JURISTS BAR REVIEW CENTER UPDATES IN TAXATION July 2010 ATTY.
RIZALINA V. LUMBERA I. PART I ( JURISPRUDENCE) A. 2007 Cases (1).
COMMISSIONER OF INTERNAL REVENUE versus ISABELA CULTURAL
CORPORATION (ICC) (G.R. 172231 12 February 2007) Facts: The ICC,
received from the BIR an assessment for deficiency income tax
arising from the BIRs disallowance of ICCs claimed expense
deductions for professional and security services billed to and
paid by ICC in 1986 in the amount of P333,196.86, to wit: (a)
Expenses for the auditing services of SGV & Co., for the year
ending December 31, 1985; (b) Expenses for the legal services
[inclusive of retainer fees] of the law firm Bengzon Zarraga
Narciso Cudala Pecson Azcuna & Bengson for the years 1984 and
1985. (c) Expense for security services of El Tigre Security &
Investigation Agency for the months of April and May 1986. (d) The
alleged understatement of ICCs interest income on the three
promissory notes due from Realty Investment, Inc. and for
deficiency expanded withholding tax in the amount of P4,897.79,
inclusive of surcharges and interest, both for the taxable year
1986 for alleged failure of ICC to withhold 1% expanded withholding
tax on its claimed P244,890.00 deduction for security services. ICC
sought a reconsideration of the subject assessments. However, it
received a final notice before seizure demanding payment of the
amounts stated in the said notices. ICC then went to the CTA which
rendered a decision canceling and setting aside the assessment
notices issued against ICC. It held that the claimed deductions for
professional and security services were properly claimed by ICC.
BIR then filed a petition for review with the CA, which affirmed
the CTA decision, thus the present case before the SC. Issue: Are
these deductions allowed? Decision: (1). The requisites for the
deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing
services, are: (a) the expense must be ordinary and necessary; (b)
it must have been paid or incurred during the taxable year; (c) it
must have been paid or incurred in carrying on the trade or
business of the taxpayer; and (d) it must be1
supported by receipts, records or other pertinent papers. The
requisite that it must have been paid or incurred during the
taxable year is further qualified by Section 45 of the National
Internal Revenue Code (NIRC) which states that: "[t]he deduction
provided for in this Title shall be taken for the taxable year in
which paid or accrued or paid or incurred, dependent upon the
method of accounting upon the basis of which the net income is
computed x x x". (2). ICC uses the accrual method of accounting and
pursuant to Revenue Audit Memorandum Order No. 1-2000, expenses not
being claimed as deductions by a taxpayer in the current year when
they are incurred cannot be claimed as deduction from income for
the succeeding year. Thus, a taxpayer who is authorized to deduct
certain expenses and other allowable deductions for the current
year but failed to do so cannot deduct the same for the next year.
The accrual of income and expense is permitted when the all-events
test has been met. This test requires: (1) fixing of a right to
income or liability to pay; and (2) the availability of the
reasonable accurate determination of such income or liability. The
test does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his disposal the
information necessary to compute the amount with reasonable
accuracy. The all-events test is satisfied where computation
remains uncertain, if its basis is unchangeable; the test is
satisfied where a computation may be unknown, but is not as much as
unknowable, within the taxable year. The amount of liability does
not have to be determined exactly; it must be determined with
"reasonable accuracy." Accordingly, the term "reasonable accuracy"
implies something less than an exact or completely accurate amount.
(3). The expenses for legal services pertain to the 1984 and 1985
legal and retainer fees of the law firm Bengzon Zarraga Narciso
Cudala Pecson Azcuna & Bengson, and for reimbursement of the
expenses of said firm in connection with ICCs tax problems for the
year 1984. From the nature of the claimed deductions and the span
of time during which the firm was retained since 1960, ICC can be
expected to have reasonably known the retainer fees charged by the
firm as well as the compensation for its legal services. The
failure to determine the exact amount of the expense during the
taxable year when they could have been claimed as deductions cannot
thus be attributed solely to the delayed billing of these
liabilities by the firm. For one, ICC, in the exercise of due
diligence could have inquired into the amount of their obligation
to the firm, especially so that it is using the accrual method of
accounting. For another, it could have reasonably determined the
amount of legal and retainer fees owing to its familiarity with the
rates charged by their long time legal consultant. The defense of
delayed billing by the firm and the company, which under the
circumstances, is not sufficient to exempt it from being charged
with knowledge of the reasonable amount of the expenses for legal
and auditing services (4). The professional fees of SGV & Co.
for auditing the financial statements of ICC for the year 1985
cannot be validly claimed as expense deductions in 1986. This is so
because ICC failed to present evidence showing that even with only
"reasonable accuracy," as the standard to ascertain its liability
to SGV & Co. in the2
year 1985, it cannot determine the professional fees which said
company would charge for its services. ICC thus failed to discharge
the burden of proving that the claimed expense deductions for the
professional services were allowable deductions for the taxable
year 1986. Hence, per Revenue Audit Memorandum Order No. 1-2000,
they cannot be validly deducted from its gross income for the said
year and were therefore properly disallowed by the BIR. (5). As to
the expenses for security services, the records show that these
expenses were incurred by ICC in 1986 and could therefore be
properly claimed as deductions for the said year. (6). On the
purported understatement of interest income from the promissory
notes of Realty Investment, Inc., findings of the CTA and the Court
of Appeals that no such understatement exists are sustained and
that only simple interest computation and not a compounded one
should have been applied by the BIR. There is indeed no stipulation
between the latter and ICC on the application of compounded
interest. Under Article 1959 of the Civil Code, unless there is a
stipulation to the contrary, interest due should not further earn
interest. (7). The findings of the CTA and the Court of Appeals
that ICC truly withheld the required withholding tax from its
claimed deductions for security services and remitted the same to
the BIR is supported by payment order and confirmation receipts.
Hence, the Assessment Notice for deficiency expanded withholding
tax was properly cancelled and set aside. (2). FELS ENERGY INC. VS.
PROVINCE OF BATANGAS (G.R. 168557 / 2-162007) NAPOCOR VS. LBAA OF
BATANGAS (G.R. 170628 16 February 2007) Facts: NAPOCOR (NPC)
entered into a lease contract with Polar Energy, Inc. over diesel
engine power barges moored in Batangas providing that NAPOCOR shall
be responsible for the payment of all taxes imposed by the National
Government to which POLAR may be or become subject to or in
relation to the performance of their obligations under the
agreement and all real estate taxes and assessments, rates and
other charges in respect of the Power Barges. POLAR subsequently
assigned its rights under the Agreement to FELS. FELS then received
an assessment from the Provincial Assessor of Batangas for real
property taxes on the power barges. NPC acting on behalf of FELS
sought reconsideration of the Provincial Assessors assessment to
assess real property taxes on the power barges which was denied by
the Provincial Assessor. NPC then filed a petition with the LBAA.
The LBAA denied the petition. The LBAA ruled that the power plant
facilities, while they may be classified as movable or personal
property, are nevertheless considered real property for taxation
purposes because they are installed at a specific location with a
character of permanency. The LBAA also pointed out that the owner
of the bargesFELS, a private corporationis the one being taxed, not
NPC. A mere agreement making NPC responsible for the payment of all
real estate taxes and assessments will not3
justify the exemption of FELS; such a privilege can only be
granted to NPC and cannot be extended to FELS. Finally, the LBAA
also ruled that the petition was filed out of time. Aggrieved, FELS
appealed to the CBAA. The CBAA rendered a decided that the power
barges exempt from real property tax. The Provincial Assessor filed
an MR which was opposed by FELS and NPC. The CBAA issued a reversed
its earlier decision. FELS and NPC filed separates petition for
review before the CA. The CA denied the petition of NPC for being
prescribed. Subsequently the petition of FELS was denied. Hence,
these present petitions. Issues: (1). Are power barges, which are
floating and movable, personal properties and therefore, not
subject to real property tax? (2). Assuming that power barges are
real properties, whether they are exempt from real estate tax under
Section 234 of the Local Government Code ("LGC")? (3). Assuming
that power barges are subject to real estate tax, whether or not it
should be NPC which should be made to pay the same under the law?
(4). What is the proper remedy for assailed assessments issued by
Assessors Office and does it prescribe? Ruling: (1) (2) (3) :
Article 415 (9) of the New Civil Code provides that "[d]ocks and
structures which, though floating, are intended by their nature and
object to remain at a fixed place on a river, lake, or coast" are
considered immovable property. Thus, power barges are categorized
as immovable property by destination, being in the nature of
machinery and other implements intended by the owner for an
industry or work which may be carried on in a building or on a
piece of land and which tend directly to meet the needs of said
industry or work. POLAR owns the power barges as stipulated in the
agreement. It follows then that FELS cannot escape liability from
the payment of realty taxes by invoking its exemption in Section
234 (c) of R.A. No. 7160, which reads: SECTION 234. Exemptions from
Real Property Tax. The following are exempted from payment of the
real property tax:x x x(c) All machineries and equipment that are
actually, directly and exclusively used by local water districts
and government-owned or controlled corporations engaged in the
supply and distribution of water and/or generation and transmission
of electric power; x x x Indeed, the law states that the machinery
must be actually, directly and exclusively used by the government
owned or controlled corporation. The mere undertaking of petitioner
NPC under Section 10.1 of the Agreement, that it shall be
responsible for the payment of all real estate taxes and
assessments, does not justify the exemption. The privilege granted
to petitioner NPC cannot be extended to FELS. The covenant is
between FELS and NPC and does not bind a third person not privy
thereto, in this case, the Province of Batangas. (5). Section 226
of R.A. No. 7160, otherwise known as the Local Government Code of
1991, provides:SECTION 226. Local Board of Assessment Appeals. Any
owner or person having legal interest in the property who is not
satisfied with the4
action of the provincial, city or municipal assessor in the
assessment of his property may, within sixty (60) days from the
date of receipt of the written notice of assessment, appeal to the
Board of Assessment Appeals of the province or city by filing a
petition under oath in the form prescribed for the purpose,
together with copies of the tax declarations and such affidavits or
documents submitted in support of the appeal. The last action of
the local assessor on a particular assessment shall be the notice
of assessment; it is this last action which gives the owner of the
property the right to appeal to the LBAA. The procedure likewise
does not permit the property owner the remedy of filing a motion
for reconsideration before the local assessor. If the taxpayer
fails to appeal in due course, the right of the local government to
collect the taxes due with respect to the taxpayers property
becomes absolute upon the expiration of the period to appeal. It
also bears stressing that the taxpayers failure to question the
assessment in the LBAA renders the assessment of the local assessor
final, executory and demandable, thus, precluding the taxpayer from
questioning the correctness of the assessment, or from invoking any
defense that would reopen the question of its liability on the
merits. (3). THE COMMISIONER OF INTERNAL REVENUE versus ACESITE
(PHILIPPINES) HOTEL CORPORATION ( G.R. No. 147295/ February 16,
2007) Facts: Acesite is the owner and operator of the Holiday Inn
Manila Pavilion Hotel along UN Avenue in Manila. It eases a portion
of the hotels premises to PAGCOR for casino operations. It also
caters food and beverages to PAGCORs casino patrons through the
hotels restaurant outlets. For the period January 1996 to April
1997, Acesite incurred VAT from its rental income and sale of food
and beverages to PAGCOR . Acesite tried to shift the said taxes to
PAGCOR by incorporating it in the amount assessed to PAGCOR but the
latter refused to pay the taxes on account of its tax exempt
status. Thus, PAGCOR paid the amount due to Acesite minus VAT while
the latter paid the VAT to the CIR as it feared the legal
consequences of non-payment of the tax. Acesite belatedly arrived
at the conclusion that its transaction with PAGCOR was subject to
zero rate as it was rendered to a tax-exempt entity and eventually
filed fro refund with the CIR but the latter failed to resolve the
same. It then filed a petition with the CTA which ordered the
refund. The CA affirmed in toto the decision of the CTA holding
that PAGCOR was not only exempt from direct taxes but was also
exempt from indirect taxes like the VAT and consequently, the
transactions between respondent Acesite and PAGCOR were
"effectively zerorated" because they involved the rendition of
services to an entity exempt from indirect taxes. The CIR went to
the SC on certiorari. Issue: (1). Is PAGCOR exempt from both direct
and indirect taxes such as VAT? (2). What is basis of tax
refund?5
Ruling: It is undisputed that P.D. 1869, the charter creating
PAGCOR, grants the latter an exemption from the payment of taxes. A
close scrutiny thereof clearly gives PAGCOR a blanket exemption to
taxes with no distinction on whether the taxes are direct or
indirect. Although the law does not specifically mention PAGCORs
exemption from indirect taxes, PAGCOR is undoubtedly exempt from
such taxes because the law exempts from taxes persons or entities
contracting with PAGCOR in casino operations. Although, differently
worded, the provision clearly exempts PAGCOR from indirect taxes.
In fact, it goes one step further by granting tax exempt status to
persons dealing with PAGCOR in casino operations. The unmistakable
conclusion is that PAGCOR is not liable for VAT and neither is
Acesite as the latter is effectively subject to zero percent rate.
VAT can either be incorporated in the value of the goods,
properties, or services sold or leased, in which case it is
computed as 1/11 of such value, or charged as an additional 10% to
the value. Verily, the seller or lessor has the option to follow
either way in charging its clients and customer. Acesite followed
the latter method that is, charging an additional 10% of the gross
sales and rentals. Be that as it may, the use of either method,
does not denigrate the fact that PAGCOR is exempt from an indirect
tax, like VAT. Considering the foregoing discussion, there are
undoubtedly erroneous payments of the VAT pertaining to the
effectively zero-rate transactions between Acesite and PAGCOR.
Verily, Acesite has clearly shown that it paid the subject taxes
under a mistake of fact, that is, when it was not aware that the
transactions it had with PAGCOR were zero-rated at the time it made
the payments. (2). Tax refunds are based on the principle of
quasi-contract or solutio indebiti. Since an action for a tax
refund partakes of the nature of an exemption, which cannot be
allowed unless granted in the most explicit and categorical
language, it is strictly construed against the claimant who must
discharge such burden convincingly. In the instant case, respondent
Acesite had discharged this burden as found by the CTA and the CA.
The BIR must release the refund to respondent without any
unreasonable delay. Indeed, fair dealing is expected by our
taxpayers from the BIR and this duty demands that the BIR should
refund without any unreasonable delay what it has erroneously
collected. (4). DIGITAL TELECOMMUNICATIONS PHIL., INC. vs.
PANGASINAN ETC. (G. R. No. 152534/ February 23, 2007) PROVINCE
OF
Facts: On Nov 13, 1992, the Province of Pangasinan granted
Digitel a provincial franchise under Provincial Ordinance No 18-92
which required the grantee to pay6
franchise and real property taxes. Thereafter, DIGITEL was
granted by Republic Act No. 7678, a legislative franchise
authorizing the grantee to install, operate and maintain
telecommunications systems, this time, throughout the Philippines.
Under its legislative franchise, DIGITEL is liable for the payment
of a franchise tax "as may be prescribed by law of all gross
receipts of the telephone or other telecommunications businesses
transacted under it by the grantee," as well as real property tax
"on its real estate, and buildings "exclusive of this franchise."
The Province of Pangasinan, in its examination of its record found
that petitioner DIGITEL had a franchise tax deficiency for the
years 1992-94 further alleging that DIGITEL had never paid any
franchise tax to the province since it started its operation in
1992. Accordingly, the Sangguniang Panlalawigan passed Resolution
No. 364 on 14 October 1994, categorically directing petitioner
DIGITEL to pay the overdue franchise tax otherwise its franchise
shall be inoperative. On 16 March 1995, Congress passed Republic
Act No. 7925, otherwise known as "The Public Telecommunications
Policy Act of the Philippines." Section 23 of this law entitled
Equality of Treatment in the Telecommunications Industry, provided
for the ipso facto application to any previously granted
telecommunications franchises of any advantage, favor, privilege,
exemption or immunity granted under existing franchises, or those
still to be granted, to be accorded immediately and unconditionally
to earlier grantees The provincial franchise and real property
taxes remained unpaid, thus, the Province of Pangasinan filed a
complaint for collection of sum of money against Digitel for
franchise tax and ad valorem tax based on Sec 137 and 232 of the
Local government Code (RA 7160). Digitel argues that under its
legislative franchise, the payment of a franchise tax to the Bureau
of Internal Revenue (BIR) would be "in lieu of all taxes" on said
franchise or the earnings therefrom. It further maintains that its
legislative franchise is subject to the immediate and unconditional
application of the tax exemption found in the franchises of Globe,
Smart and Bell, i.e., in Section 9 (b) of Republic Act No. 7229 and
RA 7925. Issues: (1). Is DIGITEL exempt from the payment of
provincial franchise tax? (2). If not exempt, are DIGITELs real
properties found within the territorial jurisdiction of respondent
Province of Pangasinan exempt from the payment of real property
taxes by virtue of the phrase "exclusive of this franchise" found
in Section 5 of its legislative franchise, Republic Act No. 7678?
Ruling: (1). No. The Supreme Court has already resolved this issue
in the case of Philippine Long Distance Telephone Company, Inc. v.
City of Davao, where it clarified the confusion brought about by
the effect of Section 23 of Republic Act No.7
7925 that the word "exemption" as used in the statute refers or
pertains merely to an exemption from regulatory or reporting
requirements of the DOTC or the NTC and not to the grantees tax
liability. In that case, the Court held that in approving Section
23 of Republic Act No. 7925, Congress did not intend it to operate
as a blanket tax exemption to all telecommunications entities;
thus, it cannot be considered as having amended petitioner PLDTs
franchise so as to entitle it to exemption from the imposition of
local franchise taxes. The fact is that the term "exemption" in Sec
23 is too general. A cardinal rule in statutory construction is
that legislative intent must be ascertained from a consideration of
the statute as a whole and not merely of a particular provision. x
x x Hence, a consideration of the law itself in its entirety and
the proceedings of both Houses of Congress is in order. Tax
exemption are highly disfavored. The tax exemption must be
expressed in the statute in clear language that leaves no doubt of
the intention of the legislature to grant such exemption. And, even
if it is granted, the exemption must be interpreted in strictissimi
juris against the taxpayer. R.A. No. 7925 is a legislative
enactment designed to set the national policy on telecommunications
and provide the structures to implement it to keep up with the
technological advances in the industry and the needs of the public.
The thrust of the law is to promote gradually the deregulation of
the entry, pricing, and operations of all public telecommunications
entities and thus promote a level playing field in the
telecommunications industry. There is nothing in the language of
nor in the proceedings of both the House of Representatives and the
Senate in enacting R.A. No. 7925 which shows that it contemplates
the grant of tax exemptions to all telecommunications entities,
including those whose exemptions had been withdrawn by the LGC. The
foregoing pronouncement notwithstanding, in view of the passage of
Republic Act No. 7716, abolishing the franchise tax imposed on
telecommunications companies effective 1 January 1996 and in its
place is imposed a 10 percent Value-Added-Tax (VAT), the
"in-lieu-of-all-taxes" clause/provision in the legislative
franchises of Globe, Smart and Bell, among others, has now become
functus officio, made inoperative for lack of a franchise tax.
Therefore, taking into consideration the above, from 1 January
1996, petitioner DIGITEL ceased to be liable for national franchise
tax and in its stead is imposed a 10% VAT in accordance with
Section 108 of the Tax Code. (2). The second issue boils down to a
dispute between the inherent taxing power of Congress and the
delegated authority to tax of the local government borne by the
1987 Constitution. In the afore-quoted case of PLDT v. City of
Davao, the Court already sustained the power of Congress to grant
exemptions over and above the8
power of the local governments delegated taxing authority
notwithstanding the source of such power. The fact that Republic
Act No. 7678 was a later piece of legislation can be taken to mean
that Congress, knowing fully well that the Local Government Code
had already withdrawn exemptions from real property taxes, chose to
restore such immunity even to a limited degree. In view of the
unequivocal intent of Congress to exempt from real property tax
those real properties actually, directly and exclusively used by
petitioner DIGITEL in the pursuit of its franchise, respondent
Province of Pangasinan can only levy real property tax on the
remaining real properties of the grantee located within its
territorial jurisdiction not part of the above-stated
classification. Said exemption, however, merely applies from the
time of the effectivity of petitioner DIGITELs legislative
franchise and not a moment sooner. (5). REPUBLIC OF THE PHILIPPINES
represented by the Commissioner of Customs vs UNIMEX MICRO
ELECTRONIC (G.R. Nos. 166309-10/ 09 March 2007) Facts: In a
decision dated June 15, 1992, the CTA reversed the forfeiture
decree issued by the Bureau of Customs and ordered the release of
the UNIMEX shipment subject to the payment of customs duties. The
said CTA decision became final and executory on July 20, 1992. As
such decision could not be executed. As counsel failed to file a
motion for writ of execution, UNIMEX filed on September 5, 2001 in
the CTA a petition for the revival of its June 15, 1992 decision.
It prayed for the immediate release by BOC of its shipment or, in
the alternative, payment of the shipments value plus damages. The
BOC Commissioner failed to file his answer, hence, he was declared
in default. During the ex parte presentation of respondents
evidence, BOC informed the court that the subject shipment could no
longer be found at its warehouses. In its decision of September 19,
2002, the CTA declared that its June 15, 1992 decision could no
longer be executed due to the loss of respondents shipment so it
ordered the BOC Commissioner to pay respondent the commercial value
of the goods based on the prevailing exchange rate at the time of
their importation which payment shall be taken from the sale or
sales of the goods or properties seized or forfeited by the Bureau
of Customs. The BOC Commissioner and the respondent then filed
separate petitions in the CA which were consolidated. In one case,
the CA held that the BOC Commissioner was liable for the value of
the subject shipment as the same was9
lost while in its custody. In the other case however, it ruled
that the CTA erred in using as basis the prevailing peso-dollar
exchange rate at the time of the importation instead of the
prevailing rate at the time of actual payment pursuant to RA 4100.
It added that respondent was also entitled to legal interest not at
the rate of 6% per annum but at 12% per annum for the actual
damages awarded. Issues: (1). Is there modification of Decision?
Can the CTA modify its earlier decision? (2). Is UNIMEX guilty of
laches? (3). Is the Bureau of Customs liable for interest? (4). Is
the Bureau of Customs liable for actual damages? Ruling: (1). The
general rule is that once a decision becomes final and executory,
it cannot be altered or modified. However, this rule is not
absolute. Where facts or events transpire after a decision has
become executory, which facts constitute a supervening cause
rendering the final judgment unenforceable, said judgment may be
modified. Also, a final judgment may be altered when its execution
becomes impossible or unjust. In the case at bar, parties do not
dispute the fact that after the June 15, 1992 CTA decision became
final and executory, respondents goods were inexplicably lost while
under the BOCs custody. Certainly, this fact presented a
supervening event warranting the modification of the CTA decision.
Even if the CTA had maintained its original decision, still
petitioner would have been unable to comply with it for the obvious
reason that there was nothing more to deliver to respondent. (2).
Laches is the failure or negligence to assert a right within a
reasonable time, giving rise to a presumption that a party has
abandoned it or declined to assert it. It is not a mere question of
lapse or passage of time but is principally a question of the
inequity or unfairness of permitting a right or claim to be
asserted.It is clear from the records that UNIMEX was not guilty of
negligence or omission. Neither did it abandon its claim against
petitioner. There was never negligence or omission to assert its
right within a reasonable period of time on the part of UNIMEX. In
fact, from the moment it intervened in the proceedings before the
Bureau of Customs up to the present time, UNIMEX is diligently
trying to fight for what it believes is right. IT may have failed
to secure a writ of execution with this court when the [CTA
decision] became final and executory due to wrong legal advice, yet
it does not mean that it was sleeping on its right for it filed a
case against the shipping agent10
and/or the sub-agent. Therefore, there [was never] an occasion
wherein petitioner had abandoned or declined to assert its right.
Laches cannot stall respondents right to recover what is due to it
especially where BOCs negligence in the safekeeping of the goods
appears indubitable. There is no denying that BOC exhibited gross
carelessness and ineptitude in the performance of its duty as it
could not even explain why or how the goods vanished while in its
custody. With this, it is difficult to exonerate petitioner from
liability; otherwise, we would countenance a wrong and exacerbate
respondents loss which to this day has remained unrecompensed. (3).
Interest may be paid either as compensation for the use of money
(monetary interest) referred to in Article 1956 of the New Civil
Code or as damages (compensatory interest) under Article 2209 above
cited. As clearly provided in [Article 2209], interest is
demandable if: a) there is monetary obligation and b) debtor incurs
delay. This case does not involve a monetary obligation to be
covered by Article 2209. There is no dispute that this case was
originally filed questioning the seizure of the shipment by the
Bureau of Customs. Our decision subject of this action for revival
[of judgment] did not refer to any monetary obligation by
[petitioner] towards the [respondent]. In fact, if there was any
monetary obligation mentioned, it referred to the obligation of
[respondent] to pay the correct taxes, duties, fees and other
charges before the release of the goods can be had. In one case,
the Supreme Court held: "In a comprehensive sense, the term "debt"
embraces not merely money due by contract, but whatever one is
bound to render to another, either for contract or the requirement
of the law, such as tax where the law imposes personal liability
therefor." Therefore, the government was never a debtor to the
petitioner in order that [Article] 2209 could apply. Nor was it in
default for there was no monetary obligation to pay in the first
place. There is default when after demand is made either judicially
or extrajudicially. In other words, for interest to be demandable
under Article 2209, there should be a monetary obligation and the
debtor was in default Interest is not chargeable against petitioner
except when it has expressly stipulated to pay it or when interest
is allowed by the legislature or in eminent domain cases where
damages sustained by the owner take the form of interest at the
legal rate. Consequently, the CAs imposition of the 12% p.a. legal
interest upon the finality of the decision of this case until the
value of the goods is fully paid (as forbearance of credit) is
likewise bereft of any legal anchor
11
(4). Government Liability For Actual Damages Although it may be
gainsaid that the satisfaction of respondents demand will
ultimately fall on the government, and that, under the political
doctrine of "state immunity," it cannot be held liable for
governmental acts (jus imperii), we still hold that petitioner
cannot escape its liability. The circumstances of this case warrant
its exclusion from the purview of the state immunity doctrine. The
Court cannot turn a blind eye to BOCs ineptitude and gross
negligence in the safekeeping of respondents goods. We are not
likewise unaware of its lackadaisical attitude in failing to
provide a cogent explanation on the goods disappearance,
considering that they were in its custody and that they were in
fact the subject of litigation. The situation does not allow us to
reject respondents claim on the mere invocation of the doctrine of
state immunity. Succinctly, the doctrine must be fairly observed
and the State should not avail itself of this prerogative to take
undue advantage of parties that may have legitimate claims against
it. Accordingly, upon payment of the necessary customs duties by
respondent, petitioners "payment shall be taken from the sale or
sales of goods or properties seized or forfeited by the Bureau of
Customs."
6). ATLAS CONSOLIDATED MINING AND DEVELOPMENT CORPORATION vs
COMMISSIONER OF INTERNAL REVENUE (G.R. No. 145526/ March 16, 2007)
Facts: On March 31, 1993, petitioner Atlas Consolidated Mining and
Development Corporation presented to Commissioner of Internal
Revenue applications for refund or tax credit of excess input
taxes. Petitioner attributed these claims to its sales of gold to
the Central Bank, copper concentrates to Philippine Associated
Smelting and Refining Corporation (PASAR) and pyrite to Philippine
Phosphates, Inc. (Philphos) on the theory that these were
zero-rated transactions resulting in refundable or creditable input
taxes under Section 106(b) of the Tax Code of 1986. Due to
respondents continuous inaction and the imminent expiration of the
twoyear period for beginning a court action for tax credit or
refund, petitioner brought its claims to the Court of Tax Appeals
(CTA) by way of a petition for review. The CTA denied petitioners
claims on the grounds of prescription and insufficiency of
evidence. Petitioner appealed to the Court of Appeals (CA). The CA
reversed the CTAs ruling on the matter of prescription but affirmed
the latters decision in all other respects. Petitioners motion for
reconsideration was denied for lack of merit. Thereupon, petitioner
filed this appeal by certiorari12
Issues: 1. Whether or not the petitioner is entitled for the tax
refund? 2. Whether or not the documentary requirements imposed by
Revenue Regulations 3-88 applied only to administrative claims for
refund or tax credit, should have had no bearing in a judicial
claim for refund in the CTA which was "entirely independent of and
distinct from the administrative claim? 3. Whether or not the
summary and certification of an independent certified public
accountant required by CTA Circular 1-95(1)12 "constitute the
principal evidence" and rendered superfluous the submission of VAT
invoices and receipts? Ruling: 1. The petitioner is not entitled to
tax refund. It has always been the rule that those seeking tax
refunds or credits bear the burden of proving the factual bases of
their claims and of showing, by words too plain to be mistaken,
that the legislature intended to entitle them to such claims. The
rule, in this case, required petitioner to (1) show that its sales
qualified for zero-rating under the laws then in force and (2)
present sufficient evidence that those sales resulted in excess
input taxes. It complied with the first requirement but failed in
the second requirement. 2. A judicial claim for refund or tax
credit in the CTA is not an original action but an appeal by way of
petition for review of a previous, unsuccessful administrative
claim. Therefore, as in every appeal or petition for review, a
petitioner has to convince the appellate court that the
quasi-judicial agency did not have any reason to deny its claims.
In this case, it was necessary for petitioner to show the CTA not
only that it was entitled under substantive law to the grant of its
claims but also that it satisfied all the documentary and
evidentiary requirements for an administrative claim for refund or
tax credit 3. There is nothing in CTA Circular No. 1-95, as amended
by CTA Circular No. 10-97, which either expressly or impliedly
suggests that summaries and schedules of input VAT payments, even
if certified by an independent CPA, suffice as evidence of input
VAT payments. The circular was promulgated to avoid the
timeconsuming procedure of presenting, identifying and marking of
documents before the Court. It does not relieve respondent of its
imperative task of pre-marking photocopies of sales receipts and
invoices and submitting the same to the court after the independent
CPA shall have examined and compared them with the originals.
Without presenting these pre-marked documents as evidence, the
court cannot verify the authenticity and veracity of the
independent auditors conclusions.
13
(7). BANCO FILIPINO SAVINGS & MORTGAGE BANK VS. COURT OF
APPEALS ET AL. (G.R.No.155682 / March 27, 2007) Facts : In its BIR
Form No. 1702 or Corporation/Partnership Annual Income Tax Return
for fiscal year 1995, Banco Filipino Savings and Mortgage Bank
(petitioner) declared a net operating loss of P211,476,241.00 and
total tax credit of P13,103,918.00, representing the prior years
excess tax credit of P11,481,342.00 and creditable withholding
taxes of P1,622,576.00. On February 4, 1998, petitioner filed with
the Commissioner of Internal Revenue (CIR) an administrative claim
for refund of creditable taxes withheld for the year 1995 in the
amount of P1,622,576.00. As the CIR failed to act on its claim,
petitioner filed a Petition for Review with the CTA on April 13,
1998. It attached to its Petition several documents, including: 1)
Certificate of Income Tax Withheld on Compensation (BIR Form No.
W-2) for the Year 1995 executed by Oscar Lozano covering P720.00 as
tax withheld on rental income paid to petitioner (Exhibit "II");
and 2) Monthly Remittance Return of Income Taxes Withheld under BIR
Form No. 1743W issued by petitioner, indicating various amounts it
withheld and remitted to the BIR (Exhibits "C" through "Z"). In his
Answer, respondent CIR interposed special and affirmative defenses,
specifically that petitioners claim is not properly documented. The
CTA issued the October 5, 1999 Decision granting only a portion of
petitioners claim for refund. The CTA allowed the
P18,884.40-portion of petitioners claim for refund as these are
covered by Exhibits "AA" through "HH", which are all in BIR Form
No. 1743-750 (Certificate of Creditable Tax Withheld at Source)
issued by various payors and reflecting taxes deducted and withheld
on petitioner-payees income from the rental of its real properties.
However, the CTA disallowed the P1,603,691.60-portion of
petitioners claim for tax refund on the ground that its Exhibit
"II" and Exhibits "C" through "Z" lack probative value as these are
not in BIR Form No. 1743.1, the form required under Revenue
Regulations No. 6-85 (as amended), to support a claim for refund.
Petitioner filed a Petition for Review with the CA but the CA
dismissed the same. Its Motion for Reconsideration was also denied,
hence, the Petition for Review on Certiorari under Rule 45 of the
Rules of Court. Issue: Whether or not the CA erred in affirming the
disallowance by the CTA of P1,603,691.60 of petitioners claim for
tax refund on the ground that the latters Exhibit "II" and Exhibits
"C" through "Z" lack probative value as not being in accordance
with BIR Form No. 7431.1.14
Ruling: There are three conditions for the grant of a claim for
refund of creditable withholding tax: the claim is filed with the
CIR within the two-year period from the date of payment of the tax;
it is shown on the return of the recipient that the income payment
received was declared as part of the gross income; and, the fact of
withholding is established by a copy of a statement duly issued by
the payor to the payee showing the amount paid and the amount of
the tax withheld therefrom. The third condition is specifically
imposed under Section 10 of Revenue Regulation No. 6-85 (as
amended) At the time material to this case, the requisite
information regarding withholding taxes from the sale of acquired
assets can be found in BIR Form No. 1743.1. As described in Section
6 of Revenue Regulations No. 6-85, BIR Form No. 1743.1 is a written
statement issued by the payor as withholding agent showing the
income or other payments made by the said withholding agent during
a quarter or year and the amount of the tax deducted and withheld
therefrom. It readily identifies the payor, the income payment and
the tax withheld. It is complete in the relevant details which
would aid the courts in the evaluation of any claim for refund of
creditable withholding taxes. Petitioners Exhibits "C" through "Z"
cannot take the place of BIR Form No. 1743.1 and its Exhibit "II,"
of BIR Form No. 1743-750.
(8). INT'L EXCHANGE BANK VS. COMMISSIONER OF INTERNATIONAL
REVENUE (G.R. No. 171266 April 4, 2007 ) Facts: On april 13, 1999,
petitioner, CIR served a Letter of Authority to International
Exchange Bank (IBank) directing the examination of petitioners
books of accounts and other accounting records for the year 1997
and "unverified prior years." IBank subsequently received on
November 16, 1999 a "Notice to Taxpayer" from the Assistant
Commissioner, Enforcement Service of the BIR, notifying it of the
results of the examination re its tax liabilities amounting to
P465,158,118.31 for 1996 and P17,033,311,974.23 for 1997, and
requesting it to appear for an informal conference to present its
side. After discussions, the parties resolved issues relating to
transactions involving payment of final withholding and gross
receipts taxes. On January 6, 2000, petitioner was personally
served with an undated PreAssessment Notice (PAN) assessing it of
deficiency on:
15
(a). Purchases of securities from the BSP or Government
Securities Purchased-Reverse Repurchase Agreement (RRPA); and (b).
FSD for the taxable years 1996 and 1997, amounting to
P25,180,492.15 and P75,383,751.55, respectively. According to the
PAN, Government Securities Purchased-RRP is subject to DST under
Section 180 of the NIRC, as amended, since this falls under the
classification of Deposits Substitutes as defined by RR 3-97 while
Savings DepositFSD should be treated as time deposits considering
that its features are very much the same as time deposits (interest
rates; terms). In substance, these are certificate[s] of deposits
subject to Documentary Stamp Tax under Section 180 of the NIRC
which provides among others that certificate[s] of deposits bearing
interest and others not payable on sight or demand are subject to
DST. The PAN advised petitioner that in case it was not agreeable
to the above-quoted findings, it may "see the Assistant
Commissioner-Enforcement Service to clarify issues arising from the
investigation and/or review," and its failure to do so within 15
days from receipt of the PAN would mean that it was agreeable. On
January 12, 2000, petitioner received a Formal Assessment Notice
(FAN) for deficiency DST on its RRPA and FSD, including surcharges,
in the amounts of P25,180,492.15 for 1996 and P75,383,751.55 for
1997, and an accompanying demand letter requesting payment thereof
within 30 days. Acting on the FAN, IBank filed on February 11, 2000
a protest letter alleging that the assessments should be
reconsidered on the grounds that: (1). the assessments are null and
void for having been issued without any authority and due process,
and were made beyond the prescribed period for making assessments;
(2). there is no law imposing DST on RRPA, and assuming that DST
was payable, it is the BSP which is liable therefor; (3). there is
no law imposing DST on its FSD; and (4). assuming the deficiency
assessments for DST were proper, the imposition of surcharges was
patently without legal authority. As the BIR failed to act on the
protest, IBank filed a petition for review before the CTA. CTA
First Division ordered that the IBanks deficiency assessments
pertaining to the reverse purchase agreements in the amounts of
P6,720,183.77 and P22,838,302.16 inclusive of surcharges, for the
years 1996 and 1997, respectively, be CANCELLED and WITHDRAWN.
However, the deficiency assessments pertaining to savings
deposits-FSD were UPHELD and IBank was16
ORDERED to PAY the amount of P71,005,757.77 representing
deficiency DST for the years 1996 and 1997 plus 20% delinquency
interest from February 12, 2000 until fully paid pursuant to
Section 249 of the 1997 NIRC. CTA En banc affirmed the CTA
Division, thus, the instant petition before the SC. ISSUE: Whether
or not petitioners FSD is subject to DST for the years assessed.
RULING: The applicable provision is Section 180 of the Tax Code, as
amended by R.A. 7660, which reads: Sec. 180. Stamp tax on all loan
agreements, promissory notes, bills of exchange, drafts,
instruments and securities issued by the government or any of its
instrumentalities, certificates of deposit bearing interest and
others not payable on sight or demand. - On all loan agreements
signed abroad wherein the object of the contract is located or used
in the Philippines; bills of exchange (between points within the
Philippines), drafts, instruments and securities issued by the
Government or any of its instrumentalities or certificates of
deposits drawing interest, or orders for the payment of any sum of
money otherwise than at sight or on demand, or on all promissory
notes, whether negotiable or non-negotiable, except bank notes
issued for circulation, and on each renewal of any such note, there
shall be collected a documentary stamp tax of Thirty centavos
(P0.30) on each two hundred pesos, or fractional part thereof, of
the face value of any such agreement, bill of exchange, draft,
certificate of deposit, or note: Provided, xxx. (Emphasis and
underscoring supplied) In resolving the issue, it is necessary to
determine whether petitioners Savings Account-Fixed Savings Deposit
(SA-FSD) has the same nature and characteristics as a time deposit.
In this case, a depositor of a savings depositFSD is required to
keep the money with the bank for at least thirty (30) days in order
to yield a higher interest rate. Otherwise, the deposit earns
interest pertaining only to a regular savings deposit. The same
feature is present in a time deposit. A depositor is allowed to
withdraw his time deposit even before its maturity subject to bank
charges on its pre-termination and the depositor loses his
entitlement to earn the interest rate corresponding to the time
deposit. Instead, he earns interest pertaining only to a regular
savings deposit. Thus, petitioners argument that the savings
deposit-FSD is withdrawable anytime as opposed to a time deposit
which has a maturity date, is not tenable. In both cases, the
deposit may be withdrawn anytime but the depositor gets to earn a
lower rate of interest. The only difference lies on the evidence of
deposit, a savings deposit-FSD is evidenced by a passbook, while a
time deposit is evidenced by a certificate of time deposit."
17
(9). COMMISSIONER OF INTERNAL REVENUE VS. BANK OF THE PHILIPPINE
ISLANDS (G.R. No. 134062/ April 17, 2007 ) Facts: In two notices
dated October 28, 1988, petitioner CIR assessed respondent bank
BPIs deficiency percentage and documentary stamp taxes for the year
1986 in the total amount of P129,488,656.63: In a letter dated
December 10, 1988, BPI repliedthe CIRs "deficiency assessments" are
no assessments at all. The taxpayer is not informed, even in the
vaguest terms, why it is being assessed a deficiency; that the
alleged deficiency documentary stamp tax has no basis as these are
subject to a compromise agreement between CIR and BAP; that as to
the alleged deficiency percentage tax, the assessment cannot be
protested since the letter does not even tell the taxpayer what
particular percentage tax is involved and how the examiner arrived
at the deficiency. As soon as this is explained and clarified in a
proper letter of assessment, we shall inform you of the taxpayers
decision on whether to pay or protest the assessment. On June 27,
1991, BPI received a letter from CIR dated May 8, 1991 explaining
the basis of the assessments, although not obliged under existing
laws at that time and stating that this constitutes the final
decision of this office on the matter. On July 6, 1991, BPI
requested a reconsideration of the assessments stated in the CIRs
May 8, 1991 letter. This was denied in a letter dated December 12,
1991, received by BPI on January 21, 1992. On February 18, 1992,
BPI filed a petition for review in the CTA. In a decision dated
November 16, 1995, the CTA dismissed the case for lack of
jurisdiction since the subject assessments had become final and
unappealable. The CTA ruled that BPI failed to file its protest on
time under Section 270 of the National Internal Revenue Code (NIRC)
of 1986 and Section 7 in relation to Section 11 of RA 1125. It
denied reconsideration in a resolution dated May 27, 1996. On
appeal, the CA reversed the tax courts decision and resolution and
remanded the case to the CTA for a decision on the merits. It ruled
that the October 28, 1988 notices were not valid assessments
because they did not inform the taxpayer of the legal and factual
bases therefor. It declared that the proper assessments were those
contained in the May 8, 1991 letter which provided the reasons for
the claimed deficiencies. Thus, it held that BPI filed the petition
for review in the CTA on time. The CIR elevated the case to this
Court. Issues:18
(1). Are the October 28, 1988 notices valid assessments. (2).
Are the assessments issued to BPI for deficiency percentage and
documentary stamp taxes for 1986 final and unappealable? and (3).
Is BPI liable for the said taxes? Ruling: (1). On the first issue,
assessments were made pursuant to the prevailing law which was
Section 270 (now renumbered Section 228) of the NIRC, the only
requirement was for the CIR to "notify" or inform the taxpayer of
his "findings." Nothing in the old law required a written statement
to the taxpayer of the law and facts on which the assessments were
based. The Court cannot read into the law what obviously was not
intended by Congress. That would be judicial legislation, nothing
less. Jurisprudence, on the other hand, simply required that the
assessments contain a computation of tax liabilities, the amount
the taxpayer was to pay and a demand for payment within a
prescribed period. Hence, there was no doubt the October 28, 1988
notices sufficiently met the requirements of a valid assessment
under the old law and jurisprudence. The provision that the
taxpayers shall be informed in writing of the law and the facts on
which the assessment is made; otherwise, the assessment shall be
void was not in the old Section 270 but was only later on inserted
in the renumbered Section 228 in 1997. Evidently, the legislature
saw the need to modify the former Section 270 by inserting the
aforequoted sentence. The fact that the amendment was necessary
showed that, prior to the introduction of the amendment, the
statute had an entirely different meaning. Furthermore, BPIs theory
that they were deprived of due process when the CIR failed to
inform it of the factual and legal bases of the assessments even if
these were not called for under the old law was debunked when BPI
was given the opportunity to discuss with the CIR the assessment
when the latter issued the former a Pre-Assessment Notice which BPI
ignored and that the examiners themselves went to BPI and talked to
them. (2). Under the former Section 270, there were two instances
when an assessment becomes final and unappealable: (1) when it was
not protested within 30 days from receipt and (2) when the adverse
decision on the protest was not appealed to the CTA within 30 days
from receipt of the final decision. Considering that the October
28, 1988 notices were valid assessments, BPI should have protested
the same within 30 days from receipt thereof. The December 10, 1988
reply it sent to the CIR did not qualify as a protest since the
letter itself stated that "as soon as this is explained and
clarified in a proper letter of assessment, we shall inform you of
the taxpayers decision on whether to pay or protest the19
assessment." Hence, by its own declaration, BPI did not regard
this letter as a protest against the assessments. As a matter of
fact, BPI never deemed this a protest since it did not even
consider the October 28, 1988 notices as valid or proper
assessments. (3). The inevitable conclusion is that BPIs failure to
protest the assessments within the 30-day period provided in the
former Section 270 meant that they became final and unappealable.
Thus, the CTA correctly dismissed BPIs appeal for lack of
jurisdiction. BPI was, from then on, barred from disputing the
correctness of the assessments or invoking any defense that would
reopen the question of its liability on the merits. Even if we
considered the December 10, 1988 letter as a protest, BPI must
nevertheless be deemed to have failed to appeal the CIRs final
decision regarding the disputed assessments within the 30-day
period provided by law. The CIR, in his May 8, 1991 response,
stated that it was his "final decision on the matter." BPI
therefore had 30 days from the time it received the decision on
June 27, 1991 to appeal but it did not. Instead it filed a request
for reconsideration and lodged its appeal in the CTA only on
February 18, 1992, way beyond the reglementary period. BPI must now
suffer the repercussions of its omission and be liable for the said
taxes, thereby resolving the third issue of the case. (10)
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. PHILIPPINE HEALTH
CARE PROVIDERS, INC., Respondent. (G.R. No. 168129/ 24 April 2007)
Facts: The Philippine Health Care Providers, Inc., is a corporation
organized to establish, maintain, conduct and operate a prepaid
group practice health care delivery system or a health maintenance
organization to take care of the sick and disabled persons enrolled
in the health care plan and to provide for the administrative,
legal, and financial responsibilities of the organization. On July
25, 1987, E.O. No. 273, imposing VAT was issued. Prior to
effectivity thereof, Healthcare wrote the CIR inquiring whether the
services it provides to the participants in its health care program
are exempt from the payment of the VAT. On June 8, 1988, CIR,
through the VAT Review Committee of the Bureau of Internal Revenue
(BIR), issued VAT Ruling No. 231-88 stating that as a provider of
medical services, it is exempt from the VAT coverage. This Ruling
was subsequently confirmed by Regional Director Osmundo G. Umali of
Revenue Region No. 8 in a letter dated April 22, 1994.
20
On January 1, 1996, Republic Act (R.A.) No. 7716 (Expanded VAT
or E-VAT Law) took effect substantially adopting the provisions of
EO 273 on VAT and RA 7716 on E-VAT. On October 1, 1999, the BIR
sent Preliminary Assessment Notice to Healthcare for deficiency VAT
and DST for the years 1996/1997. It was protested by healthcare.
CIR then sent a demand letter with attached four assessments for
the same taxes which were also protested by Healthcare. Issues: (1)
Are the services subject to VAT? (2) Does VAT Ruling No. 231-88
providing exemption from VAT have retroactive application? Ruling:
(1). Section 103 of the NIRC specifies the exempt transactions from
the provision of Section 102, thus: Medical, dental, hospital and
veterinary services except those rendered by professionals The
import of the above provision is plain. It requires no
interpretation. It contemplates the exemption from VAT of taxpayers
engaged in the performance of medical, dental, hospital, and
veterinary services. Under the prepaid group practice health care
delivery system adopted by Health Care, individuals enrolled in
Health Care's health care program are entitled to preventive,
diagnostic, and corrective medical services to be dispensed by
Health Care's duly licensed physicians, specialists, and other
professional technical staff participating in said group practice
health care delivery system established and operated by Health
Care. Such medical services will be dispensed in a hospital or
clinic owned, operated, or accredited by Health Care. To be
entitled to receive such medical services from Health Care, an
individual must enroll in Health Care's health care program and pay
an annual fee. Enrollment in Health Care's health care program is
on a year-toyear basis and enrollees are issued identification
cards. We note that these factual findings of the CTA were neither
modified nor reversed by the Court of Appeals. It is a doctrine
that findings of fact of the CTA, a special court exercising
particular expertise on the subject of tax, are generally regarded
as final, binding, and conclusive upon this Court, more so where
these do not conflict with the findings of the Court of Appeals.
Perforce, as respondent does not actually provide medical and/or
hospital services, as provided under Section 103 on exempt
transactions, but merely arranges for the same, its services are
not VAT-exempt.21
(2). Section 246 of the 1997 Tax Code, as amended, provides that
rulings, circulars, rules and regulations promulgated by the
Commissioner of Internal Revenue have no retroactive application if
to apply them would prejudice the taxpayer. The exceptions to this
rule are: (1) 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; (2) where the facts subsequently
gathered by the Bureau of Internal Revenue are materially different
from the facts on which the ruling is based, or (3) where the
taxpayer acted in bad faith. There is no showing that respondent
"deliberately committed mistakes or omitted material facts" when it
obtained VAT Ruling No. 231-88 from the BIR. The CTA held that
respondent's letter which served as the basis for the VAT ruling
"sufficiently described" its business and "there is no way the BIR
could be misled by the said representation as to the real nature"
of said business. It is thus apparent that when VAT Ruling No.
231-88 was issued in respondent's favor, the term "health
maintenance organization" was yet unknown or had no significance
for taxation purposes. Respondent, therefore, believed in good
faith that it was VAT exempt for the taxable years 1996 and 1997 on
the basis of VAT Ruling No. 231-88. (11). RIZAL COMMERCIAL BANKING
CORPORATION, Petitioner, vs.COMMISSIONER OF INTERNAL REVENUE,
Respondent. (G.R. No. 168498/ 24 April 2007) Facts: This involves a
deficiency assessment for DST on special savings accounts and gross
onshore tax imposed on RCBC by the BIR. In an earlier SC Decision
dated June 16, 2006, the SC affirmed the Decision of the Court of
Tax Appeals En Banc dated June 7, 2005 in C.T.A. EB No. 50 and
Resolutions of the Court of Tax Appeals Second Division dated May
3, 2004 and November 5, 2004 in C.T.A. Case No. 6475. The said
resolutions of the CTA dismissed the petition for review filed by
RCBC on the ground that the same was beyond the 30 day period after
the expiration of the 180 day period of inaction on the part of the
BIR. RCBC claims in its motion for reconsideration that its former
counsels failure to file petition for review with the Court of Tax
Appeals within the period set by Section 228 of the National
Internal Revenue Code of 1997 (NIRC) was excusable Issue: Is the
petition for review filed out of time? Ruling:
22
If indeed there was negligence, this is obviously on the part of
petitioners own counsel whose prudence in handling the case fell
short of that required under the circumstances. He was well aware
of the motion filed by the respondent for the Court to resolve
first the issue of this Courts jurisdiction on July 15, 2003, that
a hearing was conducted thereon on August 15, 2003 where both
counsels were present and at said hearing the motion was submitted
for resolution. Petitioners counsel apparently did not show
enthusiasm in the case he was handling as he should have been
vigilant of the outcome of said motion and be prepared for the
necessary action to take whatever the outcome may have been. Such
kind of negligence cannot support petitioners claim for relief from
judgment. Besides, tax assessments by tax examiners are presumed
correct and made in good faith, and all presumptions are in favor
of the correctness of a tax assessment unless proven otherwise.4
Also, petitioners failure to file a petition for review with the
Court of Tax Appeals within the statutory period rendered the
disputed assessment final, executory and demandable, thereby
precluding it from interposing the defenses of legality or validity
of the assessment and prescription of the Governments right to
assess. In case the Commissioner failed to act on the disputed
assessment within the 180-day period from date of submission of
documents, a taxpayer can either: 1) file a petition for review
with the Court of Tax Appeals within 30 days after the expiration
of the 180-day period; or 2) await the final decision of the
Commissioner on the disputed assessments and appeal such final
decision to the Court of Tax Appeals within 30 days after receipt
of a copy of such decision. However, these options are mutually
exclusive, and resort to one bars the application of the other. In
the instant case, the Commissioner failed to act on the disputed
assessment within 180 days from date of submission of documents.
Thus, RCBC opted to file a petition for review before the Court of
Tax Appeals. Unfortunately, the petition for review was filed out
of time, i.e., it was filed more than 30 days after the lapse of
the 180-day period. Consequently, it was dismissed by the Court of
Tax Appeals for late filing. Petitioner did not file a motion for
reconsideration or make an appeal; hence, the disputed assessment
became final, demandable and executory. Based on the foregoing,
petitioner can not now claim that the disputed assessment is not
yet final as it remained unacted upon by the Commissioner; that it
can still await the final decision of the Commissioner and
thereafter appeal the same to the Court of Tax Appeals. This legal
maneuver cannot be countenanced. After availing the first option,
i.e., filing a petition for review which was however filed out of
time, petitioner can not successfully resort to the second option,
i.e., awaiting the final decision of the Commissioner and appealing
the same to the Court of Tax Appeals, on the pretext that there is
yet no final decision on the disputed assessment because of the
Commissioners inaction.23
(12). PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY, petitioner,
vs.COURT OF APPEALS, OFFICE OF THE PRESIDENT, DEPARTMENT OF FINANCE
and the CITY OF ILOILO, respondents. (G.R. No. 169836/ 31 July
2007) Facts: Beginning October 31, 1981, the then Ministry of
Public Works and Highways reclaimed from the sea a 21-hectare
parcel of land in Barangay Tanza, Iloilo City, and constructed
thereon the Iloilo Fishing Port Complex (IFPC), consisting of
breakwater, a landing quay, a refrigeration building, a market
hall, a municipal shed, an administration building, a water and
fuel oil supply system and other port related facilities and
machineries. Upon its completion, the same was turned over to the
Philippine Fisheries Development Authority (PFDA) for its
operation. Notwithstanding said turn over, title to the land and
buildings of the IFPC remained with the Republic of the
Philippines. PFDA in the meantime leased portions of IFPC to
private firms and individuals engaged in fishing related
businesses. In May 1988, the City of Iloilo assessed the entire
IFPC for real property taxes. The assessment remained unpaid for
the fiscal years 1988 and 1989 amounted to P5,057,349.67, inclusive
of penalties and interests. To satisfy the tax delinquency, the
City of Iloilo scheduled on August 30, 1990, the sale at public
auction of the IFPC. The PFDA assailed such assessment on the
ground that it is exempt from payment of real estate tax. Issues:
(1). Is PFDA liable to pay real property tax to the City of Iloilo?
(2). Can IFPC be sold at public auction to satisfy the tax
delinquency? Ruling: To resolve said issues, the Court has to
determine (1) whether the Authority is a government owned or
controlled corporation (GOCC) or an instrumentality of the national
government; and (2) whether the IFPC is a property of public
dominion. PFDA is not a GOCC but an instrumentality of the national
government which is generally exempt from payment of real property
tax. However, said exemption does not apply to the portions of the
IFPC which the PFDA leased to24
private entities. With respect to these properties, PFDA is
liable to pay real property tax. Nonetheless, the IFPC, being a
property of public dominion cannot be sold at public auction to
satisfy the tax delinquency. The Court makes a distinction between
a GOCC and an instrumentality. For an entity to be considered as a
GOCC, it must either be organized as a stock or non-stock
corporation. Two requisites must concur before one may be
classified as a stock corporation, namely: (1) that it has capital
stock divided into shares, and (2) that it is authorized to
distribute dividends and allotments of surplus and profits to its
stockholders. If only one requisite is present, it cannot be
properly classified as a stock corporation. As for non-stock
corporations, they must have members and must not distribute any
part of their income to said members. PFDA is actually a national
government instrumentality which is defined as an 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 nonstock corporation, it remains a government
instrumentality exercising not only governmental but also corporate
powers. Thus, the Authority which is tasked with the special public
function to carry out the governments policy "to promote the
development of the countrys fishing industry and improve the
efficiency in handling, preserving, marketing, and distribution of
fish and other aquatic products," exercises the governmental powers
of eminent domain, and the power to levy fees and charges. At the
same time, the Authority exercises "the general corporate powers
conferred by laws upon private and government-owned or controlled
corporations." On the basis of these parameters , PFDA should be
classified as an instrumentality of the national government. As
such, it is generally exempt from payment of real property tax,
except those portions which have been leased to private entities.
(2). PFDA is classified as an instrumentality of the national
government which is liable to pay taxes only with respect to the
portions of the property, the beneficial use of which were vested
in private entities. When local governments invoke the power to tax
on national government instrumentalities, such power is construed
strictly against local governments. The rule is that a tax is never
presumed and there must be clear language in the law imposing the
tax. Any doubt whether a person, article or activity is taxable is
resolved against taxation. This rule applies with greater force
when local governments seek to tax national government
instrumentalities.2025
Thus, 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 PFDA fails to pay the real property taxes
due thereon, said portions cannot be sold at public auction to
satisfy the tax delinquency. In Chavez v. Public Estates Authority
it was held that reclaimed lands are lands of the public domain and
cannot, without Congressional fiat, be subject of a sale, public or
private, thus: The salient provisions of CA No. 141, on government
reclaimed, foreshore and marshy lands of the public domain, provide
that the only way the government can sell to private parties
government reclaimed and marshy disposable lands of the public
domain is for the legislature to pass a law authorizing such sale.
CA No. 141 does not authorize the President to reclassify
government reclaimed and marshy lands into other non-agricultural
lands under Section 59 (d). Lands classified under Section 59 (d)
are the only alienable or disposable lands for nonagricultural
purposes that the government could sell to private parties. In the
same vein, the port built by the State in the Iloilo fishing
complex is a property of the public dominion and cannot therefore
be sold at public auction. Article 420 of the Civil Code also
provides that 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 the
national wealth.xxxx The Iloilo fishing port which was constructed
by the State for public use and/or public service falls within the
term "port" in Article 420 of the Civil Code and being a property
of public dominion the same cannot be subject to execution or
foreclosure sale. In order to satisfy the tax, the City of Iloilo
has to resort to other means of satisfying such delinquency.
(13). COMMISSIONER OF INTERNAL REVENUE, vs. ROSEMARIE ACOSTA, as
represented by Virgilio A. Abogado, (G.R. No. 154068 / August 3,
2007) Facts: Acosta is an employee of Intel Manufacturing Phils.,
Inc. (Intel). For the period January 1, 1996 to December 31, 1996,
she was assigned in a foreign country. During that period, Intel
withheld the taxes due on her compensation income and remitted to
the Bureau of Internal Revenue (BIR) the amount of P308,084.56. On
March 21, 1997, Acosta and her husband filed with the BIR their
Joint Individual Income Tax Return for the year 1996. On June 17,
1997, Acosta,26
through her representative, filed an amended return and a
Non-Resident Citizen Income Tax Return, and paid the BIR P17,693.37
plus interests in the amount of P14,455.76. On October 8, 1997, she
filed another amended return indicating an overpayment of
P358,274.63. Claiming that the income taxes withheld and paid by
Intel and Acosta resulted in an overpayment of P340,918.92, she
filed on April 15, 1999 a petition for review with the Court of Tax
Appeals (CTA) which was opposed by CIR for alleged failure of
respondent to file the mandatory written claim for refund before
the CIR. Issue: Does the CTA have jurisdiction over petitions for
review when there is failure to file mandatory written claim for
refund before the CIR. Ruling: A claimant must first file a written
claim for refund, categorically demanding recovery of overpaid
taxes with the CIR, before resorting to an action in court. This
obviously is intended, first, to afford the CIR an opportunity to
correct the action of subordinate officers; and second, to notify
the government that such taxes have been questioned, and the notice
should then be borne in mind in estimating the revenue available
for expenditure. Tax refunds are in the nature of tax exemptions
which are construed strictissimi juris against the taxpayer and
liberally in favor of the government. As tax refunds involve a
return of revenue from the government, the claimant must show
indubitably the specific provision of law from which her right
arises; it cannot be allowed to exist upon a mere vague implication
or inference nor can it be extended beyond the ordinary and
reasonable intendment of the language actually used by the
legislature in granting the refund. To repeat, strict compliance
with the conditions imposed for the return of revenue collected is
a doctrine consistently applied in this jurisdiction. (14). ).
PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY vs. THE HONORABLE COURT
OF APPEALS (G.R. No. 150301/ 02 October 2007) Facts: 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
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
be27
sold at public auction on November 30, 1990 in order that the
municipality will be able to collect the 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. Issue: Is NFPC exempt from payment of real
property tax? Ruling: 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, to wit: 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 xxxxx
(o) taxes, fees, charges of any kind on the national government,
its agencies and instrumentalities, and local government units. The
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." As a rule, 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. (15).ERICSSON TELECOMMUNICATIONS, INC., versus CITY
OF PASIG, represented by its City Mayor, Hon. Vicente P. Eusebio,
et al. ( G.R. No. 176667 November 22, 2007) Facts: Ericsson
Telecommunications, Inc. (ERICSSON), a corporation with principal
office in Pasig City, is engaged in the design, engineering, and
marketing of telecommunication facilities/system. In an Assessment
Notice dated October 25, 2000 issued by the City Treasurer of Pasig
City, it was assessed a business tax deficiency for the years 1998
and 1999 amounting to P9,466,885.00 and P4,993,682.00,
respectively, based on its gross revenues as reported in its28
audited financial statements for the years 1997 and 1998.
Protest dated December 21, 2000 was filed by ERICSSON claiming that
the computation of the local business tax should be based on gross
receipts and not on gross revenue. The City of Pasig issued another
Notice of Assessment on November 19, 2001, this time based on
business tax deficiencies for the years 2000 and 2001, amounting to
P4,665,775.51 and P4,710,242.93, respectively, based on its gross
revenues for the years 1999 and 2000. Again, a Protest was filed on
January 21, 2002, reiterating its position that the local business
tax should be based on gross receipts and not gross revenue. Issue:
Is local business tax on contractors based on gross receipts or
gross revenue? Ruling: The applicable provision is subsection (e),
Section 143 of the same Code covering contractors and other
independent contractors which provides that the municipality may
impose taxes on contractors and other independent contractors, in
accordance with the following schedule of gross receipts for the
preceding calendar year. The provision specifically refers to gross
receipts which is defined under Section 131 of the Local Government
Code, as to include the total amount of money or its equivalent
representing the contract price, compensation or service fee,
including the amount charged or materials supplied with the
services and the deposits or advance payments actually or
constructively received during the taxable quarter for the services
performed or to be performed for another person excluding discounts
if determinable at the time of sales, sales return, excise tax, and
value-added tax (VAT). The law is clear. Gross receipts include
money or its equivalent actually or constructively received in
consideration of services rendered or articles sold, exchanged or
leased, whether actual or constructive. In contrast, gross revenue
covers money or its equivalent actually or constructively received,
including the value of services rendered or articles sold,
exchanged or leased, the payment of which is yet to be received.
This is in consonance with the International Financial Reporting
Standards, which defines revenue as the gross inflow of economic
benefits (cash, receivables, and other assets) arising from the
ordinary operating activities of an enterprise (such as sales of
goods, sales of services, interest, royalties, and dividends),
which is measured at the fair value of the consideration received
or receivable. The audited financial statements of ERICSSON reflect
income or revenue which accrued to it during the taxable period
although not yet actually or constructively received or paid. This
is because it uses the accrual method of accounting, where income
is reportable when all the events have occurred that fix the
taxpayer's right to receive the income, and the amount can be
determined with reasonable29
accuracy; the right to receive income, and not the actual
receipt, determines when to include the amount in gross income. The
imposition of local business tax based on petitioner's gross
revenue will inevitably result in the constitutionally proscribed
double taxation taxing of the same person twice by the same
jurisdiction for the same thing inasmuch as petitioner's revenue or
income for a taxable year will definitely include its gross
receipts already reported during the previous year and for which
local business tax has already been paid. Thus, respondent
committed a palpable error when it assessed petitioner's local
business tax based on its gross revenue as reported in its audited
financial statements, as Section 143 of the Local Government Code
and Section 22(e) of the Pasig Revenue Code clearly provide that
the tax should be computed based on gross receipts.
(16). ASIA INTERNATIONAL AUCTIONEERS, INC. and SUBIC BAY MOTORS
CORPORATION, VS. HON. GUILLERMO L. PARAYNO,JR., in his capacity as
Commissioner of the Bureau of Internal Revenue (BIR), THE REGIONAL
DIRECTOR, BIR, Region III, THE REVENUE DISTRICT OFFICER, BIR,
Special Economic Zone, and OFFICE OF THE SOLICITOR GENERAL ( GR
163445/ 18 December 2007) Facts: Congress enacted Republic Act
(R.A.) No. 7227 creating the Subic Special Economic Zone (SSEZ) and
extending a number of economic or tax incentives therein.
Subsequently the Secretary of Finance, through the recommendation
of then Commissioner of Internal Revenue (CIR) Liwayway
Vinzons-Chato, issued several revenue regulations relating to the
tax incentives of companies within the zone. On June 3, 2003, then
CIR Guillermo L. Parayno, Jr. issued Revenue Memorandum Circular
(RMC) No. 31-2003 setting the Uniform Guidelines on the Taxation of
Imported Motor Vehicles through the Subic Free Port Zone and Other
Freeport Zones that are Sold at Public Auction. Asia International
Auctioneers, Inc. (AIAI) and Subic Bay Motors Corporation are
corporations organized under Philippine laws with principal place
of business within the SSEZ. They are engaged in the importation of
mainly secondhand or used motor vehicles and heavy transportation
or construction equipment which they sell to the public through
auction. They filed a complaint before the RTC of Olongapo City,
praying for the nullification of RMC No. 31-2003 and other revenue
regulations and RMCs for being unconstitutional and an ultra vires
act. Consequently, the CIR, the BIR Regional Director of Region
III, the BIR Revenue District Officer of the SSEZ, and the OSG
filed with the CA a petition for30
certiorari under Rule 65 of the Rules of Court with prayer for
the issuance of a Temporary Restraining Order and/or Writ of
Preliminary Injunction to enjoin the trial court from exercising
jurisdiction over the case. Issue: Does the trial court have
jurisdiction over the subject matter of this case? Ruling: The
assailed revenue regulations and revenue memorandum circulars are
actually rulings or opinions of the CIR on the tax treatment of
motor vehicles sold at public auction within the SSEZ to implement
Section 12 of R.A. No. 7227 which provides that exportation or
removal of goods from the territory of the [SSEZ] to the other
parts of the Philippine territory shall be subject to customs
duties and taxes under the Customs and Tariff Code and other
relevant tax laws of the Philippines. They were issued pursuant to
the power of the CIR under Section 4 of the National Internal
Revenue Code. The power to decide disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties imposed in
relation thereto, or other matters arising under this Code or other
laws or portions thereof administered by the Bureau of Internal
Revenue is vested in the Commissioner, subject to the exclusive
appellate jurisdiction of the Court of Tax Appeals. Petitioners
contend that based on Section 7 of R.A. No. 1125 that the CTA shall
exercise exclusive appellate jurisdiction to review by appeal
decisions of the CIR. They argue that in the instant case, there is
no decision of the respondent CIR on any disputed assessment to
speak of as what is being questioned is purely the authority of the
CIR to impose and collect value-added and excise taxes. B. 2008
CASES (17). STATE LAND INVESTMENT CORPORATION, Petitioner VS.
COMMISSIONER OF INTERNAL REVENUE, Respondent ( GR 171956/ 18
January 2008) Facts: State Land Investment Corporation, petitioner,
is a corporation duly organized and existing under the laws of the
Republic of the Philippines. It is a real estate developer engaged
in the development and marketing of low, medium and high cost
subdivision projects in the cities of Manila, Pasay and Quezon; and
in Cavite and Bulacan.31
On April 15, 1997, it its annual income tax return for the
calendar year ending December 31, 1997. reflecting taxable income
of P27,723,328.00 with tax due in the amount of P9,703,165.54. Its
total tax credits for the same year amounted to P23,632,959.05,
inclusive of its prior years excess tax credits of P9,289,084.00.
After applying its total tax credits of P23,632,959.05 against its
income tax liability of P9,703,165.54, the amount of P13,929,793.51
remained unutilized. Petitioner opted to apply this amount as tax
credit to the succeeding taxable year 1998. On April 15, 1999,
petitioner again filed with the BIR its annual income tax return
for the calendar year ending December 31, 1998, declaring a minimum
corporate income tax due in the amount of P4,187,523.00. Petitioner
charged the said amount against its 1997 excess credit of
P13,929,793.51, leaving a balance of P9,742,270.51. Petitioner
filed with the BIR a claim for refund of its unutilized tax credit
for the year 1997 in the amount P 9,742,270.51. On April 13, 2000,
in order to toll the running of the two-year prescriptive period
and there being no immediate action on the part of the CIR,
petitioner filed a petition for review with the Court of Tax
Appeals (CTA) which denied the same, thus, the instant petition to
the SC. Issue: Is Stateland entitled to the refund of P9,742,270.51
representing the excess creditable withholding tax for taxable year
1997? . Ruling: Commissioner of Internal Revenue is ordered to
refund to petitioner the amount of P9,742,270.51 as excess
creditable withholding taxes paid for taxable year 1997 Under
Section 69 (now Section 76) of the Tax Code then in force, a
corporation entitled to a refund of excess creditable withholding
tax may either obtain the refund or credit the amount to the
succeeding taxable year, thus: Section 69. Final Adjustment Return.
Every corporation liable to tax under Section 24 shall file a final
adjustment return covering the total net income for the preceding
calendar or fiscal year. If the sum of the quarterly tax payments
made during the said taxable year is not equal to the total tax due
on the entire taxable net income of that year the corporation shall
either: (a) (b) Pay the excess tax still due; or Be refunded the
excess amount paid, as the case may be.32
In case the corporation is entitled to a refund of the excess
estimated quarterly income taxes paid, the refundable amount shown
on its final adjustment return may be credited against the
estimated quarterly income tax liabilities for the taxable quarters
of the succeeding taxable year. Section 69 clearly provides that a
taxable corporation is entitled to a tax refund when the sum of the
quarterly income taxes it paid during a taxable year exceeds its
total income tax due also for that year. Consequently, the
refundable amount that is shown on its final adjustment return may
be credited, at its option, against its quarterly income tax
liabilities for the next taxable year. Excess income taxes paid in
a year that could not be applied to taxes due the following year
may be refunded the next year. Thus, if the excess income taxes
paid in a given taxable year have not been entirely used by a
taxable corporation against its quarterly income tax liabilities
for the next taxable year, the unused amount of the excess may
still be refunded, provided that the claim for such a refund is
made within two years after payment of the tax. Substantial
justice, equity and fair play are on the side of petitioner.
Technicalities and legalisms, however exalted, should not be
misused by the government to keep money not belonging to it,
thereby enriching itself at the expense of its law-abiding
citizens. Under the principle of solutio indebiti provided in Art.
2154, Civil Code, the BIR received something "when there [was] no
right to demand it," and thus, it has the obligation to return it.
Heavily militating against respondent Commissioner is the ancient
principle that no one, not even the state, shall enrich oneself at
the expense of another. Indeed, simple justice requires the speedy
refund of the wrongly held taxes. . (18). EUFEMIA ALMEDA and ROMEL
ALMEDA, petitioners, vs. BATHALA MARKETING INDUSTRIES, INC.,
respondent. (G.R. No. 150806/ 28 January 2008) Facts: In May 1997,
Bathala Marketing Industries, Inc., as lessee, renewed its Contract
of Lease with Ponciano L. Almeda (Ponciano) representing the lessor
over a portion of the Almeda Compound, located at 2208 Pasong Tamo
Street, Makati City, consisting of 7,348.25 square meters, for a
monthly rental of P1,107,348.69, for a term of four (4) years from
May 1, 1997 unless sooner terminated. SIXTH - It is expressly
understood by the parties hereto that the rental rate stipulated is
based on the present rate of assessment on the property, and that
in case the assessment should33
hereafter be increased or any new tax, charge or burden be
imposed by authorities on the lot and building where the leased
premises are located, LESSEE shall pay, when the rental herein
provided becomes due, the additional rental or charge corresponding
to the portion hereby leased; provided, however, that in the event
that the present assessment or tax on said property should be
reduced, LESSEE shall be entitled to reduction in the stipulated
rental, likewise in proportion to the portion leased by him; After
the death of Ponciano and during effectivity of the contract, the
lessors advised Bathala that Value Added Tax (VAT) on its monthly
rentals shall be collected. In response, Bathala contends that VAT
may not be imposed as the rentals fixed in the contract of lease
were supposed to include the VAT therein, considering that their
contract was executed on May 1, 1997 when the VAT law had long been
in effect. Respondent refused to pay the VAT and adjusted rentals
as demanded by petitioners but continued to pay the stipulated
amount set forth in their contract. Issue: Ruling: Clearly, the
person primarily liable for the payment of VAT is the lessor who
may choose to pass it on to the lessee or absorb the same.
Beginning January 1, 1996, the lease of real property in the
ordinary course of business, whether for commercial or residential
use, when the gross annual receipts exceed P500,000.00, is subject
to 10% VAT. Notwithstanding the mandatory payment of the 10% VAT by
the lessor, the actual shifting of the said tax burden upon the
lessee is clearly optional on the part of the lessor, under the
terms of the statute. The word "may" in the statute, generally
speaking, denotes that it is directory in nature. It is generally
permissive only and operates to confer discretion. In this case,
despite the applicability of the rule under Sec. 99 of the NIRC, as
amended by R.A. 7716, granting the lessor the option to pass on to
the lessee the 10% VAT, to existing contracts of lease as of
January 1, 1996, the original lessor, Ponciano L. Almeda did not
charge the lessee-appellee the 10% VAT nor provided for its
additional imposition when they renewed the contract of lease in
May 1997. More significantly, said lessor did not actually collect
a 10% VAT on the monthly rental due from the lessee-appellee after
the execution of the May 1997 contract of lease. The inevitable