Exemption with the Office of the
Assistant Commissioner, Legal Service, Attention: Law Division.
SECTION 3. Documentary Requirements. --- The non-stock, nonprofit educational
institution shall submit the following documents:
a. Original copy of the application letter for issuance of Tax Exemption Ruling;
b. Certified true copy of the Certificate of Good Standing issued by the Securities and
Exchange Commission;
c. Original copy of the Certification under Oath of the Treasurer as to the amount of the
income, compensation, salaries or any emoluments paid to its trustees, officers and other
executive officers;
d. Certified true copy of the Financial Statements of the corporation for the last three (3)
years;
e. Certified true copy of government recognition/permit/accreditation to operate as an
educational institution issued by the Commission on Higher Education (CHED),
Department of Education (DepEd), or Technical Education and Skills Development
Authority (TESDA); Provided, that if the government recognition/permit/accreditation to
operate as an educational institution was issued five (5) years prior to the application for
tax exemption, an original copy of a current Certificate of Operation/Good Standing, or
other equivalent document issued by the appropriate government agency (i.e., CHED,
DepEd, or TESDA) shall be submitted as proof that the non-stock and non-profit
education is currently operating as such; and
f. Original copy of the Certificate of utilization of annual revenues and assets by the
Treasurer or his equivalent of the non-stock and nonprofit educational institution.
SECTION 4. Request for Additional Documents. --- In the course of review of the
application for tax exemption, the Bureau may require additional information or
documents as the circumstances may warrant.
SECTION 5. Validity of the Tax Exemption Ruling. --- Tax Exemption Rulings or
Certificates of Tax Exemption of non-stock, nonprofit educational institutions shall remain
valid and effective, unless recalled for valid grounds. They are not required to renew or
revalidate the Tax exemption rulings previously issued to them.
The Tax Exemption Ruling shall be subject to revocation if there are material changes in
the character, purpose or method of operation of the corporation which are inconsistent
with the basis for its income tax exemption.
SECTION 6. Transitory Provisions. --- To update the records of the Bureau and for
purposes of a better system of monitoring, non-stock, nonprofit educational institutions
with Tax Exemption Rulings or Certificates of Exemption issued prior to June 30, 2012
are required to apply for new Tax Exemption Rulings.
SECTION 7. Repealing Clause. --- Any revenue issuance which is inconsistent with this
Order is deemed revoked, repealed, or modified accordingly.
SECTION 8. Effectivity. --- This Order shall take effect immediately. (Emphases supplied)
A moot and academic case is one that ceases to present a justiciable controversy by
virtue of supervening events, so that an adjudication of the case or a declaration on the
issue would be of no practical value or use.16 Courts generally decline jurisdiction over
such case or dismiss it on the ground of mootness.17
With the issuance of RMO No. 44-2016, a supervening event has transpired that rendered
this petition moot and academic, and subject to denial.1âwphi1 The CIR, in her petition,
assails the RTC Decision finding RMO No. 20-2013 unconstitutional because it violated
the non-stock, non-profit educational institutions' tax exemption privilege under the
Constitution. However, subsequently, RMO No. 44-2016 clarified that non-stock,
nonprofit educational institutions are excluded from the coverage of RMO No. 20-2013.
Consequently, the RTC Decision no longer stands, and there is no longer any practical
value in resolving the issues raised in this petition.
WHEREFORE, we DENY the petition on the ground of mootness. We SET ASIDE the
Decision dated 25 July 2014 and Joint Resolution dated 29 October 2014 of the Regional
Trial Court, Branch 143, Makati City, declaring Revenue Memorandum Order No. 202013 unconstitutional. The writ of preliminary injunction is superseded by this Resolution.
SO ORDERED.
SECOND DIVISION
February 22, 2017
G.R. No. 215705-07
COMMISSIONER OF INTERNAL REVENUE AND COMMISSIONER OF CUSTOMS,
Petitioners
vs.
PHILIPPINE AIRLINES, INC., Respondent
DECISION
PERALTA, J.:
Before the Court is a petition for review on certiorari seeking the reversal and setting aside
of the Decision1 and Resolution2 of the Court of Tax Appeals (CTA) En Banc, dated April
30, 2014 and December 16, 2014, respectively, in CTA EB Nos. 1029, 1031 and 1032.
The assailed judgment affirmed the January 17, 2013 Decision3 and June 4, 2013
Resolution4 of the CTA Special 2nd Division in CTA Case No. 8153.
The controversy in the instant case, which gave rise to the present petition for review on
certiorari, revolves around the interpretation of the provisions of Presidential Decree No.
1590 (PD 1590), otherwise known as "An Act Granting a New Franchise to Philippine
Airlines, Inc. to Establish, Operate, and Maintain Air Transport Services in the Philippines
and Other Countries" vis-a-vis Republic Act No. 9334 (RA 9334), otherwise known as "An
Act Increasing the Excise Tax Rates Imposed on Alcohol and Tobacco Products,
Amending for the Purpose Sections 131, 141, 142, 145, and 228 of the National Internal
Revenue Code of 1997." PD 1590 was enacted on June 11, 1978, while RA 9334 took
effect on January 1, 2005.
Prior to the effectivity of RA 9334, Republic Act No. 8424 (RA 8424), otherwise known as
the "Tax Reform Act of 1997," was enacted and took effect on January 1, 1998, thereby
amending the National Internal Revenue Code (NIRC). Section 131 of the NIRC, as
amended by RA 8424, provides:
SEC. 131. Payment of Excise Taxes on Imported Articles. –
(A) Persons Liable. - Excise taxes on imported articles shall be paid by the owner or
importer to the Customs Officers, conformably with the regulations of the Department of
Finance and before the release of such articles from the customs house, or by the person
who is found in possession of articles which are exempt from excise taxes other than
those legally entitled to exemption.
In the case of tax-free articles brought or imported into the Philippines by persons, entitles,
or agencies exempt from tax which are subsequently sold, transferred or exchanged in
the Philippines to non-exempt persons or entitles, the purchasers or recipients shall be
considered the importers thereof, and shall be liable for the duty and internal revenue tax
due on such importation.
The provision of any special or general law to the contrary notwithstanding, the
importation of cigars and cigarettes, distilled spirits and wines into the Philippines, even
if destined for tax and duty free shops, shall be subject to all applicable taxes, duties,
charges, including excise taxes due thereon: Provided, however, That this shall not apply
to cigars and cigarettes, distilled spirits and wines brought directly into the duly chartered
or legislated freeports of the Subic Special Economic and Freeport Zone, crated under
Republic Act No. 7227; the Cagayan Special Economic Zone and Freeport, created under
Republic Act No. 7922; and the Zamboanga City Special Economic Zone, created under
Republic Act No. 7903, and are not transshipped to any other port in the Philippines:
Provided, further, That importations of cigars and cigarettes, distilled spirits and wines by
a government-owned and operated duty-free shop, like the DutyFree Philippines (DFP),
shall be exempted from all applicable taxes, duties, charges, including excise tax due
thereon: Provided, still.further, That if such articles directly imported by a governmentowned and operated duty-free shop like the Duty-Free Philippines, shall be labeled "tax
and duty-free" and "not for resale": Provided, still further, That is such articles brought into
the duly chartered or legislated freeports under Republic Acts No. 7227, 7922 and 7903
are subsequently introduced into the Philippine customs territory, then such articles shall,
upon such introduction, be deemed imported into the Philippines and shall be subject to
all imposts and excise taxes provided herein and other statutes: Provided, finally, That
the removal and transfer of tax and duty-free goods, products, machinery, equipment and
other similar articles, from one freeport to another freeport, shall not be deemed an
introduction into the Philippine customs territory.
Articles confiscated shall be disposed of in accordance with the rules and regulations to
be promulgated by the Secretary of Finance, upon recommendation of the Commissioner
of Customs and Internal Revenue, upon consultation with the Secretary of Tourism and
the General manager of the Philippine Tourism Authority.
The tax due on any such goods, products, machinery, equipment or other similar articles
shall constitute a lien on the article itself, and such lien shall be superior to all other
charges or liens, irrespective of the possessor thereof.
(B) Rate and Basis of the Excise Tax on Imported Articles. - Unless otherwise specified
imported articles shall be subject to the same rates and basis of excise taxes applicable
to locally manufactured articles.5
On January 1, 2005, RA 9334 took effect, Section 6 of which amended the abovequoted
Section 131 of the NIRC and, accordingly, reads as follows:
SEC. 131. Payment of Excise Taxes on Imported Articles. –
(A) Persons Liable. - Excise taxes on imported articles shall be paid by the owner or
importer to the Customs Officers, conformably with the regulations of the Department of
Finance and before the release of such articles from the customs house, or by the person
who is found in possession of articles which are exempt from excise taxes other than
those legally entitled to exemption. "In the case of tax-free articles brought or imported
into the Philippines by persons, entities, or agencies exempt from tax which are
subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or
entities, the purchasers or recipients shall be considered the importers thereof, and shall
be liable for the duty and internal revenue tax due on such importation.
"The provision of any special or general law to the contrary notwithstanding, the
importation of cigars and cigarettes, distilled spirits, fermented liquors and wines into the
Philippines, even if destined for tax and duty-free shops, shall be subject to all applicable
taxes, duties, charges, including excise taxes due thereon. This shall apply to cigars and
cigarettes, distilled spirits, fermented liquors and wines brought directly into the duly
chartered or legislated freeports of the Subic Special Economic and Freeport Zone,
created under Republic Act No. 7227; the Cagayan Special Economic Zone and Freeport,
created under Republic Act No. 7922; and the Zamboanga City Special Economic Zone,
created under Republic Act No. 7903, and such other freeports as may hereafter be
established or created by law: Provided, further, That importations of cigars and
cigarettes, distilled spirits, fermented liquors and wines made directly by a
governmentowned and operated duty-free shop, like the Duty-Free Philippines (DFP),
shall be exempted from all applicable duties only: Provided, still further, That such articles
directly imported by a government-owned and operated duty-free shop, like the DutyFree
Philippines, shall be labeled 'duty-free' and 'not for resale': Provided, finally, That the
removal and transfer of tax and duty-free goods, products, machinery, equipment and
other similar articles other than cigars and cigarettes, distilled spirits, fermented liquors
and wines, from one freeport to another freeport, shall not be deemed an introduction into
the Philippine customs territory."
"Cigars and cigarettes, distilled spirits and wines within the premises of all duty-free shops
which are not labelled as hereinabove required, as well as tax and duty-free articles
obtained from a duty-free shop and subsequently found in a non-duty-free shop to be
offered for resale shall be confiscated, and the perpetrator of such non-labelling or reselling shall be punishable under the applicable provisions of this Code.
"Articles confiscated shall be disposed of in accordance with the rules and regulations to
be promulgated by the Secretary of Finance, upon recommendation of the
Commissioners of Customs and Internal Revenue, upon consultation with the Secretary
of Tourism and the General Manager of the Philippine Tourism Authority.
"The tax due on any such goods, products, machinery, equipment or other similar articles
shall constitute a lien on the article itself, and such lien shall be superior to all other
charges or liens, irrespective of the possessor thereof.
"(B) Rate and Basis of the Excise Tax on Imported Articles. - Unless otherwise specified,
imported articles shall be subject to the same rates and basis of excise taxes applicable
to locally manufactured articles."6
The amendment increased the rates of excise tax imposed on alcohol and tobacco
products. It also removed the exemption from taxes, duties and charges, including excise
taxes, on importations of cigars, cigarettes, distilled spirits, wines and fermented liquor
into the Philippines.
Thereafter, PAL's importations of alcohol and tobacco products which were intended for
use inits commissary supplies during international flights, were subjected to excise taxes.
For the said imported articles, which arrived in Manila between October 3, 2007 and
December 22, 2007, PAL was assessed excise taxes amounting to a total of
₱6,329,735.21.
On September 5, 2008, PAL paid under protest. On March 5, 2009, PAL filed an
administrative claim for refund of the above excise taxes it paid with the Bureau of Internal
Revenue (BIR) contending that it is entitled to tax privileges under Section 13 of PD 1590,
which provides as follows:
Section 13. In consideration of the franchise and rights hereby granted, the grantee shall
pay to the Philippine Government during the life of this franchise whichever of subsections
(a) and (b) hereunder will result in a lower tax:
(a) The basic corporate income tax based on the grantee's annual net taxable income
computed in accordance with the provisions of the National Internal Revenue Code; or
(b) A franchise tax of two per cent (2%) of the gross revenues derived by the grantee from
all sources, without distinction as to transport or nontransport operations; provided, that
with respect to international air-transport service, only the gross passenger, mail, and
freight revenues from its outgoing flights shall be subject to this tax.
The tax paid by the grantee under either of the above alternatives shall be in lieu of all
other taxes, duties, royalties, registration, license, and other fees and charges of any kind,
nature, or description, imposed, levied, established, assessed, or collected by any
municipal, city, provincial, or national authority or government agency, now or in the
future, including but not limited to the following:
1. All taxes, duties, charges, royalties, or fees due on local purchases by the grantee of
aviation gas, fuel, and oil, whether refined or in crude form, and whether such taxes,
duties, charges, royalties, or fees are directly due from or imposable upon the purchaser
or the seller, producer, manufacturer, or importer of said petroleum products but are billed
or passed on the grantee either as part of the price or cost thereof or by mutual agreement
or other arrangement; provided, that all such purchases by, sales or deliveries of aviation
gas, fuel, and oil to the grantee shall be for exclusive use in its transport and nontransport
operations and other activities incidental thereto;
2. All taxes, including compensating taxes, duties, charges, royalties, or fees due on all
importations by the grantee of aircraft, engines, equipment, machinery, spare parts,
accessories, commissary and catering supplies, aviation gas, fuel, and oil, whether
refined or in crude form and other articles, supplies, or materials; provided, that such
articles or supplies or materials are imported for the use of the grantee in its transport and
transport operations and other activities incidental thereto and are not locally available in
reasonable quantity, quality, or price;
3. All taxes on lease rentals, interest, fees, and other charges payable to lessors, whether
foreign or domestic, of aircraft, engines, equipment, machinery, spare parts, and other
property rented, leased, or chartered by the grantee where the payment of such taxes is
assumed by the grantee;
4. All taxes on interest, fees, and other charges on foreign loans obtained and other
obligations incurred by the grantee where the payment of such taxes is assumed by the
grantee;
5. All taxes, fees, and other charges on the registration, licensing, acquisition, and transfer
of aircraft, equipment, motor vehicles, and all other personal and real property of the
grantee; and
6. The corporate development tax under Presidential Decree No. 1158-A.
The grantee, shall, however, pay the tax on its real property in conformity with existing
law.
For purposes of computing the basic corporate income tax as provided herein, the
grantee is authorized:
(a) To depreciate its assets to the extent of not more than twice as fast the normal rate of
depreciation; and
(b) To carry over as a deduction from taxable income any net loss incurred in any year
up to five years following the year of such loss.7
Considering that the two-year prescriptive period for filing a judicial claim for refund was
about to expire and the BIR was yet to act on its claims, PAL filed a judicial claim for
refund, via a petition for review, with the CTA on September 2, 2010. The case, docketed
as CTA Case No. 8153, was raffled-off to the Second Division of the tax court.
Respondent CIR filed his Answer, while respondent COC was declared in default for
failure to file his Answer and Pre-Trial Brief. Thereafter, trial ensued.
On January 17, 2013, the CTA Second Division issued a Decision8 partially granting
PAL's claim for refund. The dispositive portion of the said Decision reads:
WHEREFORE, the instant Petition for Review is hereby PARTIALLY GRANTED.
Accordingly, respondents are hereby ORDERED to REFUND to petitioner the amount of
₱2,094,985.21, representing petitioner's erroneously-paid excise tax on September 5,
2008.
SO ORDERED.9
The CTA Second Division found that PAL was able to sufficiently prove its exemption
from the payment of excise taxes pertaining to its importation of alcoholic products and
since it already paid the disputed excise taxes on the subject importation, it is entitled to
refund. However, the tax court ruled that, with respect to its subject importation of tobacco
products, PAL failed to discharge its burden of proving that the said product were not
locally available in reasonable quantity, quality or price, in accordance with the
requirements of the law. Thus, it is not entitled to refund for the excise taxes paid on such
importation.
The herein parties filed separate motions for reconsideration, but these were all denied
by the CTA Second Division in its Resolution dated June 4, 2013.
Consequently, the parties appealed to the CTA En Banc via separate petitions for review,
docketed as CTA EB Nos. 1029, 1031and1032, which were later consolidated.
On April 30, 2014, the CTA En Banc rendered a Decision dismissing the consolidated
petitions and affirming in toto the assailed Decision of the CTA Second Division.
The parties filed their respective motions for reconsideration, but the CTA En Banc denied
them in its Resolution dated December 16, 2014.
Hence, the instant petition for review on certiorari raising a sole issue, to wit:
Whether PAL's alcohol and tobacco importations for its commissary supplies are subject
to excise tax.10
In the present petition, petitioner argues that:
I.
Section 131 of the NIRC revoked PAL's tax privilege under Section 13 of P.D No. 1590
with respect to excise tax on its alcohol and tobacco importation.
II
Assuming that it is still entitled to the tax privilege, PAL failed to adequately prove that the
conditions under Section 13 of P.D. No. 1590 were met in this case.11
The main question raised in the instant case is whether the tax privilege of PAL provided
in Section 13 of PD 1590 has been revoked by Section 131 of the NIRC of 1997, as
amended by Section 6 of RA 9334.
The Court rules in the negative.
This issue is not novel. Thus, as in previous cases resolving the same question and
involving substantially similar factual backgrounds, the ruling will not change.
In the fairly recent case of Commissioner of Internal Revenue and Commissioner of
Customs v. Philippine Airlines, Inc.,12 the core issue raised was whether or not PAL's
importations of alcohol and tobacco products for its commissary supplies are subject to
excise tax. This Court, ruling in favor of PAL, held that:
It is a basic principle of statutory construction that a later law, general in terms and not
expressly repealing or amending a prior special law, will not ordinarily affect the special
provisions of such earlier statute. So it must be here.
Indeed, as things stand, PD 1590 has not been revoked by the NIRC of 1997, as
amended. Or to be more precise, the tax privilege of PAL provided in Sec. 13 of PD 1590
has not been revoked by Sec. 131 of the NIRC of 1997, as amended by Sec. 6 of RA
9334. We said as much in Commissioner of Internal Revenue v. Philippine Air Lines, Inc
[GR. No. 180066, July 7, 2009, 609 Phil. 695]:
That the Legislature chose not to amend or repeal [PD] 1590 even after PAL was
privatized reveals the intent of the Legislature to let PAL continue to enjoy, as a private
corporation, the very same rights and privileges under the terms and conditions stated in
said charter. x x x
To be sure, the manner to effectively repeal or at least modify any specific provision of
PAL's franchise under PD 1590, as decreed in the aforequoted Sec. 24, has not been
demonstrated. And as aptly held by the CTA en banc, borrowing from the same
Commissioner of Internal Revenue case:
While it is true that Sec. 6 of RA 9334 as previously quoted states that "the provisions of
any special or general law to the contrary notwithstanding," such phrase left alone cannot
be considered as an express repeal of the exemptions granted under PAL's franchise
because it fails to specifically identify PD 1590 as one of the acts intended to be repealed.
xxx
Noteworthy is the fact that PD 1590 is a special law, which governs the franchise of PAL.
Between the provisions under PD 1590 as against the provisions under the NIRC of 1997,
as amended by 9334, which is a general law, the former necessary prevails. This is in
accordance with the rule that on a specific matter, the special law shall prevail over the
general law, which shall be resorted only to supply deficiencies in the former. In addition,
where there are two statutes, the earlier special and the later general - the terms of the
general broad enough to include the matter provided for in the special - the fact that one
is special and other general creates a presumption that the special is considered as
remaining an exception tothe general, one as a general law of the land and the other as
the law of a particular case.
Any lingering doubt, however, as to the continued entitlement of PAL under Sec. 13 of its
franchise to excise tax exemption on otherwise taxable items contemplated therein, e.g.,
aviation gas, wine, liquor or cigarettes, should once and for all be put to rest by the fairly
recent pronouncement in Philippine Airlines, Inc. v. Commissioner of Internal Revenue.
In that case, the Court, on the premise that the "propriety of a tax refund is hinged on the
kind of exemption which forms its basis," declared in no uncertain terms that PAL has
"sufficiently prove[d]" its entitlement to a tax refund of the excise taxes and that PAL's
payment of either the franchise tax or basic corporate income tax in the amount fixed
thereat shall be in lieu of all other taxes or duties, and inclusive of all taxes on all
importations of commissary and catering supplies, subject to the condition of their
availability and eventual use.x x x13
In the more recent consolidated cases of Republic of the Philippines v. Philippine Airlines,
Inc. (PAL)14 and Commissioner of Internal Revenue v. Philippine Airlines, Inc. (PAL),15
this Court, echoing the ruling in the abovecited case of CIR v. PAL, held that:
In other words, the franchise of PAL remains the governing law on its exemption from
taxes. Its payment of either basic corporate income tax or franchise tax - whichever is
lower - shall be in lieu of all other taxes, duties, royalties, registrations, licenses, and other
fees and charges, except only real property tax. The phrase "in lieu of all other taxes"
includes but is not limited to taxes, duties, charges, royalties, or fees due on all
importations by the grantee of the commissary and catering supplies, provided that such
articles or supplies or materials are imported for the use of the grantee in its transport and
nontransport operations and other activities incidental thereto and are not locally available
in reasonable quantity, quality, or price.16
On July 1, 2005, Republic Act No. 9337 (RA 9337) took effect thereby further amending
certain provisions of the NIRC.1âwphi1 Section 22 of RA 9337 specifically provides as
follows:
SEC. 22. Franchises of Domestic Airlines. - The provisions of P.D. No. 1590 on the
franchise tax of Philippine Airlines, Inc., R.A. No. 7151 on the franchise tax of Cebu Air,
Inc., R.A. No. 7583 on the franchise tax of Aboitiz Air Transport Corporation, R.A. No.
7909 on the franchise tax of Pacific Airways Corporation, R.A. No. 8339 on the franchise
tax of Air Philippines, or any other franchise agreement or law pertaining to a domestic
airline to the contrary notwithstanding:
(A) The franchise tax is abolished;
(B) The franchisee shall be liable to the corporate income tax;
(C) The franchisee shall register for value-added tax under Section 236, and to account
under Title IV of the National Internal Revenue Code of 1997, as amended, for valueadded tax on its sale of goods, property or services and its lease of property; and
(D) The franchisee shall otherwise remain exempt from any taxes, duties, royalties,
registration, license, and other fees and charges, as may be provided by their respective
franchise agreement.17
Thus, this Court held in the abovecited PAL consolidated cases:
However, upon the amendment of the 1997 NIRC, Section 22 of R.A. 9337 abolished the
franchise tax and subjected PAL and similar entities to corporate income tax and valueadded tax (VAT). PAL nevertheless remains exempt from taxes, duties, royalties,
registrations, licenses, and other fees and charges, provided it pays corporate income tax
as granted in its franchise agreement. Accordingly, PAL is left with no other option but to
pay its basic corporate income tax, the payment of which shall be in lieu of all other taxes,
except VAT, and subject to certain conditions provided in its charter.18
It bears to note that the repealing clause of RA 933 7 enumerated the laws or provisions
of laws which it repeals. However, there is nothing in the repealing clause, nor in any
other provisions of the said law, which makes specific mention of PD 1590 as one of the
acts intended to be repealed.
Lastly, as in the abovecited cases, petitioners in the present petition again raise the issue
regarding PAL's alleged failure to comply with the conditions set by Section 13 of PD
1590 for its imported tobacco and alcohol products to be exempt from excise tax. These
conditions are: (1) such supplies are imported for the use of the franchisee in its
transport/nontransport operations and other incidental activities; and (2) they are not
locally available in reasonable quantity, quality and price.19 However, as this Court has
previously held, the matter as to PAL's supposed noncompliance with the conditions set
by Section 13 of P.D. 1590 for its imported supplies to be exempt from excise tax, are
factual determinations that are best left to the CTA, which found that PAL had, in fact,
complied with the above conditions.20 The CTA is a highly specialized body that reviews
tax cases and conducts trial de nova. Thus, without any showing that the findings of the
CTA are unsupported by substantial evidence, its findings are binding on this Court.21
WHEREFORE, the instant petition for review on certiorari is DENIED. The assailed
Decision and Resolution of the Court of Tax Appeals En Banc, dated April 30, 2014 and
December 16, 2014, respectively, in CTA EB Nos. 1029, 1031 and 1032 are AFFIRMED.
SO ORDERED.
FIRST DIVISION
February 13, 2017
G.R. No. 203514
COMMISSIONER OF INTERNAL REVENUE, Petitioner
vs.
ST. LUKE’S MEDICAL CENTER, INC., Respondent
DECISION
DEL CASTILLO, J.:
The doctrine of stare decisis dictates that "absent any powerful countervailing
considerations, like cases ought to be decided alike."1
This Petition for Review on Certiorari2 under Rule 45 of the Rules of Court assails the
May 9, 2012 Decision3 and the September 17, 2012 Resolution4 of the Court of Tax
Appeals (CTA) in CTA EB Case No. 716.
Factual Antecedents
On December 14, 2007, respondent St. Luke’s Medical Center, Inc. (SLMC) received
from the Large Taxpayers Service-Documents Processing and Quality Assurance
Division of the Bureau of Internal Revenue (BIR) Audit Results/Assessment Notice Nos.
QA-07-0000965 and QA-07-000097,6 assessing respondent SLMC deficiency income
tax under Section 27(B)7 of the 1997 National Internal Revenue Code (NIRC), as
amended, for taxable year 2005 in the amount of ₱78,617,434.54 and for taxable year
2006 in the amount of ₱57,119,867.33.
On January 14, 2008, SLMC filed with petitioner Commissioner of Internal Revenue (CIR)
an administrative protest8 assailing the assessments. SLMC claimed that as a non-stock,
non-profit charitable and social welfare organization under Section 30(E) and (G)9 of the
1997 NIRC, as amended, it is exempt from paying income tax.
On April 25, 2008, SLMC received petitioner CIR's Final Decision on the Disputed
Assessment10 dated April 9, 2008 increasing the deficiency income for the taxable year
2005 tax to ₱82,419,522.21 and for the taxable year 2006 to ₱60,259,885.94, computed
as follows:
For Taxable Year 2005:
ASSESSMENT NO. QA-07-000096
PARTICULARS
AMOUNT
Sales/Revenues/Receipts/Fees
?3,623,511,616.00
Less: Cost of Sales/Services
2,643,049, 769.00
Gross Income From Operation
980,461,847.00
Add: Non-Operating & Other Income
-
Total Gross Income 980,461,847.00
Less: Deductions
481,266,883 .00
Net Income Subject to Tax 499, 194,964.00
XTaxRate
10%
Tax Due
49,919,496.40
Less: Tax Credits
-
Deficiency Income Tax
49,919,496.40
Add: Increments
25% Surcharge
12,479,874.10
20% Interest Per Annum (4115/06-4/15/08)
19,995,151.71
Compromise Penalty for Late Payment 25,000.00
Total increments
32,500,025.81
Total Amount Due ?82,419,522.21
For Taxable Year 2006:
ASSESSMENT NO. QA-07-000097
PARTICULARS
[AMOUNT]
Sales/Revenues/Receipts/Fees
?3,8 l 5,922,240.00
Less: Cost of Sales/Services
2,760,518,437.00
Gross Income From Operation
1,055,403,803.00
Add: Non-Operating & Other Income
-
Total Gross Income 1,055,403,803.00
Less: Deductions
640,147,719.00
Net Income Subject to Tax 415,256,084.00
XTaxRate
10%
Tax.Due
41,525,608.40
Less: Tax Credits
-
Deficiency Income Tax
41,525,608.40
Add: Increments
-
25% Surcharge
10,381,402.10
20% Interest Per Annum (4/15/07-4/15/08)
8,327,875.44
Compromise Penalty for Late Payment 25,000.00
Total increments
18,734,277.54
Total Amount Due ?60,259,885.9411
Aggrieved, SLMC elevated the matter to the CTA via a Petition for Review,12 docketed
as CTA Case No. 7789.
Ruling of the Court of Tax Appeals Division
On August 26, 2010, the CTA Division rendered a Decision13 finding SLMC not liable for
deficiency income tax under Section 27(B) of the 1997 NIRC, as amended, since it is
exempt from paying income tax under Section 30(E) and (G) of the same Code. Thus:
WHEREFORE, premises considered, the Petition for Review is hereby GRANTED.
Accordingly, Audit Results/Assessment Notice Nos. QA-07-000096 and QA-07-000097,
assessing petitioner for alleged deficiency income taxes for the taxable years 2005 and
2006, respectively, are hereby CANCELLED and SET ASIDE.
SO ORDERED.14
CIR moved for reconsideration but the CTA Division denied the same in its December 28,
2010 Resolution.15
This prompted CIR to file a Petition for Review16 before the CTA En Banc.
Ruling of the Court of Tax Appeals En Banc
On May 9, 2012, the CTA En Banc affirmed the cancellation and setting aside of the Audit
Results/Assessment Notices issued against SLMC. It sustained the findings of the CTA
Division that SLMC complies with all the requisites under Section 30(E) and (G) of the
1997 NIRC and thus, entitled to the tax exemption provided therein.17
On September 17, 2012, the CTA En Banc denied CIR's Motion for Reconsideration.
Issue
Hence, CIR filed the instant Petition under Rule 45 of the Rules of Court contending that
the CTA erred in exempting SLMC from the payment of income tax.
Meanwhile, on September 26, 2012, the Court rendered a Decision in G.R. Nos. 195909
and 195960, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center,
Inc.,18 finding SLMC not entitled to the tax exemption under Section 30(E) and (G) of the
NIRC of 1997 as it does not operate exclusively for charitable or social welfare purposes
insofar as its revenues from paying patients are concerned. Thus, the Court disposed of
the case in this manner:
WHEREFORE, the petition of the Commissioner of Internal Revenue in G.R. No.
195909is PARTLY GRANTED. The Decision of the Court of Tax Appeals En Banc dated
19 November 2010 and its Resolution dated 1 March 2011 in CTA Case No. 6746 are
MODIFIED. St. Luke's Medical Center, Inc. is ORDERED TO PAY the deficiency income
tax in 1998 based on the 10% preferential income tax rate under Section 27(B) of the
National Internal Revenue Code. However, it is not liable for surcharges and interest on
such deficiency income tax under Sections 248 and 249 of the National Internal Revenue
Code. All other parts of the Decision and Resolution of the Court of Tax Appeals are
AFFIRMED.
The petition of St. Luke's Medical Center, Inc. in G.R. No. 195960 is DENIED for violating
Section I, Rule 45 of the Rules of Court.
SO ORDERED.19
Considering the foregoing, SLMC then filed a Manifestation and Motion20 informing the
Court that on April 30, 2013, it paid the BIR the amount of basic taxes due for taxable
years 1998, 2000-2002, and 2004-2007, as evidenced by the payment confirmation21
from the BIR, and that it did not pay any surcharge, interest, and compromise penalty in
accordance with the above-mentioned Decision of the Court. In view of the payment it
made, SLMC moved for the dismissal of the instant case on the ground of mootness.
CIR opposed the motion claiming that the payment confirmation submitted by SLMC is
not a competent proof of payment as it is a mere photocopy and does not even indicate
the quarter/sand/or year/s said payment covers.22
In reply,23 SLMC submitted a copy of the Certification24 issued by the Large Taxpayers
Service of the BIR dated May 27, 2013, certifying that, "[a]s far as the basic deficiency
income tax for taxable years 2000, 2001, 2002, 2004, 2005, 2006, 2007 are concen1ed,
this Office considers the cases closed due to the payment made on April 30, 2013." SLMC
likewise submitted a letter25 from the BIR dated November 26, 2013 with attached
Certification of Payment26 and application for abatement,27 which it earlier submitted to
the Court in a related case, G.R. No. 200688, entitled Commissioner of Internal Revenue
v. St. Luke's Medical Center, Inc.28
Thereafter, the parties submitted their respective memorandum.
CIR 's Arguments
CIR argues that under the doctrine of stare decisis SLMC is subject to 10% income tax
under Section 27(B) of the 1997 NIRC.29 It likewise asserts that SLMC is liable to pay
compromise penalty pursuant to Section 248(A)30 of the 1997 NIRC for failing to file its
quarterly income tax returns.31
As to the alleged payment of the basic tax, CIR contends that this does not render the
instant case moot as the payment confirmation submitted by SLMC is not a competent
proof of payment of its tax liabilities.32
SLMC's Arguments
SLMC, on the other hand, begs the indulgence of the Court to revisit its ruling in G.R.
Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical
Center, Inc.)33 positing that earning a profit by a charitable, benevolent hospital or
educational institution does not result in the withdrawal of its tax exempt privilege.34
SLMC further claims that the income it derives from operating a hospital is not income
from "activities conducted for profit."35 Also, it maintains that in accordance with the ruling
of the Court in G.R. Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St.
Luke's Medical Center, Inc.),36 it is not liable for compromise penalties.37
In any case, SLMC insists that the instant case should be dismissed in view of its payment
of the basic taxes due for taxable years 1998, 2000-2002, and 2004-2007 to the BIR on
April 30, 2013.38
Our Ruling
SLMC is liable for income tax under
Section 27(B) of the 1997 NIRC insofar
as its revenues from paying patients are
concerned
The issue of whether SLMC is liable for income tax under Section 27(B) of the 1997 NIRC
insofar as its revenues from paying patients are concerned has been settled in G.R. Nos.
195909 and 195960 (Commissioner of Internal Revenue v. St. Luke's Medical Center,
Inc.),39 where the Court ruled that:
x x x We hold that Section 27(B) of the NIRC does not remove the income tax exemption
of proprietary non-profit hospitals under Section 30(E) and (G). Section 27(B) on one
hand, and Section 30(E) and (G) on the other hand, can be construed together without
the removal of such tax exemption. The effect of the introduction of Section 27(B) is to
subject the taxable income of two specific institutions, namely, proprietary non-profit
educational institutions and proprietary non-profit hospitals, among the institutions
covered by Section 30, to the 10% preferential rate under Section 27(B) instead of the
ordinary 30% corporate rate under the last paragraph of Section 30 in relation to Section
27(A)(l).
Section 27(B) of the NIRC imposes a 10% preferential tax rate on the income of (1)
proprietary non-profit educational institutions and (2) proprietary non-profit hospitals. The
only qualifications for hospitals are that they must be proprietary and non-profit.
'Proprietary' means private, following the definition of a 'proprietary educational institution'
as 'any private school maintained and administered by private individuals or groups' with
a government permit. 'Non-profit' means no net income or asset accrues to or benefits
any member or specific person, with all the net income or asset devoted to the institution's
purposes and all its activities conducted not for profit.
'Non-profit' does not necessarily mean 'charitable.' In Collector of Internal Revenue v.
Club Filipino, Inc. de Cebu, this Court considered as non-profit a sports club organized
for recreation and entertainment of its stockholders and members. The club was primarily
funded by membership fees and dues. If it had profits, they were used for overhead
expenses and improving its golf course. The club was non-profit because of its purpose
and there was no evidence that it was engaged in a profit-making enterprise.
The sports club in Club Filipino, Inc. de Cebu may be non-profit, but it was not charitable.
Tue Court defined 'charity' in Lung Center of the Philippines v. Quezon City as 'a gift, to
be applied consistently with existing laws, for the benefit of an indefinite number of
persons, either by bringing their minds and hearts under the influence of education or
religion, by assisting them to establish themselves in life or [by] otherwise lessening the
burden of government.' A nonprofit club for the benefit of its members fails this test. An
organization may be considered as non-profit if it does not distribute any part of its income
to stockholders or members. However, despite its being a tax exempt institution, any
income such institution earns from activities conducted for profit is taxable, as expressly
provided in the last paragraph of Section 30.
To be a charitable institution, however, an organization must meet the substantive test of
charity in Lung Center. The issue in Lung Center concerns exemption from real property
tax and not income tax. However, it provides for the test of charity in our jurisdiction.
Charity is essentially a gift to an indefinite number of persons which lessens the burden
of government. In other words, charitable institutions provide for free goods and services
to the public which would otherwise fall on the shoulders of government. Thus, as a matter
of efficiency, the government forgoes taxes which should have been spent to address
public needs, because certain private entities already assume a part of the burden. This
is the rationale for the tax exemption of charitable institutions. The loss of taxes by the
government is compensated by its relief from doing public works which would have been
funded by appropriations from the Treasury.
Charitable institutions, however, are not ipso facto entitled to a tax exemption. The
requirements for a tax exemption are specified by the law granting it. The power of
Congress to tax implies the power to exempt from tax. Congress can create tax
exemptions, subject to the constitutional provision that '[n]o law granting any tax
exemption shall be passed without the concurrence of a majority of all the Members of
Congress.' The requirements for a tax exemption are strictly construed against the
taxpayer because an exemption restricts the collection of taxes necessary for the
existence of the government.
The Court in Lung Center declared that the Lung Center of the Philippines is a charitable
institution for the purpose of exemption from real property taxes. This ruling uses the
same premise as Hospital de San Juan and Jesus Sacred Heart College which says that
receiving income from paying patients does not destroy the charitable nature of a hospital.
As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether
outpatient, or confined in the hospital, or receives subsidies from the government, so long
as the money received is devoted or used altogether to the charitable object which it is
intended to achieve; and no money inures to the private benefit of the persons managing
or operating the institution.
For real property taxes, the incidental generation of income is permissible because the
test of exemption is the use of the property. The Constitution provides that '[c]haritable
institutions, churches and personages or convents appurtenant thereto, mosques, nonprofit cemeteries, and all lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation.' The test of exemption is not strictly a requirement on the intrinsic nature or
character of the institution. The test requires that the institution use property in a certain
way, i.e., for a charitable purpose. Thus, the Court held that the Lung Center of the
Philippines did not lose its charitable character when it used a portion of its lot for
commercial purposes. The effect of failing to meet the use requirement is simply to
remove from the tax exemption that portion of the property not devoted to charity.
The Constitution exempts charitable institutions only from real property taxes. In the
NIRC, Congress decided to extend the exemption to income taxes. However, the way
Congress crafted Section 30(E) of the NIRC is materially different from Section 28(3),
Article VI of the Constitution. Section 30(E) of the NIRC defines the corporation or
association that is exempt from income tax. On the other hand, Section 28(3), Article VI
of the Constitution does not define a charitable institution, but requires that the institution
'actually, directly and exclusively' use the property for a charitable purpose.
Section 30(E) of the NIRC provides that a charitable institution must be:
(1) A non-stock corporation or association;
(2) Organized exclusively for charitable purposes;
(3) Operated exclusively for charitable purposes; and
(4) No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.
Thus, both the organization and operations of the charitable institution must be devoted
'exclusively' for charitable purposes. The organization of the institution refers to its
corporate form, as shown by its articles of incorporation, by-laws and other constitutive
documents. Section 30(E) of the NIRC specifically requires that the corporation or
association be non-stock, which is defined by the Corporation Code as 'one where no
part of its income is distributable as dividends to its members, trustees, or officers' and
that any profit 'obtain[ed] as an incident to its operations shall, whenever necessary or
proper, be used for the furtherance of the purpose or purposes for which the corporation
was organized.' However, under Lung Center, any profit by a charitable institution must
not only be plowed back 'whenever necessary or proper,' but must be 'devoted or used
altogether to the charitable object which it is intended to achieve.'
The operations of the charitable institution generally refer to its regular activities. Section
30(E) of the NIRC requires that these operations be exclusive to charity. There is also a
specific requirement that 'no part of [the] net income or asset shall belong to or inure to
the benefit of any member, organizer, officer or any specific person.' The use of lands,
buildings and improvements of the institution is but a part of its operations.
There is no dispute that St. Luke's is organized as a non-stock and non-profit charitable
institution. However, this does not automatically exempt St. Luke's from paying taxes.
This only refers to the organization of St. Luke's. Even if St. Luke's meets the test of
charity, a charitable institution is not ipso facto tax exempt. To be exempt from real
property taxes, Section 28(3), Article VI of the Constitution requires that a charitable
institution use the property 'actually, directly and exclusively' for charitable purposes. To
be exempt from income taxes, Section 30(E) of the NIRC requires that a charitable
institution must be 'organized and operated exclusively' for charitable purposes. Likewise,
to be exempt from income taxes, Section 30(G) of the NIRC requires that the institution
be 'operated exclusively' for social welfare.
However, the last paragraph of Section 30 of the NIRC qualifies the words 'organized and
operated exclusively' by providing that:
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind
and character of the foregoing organizations from any of their properties, real or personal,
or from any of their activities conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed under this Code.
In short, the last paragraph of Section 30 provides that if a tax exempt charitable institution
conducts 'any' activity for profit, such activity is not tax exempt even as its not-for-profit
activities remain tax exempt. This paragraph qualifies the requirements in Section 30(E)
that the '[n]on-stock corporation or association [must be] organized and operated
exclusively for . . . charitable . . . purposes . . . . ' It likewise qualifies the requirement in
Section 30(G) that the civic organization must be 'operated exclusively' for the promotion
of social welfare.
Thus, even if the charitable institution must be 'organized and operated exclusively' for
charitable purposes, it is nevertheless allowed to engage in 'activities conducted for profit'
without losing its tax exempt status for its not-for-profit activities. The only consequence
is that the 'income of whatever kind and character' of a charitable institution 'from any of
its activities conducted for profit, regardless of the disposition made of such income, shall
be subject to tax.' Prior to the introduction of Section 27(B), the tax rate on such income
from for-profit activities was the ordinary corporate rate under Section 27(A). With the
introduction of Section 27(B), the tax rate is now 10%.
In 1998, St. Luke's had total revenues of ₱l,730,367,965 from services to paying patients.
It cannot be disputed that a hospital which receives approximately ₱l.73 billion from
paying patients is not an institution 'operated exclusively' for charitable purposes. Clearly,
revenues from paying patients are income received from 'activities conducted for profit.'
Indeed, St. Luke's admits that it derived profits from its paying patients. St. Luke's
declared ₱l,730,367,965 as 'Revenues from Services to Patients' in contrast to its 'Free
Services' expenditure of ₱218,187,498. In its Comment in G.R. No. 195909, St. Luke's
showed the following 'calculation' to support its claim that 65.20% of its 'income after
expenses was allocated to free or charitable services' in 1998.
x x xx
In Lung Center, this Court declared:
'[e]xclusive' 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.' . . . The words 'dominant use' or 'principal use' cannot
be substituted for the words 'used exclusively' without doing violence to the Constitution
and thelaw. Solely is synonymous with exclusively.
The Court cannot expand the meaning of the words 'operated exclusively' without
violating the NIRC. Services to paying patients are activities conducted for profit. They
cannot be considered any other way. There is a 'purpose to make profit over and above
the cost' of services. The ₱l.73 billion total revenues from paying patients is not even
incidental to St. Luke's charity expenditure of ₱2l8,187,498 for non-paying patients.
St. Luke's claims that its charity expenditure of ₱218,187,498 is 65.20% of its operating
income in 1998. However, if a part of the remaining 34.80% of the operating income is
reinvested in property, equipment or facilities used for services to paying and non-paying
patients, then it cannot be said that the income is 'devoted or used altogether to the
charitable object which it is intended to achieve.' The income is plowed back to the
corporation not entirely for charitable purposes, but for profit as well. In any case, the last
paragraph of Section 30 of the NIRC expressly qualifies that income from activities for
profit is taxable 'regardless of the disposition made of such income.'
Jesus Sacred Heart College declared that there is no official legislative record explaining
the phrase 'any activity conducted for profit.' However, it quoted a deposition of Senator
Mariano Jesus Cuenco, who was a member of the Committee of Conference for the
Senate, which introduced the phrase 'or from any activity conducted for profit.'
P. Cuando ha hablado de la Universidad de Santo Tomas que tiene un hospital, no cree
V d que es una actividad esencial dicho hospital para el funcionamiento def colegio de
medicina
de dicha universidad?
x x x x x x xxx
R. Si el hospital se limita a recibir enformos pobres, mi contestacion seria afirmativa; pero
considerando que el hospital tiene cuartos de pago, y a los mismos generalmente van
enfermos de buena posicion social economica, lo que se paga por estos enfermos debe
estar sujeto a 'income tax', y es una de las razones que hemos tenido para insertar las
palabras o frase 'or from any activity conducted for profit.'
The question was whether having a hospital is essential to an educational institution like
the College of Medicine of the University of Santo Tomas.1awp++i1 Senator Cuenco
answered that if the hospital has paid rooms generally occupied by people of good
economic standing, then it should be subject to income tax. He said that this was one of
the reasons Congress inserted the phrase 'or any activity conducted for profit.'
The question in Jesus Sacred Heart College involves an educational institution. However,
it is applicable to charitable institutions because Senator Cuenco's response shows an
intent to focus on the activities of charitable institutions. Activities for profit should not
escape the reach of taxation. Being a non-stock and non-profit corporation does not, by
this reason alone, completely exempt an institution from tax. An institution cannot use its
corporate form to prevent its profitable activities from being taxed.
The Court finds that St. Luke's is a corporation that is not 'operated exclusively' for
charitable or social welfare purposes insofar as its revenues from paying patients are
concerned. This ruling is based not only on a strict interpretation of a provision granting
tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E)
and (G) of the NIRC requires that an institution be 'operated exclusively' for charitable or
social welfare purposes to be completely exempt from income tax. An institution under
Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit
activities. Such income from for-profit activities, under the last paragraph of Section 30,
is merely subject to income tax, previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B).
A tax exemption is effectively a social subsidy granted by the State because an exempt
institution is spared from sharing in the expenses of government and yet benefits from
them. Tax exemptions for charitable institutions should therefore be lin1ited to institutions
beneficial to the public and those which improve social welfare. A profit-making entity
should not be allowed to exploit this subsidy to the detriment of the government and other
taxpayers.
St. Luke's fails to meet the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt from all its income. However, it remains a proprietary non-profit
hospital under Section 27(B) of the NIRC as long as it does not distribute any of its profits
to its members and such profits are reinvested pursuant to its corporate purposes. St.
Luke's, as a proprietary non-profit hospital, is entitled to the preferential tax rate of 10%
on its net income from its for-profit activities.
St. Luke's is therefore liable for deficiency income tax in 1998 under Section 27(B) of the
NIRC. However, St. Luke's has good reasons to rely on the letter dated 6 June 1990 by
the BIR, which opined that St. Luke's is 'a corporation for purely charitable and social
welfare purposes' and thus exempt from income tax. In Michael J Lhuillier, Inc. v.
Commissioner of Internal Revenue, the Court said that 'good faith and honest belief that
one is not subject to tax on the basis of previous interpretation of government agencies
tasked to implement the tax law, are sufficient justification to delete the imposition of
surcharges and interest.'40
A careful review of the pleadings reveals that there is no countervailing consideration for
the Court to revisit its aforequoted ruling in G.R. Nos. 195909 and 195960 (Commissioner
of Internal Revenue v. St. Luke's Medical Center, Inc.). Thus, under the doctrine of stare
decisis, which states that "[o]nce a case has been decided in one way, any other case
involving exactly the same point at issue x x x should be decided in the same manner,"41
the Court finds that SLMC is subject to 10% income tax insofar as its revenues from
paying patients are concerned.
To be clear, for an institution to be completely exempt from income tax, Section 30(E)
and (G) of the 1997 NIRC requires said institution to operate exclusively for charitable or
social welfare purpose. But in case an exempt institution under Section 30(E) or (G) of
the said Code earns income from its for-profit activities, it will not lose its tax exemption.
However, its income from for-profit activities will be subject to income tax at the
preferential 10% rate pursuant to Section 27(B) thereof.
SLMC is not liable for Compromise
Penalty.
As to whether SLMC is liable for compromise penalty under Section 248(A) of the 1997
NIRC for its alleged failure to file its quarterly income tax returns, this has also been
resolved in G.R Nos. 195909 and 195960 (Commissioner of Internal Revenue v. St.
Luke's Medical Center, Inc.),42 where the imposition of surcharges and interest under
Sections 24843 and 24944 of the 1997 NIRC were deleted on the basis of good faith and
honest belief on the part of SLMC that it is not subject to tax. Thus, following the ruling of
the Court in the said case, SLMC is not liable to pay compromise penalty under Section
248(A) of the 1997 NIRC.
The Petition is rendered moot by the
payment made by SLMC on April 30,
2013.
However, in view of the payment of the basic taxes made by SLMC on April 30, 2013, the
instant Petition has become moot.1avvphi1
While the Court agrees with the CIR that the payment confirmation from the BIR
presented by SLMC is not a competent proof of payment as it does not indicate the
specific taxable period the said payment covers, the Court finds that the Certification
issued by the Large Taxpayers Service of the BIR dated May 27, 2013, and the letter
from the BIR dated November 26, 2013 with attached Certification of Payment and
application for abatement are sufficient to prove payment especially since CIR never
questioned the authenticity of these documents. In fact, in a related case, G.R. No.
200688, entitled Commissioner of Internal Revenue v. St. Luke's Medical Center, lnc.,45
the Court dismissed the petition based on a letter issued by CIR confirming SLMC's
payment of taxes, which is the same letter submitted by SLMC in the instant case.
In fine, the Court resolves to dismiss the instant Petition as the same has been rendered
moot by the payment made by SLMC of the basic taxes for the taxable years 2005 and
2006, in the amounts of ₱49,919,496.40 and ₱4 l,525,608.40, respectively.46
WHEREFORE, the Petition is hereby DISMISSED.
SO ORDERED.
FIRST DIVISION
February 8, 2017
G.R. No. 201326
SITEL PHILIPPINES CORPORATION (FORMERLY CLIENTLOGIC PHILS., INC.),
Petitioner
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent
DECISION
CAGUIOA, J.:
This Petition for Review on Certiorari1 under Rule 45 of the Rules of Court filed by
petitioner Sitel Philippines Corporation (Sitel) against the Commissioner of Internal
Revenue (CIR) seeks to reverse and set aside the Decision dated November 11, 2011[[2]]
and Resolution dated March 28, 2012[[3]] of the Court of Tax Appeals (CTA) En Banc in
CTA EB No. 644, which denied Sitel' s claim for refund of unutilized input value-added
tax (VAT) for the first to fourth quarters of taxable year 2004 for being prematurely filed.
Facts
Sitel, a corporation organized and existing under the laws of the Philippines, is engaged
in the business of providing call center services from the Philippines to domestic and
offshore businesses. It is registered with the Bureau of Internal Revenue (BIR) as a VAT
taxpayer, as well as with the Board of Investments on pioneer status as a new information
technology service firm 'in the field of call center.[[4]]
For the period from January 1, 2004 to December 31, 2004, Sitel filed with the BIR its
Quarterly VAT Returns as follows:
Period Covered
Date Filed
1st Quarter 2004
26 April 2004
2nd Quarter 2004
26 July 2004
3rd Quarter 2004
25 October 2004
4th Quarter 2004
25 January 20055
Sitel's Amended Quarterly VAT Returns for the first to fourth quarters of 2004 declared
as follows:
Taxable Sales
(A)
Zero-Rated Sales
(B)
Total Sales
(C=A+B)
Input Tax for the [Quarter]
(D)
Input Tax from Capital Goods
(E)
Input Tax from Regular Transactions
(F+D-E)
Input Tax Allocated to Taxable Sales
[G=(A/C) x (F)]
Input Tax Allocated to Zero-Rated Sales
[H=(B/C) x (F)]
509,799.74 180,450,030.29
1,400,623.81 3,930.40
0
142,664,271.00
142,664,271.00
708,696.58
517,736.36 205,021,590.46
1,938,312.85 4,882.45
0
180,957,830.03
1,396,693.41
3,554,922.94 2,846,225.66 708,696.58
205,539,326.82
1,933,430.40
334,384,766.48
334,384,766.48
3,313,455.63
3,842,714.21 2,422,090.40
9,568,047.25 7,629,
734.40
6,137,028.74 3,005,573.11 3,313,455.63
1,025,536.10 862,520,658.23
863,546,194.33
15,923,623.57
7,179,088.87 8,812.85
23,102,712.44
7,170,276.026
On March 28, 2006, Sitel filed separate formal claims for refund or issuance of tax credit
with the One-Stop Shop Inter-Agency Tax Credit and Duty Drawback Center of the
Department of Finance for its unutilized input VAT arising from domestic purchases of
goods and services attributed to zero-rated transactions and purchases/importations of
capital goods for the 1st, 2nd, 3rd and 4th quarters of 2004 in the aggregate amount of
₱23,093,899.59.7
On March 30, 2006, Sitel filed a judicial claim for refund or tax credit via a petition for
review before the CTA, docketed as CTA Case No. 7423.
Ruling of the CTA Division
On October 21, 2009, the CTA Division rendered a Decision8 partially granting Sitel' s
claim for VAT refund or tax credit, the dispositive portion of which reads as follows:
In view of the foregoing, the instant Petition for Review is hereby PARTIALLY GRANTED.
Petitioner is entitled to the instant claim in the reduced amount of ₱11,155,276.59
computed as follows:
Amount of Input VAT Claim
₱ 23,093,899.59
Less: Input VAT Claim on Zero-Rated Sales
7,170,276.02
Input VAT Claim on Capital Goods Purchases ₱ 15,923,623.57
Less: Not Properly Substantiated Input VAT Claim on Capital Goods Purchases
Per ICPA Report (₱15,923,623.57 less ₱13,824,129.14)
Per this Court's further verification
2,099,494.43
2,668,852.55
Refundable Input VAT on Capital Goods Purchases
₱ 11,155,276.59
Accordingly, respondent is ORDERED to REFUND OR ISSUE A TAX CREDIT
CERTIFICATE in the reduced amount of ₱11,155,276.59 representing unutilized input
VAT arising from petitioner's domestic purchases of goods and services which are
attributable to zero-rated transactions and purchases/importations of capital goods for the
taxable year 2004.
SO ORDERED.9
The CTA Division denied Sitel's ₱7,170,276.02 claim for unutilized input VAT attributable
to its zero-rated sales for the four quarters of 2004. Relying upon the rulings of this Court
in Commissioner of Internal Revenue v.Burmeister and Wain Scandinavian Contractor
Mindanao, Inc.10 (Burmeister), the CTA Division found that Sitel failed to prove that the
recipients of its services are doing business outside the Philippines, as required under
Section 108(B)(2) of the National Internal Revenue Code of 1997 (NIRC), as amended.11
The CTA Division also disallowed the amount of ₱2,668,852.55 representing input VAT
paid on capital goods purchased for taxable year 2004 for failure to comply with the
invoicing requirements under Sections 113, 237, and 238 of the NIRC of 1997, as
amended, and Section 4.108-1 of Revenue Regulations No. 7-95 (RR 7-95).12
Aggrieved, Sitel filed a motion for partial reconsideration13 and Supplement (To Motion
for Reconsideration [of Decision dated October 21, 2009]),14 on November 11, 2009 and
March 26, 2010, respectively.
Prior thereto, or on January 8, 2010, Sitel filed a Motion for Partial Execution of
Judgment15 seeking the execution pending appeal of the portion of the Decision dated
October 21, 2009 granting refund in the amount of ₱11,155,276.59, which portion was
not made part of its motion for partial reconsideration.
On May 31, 2010, the CTA Division denied Sitel's Motion for Reconsideration and
Supplement (To Motion for Reconsideration [of Decision dated October 21, 2009]) for
lack of merit.16
Undaunted, Sitel filed a Petition for Review17 with the CTA En Banc claiming that it is
entitled to the amount denied by the CTA Division.
Ruling of the CTA En Banc
In the assailed Decision, the CTA En Banc reversed and set aside the ruling of the CTA
Division. Citing the case of Commissioner of Internal Revenue v. Aichi Forging Company
of Asia, Inc.18 (Aichi), the CTA En Banc ruled that the 120-day period for the CIR to act
on the administrative claim for refund or tax credit, under Section 112(D) of the NIRC of
1997, as amended, is mandatory and jurisdictional. Considering that Sitel filed its judicial
claim for VAT refund or credit without waiting for the lapse of the 120-day period for the
CIR to act on its administrative claim, the CTA did not acquire jurisdiction as there was
no decision or inaction to speak of.19 Thus, the CTA En Banc denied Sitel' s entire refund
claim on the ground of prematurity. The dispositive portion of the CTA En Banc's Decision
reads as follows:
WHEREFORE, on the basis of the foregoing considerations, the Petition for Review En
Banc is DISMISSED. Accordingly, the Decision of the CTA First Division dated October
21, 2009 and the Resolution issued by the Special First Division dated May 31, 2010, are
hereby reversed and set aside. Petitioner's refund claim of ₱19,702,880.80 is DENIED
on the ground that the judicial claim for the first to fourth quarters of taxable year 2004
was prematurely filed.
SO ORDERED.20
Aggrieved, Sitel moved for reconsideration,21 but the same was denied by the Court En
Banc for lack of merit.22
Hence, the instant petition raising the following issues:
x x x WHETHER OR NOT THE AICHI RULING PROMULGATED ON OCTOBER 6, 2010
MAY BE APPLIED RETROACTIVELY TO THE INST ANT CLAIM FOR REFUND OF
INPUT VAT INCURRED IN 2004.
x x x WHETHER OR NOT THE CTA EN BANC CAN VALIDLY WITHDRAW AND
REVOKE THE PORTION OF THE REFUND CLAIM ALREADY GRANTED TO
PETITIONER IN THE AMOUNT OF ₱11,155,276.59 AFTER TRIAL ON THE MERITS,
NOTWITHSTANDING THAT SUCH PORTION OF THE DECISION HAD NOT BEEN
APPEALED.
x x x WHETHER OR NOT PETITIONER IS ENTITLED TO A REFUND OR TAX CREDIT
OF ITS UNUTILIZED INPUT VAT ARISING FROM PURCHASES OF GOODS AND
SERVICES
ATTRIBUTABLE
TO
ZERO-RATED
SALES
AND
PURCHASES/IMPORTATIONS OF CAPITAL GOODS FOR THE 1sT, 2ND, 3RD, [AND]
4TH QUARTERS OF TAXABLE YEAR 2004 IN THE AGGREGATE AMOUNT OF
₱20,994,405.16.23
In the Resolution24 dated July 4, 2012, the CIR was required to comment on the instant
petition. In compliance thereto, the CIR filed its Comment25 on November 14, 2012.
On January 16, 2013, the Court issued a Resolution26 denying Sitel's petition for failure
to sufficiently show that the CTA En Banc committed reversible error in denying its refund
claim on the ground of prematurity based on prevailing jurisprudence.
Soon thereafter, however, or on February 12, 2013, the Court En Banc decided the
consolidated cases of Commissioner of Internal Revenue v. San Roque Power
Corporation, Taganito Mining Corporation v. Commissioner of Internal Revenue, and
Phi/ex Mining Corporation v. Commissioner of Internal Revenue27 (San Roque). In that
case, the Court recognized BIR Ruling No. DA-489-03 as an exception to the mandatory
and jurisdictional nature of the 120-day waiting period.
Invoking San Roque, Sitel filed a Motion for Reconsideration.28
In the Resolution29 dated June 17, 2013, the Court granted Sitel's motion and reinstated
the instant petition.
In the instant petition, Sitel claims that its judicial claim for refund was timely filed following
the Court's pronouncements in San Roque; thus, it was erroneous for the CTA En Banc
to reverse the ruling of the CTA Division and to dismiss its petition on the ground of
prematurity. Sitel further argues that the previously granted amount for refund of
₱11,155,276.59 should be reinstated and declared final and executory, the same not
being the subject of Sitel's partial appeal before the CTA En Banc, nor of any appeal from
the CIR.
Finally, Sitel contends that insofar as the denied portion of the claim is concerned, which
the CTA En Banc failed to pass upon with the dismissal of its appeal, speedy justice
demands that the Court resolved the same on the merits and Sitel be declared entitled to
an additional refund in the amount of ₱9,839, 128.57.
The Court's Ruling
The Court finds the petition partly meritorious.
Sitel's Judicial Claim/or VAT Refund
was deemed timely filed pursuant to
the Court's pronouncement in San
Roque.
Section 112(C) of the NIRC, as amended, provides:
SEC. 112. Refunds or Tax Credits of Input Tax. –
xxxx
(C) Period within which Refund or Tax Credit of Input Taxes shall be Made. - In proper
cases, the Commissioner shall grant a refund or issue the tax credit certificate for
creditable input taxes within one hundred twenty (120) days from the date of submission
of complete documents in support of the application filed in accordance with Subsection
(A) hereof.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the
part of the Commissioner to act on the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt of the decision denying the
claim or after the expiration of the one hundred twenty day-period, appeal the decision or
the unacted claim with the Court of Tax Appeals. (Emphasis supplied)
Based on the plain language of the foregoing provision, the CIR is given 120 days within
which to grant or deny a claim for refund. Upon receipt of CIR' s decision or ruling denying
the said claim, or upon the expiration of the 120-day period without action from the CIR,
the taxpayer has thirty (30) days within which to file a petition for review with the CTA.
In Aichi, the Court ruled that the 120-day period granted to the CIR was mandatory and
jurisdictional, the non-observance of which was fatal to the filing of a judicia1 claim with
the CTA. The Court further explained that the two (2)-year prescriptive period under
Section 112(A) of the NIRC pertained only to the filing of the administrative claim with the
BIR; while the judicial claim may be filed with the CTA within thirty (30) days from the
receipt of the decision of the CIR or the expiration of the 120-day period of the CIR to act
on the claim. Thus:
Section 112 (D) of the NIRC clearly provides that the CIR has "120 days, from the date
of the submission of the complete documents in support of the application [for tax
refund/credit]," within which to grant or deny the claim. In case of full or partial denial by
the CIR, the taxpayer's recourse is to file an appeal before the CTA within 30 days from
receipt of the decision of the CIR. However, if after the 120-day period the CIR fails to act
on the application for tax refund/credit, the remedy of the taxpayer is to appeal the inaction
of the CIR to CTA within 30 days.
In this case, the administrative and the judicial claims were simultaneously filed on
September 30, 2004. Obviously, respondent did not wait for the decision of the CIR or the
lapse of the 120-day period. For this reason, we find the filing of the judicial claim with the
CTA premature.
Respondent's assertion that the non-observance of the 120-day period is not fatal to the
filing of a judicial claim as long as both the administrative and the judicial claims are filed
within the two-year prescriptive period has no legal basis.
There is nothing in Section 112 of the NIRC to support respondent's view. Subsection (A)
of the said provision states that "any VAT-registered person, whose sales are zero-rated
or effectively zero-rated may, within two years after the close of the taxable quarter when
the sales were made, apply for the issuance of a tax credit certificate or refund of
creditable input tax due or paid attributable to such sales." The phrase "within two (2)
years x x x apply for the issuance of a tax credit certificate or refund" refers to applications
for refund/credit filed with the CIR and not to appeals made to the CT A. This is apparent
in the first paragraph of subsection (D) of the same provision, which states that the CIR
has "120 days from the submission of complete documents in support of the application
filed in accordance with Subsections (A) and (B)" within which to decide on the claim.
In fact, applying the two-year period to judicial claims would render nugatory Section
112(D) of the NIRC, which already provides for a specific period within which a taxpayer
should appeal the decision or inaction of the CIR. The second paragraph of Section
112(D) of the NIRC envisions two scenarios: (1) when a decision is issued by the CIR
before the lapse of the 120-day period; and (2) when no decision is made after the 120day period. In both instances, the taxpayer has 30 days within which to file an appeal with
the CTA. As we see it then, the 120-day period is crucial in filing an appeal with the CTA.
xxxx
In fine, the premature filing of respondent's claim for refund/credit of input VAT before the
CTA warrants a dismissal inasmuch as no jurisdiction was acquired by the CTA.30
However, in San Roque, the Court clarified that the 120-day period does not apply to
claims for refund that were prematurely filed during the period from the issuance of BIR
Ruling No. DA-489-03, on December 10, 2003, until October 6, 2010, when Aichi was
promulgated. The Court explained that BIR Ruling No. DA-489-03, which expressly
allowed the filing of judicial claims with the CTA even before the lapse of the 120-day
period, provided for a valid claim of equitable estoppel because the CIR had misled
taxpayers into prematurely filing their judicial claims before the CTA:
There is no dispute that the 120-day period is mandatory and jurisdictional, and that the
CTA does not acquire jurisdiction over a judicial claim that is filed before the expiration of
the 120-day period. There are, however, two exceptions to this rule. The first exception
is if the Commissioner, through a specific ruling, misleads a particular taxpayer to
prematurely file a judicial claim with the CTA. Such specific ruling is applicable only to
such particular taxpayer. The second exception is where the Commissioner, through a
general interpretative rule issued under Section 4 of the Tax Code, misleads all taxpayers
into filing prematurely judicial claims with the CTA. In these cases, the Commissioner
cannot be allowed to later on question the CTA's assumption of jurisdiction over such
claim since equitable estoppel has set in as expressly authorized under Section 246 of
the Tax Code.
xxxx
BIR Ruling No. DA-489-03 is a general interpretative rule because it was a response to a
query made, not by a particular taxpayer, but by a government agency tasked with
processing tax refunds and credits, that is, the One Stop Shop Inter-Agency Tax Credit
and Drawback Center of the Department of Finance. This government agency is also the
addressee, or the entity responded to, in BIR Ruling No. DA-489-03. Thus, while this
government agency mentions in its query to the Commissioner the administrative claim
of Lazi Bay Resources Development, Inc., the agency was in fact asking the
Commissioner what to do in cases like the tax claim of Lazi Bay Resources Development,
Inc., where the taxpayer did not wait for the lapse of the 120-day period.
Clearly, BIR Ruling No. DA-489-03 is a general interpretative rule. Thus, all taxpayers
can rely on BIR Ruling No. DA-489-03 from the time of its issuance on 10 December 2003
up to its reversal by this Court in Aichi on 6 October 2010, where this Court held that the
120+30 day periods are mandatory and jurisdictional.31 (Emphasis supplied).
In Visayas Geothermal Power Company v. Commissioner of Internal Revenue,32 the
Court came up with an outline summarizing the pronouncements in San Roque, to wit:
For clarity and guidance, the Court deems it proper to outline the rules laid down in San
Roque with regard to claims for refund or tax credit of unutilized creditable input VAT.
They are as follows:
1. When to file an administrative claim with the CIR:
a. General rule - Section 112(A) and Mirant
Within 2 years from the close of the taxable quarter when the sales were made.
b. Exception – Atlas
Within 2 years from the date of payment of the output VAT, if the administrative claim was
filed from June 8, 2007 (promulgation of Atlas) to September 12, 2008 (promulgation of
Mirant).
2. When to file a judicial claim with the CT A:
a. General rule - Section 112(D); not Section 229
i. Within 30 days from the full or partial denial of the administrative claim by the CIR; or
ii. Within 30 days from the expiration of the 120-day period provided to the CIR to decide
on the claim. This is mandatory and jurisdictional beginning January 1, 1998 (effectivity
of 1997 NIRC).
b. Exception-BIR Ruling No. DA-489-03
The judicial claim need not await the expiration of the 120-day period, if such was filed
from December 10, 2003 (issuance of BIR Ruling No. DA-489-03) to October 6, 2010
(promulgation of Aichi).33 (Emphasis and underscoring supplied).
In this case, records show that Sitel filed its administrative and judicial claim for refund on
March 28, 2006 and March 30, 2006, respectively, or after the issuance of BIR Ruling No.
DA-489-03, but before the date when Aichi was promulgated. Thus, even though Sitel
filed its judicial claim prematurely, i.e., without waiting for the expiration of the 120-day
mandatory period, the CTA may still take cognizance of the case because the claim was
filed within the excepted period stated in San Roque. In other words, Sitel' s judicial claim
was deemed timely filed and should have not been dismissed by the CTA En Banc.
Consequently, the October 21, 2009 Decision34 of the CTA Division partially granting
Sitel' s judicial claim for refund in the reduced amount of ₱11,155,276.59, which is not
subject of the instant appeal, should be reinstated. In this regard, since the CIR did not
appeal said decision to the CTA En Banc, the same is now considered final and beyond
this Court's review.
Sitel now questions the following portions of its refund claim which the CTA Division
denied: (1) ₱7,l 70,276.02, representing unutilized input VAT on purchases of goods and
services attributable to zero-rated sales, which was denied because Sitel failed to prove
that the call services it rendered for the year 2004 were made to non-resident foreign
clients doing business outside the Philippines; and (2) ₱2,668,852.55 representing input
VAT on purchases of capital goods, because these are supported by invoices and official
receipts with pre-printed TIN-V instead of TIN-VAT, as required under Section 4.108-1 of
RR 7-95.
Sitel claims that testimonial and documentary evidence sufficiently established that its
clients were non-resident foreign corporations not doing business in Philippines. It also
asserts that the input VAT on its purchases of capital goods were duly substantiated
because the supporting official receipts substantially complied with the invoicing
requirements provided by the rules.
In other words, Sitel wants the Court to review factual findings of the CTA Division,
reexamine the evidence and determine on the basis thereof whether it should be refunded
the additional amount of ₱9,839,128.57. This, however, cannot be done in the instant
case for settled is the rule that this Court is not a trier of facts and does not normally
embark in the evaluation of evidence adduced during trial.35 It is not this Court's function
to analyze or weigh all over again the evidence already considered in the proceedings
below, the Court's jurisdiction being limited to reviewing only errors of law that may have
been committed by the lower court.36
Furthermore, the Court accords findings and conclusions of the CTA with the highest
respect.37 As a specialized court dedicated exclusively to the resolution of tax problems,
the CTA has accordingly developed an expertise on the subject of taxation.38 Thus, its
decisions are presumed valid in every aspect and will not be overturned on appeal, unless
the Court finds that the questioned decision is not supported by substantial evidence or
there has been an abuse or improvident exercise of authority on the part of the tax
court.39
Upon careful review of the instant case, and directly addressing the issues raised by Sitel,
the Court finds no cogent reason to reverse or modify the findings of the CTA Division.
The Court expounds.
Sitel failed to prove that the
recipients of its call services are
foreign corporations doing business
outside the Philippines.
Sitel's claim for refund is anchored on Section 112(A)40 of the NIRC, which allows the
refund or credit of input VAT attributable to zero-rated or effectively zero-rated sales. In
relation thereto, Sitel points to Section 108(B)(2) of the NIRC [formerly Section 102(b)(2)
of the NIRC of 1977, as amended] as legal basis for treating its sale of services as zerorated or effectively zero-rated. Section 108(B)(2) reads:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. -
xxxx
(B) Transactions Subject to Zero Percent (0%) Rate. - The following services performed
in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:
xxxx
(2) Services other than those mentioned in the preceding paragraph rendered to a person
engaged in business conducted outside the Philippines or to a nonresident person not
engaged in business who is outside the Philippines when the services are performed, the
consideration for which is paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
(Emphasis supplied)
In Burmeister, the Court clarified that an essential condition to qualify for zero-rating under
the aforequoted provision is that the service-recipient must be doing business outside the
Philippines, to wit:
The Tax Code not only requires that the services be other than "processing,
manufacturing or repacking of goods" and that payment for such services be in
acceptable foreign currency accounted for in accordance with BSP rules. Another
essential condition for qualification to zero-rating under Section 102(b)(2) is that the
recipient of such services is doing business outside the Philippines. x x x
This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient
of the "other services" are both doing business in the Philippines, the payment of foreign
currency is irrelevant. Otherwise, those subject to the regular VAT under Section 102(a)
can avoid paying the VAT by simply stipulating payment in foreign currency inwardly
remitted by the recipient of services. To interpret Section 102(b)(2) to apply to a payerrecipient of services doing business in the Philippines is to make the payment of the
regular VAT under Section 102(a) dependent on the generosity of the taxpayer. The
provider of services can choose to pay the regular VAT or avoid it by stipulating payment
in foreign currency inwardly remitted by the payer-recipient. Such interpretation removes
Section 102(a) as a tax measure in the Tax Code, an interpretation this Court cannot
sanction. A tax is a mandatory exaction, not a voluntary contribution.
xxxx
Thus, when Section 102(b)(2) speaks of "[s]ervices other than those mentioned in the
preceding subparagraph," the legislative intent is that only the services are different
between subparagraphs 1 and 2. The requirements for zero-rating, including the essential
condition that the recipient of services is doing business outside the Philippines, remain
the same under both subparagraphs.
Significantly, the amended Section 108(b) [previously Section 102 (b)] of the present Tax
Code clarifies this legislative intent. Expressly included among the transactions subject
to 0% VAT are "[s]ervices other than those mentioned in the [first] paragraph [of Section
108(b)] rendered to a person engaged in business conducted outside the Philippines or
to a nonresident person not engaged in business who is outside the Philippines when the
services are performed, the consideration for which is paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the BSP."41
Following Burmeister, the Court, in Accenture, Inc. v. Commissioner of Internal
Revenue,42 (Accenture), emphasized that a taxpayer claiming for a VAT refund or credit
under Section 108(B) has the burden to prove not only that the recipient of the service is
a foreign corporation, but also that said corporation is doing business outside the
Philippines. For failure to discharge this burden, the Court denied Accenture's claim for
refund.
We rule that the recipient of the service must be doing business outside the Philippines
for the transaction to qualify for zero-rating under Section 108(B) of the Tax Code.
xxxx
The evidence presented by Accenture may have established that its clients are foreign.
This fact does not automatically mean, however, that these clients were doing business
outside the Philippines. After all, the Tax Code itself has provisions for a foreign
corporation engaged in business within the Philippines and vice versa, to wit:
SEC. 22. Definitions. - When used in this Title:
xxxx
(H) The term "resident foreign corporation" applies to a foreign corporation engaged in
trade or business within the Philippines.
(I) The term 'nonresident foreign corporation' applies to a foreign corporation not engaged
in trade or business within the Philippines. (Emphasis in the original)
Consequently, to come within the purview of Section 108(B)(2), it is not enough that the
recipient of the service be proven to be a foreign corporation; rather, it must be specifically
proven to be a nonresident foreign corporation.
There is no specific criterion as to what constitutes "doing" or "engaging in" or
"transacting" business. We ruled thus in Commissioner of Internal Revenue v. British
Overseas Airways Corporation:
x x x. 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 a continuity 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."
A taxpayer claiming a tax credit or refund has the burden of proof to establish the factual
basis of that claim. Tax refunds, like tax exemptions, are construed strictly against the
taxpayer.
Accenture failed to discharge this burden. It alleged and presented evidence to prove only
that its clients were foreign entities. However, as found by both the CTA Division and the
CTA En Banc, no evidence was presented by Accenture to prove the fact that the foreign
clients to whom petitioner rendered its services were clients doing business outside the
Philippines.
As ruled by the CTA En Banc, the Official Receipts, Intercompany Payment Requests,
Billing Statements, Memo Invoices-Receivable, Memo Invoices-Payable, and Bank
Statements presented by Accenture merely substantiated the existence of sales, receipt
of foreign currency payments, and inward remittance of the proceeds of such sales duly
accounted for in accordance with BSP rules, all of these were devoid of any evidence that
the clients were doing business outside of the Philippines.43 (Emphasis supplied;
citations omitted)
In the same vein, Sitel fell short of proving that the recipients of its call services were
foreign corporations doing business outside the Philippines. As correctly pointed out by
the CTA Division, while Sitel' s documentary evidence, which includes Certifications
issued by the Securities and Exchange Commission and Agreements between Sitel and
its foreign clients, may have established that Sitel rendered services to foreign
corporations in 2004 and received payments therefor through inward remittances, said
documents failed to specifically prove that such foreign clients were doing business
outside the Philippines or have a continuity of commercial dealings outside the
Philippines.
Thus, the Court finds no reason to reverse the ruling of the CTA Division denying the
refund of ₱7,170,276.02, allegedly representing Sitel's input VAT attributable to zerorated sales.
Sitel failed to strictly comply with
invoicing requirements for VAT
refund.
The CTA Division also did not err when it denied the amount of ₱2,668,852.55, allegedly
representing input taxes claimed on Sitel's domestic purchases of goods and services
which are supported by invoices/receipts with pre-printed TIN-V. In Western Mindanao
Power Corp. v. Commissioner of Internal Revenue,44 the Court ruled that in a claim for
tax refund or tax credit, the applicant must prove not only entitlement to the grant of the
claim under substantive law, he must also show satisfaction of all the documentary and
evidentiary requirements for an administrative claim for a refund or tax credit and
compliance with the invoicing and accounting requirements mandated by the NIRC, as
well as by revenue regulations implementing them. The NIRC requires that the creditable
input VAT should be evidenced by a VAT invoice or official receipt,45 which may only be
considered as such when the TIN-VAT is printed thereon, as required by Section 4.1081 of RR 7-95.
The Court's pronouncement in Kepco Philippines Corp. v. Commissioner of Internal
Revenue46 is instructive:
Furthermore, Kepco insists that Section 4.108-1 of Revenue Regulation 07-95 does not
require the word "TIN-VAT" to be imprinted on a VAT-registered person's supporting
invoices and official receipts and so there is no reason for the denial of its ₱4,720,725.63
claim of input tax.
In this regard, Internal Revenue Regulation 7-95 (Consolidated Value-Added Tax
Regulations) is clear.1âwphi1 Section 4.108-1 thereof reads:
Only VAT registered persons are required to print their TIN followed by the word "VAT" in
their invoice or receipts and this shall be considered as a "VAT" Invoice. All purchases
covered by invoices other than 'VAT Invoice' shall not give rise to any input tax.
Contrary to Kepco's allegation, the regulation specifically requires the VAT registered
person to imprint TIN-VAT on its invoices or receipts. Thus, the Court agrees with the
CTA when it wrote: "[T]o be considered a 'VAT invoice,' the TIN-VAT must be printed,
and not merely stamped. Consequently, purchases supported by invoices or official
receipts, wherein the TIN-VAT is not printed thereon, shall not give rise to any input VAT.
Likewise, input VAT on purchases supported by invoices or official receipts which are
NON-VAT are disallowed because these invoices or official receipts are not considered
as 'VAT Invoices."'47
In the same vein, considering that the subject invoice/official receipts are not imprinted
with the taxpayer's TIN followed by the word VAT, these would not be considered as VAT
invoices/official receipts and would not give rise to any creditable input VAT in favor of
Sitel.
At this juncture, it bears to emphasize that "[t]ax refunds or tax credits - just like tax
exemptions - are strictly construed against taxpayers, the latter having the burden to
prove strict compliance with the conditions for the grant of the tax refund or credit."48
WHEREFORE, premises considered, the instant petition for review is GRANTED IN
PART. The Decision dated November 11, 2011 and Resolution dated March 28, 2012 of
the CTA En Banc in CTA EB No. 644 are hereby REVERSED and SET ASIDE.
Accordingly, the October 21, 2009 Decision of the CTA First Division in CTA Case No.
7423 is hereby REINSTATED.
Respondent is hereby ORDERED TO REFUND or, in the alternative, TO ISSUE A TAX
CREDIT CERTIFICATE, in favor of the petitioner in the amount of ₱11,155,276.59,
representing unutilized input VAT arising from purchases/importations of capital goods
for taxable year 2004.
SO ORDERED.
SECOND DIVISION
February 8, 2017
G.R. No. 193381
COMMISSIONER OF INTERNAL REVENUE, Petitioner
vs.
APO CEMENT CORPORATION, Respondent
DECISION
LEONEN, J.:
This resolves a Petition for Review1 seeking to reverse and set aside the Court of Tax
Appeals En Banc’s Decision2 dated June 24, 2010, which affirmed the Second Division's
Resolution3 dated June 11, 2009 granting respondent's Motion to Cancel Tax
Assessment; and Resolution4 dated August 23, 2010 denying respondent's motion for
reconsideration.
On September 1, 2003, the Bureau of Internal Revenue sent Apo Cement Corporation
(Apo Cement) a Final Assessment Notice (FAN) for deficiency taxes for the taxable year
1999, as follows:
DEFICIENCY TAXES
AMOUNT
Income Tax ₱ 479,977,176.22
Value-Added Tax
181,345,963.86
VAT Withholding
23,536,374.48
Withholding Tax on Compensation
15,595,098.12
Unremitted Withholding Tax on Compensation 10,388,757.86
Expanded Withholding Tax 17,642,981.74
Unremitted Expanded Withholding Tax 3,510,390.71
Final Withholding Tax
53,808,355.59
Fringe Benefits Tax 167,337.31
Documentary Stamp Tax 52,480,372.77
Administrative Penalties
25,000.005
Apo Cement protested the FAN.6 The Bureau issued the Final Decision on Disputed
Assessment dated June 15, 2006 denying the Apo Cement's protest.7 The Final Decision
contained the following deficiency assessments, viz:
DEFICIENCY TAXES
AMOUNT
Income Tax ₱ 9,305,697.74
Value-Added Tax
1,610,070.51
Withholding Tax on Compensation
20,916,611.66
Unremitted Withholding Tax on Compensation 13,479,061.25
Expanded Withholding Tax 23,664,416.39
Unremitted Expanded Withholding Tax 4,549,677.32
Final Withholding Tax
3,095,786.45
Fringe Benefits Tax 213,656.36
Documentary Stamp Tax 67,433,862. 97
Administrative Penalties
25,000.00
Total ₱ 144,293,840.658
(Emphasis supplied)
On August 3, 2006, Apo Cement filed a Petition for Review with the Court of Tax
Appeals.9
In its Answer, the Commissioner of Internal Revenue admitted that Apo Cement had
already paid the deficiency assessments reflected in the Bureau's Final Decision on
Disputed Assessment, except for the documentary stamp taxes.10 The deficiency
documentary stamp taxes were allegedly based on several real property transactions of
the corporation consisting of the assignment of several parcels of land with mineral
deposits to Apo Land and Quarry Corporation, a wholly owned subsidiary, and land
acquisitions in 1999.11 According to the Commissioner, Apo Cement should have paid
documentary stamp taxes based on the zonal value of property with mineral/quarry
content, not on the zonal value of regular residential property.12
On January 25, 2008, Apo Cement availed of the tax amnesty under Republic Act No.
9480, particularly affecting the 1999 deficiency documentary stamp taxes.13
After stipulation of facts and presentation of evidence, Apo Cement filed on April 17, 2009
a Motion to Cancel Tax Assessment (with Motion to Admit Attached Formal Offer of
Evidence).14 The Commissioner filed her Opposition.15
On June 11, 2009, the Court of Tax Appeals (Second Division) granted16 Apo Cement's
Motion to Cancel Tax Assessment. It found Apo Cement a qualified tax amnesty applicant
under Republic Act No. 9480;17 and fully compliant with the requirements of the law, the
Department Order No. 29-07, and Revenue Memorandum Circular No. 19-2008. The
Decision disposed as follows:
WHEREFORE, premises considered:
1) the Assessment Notices for deficiency Documentary Stamp Taxes for taxable year
1999 issued against [Apo Cement Corporation] are hereby CANCELLED and SET
ASIDE, solely in view of [its] availment of the Tax Amnesty under RA 9480;
2) the Assessment Notices for deficiency Income Tax, Value-Added Tax, VAT
Withholding Tax, Withholding Tax on Compensation, Unremitted Withholding Tax on
Compensation, Expanded Withholding Tax, Unremitted Expanded Withholding Tax, Final
Withholding Tax, and Fringe Benefits Tax are CANCELLED and SET ASIDE in view of
petitioner's payment of said taxes.
Accordingly, the
TERMINATED.
-above-captioned case is hereby considered CLOSED and
SO ORDERED.18
The Commissioner filed a Motion for Reconsideration, which the Court of Tax Appeals
denied in a Resolution dated October 19, 2009 for lack of merit.
On November 19, 2009, the Commissioner appealed to the En Banc.19 However, in a
Decision promulgated on June 24, 2010, the Court of Tax Appeals En Banc dismissed
the Commissioner's appeal and affirmed the Second Division's resolution ordering the
cancellation of the assessment for deficiency documentary stamp taxes in view of the
Apo Cement's availment of the tax amnesty program. The En Banc ruled that (a) Apo
Cement is qualified to avail of the tax amnesty;20 (b) it submitted the required documents
to the court;21 (c) the Commissioner is not the proper party to challenge the SALN;22 (d)
the one-year prescriptive period already lapsed;23 and (e) in another tax case involving
the same parties (CTA EB No. 256, CTA Case No. 6710), it was already adjudged that
Apo Cement complied with the requirements of Tax Amnesty.24
The Commissioner filed a Motion for Reconsideration, but the same was denied in the
Court of Tax Appeals En Banc’s Resolution dated August 23, 2010.25
Hence, the petitioner filed its Petition for Review with this Court. Respondent filed its
Comment26 and petitioner her Reply.27
In a Resolution28 dated June 15, 2011, the Court expunged from the records
respondent's Rejoinder to petitioner's Reply.
The core issue is whether respondent had fully complied with all the requirements to avail
of the tax amnesty granted under Republic Act No. 9480.
The Petition is devoid of merit. The Court of Tax Appeals committed no reversible error.
I
We shall first address the procedural issue of defective verification raised by the
respondent.
Through the Verification and Certification of Non-Forum Shopping29 attached to the
present Petition, Deputy Commissioner Estela V. Sales of the Legal and Inspection Group
of the Bureau of Internal Revenue states that the contents of the Petition are true and
correct of her own "knowledge and belief based on authentic records."30
In the Court's Resolution31 dated December 8, 2010, the petitioner was directed to submit
a sufficient verification within five (5) days from notice. Petitioner did not comply.
Petitioner would argue however that while the verification still stated "belief," it was
qualified by "based on authentic records." Hence, "the statement implies that the contents
of the petition were based not only on the pleader's belief but ultimately they are recitals
from authentic records."32
We are not persuaded.
The amendment to Section 4, Rule 7 entirely removed any reference to "belief" as
basis.33 This is to ensure that the pleading is anchored on facts and not on imagination
or speculation, and is filed in good faith.
In Go v. Court of Appeals:34
Mere belief is insufficient basis and negates the verification which should be on the basis
of personal knowledge or authentic records. Verification is required to secure an
assurance that the allegations of the petition have been made in good faith, or are true
and correct and not merely speculative.35
To emphasize this further, the third paragraph of Rule 7, Section 4 of the 1997 Rules of
Civil Procedure, as amended, expressly treats pleadings with a verification based on
"information and belief' or "knowledge, information and belief," as unsigned.36
In Negros Oriental Planters Association, Inc. v. Hon. Presiding Judge of RTC-Negros
Occidental, Branch 52, Bacolod City,37 the Court explained that the amendment in the
rules was made stricter so that a party cannot be allowed to base his statements on his
belief. Otherwise, the pleading is treated as unsigned which produces no legal effect. The
court, though, in its discretion, may give the party a chance to remedy the insufficiency.
Thus:
Clearly, the amendment was introduced in order to make the verification requirement
stricter, such that the party cannot now merely state under oath that he believes the
statements made in the pleading. He cannot even merely state under oath that he has
knowledge that such statements are true and correct. His knowledge must be specifically
alleged under oath to be either personal knowledge or at least based on authentic
records.
Unlike, however, the requirement for a Certification against Forum Shopping in Section
5, wherein failure to comply with the requirements is not curable by amendment of the
complaint or other initiatory pleading, Section 4 of Rule 7, as amended, states that the
effect of the failure to properly verify a pleading is that the pleading shall be treated as
unsigned:
A pleading required to be verified which contains a verification based on "information and
belief", or upon "knowledge, information and belief", or lacks a proper verification, shall
be treated as an unsigned pleading.
Unsigned pleadings are discussed in the immediately preceding section of Rule 7:
SEC. 3. Signature and address. - ....
....
An unsigned pleading produces no legal effect. However, the court may, in its discretion,
allow such deficiency to be remedied if it shall appear that the same was due to mere
inadvertence and not intended for delay. Counsel who deliberately files an unsigned
pleading, or signs a pleading in violation of this Rule, or alleges scandalous or indecent
matter therein, or fails to promptly report to the court a change of his address, shall be
subject to appropriate disciplinary action. (5a)
A pleading, therefore, wherein the Verification is merely based on the party's knowledge
and belief produces no legal effect, subject to the discretion of the court to allow the
deficiency to be remedied.38
In this case, petitioner did not submit a corrected verification despite the order of this
Court. This alone merits the denial of the Petition outright.
In any case, we find respondent had fully complied with the requirements of Republic Act
No. 9480. Hence, the Court of Tax Appeals properly cancelled the remaining assessment
for deficiency documentary stamp taxes.
II.
The pertinent provisions on the grant and availment of tax amnesty under Republic Act
No. 9480 state:
SECTION 1. Coverage. -There is hereby authorized and granted a tax amnesty which
shall cover all national internal revenue taxes for the taxable year 2005 and prior years,
with or without assessments duly issued therefor, that have remained unpaid as of
December 31, 2005: Provided, however, That the amnesty hereby authorized and
granted shall not cover persons or cases enumerated under Section 8 hereof.
SEC. 2. Availment of the Amnesty. - Any person, natural or juridical, who wishes to avail
himself of the tax amnesty authorized and granted under this Act shall file with the Bureau
of Internal Revenue (BIR) a notice and Tax Amnesty Return accompanied by a Statement
of Assets, Liabilities and Net worth (SALN) as of December 31, 2005, in such form as
may be prescribed in the implementing rules and regulations (IRR) of this Act, and pay
the applicable amnesty tax within six months from the effectivity of the IRR.
SECTION 3. What to Declare in the SALN - The SALN shall contain a declaration of the
assets, liabilities and net worth as of December 31, 2005, as follows:
(a) Assets within or without the Philippines, whether real or personal, tangible or
intangible, whether or not used in trade or business: Provided, That property other than
money shall be valued at the cost at which the property was acquired: Provided, further,
That foreign currency assets and/or securities shall be valued at the rate of exchange
prevailing as of the date of the SALN;
(b) All existing liabilities which are legitimate and enforceable, secured or unsecured,
whether or not incurred in trade or business; and
(c) The net worth of the taxpayer, which shall be the difference between the total assets
and total liabilities.
....
SEC. S. Grant of Tax Amnesty. - Except for the persons or cases covered in Section 8
hereof, any person, whether natural or juridical, may avail himself of the benefits of tax
amnesty under this Act, and pay the amnesty tax due thereon, based on his net worth as
of December 31, 200S as declared in the SALN as of said period, in accordance with the
following schedule of amnesty tax rates and minimum amnesty tax payments required:
....
(b) Corporations
(1) With subscribed capital of above ₱50 Million
5% or ₱500,000, whichever is higher
(2) With subscribed capital of above ₱20 Million up to ₱50 Million
5% or ₱250,000, whichever is higher
(3) With subscribed capital of ₱5 Million to ₱20 Million
5% or ₱100,000, whichever is higher
(4) With subscribed capital of below ₱5 Million
5% or ₱25,000, whichever is higher
....
(d) Taxpayers who filed their balance sheet/SALN, together with their income tax returns
for 2005, and who desire to avail of the tax amnesty under this Act shall amend such
previously filed statements by including still undeclared assets and/or liabilities and pay
an amnesty tax equal to five percent (5%) based on the resulting increase in net worth:
Provided, That such taxpayers shall likewise be categorized in accordance with, and
subjected to the minimum amounts of amnesty tax prescribed under the provisions of this
Section. (Emphasis supplied)
In addition to the above provisions of law, the Department of Finance Department Order
No. 29-0739 provides:
SECTION 6. Method of Availment of Tax Amnesty. –
1. Forms/Documents to be filed. - To avail of the general tax amnesty, concerned
taxpayers shall file the following documents/requirements:
a. Notice of A vailment in such form as may be prescribed by the BIR.
b. Statements of Assets, Liabilities and Net worth (SALN) as of December 31, 2005 in
such form, as may be prescribed by the BIR.
c. Tax Amnesty Return in such form as may be prescribed by the BIR.
2. Place of Filing of Amnesty Tax Return. - The Tax Amnesty Return, together with the
other documents stated in Sec. 6 (1) hereof, shall be filed as follows:
a. Residents shall file with the Revenue District Officer (RDO)/Large Taxpayer District
Office of the BIR which has jurisdiction over the legal residence or principal place of
business of the taxpayer, as the case may be.
b. Non-residents shall file with the office of the Commissioner of the BIR, or with any RDO.
c. At the option of the taxpayer, the RDO may assist the taxpayer in accomplishing the
forms and computing the taxable base and the amnesty tax payable, but may not look
into, question or examine the veracity of the entries contained in the Tax Amnesty Return,
Statement of Assets, Liabilities and Net worth, or such other documents submitted by the
taxpayer.
3. Payment of Amnesty Tax and Full Compliance. - Upon filing of the Tax Amnesty Return
in accordance with Sec. 6 (2) hereof, the taxpayer shall pay the amnesty tax to the
authorized agent bank or in the absence thereof, the Collection Agent or duly authorized
Treasurer of the city or municipality in which such person has his legal residence or
principal place of business.
The RDO shall issue sufficient Acceptance of Payment Forms, as may be prescribed by
the BIR for the use of - or to be accomplished by - the bank, the collection agent or the
Treasurer, showing the acceptance of the amnesty tax payment. In case of the authorized
agent bank, the branch manager or the assistant branch manager shall sign the
acceptance of payment form.
The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax
Amnesty Return shall be submitted to the RDO, which shall be received only after
complete payment. The completion of these requirements shall be deemed full
compliance with the provisions of RA 9480.
4. Time for Filing and Payment of Amnesty Tax. - The filing of the Tax Amnesty Return,
together with the SALN, and the payment of the amnesty tax shall be made within six (6)
months from the effectivity of these Rules.
Taxpayers who availed themselves of the tax amnesty program are entitled to the
immunities and privileges under Section 6 of the law:
SEC. 6. Immunities and Privileges. - Those who availed themselves of the tax amnesty
under Section 5 hereof, and have fully complied with all its conditions shall be entitled to
the following immunities and privileges:
(a) The taxpayer shall be immune from the payment of taxes, as well as additions thereto,
and the appurtenant civil, criminal or administrative penalties under the National Internal
Revenue Code of 1997, as amended, arising from the failure to pay any and all internal
revenue taxes for taxable year 2005 and prior years.
(b) The taxpayer's Tax Amnesty Return and the SALN as of December 31, 2005 shall not
be admissible as evidence in all proceedings that pertain to taxable year 2005 and prior
years, insofar as such proceedings relate to internal revenue taxes, before judicial, quasijudicial or administrative bodies in which he is a defendant or respondent, and except for
the purpose of ascertaining the net worth beginning January 1, 2006, the same shall not
be examined, inquired or looked into by any person or government office. However, the
taxpayer may use this as a defense, whenever appropriate, in cases brought against him.
(c) The books of accounts and other records of the taxpayer for the years covered by the
tax amnesty availed of shall not be examined: Provided, That the Commissioner of
Internal Revenue may authorize in writing the examination of the said books of accounts
and other records to verify the validity or correctness of a claim for any tax refund, tax
credit (other than refund or credit of taxes withheld on wages), tax incentives, and/or
exemptions under existing laws.
All these immunities and privileges shall not apply where the person failed to file a SALN
and the Tax Amnesty Return, or where the amount of net worth as of December 31, 2005
is proven to be understated to the extent of thirty percent (30%) or more, in accordance
with the provisions of Section 3 hereof.
This Court has declared40 that submission of the documentary requirements and
payment of the amnesty tax is considered full compliance with Republic Act No. 9480 and
the taxpayer can immediately enjoy the immunities and privileges enumerated in Section
6 of the law.
The plain and straightforward conditions were obviously meant to encourage taxpayers
to avail of the amnesty program, thereby enhancing revenue administration and
collection.41
Here, it is undisputed that respondent had submitted all the documentary requirements.
The Court of Tax Appeals En Banc found that respondent had submitted the following:
i. Letter to the Commissioner of Internal Revenue, addressed to the Chief-LT Audit and
Investigation Division II, Ms. Olivia O. Lao, received on January 25, 2008;
ii. Notice of Availment of the Tax Amnesty;
iii. Tax Amnesty Payment Form/Acceptance of Payment Form (BIR Form No. 0617);
iv. Tax Amnesty Return (BIR Form No. 2116);
v. Statement of Assets, Liabilities and Net worth;
vi. Annual Income Tax Return for the taxable year 2005 with Audited Financial Statements
for the year 2005; and
vii. Development Bank of the Philippines BIR Tax Payment Deposit Slip in the amount of
₱3,668,951.06.42
The Court of Tax Appeals further found that there was nothing in the records, which would
show that proceedings to question the correctness of the Statement of Assets, Liabilities,
and Net Worth (SALN) have been filed within the one-year period stated in Section 4 of
the law.43 Hence, it concluded that respondent had duly complied with the requisites
enumerated under Republic Act No. 9480 and is therefore entitled to the benefits under
Section 6.44
III.
The Commissioner disputes, however, the correctness of respondent's 2005 SALN
because respondent allegedly did not include the 57,500,000 shares of stocks it acquired
in 1999 from its subsidiary - Apo Land and Quarry Corporation - in exchange for several
parcels of land.45
Consequently, respondent underpaid its amnesty tax by ₱89,858,951.05, corresponding
to the value of the shares of stocks, which respondent allegedly did not include in its
declaration of assets in the SALN.46
Petitioner further submits that the one-year contestability period under Section 4 has not
yet lapsed - as it had not yet even commenced - due to respondent's failure to file a
complete SALN and to pay the correct amnesty tax.47
Respondent counters that the petitioner is not the proper party to question the correctness
of its SALN.48 Under Section 4 of Republic Act No. 9480, there is a presumption of
correctness of the SALN and only parties other than the Bureau of Internal Revenue or
its agents may dispute the correctness of the SALN.49
Even assuming that petitioner has the standing to question the SALN, Republic Act No.
9480 provides that the proceeding to challenge the SALN must be initiated within one
year following the date of filing of the Tax Amnesty documents.50 Respondent asserts
that it availed of the tax amnesty program on January 25, 2008.51 Hence, petitioner's
challenge, made only in April 2009, was already time-barred.52
In her Reply, petitioner argues that: (1) she is the proper party to question the
completeness of the applicant's SALN; and (2) the State is not bound by the acts of the
Bureau's officials, who examined respondent's SALN and accepted the wrong amnesty
tax payment.53
IV.
Section 4 of Republic Act No. 9480 provides:
SEC. 4. Presumption of Correctness of the SALN. - The SALN as of December 31, 2005
shall be considered as true and correct except where the amount of declared net worth
is understated to the extent of thirty percent (30%) or more as may be established in
proceedings initiated by, or at the instance of, parties other than the BIR or its agents:
Provided, That such proceedings must be initiated within one year following the date of
the filing of the tax amnesty return and the SALN. Findings of or admission in
congressional hearings, other administrative agencies of government, and/or courts shall
be admissible to prove a thirty percent (30%) under-declaration. (Emphasis and
underscoring supplied)
Under the above-stated provision, the SALN is presumed correct unless there is a
concurrence of the following:
a. There is under-declaration of net worth by 30%;
b. The under-declaration is established in proceedings initiated by parties other than the
BIR; and
c. The proceedings were initiated within one (1) year from the filing of the tax amnesty.
The Court of Tax Appeals ruled that petitioner is not the proper party to question the
veracity of respondent's SALN. It emphasized that "the presumption of correctness of the
SALN applies even against the Commissioner . . . Thus, the thirty percent (30%) threshold
can be established in proceedings initiated by, or at the instance of, parties other than the
B[ureau of] I[ntemal] R[evenue] or its agents."54
The Court of Tax Appeals is correct.
We cannot disregard the plain and categorical text of Section 4. It is a basic rule of
statutory construction that where the language of the law is clear and unambiguous, it
should be applied as written.55 Determining its wisdom or policy is beyond the realm of
judicial power.56
In CS Garment, Inc. v. Commissioner of Internal Revenue,57 the Court clarified that –
The one-year period referred to in the law should ... be considered only as a prescriptive
period within which third parties, meaning 'parties other than the BIR or its agents,' can
question the SALN - not as a waiting period during which the BIR may contest the SALN
and the taxpayer prevented from enjoying the immunities and privileges under the law.58
The Court explained that the documentary requirements and payment of the amnesty tax
operate as a suspensive condition, such that completion of these requirements entitles
the taxpayer-applicant to immediately enjoy the immunities and privileges under Republic
Act No. 9480.
However, the Court further stated that Section 6 of the law contains a resolutory condition.
Immunities and privileges will cease to apply to taxpayers who, in their SALN, were
proven to have understated their net worth by 30% or more.
This clarification, however, does not mean that the amnesty taxpayers would go scot-free
in case they substantially understate the amounts of their net worth in their SALN. The
2007 Tax Amnesty Law imposes a resolutory condition insofar as the enjoyment of
immunities and privileges under the law is concerned. Pursuant to Section 4 of the law,
third parties may initiate proceedings contesting the declared amount of net worth of the
amnesty taxpayer within one year following the date of the filing of the tax amnesty return
and the SALN. Section 6 then states that "All these immunities and privileges shall not
apply ... where the amount of net worth as of December 31, 2005 is proven to be
understated to the extent of thirty percent (30%) or more, in accordance with the
provisions of Section 3 hereof." Accordingly, Section 10 provides that amnesty taxpayers
who willfully understate their net worth shall be (a) liable for perjury under the Revised
Penal Code; and (b) subject to immediate tax fraud investigation in order to collect all
taxes due and to criminally prosecute those found to have willfully evaded lawful taxes
due.59
Thus, the amnesty granted under the law is revoked once the taxpayer is proven to have
under-declared his assets in his SALN by 30% or more.1âwphi1 Pursuant to Section 1060
of the Tax Amnesty Law, amnesty taxpayers who wilfully understate their net worth shall
not only be liable for perjury under the Revised Penal Code, but, upon conviction, also
subject to immediate tax fraud investigation in order to collect all taxes due and to
criminally prosecute for tax evasion.
Here, the requisites to overturn the presumption of correctness of respondent's 2005
SALN were not met.
Respondent filed its Tax Amnesty documents on January 25, 2008.61 Since then, and up
to the time of the filing of respondent's Motion to Cancel Tax Assessment on April 1 7,
2009, there had been no proceeding initiated to question its declared amount of net
worth.62 Petitioner never alleged, before the Court of Tax Appeals and this Court, the
existence of any such proceeding to challenge respondent's 2005 SALN during this
period. Indeed, petitioner first raised the possibility of under-declaration of assets only in
her Opposition to respondent's Motion to Cancel Tax Assessment.63 Thus, the lapse of
the one-year period effectively closed the window to question respondent's 2005 SALN.
Significantly, as explained by respondent, there was no understatement in its 2005 SALN
because the shares of stocks, which the BIR repeatedly referred to, were sold in 2002 or
more than three (3) years prior to the tax amnesty availment.64 This was already
discussed and detailed before the Court of Tax Appeals together with proofs of the
transfer of ownership.65
Our judicial review under Rule 45 of the Rules of Court is confined only to errors of law
and does not extend to questions of fact.66 This Court is not a trier of facts.67 At any
rate, petitioner's utter failure to refute these material points constitutes an implied
admission.
WHEREFORE, the Petition is DENIED.
SO ORDERED
EN BANC
January 24, 2017
G.R. No. 184450
JAIME N. SORIANO, MICHAEL VERNON M. GUERRERO, MARY ANN L. REYES,
MARAH SHARYN M. DE CASTRO and CRIS P. TENORIO, Petitioners,
vs.
SECRETARY OF FINANCE and the COMMISSIONER OF INTERNAL REVENUE,
Respondents.
x-----------------------x
G.R. No. 184508
SENATOR MANUEL A. ROXAS, Petitioner,
vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and
LILIAN B. HEFTI, in her capacity as Commissioner of the Bureau of Internal Revenue,
Respondents.
x-----------------------x
G.R. No. 184538
TRADE UNION CONGRESS OF THE PHILIPPINES (TUCP), represented by its
President, DEMOCRITO T. MENDOZA, Petitioner,
vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and
LILIAN B. HEFTI, in her capacity as Commissioner of the Bureau of Internal Revenue,
Respondents.
x-----------------------x
G.R. No. 185234
SENATOR FRANCIS JOSEPH G. ESCUDERO, TAX MANAGEMENT ASSOCIATION
OF THE PHILIPPINES, INC. and ERNESTO G. EBRO, Petitioners,
vs.
MARGARITO B. TEVES, in his capacity as Secretary of the Department of Finance and
SIXTO S. ESQUIVIAS IV, in his capacity as Commissioner of the Bureau of Internal
Revenue, Respondents.
DECISION
SERENO, CJ.:
Before us are consolidated Petitions for Certiorari, Prohibition and Mandamus, under Rule
65 of the 1997 Revised Rules of Court. These Petitions seek to nullify certain provisions
of Revenue Regulation No. (RR) 10-2008. The RR was issued by the Bureau of Internal
Revenue (BIR) on 24 September 2008 to implement the provisions of Republic Act No.
(R.A.) 9504. The law granted, among others, income tax exemption for minimum wage
earners (MWEs), as well as an increase in personal and additional exemptions for
individual taxpayers.
Petitioners assail the subject RR as an unauthorized departure from the legislative intent
of R.A. 9504. The regulation allegedly restricts the implementation of the MWEs income
tax exemption only to the period starting from 6 July 2008, instead of applying the
exemption to the entire year 2008. They further challenge the BIR's adoption of the
prorated application of the new set of personal and additional exemptions for taxable year
2008. They also contest the validity of the RR's alleged imposition of a condition for the
availment by MWEs of the exemption provided by R.A. 9504. Supposedly, in the event
they receive other benefits in excess of ₱30,000, they can no longer avail themselves of
that exemption. Petitioners contend that the law provides for the unconditional exemption
of MWEs from income tax and, thus, pray that the RR be nullified.
ANTECEDENT FACTS
R.A. 9504
On 19 May 2008, the Senate filed its Senate Committee Report No. 53 on Senate Bill No.
(S.B.) 2293. On 21 May 2008, former President Gloria M. Arroyo certified the passage of
the bill as urgent through a letter addressed to then Senate President Manuel Villar. On
the same day, the bill was passed on second reading IN the Senate and, on 27 May 2008,
on third reading. The following day, 28 May 2008, the Senate sent S.B. 2293 to the House
of Representatives for the latter's concurrence.
On 04 June 2008, S.B. 2293 was adopted by the House of Representatives as an
amendment to House Bill No. (H.B.) 3971.
On 17 June 2008, R.A. 9504 entitled "An Act Amending Sections 22, 24, 34, 35, 51, and
79 of Republic Act No. 8424, as Amended, Otherwise Known as the National Internal
Revenue Code of 1997," was approved and signed into law by President Arroyo. The
following are the salient features of the new law:
1. It increased the basic personal exemption from ₱20,000 for a single individual, ₱25,000
for the head of the family, and ₱32,000 for a married individual to P50,000 for each
individual.
2. It increased the additional exemption for each dependent not exceeding four from
₱8,000 to ₱25,000.
3. It raised the Optional Standard Deduction (OSD) for individual taxpayers from 10% of
gross income to 40% of the gross receipts or gross sales.
4. It introduced the OSD to corporate taxpayers at no more than 40% of their gross
income.
5. It granted MWEs exemption from payment of income tax on their minimum wage,
holiday pay, overtime pay, night shift differential pay and hazard pay. 1
Section 9 of the law provides that it shall take effect 15 days following its publication in
the Official Gazette or in at least two newspapers of general circulation. Accordingly, R.A.
9504 was published in the Manila Bulletin and Malaya on 21 June 2008. On 6 July 2008,
the end of the 15-day period, the law took effect.
RR 10-2008
On 24 September 2008, the BIR issued RR 10-2008, dated 08 July 2008, implementing
the provisions of R.A. 9504. The relevant portions of the said RR read as follows:
SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read
as follows:
Sec. 2.78.1. Withholding of Income Tax on Compensation Income.
xxxx
The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not
be considered in determining the ₱30,000.00 ceiling of 'other benefits' excluded from
gross income under Section 32 (b) (7) (e) of the Code. Provided that, the excess of the
'de minimis' benefits over their respective ceilings prescribed by these regulations shall
be considered as part of 'other benefits' and the employee receiving it will be subject to
tax only on the excess over the ₱30,000.00 ceiling. Provided, further, that MWEs
receiving 'other benefits' exceeding the ₱30,000.00 limit shall be taxable on the excess
benefits, as well as on his salaries, wages and allowances, just like an employee receiving
compensation income beyond the SMW.
xxxx
(B) Exemptions from Withholding Tax on Compensation. - The following income
payments are exempted from the requirements of withholding tax on compensation:
xxxx
(13) Compensation income of MWEs who work in the private sector and being paid the
Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity
Board (RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the
place where he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.
'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional Tripartite
Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and
Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). The
RTWPB of each region shall determine the wage rates in the different regions based on
established criteria and shall be the basis of exemption from income tax for this purpose.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided,
however, that an employee who receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of ₱30,000.00, taxable allowances and other taxable income other than the SMW,
holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the
privilege of being a MWE and, therefore, his/her entire earnings are not exempt from
income tax, and consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year. This rule, notwithstanding, the SMW, holiday pay, overtime pay, night shift
differential pay and hazard pay shall still be exempt from withholding tax.
For purposes of these regulations, hazard pay shall mean the amount paid by the
employer to MWEs who were actually assigned to danger or strife-torn areas, diseaseinfested places, or in distressed or isolated stations and camps, which expose them to
great danger of contagion or peril to life. Any hazard pay paid to MWEs which does not
satisfy the above criteria is deemed subject to income tax and consequently, to
withholding tax.
xxxx
SECTION 3. Section 2. 79 of RR 2-98, as amended, is hereby further amended to read
as follows:
Sec. 2.79. Income Tax Collected at Source on Compensation Income. --
(A) Requirement of Withholding. - Every employer must withhold from compensation paid
an amount computed in accordance with these Regulations. Provided, that no withholding
of tax shall be required on the SMW, including holiday pay, overtime pay, night shift
differential and hazard pay of MWEs in the private/public sectors as defined in these
Regulations. Provided, further, that an employee who receives additional compensation
such as commissions, honoraria, fringe benefits, benefits in excess of the allowable
statutory amount of ₱30,000.00, taxable allowances and other taxable income other than
the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not
enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt
from income tax and, consequently, shall be subject to withholding tax.
xxxx
For the year 2008, however, being the initial year of implementation of R.A. 9504, there
shall be a transitory withholding tax table for the period from July 6 to December 31, 2008
(Annex "D") determined by prorating the annual personal and additional exemptions
under R.A. 9504 over a period of six months. Thus, for individuals, regardless of personal
status, the prorated personal exemption is ₱25,000, and for each qualified dependent
child (QDC), ₱12,500.
xxxx
SECTION 9. Effectivity. -
These Regulations shall take effect beginning July 6, 2008. (Emphases supplied)
The issuance and effectivity of RR 10-2008 implementing R.A. 9504 spawned the present
Petitions.1âwphi1
G.R. No. 184450
Petitioners Jaime N. Soriano et al. primarily assail Section 3 of RR 10-2008 providing for
the prorated application of the personal and additional exemptions for taxable year 2008
to begin only effective 6 July 2008 for being contrary to Section 4 of Republic Act No.
9504.2
Petitioners argue that the prorated application of the personal and additional exemptions
under RR 10-2008 is not "the legislative intendment in this jurisdiction."3 They stress that
Congress has always maintained a policy of "full taxable year treatment"4 as regards the
application of tax exemption laws. They allege further that R.A. 9504 did not provide for
a prorated application of the new set of personal and additional exemptions. 5
G.R. No. 184508
Then Senator Manuel Roxas, as principal author of R.A. 9504, also argues for a full
taxable year treatment of the income tax benefits of the new law. He relies on what he
says is clear legislative intent. In his "Explanatory Note of Senate Bill No. 103," he
stresses "the very spirit of enacting the subject tax exemption law"6 as follows:
With the poor, every little bit counts, and by lifting their burden of paying income tax, we
give them opportunities to put their money to daily essentials as well as savings. Minimum
wage earners can no longer afford to be taxed and to be placed in the cumbersome
income tax process in the same manner as higher-earning employees. It is our obligation
to ease their burdens in any way we can.7 (Emphasis Supplied)
Apart from raising the issue of legislative intent, Senator Roxas brings up the following
legal points to support his case for the full-year application of R.A. 9504's income tax
benefits. He says that the pro rata application of the assailed RR deprives MWEs of the
financial relief extended to them by the law;8 that Umali v. Estanislao9serves as
jurisprudential basis for his position that R.A. 9504 should be applied on a full-year basis
to taxable year 2008; 10 and that the social justice provisions of the 1987 Constitution,
particularly Articles II and XIII, mandate a full application of the law according to the spirit
of R.A. 9504. 11
On the scope of exemption of MWEs under R.A. 9504, Senator Roxas argues that the
exemption of MWEs is absolute, regardless of the amount of the other benefits they
receive. Thus, he posits that the Department of Finance (DOF) and the BIR committed
grave abuse of discretion amounting to lack and/or excess of jurisdiction. They
supposedly did so when they provided in Section l of RR 10-2008 the condition that an
MWE who receives "other benefits" exceeding the ₱30,000 limit would lose the tax
exemption. 12 He further contends that the real intent of the law is to grant income tax
exemption to the MWE without any limitation or qualification, and that while it would be
reasonable to tax the benefits in excess of ₱30,000, it is unreasonable and unlawful to
tax both the excess benefits and the salaries, wages and allowances. 13
G.R. No. 184538
Petitioner Trade Union Congress of the Philippine contends that the provisions of R.A.
9504 provide for the application of the tax exemption for the full calendar year 2008. It
also espouses the interpretation that R.A. 9504 provides for the unqualified tax exemption
of the income of MWEs regardless of the other benefits they receive. 14 In conclusion, it
says that RR 10-2008, which is only an implementing rule, amends the original intent of
R.A. 9504, which is the substantive law, and is thus null and void.
G.R. No. 185234
Petitioners Senator Francis Joseph Escudero, the Tax Management Association of the
Philippines, Inc., and Ernesto Ebro allege that R.A. 9504 unconditionally grants MWEs
exemption from income tax on their taxable income, as well as increased personal and
additional exemptions for other individual taxpayers, for the whole year 2008. They note
that the assailed RR 10-2008 restricts the start of the exemptions to 6 July 2008 and
provides that those MWEs who received "other benefits" in excess of ₱30,000 are not
exempt from income taxation. Petitioners believe this RR is a "patent nullity" 15 and
therefore void.
Comment of the OSG
The Office of the Solicitor General (OSG) filed a Consolidated Comment16 and took the
position that the application of R.A. 9504 was intended to be prospective, and not
retroactive. This was supposedly the general 1ule under the rules of statutory
construction: law will only be applied retroactively if it clearly provides for retroactivity,
which is not provided in this instance. 17
The OSG contends that Umali v. Estanislao is not applicable to the present case.1âwphi1
It explains that R.A. 7167, the subject of that case, was intended to adjust the personal
exemption levels to the poverty threshold prevailing in 1991. Hence, the Court in that case
held that R.A. 7167 had been given a retroactive effect. The OSG believes that the grant
of personal exemptions no longer took into account the poverty threshold level under R.A.
9504, because the amounts of personal exemption far exceeded the poverty threshold
levels. 18
The OSG further argues that the legislative intent of non-retroactivity was effectively
confirmed by the "Conforme" of Senator Escudero, Chairperson of the Senate Committee
on Ways and Means, on the draft revenue regulation that became RR 10-2008.
ISSUES
Assailing the validity of RR 10-2008, all four Petitions raise common issues, which may
be distilled into three major ones:
First, whether the increased personal and additional exemptions provided by R.A. 9504
should be applied to the entire taxable year 2008 or prorated, considering that R.A. 9504
took effect only on 6 July 2008.
Second, whether an MWE is exempt for the entire taxable year 2008 or from 6 July 2008
only.
Third, whether Sections 1 and 3 of RR 10-2008 are consistent with the law in providing
that an MWE who receives other benefits in excess of the statutory limit of ₱30,000 19 is
no longer entitled to the exemption provided by R.A. 9504.
THE COURT'S RULING
I.
Whether the increased personal and additional exemptions provided by R.A. 9504 should
be applied to the entire taxable year 2008 or prorated, considering that the law took effect
only on 6 July 2008
The personal and additional exemptions established by R.A. 9504 should be applied to
the entire taxable year 2008.
Umali is applicable.
Umali v. Estanislao20supports this Comi's stance that R.A. 9504 should be applied on a
full-year basis for the entire taxable year 2008.21 In Umali, Congress enacted R.A. 7167
amending the 1977 National Internal Revenue Code (NIRC). The amounts of basic
personal and additional exemptions given to individual income taxpayers were adjusted
to the poverty threshold level. R.A. 7167 came into law on 30 January 1992. Controversy
arose when the Commission of Internal Revenue (CIR) promulgated RR 1-92 stating that
the regulation shall take effect on compensation income earned beginning 1 January
1992. The issue posed was whether the increased personal and additional exemptions
could be applied to compensation income earned or received during calendar year 1991,
given that R.A. 7167 came into law only on 30 January 1992, when taxable year 1991
had already closed.
This Court ruled in the affirmative, considering that the increased exemptions were
already available on or before 15 April 1992, the date for the filing of individual income
tax returns. Further, the law itself provided that the new set of personal and additional
exemptions would be immediately available upon its effectivity. While R.A. 7167 had not
yet become effective during calendar year 1991, the Court found that it was a piece of
social legislation that was in part intended to alleviate the economic plight of the lowerincome taxpayers. For that purpose, the new law provided for adjustments "to the poverty
threshold level" prevailing at the time of the enactment of the law. The relevant discussion
is quoted below:
[T]he Court is of the considered view that Rep. Act 7167 should cover or extend to
compensation income earned or received during calendar year 1991.
Sec. 29, par.(L), Item No. 4 of the National Internal Revenue Code, as amended,
provides:
Upon the recommendation of the Secretary of Finance, the President shall automatically
adjust not more often than once every three years, the personal and additional
exemptions taking into account, among others, the movement in consumer price indices,
levels of minimum wages, and bare subsistence levels.
As the personal and additional exemptions of individual taxpayers were last adjusted in
1986, the President, upon the recommendation of the Secretary of Finance, could have
adjusted the personal and additional exemptions in 1989 by increasing the same even
without any legislation providing for such adjustment. But the President did not.
However, House Bill 28970, which was subsequently enacted by Congress as Rep. Act
7167, was introduced in the House of Representatives in 1989 although its passage was
delayed and it did not become effective law until 30 January 1992. A perusal, however,
of the sponsorship remarks of Congressman Hernando B. Perez, Chairman of the House
Committee on Ways and Means, on House Bill 28970, provides an indication of the intent
of Congress in enacting Rep. Act 716 7. The pertinent legislative journal contains the
following:
At the outset, Mr. Perez explained that the Bill Provides for increased personal additional
exemptions to individuals in view of the higher standard of living.
The Bill, he stated, limits the amount of income of individuals subject to income tax to
enable them to spend for basic necessities and have more disposable income.
xxxx
Mr. Perez added that inflation has raised the basic necessities and that it had been three
years since the last exemption adjustment in 1986.
xxxx
Subsequently, Mr. Perez stressed the necessity of passing the measure to mitigate the
effects of the current inflation and of the implementation of the salary standardization law.
Stating that it is imperative for the government to take measures to ease the burden of
the individual income tax filers, Mr. Perez then cited specific examples of how the
measure can help assuage the burden to the taxpayers.
He then reiterated that the increase in the prices of commodities has eroded the
purchasing power of the peso despite the recent salary increases and emphasized that
the Bill will serve to compensate the adverse effects of inflation on the taxpayers. x x x
(Journal of the House of Representatives, May 23, 1990, pp. 32-33).
It will also be observed that Rep. Act 7167 speaks of the adjustments that it provides for,
as adjustments "to the poverty threshold level." Certainly, "the poverty threshold level" is
the poverty threshold level at the time Rep. Act 7167 was enacted by Congress, not
poverty threshold levels in futuro, at which time there may be need of further adjustments
in personal exemptions. Moreover, the Court can not lose sight of the fact that these
personal and additional exemptions are fixed amounts to which an individual taxpayer is
entitled, as a means to cushion the devastating effects of high prices and a depreciated
purchasing power ofthe currency. In the end, it is the lower-income and the middle-income
groups of taxpayers (not the high-income taxpayers) who stand to benefit most from the
increase of personal and additional exemptions provided for by Rep. Act 7167. To that
extent, the act is a social legislation intended to alleviate in part the present economic
plight of the lower income taxpayers. It is intended to remedy the inadequacy of the
heretofore existing personal and additional exemptions for individual taxpayers.
And then, Rep. Act 7167 says that the increased personal exemptions that it provides for
shall be available thenceforth, that is, after Rep. Act 7167 shall have become effective. In
other words, these exemptions are available upon the filing of personal income tax returns
which is, under the National Internal Revenue Code, done not later than the 15th day of
April after the end of a calendar year. Thus, under Rep. Act 7167, which became effective,
as aforestated, on 30 January 1992, the increased exemptions are literally available on
or before 15 April 1992 (though not before 30 January 1992). But these increased
exemptions can be available on 15 April 1992 only in respect of compensation income
earned or received during the calendar year 1991.
The personal exemptions as increased by Rep. Act 7167 cannot be regarded as available
in respect of compensation income received during the 1990 calendar year; the tax due
in respect of said income had already accrued, and been presumably paid, by 15 April
1991 and by 15 July 1991, at which time Rep. Act 7167 had not been enacted. To make
Rep. Act 7167 refer back to income received during 1990 would require language
explicitly retroactive in purport and effect, language that would have to authorize the
payment of refunds of taxes paid on 15 April 1991 and 15 July 1991: such language is
simply not found in Rep. Act 7167.
The personal exemptions as increased by Rep. Act 7167 cannot be regarded as available
only in respect of compensation income received during 1992, as the implementing
Revenue Regulations No. 1-92 purport to provide. Revenue Regulations No. 1-92 would
in effect postpone the availability of the increased exemptions to 1 January-15 April 1993,
and thus literally defer the effectivity of Rep. Act 7167 to 1 January 1993. Thus, the
implementing regulations collide frontally with Section 3 of Rep. Act 7167 which states
that the statute "shall take effect upon its approval." The objective of the Secretary of
Finance and the Commissioner of Internal Revenue in postponing through Revenue
Regulations No. 1-92 the legal effectivity of Rep. Act 7167 is, of course, entirely
understandable - to defer to 1993 the reduction of governmental tax revenues which
irresistibly follows from the application of Rep. Act 7167. But the law-making authority has
spoken and the Court can not refuse to apply the law-maker's words. Whether or not the
government can afford the drop in tax revenues resulting from such increased exemptions
was for Congress (not this Court) to decide.22 (Emphases supplied)
In this case, Senator Francis Escudero's sponsorship speech for Senate Bill No. 2293
reveals two important points about R.A. 9504: (1) it is a piece of social legislation; and (2)
its intent is to make the proposed law immediately applicable, that is, to taxable year 2008:
Mr. President, distinguished colleagues, Senate Bill No. 2293 seeks, among others, to
exempt minimum wage earners from the payment of income and/or withholding tax. It is
an attempt to help our people cope with the rising costs of commodities that seem to be
going up unhampered these past few months.
Mr. President, a few days ago, the Regional Tripartite and Wages Productivity Board
granted an increase of ₱20 per day as far as minimum wage earners are concerned. By
way of impact, Senate Bill No. 2293 would grant our workers an additional salary or takehome pay of approximately ₱34 per day, given the exemption that will be granted to all
minimum wage earners. It might be also worthy of note that on the part of the public
sector, the Senate Committee on Ways and Means included, as amongst those who will
be exempted from the payment of income tax and/or withholding tax, government workers
receiving Salary Grade V. We did not make any distinction so as to include Steps 1 to 8
of Salary Grade V as long as one is employed in the public sector or in government.
In contradistinction with House Bill No. 3971 approved by the House of Representatives
pertaining to a similar subject matter, the House of Representatives, very much like the
Senate, adopted the same levels of exemptions which are:
From an allowable personal exemption for a single individual of ₱20,000, to a head of
family of ₱25,000, to a married individual of ₱32,000, both the House and the Senate
versions contain a higher personal exemption of ₱50,000.
Also, by way of personal additional exemption as far as dependents are concerned, up to
four, the House, very much like the Senate, recommended a higher ceiling of ₱25,000 for
each dependent not exceeding four, thereby increasing the maximum additional
exemptions and personal additional exemptions to as high as ₱200,000, depending on
one's status in life.
The House also, very much like the Senate, recommended by way of trying to address
the revenue loss on the part of the government, an optional standard deduction (OSD) on
gross sales, and/or gross receipts as far as individual taxpayers are concerned. However,
the House, unlike the Senate, recommended a Simplified Net Income Tax Scheme
(SNITS) in order to address the remaining balance of the revenue loss.
By way of contrast, the Senate Committee on Ways and Means recommended, in lieu of
SNITS, an optional standard deduction of 40% for corporations as far as their gross
income is concerned.
Mr. President, if we total the revenue loss as well as the gain
brought about by the 40% OSD on individuals on gross sales and receipts and 40% on
gross income as far as corporations are concerned, with a conservative availment rate as
computed by the Department of Finance, the government would still enjoy a gain of ₱.78
billion or ₱780 million if we use the high side of the computation however improbable it
may be.
For the record, we would like to state that if the availment rate is computed at 15% for
individuals and 10% for corporations, the potential high side of a revenue gain would
amount to approximately ₱18.08 billion.
Mr. President, we have received many suggestions increasing the rate of personal
exemptions and personal additional exemptions. We have likewise received various
suggestions pertaining to the expansion of the coverage of the tax exemption granted to
minimum wage earners to encompass as well other income brackets.
However, the only suggestion other than or outside the provisions contained in House Bill
No. 3971 that the Senate Committee on Ways and Means adopted, was an expansion of
the exemption to cover overtime, holiday, nightshift differential, and hazard pay also being
enjoyed by minimum wage earners. It entailed an additional revenue loss of ₱l billion
approximately on the part of the government. However, Mr. President, that was taken into
account when I stated earlier that there will still be a revenue gain on the conservative
side on the part of government of ₱780 million.
Mr. President, [my distinguished colleagues in the Senate, we wish to provide a higher
exemption for our countrymen because of the incessant and constant increase in the price
of goods. Nonetheless, not only Our Committee, but also the Senate and Congress, must
act responsibly in recognizing that much as we would like to give all forms of help that we
can and must provide to our people, we also need to recognize the need of the
government to defray its expenses in providing services to the public. This is the most
that we can give at this time because the government operates on a tight budget and is
short on funds when it comes to the discharge of its main expenses.]23
Mr. President, time will perhaps come and we can improve on this version, but at present,
this is the best, I believe, that we can give our people. But by way of comparison, it is still
₱10 higher than what the wage boards were able to give minimum wage earners. Given
that, we were able to increase their take-home pay by the amount equivalent to the tax
exemption we have granted.
We urge our colleagues, Mr. President, to pass this bill in earnest so that we can
immediately grant relief to our people.
Thank you, Mr. President. (Emphases Supplied)24
Clearly, Senator Escudero expressed a sense of urgency for passing what would
subsequently become R.A. 9504. He was candid enough to admit that the bill needed
improvement, but because time was of the essence, he urged the Senate to pass the bill
immediately. The idea was immediate tax relief to the individual taxpayers, particularly
low-compensation earners, and an increase in their take-home pay.25
Senator Miriam Defensor-Santiago also remarked during the deliberations that "the
increase in personal exemption from ₱20,000 to ₱50,000 is timely and appropriate given
the increased cost of living. Also, the increase in the additional exemption for dependent
children is necessary and timely."26
Finally, we consider the President's certification of the necessity of the immediate
enactment of Senate Bill No. 2293. That certification became the basis for the Senate to
dispense with the three-day rule27 for passing a bill. It evinced the intent of the President
to afford wage earners immediate tax relief from the impact of a worldwide increase in the
prices of commodities. Specifically, the certification stated that the purpose was to
"address the urgent need to cushion the adverse impact of the global escalation of
commodity prices upon the most vulnerable within the low income group by providing
expanded income tax relief."28
In sum, R.A. 9504, like R.A. 7167 in Umali, was a piece of social legislation clearly
intended to afford immediate tax relief to individual taxpayers, particularly low-income
compensation earners. Indeed, if R.A. 9504 was to take effect beginning taxable year
2009 or half of the year 2008 only, then the intent of Congress to address the increase in
the cost of living in 2008 would have been negated.
Therefore, following Umali, the test is whether the new set of personal and additional
exemptions was available at the time of the filing of the income tax return. In other words,
while the status of the individual taxpayers is determined at the close of the taxable year,
29 their personal and additional exemptions - and consequently the computation of their
taxable income - are reckoned when the tax becomes due, and not while the income is
being earned or received.
The NIRC is clear on these matters. The taxable income of an individual taxpayer shall
be computed on the basis of the calendar year.30 The taxpayer is required to file an
income tax return on the 15th of April of each year covering income of the preceding
taxable year. 31 The tax due thereon shall be paid at the time the return is filed. 32
It stands to reason that the new set of personal and additional exemptions, adjusted as a
form of social legislation to address the prevailing poverty threshold, should be given
effect at the most opportune time as the Court ruled in Umali.
The test provided by Umali is consistent with Ingalls v. Trinidad, 33 in which the Court
dealt with the matter of a married person's reduced exemption. As early as 1923, the
Court already provided the reference point for determining the taxable income:
[T]hese statutes dealing with the manner of collecting the income tax and with the
deductions to be made in favor of the taxpayer have reference to the time when the return
is filed and the tax assessed. If Act No. 2926 took, as it did take, effect on January 1,
1921, its provisions must be applied to income tax returns filed, and assessments made
from that date. This is the reason why Act No. 2833, and Act No. 2926, in their respective
first sections, refer to income received during the preceding civil year. (Italics in the
original)
There, the exemption was reduced, not increased, and the Court effectively ruled that
income tax due from the individual taxpayer is properly determined upon the filing of the
return. This is done after the end of the taxable year, when all the incomes for the
immediately preceding taxable year and the corresponding personal exemptions and/or
deductions therefor have been considered. Therefore, the taxpayer was made to pay a
higher tax for his income earned during 1920, even if the reduced exemption took effect
on 1 January 1921.
In the present case, the increased exemptions were already available much earlier than
the required time of filing of the return on 15 April 2009. R.A. 9504 came into law on 6
July 2008, more than nine months before the deadline for the filing of the income tax
return for taxable year 2008. Hence, individual taxpayers were entitled to claim the
increased amounts for the entire year 2008. This was true despite the fact that incomes
were already earned or received prior to the law's effectivity on 6 July 2008.
Even more compelling is the fact that R.A. 9504 became effective during the taxable year
in question. In Umali, the Court ruled that the application of the law was prospective, even
if the amending law took effect after the close of the taxable year in question, but before
the deadline for the filing of the return and payment of the taxes due for that year. Here,
not only did R.A. 9504 take effect before the deadline for the filing of the return and
payment for the taxes due for taxable year 2008, it took effect way before the close of
that taxable year. Therefore, the operation of the new set of personal and additional
exemption in the present case was all the more prospective.
Additionally, as will be discussed later, the rule of full taxable year treatment for the
availment of personal and additional exemptions was established, not by the
amendments introduced by R.A. 9504, but by the provisions of the 1997 Tax Code itself.
The new law merely introduced a change in the amounts of the basic and additional
personal exemptions. Hence, the fact that R.A. 9504 took effect only on 6 July 2008 is
irrelevant.
The present case issubstantially
identical with Umali and not with
Pansacola.
Respondents argue that Umali is not applicable to the present case. They contend that
the increase in personal and additional exemptions were necessary in that case to
conform to the 1991 poverty threshold level; but that in the present case, the amounts
under R.A. 9504 far exceed the poverty threshold level. To support their case,
respondents cite figures allegedly coming from the National Statistical Coordination
Board. According to those figures, in 2007, or one year before the effectivity of R.A. 9504,
the poverty threshold per capita was ₱14,866 or ₱89,196 for a family of six. 34
We are not persuaded.
The variance raised by respondents borders on the superficial. The message of Umali is
that there must be an event recognized by Congress that occasions the immediate
application of the increased amounts of personal and additional exemptions. In Umali,
that event was the failure to adjust the personal and additional exemptions to the
prevailing poverty threshold level. In this case, the legislators specified the increase in the
price of commodities as the basis for the immediate availability of the new amounts of
personal and additional exemptions.
We find the facts of this case to be substantially identical to those of Umali.
First, both cases involve an amendment to the prevailing tax code. The present petitions
call for the interpretation of the effective date of the increase in personal and additional
exemptions. Otherwise stated, the present case deals with an amendment (R.A. 9504) to
the prevailing tax code (R.A. 8424 or the 1997 Tax Code). Like the present case, Umali
involved an amendment to the then prevailing tax code - it interpreted the effective date
of R.A. 7167, an amendment to the 1977 NIRC, which also increased personal and
additional exemptions.
Second, the amending law in both cases reflects an intent to make the new set of personal
and additional exemptions immediately available after the effectivity of the law. As already
pointed out, in Umali, R.A. 7167 involved social legislation intended to adjust personal
and additional exemptions. The adjustment was made in keeping with the poverty
threshold level prevailing at the time.
Third, both cases involve social legislation intended to cure a social evil - R.A. 7167 was
meant to adjust personal and additional exemptions in relation to the poverty threshold
level, while R.A. 9504 was geared towards addressing the impact of the global increase
in the price of goods.
Fourth, in both cases, it was clear that the intent of the legislature was to hasten the
enactment of the law to make its beneficial relief immediately available.
Pansacola is not applicable.
In lieu of Umali, the OSG relies on our ruling in Pansacola v.Commissioner of Internal
Revenue. 35 In that case, the 1997 Tax Code (R.A. 8424) took effect on 1 January 1998,
and the petitioner therein pleaded for the application of the new set of personal and
additional exemptions provided thereunder to taxable year 1997. R.A. 8424 explicitly
provided for its effectivity on 1 January 1998, but it did not provide for any retroactive
application.
We ruled against the application of the new set of personal and additional exemptions to
the previous taxable year 1997, in which the filing and payment of the income tax was
due on 15 April 1998, even if the NIRC had already taken effect on 1 January 1998. This
court explained that the NIRC could not be given retroactive application, given the specific
mandate of the law that it shall take effect on 1 January 1998; and given the absence of
any reference to the application of personal and additional exemptions to income earned
prior to 1January 1998. We further stated that what the law considers for the purpose of
determining the income tax due is the status at the close of the taxable year, as opposed
to the time of filing of the return and payment of the corresponding tax.
The facts of this case are not identical with those of Pansacola.
First, Pansacola interpreted the effectivity of an entirely new tax code - R.A. 8424, the
Tax Reform Act of 1997. The present case, like Umali, involves a mere amendment of
some specific provisions of the prevailing tax code: R.A. 7167 amending then P.D. 1158
(the 1977 NIRC) in Umali and R.A. 9504 amending R.A. 8424 herein.
Second, in Pansacola, the new tax code specifically provided for an effective date - the
beginning of the following year - that was to apply to all its provisions, including new tax
rates, new taxes, new requirements, as well as new exemptions. The tax code did not
make any exception to the effectivity of the subject exemptions, even if transitory
provisions36 specifically provided for different effectivity dates for certain provisions.
Hence, the Court did not find any legislative intent to make the new rates of personal and
additional exemptions available to the income earned in the year previous to R.A. 8424's
effectivity. In the present case, as previously discussed, there was a clear intent on the
part of Congress to make the new amounts of personal and additional exemptions
immediately available for the entire taxable year 2008. R.A. 9504 does not even need a
provision providing for retroactive application because, as mentioned above, it is actually
prospective - the new law took effect during the taxable year in question.
Third, in Pansacola, the retroactive application of the new rates of personal and additional
exemptions would result in an absurdity - new tax rates under the new law would not
apply, but a new set of personal and additional exemptions could be availed of. This
situation does not obtain in this case, however, precisely because the new law does not
involve an entirely new tax code. The new law is merely an amendment to the rates of
personal and additional exemptions.
Nonetheless, R.A. 9504 can still be made applicable to taxable year 2008, even if we
apply the Pansacola test. We stress that Pansacola considers the close of the taxable
year as the reckoning date for the effectivity of the new exemptions. In that case, the
Court refused the application of the new set of personal exemptions, since they were not
yet available at the close of the taxable year. In this case, however, at the close of the
taxable year, the new set of exemptions was already available. In fact, it was already
available during the taxable year - as early as 6 July 2008 - when the new law took effect.
There may appear to be some dissonance between the Court's declarations in Umali and
those in Pansacola, which held:
Clearly from the abovequoted provisions, what the law should consider for the purpose
of determining the tax due from an individual taxpayer is his status and qualified
dependents at the close of the taxable year and not at the time the return is filed and the
tax due thereon is paid. Now comes Section 35(C) of the NIRC which provides,
xxxx
Emphasis must be made that Section 35(C) of the NIRC allows a taxpayer to still claim
the corresponding full amount of exemption for a taxable year, e.g. if he marries; have
additional dependents; he, his spouse, or any of his dependents die; and if any of his
dependents marry, turn 21 years old; or become gainfully employed. It is as if the changes
in his or his dependents status took place at the close of the taxable year.
Consequently, his correct taxable income and his corresponding allowable deductions
e.g. personal and additional deductions, if any, had already been determined as of the
end of the calendar year.
x x x. Since the NIRC took effect on January 1, 1998, the increased amounts of personal
and additional exemptions under Section 35, can only be allowed as deductions from the
individual taxpayers gross or net income, as the case maybe, for the taxable year 1998
to be filed in 1999. The NIRC made no reference that the personal and additional
exemptions shall apply on income earned before January 1, 1998.37
It must be remembered, however, that the Court therein emphasized that Umali was
interpreting a social legislation:
In Umali, we noted that despite being given authority by Section 29(1)(4) of the National
Internal Revenue Code of 1977 to adjust these exemptions, no adjustments were made
to cover 1989. Note that Rep. Act No. 7167 is entitled "An Act Adjusting the Basic
Personal and Additional Exemptions Allowable to Individuals for Income Tax Purposes to
the Poverty Threshold Level, Amending for the Purpose Section 29, Paragraph (L), Items
(1) and (2) (A), of the National Internal Revenue Code, As Amended, and For Other
Purposes." Thus, we said in Umali, that the adjustment provided by Rep. Act No. 7167
effective 1992, should consider the poverty threshold level in 1991, the time it was
enacted. And we observed therein that since the exemptions would especially benefit
lower and middle-income taxpayers, the exemption should be made to cover the past
year 1991. To such an extent, Rep. Act No. 7167 was a social legislation intended to
remedy the non-adjustment in 1989. And as cited in Umali, this legislative intent is also
clear in the records of the House of Representatives' Journal.
This is not so in the case at bar. There is nothing in the NIRC that expresses any such
intent. The policy declarations in its enactment do not indicate it was a social legislation
that adjusted personal and additional exemptions according to the poverty threshold level
nor is there any indication that its application should retroact. x x x.38 (Emphasis
Supplied)
Therefore, the seemingly inconsistent pronouncements in Umali and Pansacola are more
apparent than real. The circumstances of the cases and the laws interpreted, as well as
the legislative intents thereof, were different.
The policy in this jurisdiction is full
taxable year treatment.
We have perused R.A. 9504, and we see nothing that expressly provides or even
suggests a prorated application of the exemptions for taxable year 2008. On the other
hand, the policy of full taxable year treatment, especially of the personal and additional
exemptions, is clear under Section 35, particularly paragraph C of R.A. 8424 or the 1997
Tax Code:
SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -
(A) In General. - For purposes of determining the tax provided in Section 24(A) of this
Title, there shall be allowed a basic personal exemption as follows:
xxxx
(B) Additional Exemption for Dependents.-There shall be allowed an additional exemption
of... for each dependent not exceeding four (4).
x x xx
(C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as
defined above during the taxable year, the taxpayer may claim the corresponding
additional exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependent(s) as if he died at the close of such
year.
If the spouse or any of the dependents dies or if any of such
dependents marries, becomes twenty-one (21) years old or becomes gainfully employed
during the taxable year, the taxpayer may still claim the same exemptions as if the spouse
or any of the dependents died, or as if such dependents married, became twenty-one (21)
years old or became gainfully employed at the close of such year. (Emphases supplied)
Note that paragraph C does not allow the prorating of the personal and additional
exemptions provided in paragraphs A and B, even in case a status-changing event occurs
during the taxable year. Rather, it allows the fullest benefit to the individual taxpayer. This
manner of reckoning the taxpayer's status for purposes of the personal and additional
exemptions clearly demonstrates the legislative intention; that is, for the state to give the
taxpayer the maximum exemptions that can be availed, notwithstanding the fact that the
latter's actual status would qualify only for a lower exemption if prorating were employed.
We therefore see no reason why we should make any distinction between the income
earned prior to the effectivity of the amendment (from 1 January 2008 to 5 July 2008) and
that earned thereafter (from 6 July 2008 to 31 December 2008) as none is indicated in
the law. The principle that the courts should not distinguish when the law itself does not
distinguish squarely app1ies to this case. 39
We note that the prorating of personal and additional exemptions was employed in the
1939 Tax Code. Section 23(d) of that law states:
Change of status. - - If the status of the taxpayer insofar as it affects the personal and
additional exemptions for himself or his dependents, changes during the taxable year, the
amount of the personal and additional exemptions shall be apportioned, under rules and
regulations prescribed by the Secretary of Finance, in accordance with the number of
months before and after such change. For the purpose of such apportionment a fractional
part of a month shall be disregarded unless it amounts to more than half a month, in which
case it shall be considered as a month.40 (Emphasis supplied)
On 22 September 1950, R.A. 590 amended Section 23(d) of the 1939 Tax Code by
restricting the operation of the prorating of personal exemptions. As amended, Section
23(d) reads:
(d) Change of status. - If the status of the taxpayer insofar as it affects the personal and
additional exemption for himself or his dependents, changes during the taxable year by
reason of his death, the amount of the personal and additional exemptions shall be
apportioned, under rules and regulations prescribed by the Secretary of Finance, in
accordance with the number of months before and after such change. For the purpose of
such apportionment a fractional part of a month shall be disregarded unless it amounts
to more than half a month, in which case it shall be considered as a month.41 (Emphasis
supplied)
Nevertheless, in 1969, R. A. 6110 ended the operation of the prorating scheme in our
jurisdiction when it amended Section 23(d) of the 1939 Tax Code and adopted a full
taxable year treatment of the personal and additional exemptions. Section 23(d), as
amended, reads:
(d) Change of status. -
If the taxpayer married or should have additional dependents as defined in subsection (c)
above during the taxable year the taxpayer may claim the corresponding personal
exemptions in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the personal
and additional deductions for himself and his dependents as if he died at the close of such
year.
If the spouse or any of the dependents should die during the year, the taxpayer may still
claim the same deductions as if they died at the close of such year.
P.D. 69 followed in 1972, and it retained the full taxable year scheme. Section 23(d)
thereof reads as follows:
(d) Change of status. - If the taxpayer marries or should have additional dependents as
defined in subsection (c) above during the taxable year the taxpayer may claim the
corresponding personal exemptions in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the personal
and additional deductions for himself and his dependents as if he died at the close of such
year.
If the spouse or any of the dependents should die or become twenty-one years old during
the taxable year, the taxpayer may still claim the same exemptions as if they died, or as
if such dependents became twenty-one years old at the close of such year.
The 1977 Tax Code continued the policy of full taxable year treatment. Section 23(d)
thereof states:
(d) Change of status.- If the taxpayer married or should have additional dependents as
defined in subsection (c) above during the taxable year, the taxpayer may claim the
corresponding personal exemption in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the personal
and additional exemptions for himself and his dependents as if he died at the close of
such year.
If the spouse or any of the dependents should die or become
twenty-one years old during the taxable year, the taxpayer may still claim the same
exemptions as if they died, or as if such dependents became twenty-one years old at the
close of such year.
While Section 23 of the 1977 Tax Code underwent changes, the provision on full taxable
year treatment in case of the taxpayer's change of status was left untouched.42 Executive
Order No. 37, issued on 31 July 1986, retained the change of status provision verbatim.
The provision appeared under Section 30(1)(3) of the NIRC, as amended:
(3) Change of status.- If the taxpayer married or should have additional dependents as
defined above during the taxable year, the taxpayer may claim the corresponding
personal and additional exemptions, as the case may be, in full for such year.
If the taxpayer should die during the taxable year, his estate may still claim the personal
and additional exemptions for himself and his dependents as if he died at the close of
such year.
If the spouse or any of the dependents should die or if any of such
dependents becomes twenty-one years old during the taxable year, the taxpayer may still
claim the same exemptions as if they died, or if such dependents become twenty-one
years old at the close of such year.
Therefore, the legislative policy of full taxable year treatment of the personal and
additional exemptions has been in our jurisdiction continuously since 1969. The prorating
approach has long since been abandoned. Had Congress intended to revert to that
scheme, then it should have so stated in clear and unmistakeable terms. There is nothing,
however, in R.A. 9504 that provides for the reinstatement of the prorating scheme. On
the contrary, the change-of-status provision utilizing the full-year scheme in the 1997 Tax
Code was left untouched by R.A. 9504.
We now arrive at this important point: the policy of full taxable year treatment is
established, not by the amendments introduced by R.A. 9504, but by the provisions of the
1997 Tax Code, which adopted the policy from as early as 1969.
There is, of course, nothing to prevent Congress from again adopting a policy that
prorates the effectivity of basic personal and additional exemptions. This policy, however,
must be explicitly provided for by law - to amend the prevailing law, which provides for
full-year treatment. As already pointed out, R.A. 9504 is totally silent on the matter. This
silence cannot be presumed by the BIR as providing for a half-year application of the new
exemption levels. Such presumption is unjust, as incomes do not remain the same from
month to month, especially for the MWEs.
Therefore, there is no legal basis for the BIR to reintroduce the prorating of the new
personal and additional exemptions. In so doing, respondents overstepped the bounds of
their rule-making power. It is an established rule that administrative regulations are valid
only when these are consistent with the law. 43 Respondents cannot amend, by mere
regulation, the laws they administer.44 To do so would violate the principle of nondelegability of legislative powers.45
The prorated application of the new set of personal and additional exemptions for the year
2008, which was introduced by respondents, cannot even be justified under the exception
to the canon of non-delegability; that is, when Congress makes a delegation to the
executive branch.46 The delegation would fail the two accepted tests for a valid
delegation of legislative power; the completeness test and the sufficient standard test.47
The first test requires the law to be complete in all its terms and conditions, such that the
only thing the delegate will have to do is to enforce it.48 The sufficient standard test
requires adequate guidelines or limitations in the law that map out the boundaries of the
delegate's authority and canalize the delegation.49
In this case, respondents went beyond enforcement of the law, given the absence of a
provision in R.A. 9504 mandating the prorated application of the new amounts of personal
and additional exemptions for 2008. Further, even assuming that the law intended a
prorated application, there are no parameters set forth in R.A. 9504 that would delimit the
legislative power surrendered by Congress to the delegate. In contrast, Section 23(d) of
the 1939 Tax Code authorized not only the prorating of the exemptions in case of change
of status of the taxpayer, but also authorized the Secretary of Finance to prescribe the
corresponding rules and regulations.
II.
Whether an MWE is exempt for the entire taxable
year 2008 or from 6 July 2008 only
The MWE is exempt for the entire taxable year 2008.
As in the case of the adjusted personal and additional exemptions, the MWE exemption
should apply to the entire taxable year 2008, and not only from 6 July 2008 onwards. We
see no reason why Umali cannot be made applicable to the MWE exemption, which is
undoubtedly a piece of social legislation. It was intended to alleviate the plight of the
working class, especially the low-income earners. In concrete terms, the exemption
translates to a ₱34 per day benefit, as pointed out by Senator Escudero in his sponsorship
speech.50
As it stands, the calendar year 2008 remained as one taxable year for an individual
taxpayer. Therefore, RR 10-2008 cannot declare the income earned by a minimum wage
earner from 1 January 2008 to 5 July 2008 to be taxable and those earned by him for the
rest of that year to be tax-exempt. To do so would be to contradict the NIRC and
jurisprudence, as taxable income would then cease to be determined on a yearly basis.
Respondents point to the letter of former Commissioner of Internal Revenue Lilia B. Hefti
dated 5 July 2008 and petitioner Sen. Escudero's signature on the Conforme portion
thereof. This letter and the conforme supposedly establish the legislative intent not to
make the benefits of R.A. 9504 effective as of 1 January 2008.
We are not convinced. The conforme is irrelevant in the determination of legislative intent.
We quote below the relevant portion of former Commissioner Hefti's letter:
Attached herewith are salient features of the proposed regulations to implement RA 9504
x x x. We have tabulated critical issues raised during the public hearing and comments
received from the public which we need immediate written resolution based on the
inten[t]ion of the law more particularly the effectivity clause. Due to the expediency and
clamor of the public for its immediate implementation, may we request your confirmation
on the proposed recommendation within five (5) days from receipt hereof. Otherwise, we
shall construe your affirmation. 51
We observe that a Matrix of Salient Features of Proposed Revenue Regulations per R.A.
9504 was attached to the letter.52 The Matrix had a column entitled "Remarks" opposite
the Recommended Resolution. In that column, noted was a suggestion coming from
petitioner TMAP:
TMAP suggested that it should be retroactive considering that it was [for] the benefit of
the majority and to alleviate the plight of workers. Exemption should be applied for the
whole taxable year as provided in the NIRC. x x x Umali v. Estanislao [ruled] that the
increase[d] exemption in 1992 [was applicable] [to] 1991.
Majority issues raised during the public hearing last July 1, 2008 and emails received
suggested [a] retroactive implementation. 53(Italics in the original)
The above remarks belie the claim that the conforme is evidence of the legislative intent
to make the benefits available only from 6 July 2008 onwards. There would have been no
need to make the remarks if the BIR had merely wanted to confirm was the availability of
the law's benefits to income earned starting 6 July 2008. Rather, the implication is that
the BIR was requesting the conformity of petitioner Senator Escudero to the proposed
implementing rules, subject to the remarks contained in the Matrix. Certainly, it cannot be
said that Senator Escudero's conforme is evidence of legislative intent to the effect that
the benefits of the law would not apply to income earned from 1 January 2008 to 5 July
2008.
Senator Escudero himself states in G.R. No. 185234:
In his bid to ensure that the BIR would observe the effectivity dates of the grant of tax
exemptions and increased basic personal and additional exemptions under Republic Act
No. 9504, Petitioner Escudero, as Co-Chairperson of the Congressional Oversight
Committee on Comprehensive Tax Reform Program, and his counterpart in the House of
Representatives, Hon. Exequiel B. Javier, conveyed through a letter, dated 16 September
2008, to Respondent Teves the legislative intent that "Republic Act (RA) No. 9504 must
be made applicable to the entire taxable year 2008" considering that it was "a social
legislation intended to somehow alleviate the plight of minimum wage earners or low
income taxpayers". They also jointly expressed their "fervent hope that the corresponding
Revenue Regulations that will be issued reflect the true legislative intent and rightful
statutory interpretation of R.A. No. 9504." 54
Senator Escudero repeats in his Memorandum:
On 16 September 2008, the Chairpersons (one of them being herein Petitioner Sen.
Escudero) of the Congressional Oversight Committee on Comprehensive Tax Reform
Program of both House of Congress wrote Respondent DOF Sec. Margarito Teves, and
requested that the revenue regulations (then yet still to be issued)55 to implement
Republic Act No. 9504 reflect the true intent and rightful statutory interpretation thereof,
specifically that the grant of tax exemption and increased basic personal and additional
exemptions be made available for the entire taxable year 2008. Yet, the DOF promulgated
Rev. Reg. No. 10-2008 in contravention of such legislative intent.x x x.56
We have gone through the records and we do not see anything that would to suggest that
respondents deny the senator's assertion.
Clearly, Senator Escudero's assertion is that the legislative intent is to make the MWE' s
tax exemption and the increased basic personal and additional exemptions available for
the entire year 2008. In the face of his assertions, respondents' claim that his conforme
to Commissioner Hefti's letter was evidence of legislative intent becomes baseless and
specious. The remarks described above and the subsequent letter sent to DOF Secretary
Teves, by no less than the Chairpersons of the Bi-camera! Congressional Oversight
Committee on Comprehensive Tax Reform Program, should have settled for respondents
the matter of what the legislature intended for R.A. 9504's exemptions.
Accordingly, we agree with petitioners that RR 10-2008, insofar as it allows the availment
of the MWE's tax exemption and the increased personal and additional exemptions
beginning only on 6 July 2008 is in contravention of the law it purports to implement.
A clarification is proper at this point. Our ruling that the MWE exemption is available for
the entire taxable year 2008 is premised on the fact of one's status as an MWE; that is,
whether the employee during the entire year of 2008 was an MWE as defined by R.A.
9504. When the wages received exceed the minimum wage anytime during the taxable
year, the employee necessarily loses the MWE qualification. Therefore, wages become
taxable as the employee ceased to be an MWE. But the exemption of the employee from
tax on the income previously earned as an MWE remains.
This rule reflects the understanding of the Senate as gleaned from the exchange between
Senator Miriam Defensor-Santiago and Senator Escudero:
Asked by Senator Defensor-Santiago on how a person would be taxed if, during the year,
he is promoted from Salary Grade 5 to Salary Grade 6 in July and ceases to be a minimum
wage employee, Senator Escudero said that the tax computation would be based starting
on the new salary in July. 57
As the exemption is based on the employee's status as an MWE, the operative phrase is
"when the employee ceases to be an MWE. Even beyond 2008, it is therefore possible
for one employee to be exempt early in the year for being an MWE for that period, and
subsequently become taxable in the middle of the same year with respect to the
compensation income, as when the pay is increased higher than the minimum wage. The
improvement of one's lot, however, cannot justly operate to make the employee liable for
tax on the income earned as an MWE.
Additionally, on the question of whether one who ceases to be an MWE may still be
entitled to the personal and additional exemptions, the answer must necessarily be yes.
The MWE exemption is separate and distinct from the personal and additional
exemptions. One's status as an MWE does not preclude enjoyment of the personal and
additional exemptions. Thus, when one is an MWE during a part of the year and later
earns higher than the minimum wage and becomes a non-MWE, only earnings for that
period when one is a non-MWE is subject to tax. It also necessarily follows that such an
employee is entitled to the personal and additional exemptions that any individual
taxpayer with taxable gross income is entitled.
A different interpretation will actually render the MWE exemption a totally oppressive
legislation. It would be a total absurdity to disqualify an MWE from enjoying as much as
₱150,00058 in personal and additional exemptions just because sometime in the year,
he or she ceases to be an MWE by earning a little more in wages. Laws cannot be
interpreted with such absurd and unjust outcome. It is axiomatic that the legislature is
assumed to intend right and equity in the laws it passes.59
Critical, therefore, is how an employee ceases to become an MWE and thus ceases to
be entitled to an MWE's exemption.
III.
Whether Sections 1 and 3 of RR 10-2008 are consistent with the law in
declaring that an MWE who receives other benefits in excess of the
statutory limit of ₱30,000 is no longer entitled to the exemption provided
by R.A. 9504, is consistent with the law.
Sections 1 and 3 of RR 10-2008 add a requirement not found in the law by effectively
declaring that an MWE who receives other benefits in excess of the statutory limit of
₱30,000 is no longer entitled to the exemption provided by R.A. 9504.
The BIR added a requirement not
found in the law.
The assailed Sections 1 and 3 of RR 10-2008 are reproduced hereunder for easier
reference.
SECTION 1. Section 2.78.1 of RR 2-98, as amended, is hereby further amended to read
as follows:
Sec. 2.78.1. Withholding of Income Tax on Compensation Income. -
(A) Compensation Income Defined. – x x x
xxxx
(3) Facilities and privileges of relatively small value. - Ordinarily, facilities, and privileges
(such as entertainment, medical services, or so-called "courtesy" discounts on
purchases), otherwise known as "de minimis benefits," furnished or offered by an
employer to his employees, are not considered as compensation subject to income tax
and consequently to withholding tax, if such facilities or privileges are of relatively small
value and are offered or furnished by the employer merely as means of promoting the
health, goodwill, contentment, or efficiency of his employees.
The following shall be considered as "de minimis" benefits not subject to income tax,
hence, not subject to withholding tax on compensation income of both managerial and
rank and file employees:
(a) Monetized unused vacation leave credits of employees not exceeding ten (10) days
during the year and the monetized value of leave credits paid to government officials and
employees;
(b) Medical cash allowance to dependents of employees not exceeding ₱750.00 per
employee per semester or ₱125 per month;
(c) Rice subsidy of ₱l,500.00 or one (1) sack of 50-kg. rice per month amounting to not
more than ₱l,500.00;
(d) Uniforms and clothing allowance not exceeding ₱4,000.00 per annum;
(e) Actual yearly medical benefits not exceeding ₱10,000.00 per annum;
(f) Laundry allowance not exceeding ₱300.00 per month;
(g) Employees achievement awards, e.g., for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift certificate,
with an annual monetary value not exceeding ₱10,000.00 received by the employee
under an established written plan which does not discriminate in favor of highly paid
employees;
(h) Gifts given during Christmas and major anniversary celebrations not exceeding
₱5,000.00per employee per annum;
(i) Flowers, fruits, books, or similar items given to employees under special
circumstances, e.g., on account of illness, marriage, birth of a baby, etc.; and
(j) Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the
basic minimum wage.60
The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not
be considered in determining the ₱30,000.00 ceiling of 'other benefits' excluded from
gross income under Section 32(b)(7)(e) of the Code. Provided that, the excess of the 'de
minimis' benefits over their respective ceilings prescribed by these regulations shall be
considered as part of 'other benefits' and the employee receiving it will be subject to tax
only on the excess over the ₱30,000.00 ceiling. Provided, further, that MWEs receiving
'other benefits' exceeding the P30,000.00 limit shall be taxable on the excess benefits, as
well as on his salaries, wages and allowances, just like an employee receiving
compensation income beyond the SMW.
Any amount given by the employer as benefits to its employees, whether classified as 'de
minimis' benefits or fringe benefits, shall constitute [a] deductible expense upon such
employer.
Where compensation is paid in property other than money, the employer shall make
necessary arrangements to ensure that the amount of the tax required to be withheld is
available for payment to the Bureau of Internal Revenue.
xxxx
(B) Exemptions from Withholding Tax on Compensation. - The following income
payments are exempted from the requirements of withholding tax on compensation:
xxxx
(13) Compensation income of MWEs who work
in the private sector and being paid the Statutory Minimum Wage (SMW), as fixed by
Regional Tripartite Wage and Productivity Board (RTWPB)/National Wages and
Productivity Commission (NWPC), applicable to the place where he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.
"Statutory Minimum Wage" (SMW) shall refer to the rate fixed by the Regional Tripartite
Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and
Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). The
RTWPB of each region shall determine the wage rates in the different regions based on
established criteria and shall be the basis of exemption from income tax for this purpose.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided,
however, that an employee who receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of ₱30,000.00, taxable allowances and other taxable income other than the SMW,
holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the
privilege of being a MWE and, therefore, his/her entire earnings are not exempt form
income tax, and consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year. This rule, notwithstanding, the [statutory minimum wage], [h]oliday pay,
overtime pay, night shift differential pay and hazard pay shall still be exempt from
withholding tax.
For purposes of these regulations, hazard pay shall mean x x x.
In case of hazardous employment, x x x
The NWPC shall officially submit a Matrix of Wage Order by region x x x
Any reduction or diminution of wages for purposes of exemption from income tax shall
constitute misrepresentation and therefore, shall result to the automatic disallowance of
expense, i.e. compensation and benefits account, on the part of the employer. The
offenders may be criminally prosecuted under existing laws.
(14) Compensation income of employees in the public sector with compensation income
of not more than the SMW in the non-agricultural sector, as fixed by RTWPB/NWPC,
applicable to the place where he/she is assigned.
The aforesaid income shall likewise be exempted from income tax.
The basic salary of MWEs in the public sector shall be equated to the SMW in the nonagricultural sector applicable to the place where he/she is assigned. The determination
of the SMW in the public sector shall likewise adopt the same procedures and
consideration as those of the private sector.
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE in the public sector shall likewise be covered by the above
exemption. Provided, however, that a public sector employee who receives additional
compensation such as commissions, honoraria, fringe benefits, benefits in excess of the
allowable statutory amount of ₱30,000.00, taxable allowances and other taxable income
other than the SMW, holiday pay, overtime pay, night shift differential pay and hazard pay
shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are
not exempt from income tax and, consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift
differential pay and hazard pay shall still be exempt from withholding tax.
For purposes of these regulations, hazard pay shall mean xxx
In case of hazardous employment, x x x
xxxx
SECTION 3. Section 2.79 of RR 2-98, as amended, is hereby further amended to read
as follows:
Sec. 2.79. Income Tax Collected at Source on Compensation Income. -
(A) Requirement of Withholding. - Every employer must withhold from compensation paid
an amount computed in accordance with these Regulations. Provided, that no withholding
of tax shall be required on the SMW, including holiday pay, overtime pay, night shift
differential and hazard pay of MWEs in the private/public sectors as defined in these
Regulations. Provided, further, that an employee who receives additional compensation
such as commissions, honoraria, fringe benefits, benefits in excess of the allowable
statutory amount of₱30,000.00, taxable allowances and other taxable income other than
the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not
enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt
from income tax and, consequently, shall be subject to withholding tax.
xxxx
For the year 2008, however, being the initial year of implementation of R.A. 9504, there
shall be a transitory withholding tax table for the period from July 6 to December 31, 2008
(Annex "D") determined by prorating the annual personal and additional exemptions
under R.A. 9504 over a period of six months. Thus, for individuals, regardless of personal
status, the prorated personal exemption is ₱25,000, and for each qualified dependent
child (QDC), ₱12,500.
On the other hand, the pertinent provisions of law, which are supposed to be implemented
by the above-quoted sections of RR10-2008, read as follows:
SECTION 1. Section 22 of Republic Act No. 8424, as amended, otherwise known as the
National Internal Revenue Code of 1997, is hereby further amended by adding the
following definitions after Subsection (FF) to read as follows:
Section 22. Definitions.- when used in this Title:61
(A) x x x
(FF) x x x
(GG) The term 'statutory minimum wage' shall refer to the rate fixed by the Regional
Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and
Employment Statistics (BLES) of the Department of Labor and Employment (DOLE).
(HH) The term 'minimum wage earner' shall refer to a worker in the private sector paid
the statutory minimum wage, or to an employee in the public sector with compensation
income of not more than the statutory minimum wage in the non-agricultural sector where
he/she is assigned.
SECTION 2. Section 24(A) of Republic Act No. 8424, as amended, otherwise known as
the National Internal Revenue Code of 1997, is hereby further amended to read as
follows:
SEC. 24. Income Tax Rates. -
(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the
Philippines. -
(l)x x x
x x x x; and
(c) On the taxable income defined in Section 31 of this Code, other than income subject
to tax under Subsections (B), (C) and (D)of this Section, derived for each taxable year
from all sources within the Philippines by an individual alien who is a resident of the
Philippines.
(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in
accordance with and at the rates established in the following schedule:
xxxx
For married individuals, the husband and wife, subject to the provision of Section 51 (D)
hereof, shall compute separately their individual income tax based on their respective
total taxable income: Provided, That if any income cannot be definitely attributed to or
identified as income exclusively earned or realized by either of the spouses, the same
shall be divided equally between the spouses for the purpose of determining their
respective taxable income.
Provided, That mm1mum wage earners as defined in Section 22(HH) of this Code shall
be exempt from the payment of income tax on their taxable income: Provided, further,
That the holiday pay, ovr.rtime pay, night shift differential pay and hazard pay received
by such minimum wage earners shall likewise be exempt from income tax.
xxxx
SECTION 5. Section 51(A)(2) of Republic Act No. 8424, as amended, otherwise known
as the National Internal Revenue Code of 1997, is hereby further amended to read as
follows:
SEC. 51. Individual Return. -
(A) Requirements. -
(1) Except as provided in paragraph (2) of this Subsection, the following individuals are
required to file an income tax return:
(a) x x x
xxxx
(2) The following individuals shall not be required to file an income tax return:
(a) x x x
(b) An individual with respect to pure compensation income, as defined in Section
32(A)(l), derived from sources within the Philippines, the income tax on which has been
correctly withheld under the provisions of Section 79 of this Code:
Provided, That an individual deriving compensation concurrently from two or more
employers at any time during the taxable year shall file an income tax return;
(c) x x x; and
(d) A minimum wage earner as defined in Section 22(HH) of this Code or an individual
who is exempt from income tax pursuant to the provisions of this Code and other laws,
general or special.
xxxx
SECTION 6. Section 79(A) of Republic Act No. 8424, as amended, otherwise known as
the National Internal Revenue Code of 1997, is hereby further amended to read as
follows:
SEC. 79. Income Tax Collected at Source. –
(A) Requirement of Withholding. - Except in the case of a minimum wage earner as
defined in Section 22(HH) of this Code, every employer making payment of wages shall
deduct and withhold upon such wages a tax determined in accordance with the rules and
regulations to be prescribed by the Secretary of Finance, upon recommendation of the
Commissioner. (Emphases supplied)
Nowhere in the above provisions of R.A. 9504 would one find the qualifications prescribed
by the assailed provisions of RR 10-2008. The provisions of the law are clear and precise;
they leave no room for interpretation - they do not provide or require any other qualification
as to who are MWEs.
To be exempt, one must be an MWE, a term that is clearly defined. Section 22(HH) says
he/she must be one who is paid the statutory minimum wage if he/she works in the private
sector, or not more than the statutory minimum wage in the non-agricultural sector where
he/she is assigned, if he/she is a government employee. Thus, one is either an MWE or
he/she is not. Simply put, MWE is the status acquired upon passing the litmus test whether one receives wages not exceeding the prescribed minimum wage.
The minimum wage referred to in the definition has itself a clear and definite meaning.
The law explicitly refers to the rate fixed by the Regional Tripartite Wage and Productivity
Board, which is a creation of the Labor Code.62 The Labor Code clearly describes wages
and Minimum Wage under Title II of the Labor Code. Specifically, Article 97 defines
"wage" as follows:
(f) "Wage" paid to any employee shall mean the remuneration or earnings, however
designated, capable of being expressed in terms of money, whether fixed or ascertained
on a time, task, piece, or commission basis, or other method of calculating the same,
which is payable by an employer to an employee under a written or unwritten contract of
employment for work done or to be done, or for services rendered or to be rendered and
includes the fair and reasonable value, as determined by the Secretary of Labor and
Employment, of board, lodging, or other facilities customarily furnished by the employer
to the employee. "Fair and reasonable value" shall not include any profit to the employer,
or to any person affiliated with the employer.
While the Labor Code's definition of "wage" appears to encompass any payments of any
designation that an employer pays his or her employees, the concept of minimum wage
is distinct.63 "Minimum wage" is wage mandated; one that employers may not freely
choose on their own to designate in any which way.
In Article 99, minimum wage rates are to be prescribed by the
Regional Tripartite Wages and Productivity Boards. In Articles 102 to 105, specific
instructions are given in relation to the payment of wages. They must be paid in legal
tender at least once every two weeks, or twice a month, at intervals not exceeding 16
days, directly to the worker, except in case of force majeure or death of the worker.
These are the wages for which a minimum is prescribed. Thus, the minimum wage
exempted by R.A. 9504 is that which is referred to in the Labor Code. It is distinct and
different from other payments including allowances, honoraria, commissions, allowances
or benefits that an employer may pay or provide an employee.
Likewise, the other compensation incomes an MWE receives that are also exempted by
R.A. 9504 are all mandated by law and are based on this minimum wage. Additional
compensation in the form of overtime pay is mandated for work beyond the normal hours
based on the employee's regular wage.64 Those working between ten o'clock in the
evening and six o'clock in the morning are required to be paid a night shift differential
based on their regular wage.65 Holiday/premium pay is mandated whether one works on
regular holidays or on one's scheduled rest days and special holidays. In all of these
cases, additional compensation is mandated, and computed based on the employee's
regular wage.66
R.A. 9504 is explicit as to the coverage of the exemption: the wages that are not in excess
of the minimum wage as determined by the wage boards, including the corresponding
holiday, overtime, night differential and hazard pays.
In other words, the law exempts from income taxation the most basic compensation an
employee receives - the amount afforded to the lowest paid employees by the mandate
of law. In a way, the legislature grants to these lowest paid employees additional income
by no longer demanding from them a contribution for the operations of government. This
is the essence of R.A. 9504 as a social legislation. The government, by way of the tax
exemption, affords increased purchasing power to this sector of the working class.
This intent is reflected in the Explanatory Note to Senate Bill No. 103 of Senator Roxas:
This bill seeks to exempt minimum wage earners in the private sector and government
workers in Salary Grades 1 to 3, amending certain provisions of Republic Act 8424,
otherwise known as the National Internal Revenue Code of 1997, as amended.
As per estimates by the National Wages and Productivity Board, there are 7 million
workers earning the minimum wage and even below. While these workers are in the verge
of poverty, it is unfair and unjust that the Government, under the law, is taking away a
portion of their already subsistence-level income.
Despite this narrow margin from poverty, the Government would still be mandated to take
a slice away from that family's meager resources. Even if the Government has recently
exempted minimum wage earners from withholding taxes, they are still liable to pay
income taxes at the end of the year. The law must be amended to correct this injustice.
(Emphases supplied)
The increased purchasing power is estimated at about ₱9,500 a year.67 RR 10-2008,
however, takes this away. In declaring that once an MWE receives other forms of taxable
income like commissions, honoraria, and fringe benefits in excess of the non-taxable
statutory amount of ₱30,000, RR 10-2008 declared that the MWE immediately becomes
ineligible for tax exemption; and otherwise non-taxable minimum wage, along with the
other taxable incomes of the MWE, becomes taxable again.
Respondents acknowledge that R.A.9504 is a social legislation meant for social justice,68
but they insist that it is too generous, and that consideration must be given to the fiscal
position and financial capability of the government.69 While they acknowledge that the
intent of the income tax exemption of MWEs is to free low-income earners from the burden
of taxation, respondents, in the guise of clarification, proceed to redefine which incomes
may or may not be granted exemption. These respondents cannot do without encroaching
on purely legislative prerogatives.
By way of review, this ₱30,000 statutory ceiling on benefits has its beginning in 1994
under R. A. 7833, which amended then Section 28(b )(8) of the 1977 NIRC. It is
substantially carried over as Section 32(B) (Exclusion from Gross Income) of Chapter VI
(Computation of Gross Income) of Title II (Tax on Income) in the 1997 NIRC (R.A. 8424).
R.A. 9504 does not amend that provision of R.A. 8424, which reads:
SEC. 32. Gross Income.-
(A) General Definition.- x x x
(B) Exclusions from Gross Income.- The following items shall not be included in gross
income and shall be exempt from taxation under this title:
(1) x x x
xxxx
(7) Miscellaneous Items. -
(a) x x x
xxxx
(e) 13th Month Pay and Other Benefits.- Gross benefits received by officials and
employees of public and private entities: Provided, however, That the total exclusion
under this subparagraph shall not exceed Thirty thousand pesos (₱30,000) which shall
cover:
(i) Benefits received by officials and employees of the national and local government
pursuant to Republic Act No. 668670;
(ii) Benefits received by employees pursuant to Presidential Decree No. 85171, as
amended by Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential decree No.
851, as amended by Memorandum Order No. 28, dated August 13, 1986;and
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further,
That the ceiling of Thirty thousand pesos (₱30,000) may be increased through rules and
regulations issued by the Secretary of Finance, upon recommendation of the
Commissioner, after considering among others, the effect on the same of the inflation rate
at the end of the taxable year.
(f) x x x
The exemption granted to MWEs by R.A. 9504 reads:
Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall
be exempt from the payment of income tax on their taxable income: Provided, further,
That the holiday pay, overtime pay, night shift differential pay and hazard pay received
by such minimum wage earners shall likewise be exempt from income tax.
"Taxable income" is defined as follows:
SEC. 31. Taxable Income Defined.- The term taxable income means the pertinent items
of gross income specified in this Code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by this Code or other special
laws.
A careful reading of these provisions will show at least two distinct groups of items of
compensation. On one hand are those that are further exempted from tax by R.A. 9504;
on the other hand are items of compensation that R.A. 9504 does not amend and are
thus unchanged and in no need to be disturbed.
First are the different items of compensation subject to tax prior to R.A. 9504. These are
included in the pertinent items of gross income in Section 31. "Gross income" in Section
32 includes, among many other items, "compensation for services in whatever form paid,
including, but not limited to salaries, wages, commissions, and similar items." R.A. 9504
particularly exempts the minimum wage and its incidents; it does not provide exemption
for the many other forms of compensation.
Second are the other items of income that, prior to R.A. 9504, were excluded from gross
income and were therefore not subject to tax. Among these are other payments that
employees may receive from employers pursuant to their employer-employee
relationship, such as bonuses and other benefits. These are either mandated by law (such
as the 13th month pay) or granted upon the employer's prerogative or are pursuant to
collective bargaining agreements (as productivity incentives). These items were not
changed by R.A. 9504.
It becomes evident that the exemption on benefits granted by law in 1994 are now
extended to wages of the least paid workers under R.A. 9504. Benefits not beyond
₱30,000 were exempted; wages not beyond the SMW are now exempted as well.
Conversely, benefits in excess of ₱30,000 are subject to tax and now, wages in excess
of the SMW are still subject to tax.
What the legislature is exempting is the MWE's minimum wage and other forms statutory
compensation like holiday pay, overtime pay, night shift differential pay, and hazard pay.
These are not bonuses or other benefits; these are wages. Respondents seek to frustrate
this exemption granted by the legislature.
In respondents' view, anyone receiving 13th month pay and other benefits in excess of
₱30,000 cannot be an MWE. They seek to impose their own definition of "MWE" by
arguing thus:
It should be noted that the intent of the income tax exemption of MWEs is to free the lowincome earner from the burden of tax. R.A. No. 9504 and R.R. No. 10-2008 define who
are the low-income earners. Someone who earns beyond the incomes and benefits
above-enumerated is definitely not a low-income earner. 72
We do not agree.
As stated before, nothing to this effect can be read from R.A. 9504. The amendment is
silent on whether compensation-related benefits exceeding the ₱30,000 threshold would
make an MWE lose exemption. R.A. 9504 has given definite criteria for what constitutes
an MWE, and R.R. 10-2008 cannot change this.
An administrative agency may not enlarge, alter or restrict a provision of law. It cannot
add to the requirements provided by law. To do so constitutes lawmaking, which is
generally reserved for Congress. 73 In CIR v. Fortune Tobacco, 74 we applied the plain
meaning rule when the Commissioner of Internal Revenue ventured into unauthorized
administrative lawmaking:
[A]n administrative agency issuing regulations may not enlarge, alter or restrict the
provisions of the law it administers, and it cannot engraft additional requirements not
contemplated by the legislature. The Court emphasized that tax administrators are not
allowed to expand or contract the legislative mandate and that the "plain meaning rule"
or verba legis in statutory construction should be applied such that where the words of a
statute are clear, plain and free from ambiguity, it must be given its literal meaning and
applied without attempted interpretation.
As we have previously declared, rule-making power must be confined to details for
regulating the mode or proceedings in order to carry into effect the law as it has been
enacted, and it cannot be extended to amend or expand the statutory requirements or to
embrace matters not covered by the statute. Administrative regulations must always be
in harmony with the provisions of the law because any resulting discrepancy between the
two will always be resolved in favor of the basic law. 75 (Emphases supplied)
We are not persuaded that RR 10-2008 merely clarifies the law. The CIR' s clarification
is not warranted when the language of the law is plain and clear. 76
The deliberations of the Senate reflect its understanding of the outworking of this MWE
exemption in relation to the treatment of benefits, both those for the ₱30,000 threshold
and the de minimis benefits:
Senator Defensor Santiago. Thank you. Next question: How about employees who are
only receiving a minimum wage as base pay, but are earning significant amounts of
income from sales, commissions which may be even higher than their base pay? Is their
entire income from commissions also tax-free? Because strictly speaking, they are
minimum wage earners. For purposes of ascertaining entitlement to tax exemption, is the
basis only the base pay or should it be the aggregate compensation that is being received,
that is, inclusive of commissions, for example?
Senator Escudero. Mr. President, what is included would be only the base pay and, if any,
the hazard pay, holiday pay, overtime pay and night shift differential received by a
minimum wage earner. As far as commissions are concerned, only to the extent of
₱30,000 would be exempted. Anything in excess of ₱30,000 would already be taxable if
it is being received by way of commissions. Add to that de minimis benefits being received
by an employee, such as rice subsidy or clothing allowance or transportation allowance
would also be exempted; but they are exempted already under the existing law.
Senator Defensor Santiago. I would like to thank the sponsor. That makes it clear. 77
(Emphases supplied)
Given the foregoing, the treatment of bonuses and other benefits that an employee
receives from the employer in excess of the ₱30,000 ceiling cannot but be the same as
the prevailing treatment prior to R.A. 9504 - anything in excess of ₱30,000 is taxable; no
more, no less.
The treatment of this excess cannot operate to disenfranchise the MWE from enjoying
the exemption explicitly granted by R.A. 9504.
The government's argument that the
RR avoids a tax distortion has no
merit.
The government further contends that the "clarification" avoids a situation akin to wage
distortion and discourages tax evasion. They claim that MWE must be treated equally as
other individual compensation income earners "when their compensation does not
warrant exemption under R.A. No. 9504. Otherwise, there would be gross inequity
between and among individual income taxpayers."78 For illustrative purposes,
respondents present three scenarios:
37.1. In the first scenario, a minimum wage earner in the National Ca[ital Region receiving
₱382.00 per day has an annual salary of ₱119,566.00, while a non-minimum wage earner
with a basic pay of ₱385.00 per day has an annual salary of ₱120,505.00. The difference
in their annual salaries amounts to only ₱939.00, but the non-minimum wage earner is
liable for a tax of ₱8,601.00, while the minimum wage earner is tax-exempt?
37.2. In the second scenario, the minimum wage earner's "other benefits" exceed the
threshold of ₱30,000.00 by ₱20,000.00. The non-minimum wage earner is liable for
₱8,601.00, while the minimum wage earner is still tax-exempt.
37.3. In the third scenario, both workers earn "other benefits" at ₱50,000.00 more than
the ₱30,000 threshold. The non-minimum wage earner is liable for the tax of ₱l8,601.00,
while the minimum wage earner is still tax-exempt.79 (Underscoring in the original)
Again, respondents are venturing into policy-making, a function that properly belongs to
Congress. In British American Tobacco v. Camacho, we explained:80
We do not sit in judgment as a supra-legislature to decide, after a law is passed by
Congress, which state interest is superior over another, or which method is better suited
to achieve one, some or all of the state's interests, or what these interests should be in
the first place. This policy-determining power, by constitutional fiat, belongs to Congress
as it is its function to determine and balance these interests or choose which ones to
pursue. Time and again we have ruled that the judiciary does not settle policy issues. The
Court can only declare what the law is and not what the law should be. Under our system
of government, policy issues are within the domain of the political branches of government
and of the people themselves as the repository of all state power. Thus, the legislative
classification under the classification freeze provision, after having been shown to be
rationally related to achieve certain legitimate state interests and done in good faith, must,
perforce, end our inquiry.
Concededly, the finding that the assailed law seems to derogate, to a limited extent, one
of its avowed objectives (i.e. promoting fair competition among the players in the industry)
would suggest that, by Congress's own standards, the current excise tax system on sin
products is imperfect. But, certainly, we cannot declare a statute unconstitutional merely
because it can be improved or that it does not tend to achieve all of its stated objectives.
This is especially true for tax legislation which simultaneously addresses and impacts
multiple state interests. Absent a clear showing of breach of constitutional limitations,
Congress, owing to its vast experience and expertise in the field of taxation, must be given
sufficient leeway to formulate and experiment with different tax systems to address the
complex issues and problems related to tax administration. Whatever imperfections that
may occur, the same should be addressed to the democratic process to refine and evolve
a taxation system which ideally will achieve most, if not all, of the state's objectives.
In fine, petitioner may have valid reasons to disagree with the policy decision of Congress
and the method by which the latter sought to achieve the same. But its remedy is with
Congress and not this Court. (Emphases supplied and citations deleted)
Respondents cannot interfere with the wisdom of R.A. 9504. They must respect and
implement it as enacted.
Besides, the supposed undesirable "income distortion" has been addressed in the Senate
deliberations. The following exchange between Senators Santiago and Escudero reveals
the view that the distortion impacts only a few - taxpayers who are single and have no
dependents:
Senator Santiago.... It seems to me awkward that a person is earning just Pl above the
minimum wage is already taxable to the full extent simply because he is earning ₱l more
each day, or o more than P30 a month, or ₱350 per annum. Thus, a single individual
earning ₱362 daily in Metro Manila pays no tax but the same individual if he earns ₱363
a day will be subject to tax, under the proposed amended provisions, in the amount of
₱4,875 - I no longer took into account the deductions of SSS, e cetera- although that
worker is just ₱360 higher than the minimum wage.
xxxx
I repeat, I am raising respectfully the point that a person who is earning just Pl above the
minimum wage is already taxable to the full extent just for a mere Pl. May I please have
the Sponsor's comment. Senator Escudero...I fully subscribe and accept the analysis and
computation of the distinguished Senator, Mr. President, because this was the very
concern of this representation when we were discussing the bill. It will create wage
distortions up to the extent wherein a person is paying or rather receiving a salary which
is only higher by ₱6,000 approximately from that of a minimum wage earner. So anywhere
between P1 to approximately ₱6,000 higher, there will be a wage distortion, although
distortions disappears as the salary goes up.
However, Mr. President, as computed by the distinguished Senator, the distortion is only
made apparent if the taxpayer is single or is not married and has no dependents. Because
at two dependents, the distortion would already disappear; at three dependents, it would
not make a difference anymore because the exemption would already cover
approximately the wage distortion that would be created as far as individual or single
taxpayers are concerned.81 (Emphases in the original)
Indeed, there is a distortion, one that RR 10-2008 actually engenders. While respondents
insist that MWEs who are earning purely compensation income will lose their MWE
exemption the moment they receive benefits in excess of ₱30,000, RR 10-2008 does not
withdraw the MWE exemption from those who are earning other income outside of their
employer-employee relationship. Consider the following provisions of RR 10-2008:
Section 2.78.l (B):
(B) Exemptions from Withholding Tax on Compensation. -
The following income payments are exempted from the requirements of withholding tax
on compensation:
xxxx
(13) Compensation income of MWEs who work in the private sector and being paid the
Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage and Productivity
Board (RTWPB)/National Wages and Productivity Commission (NWPC), applicable to the
place where he/she is assigned.
xxxx
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided,
however, that an employee who receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of ₱30,000.00, taxable allowances and other taxable income other than the SMW,
holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the
privilege of being a MWE and, therefore, his/her entire earnings are not exempt from
income tax, and consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift
differential pay and hazard pay shall still be exempt from withholding tax.
xxxx
(14) Compensation income of employees in the public sector with compensation income
of not more than the SMW in the nonagricultural sector, as fixed by RTWPB/NWPC,
applicable to the place where he/she is assigned.
xxxx
Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE in the public sector shall likewise be covered by the above
exemption. Provided, however, that a public sector employee who receives additional
compensation such as commissions, honoraria, fringe benefits, benefits in excess of the
allowable statutory amount of ₱30,000.00, taxable allowances and other taxable income
other than the SMW, holiday pay, overtime pay, night shift differential pay and hazard pay
shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are
not exempt from income tax and, consequently, from withholding tax.
MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift
differential pay and hazard pay shall still be exempt from withholding tax.
These provisions of RR 10-2008 reveal a bias against those who are purely compensation
earners. In their consolidated comment, respondents reason:
Verily, the interpretation as to who is a minimum wage earner as petitioners advance will
open the opportunity for tax evasion by the mere expedient of pegging the salary or wage
of a worker at the minimum and reflecting a worker's other incomes as some other
benefits. This situation will not only encourage tax evasion, it will likewise discourage able
employers from paying salaries or wages higher than the statutory minimum. This should
never be countenanced. 82
Again, respondents are delving into policy-making they presume bad faith on the part of
the employers, and then shift the burden of this presumption and lay it on the backs of
the lowest paid workers. This presumption of bad faith does not even reflect pragmatic
reality. It must be remembered that a worker's holiday, overtime and night differential pays
are all based on the worker's regular wage. Thus, there will always be pressure from the
workers to increase, not decrease, their basic pay.
What is not acceptable is the blatant inequity between the treatment that RR 10-2008
gives to those who earn purely compensation income and that given to those who have
other sources of income. Respondents want to tax the MWEs who serve their employer
well and thus receive higher bonuses or performance incentives; but exempts the MWEs
who serve, in addition to their employer, their other business or professional interests.
We cannot sustain respondent’s position.
In sum, the proper interpretation of R.A. 9504 is that it imposes taxes only on the taxable
income received in excess of the minimum wage, but the MWEs will not lose their
exemption as such. Workers who receive the statutory minimum wage their basic pay
remain MWEs. The receipt of any other income during the year does not disqualify them
as MWEs. They remain MWEs, entitled to exemption as such, but the taxable income
they receive other than as MWEs may be subjected to appropriate taxes.
R.A. 9504 must be liberally construed.
We are mindful of the strict construction rule when it comes to the interpretation of tax
exemption laws. 83 The canon, however, is tempered by several exceptions, one of which
is when the taxpayer falls within the purview of the exemption by clear legislative intent.
In this situation, the rule of liberal interpretation applies in favor of the grantee and against
the government. 84
In this case, there is a clear legislative intent to exempt the minimum wage received by
an MWE who earns additional income on top of the minimum wage. As previously
discussed, this intent can be seen from both the law and the deliberations.
Accordingly, we see no reason why we should not liberally interpret R.A. 9504 in favor of
the taxpayers.
R.A. 9504 is a grant of tax relief long overdue.
We do not lose sight of the fact that R.A. 9504 is a tax relief that is long overdue.
Table 1 below shows the tax burden of an MWE over the years. We use as example one
who is a married individual without dependents and is working in the National Capital
Region (NCR). For illustration purposes, R.A. 9504 is applied as if the worker being paid
the statutory minimum wage is not tax exempt:
Table 1 -Tax Burden of MWE over the years
Law
Effective
NCR Minimum Daily Wage85
Taxable Income86
Tax Due
(Annual)
Tax Burden87
RA 716788
RA 749689
1992
WO 3 (1993 Dec)
₱135.00
₱24,255
₱1,343.05
3.2%
WO 5 (1997 May)
₱185.00
₱39,905
₱3,064.55
5.3%
RA 842490
(1997 NIRC)
1998
WO 6 (1998 Feb)
₱198.00
₱29,974
₱2,497.40
40.%
WO 13 (2007 Aug)
₱362.00
₱81,306
₱10,761.20
9.5%
WO 14 (2008 June)
₱382.00
₱87,566
₱12,013.20
10.0%
RA 950491
2008
WO 14 (2008 Aug)
₱382.00
₱69,566
₱8,434.90
7.1%
WO 20 (2016 June)
₱491.00
₱103,683
₱15,236.60
9.9%
As shown on Table 1, we note that in 1992, the tax burden upon an MWE was just about
3.2%, when Congress passed R.A. 7167, which increased the personal exemptions for a
married individual without dependents from ₱12,000 to ₱18,000; and R.A. 7496, which
revised the table of graduated tax rates (tax table).
Over the years, as the minimum wage increased, the tax burden of the MWE likewise
increased. In 1997, the MWE's tax burden was about 5.3%. When R.A. 8424 became
effective in 1998, some relief in the MWE's tax burden was seen as it was reduced to
4.0%. This was mostly due to the increase in personal exemptions, which were increased
from ₱18,000 to ₱32,000 for a married individual without dependents. It may be noted
that while the tax table was revised, a closer scrutiny of Table 3 below would show that
the rates actually increased for those who were earning less.
As the minimum wage continued to increase, the MWE's tax burden likewise did - by
August 2007, it was 9.5%. This means that in 2007, of the ₱362 minimum wage, the
MWE's take-home pay was only ₱327.62, after a tax of ₱34.38.
This scenario does not augur well for the wage earners. Over the years, even with the
occasional increase in the basic personal and additional exemptions, the contribution the
government exacts from its MWEs continues to increase as a portion of their income. This
is a serious social issue, which R.A. 9504 partly addresses. With the ₱20 increase in
minimum wage from ₱362 to ₱382 in 2008, the tax due thereon would be about ₱30. As
seen in their deliberations, the lawmakers wanted all of this amount to become additional
take-home pay for the MWEs in 2008.92
The foregoing demonstrates the effect of inflation. When tax tables do not get adjusted,
inflation has a profound impact in terms of tax burden. "Bracket creep," "the process by
which inflation pushes individuals into higher tax brackets,"93 occurs, and its deleterious
results may be explained as follows:
[A]n individual whose dollar income increases from one year to the next might be obliged
to pay tax at a higher marginal rate (say 25% instead of 15%) on the increase, this being
a natural consequence of rate progression. If, however, due to inflation the benefit of the
increase is wiped out by a corresponding increase in the cost of living, the effect would
be a heavier tax burden with no real improvement in the taxpayer's economic position.
Wage and salary-earners are especially vulnerable. Even if a worker gets a raise in wages
this year, the raise will be illusory if the prices of consumer goods rise in the same
proportion. If her marginal tax rate also increased, the result would actually be a decrease
in the taxpayer's real disposable income.94
Table 2 shows how MWEs get pushed to higher tax brackets with higher tax rates due
only to the periodic increases in the minimum wage. This unfortunate development
illustrates how "bracket creep" comes about and how inflation alone increases their tax
burden:
Table 2
Law
Effective
NCR Minimum Daily Wage95
Highest Applicable Tax Rate (Bracket Creep)
Tax Due (Annual)
Tax Burden96
RA 716797
1992
WO 3 (1993 Dec)
₱135.00
11%
₱1,343.05
3.2%
RA 749698
WO 5 (1997 May)
₱185.00
11%
₱3,064.55
5.3%
RA 842499
(1997 NIRC)
1998
WO 6 (1998 Feb)
₱198.00
10%
₱2,497.40
4.0%
WO 13 (2007 Aug)
₱362.00
20%
₱10,761.20
9.5%
WO 14 (2008 June)
₱382.00
20%
₱12,013.20
10.0%
RA 9504100
2008
WO 14 (2008 Aug)
₱382.00
15%
₱8,434.90
7.1%
WO 20 (2016 June)
₱491.00
20%
₱15,236.60
9.9%
The overall effect is the diminution, if not elimination, of the progressivity of the rate
structure under the present Tax Code. We emphasize that the graduated tax rate
schedule for individual taxpayers, which takes into account the ability to pay, is intended
to breathe life into the constitutional requirement of equity. 101
R.A. 9504 provides relief by declaring that an MWE, one who is paid the statutory
minimum wage (SMW), is exempt from tax on that income, as well as on the associated
statutory payments for hazardous, holiday, overtime and night work.
R.R. 10-2008, however, unjustly removes this tax relief. While R.A. 9504 grants MWEs
zero tax rights from the beginning or for the whole year 2008, RR 10-2008 declares that
certain workers - even if they are being paid the SMW, "shall not enjoy the privilege."
Following RR10-2008's "disqualification" injunction, the MWE will continue to be pushed
towards the higher tax brackets and higher rates. As Table 2 shows, as of June 2016, an
MWE would already belong to the 4th highest tax bracket of 20% (see also Table 3),
resulting in a tax burden of 9.9%. This means that for every ₱100 the MWE earns, the
government takes back ₱9.90.
Further, a comparative view of the tax tables over the years (Table 3) shows that while
the highest tax rate was reduced from as high as 70% under the 1977 NTRC, to 35% in
1992, and 32% presently, the lower income group actually gets charged higher taxes.
Before R.A. 8424, one who had taxable income of less than ₱2,500 did not have to pay
any income tax; under R.A. 8424, he paid 5% thereof. The MWEs now pay 20% or even
more, depending on the other benefits they receive including overtime, holiday, night shift,
and hazard pays.
Table 3 – Tax Tables: Comparison of Tax Brackets and Rates
Taxable Income Bracket
Rates under R. A. 7496 (1992)
Rates under R. A. 8424 (1998)
Rates under R. A. 9504 (2008)
Not Over ₱2,500
0%
5%
5%
Over ₱2,500 but not over ₱5,000
1%
Over ₱5,000 but not over ₱10,000
3%
Over ₱10,000 but not over ₱20,000
7%
10%
10%
Over ₱20,000 but not over ₱30,000
11%
Over ₱30,000 but not over ₱40,000
15%
15%
Over ₱40,000 but not over ₱60,000
15%
Over ₱60,000 but not over ₱70,000
19%
Over ₱70,000 but not over ₱100,000
20%
20%
Over ₱100,000 but not over ₱140,000
24%
Over ₱140,000 but not over ₱250,000
25%
25%
Over ₱250,000 but not over ₱500,000
29%
30%
30%
Over ₱500,00
35%
34%
32%
The relief afforded by R.A.9504 is thus long overdue. The law must be now given full
effect for the entire taxable year 2008, and without the qualification introduced by RR 102008. The latter cannot disqualify MWEs from exemption from taxes on SMW and on their
on his SMW, holiday, overtime, night shift differential, and hazard pay.
CONCLUSION
The foregoing considered, we find that respondents committed grave abuse of discretion
in promulgating Sections 1 and 3 of RR 10-2008, insofar as they provide for (a) the
prorated application of the personal and additional exemptions for taxable year 2008 and
for the period of applicability of the MWE exemption for taxable year 2008 to begin only
on 6 July 2008; and (b) the disqualification of MWEs who earn purely compensation
income, whether in the private or public sector, from the privilege of availing themselves
of the MWE exemption in case they receive compensation-related benefits exceeding the
statutory ceiling of ₱30,000.
As an aside, we stress that the progressivity of the rate structure under the present Tax
Code has lost its strength. In the main, it has not been updated since its revision in 1997,
or for a period of almost 20 years. The phenomenon of "bracket creep" could be prevented
through the inclusion of an indexation provision, in which the graduated tax rates are
adjusted periodically without need of amending the tax law. The 1997 Tax Code, however,
has no such indexation provision. It should be emphasized that indexation to inflation is
now a standard feature of a modern tax code. 102
We note, however, that R.A. 8424 imposes upon respondent Secretary of Finance and
Commissioner of Internal Revenue the positive duty to periodically review the other
benefits, in consideration of the effect of inflation thereon, as provided under Section
32(B)(7)(e) entitled" 13th Month Pay and Other Benefits":
(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further,
That the ceiling of Thirty thousand pesos (₱30,000) may be increased through rules and
regulations issued by the Secretary of Finance, upon recommendation of the
Commissioner, after considering among others, the effect on the same of the inflation rate
at the end of the taxable year.
This same positive duty, which is also imposed upon the same officials regarding the de
minimis benefits provided under Section 33(C)(4), is a duty that has been exercised
several times. The provision reads:
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this
Section:
(l) x x x
xxxx
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner.
WHEREFORE, the Court resolves to
(a) GRANT the Petitions for Certiorari, Prohibition, and Mandamus; and
(b) DECLARE NULL and VOID the following provisions of Revenue Regulations No. 102008:
(i) Sections 1 and 3, insofar as they disqualify MWEs who earn purely compensation
income from the privilege of the MWE exemption in case they receive bonuses and other
compensation-related benefits exceeding the statutory ceiling of ₱30,000;
(ii) Section 3 insofar as it provides for the prorated application of the personal and
additional exemptions under R.A. 9504 for taxable year 2008, and for the period of
applicability of the MWE exemption to begin only on 6 July 2008.
(c) DIRECT respondents Secretary of Finance and Commissioner of Internal Revenue to
grant a refund, or allow the application of the refund by way of withholding tax
adjustments, or allow a claim for tax credits by (i) all individual taxpayers whose incomes
for taxable year 2008 were the subject of the prorated increase in personal and additional
tax exemption; and (ii) all MWEs whose minimum wage incomes were subjected to tax
for their receipt of the 13th month pay and other bonuses and benefits exceeding the
threshold amount under Section 32(B)(7)(e) of the 1997 Tax Code.
SO ORDERED.