case 6-10 tax 1

G.R. No. L-54908 January 22, 1990

COMMISSIONER OF INTERNAL REVENUE,petitioner,vs.MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS,respondents.

G.R. No. 80041 January 22, 1990

COMMISSIONER OF INTERNAL REVENUE,petitioner,vs.MITSUBISHI METAL CORPORATION, ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION and the COURT OF TAX APPEALS,respondents.

Gadioma Law Offices for respondents.

REGALADO,J.:

These cases, involving the same issue being contested by the same parties and having originated from the same factual antecedents generating the claims for tax credit of private respondents, the same were consolidated by resolution of this Court dated May 31, 1989 and are jointly decided herein.

The records reflect that on April 17, 1970, Atlas Consolidated Mining and Development Corporation (hereinafter, Atlas) entered into a Loan and Sales Contract with Mitsubishi Metal Corporation (Mitsubishi, for brevity), a Japanese corporation licensed to engage in business in the Philippines, for purposes of the projected expansion of the productive capacity of the former's mines in Toledo, Cebu. Under said contract, Mitsubishi agreed to extend a loan to Atlas 'in the amount of $20,000,000.00, United States currency, for the installation of a new concentrator for copper production. Atlas, in turn undertook to sell to Mitsubishi all the copper concentrates produced from said machine for a period of fifteen (15) years. It was contemplated that $9,000,000.00 of said loan was to be used for the purchase of the concentrator machinery from Japan.1

Mitsubishi thereafter applied for a loan with the Export-Import Bank of Japan (Eximbank for short) obviously for purposes of its obligation under said contract. Its loan application was approved on May 26, 1970 in the sum of 4,320,000,000.00, at about the same time as the approval of its loan for 2,880,000,000.00 from a consortium of Japanese banks. The total amount of both loans is equivalent to $20,000,000.00 in United States currency at the then prevailing exchange rate. The records in the Bureau of Internal Revenue show that the approval of the loan by Eximbank to Mitsubishi was subject to the condition that Mitsubishi would use the amount as a loan to Atlas and as a consideration for importing copper concentrates from Atlas, and that Mitsubishi had to pay back the total amount of loan by September 30, 1981.2

Pursuant to the contract between Atlas and Mitsubishi, interest payments were made by the former to the latter totalling P13,143,966.79 for the years 1974 and 1975. The corresponding 15% tax thereon in the amount of P1,971,595.01 was withheld pursuant to Section 24 (b) (1) and Section 53 (b) (2) of the National Internal Revenue Code, as amended by Presidential Decree No. 131, and duly remitted to the Government.3

On March 5, 1976, private respondents filed a claim for tax credit requesting that the sum of P1,971,595.01 be applied against their existing and future tax liabilities. Parenthetically, it was later noted by respondent Court of Tax Appeals in its decision that on August 27, 1976, Mitsubishi executed a waiver and disclaimer of its interest in the claim for tax credit in favor ofAtlas.4

The petitioner not having acted on the claim for tax credit, on April 23, 1976 private respondents filed a petition for review with respondent court, docketed therein as CTA Case No. 2801.5The petition was grounded on the claim that Mitsubishi was a mere agent of Eximbank, which is a financing institution owned, controlled and financed by the Japanese Government. Such governmental status of Eximbank, if it may be so called, is the basis for private repondents' claim for exemption from paying the tax on the interest payments on the loan as earlier stated. It was further claimed that the interest payments on the loan from the consortium of Japanese banks were likewise exempt because said loan supposedly came from or were financed by Eximbank. The provision of the National Internal Revenue Code relied upon is Section 29 (b) (7) (A),6which excludes from gross income:

(A) Income received from their investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on their deposits in banks in the Philippines by (1) foreign governments, (2) financing institutions owned, controlled, or enjoying refinancing from them, and (3) international or regional financing institutions established by governments.

Petitioner filed an answer on July 9, 1976. The case was set for hearing on April 6, 1977 but was later reset upon manifestation of petitioner that the claim for tax credit of the alleged erroneous payment was still being reviewed by the Appellate Division of the Bureau of Internal Revenue. The records show that on November 16, 1976, the said division recommended to petitioner the approval of private respondent's claim. However, before action could be taken thereon, respondent court scheduled the case for hearing on September 30, 1977, during which trial private respondents presented their evidence while petitioner submitted his case on the basis of the records of the Bureau of Internal Revenue and the pleadings.7

On April 18, 1980, respondent court promulgated its decision ordering petitioner to grant a tax credit in favor of Atlas in the amount of P1,971,595.01. Interestingly, the tax court held that petitioner admitted the material averments of private respondents when he supposedly prayed "for judgment on the pleadings without off-spring proof as to the truth of his allegations."8Furthermore, the court declared that all papers and documents pertaining to the loan of 4,320,000,000.00 obtained by Mitsubishi from Eximbank show that this was the same amount given to Atlas. It also observed that the money for the loans from the consortium of private Japanese banks in the sum of 2,880,000,000.00 "originated" from Eximbank. From these, respondent court concluded that the ultimate creditor of Atlas was Eximbank with Mitsubishi acting as a mere "arranger or conduit through which the loans flowed from the creditor Export-Import Bank of Japan to the debtor Atlas Consolidated Mining & Development Corporation."9

A motion for reconsideration having been denied on August 20, 1980, petitioner interposed an appeal to this Court, docketed herein as G.R. No. 54908.

While CTA Case No. 2801 was still pending before the tax court, the corresponding 15% tax on the amount of P439,167.95 on the P2,927,789.06 interest payments for the years 1977 and 1978 was withheld and remitted to the Government. Atlas again filed a claim for tax credit with the petitioner, repeating the same basis for exemption.

On June 25, 1979, Mitsubishi and Atlas filed a petition for review with the Court of Tax Appeals docketed as CTA Case No. 3015. Petitioner filed his answer thereto on August 14, 1979, and, in a letter to private respondents dated November 12, 1979, denied said claim for tax credit for lack of factual or legal basis.10

On January 15, 1981, relying on its prior ruling in CTA Case No. 2801, respondent court rendered judgment ordering the petitioner to credit Atlas the aforesaid amount of tax paid. A motion for reconsideration, filed on March 10, 1981, was denied by respondent court in a resolution dated September 7, 1987. A notice of appeal was filed on September 22, 1987 by petitioner with respondent court and a petition for review was filed with this Court on December 19, 1987. Said later case is now before us as G.R. No. 80041 and is consolidated with G.R. No. 54908.

The principal issue in both petitions is whether or not the interest income from the loans extended to Atlas by Mitsubishi is excludible from gross income taxation pursuant to Section 29 b) (7) (A) of the tax code and, therefore, exempt from withholding tax.Aproposthereto, the focal question is whether or not Mitsubishi is a mere conduit of Eximbank which will then be considered as the creditor whose investments in the Philippines on loans are exempt from taxes under the code.

Prefatorily, it must be noted that respondent court erred in holding in CTA Case No. 2801 that petitioner should be deemed to have admitted the allegations of the private respondents when it submitted the case on the basis of the pleadings and records of the bureau. There is nothing to indicate such admission on the part of petitioner nor can we accept respondent court's pronouncement that petitioner did not offer to prove the truth of its allegations. The records of the Bureau of Internal Revenue relevant to the case were duly submitted and admitted as petitioner's supporting evidence. Additionally, a hearing was conducted, with presentation of evidence, and the findings of respondent court were based not only on the pleadings but on the evidence adduced by the parties. There could, therefore, not have been a judgment on the pleadings, with the theorized admissions imputed to petitioner, as mistakenly held by respondent court.

Time and again, we have ruled that findings of fact of the Court of Tax Appeals are entitled to the highest respect and can only be disturbed on appeal if they are not supported by substantial evidence or if there is a showing of gross error or abuse on the part of the tax court.11Thus, ordinarily, we could give due consideration to the holding of respondent court that Mitsubishi is a mere agent of Eximbank. Compelling circumstances obtaining and proven in these cases, however, warrant a departure from said general rule since we are convinced that there is a misapprehension of facts on the part of the tax court to the extent that its conclusions are speculative in nature.

The loan and sales contract between Mitsubishi and Atlas does not contain any direct or inferential reference to Eximbank whatsoever. The agreement is strictly between Mitsubishi as creditor in the contract of loan and Atlas as the seller of the copper concentrates. From the categorical language used in the document, one prestation was in consideration of the other. The specific terms and the reciprocal nature of their obligations make it implausible, if not vacuous to give credit to the cavalier assertion that Mitsubishi was a mere agent in said transaction.

Surely, Eximbank had nothing to do with the sale of the copper concentrates since all that Mitsubishi stated in its loan application with the former was that the amount being procured would be used as a loan to and in consideration for importing copper concentrates from Atlas.12Such an innocuous statement of purpose could not have been intended for, nor could it legally constitute, a contract of agency. If that had been the purpose as respondent court believes, said corporations would have specifically so stated, especially considering their experience and expertise in financial transactions, not to speak of the amount involved and its purchasing value in 1970.

A thorough analysis of the factual and legal ambience of these cases impels us to give weight to the following arguments of petitioner:

The nature of the above contract shows that the same is not just a simple contract of loan. It is not a mere creditor-debtor relationship. It is more of a reciprocal obligation between ATLAS and MITSUBISHI where the latter shall provide the funds in the installation of a new concentrator at the former's Toledo mines in Cebu, while ATLAS in consideration of which, shall sell to MITSUBISHI, for a term of 15 years, the entire copper concentrate that will be produced by the installed concentrator.

Suffice it to say, the selling of the copper concentrate to MITSUBISHI within the specified term was the consideration of the granting of the amount of $20 million to ATLAS. MITSUBISHI, in order to fulfill its part of the contract, had to obtain funds. Hence, it had to secure a loan or loans from other sources. And from what sources, it is immaterial as far as ATLAS in concerned. In this case, MITSUBISHI obtained the $20 million from the EXIMBANK, of Japan and the consortium of Japanese banks financed through the EXIMBANK, of Japan.

When MITSUBISHI therefore secured such loans, 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 the 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.

Thus, the transaction between MITSUBISHI and EXIMBANK of Japan was a distinct and separate contract from that entered into by MITSUBISHI and ATLAS. Surely, in the latter contract, it is not EXIMBANK, that was intended to be benefited. It is MITSUBISHI which stood to profit. Besides, the Loan and Sales Contract cannot be any clearer. The only signatories to the same were MITSUBISHI and ATLAS. Nowhere in the contract can it be inferred that MITSUBISHI acted for and in behalf of EXIMBANK, of Japan nor of any entity, private or public, for that matter.

Corollary to this, it may well be stated that in this jurisdiction, well-settled is the rule that when a contract of loan is completed, the money ceases to be the property of the former owner and becomes the sole property of the obligor (Tolentino and Manio vs. Gonzales Sy, 50 Phil. 558).

In the case at bar, when MITSUBISHI obtained the loan of $20 million from EXIMBANK, of Japan, said amount ceased to be the property of the bank and became the property of MITSUBISHI.

The conclusion is indubitable; MITSUBISHI, and NOT EXIMBANK, is the sole creditor of ATLAS, the former being the owner of the $20 million 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. . . .13

To repeat, the contract between Eximbank and Mitsubishi is entirely different. It is complete in itself, does not appear to be suppletory or collateral to another contract and is, therefore, not to be distorted by other considerationsaliunde. The application for the loan was approved on May 20, 1970, or more than a month after the contract between Mitsubishi and Atlas was entered into on April 17, 1970. It is true that under the contract of loan with Eximbank, Mitsubishi agreed to use the amount as a loan to and in consideration for importing copper concentrates from Atlas, but all that this proves is the justification for the loan as represented by Mitsubishi, a standard banking practice for evaluating the prospects of due repayment. There is nothing wrong with such stipulation as the parties in a contract are free to agree on such lawful terms and conditions as they see fit. Limiting the disbursement of the amount borrowed to a certain person or to a certain purpose is not unusual, especially in the case of Eximbank which, aside from protecting its financial exposure, must see to it that the same are in line with the provisions and objectives of its charter.

Respondents postulate that Mitsubishi had to be a conduit because Eximbank's charter prevents it from making loans except to Japanese individuals and corporations. We are not impressed. Not only is there a failure to establish such submission by adequate evidence but it posits the unfair and unexplained imputation that, for reasons subject only of surmise, said financing institution would deliberately circumvent its own charter to accommodate an alien borrower through a manipulated subterfuge, but with it as a principal and the real obligee.

The allegation that the interest paid by Atlas was remitted in full by Mitsubishi to Eximbank, assuming the truth thereof, is too tenuous and conjectural to support the proposition that Mitsubishi is a mere conduit. Furthermore, the remittance of the interest payments may also be logically viewed as an arrangement in paying Mitsubishi's obligation to Eximbank. Whatever arrangement was agreed upon by Eximbank and Mitsubishi as to the manner or procedure for the payment of the latter's obligation is their own concern. It should also be noted that Eximbank's loan to Mitsubishi imposes interest at the rate of 75%per annum, while Mitsubishis contract with Atlas merely states that the "interest on the amount of the loan shall be the actual cost beginning from and including other dates of releases against loan."14

It is too settled a rule in this jurisdiction, as to dispense with the need for citations, that laws granting exemption from tax are construedstrictissimi jurisagainst the taxpayer and liberally in favor of the taxing power. Taxation is the rule and exemption is the exception. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed, which onus petitioners have failed to discharge. Significantly, private respondents are not even among the entities which, under Section 29 (b) (7) (A) of the tax code, are entitled to exemption and which should indispensably be the party in interest in this case.

Definitely, the taxability of a party cannot be blandly glossed over on the basis of a supposed "broad, pragmatic analysis" alone without substantial supportive evidence, lest governmental operations suffer due to diminution of much needed funds. Nor can we close this discussion without taking cognizance of petitioner's warning, of pervasive relevance at this time, that while international comity is invoked in this case on the nebulous representation that the funds involved in the loans are those of a foreign government, scrupulous care must be taken to avoid opening the floodgates to the violation of our tax laws. Otherwise, the mere expedient of having a Philippine corporation enter into a contract for loans or other domestic securities with private foreign entities, which in turn will negotiate independently with their governments, could be availed of to take advantage of the tax exemption law under discussion.

WHEREFORE, the decisions of the Court of Tax Appeals in CTA Cases Nos. 2801 and 3015, dated April 18, 1980 and January 15, 1981, respectively, are hereby REVERSED and SET ASIDE.

SO ORDERED.

G.R. No. 112024 January 28, 1999

PHILIPPINE BANK OF COMMUNICATIONS,petitioner,vs.COMMISSIONER OF INTERNAL REVENUE, COURT OF TAX APPEALS and COURT OF APPEALS,respondent.

QUISUMBING,J.:

This petition for review assails the Resolution1of the Court of Appeals dated September 22, 1993affirmingthe Decision2and a Resolution3of the Court Of Tax Appeals which denied the claims of the petitioner for tax refund and tax credits, anddisposingas follows:

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

SO ORDERED.4

The Court of Tax Appeals earlier ruled as follows:

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

SO ORDERED.5

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

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

Subsequently, however, PBCom suffered losses so that when it filed its Annual Income Tax Returns for the year-ended December 31, 1986, the petitioner likewise reported a net loss of P14,129,602.00, and thus declared no tax payable for the year.

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

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

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

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

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

1985 1986

Net Income (Loss) (P25,317,288.00) (P14,129,602.00)

Tax Due NIL NIL

Quarterly tax.

Payments Made 5,016,954.00

Tax Withheld at Source 282,795.50 234,077.69

Excess Tax Payments P5,299,749.50* P234,077.69

=============== =============

*CTA's decision reflects PBCom's 1985 tax claim as P5,299,749.95. A forty five centavo difference was noted.

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

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

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

The issues raised by the petitioner are:

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

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

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

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

REVENUE MEMORANDUM CIRCULAR NO. 7-85

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

TO: All Internal Revenue Officers and Others Concerned.

Sec. 85 And 86 Of the National Internal Revenue Code provide:

xxx xxx xxx

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

xxx xxx xxx

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

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

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

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

Petitioner argues that the government is barred from asserting a position contrary to its declared circular if it would result to injustice to taxpayers. CitingABS CBN Broadcasting Corporation vs. Court of Tax Appeals10petitioner claims that rulings or circulars promulgated by the Commissioner of Internal Revenue have no retroactive effect if it would be prejudicial to taxpayers, In ABS-CBN case, the Court held that the government is precluded from adopting a position inconsistent with one previously taken where injustice would result therefrom or where there has been a misrepresentation to the taxpayer.

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

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

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

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

c). where the taxpayer acted in bad faith.

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

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

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

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

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

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

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

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

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

Clearly, the prescriptive period of two years should commence to run only from the time that the refund is ascertained, which can only be determined after a final adjustment return is accomplished. In the present case, this date is April 16, 1984, and two years from this date would be April 16, 1986. . . . As we have earlier said in the TMX Sales case, Sections 68.1669,17and 7018on Quarterly Corporate Income Tax Payment and Section 321 should be considered in conjunction with it19

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

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

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

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

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

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

Art. 8 of the Civil Code26recognizes judicial decisions, applying or interpreting statutes as part of the legal system of the country. But administrative decisions do not enjoy that level of recognition. A memorandum-circular of a bureau head could not operate to vest a taxpayer with shield against judicial action. For there are no vested rights to speak of respecting a wrong construction of the law by the administrative officials and such wrong interpretation could not place the Government in estoppel to correct or overrule the same.27Moreover, the non-retroactivity of rulings by the Commissioner of Internal Revenue is not applicable in this case because the nullity of RMC No. 7-85 was declared by respondent courts and not by the Commissioner of Internal Revenue. Lastly, it must be noted that, as repeatedly held by this Court, a claim for refund is in the nature of a claim for exemption and should be construed instrictissimi jurisagainst the taxpayer.28

On the second issue, the petitioner alleges that the Court of Appeals seriously erred in affirming CTA's decision denying its claim for refund of P234,077.69 (tax overpaid in 1986), based on mere speculation, without proof, that PBCom availed of the automatic tax credit in 1987.

Sec. 69 of the 1977 NIRC29(now Sec. 76 of the 1997 NIRC) provides that any excess of the total quarterly payments over the actual income tax computed in the adjustment or final corporate income tax return, shall either(a) be refunded to the corporation, or (b) may be credited against the estimated quarterly income tax liabilities for the quarters of the succeeding taxable year.

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

As stated by respondent Court of Appeals:

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

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

WHEREFORE, the, petition is hereby DENIED, The decision of the Court of Appeals appealed from is AFFIRMED, with COSTS against the petitioner.1wphi1.nt

SO ORDERED.

G.R. No. L-59431 July 25, 1984

ANTERO M. SISON, JR.,petitioner,vs.RUBEN B. ANCHETA, Acting Commissioner, Bureau of Internal Revenue; ROMULO VILLA, Deputy Commissioner, Bureau of Internal Revenue; TOMAS TOLEDO Deputy Commissioner, Bureau of Internal Revenue; MANUEL ALBA, Minister of Budget, FRANCISCO TANTUICO, Chairman, Commissioner on Audit, and CESAR E. A. VIRATA, Minister of Finance,respondents.

Antero Sison for petitioner and for his own behalf.

The Solicitor General for respondents.

FERNANDO,C.J.:

The success of the challenge posed in this suit for declaratory relief or prohibition proceeding1on the validity of Section I of Batas Pambansa Blg. 135 depends upon a showing of its constitutional infirmity. The assailed provision further amends Section 21 of the National Internal Revenue Code of 1977, which provides for rates of tax on citizens or residents on (a) taxable compensation income, (b) taxable net income, (c) royalties, prizes, and other winnings, (d) interest from bank deposits and yield or any other monetary benefit from deposit substitutes and from trust fund and similar arrangements, (e) dividends and share of individual partner in the net profits of taxable partnership, (f) adjusted gross income.2Petitioner3as taxpayer alleges that by virtue thereof, "he would be unduly discriminated against by the imposition of higher rates of tax upon his income arising from the exercise of his professionvis-a-visthose which are imposed upon fixed income or salaried individual taxpayers.4He characterizes the above sction as arbitrary amounting to class legislation, oppressive and capricious in character5For petitioner, therefore, there is a transgression of both the equal protection and due process clauses6of the Constitution as well as of the rule requiring uniformity in taxation.7

The Court, in a resolution of January 26, 1982, required respondents to file an answer within 10 days from notice. Such an answer, after two extensions were granted the Office of the Solicitor General, was filed on May 28, 1982.8The facts as alleged were admitted but not the allegations which to their mind are "mere arguments, opinions or conclusions on the part of the petitioner, the truth [for them] being those stated [in their] Special and Affirmative Defenses."9The answer then affirmed: "Batas Pambansa Big. 135 is a valid exercise of the State's power to tax. The authorities and cases cited while correctly quoted or paraghraph do not support petitioner's stand."10The prayer is for the dismissal of the petition for lack of merit.

This Court finds such a plea more than justified. The petition must be dismissed.

1. It is manifest that the field of state activity has assumed a much wider scope, The reason was so clearly set forth by retired Chief Justice Makalintal thus: "The areas which used to be left to private enterprise and initiative and which the government was called upon to enter optionally, and only 'because it was better equipped to administer for the public welfare than is any private individual or group of individuals,' continue to lose their well-defined boundaries and to be absorbed within activities that the government must undertake in its sovereign capacity if it is to meet the increasing social challenges of the times."11Hence the need for more revenues. The power to tax, an inherent prerogative, has to be availed of to assure the performance of vital state functions. It is the source of the bulk of public funds. To praphrase a recent decision, taxes being the lifeblood of the government, their prompt and certain availability is of the essence.12

2. The power to tax moreover, to borrow from Justice Malcolm, "is an attribute of sovereignty. It is the strongest of all the powers of of government."13It is, of course, to be admitted that for all its plenitude 'the power to tax is not unconfined. There are restrictions. The Constitution sets forth such limits . Adversely affecting as it does properly rights, both the due process and equal protection clauses inay properly be invoked, all petitioner does, to invalidate in appropriate cases a revenue measure. if it were otherwise, there would -be truth to the 1803 dictum of Chief Justice Marshall that "the power to tax involves the power to destroy."14In a separate opinion inGraves v. New York,15Justice Frankfurter, after referring to it as an 1, unfortunate remark characterized it as "a flourish of rhetoric [attributable to] the intellectual fashion of the times following] a free use of absolutes."16This is merely to emphasize that it is riot and there cannot be such a constitutional mandate. Justice Frankfurter could rightfully conclude: "The web of unreality spun from Marshall's famous dictum was brushed away by one stroke of Mr. Justice Holmess pen: 'The power to tax is not the power to destroy while this Court sits."17So it is in the Philippines.

3. This Court then is left with no choice. The Constitution as the fundamental law overrides any legislative or executive, act that runs counter to it. In any case therefore where it can be demonstrated that the challenged statutory provision as petitioner here alleges fails to abide by its command, then this Court must so declare and adjudge it null. The injury thus is centered on the question of whether the imposition of a higher tax rate on taxable net income derived from business or profession than on compensation is constitutionally infirm.

4, The difficulty confronting petitioner is thus apparent. He alleges arbitrariness. A mere allegation, as here. does not suffice. There must be a factual foundation of such unconstitutional taint. Considering that petitioner here would condemn such a provision as void or its face, he has not made out a case. This is merely to adhere to the authoritative doctrine that were the due process and equal protection clauses are invoked, considering that they arc not fixed rules but rather broad standards, there is a need for of such persuasive character as would lead to such a conclusion. Absent such a showing, the presumption of validity must prevail.18

5. It is undoubted that the due process clause may be invoked where a taxing statute is so arbitrary that it finds no support in the Constitution. An obvious example is where it can be shown to amount to the confiscation of property. That would be a clear abuse of power. It then becomes the duty of this Court to say that such an arbitrary act amounted to the exercise of an authority not conferred. That properly calls for the application of the Holmes dictum. It has also been held that where the assailed tax measure is beyond the jurisdiction of the state, or is not for a public purpose, or, in case of a retroactive statute is so harsh and unreasonable, it is subject to attack on due process grounds.19

6. Now for equal protection. The applicable standard to avoid the charge that there is a denial of this constitutional mandate whether the assailed act is in the exercise of the lice power or the power of eminent domain is to demonstrated that the governmental act assailed, far from being inspired by the attainment of the common weal was prompted by the spirit of hostility, or at the very least, discrimination that finds no support in reason. It suffices then that the laws operate equally and uniformly on all persons under similar circumstances or that all persons must be treated in the same manner, the conditions not being different, both in the privileges conferred and the liabilities imposed. Favoritism and undue preference cannot be allowed. For the principle is that equal protection and security shall be given to every person under circumtances which if not Identical are analogous. If law be looked upon in terms of burden or charges, those that fall within a class should be treated in the same fashion, whatever restrictions cast on some in the group equally binding on the rest."20That same formulation applies as well to taxation measures. The equal protection clause is, of course, inspired by the noble concept of approximating the Ideal of the laws benefits being available to all and the affairs of men being governed by that serene and impartial uniformity, which is of the very essence of the Idea of law. There is, however, wisdom, as well as realism in these words of Justice Frankfurter: "The equality at which the 'equal protection' clause aims is not a disembodied equality. The Fourteenth Amendment enjoins 'the equal protection of the laws,' and laws are not abstract propositions. They do not relate to abstract units A, B and C, but are expressions of policy arising out of specific difficulties, address to the attainment of specific ends by the use of specific remedies. The Constitution does not require things which are different in fact or opinion to be treated in law as though they were the same."21Hence the constant reiteration of the view that classification if rational in character is allowable. As a matter of fact, in a leading case of Lutz V. Araneta,22this Court, through Justice J.B.L. Reyes, went so far as to hold "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.'"23

7. Petitioner likewise invoked the kindred concept of uniformity. According to the Constitution: "The rule of taxation shag be uniform and equitable."24This requirement is met according to Justice Laurel inPhilippine Trust Company v. Yatco,25decided in 1940, when the tax "operates with the same force and effect in every place where the subject may be found. "26He likewise added: "The rule of uniformity does not call for perfect uniformity or perfect equality, because this is hardly attainable."27The problem of classification did not present itself in that case. It did not arise until nine years later, when the Supreme Court held: "Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation, ... .28As clarified by Justice Tuason, where "the differentiation" complained of "conforms to the practical dictates of justice and equity" it "is not discriminatory within the meaning of this clause and is therefore uniform."29There is quite a similarity then to the standard of equal protection for all that is required is that the tax "applies equally to all persons, firms and corporations placed in similar situation."30

8. Further on this point. Apparently, what misled petitioner is his failure to take into consideration the distinction between a tax rate and a tax base. There is no legal objection to a broader tax base or taxable income by eliminating all deductible items and at the same time reducing the applicable tax rate. Taxpayers may be classified into different categories. To repeat, it. is enough that the classification must rest upon substantial distinctions that make real differences. In the case of the gross income taxation embodied in Batas Pambansa Blg. 135, the, discernible basis of classification is the susceptibility of the income to the application of generalized rules removing all deductible items for all taxpayers within the class and fixing a set of reduced tax rates to be applied to all of them. Taxpayers who are recipients of compensation income are set apart as a class. As there is practically no overhead expense, these taxpayers are e not entitled to make deductions for income tax purposes because they are in the same situation more or less. On the other hand, in the case of professionals in the practice of their calling and businessmen, there is no uniformity in the costs or expenses necessary to produce their income. It would not be just then to disregard the disparities by giving all of them zero deduction and indiscriminately impose on all alike the same tax rates on the basis of gross income. There is ample justification then for the Batasang Pambansa to adopt the gross system of income taxation to compensation income, while continuing the system of net income taxation as regards professional and business income.

9. Nothing can be clearer, therefore, than that the petition is without merit, considering the (1) lack of factual foundation to show the arbitrary character of the assailed provision;31(2) the force of controlling doctrines on due process, equal protection, and uniformity in taxation and (3) the reasonableness of the distinction between compensation and taxable net income of professionals and businessman certainly not a suspect classification,

WHEREFORE, the petition is dismissed. Costs against petitioner.

G.R. No. 115455 August 25, 1994

ARTURO M. TOLENTINO,petitioner,vs.THE SECRETARY OF FINANCE and THE COMMISSIONER OF INTERNAL REVENUE,respondents.

G.R. No. 115525 August 25, 1994

JUAN T. DAVID,petitioner,vs.TEOFISTO T. GUINGONA, JR., as Executive Secretary; ROBERTO DE OCAMPO, as Secretary of Finance; LIWAYWAY VINZONS-CHATO, as Commissioner of Internal Revenue; and their AUTHORIZED AGENTS OR REPRESENTATIVES,respondents.

G.R. No. 115543 August 25, 1994

RAUL S. ROCO and the INTEGRATED BAR OF THE PHILIPPINES,petitioners,vs.THE SECRETARY OF THE DEPARTMENT OF FINANCE; THE COMMISSIONERS OF THE BUREAU OF INTERNAL REVENUE AND BUREAU OF CUSTOMS,respondents.

G.R. No. 115544 August 25, 1994

PHILIPPINE PRESS INSTITUTE, INC.; EGP PUBLISHING CO., INC.; PUBLISHING CORPORATION; PHILIPPINE JOURNALISTS, INC.; JOSE L. PAVIA; and OFELIA L. DIMALANTA,petitioners,vs.HON. LIWAYWAY V. CHATO, in her capacity as Commissioner of Internal Revenue; HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary; and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of Finance,respondents.

G.R. No. 115754 August 25, 1994

CHAMBER OF REAL ESTATE AND BUILDERS ASSOCIATIONS, INC., (CREBA),petitioner,vs.THE COMMISSIONER OF INTERNAL REVENUE,respondent.

G.R. No. 115781 August 25, 1994

KILOSBAYAN, INC., JOVITO R. SALONGA, CIRILO A. RIGOS, ERME CAMBA, EMILIO C. CAPULONG, JR., JOSE T. APOLO, EPHRAIM TENDERO, FERNANDO SANTIAGO, JOSE ABCEDE, CHRISTINE TAN, FELIPE L. GOZON, RAFAEL G. FERNANDO, RAOUL V. VICTORINO, JOSE CUNANAN, QUINTIN S. DOROMAL, MOVEMENT OF ATTORNEYS FOR BROTHERHOOD, INTEGRITY AND NATIONALISM, INC. ("MABINI"), FREEDOM FROM DEBT COALITION, INC., PHILIPPINE BIBLE SOCIETY, INC., and WIGBERTO TAADA,petitioners,vs.THE EXECUTIVE SECRETARY, THE SECRETARY OF FINANCE, THE COMMISSIONER OF INTERNAL REVENUE and THE COMMISSIONER OF CUSTOMS,respondents.

G.R. No. 115852 August 25, 1994

PHILIPPINE AIRLINES, INC.,petitioner,vs.THE SECRETARY OF FINANCE, and COMMISSIONER OF INTERNAL REVENUE,respondents.

G.R. No. 115873 August 25, 1994

COOPERATIVE UNION OF THE PHILIPPINES,petitioners,vs.HON. LIWAYWAY V. CHATO, in her capacity as the Commissioner of Internal Revenue, HON. TEOFISTO T. GUINGONA, JR., in his capacity as Executive Secretary, and HON. ROBERTO B. DE OCAMPO, in his capacity as Secretary of Finance,respondents.

G.R. No. 115931 August 25, 1994

PHILIPPINE EDUCATIONAL PUBLISHERS ASSOCIATION, INC., and ASSOCIATION OF PHILIPPINE BOOK-SELLERS,petitioners,vs.HON. ROBERTO B. DE OCAMPO, as the Secretary of Finance; HON. LIWAYWAY V. CHATO, as the Commissioner of Internal Revenue and HON. GUILLERMO PARAYNO, JR., in his capacity as the Commissioner of Customs,respondents.

Arturo M. Tolentino for and in his behalf.

Donna Celeste D. Feliciano and Juan T. David for petitioners in G.R. No. 115525.

Roco, Bunag, Kapunan, Migallos and Jardeleza for petitioner R.S. Roco.

Villaranza and Cruz for petitioners in G.R. No. 115544.

Carlos A. Raneses and Manuel M. Serrano for petitioner in G.R. No. 115754.

Salonga, Hernandez & Allado for Freedon From Debts Coalition, Inc. & Phil. Bible Society.

Estelito P. Mendoza for petitioner in G.R. No. 115852.

Panganiban, Benitez, Parlade, Africa & Barinaga Law Offices for petitioners in G.R. No. 115873.

R.B. Rodriguez & Associates for petitioners in G.R. No. 115931.

Reve A.V. Saguisag for MABINI.

MENDOZA,J.:

The value-added tax (VAT) is levied on the sale, barter or exchange of goods and properties as well as on the sale or exchange of services. It is equivalent to 10% of the gross selling price or gross value in money of goods or properties sold, bartered or exchanged or of the gross receipts from the sale or exchange of services. Republic Act No. 7716 seeks to widen the tax base of the existing VAT system and enhance its administration by amending the National Internal Revenue Code.

These are various suits forcertiorariand prohibition, challenging the constitutionality of Republic Act No. 7716 on various grounds summarized in the resolution of July 6, 1994 of this Court, as follows:

I. Procedural Issues:

A. Does Republic Act No. 7716 violate Art. VI, 24 of the Constitution?

B. Does it violate Art. VI, 26(2) of the Constitution?

C. What is the extent of the power of the Bicameral Conference Committee?

II. Substantive Issues:

A. Does the law violate the following provisions in the Bill of Rights (Art. III)?

1. 1

2. 4

3. 5

4. 10

B. Does the law violate the following other provisions of the Constitution?

1. Art. VI, 28(1)

2. Art. VI, 28(3)

These questions will be dealt in the order they are stated above. As will presently be explained not all of these questions are judicially cognizable, because not all provisions of the Constitution are self executing and, therefore, judicially enforceable. The other departments of the government are equally charged with the enforcement of the Constitution, especially the provisions relating to them.

I. PROCEDURAL ISSUES

The contention of petitioners is that in enacting Republic Act No. 7716, or the Expanded Value-Added Tax Law, Congress violated the Constitution because, although H. No. 11197 had originated in the House of Representatives, it was not passed by the Senate but was simply consolidated with the Senate version (S. No. 1630) in the Conference Committee to produce the bill which the President signed into law. The following provisions of the Constitution are cited in support of the proposition that because Republic Act No. 7716 was passed in this manner, it did not originate in the House of Representatives and it has not thereby become a law:

Art. VI, 24: All appropriation, revenue or tariff bills, bills authorizing increase of the public debt, bills of local application, and private bills shall originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments.

Id., 26(2): No bill passed by either House shall become a law unless it has passed three readings on separate days, and printed copies thereof in its final form have been distributed to its Members three days before its passage, except when the President certifies to the necessity of its immediate enactment to meet a public calamity or emergency. Upon the last reading of a bill, no amendment thereto shall be allowed, and the vote thereon shall be taken immediately thereafter, and theyeasandnaysentered in the Journal.

It appears that on various dates between July 22, 1992 and August 31, 1993, several bills1were introduced in the House of Representatives seeking to amend certain provisions of the National Internal Revenue Code relative to the value-added tax or VAT. These bills were referred to the House Ways and Means Committee which recommended for approval a substitute measure, H. No. 11197, entitled

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 106, 107, 108 AND 110 OF TITLE IV, 112, 115 AND 116 OF TITLE V, AND 236, 237 AND 238 OF TITLE IX, AND REPEALING SECTIONS 113 AND 114 OF TITLE V, ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED

The bill (H. No. 11197) was considered on second reading starting November 6, 1993 and, on November 17, 1993, it was approved by the House of Representatives after third and final reading.

It was sent to the Senate on November 23, 1993 and later referred by that body to its Committee on Ways and Means.

On February 7, 1994, the Senate Committee submitted its report recommending approval of S. No. 1630, entitled

AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM TO WIDEN ITS TAX BASE AND ENHANCE ITS ADMINISTRATION, AMENDING FOR THESE PURPOSES SECTIONS 99, 100, 102, 103, 104, 105, 107, 108, AND 110 OF TITLE IV, 112 OF TITLE V, AND 236, 237, AND 238 OF TITLE IX, AND REPEALING SECTIONS 113, 114 and 116 OF TITLE V, ALL OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES

It was stated that the bill was being submitted "in substitution of Senate Bill No. 1129, taking into consideration P.S. Res. No. 734 and H.B. No. 11197."

On February 8, 1994, the Senate began consideration of the bill (S. No. 1630). It finished debates on the bill and approved it on second reading on March 24, 1994. On the same day, it approved the bill on third reading by the affirmative votes of 13 of its members, with one abstention.

H. No. 11197 and its Senate version (S. No. 1630) were then referred to a conference committee which, after meeting four times (April 13, 19, 21 and 25, 1994), recommended that "House Bill No. 11197, in consolidation with Senate Bill No. 1630, be approved in accordance with the attached copy of the bill as reconciled and approved by the conferees."

The Conference Committee bill, entitled "AN ACT RESTRUCTURING THE VALUE-ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES," was thereafter approved by the House of Representatives on April 27, 1994 and by the Senate on May 2, 1994. The enrolled bill was then presented to the President of the Philippines who, on May 5, 1994, signed it. It became Republic Act No. 7716. On May 12, 1994, Republic Act No. 7716 was published in two newspapers of general circulation and, on May 28, 1994, it took effect, although its implementation was suspended until June 30, 1994 to allow time for the registration of business entities. It would have been enforced on July 1, 1994 but its enforcement was stopped because the Court, by the vote of 11 to 4 of its members, granted a temporary restraining order on June 30, 1994.

First. Petitioners' contention is that Republic Act No. 7716 did not "originate exclusively" in the House of Representatives as required by Art. VI, 24 of the Constitution, because it is in fact the result of the consolidation of two distinct bills, H. No. 11197 and S. No. 1630. In this connection, petitioners point out that although Art. VI, SS 24 was adopted from the American Federal Constitution,2it is notable in two respects: the verb "shall originate" is qualified in the Philippine Constitution by the word "exclusively" and the phrase "as on other bills" in the American version is omitted. This means, according to them, that to be considered as having originated in the House, Republic Act No. 7716 must retain the essence of H. No. 11197.

This argument will not bear analysis. To begin with, it is not the law but the revenue bill which is required by the Constitution to "originate exclusively" in the House of Representatives. It is important to emphasize this, because a bill originating in the House may undergo such extensive changes in the Senate that the result may be a rewriting of the whole. The possibility of a third version by the conference committee will be discussed later. At this point, what is important to note is that, as a result of the Senate action, a distinct bill may be produced. To insist that a revenue statute and not only the bill which initiated the legislative process culminating in the enactment of the law must substantially be the same as the House bill would be to deny the Senate's power not only to "concur with amendments" but also to "propose amendments." It would be to violate the coequality of legislative power of the two houses of Congress and in fact make the House superior to the Senate.

The contention that the constitutional design is to limit the Senate's power in respect of revenue bills in order to compensate for the grant to the Senate of the treaty-ratifying power3and thereby equalize its powers and those of the House overlooks the fact that the powers being compared are different. We are dealing here with the legislative power which under the Constitution is vested not in any particular chamber but in the Congress of the Philippines, consisting of "a Senate and a House of Representatives."4The exercise of the treaty-ratifying power is not the exercise of legislative power. It is the exercise of a check on the executive power. There is, therefore, no justification for comparing the legislative powers of the House and of the Senate on the basis of the possession of such nonlegislative power by the Senate. The possession of a similar power by the U.S. Senate5has never been thought of as giving it more legislative powers than the House of Representatives.

In the United States, the validity of a provision ( 37) imposing anad valoremtax based on the weight of vessels, which the U.S. Senate had inserted in the Tariff Act of 1909, was upheld against the claim that the provision was a revenue bill which originated in the Senate in contravention of Art. I, 7 of the U.S. Constitution.6Nor is the power to amend limited to adding a provision or two in a revenue bill emanating from the House. The U.S. Senate has gone so far as changing the whole of bills following the enacting clause and substituting its own versions. In 1883, for example, it struck out everything after the enacting clause of a tariff bill and wrote in its place its own measure, and the House subsequently accepted the amendment. The U.S. Senate likewise added 847 amendments to what later became the Payne-Aldrich Tariff Act of 1909; it dictated the schedules of the Tariff Act of 1921; it rewrote an extensive tax revision bill in the same year and recast most of the tariff bill of 1922.7Given, then, the power of the Senate to propose amendments, the Senate can propose its own version even with respect to bills which are required by the Constitution to originate in the House.

It is insisted, however, that S. No. 1630 was passed not in substitution of H. No. 11197 but of another Senate bill (S. No. 1129) earlier filed and that what the Senate did was merely to "take [H. No. 11197] into consideration" in enacting S. No. 1630. There is really no difference between the Senate preserving H. No. 11197 up to the enacting clause and then writing its own version following the enacting clause (which, it would seem, petitioners admit is an amendment by substitution), and, on the other hand, separately presenting a bill of its own on the same subject matter. In either case the result are two bills on the same subject.

Indeed, what the Constitution simply means is that the initiative for filing revenue, tariff, or tax bills, bills authorizing an increase of the public debt, private bills and bills of local application must come from the House of Representatives on the theory that, elected as they are from the districts, the members of the House can be expected to be more sensitive to the local needs and problems. On the other hand, the senators, who are elected at large, are expected to approach the same problems from the national perspective. Both views are thereby made to bear on the enactment of such laws.

Nor does the Constitution prohibit the filing in the Senate of a substitute bill in anticipation of its receipt of the bill from the House, so long as action by the Senate as a body is withheld pending receipt of the House bill. The Court cannot, therefore, understand the alarm expressed over the fact that on March 1, 1993, eight months before the House passed H. No. 11197, S. No. 1129 had been filed in the Senate. After all it does not appear that the Senate ever considered it. It was only after the Senate had received H. No. 11197 on November 23, 1993 that the process of legislation in respect of it began with the referral to the Senate Committee on Ways and Means of H. No. 11197 and the submission by the Committee on February 7, 1994 of S. No. 1630. For that matter, if the question were simply the priority in the time of filing of bills, the fact is that it was in the House that a bill (H. No. 253) to amend the VAT law was first filed on July 22, 1992. Several other bills had been filed in the House before S. No. 1129 was filed in the Senate, and H. No. 11197 was only a substitute of those earlier bills.

Second. Enough has been said to show that it was within the power of the Senate to propose S. No. 1630. We now pass to the next argument of petitioners that S. No. 1630 did not pass three readings on separate days as required by the Constitution8because the second and third readings were done on the same day, March 24, 1994. But this was because on February 24, 19949and again on March 22, 1994,10the President had certified S. No. 1630 as urgent. The presidential certification dispensed with the requirement not only of printing but also that of reading the bill on separate days. The phrase "except when the President certifies to the necessity of its immediate enactment, etc." in Art. VI, 26(2) qualifies the two stated conditions before a bill can become a law: (i) the bill has passed three readings on separate days and (ii) it has been printed in its final form and distributed three days before it is finally approved.

In other words, the "unless" clause must be read in relation to the "except" clause, because the two are really coordinate clauses of the same sentence. To construe the "except" clause as simply dispensing with the second requirement in the "unless" clause (i.e., printing and distribution three days before final approval) would not only violate the rules of grammar. It would also negate the very premise of the "except" clause: the necessity of securing the immediate enactment of a bill which is certified in order to meet a public calamity or emergency. For if it is only the printing that is dispensed with by presidential certification, the time saved would be so negligible as to be of any use in insuring immediate enactment. It may well be doubted whether doing away with the necessity of printing and distributing copies of the bill three days before the third reading would insure speedy enactment of a law in the face of an emergency requiring the calling of a special election for President and Vice-President. Under the Constitution such a law is required to be made within seven days of the convening of Congress in emergency session.11

That upon the certification of a bill by the President the requirement of three readings on separate days and of printing and distribution can be dispensed with is supported by the weight of legislative practice. For example, the bill defining thecertiorarijurisdiction of this Court which, in consolidation with the Senate version, became Republic Act No. 5440, was passed on second and third readings in the House of Representatives on the same day (May 14, 1968) after the bill had been certified by the President as urgent.12

There is, therefore, no merit in the contention that presidential certification dispenses only with the requirement for the printing of the bill and its distribution three days before its passage but not with the requirement of three readings on separate days, also.

It is nonetheless urged that the certification of the bill in this case was invalid because there was no emergency, the condition stated in the certification of a "growing budget deficit" not being an unusual condition in this country.

It is noteworthy that no member of the Senate saw fit to controvert the reality of the factual basis of the certification. To the contrary, by passing S. No. 1630 on second and third readings on March 24, 1994, the Senate accepted the President's certification. Should such certification be now reviewed by this Court, especially when no evidence has been shown that, because S. No. 1630 was taken up on second and third readings on the same day, the members of the Senate were deprived of the time needed for the study of a vital piece of legislation?

The sufficiency of the factual basis of the suspension of the writ ofhabeas corpusor declaration of martial law under Art. VII, 18, or the existence of a national emergency justifying the delegation of extraordinary powers to the President under Art. VI, 23(2), is subject to judicial review because basic rights of individuals may be at hazard. But the factual basis of presidential certification of bills, which involves doing away with procedural requirements designed to insure that bills are duly considered by members of Congress, certainly should elicit a different standard of review.

Petitioners also invite attention to the fact that the President certified S. No. 1630 and not H. No. 11197. That is because S. No. 1630 was what the Senate was considering. When the matter was before the House, the President likewise certified H. No. 9210 the pending in the House.

Third. Finally it is contended that the bill which became Republic Act No. 7716 is the bill which the Conference Committee prepared by consolidating H. No. 11197 and S. No. 1630. It is claimed that the Conference Committee report included provisions not found in either the House bill or the Senate bill and that these provisions were "surreptitiously" inserted by the Conference Committee. Much is made of the fact that in the last two days of its session on April 21 and 25, 1994 the Committee met behind closed doors. We are not told, however, whether the provisions were not the result of the give and take that often mark the proceedings of conference committees.

Nor is there anything unusual or extraordinary about the fact that the Conference Committee met in executive sessions. Often the only way to reach agreement on conflicting provisions is to meet behind closed doors, with only the conferees present. Otherwise, no compromise is likely to be made. The Court is not about to take the suggestion of a cabal or sinister motive attributed to the conferees on the basis solely of their "secret meetings" on April 21 and 25, 1994, nor read anything into the incomplete remarks of the members, marked in the transcript of stenographic notes by ellipses. The incomplete sentences are probably due to the stenographer's own limitations or to the incoherence that sometimes characterize conversations. William Safire noted some such lapses in recorded talks even by recent past Presidents of the United States.

In any event, in the United States conference committees had been customarily held in executive sessions with only the conferees and their staffs in attendance.13Only in November 1975 was a new rule adopted requiring open sessions. Even then a majority of either chamber's conferees may vote in public to close the meetings.14

As to the possibility of an entirely new bill emerging out of a Conference Committee, it has been explained:

Under congressional rules of procedure, conference committees are not expected to make any material change in the measure at issue, either by deleting provisions to which both houses have already agreed or by inserting new provisions. But this is a difficult provision to enforce. Note the problem when one house amends a proposal originating in either house by striking out everything following the enacting clause and substituting provisions which make it an entirely new bill. The versions are now altogether different, permitting a conference committee to draft essentially a new bill. . . .15

The result is a third version, which is considered an "amendment in the nature of a substitute," the only requirement for which being that the third version be germane to the subject of the House and Senate bills.16

Indeed, this Court recently held that it is within the power of a conference committee to include in its report an entirely new provision that is not found either in the House bill or in the Senate bill.17If the committee can propose an amendment consisting of one or two provisions, there is no reason why it cannot propose several provisions, collectively considered as an "amendment in the nature of a substitute," so long as such amendment is germane to the subject of the bills before the committee. After all, its report was not final but needed the approval of both houses of Congress to become valid as an act of the legislative department. The charge that in this case the Conference Committee acted as a third legislative chamber is thus without any basis.18

Nonetheless, it is argued that under the respective Rules of the Senate and the House of Representatives a conference committee can only act on the differing provisions of a Senate bill and a House bill, and that contrary to these Rules the Conference Committee inserted provisions not found in the bills submitted to it. The following provisions are cited in support of this contention:

Rules of the Senate

Rule XII:

26. In the event that the Senate does not agree with the House of Representatives on the provision of any bill or joint resolution,thedifferences shall be settled by a conference committee of both Houseswhich shall meet within ten days after their composition.

The President shall designate the members of the conference committee in accordance with subparagraph (c), Section 3 of Rule III.

Each Conference Committee Report shall contain a detailed and sufficiently explicit statement of the changes in or amendments to the subject measure,and shall be signed by the conferees.

The consideration of such report shall not be in order unless the report has been filed with the Secretary of the Senate and copies thereof have been distributed to the Members.

(Emphasis added)

Rules of the House of Representatives

Rule XIV:

85. Conference Committee Reports. In the event that the House does not agree with the Senate on the amendments to any bill or joint resolution,the differences may be settled by conference committees of both Chambers.

The consideration of conference committee reports shall always be in order, except when the journal is being read, while the roll is being called or the House is dividing on any question. Each of the pages of such reports shall be signed by the conferees.Eachreport shall contain a detailed, sufficiently explicit statement of the changes in or amendments to the subject measure.

The consideration of such report shall not be in order unless copies thereof are distributed to the Members: Provided, That in the last fifteen days of each session period it shall be deemed sufficient that three copies of the report, signed as above provided, are deposited in the office of the Secretary General.

(Emphasis added)

To be sure, nothing in the Rules limits a conference committee to a consideration of conflicting provisions. But Rule XLIV, 112 of the Rules of the Senate is cited to the effect that "If there is no Rule applicable to a specific case the precedents of the Legislative Department of the Philippines shall be resorted to, and as a supplement of these, the Rules contained in Jefferson's Manual." The following is then quoted from the Jefferson's Manual:

The managers of a conference must confine themselves to the differences committed to them. . . and may not include subjects not within disagreements, even though germane to a question in issue.

Note that, according to Rule XLIX, 112, in case there is no specific rule applicable, resort must be to the legislative practice. The Jefferson's Manual is resorted to only as supplement. It is common place in Congress that conference committee reports include new matters which, though germane, have not been committed to the committee. This practice was admitted by Senator Raul S. Roco, petitioner in G.R. No. 115543, during the oral argument in these cases. Whatever, then, may be provided in the Jefferson's Manual must be considered to have been modified by the legislative practice. If a change is desired in the practice it must be sought in Congress since this question is not covered by any constitutional provision but is only an internal rule of each house. Thus, Art. VI, 16(3) of the Constitution provides that "Each House may determine the rules of its proceedings. . . ."

This observation applies to the other contention that the Rules of the two chambers were likewise disregarded in the preparation of the Conference Committee Report because the Report did not contain a "detailed and sufficiently explicit statement of changes in, or amendments to, the subject measure." The Report used brackets and capital letters to indicate the changes. This is a standard practice in bill-drafting. We cannot say that in using these marks and symbols the Committee violated the Rules of the Senate and the House. Moreover, this Court is not the proper forum for the enforcement of these internal Rules. To the contrary, as we have already ruled, "parliamentary rules are merely procedural and with their observance the courts have no concern."19Our concern is with the procedural requirements of the Constitution for the enactment of laws. As far as these requirements are concerned, we are satisfied that they have been faithfully observed in these cases.

Nor is there any reason for requiring that the Committee's Report in these cases must have undergone three readings in each of the two houses. If that be the case, there would be no end to negotiation since each house may seek modifications of the compromise bill. The nature of the bill, therefore, requires that it be acted upon by each house on a "take it or leave it" basis, with the only alternative that if it is not approved by both houses, another conference committee must be appointed. But then again the result would still be a compromise measure that may not be wholly satisfying to both houses.

Art. VI, 26(2) must, therefore, be construed as referring only to bills introduced for the first time in either house of Congress, not to the conference committee report. For if the purpose of requiring three readings is to give members of Congress time to study bills, it cannot be gainsaid that H. No. 11197 was passed in the House after three readings; that in the Senate it was considered on first reading and then referred to a committee of that body; that although the Senate committee did not report out the House bill, it submitted a version (S. No. 1630) which it had prepared by "taking into consideration" the House bill; that for its part the Conference Committee consolidated the two bills and prepared a compromise version; that the Conference Committee Report was thereafter approved by the House and the Senate, presumably after appropriate study by their members. We cannot say that, as a matter of fact, the members of Congress were not fully informed of the provisions of the bill. The allegation that the Conference Committee usurped the legislative power of Congress is, in our view, without warrant in fact and in law.

Fourth. Whatever doubts there may be as to the formal validity of Republic Act No. 7716 must be resolved in its favor. Our cases20manifest firm adherence to the rule that an enrolled copy of a bill is conclusive not only of its provisions but also of its due enactment. Not even claims that a proposed constitutional amendment was invalid because the requisite votes for its approval had not been obtained21or that certain provisions of a statute had been "smuggled" in the printing of the bill22have moved or persuaded us to look behind the proceedings of a coequal branch of the government. There is no reason now to depart from this rule.

No claim is here made that the "enrolled bill" rule is absolute. In fact in one case23we "went behind" an enrolled bill and consulted the Journal to determine whether certain provisions of a statute had been approved by the Senate in view of the fact that the President of the Senate himself, who had signed the enrolled bill, admitted a mistake and withdrew his signature, so that in effect there was no longer an enrolled bill to consider.

But where allegations that the constitutional procedures for the passage of bills have not been observed have no more basis than another allegation that the Conference Committee "surreptitiously" inserted provisions into a bill which it had prepared, we should decline the invitation to go behind the enrolled copy of the bill. To disregard the "enrolled bill" rule in such cases would be to disregard the respect due the other two departments of our government.

Fifth. An additional attack on the formal validity of Republic Act No. 7716 is made by the Philippine Airlines, Inc., petitioner in G.R. No. 11582, namely, that it violates Art. VI, 26(1) which provides that "Every bill passed by Congress shall embrace only one subject which shall be expressed in the title thereof." It is contended that neither H. No. 11197 nor S. No. 1630 provided for removal of exemption of PAL transactions from the payment of the VAT and that this was made only in the Conference Committee bill which became Republic Act No. 7716 without reflecting this fact in its title.

The title of Republic Act No. 7716 is:

AN ACT RESTRUCTURING THE VALUE- ADDED TAX (VAT) SYSTEM, WIDENING ITS TAX BASE AND ENHANCING ITS ADMINISTRATION, AND FOR THESE PURPOSES AMENDING AND REPEALING THE RELEVANT PROVISIONS OF THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES.

Among the provisions of the NIRC amended is 103, which originally read:

103. Exempt transactions. The following shall be exempt from the value-added tax:

. . . .

(q) Transactions which are exempt under special laws or international agreements to which the Philippines is a signatory. Among the transactions exempted from the VAT were those of PAL because it was exempted under its franchise (P.D. No. 1590) from the payment of all "other taxes . . . now or in the near future," in consideration of the payment by it either of the corporate income tax or a franchise tax of 2%.

As a result of its amendment by Republic Act No. 7716, 103 of the NIRC now provides:

103. Exempt transactions. The following shall be exempt from the value-added tax:

. . . .

(q) Transactions which are exempt under special laws, except those granted under Presidential Decree Nos. 66, 529, 972, 1491, 1590. . . .

The effect of the amendment is to remove the exemption granted to PAL, as far as the VAT is concerned.

The question is whether this amendment of 103 of the NIRC is fairly embraced in the title of Republic Act No. 7716, although no mention is made therein of P.D. No. 1590 as among those which the statute amends. We think it is, since the title states that the purpose of the statute is to expand the VAT system, and one way of doing this is to widen its base by withdrawing some of the exemptions granted before. To insist that P.D. No. 1590 be mentioned in the title of the law, in addition to 103 of the NIRC, in which it is specifically referred to, would be to insist that the title of a bill should be a complete index of its content.

The constitutional requirement that every bill passed by Congress shall embrace only one subject which shall be expressed in its title is intended to prevent surprise upon the members of Congress and to inform the people of pending legislation so that, if they wish to, they can be heard regarding it. If, in the case at bar, petitioner did not know before that its exemption had been withdrawn, it is not because of any defect in the title but perhaps for the same reason other statutes, although published, pass unnoticed until some event somehow calls attention to their existence. Indeed, the title of Republic Act No. 7716 is not any more general than the title of PAL's own franchise under P.D. No. 1590, and yet no mention is made of its tax exemption. The title of P.D. No. 1590 is:

AN ACT GRANTING A NEW FRANCHISE TO PHILIPPINE AIRLINES, INC. TO ESTABLISH, OPERATE, AND MAINTAIN AIR-TRANSPORT SERVICES IN THE PHILIPPINES AND BETWEEN THE PHILIPPINES AND OTHER COUNTRIES.

The trend in ou