PLDT VS. CIR

Petitioner PLDT claiming that it terminated in 1995 the employment of several rank and file, supervisory and executive employees dues to redundancy.  In compliance with labor law requirements, it paid those separated employees separation pay and other benefits, and that as employer and withholding agent, it deducted from the separation pay withholding taxes which was remitted to BIR.

Petitioner filed with BIR a claim of tax credit or refund invoking sec. 28(b)(7)(B) of NIRC which excluded from gross income any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from service of the employer due to death, sickness or other physical ability or for any cause beyond the control of the said official or employer.

CTA denied PLDT claim on the ground that it failed to sufficiently prove that the terminated employees received separation pay and that taxes were withheld therefrom or remitted to the BIR.

ISSUE: WON the withholding taxes, which petitioner remitted to the BIR, should be refunded for having been erroneously withheld and paid to the later?

HELD:
PLDT failed to establish that the redundant employees actually received separation ay and it withheld taxes therefrom and remitted the same to the BIR.

A taxpayer must do two (2) things to be able to be able to successfully make a claim for the tax refund:
1.  Declare the income payment it received as part of its gross income.
2.  Establish the fact of withholding.

On this score, the relevant revenue regulations provides as follows:
Sec. 10. Claims for tax credit or refund -  claims for tax credit or refund of income tax deducted and withheld on income payments shall be given due course only when it is shown on the return that the income payment received was declared as part of the gross income and the fact of withholding is established by a copy of the statement duly issued by the payer to the payee showing the amount paid and the amount of tax withheld therefrom.

HENDERSON VS. CIR

The spouses Arthur Henderson and Marie Henderson filed with BIR returns of annual net income for the years 1948-1952.  Henderson's received notice of assessment from BIR, subsequently, paid the assessment.  BIR reassessed the taxpayers income for the year 1948-1952 and demanded payment of the deficiency taxes.

In the assessments, BIR considered as part of their taxable income the taxpayers-husband allowances for rental, residential expenses, subsistence, water, electricity and telephone; bonus paid to him; withholding tax and entrance fee to Marikina Gun and Country Club paid by his employer for his account; and travelling allowance of his wife.

Taxpayer claim that taxpayer-husband allowances for the rental and utilities did not receive the money but that they lived in the said apartment furnished and paid by his employer for its convenience.  As to the entrance fee to the Marikina Gun and Country Club paid by his employer and should not be considered as part of their income as with the wife-taxpayer travelling allowance.

ISSUE: WON the allowance for rental of the apartment furnished by the husband-taxpayers employer-corporation, including utilities and the allowance for travel expenses given by his employer-corporation to his wife in 1952 part of the taxable income?

HELD:
Bills for rentals and utilities were paid directly by the employer-corporation to the creditors.  CTA held that taxpayers are entitled only to ratable value of the allowance in question, and the reasonable amount they would have spend for house rentals and utilities such as light, water, telephone should be the amount subject to tax and the excess considered as expense of the corporation.

The taxpayer claim is supported by evidence.  Loberiza ( Head of Accounting department of the American Int'l underwriters...)  testified that rentals, utilities, water, phone, and electric bills of executive of the corporation were entered in the books of account as 'subsistence allowance and expenses; that there was a separate account for salaries and wages of employees.

The manager's residential expenses in 1948 should be treated as rentals for apartments and utilities and should not form part of the ratable value subject to tax.

NDC vs. CIR

The NDC entered into contract in Tokyo with several Japanese shipbuilding companies for the construction of its 12 ocean-going vessels.  The purchase price was to come from the proceeds of bonds issued by the Central Bank.  Initial payments were made in cash and through irrevocable letter of credit.  Fourteen (14) promissory notes were signed for the balance by the NDC guaranteed by Republic of the Philippines.

Pursuant thereto, the remaining payments and the interest thereon were remitted in due time by the NDC to Tokyo.  The NDC remitted to the ship builders in Tokyo the total amount of US$4,066,580 as interest on the balance of the purchase price.  No tax was withheld.

The Commissioner then held the NDC liable on such tax in the total sum of PhP5,115,234.74.  The BIR thereupon served on the NDC a warrant of distraint and levy to enforcce collection of the claimed amount.

Petitioner argues that the Japanese ship builders were not subject to tax under the sec. 37 of the Tax Code because all the related activities- the signing of the contract, the construction of the vessels, the payment of the stipulated price, and their delivery to the NDC - were done in Tokyo.

ISSUE: WON the Tokyo shipbuilders are subject to tax?

HELD:
  The law specifies: interest derived from sources within the Philippines, and interest on bonds, notes, or other interest-bearing obligation of resident, corporate or otherwise.  Nothing there speak of the 'acts or activity' of non-residential corporation in the Philippines, or place where the contract is signed.

The residence of the obligor who pays the interest rather than the physical location of the securities, bonds or notes or the place of payment, is the determining factor of the source of interest income.  Accordingly, if the obligor is a resident of the Philippines the interest payment paid by him can have no other source than within the Philippines.  The interest is paid not by the bond note or other interest-bearing obligations, but by the obligor.

CIR vs. Smart Communication

Smart Communication (Smart for brevity), is a domestic corporation and duly registered with the Board of Investment.

Respondent Smart entered into three agreements for Programming and Consultancy Services with PRISM Transactive, a non-resident corporation duly organized and existing under the law of Malaysia.  Under the agreement, PRISM was to provide programming and consultancy service for the installation of SDM and CM, for the implementation of SIM.

PRISM billed respondent of US$547822.45 and respondent withheld the 25% royalty tax of US$136,955.61.

Respondent filed a claim of refund with the BIR of the amount PhP7,008,840.  Respondent claim that it is entitled to a refund because the payment made to PRISM are not royalties but business profits pursuant to the definition of royalties under the RP-Malaysia Tax Treaty.

ISSUE: WON the payment made to PRISM constitite "business profits" or royalties?

HELD:

SDM Agreement read, "The SDM shall be installed by PRISM, inlcuding the SDM libraries, the Intellectual Property Right (IPR) of which shall be retained by PRISM.

SIM agreement provides, " The client shall own the IPR for the specification and the source code for the SIM application.

PRISM has intellectual property right over the SDMprogram, but not over the CM and SIM application programs as the proprietary rights of these programs belong to respondent.  In other words, out of the payments made to PRISM, only the payment for the SDM program is a royalty subject to a 25% withholding tax.

A refund of the erroneously withheld royalty taxes for the payments pertaining to the CM and SIM application agreement is therefore in order.

Commissioner vs. Tours Specialist

Tours specialist had derived income from its activities as a travel agency servicing the need of foreign tourists and travelers and Filipino during their stay in the country.

In order to ably supply these services to the foreign tourists, Tour specialist and its counterpart tourist agencies abroad have agreed to offer a package fee for the tourists.  Although the fee to be paid by said tourist is quoted by the petitioner, the payment of the hotel accommodations food and other personal expenses, as a rule, are paid directly either by tourists themselves or by their foreign travel agencies to the local hotels.

In some cases the foreign agencies request local tour agencies such as respondent that the hotel room charges be paid through them.  By this arrangement, the foreign tour agency entrust to respondent the fund for hotel room accommodation, which in turn is paid by respondent tour agency to the local hotel when billed because room charge is exempt from tax under PD 31.

Petitioner CIR assessed respondent for deficiency of 3% contractor's tax as independent contractor by including the entrusted hotel charges in its gross receipt from services for the year 1974 to 1976.  Respondent formally protested the assessment made by CIR on the ground that the hotel room charges were not considered and have never been considered by it as part of its taxable gross receipt for purposes of computing and paying its contractor's tax.

ISSUE:
WON the amount received by a local tourist and travel agency included in a package fee from tourist or foreign tour agencies, intended or earmarked for hotel accommodation form part of gross recipt subject to 3% contractor's tax?

Held:

NO.  Money entrusted to Tour Specialist, earmarked and paid for hotel room charges does not form part of its gross receipt subject to the 3% independent contractor's tax under NIRC.

GROSS RECEIPT do not include monies or receipt entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; it is not necessary that there must be a law or regulation which would exempt such monies or receipt within the meaning of gross receipts under the Tax Code.

If the hotel room charges entrusted to petitioner will be subject to 3% contractor's tax as what CIR would want to do in this case, that would in effect do indirectly what PD 31 would not like hotel room charges of foreign tourist to be subject to hotel room tax.

Javier vs CA

Javier vs CA, GR No L-78953, January 22, 1990

Victoria Javier, wife of the private respondent received from Prudential bank and Trust Company the amount of USD 999,973.70 remitted by her sister, Mrs. Dolores Vertosa, through some banks in the US, among which is Mellon Bank,NA.

Mellon Bank filed a complaint against private respondent, his wife and other defendants, claiming that its remittance of US$1M was a clerical error and should have been US$1,000. On the ground that the defendants are trustees of an implied trust for the benefit of Mellon Bank with the clear, immediate and continuing duty to return the said amount from the moment it was received.

Private respondent filed his income tax return for the taxable year 1977 showing a gross income of PhP 53,053.38 and a net income of PhP 48.053.88 and stating in the footnote of the return that “Taxpayer was a recipient of some money received from abroad which he presumed to be a gift but turned out to be an error and is now subject to litigation.”

Private respondent wrote the BIR that he was paying the deficiency income assessment for the year 1976 but denying that he had any undeclared income for the year 1977 and requested that the assessment for 1977 be made to wait final court decision on the case filed against him for filing an allegedly fraudulent return.

CIR reply stating that the amount of Mellon Bank erroneous remittance which were depose is definitely taxable.  The Commission also imposed a 50% fraud penalty against Javier.

ISSUE: WON private respondent is liable for the 50% fraud?

HELD:

Under Sec 72 of the Tax Code, a taxpayer who files a false return is liable to pay a fraud penalty of 50% of the tax due from him of the deficiency tax in case payment has been made on the basis of the return filed before the discovery of the falsity or fraud. The fraud contemplated by law is actual and not constructive.

In the case at bar, there was no actual and intentional fraud through willful and deliberate misleading of the government agency concerned, the BIR.  The government was not induced to give up some legal right and place itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax liabilities because Javier did not conceal anything.  Error or mistake of law is not fraud.

The imposition of the fraud penalty in this case is not justifies by the extant facts because he did not conceal the facts that he received an amount of money although it was a subject of litigation.

As ruled by respondent CTA, the 50% surcharge imposed as fraud penalty by the petitioner against the private respondent in the deficiency assessment should be deleted.

Plaridel Surety Co vs. Collector

Plaridel Surety Co vs. Collector, GR No L-21520, Dec. 11, 1967

Petitioner Plaridel Surety is a domestic corporation engaged in the bonding business.

Petitioner surety and Constancio San Jose (principal), solidarily executed a performance bond in favor of the PL Galang Machinery to secure the performance of San Jose contractual obligation to produce and supply logs. To afford itself adequate protection against loss or damages on the performance, petitioner required San Jose and Ramon Cuervo to execute an indemnity agreement obligating themselves, solidarity to indemnify petitioner for whatever liability it may incur by reason of said performance bond. San Jose constituted a chattel mortgage on logging machineries and other movables in petitioners favor while Ramon Cuervo executed a real estate mortgage.

San Jose failed to deliver the logs to Galang Machinery and sued on the performance bond.  The lower court directed San Jose and Cuervo to reimburse petitioner for whatever amount it would pay Galang Machinery.

Petitioner in his income tax claimed that the amount P44,490 as deductible loss from its gross income.

CIR disallowed the claimed deductions and assessed against petitioner the sum P8,898, plus interest, as deficiency income tax for the year 1957.

ISSUE: WON petitioner can claim P44,490 as a deductible loss from its gross income.

Held:

NO

Petitioner was duly compensated for otherwise than by insurance- thru the mortgage in its favor executed by San Jose and Cuervo and it had not yet exhausted all its available remedies, especially as against Cuervo to minimize its loss.

LOSS is deductible only in the taxable year it actually happens or is sustained.  However, if it is compensable by insurance or otherwise deductions for the loss suffered is postponed to a subsequent year, with, to be precise, is that year in which it appears that no compensation at all can be had, on that there is a remaining or net loss.

City Lumber vs. Domingo and CTA

City Lumber vs. Domingo and CTA, GR. No. L-18611, January 30,1964

Petitioner seek the review of CTA decision, upholding an assessment by respondent on an additional income of P16, 678 representing minor deductions from the alleged expenses, on undisclosed sales of plywood, nails and GI sheets and on a cash credit balance.

Petitioner claim the plywood and GI sheet were lost in a fire and the credit cash balance as a loan secured by petitioner.

Issue: WON petitioner can claim deductions on his expenses/loss?

Held:

NO

The lower court rejected the alleged loss of plywood because said loss was never reported in the books of petitioner, and neither was such loss reported in the ITR of petitioner for that year. Neither were any receipt or other evidence reduced to show that said amount was a loan secured by petitioner or that loan was never secured.

CIR vs Mitsubishi

CIR vs Mitsubishi, GR No L-54908, January 22, 1990

Atlas Consolidated Mining and Dev Corp (Atlas) entered into a loan and sales contract with Mitsubishi, a Japanese corp licenses to engage in business in the Phils., for purposes of the projected expansion of the productive capacity of Atlas.

Mitsubishi agreed to extend a loan to Atlas for the installation of a new concentrator for copper production and Atlas to sell to Mitsubishi all the copper concentrates produced for 15 years.

Mitsubishi applied for a loan with Export-Import Bank of Japan (Eximbank) for purpose of its obligation under said contract. Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by Atlas to Mitsubishi for the years 1974-75.  The corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld pursuant to sec. 24(b)(1) and sec. 53 (b)(2) of NIRC, as amended by PD 131, and duly remitted to the government.

Private respondent filed a claim for the tax credit requesting the sum of P1,971,595.01 be applied against their existing and future tax liabilities. It was later noted by respondent CTA that Mitsubishi executed a waiver and disclaimer of its interest in the claim for tax credit in favor of Atlas.

Mitsubishi filed a petition for review with respondent court on the ground that Mitsubishi was a mere agent of Eximbank, which is a financing institution owned, controlled and financed by the Japanese Government.  Such government status of Eximbank, if it may be so called, is the basis for private respondents claim for exemption from paying the tax on the interest payment on the loan. It was further claimed that the interest payments on the loan from the consortium of Japanese banks were likewise exempt because loan supposedly came from or were fniancé by Eximbank.  Relying on the provision of sec. 29(b)(7)(A) NIRC.

CTA promulgated its decision ordering petitioner to grant a tax credit in favor of Atlas and the court declared that all papers and documents pertaining to the loan obtained by Mitsubishi from Eximbank shows that this was the same amount given to Atlas. It also observed that the money for the loan from the consortium of private Japanese banks originated from Eximbank.  From these, respondent court concluded that the ultimate creditor of Atlas was Eximbank.  Mitsubishi was acting as a mere “arranger or conduit through which the loan flowed from the creditor Eximbank to the debtor Atlas.

ISSUE: 1) WON the interest income from the loan extended to Atlas by Mitsubishi is excludible from gross income taxation pursuant to sec. 29(b)(7)(A), NIRC and therefore, exempt from withholding tax.

       

            2) WON Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose investment in the Phils. On loans are exempt from taxes.

HELD:

1)    NO

The signatories on the loans and sales contract were Mitsubishi and Atlas, nowhere in the contract can it be inferred that Mitsubishi acted for and behalf of Eximbank of Japan nor of any entity, private or public, for that matter.  When Mitsubishi obtained the loan of USD 20M from Eximbank of Japan said amount ceased to be the property of the bank and become property of Mitsubishi. 

Mitsubishi and not Eximbank is the sole creditor of Atlas, the former being the owner of the USD 20M upon completion of its loan contract with Eximbank of Japan.  The interest income of the loan paid by Atlas to Mitsubishi is therefore entirely different from the interest income paid by Mitsubishi to Eximbank of Japan.  What was the subject of the 15% withholding tax is not the interest income paid by Mitsubishi to Eximbank, but the interest income earned by Mitsubishi from the loan to Atlas.

2)    NO

When Mitsubishi secured the loan, it was in its own independent capacity as a private entity and not as a conduit of the consortium of Japanese banks or the Eximbank of Japan.  While loans were secured by Mitsubishi primarily “as a loan to and in consideration for importing copper concentrates from Atlas, the fact remains that it was a loan by Eximbank of Japan to Mitsubishi and not to Atlas.

China Banking Corporation vs. CA

[G.R. No. 125508. July 19, 2000]

CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Petitioner China Banking Corp made an equity investment in the First CBC Capital, a HongKong subsidiary engaged in financing and investment with “deposit-taking” function.

A regular examination by Bangko Sentral on petitioner financial book and investment portfolio shows that First CBC Capital has become insolvent. With approval of Bangko Sentral, petitioner wrote off as being worthless in its investment in First CBC in its 1987 Income Tax Return and treated it as a bad debt or as an ordinary loss deductible from its gross income.  Respondent CIR disallowed the deduction and assessed petitioner for income deficiency, inclusive of surcharge, interest and compromise penalty.

Issue: WON petitioner is allowed to claim for the deductions?

Held:

NO.

The disallowance of the deduction was made on the ground that the investment should not be classified as being “worthless” and that, although the HongKong Banking Commissioner had revoked the license of First CBC Capital as a “deposit-taking company” it can still exercise its financing investments.  Also, it should be classifies as capital loss and not as a bad debts expense there being no indebtedness to speak petitioner and its subsidiary.

Madrigal vs. Rafferty

G.R. No. L-12287            August 7, 1918

VICENTE MADRIGAL and his wife, SUSANA PATERNO, plaintiffs-appellants, 
vs.
JAMES J. RAFFERTY, Collector of Internal Revenue, and VENANCIO CONCEPCION, Deputy Collector of Internal Revenue, defendants-appellees.

Vicente Madrigal and Susana Paterno were legally married and have conjugal partnership.

Madrigal filed his total net income for the year is P296,302.73.

Subsequently, Madrigal submitted the claim that the said total net income of year 1914 did not represent his income for the year 1914, but was in fact the income of the conjugal partnership existing between himself and his wife, and the computing and assessing the additional income tax provided by the Act of Congress of Oct. 3, 1913, the income declared by Madrigal and the other half of Paterno.

Madrigal and Paterno brought action against Collector of Internal Revenue and the Deputy Collector of Internal Revenue for the recovery of the sum P3,786.08.

The burden of the complaint was that if the income tax for the year 1914 had been correctly and lawfully computed there would have been due payable by each of the plaintiff the sum of P2,921.09, which taken together amount of P5842.18 instead of P9,668.21.

Issue: WON the additional income tax should be divided into equal parts because of the conjugal partnership existing between them?

Held:

NO.

Paterno has an inchoate right in the property of her husband Madrigal during the lifetime of the conjugal property.  She has an interest in the ultimate ownership of property acquired as income of the conjugal partnership. Not being seized of the separate estate, Paterno cannot make a separate return in order to receive the benefit of the exemption which would arise by reason of the additional tax.  As she has no estate or income, actually and legally vested in her and entirely distinct from her husband property, the income cannot properly be considered the separate income of the wife for the purpose of the additional tax.  The income tax law does not look on the spouses as individual partners in an ordinary partnership.

The higher schedules of the additional tax directed at the incomes of the wealthy may not be partially defeated by reliance on provisions in our Civil Code dealing with the conjugal partnership and having no application to the Income Tax Law.

SANTOS VS PEOPLE OF THE PHILIPPINES and BUREAU OF INTERNAL REVENUE

G.R. No. 173176
JUDY ANNE L. SANTOS, Petitioner,
Vs.
PEOPLE OF THE PHILIPPINESand BUREAU OF INTERNAL REVENUE,    Respondents

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court filed by petitioner Judy Anne L. Santos (Santos) seeking the reversal and setting aside of the Resolution, dated 19 June 2006, of the Court of Tax Appeals (CTA) en banc in C.T.A. EB. CRIM. No. 001 which denied petitioner’s Motion for Extension of Time to File Petition for Review.  Petitioner intended to file the Petition for Review with the CTA en banc to appeal the Resolutions dated 23 February 2006 and 11 May 2006 of the CTA First Division in C.T.A. Crim. Case No. 0-012 denying, respectively, her Motion to Quash the Information filed against her for violation of Section 255, in relation to Sections 254 and 248(B) of the National Internal Revenue Code (NIRC), as amended; and her Motion for Reconsideration.

On 19 May 2005, then Bureau of Internal Revenue (BIR) Commissioner Guillermo L. Parayno, Jr. wrote to the Department of Justice (DOJ) Secretary Raul M. Gonzales a letter regarding the possible filing of criminal charges against petitioner.  BIR Commissioner Parayno began his letter with the following statement:

I have the honor to refer to you for preliminary investigation and filing of an information in court if evidence so warrants, the herein attached Joint Affidavit of RODERICK C. ABAD, STIMSON P. CUREG, VILMA V. CARONAN, RHODORA L. DELOS REYES under Group Supervisor TEODORA V. PURINO, of the National Investigation Division, BIR National Office Building, BIR Road, Diliman, Quezon City, recommending the criminal prosecution of MS. JUDY ANNE LUMAGUI SANTOS for substantial underdeclaration of income, which constitutes as prima facie evidence of false or fraudulent return under Section 248(B) of the NIRC and punishable under Sections 254 and 255 of the Tax Code.

In said letter, BIR Commissioner Parayno summarized the findings of the investigating BIR officers that petitioner, in her Annual Income Tax Return for taxable year 2002 filed with the BIR, declared an income of P8,033,332.70 derived from her talent fees solely from ABS-CBN;  initial documents gathered from the BIR offices and those given by petitioner’s accountant and third parties, however, confirmed that petitioner received in 2002 income in the amount of at least P14,796,234.70, not only from ABS-CBN, but also from other sources, such as movies and product endorsements; the estimated tax liability arising from petitioner’s under declaration amounted to P1,718,925.52, including incremental penalties; the non-declaration by petitioner of an amount equivalent to at least 84.18% of the income declared in her return was considered a substantial under declaration of income, which constituted prima facie evidence of false or fraudulent return under Section 248(B) of the NIRC, as amended; and petitioner’s failure to account as part of her income the professional fees she received from sources other than ABS-CBN and her under declaration of the income she received from ABS-CBN amounted to manifest violations of Sections 254 and 255, as well as Section 248(B) of the NIRC, as amended.

As regards petitioner’s second ground in her intended Petition for Review with the CTA en banc, she asserts that she has been denied due process and equal protection of the laws when similar charges for violation of the NIRC, as amended, against Regina Encarnacion A. Velasquez (Velasquez) were dismissed by the DOJ in its Resolution dated 10 August 2005 in I.S. No. 2005-330 for the reason that Velasquez’s tax liability was not yet fully determined when the charges were filed.

Issue: WON petitioner was denied of equal protection of law.

Held:

Petitioner cannot claim denial of due process when she was given the opportunity to file her affidavits and other pleadings and submit evidence before the DOJ during the preliminary investigation of her case and before the Information was filed against her.  Due process is merely an opportunity to be heard.  In addition, preliminary investigation conducted by the DOJ is merely inquisitorial.  It is not a trial of the case on the merits.  Its sole purpose is to determine whether a crime has been committed and whether the respondent therein is probably guilty of the crime.  It is not the occasion for the full and exhaustive display of the parties’ evidence.  Hence, if the investigating prosecutor is already satisfied that he can reasonably determine the existence of probable cause based on the parties’ evidence thus presented, he may terminate the proceedings and resolve the case.

The equal protection clause exists to prevent undue favor or privilege. It is intended to eliminate discrimination and oppression based on inequality. Recognizing the existence of real differences among men, the equal protection clause does not demand absolute equality.  It merely requires that all persons shall be treated alike, under like circumstances and conditions, both as to the privileges conferred and liabilities enforced.

Petitioner was not able to duly establish to the satisfaction of this Court that she and Velasquez were indeed similarly situated, i.e., that they committed identical acts for which they were charged with the violation of the same provisions of the NIRC; and that they presented similar arguments and evidence in their defense - yet, they were treated differently.

LUTZ VS ARANETA

G.R. No. L-7859        December 22, 1955

WALTER LUTZ, as Judicial Administrator of the Intestate Estate of the deceased Antonio Jayme Ledesma, plaintiff-appellant,
vs.
J. ANTONIO ARANETA, as the Collector of Internal Revenue,

This case was initiated in the Court of First Instance of Negros Occidental to test the legality of the taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act.
Promulgated in 1940, the law in question opens (section 1) with a declaration of emergency, due to the threat to our industry by the imminent imposition of export taxes upon sugar as provided in the Tydings-McDuffe Act, and the "eventual loss of its preferential position in the United States market"; wherefore, the national policy was expressed "to obtain a readjustment of the benefits derived from the sugar industry by the component elements thereof" and "to stabilize the sugar industry so as to prepare it for the eventuality of the loss of its preferential position in the United States market and the imposition of the export taxes."

In section 2, Commonwealth Act 567 provides for an increase of the existing tax on the manufacture of sugar, on a graduated basis, on each picul of sugar manufactured; while section 3 levies on owners or persons in control of lands devoted to the cultivation of sugar cane and ceded to others for a consideration, on lease or otherwise — a tax equivalent to the difference between the money value of the rental or consideration collected and the amount representing 12 per centum of the assessed value of such land.

Plaintiff, Walter Lutz, in his capacity as Judicial Administrator of the Intestate Estate of Antonio Jayme Ledesma, seeks to recover from the Collector of Internal Revenue the sum of P14,666.40 paid by the estate as taxes, under section 3 of the Act, for the crop years 1948-1949 and 1949-1950; alleging that such tax is unconstitutional and void, being levied for the aid and support of the sugar industry exclusively, which in plaintiff's opinion is not a public purpose for which a tax may be constitutionally levied.

Issue: WON  taxes imposed by Commonwealth Act No. 567, otherwise known as the Sugar Adjustment Act is legal?

This Court can take judicial notice of the fact that sugar production is one of the great industries of our nation, sugar occupying a leading position among its export products; that it gives employment to thousands of laborers in fields and factories; that it is a great source of the state's wealth, is one of the important sources of foreign exchange needed by our government, and is thus pivotal in the plans of a regime committed to a policy of currency stability. Its promotion, protection and advancement, therefore redounds greatly to the general welfare. Hence it was competent for the legislature to find that the general welfare demanded that the sugar industry should be stabilized in turn; and in the wide field of its police power, the lawmaking body could provide that the distribution of benefits therefrom be readjusted among its components to enable it to resist the added strain of the increase in taxes that it had to sustain

As stated in Johnson vs. State ex rel. Marey, with reference to the citrus industry in Florida —
The protection of a large industry constituting one of the great sources of the state's wealth and therefore directly or indirectly affecting the welfare of so great a portion of the population of the State is affected to such an extent by public interests as to be within the police power of the sovereign.
Once it is conceded, as it must, that the protection and promotion of the sugar industry is a matter of public concern, it follows that the Legislature may determine within reasonable bounds what is necessary for its protection and expedient for its promotion. Here, the legislative discretion must be allowed fully play, subject only to the test of reasonableness; and it is not contended that the means provided in section 6 of the law (above quoted) bear no relation to the objective pursued or are oppressive in character. If objective and methods are alike constitutionally valid, no reason is seen why the state may not levy taxes to raise funds for their prosecution and attainment. Taxation may be made the implement of the state's police power

Notes:

That the tax to be levied should burden the sugar producers themselves can hardly be a ground of complaint; indeed, it appears rational that the tax be obtained precisely from those who are to be benefited from the expenditure of the funds derived from it. At any rate, it is inherent in the power to tax that a state be free to select the subjects of taxation, and it has been repeatedly held that "inequalities which result from a singling out of one particular class for taxation or exemption infringe no constitutional limitation"

From the point of view we have taken it appears of no moment that the funds raised under the Sugar Stabilization Act, now in question, should be exclusively spent in aid of the sugar industry, since it is that very enterprise that is being protected. It may be that other industries are also in need of similar protection; that the legislature is not required by the Constitution to adhere to a policy of "all or none." As ruled in Minnesota ex rel. Pearson vs. Probate Court, 309 U. S. 270, 84 L. Ed. 744, "if the law presumably hits the evil where it is most felt, it is not to be overthrown because there are other instances to which it might have been applied;" and that "the legislative authority, exerted within its proper field, need not embrace all the evils within its reach"

MIAA vs City of Pasay

G.R. No. 163072

MANILA INTERNATIONAL AIRPORT AUTHORITY, Petitioner,
CITY OF PASAY, SANGGUNIANG PANGLUNGSOD NG PASAY, CITY MAYOR OF PASAY, CITY TREASURER OF PASAY, and CITY ASSESSOR OF PASAY, Respondents.

 Petitioner Manila International Airport Authority (MIAA) operates and administers the Ninoy Aquino International Airport (NAIA) Complex under Executive Order No. 903 (EO 903), otherwise known as the Revised Charter of the Manila International Airport Authority. EO 903 was issued on 21 July 1983 by then President Ferdinand E. Marcos. Under Sections 3 and 22 of EO 903, approximately 600 hectares of land, including the runways, the airport tower, and other airport buildings, were transferred to MIAA. The NAIA Complex is located along the border between Pasay City and Parañaque City.

          On 28 August 2001, MIAA received Final Notices of Real Property Tax Delinquency from the City of Pasay for the taxable years 1992 to 2001. The City of Pasay, through its City Treasurer, issued notices of levy and warrants of levy for the NAIA Pasay properties. MIAA received the notices and warrants of levy on 28 August 2001.

Issue
Whether the NAIA Pasay properties of MIAA are exempt from real property tax.

Held:        

    In Manila International Airport Authority v. Court of Appeals (2006 MIAA case), this Court already resolved the issue of whether the airport lands and buildings of MIAA are exempt from tax under existing laws. The  2006 MIAA case originated from a petition for prohibition and injunction which MIAA filed with the Court of Appeals, seeking to restrain the City of Parañaque from imposing  real property tax on, levying against, and auctioning for public sale the airport lands and buildings located in Parañaque City. The only difference between the 2006 MIAA case and this case is that the 2006 MIAA case involved airport lands and buildings located in Parañaque City while this case involved airport lands and buildings located in Pasay City. The 2006 MIAA case and this case raised the same threshold issue: whether the local government can impose real property tax on the airport lands, consisting mostly of the runways, as well as the airport buildings, of MIAA. In the 2006 MIAA case, this Court held:
             
            To summarize, MIAA is not a government-owned or controlled corporation under Section 2(13) of the Introductory Provisions of the Administrative Code because it is not organized as a stock or non-stock corporation. Neither is MIAA a government-owned or controlled corporation under Section 16, Article XII of the 1987 Constitution because MIAA is not required to meet the test of economic viability. MIAA is a government instrumentality vested with corporate powers and performing essential public services pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code. As a government instrumentality, MIAA is not subject to any kind of tax by local governments under Section 133(o) of the Local Government Code. The exception to the exemption in Section 234(a) does not apply to MIAA because MIAA is not a taxable entity under the Local Government Code. Such exception applies only if the beneficial use of real property owned by the Republic is given to a taxable entity.

MIAA vs CA

G.R. No. 155650

MANILA INTERNATIONAL  AIRPORT AUTHORITY,
                   Petitioner,         
COURT OF APPEALS, CITY OF  PARAÑAQUE, CITY MAYOR OF  PARAÑAQUE, SANGGUNIANG         PANGLUNGSOD NG PARAÑAQUE,          CITY ASSESSOR OF PARAÑAQUE,         and CITY TREASURER OF                       PARAÑAQUE,
                     Respondents. 

Petitioner Manila International Airport Authority (MIAA) operates the Ninoy Aquino International Airport (NAIA) Complex in Parañaque City under Executive Order No. 903, otherwise known as the Revised Charter of the Manila International Airport Authority (“MIAA Charter”).  Executive Order No. 903 was issued on 21 July 1983 by then President Ferdinand E. Marcos. Subsequently, Executive Order Nos. 909 and 298 amended the MIAA Charter.

As operator of the international airport, MIAA administers the land, improvements and equipment within the NAIA Complex.  The MIAA Charter transferred to MIAA approximately 600 hectares of land, including the runways and buildings (“Airport Lands and Buildings”) then under the Bureau of Air Transportation.  The MIAA Charter further provides that no portion of the land transferred to MIAA shall be disposed of through sale or any other mode unless specifically approved by the President of the Philippines.

The Office of the Government Corporate Counsel (OGCC) issued Opinion No. 061.  The OGCC opined that the Local Government Code of 1991 withdrew the exemption from real estate tax granted to MIAA under Section 21 of the MIAA Charter.  Thus, MIAA negotiated with respondent City of Parañaque to pay the real estate tax imposed by the City.  MIAA then paid some of the real estate tax already due.

On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency from the City of Parañaque for the taxable years 1992 to 2001.

The City of Parañaque, through its City Treasurer, issued notices of levy and warrants of levy on the Airport Lands and Buildings.  The Mayor of the City of Parañaque threatened to sell at public auction the Airport Lands and Buildings should MIAA fail to pay the real estate tax delinquency.   MIAA thus sought a clarification of OGCC Opinion No. 061.

The OGCC issued Opinion No. 147 clarifying OGCC Opinion No. 061.  The OGCC pointed out that Section 206 of the Local Government Code requires persons exempt from real estate tax to show proof of exemption.  The OGCC opined that Section 21 of the MIAA Charter is the proof that MIAA is exempt from real estate tax.

Meanwhile, in January 2003, the City of Parañaque posted notices of auction sale at the Barangay Halls of Barangays Vitalez, Sto. Niño, and Tambo, Parañaque City; in the public market of Barangay La Huerta; and in the main lobby of the Parañaque City Hall.  The City of Parañaque published the notices in the 3 and 10 January 2003 issues of the Philippine Daily Inquirer, a newspaper of general circulation in the Philippines.  The notices announced the public auction sale of the Airport Lands and Buildings to the highest bidder on 7 February 2003, 10:00 a.m., at the Legislative Session Hall Building of Parañaque City.  

MIAA admits that the MIAA Charter has placed the title to the Airport Lands and Buildings in the name of MIAA.  However, MIAA points out that it cannot claim ownership over these properties since the real owner of the Airport Lands and Buildings is the Republic of the Philippines.  The MIAA Charter mandates MIAA to devote the Airport Lands and Buildings for the benefit of the general public. Since the Airport Lands and Buildings are devoted to public use and public service, the ownership of these properties remains with the State.  The Airport Lands and Buildings are thus inalienable and are not subject to real estate tax by local governments.

MIAA also points out that Section 21 of the MIAA Charter  specifically exempts MIAA from the payment of real estate tax.  MIAA insists that it is also exempt from real estate tax under Section 234 of the Local Government Code because the Airport Lands and Buildings are owned by the Republic.  To justify the exemption, MIAA invokes the principle that the government cannot tax itself.  MIAA points out that the reason for tax exemption of public property is that its taxation would not inure to any public advantage, since in such a case the tax debtor is also the tax creditor.

Respondents invoke Section 193 of the Local Government Code, which expressly withdrew the tax exemption privileges of “government-owned and-controlled corporations” upon the effectivity of the Local Government Code.  Respondents also argue that a basic rule of statutory construction is that the express mention of one person, thing, or act excludes all others.  An international airport is not among the exceptions mentioned in Section 193 of the Local Government Code.  Thus, respondents assert that MIAA cannot claim that the Airport Lands and Buildings are exempt from real estate tax.

The Issue
           
whether the Airport Lands and Buildings of MIAA are exempt from real estate tax under existing laws.  If so exempt, then the real estate tax assessments issued by the City of Parañaque, and all proceedings taken pursuant to such assessments, are void. 

Held:

SC ruled that MIAA’s Airport Lands and Buildings are exempt from real estate tax imposed by local governments.

          First, MIAA is not a government-owned or controlled corporation but an instrumentality of the National Government and thus exempt from local taxation.  Second, the real properties of MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax.

  MIAA is not organized as a stock or non-stock corporation. MIAA is not a stock corporation because it has no capital stock divided into shares.  MIAA has no stockholders or voting shares.   Section 10 of the MIAA Charter provides:

SECTION 10. Capital. — The capital of the Authority to be contributed by the National Government shall be increased from Two and One-half Billion (P2,500,000,000.00) Pesos to Ten Billion (P10,000,000,000.00) Pesos to consist of:

MIAA is also not a non-stock corporation because it has no members.   Section 87 of the Corporation Code defines a non-stock corporation as “one where no part of its income is distributable as dividends to its members, trustees or officers.”  A non-stock corporation must have members.  Even if we assume that the Government is considered as the sole member of MIAA, this will not make MIAA a non-stock corporation.  Non-stock corporations cannot distribute any part of their income to their members.   Section 11 of the MIAA Charter mandates MIAA to remit 20% of its annual gross operating income to the National Treasury.  This prevents MIAA from qualifying as a non-stock corporation.

MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental functions.  MIAA is like any other government instrumentality, the only difference is that MIAA is vested with corporate powers.  Section 2(10) of the Introductory Provisions of the Administrative Code defines a government “instrumentality” as follows:

SEC. 2. General Terms Defined. ––  x x x x

(10) Instrumentality refers to any agency of the National Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter.

When the law vests in a government instrumentality corporate powers, the instrumentality does not become a corporation.   Unless the government instrumentality is organized as a stock or non-stock corporation, it remains a government instrumentality exercising not only governmental but also corporate powers.   Thus, MIAA exercises the governmental powers of eminent domain, police authority and the levying of fees and charges.  At the same time, MIAA exercises “all the powers of a corporation under the Corporation Law, insofar as these powers are not inconsistent with the provisions of this Executive Order.”

No one can dispute that properties of public dominion mentioned in Article 420 of the Civil Code, like “roads, canals, rivers, torrents, ports and bridges constructed by the State,” are owned by the State.  The term “ports” includes seaports and airports.   The MIAA Airport Lands and Buildings constitute a “port” constructed by the State.  Under Article 420 of the Civil Code, the MIAA Airport Lands and Buildings are properties of public dominion and thus owned by the State or the Republic of the Philippines.

The Airport Lands and Buildings are devoted to public use because they are used by the public for international and domestic travel and transportation.   The fact that the MIAA collects terminal fees and other charges from the public does not remove the character of the Airport Lands and Buildings as properties for public use.   The operation by the government of a tollway does not change the character of the road as one for public use.  Someone must pay for the maintenance of the road, either the public indirectly through the taxes they pay the government, or only those among the public who actually use the road through the toll fees they pay upon using the road.  The tollway system is even a more efficient and equitable manner of taxing the public for the maintenance of public roads.

  MIAA is a Mere Trustee of the Republic

MIAA is merely holding title to the Airport Lands and Buildings in trust for the Republic.  Section 48, Chapter 12, Book I of the Administrative Code allows instrumentalities like MIAA to hold title to real properties owned by the Republic, thus:

SEC. 48.  Official Authorized to Convey Real Property. — Whenever real property of the Government is authorized by law to be conveyed, the deed of conveyance shall be executed in behalf of the government by the following:

(1)        For property belonging to and titled in the name of the Republic of the Philippines, by the President, unless the authority therefor is expressly vested by law in another officer.

(2)        For property belonging to the Republic of the Philippines but titled in the name of any political subdivision or of any corporate agency or instrumentality, by the executive head of the agency or instrumentality. (Emphasis supplied)

In MIAA’s case, its status as a mere trustee of the Airport Lands and Buildings is clearer because even its executive head cannot sign the deed of conveyance on behalf of the Republic.   Only the President of the Republic can sign such deed of conveyance.

Real Property Owned by the Republic is Not Taxable
                                   
Section 234(a) of the Local Government Code exempts from real estate tax any “[r]eal property owned by the Republic of the Philippines.”      Section 234(a)  provides:

SEC. 234.   Exemptions from Real Property Tax. — The following are exempted from payment of the real property tax:

 (a) Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person;
This exemption should be read in relation with Section 133(o) of the same Code, which prohibits local governments from imposing “[t]axes, fees or charges of any kind on the National Government, its agencies and instrumentalities x x x.”   The real properties owned by the Republic are titled either in the name of the Republic itself or in the name of agencies or instrumentalities of the National Government.  The Administrative Code allows real property owned by the Republic to be titled in the name of agencies or instrumentalities of the national government.    Such real properties remain owned by the Republic and continue to be exempt from real estate tax.

The Republic may grant the beneficial use of its real property to an agency or instrumentality of the national government.   This happens when title of the real property is transferred to an agency or instrumentality even as the Republic remains the owner of the real property.    Such arrangement does not result in the loss of the tax exemption.  Section 234(a) of the Local Government Code states that real property owned by the Republic loses its tax exemption only if the “beneficial use thereof has been granted, for consideration or otherwise, to a taxable person.” MIAA, as a government instrumentality, is not a taxable person under Section 133(o) of the Local Government Code.   Thus, even if we assume that the Republic has granted to MIAA the beneficial use of the Airport Lands and Buildings, such fact does not make these real properties subject to real estate tax.

The Constitution imposes no limitation when the legislature creates government instrumentalities vested with corporate powers but performing essential governmental or public functions.  Congress has plenary authority to create government instrumentalities vested with corporate powers provided these instrumentalities perform essential government functions or public services.  However, when the legislature creates through special charters corporations that perform economic or commercial activities, such entities — known as “government-owned or controlled corporations” — must meet the test of economic viability because they compete in the market place.

This is the situation of the Land Bank of the Philippines and the Development Bank of the Philippines and similar government-owned or controlled corporations, which derive their income to meet operating expenses solely from commercial transactions in competition with the private sector.   The intent of the Constitution is to prevent the creation of government-owned or controlled corporations that cannot survive on their own in the market place and thus merely drain the public coffers.

Notes:
 Section 2(13) of the Introductory Provisions of the Administrative Code of 1987 defines a government-owned or controlled corporation as follows:                                                                      

SEC. 2. General Terms Defined. – x x x x

(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its capital stock

Properties of public dominion, being for public use, are not subject to levy, encumbrance or disposition through public or private sale.  Any encumbrance, levy on execution or auction sale of any property of public dominion is void for being contrary to public policy.   Essential public services will stop if properties of public dominion are subject to encumbrances, foreclosures and auction sale.

PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY vs CA

G.R. No. 150301
PHILIPPINE FISHERIES                     
DEVELOPMENT AUTHORITY,   Petitioner,     CA

The controversy arose when respondent Municipality of Navotas assessed the real estate taxes allegedly due from petitioner Philippine Fisheries Development Authority (PFDA) for the period 1981-1990 on properties under its jurisdiction, management and operation located inside the Navotas Fishing Port Complex (NFPC).

          The assessed taxes had remained unpaid despite the demands made by the municipality which prompted it, through Municipal Treasurer Florante M. Barredo, to give notice to petitioner on October 29, 1990 that the NFPC will be sold at public auction on November 30, 1990 in order that the municipality will be able to collect on petitioner’s delinquent realty taxes which, as of June 30, 1990, amounted to P23,128,304.51, inclusive of penalties.

          Petitioner sought the deferment of the auction sale claiming that the NFPC is owned by the Republic of the Philippines, and pursuant to Presidential Decree (P.D.) No. 977, it (PFDA) is not a taxable entity.

In view of the refusal of PFDA to pay the assessed realty taxes, the matter was referred to the Department of Finance (DOF). On July 14, 1990 the DOF stated that:

This Department takes cognizance of the allegations of [the Office of the Mayor of Navotas] that PFDA has leased its properties to beneficial users, such as “businessmen, private persons and entities who are taxable persons.” For this reason, it is imperative that the Municipality should conduct an ocular inspection on the real properties (land and building owned by PFDA) in order to identify the properties actually leased and the taxable persons enjoying the beneficial use thereof. The ocular inspection is necessary for reason that the real properties, the use of which has been granted to taxable persons, for consideration or otherwise, are subject to the payment of real property taxes which must be paid by the grantees pursuant to the provisions  … of the Real Property Tax Code, as amended.

… Therefore, it is imperative to determine who the actual users of the properties concerned [are]. If used by a non-taxable person other than PFDA itself, it remains to be non-taxable. Otherwise, if said properties are being used by taxable persons, same becomes taxable properties. For this purpose, it is also incumbent upon PFDA to furnish the Municipality copies of the deed of lease or other relevant documents showing the leased properties and their beneficial users for proper assessment.

Notwithstanding the DOF’s instruction, respondent Municipality proceeded to publish the notice of sale of NFPC in the November 2, 1990 issue of Balita, a local newspaper.

Petitioner instituted a Civil Case in the Regional Trial Court (RTC) of Malabon, Metro Manila against respondent Municipality, its Municipal Treasurer and the Chairman of the Public Auction Sale Committee. Petitioner asked the RTC to enjoin the auction of the NFPC on the ground that the properties comprising the NFPC are owned by the Republic of the Philippines and are, thus, exempt from taxation.  According to petitioner, only a small portion of NFPC which had been leased to private parties may be subjected to real property tax which should be paid by the latter.

Respondent Municipality insisted that:
1) the real properties within NFPC are owned entirely by petitioner which, despite the opportunity given, had failed to submit proof to the Municipal Assessor that the properties are indeed owned by the Republic of the Philippines;

 2) if the properties in question really belong to the government, then the complaint should have been instituted in the name of the Republic of the Philippines, represented by the Office of the Solicitor General; and

3) the complaint is fatally defective because of non-compliance with a condition precedent, which is, payment of the disputed tax assessment under protest.

Issues:
Whether petitioner is liable to pay real property tax.

Held:

Local government units, pursuant to the fiscal autonomy granted by the provisions of Republic Act No. 7160 or the 1991 Local Government Code, can impose realty taxes on juridical persons subject to the limitations enumerated in Section 133 of the Code:

SEC. 133. Common Limitations on the Taxing Power of Local Government Units. – Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following:

(o)               taxes, fees, charges of any kind on the national government, its agencies and instrumentalities, and local government units.
       
          Nonetheless, the above exemption does not apply when the beneficial use of the government property has been granted to a taxable person. Section 234 (a) of the Code states that real property owned by the Republic of the Philippines or any of its political subdivisions is exempted from payment of the real property tax “except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person.”

         Thus, as a rule, petitioner PFDA, being an instrumentality of the national government, is exempt from real property tax but the exemption does not extend to the portions of the NFPC that were leased to taxable or private persons and entities for their beneficial use.

The real property tax assessments issued by the City of Iloilo should be upheld only with respect to the portions leased to private persons. In case the Authority fails to pay the real property taxes due thereon, said portions cannot be sold at public auction to satisfy the tax delinquency.
The port built by the State in the Iloilo fishing complex is a property of public dominion and cannot therefore be sold at public auction. Article 420 of the Civil Code provides:

ARTICLE 420. The following things are property of public dominion:

(1)        Those intended for public use, such as roads, canals, rivers, torrents, ports and bridges constructed by the State, banks, shores, roadsteads, and others of similar character;

(2)        Those which belong to the State, without being for public use, and are intended for some public service or for the development of national wealth.

            The Iloilo [F]ishing [P]ort [Complex/IFPC] which was constructed by the State for public use and/or public service falls within the term “port” in the aforecited provision. Being a property of public dominion the same cannot be subject to execution or foreclosure sale. … Whether there are improvements in the fishing port complex that should not be construed to be embraced within the term ‘port’ involves evidentiary matters that cannot be addressed in the present case. As for now, considering that the Authority is a national government instrumentality, any doubt on whether the entire IFPC may be levied upon to satisfy the tax delinquency should be resolved against the City of Iloilo.

Similarly, for the same reason, the NFPC cannot be sold at public auction in satisfaction of the tax delinquency assessments made by the Municipality of Navotas on the entire complex.

Additionally, the land on which the NFPC property sits is a reclaimed land, which belongs to the State. In Chavez v. Public Estates Authority, the Court declared that reclaimed lands are lands of the public domain and cannot, without Congressional fiat, be subject of a sale, public or private.

CIA vs MARUBENI

G.R. No. 137377.  December 18, 2001

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MARUBENI CORPORATION, respondent.

Respondent Marubeni Corporation is a foreign corporation organized and existing under the laws of Japan. It is engaged in general import and export trading, financing and the construction business. It is duly registered to engage in such business in the Philippines and maintains a branch office in Manila.

Sometime in November 1985, petitioner Commissioner of Internal Revenue issued a letter of authority to examine the books of accounts of the Manila branch office of respondent corporation for the fiscal year ending March 1985. In the course of the examination, petitioner found respondent to have undeclared income from two (2) contracts in the Philippines, both of which were completed in 1984. One of the contracts was with the National Development Company (NDC) in connection with the construction and installation of a wharf/port complex at the Leyte Industrial Development Estate in the municipality of Isabel, province of Leyte. The other contract was with the Philippine Phosphate Fertilizer Corporation (Philphos) for the construction of an ammonia storage complex also at the Leyte Industrial Development Estate.

On March 1, 1986, petitioner’s revenue examiners recommended an assessment for deficiency income, branch profit remittance, contractor’s and commercial broker’s taxes. Respondent questioned this assessment in a letter dated June 5, 1986.

Petitioner found that the NDC and Philphos contracts were made on a “turn-key” basis and that the gross income from the two projects amounted to P967,269,811.14. Each contract was for a piece of work and since the projects called for the construction and installation of facilities in the Philippines, the entire income therefrom constituted income from Philippine sources, hence, subject to internal revenue taxes.

Issue:  Whether or not respondent is liable to pay the income, branch profit remittance, and contractor’s taxes assessed by petitioner.

Held:

A contractor’s tax is imposed in the National Internal Revenue Code (NIRC) as follows:
“Sec. 205. Contractors, proprietors or operators of dockyards, and others.—A contractor’s tax of four percent of the gross receipts is hereby imposed on proprietors or operators of the following business establishments and/or persons engaged in the business of selling or rendering the following services for a fee or compensation:

(a) General engineering, general building and specialty contractors, as defined in Republic Act No. 4566;

 (q) Other independent contractors. The term “independent contractors” includes persons (juridical or natural) not enumerated above (but not including individuals subject to the occupation tax under the Local Tax Code) whose activity consists essentially of the sale of all kinds of services for a fee regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. It does not include regional or area headquarters established in the Philippines by multinational corporations, including their alien executives, and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region.

Under the afore-quoted provision, an independent contractor is a person whose activity consists essentially of the sale of all kinds of services for a fee,  regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractors or their employees. The word “contractor” refers to a person who, in the pursuit of independent business, undertakes to do a specific job or piece of work for other persons, using his own means and methods without submitting himself to control as to the petty details.

A contractor’s tax is a tax imposed upon the privilege of engaging in business. It is generally in the nature of an excise tax on the exercise of a privilege of selling services or labor rather than a sale on products; and is directly collectible from the person exercising the privilege. Being an excise tax, it can be levied by the taxing authority only when the acts, privileges or business are done or performed within the jurisdiction of said authority. Like property taxes, it cannot be imposed on an occupation or privilege outside the taxing district.

In the case at bar, it is undisputed that respondent was an independent contractor under the terms of the two subject contracts.

Clearly, the service of “design and engineering, supply and delivery, construction, erection and installation, supervision, direction and control of testing and commissioning, coordination…”of the two projects involved two taxing jurisdictions.  These acts occurred in two countries – Japan and the Philippines. While the construction and installation work were completed within the Philippines, the evidence is clear that some pieces of equipment and supplies were completely designed and engineered in Japan. The two sets of ship unloader and loader, the boats and mobile equipment for the NDC project and the ammonia storage tanks and refrigeration units were made and completed in Japan. They were already finished products when shipped to the Philippines. The other construction supplies listed under the Offshore Portion such as the steel sheets, pipes and structures, electrical and instrumental apparatus, these were not finished products when shipped to the Philippines. They, however, were likewise fabricated and manufactured by the sub-contractors in Japan. All services for the design, fabrication, engineering and manufacture of the materials and equipment under Japanese Yen Portion I were made and completed in Japan. These services were rendered outside the taxing jurisdiction of the Philippines and are therefore not subject to contractor’s tax.

PEPSI VS CITY OF BUTUAN

G.R. No. L-22814           August 28, 1968

PEPSI-COLA BOTTLING CO. OF THE PHILIPPINES, INC., plaintiff-appellant, 
vs.

CITY OF BUTUAN, MEMBERS OF THE MUNICIPAL BOARD, 
THE CITY MAYOR and THE CITY TREASURER, all of the CITY OF BUTUAN, defendants-appellees.

Plaintiff, Pepsi-Cola Bottling Company of the Philippines, is a domestic corporation with offices and principal place of business in Quezon City. The defendants are the City of Butuan, its City Mayor, the members of its municipal board and its City Treasurer. Plaintiff — seeks to recover the sums paid by it to the City of Butuan — hereinafter referred to as the City and collected by the latter, pursuant to its Municipal Ordinance No. 110, as amended by Municipal Ordinance No. 122, both series of 1960, which plaintiff assails as null and void, and to prevent the enforcement thereof. Both parties submitted the case for decision in the lower court upon a stipulation to the effect:

1. That plaintiff's warehouse in the City of Butuan serves as a storage for its products the "Pepsi-Cola" soft drinks for sale to customers in the City of Butuan and all the municipalities in the Province of Agusan. These "Pepsi-Cola Cola" soft drinks are bottled in Cebu City and shipped to the Butuan City warehouse of plaintiff for distribution and sale in the City of Butuan and all municipalities of Agusan.

2. That on August 16, 1960, the City of Butuan enacted Ordinance No. 110 which was subsequently amended by Ordinance No. 122 and effective November 28, 1960. A copy of Ordinance No. 110, Series of 1960 and Ordinance No. 122 are incorporated herein as Exhibits "A" and "B", respectively.

3. That Ordinance No. 110 as amended, imposes a tax on any person, association, etc., of P0.10 per case of 24 bottles of Pepsi-Cola and the plaintiff paid under protest the amount of P4,926.63 from August 16 to December 31, 1960 and the amount of P9,250.40 from January 1 to July 30, 1961
Section 1 of said Ordinance No. 110, as amended, states what products are "liquors", within the purview thereof. Section 2 provides for the payment by "any agent and/or consignee" of any dealer "engaged in selling liquors, imported or local, in the City," of taxes at specified rates. Section 3 prescribes a tax of P0.10 per case of 24 bottles of the soft drinks and carbonated beverages therein named, and "all other soft drinks or carbonated drinks." Section 3-A, defines the meaning of the term "consignee or agent" for purposes of the ordinance. Section 4 provides that said taxes "shall be paid at the end of every calendar month." Pursuant to Section 5, the taxes "shall be based and computed from the cargo manifest or bill of lading or any other record showing the number of cases of soft drinks, liquors or all other soft drinks or carbonated drinks received within the month." Sections 6, 7 and 8 specify the surcharge to be added for failure to pay the taxes within the period prescribed and the penalties imposable for "deliberate and wilful refusal to pay the tax mentioned in Sections 2 and 3" or for failure "to furnish the office of the City Treasurer a copy of the bill of lading or cargo manifest or record of soft drinks, liquors or carbonated drinks for sale in the City." Section 9 makes the ordinance applicable to soft drinks, liquors or carbonated drinks "received outside" but "sold within" the City. Section 10 of the ordinance provides that the revenue derived therefrom "shall be allotted as follows: 40% for Roads and Bridges Fund; 40% for the General Fund and 20% for the School Fund."

Issue: WON Ordinance 122 is valid?

Held:

These conditions are not fully met by the ordinance in question. Indeed, if its purpose were merely to levy a burden upon the sale of soft drinks or carbonated beverages, there is no reason why sales thereof by sealer's other than agents or consignees of producers or merchants established outside the City of Butuan should be exempt from the tax.

 It is noteworthy that the tax prescribed in section 3 of Ordinance No. 110, as originally approved, was imposed upon dealers "engaged in selling" soft drinks or carbonated drinks. Thus, it would seem that the intent was then to levy a tax upon the sale of said merchandise. As amended by Ordinance No. 122, the tax is, however, imposed only upon "any agent and/or consignee of any person, association, partnership, company or corporation engaged in selling ... soft drinks or carbonated drinks." And, pursuant to section 3-A, which was inserted by said Ordinance No. 122:

 — Definition of the Term Consignee or Agent. — For purposes of this Ordinance, a consignee of agent shall mean any person, association, partnership, company or corporation who acts in the place of another by authority from him or one entrusted with the business of another or to whom is consigned or shipped no less than 1,000 cases of hard liquors or soft drinks every month for resale, either retail or wholesale.

As a consequence, merchants engaged in the sale of soft drink or carbonated drinks, are not subject to the tax,unless they are agents and/or consignees of another dealer, who, in the very nature of things, must be one engaged in business outside the City. Besides, the tax would not be applicable to such agent and/or consignee, if less than 1,000 cases of soft drinks are consigned or shipped to him every month. When we consider, also, that the tax "shall be based and computed from the cargo manifest or bill of lading ... showing the number of cases" — not sold — but "received" by the taxpayer, the intention to limit the application of the ordinance to soft drinks and carbonated drinks brought into the City from outside thereof becomes apparent. Viewed from this angle, the tax partakes of the nature of an import duty, which is beyond defendant's authority to impose by express provision of law.

Even however, if the burden in question were regarded as a tax on the sale of said beverages, it would still be invalid, as discriminatory, and hence, violative of the uniformity required by the Constitution and the law therefor, since only sales by "agents or consignees" of outside dealers would be subject to the tax. Sales by local dealers, not acting for or on behalf of other merchants, regardless of the volume of their sales, and even if the same exceeded those made by said agents or consignees of producers or merchants established outside the City of Butuan, would be exempt from the disputed tax.

It is true that the uniformity essential to the valid exercise of the power of taxation does not require identity or equality under all circumstances, or negate the authority to classify the objects of taxation. The classification made in the exercise of this authority, to be valid, must, however, be reasonable and this requirement is not deemed satisfied unless: (1) it is based upon substantial distinctions which make real differences; (2) these are germane to the purpose of the legislation or ordinance; (3) the classification applies, not only to present conditions, but, also, to future conditions substantially identical to those of the present; and (4) the classification applies equally all those who belong to the same class.

PLANTERS PRODUCTS VS FERTIPHIL

G.R. No. 166006
PLANTERS PRODUCTS, INC
                             Petitioner,
FERTIPHIL CORPORATION,
Respondent.

Petitioner PPI and private respondent Fertiphil are private corporations incorporated under Philippine laws.  They are both engaged in the importation and distribution of fertilizers, pesticides and agricultural chemicals.

On June 3, 1985, then President Ferdinand Marcos, exercising his legislative powers, issued LOI No. 1465 which provided, among others, for the imposition of a capital recovery component (CRC) on the domestic sale of all grades of fertilizers in the Philippines.  The LOI provides:

The Administrator of the Fertilizer Pesticide Authority to include in its fertilizer pricing formula a capital contribution component of not less than P10 per bag.  This capital contribution shall be collected until adequate capital is raised to make PPI viable.  Such capital contribution shall be applied by FPA to all domestic sales of fertilizers in the Philippines.

Pursuant to the LOI, Fertiphil paid P10 for every bag of fertilizer it sold in the domestic market to the Fertilizer and Pesticide Authority (FPA).  FPA then remitted the amount collected to the Far East Bank and Trust Company, the depositary bank of PPI.  Fertiphil paid P6,689,144 to FPA from July 8, 1985 to January 24, 1986.

After the 1986 Edsa Revolution, FPA voluntarily stopped the imposition of the P10 levy.  With the return of democracy, Fertiphil demanded from PPI a refund of the amounts it paid under LOI No. 1465, but PPI refused to accede to the demand.

Unreasonable, oppressive, invalid and an unlawful imposition that amounted to a denial of due process of law. Fertiphil alleged that the LOI solely favored PPI, a privately owned corporation, which used the proceeds to maintain its monopoly of the fertilizer industry.

In its Answer, FPA, through the Solicitor General, countered that the issuance of LOI No. 1465 was a valid exercise of the police power of the State in ensuring the stability of the fertilizer industry in the country.  It also averred that Fertiphil did not sustain any damage from the LOI because the burden imposed by the levy fell on the ultimate consumer, not the seller.

Issues:

THE CONSTITUTIONALITY OF LOI 1465 CANNOT BE COLLATERALLY ATTACKED AND BE DECREED VIA A DEFAULT JUDGMENT IN A CASE FILED FOR COLLECTIONAND DAMAGES WHERE THE ISSUE OF CONSTITUTIONALITY IS NOT THE VERY LIS MOTA OF THE CASE.  NEITHER CAN LOI 1465 BE CHALLENGED BY ANY PERSON OR ENTITY WHICH HAS NO STANDING TO DO SO.

In this jurisdiction,SC adopted the “direct injury test” to determine locus standi in public suits.  In People v. Vera, it was held that a person who impugns the validity of a statute must have “a personal and substantial interest in the case such that he has sustained, or will sustain direct injury as a result.”  The “direct injury test” in public suits is similar to the “real party in interest” rule for private suits under Section 2, Rule 3 of the 1997 Rules of Civil Procedure.

Recognizing that a strict application of the “direct injury” test may hamper public interest, this Court relaxed the requirement in cases of “transcendental importance” or with “far reaching implications.”  Being a mere procedural technicality, it has also been held that locus standi may be waived in the public interest.

Whether or not the complaint for collection is characterized as a private or public suit, Fertiphil has locus standi to file it.  Fertiphil suffered a direct injury from the enforcement of LOI No. 1465.  It was required, and it did pay, the P10 levy imposed for every bag of fertilizer sold on the domestic market.  It may be true that Fertiphil has passed some or all of the levy to the ultimate consumer, but that does not disqualify it from attacking the constitutionality of the LOI or from seeking a refund.  As seller, it bore the ultimate burden of paying the levy.  It faced the possibility of severe sanctions for failure to pay the levy.  The fact of payment is sufficient injury to Fertiphil.

Moreover, Fertiphil suffered harm from the enforcement of the LOI because it was compelled to factor in its product the levy.  The levy certainly rendered the fertilizer products of Fertiphil and other domestic sellers much more expensive.  The harm to their business consists not only in fewer clients because of the increased price, but also in adopting alternative corporate strategies to meet the demands of LOI No. 1465.  Fertiphil and other fertilizer sellers may have shouldered all or part of the levy just to be competitive in the market.  The harm occasioned on the business of Fertiphil is sufficient injury for purposes of locus standi.


II
LOI 1465, BEING A LAW IMPLEMENTED FOR THE PURPOSE OF ASSURING THE FERTILIZER SUPPLY AND DISTRIBUTION IN THE COUNTRY, AND FOR BENEFITING A FOUNDATION CREATED BY LAW TO HOLD IN TRUST FOR MILLIONS OF FARMERS THEIR STOCK OWNERSHIP IN PPI CONSTITUTES A VALID LEGISLATION PURSUANT TO THE EXERCISE OF TAXATION AND POLICE POWER FOR PUBLIC PURPOSES.

  The levy was imposed to pay the corporate debt of PPI. Fertiphil also argues that, even if the LOI is enacted under the police power, it is still unconstitutional because it did not promote the general welfare of the people or public interest.

Police power and the power of taxation are inherent powers of the State.  These powers are distinct and have different tests for validity.  Police power is the power of the State to enact legislation that may interfere with personal liberty or property in order to promote the general welfare, while the power of taxation is the power to levy taxes to be used for public purpose.  The main purpose of police power is the regulation of a behavior or conduct, while taxation is revenue generation.  The “lawful subjects” and “lawful means” tests are used to determine the validity of a law enacted under the police power.  The power of taxation, on the other hand, is circumscribed by inherent and constitutional limitations.

While it is true that the power of taxation can be used as an implement of police power, the primary purpose of the levy is revenue generation.  If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then the exaction is properly called a tax.

III
THE AMOUNT COLLECTED UNDER THE CAPITAL RECOVERY COMPONENT WAS REMITTED TO THE GOVERNMENT, AND BECAME GOVERNMENT FUNDS PURSUANT TO AN EFFECTIVE AND VALIDLY ENACTED LAW WHICH IMPOSED DUTIES AND CONFERRED RIGHTS BY VIRTUE OF THE PRINCIPLE OF “OPERATIVEFACT” PRIOR TO ANY DECLARATION OF UNCONSTITUTIONALITY OF LOI 1465.

The general rule is that an unconstitutional law is void.  It produces no rights, imposes no duties and affords no protection. It has no legal effect.  It is, in legal contemplation, inoperative as if it has not been passed.  Being void, Fertiphil is not required to pay the levy.  All levies paid should be refunded in accordance with the general civil code principle against unjust enrichment.  The general rule is supported by Article 7 of the Civil Code, which provides:

ART. 7.  Laws are repealed only by subsequent ones, and their violation or non-observance shall not be excused by disuse or custom or practice to the contrary.

When the courts declare a law to be inconsistent with the Constitution, the former shall be void and the latter shall govern.

Notes:

An inherent limitation on the power of taxation is public purpose.  Taxes are exacted only for a public purpose.  They cannot be used for purely private purposes or for the exclusive benefit of private persons.  The reason for this is simple.  The power to tax exists for the general welfare; hence, implicit in its power is the limitation that it should be used only for a public purpose.  It would be a robbery for the State to tax its citizens and use the funds generated for a private purpose.  As an old United States case bluntly put it: “To lay with one hand, the power of the government on the property of the citizen, and with the other to bestow it upon favored individuals to aid private enterprises and build up private fortunes, is nonetheless a robbery because it is done under the forms of law and is called taxation.”

The doctrine of operative fact, as an exception to the general rule, only applies as a matter of equity and fair play.  It nullifies the effects of an unconstitutional law by recognizing that the existence of a statute prior to a determination of unconstitutionality is an operative fact and may have consequences which cannot always be ignored.  The past cannot always be erased by a new judicial declaration.

The doctrine is applicable when a declaration of unconstitutionality will impose an undue burden on those who have relied on the invalid law.  Thus, it was applied to a criminal case when a declaration of unconstitutionality would put the accused in double jeopardy or would put in limbo the acts done by a municipality in reliance upon a law creating it.