PROGRESSIVE DEVELOPMENT CORPORATION VS.

QUEZON CITY

FACTS:
Involves determination whether an imposition is of the nature of a tax or of a license fee.

a. As to the Taxpayers
On 15 July 1972, petitioner Progressive Development Corporation, owner and operator of a
public market known as the "Farmers Market & Shopping Center" filed a Petition for
Prohibition with Preliminary Injunction against respondent before the then Court of First
Instance of Rizal on the ground that the supervision fee or license tax imposed by the above-
mentioned ordinances is in reality a tax on income which respondent may not impose, the
same being expressly prohibited by Republic Act No. 2264, as amended.
On 21 October 1972, the lower court dismissed the petition, ruling [3] that the questioned
imposition is not a tax on income, but rather a privilege tax or license fee which local
governments, like respondent, are empowered to impose and collect.

b. As to the Government
On 24 December 1969, the City Council of respondent Quezon City adopted Ordinance No.
7997, Series of 1969, otherwise known as the Market Code of Quezon City.
Section 3 of which provided privately owned and operated public markets shall submit
monthly to the Treasurer's Office, a certified list of stallholders showing the amount of stall
fees or rentals paid daily by each stallholder, and shall pay 10% of the gross receipts from
stall rentals to the City, as supervision fee. Failure to submit said list and to pay the
corresponding amount within the period herein prescribed shall subject the operator to the
penalties provided in this Code including revocation of permit to operate.
The Market Code was thereafter amended by Ordinance No. 9236, Series of 1972, on 23
March 1972, which reads that There is hereby imposed a five percent (5%) tax on gross
receipts on rentals or lease of space in privately-owned public markets in Quezon City. And In
case of consistent failure to pay the percentage tax for three (3) consecutive months, the City
shall revoke the permit of the privately-owned market to operate and/or take any other
appropriate action or remedy allowed by law for the collection of the overdue percentage tax
and surcharge.

ISSUES
a. Taxpayer
Whether the supervision fee was a tax on the income which the respondent may not impose.

b. Government
Whether the imposition was in the nature of a license fee, therefore valid.

RULING
It is now settled that Republic Act No. 2264 confers upon local governments broad taxing
authority extending to almost "everything, excepting those which are mentioned therein,"
provided that the tax levied is "for public purposes, just and uniform," does not transgress any
constitutional provision and is not repugnant to a controlling statute. Both the Local Autonomy
Act and the Charter of respondent clearly show that respondent is authorized to fix the license
fee collectible from and regulate the business of petitioner as operator of a privately-owned
public market.
The "Farmers' Market and Shopping Center" being a public market in the sense of a market
open to and inviting the, patronage of the general public, even though privately owned,
petitioner's operation thereof required a license issued by the respondent City, the issuance of
which, applying the standards set forth above, was done principally in the exercise of the
respondent's police power.

We believe and so hold that the five percent (5%) tax imposed in Ordinance No. 9236
constitutes, not a tax on income, not a city income tax (as distinguished from
the national income tax imposed by the National Internal Revenue Code) within the meaning
of Section 2 (g) of the Local Autonomy Act, but rather a license tax or fee for the regulation of
the business in which the petitioner is engaged.

Petitioner has not shown that the rate of the gross receipts tax is so unreasonably large and
excessive and so grossly disproportionate to the costs of the regulatory service being
performed by the respondent as to compel the Court to characterize the imposition as a
revenue measure exclusively.

The use of the gross amount of stall rentals as basis for determining the collectible amount of
license tax, does not by itself, upon the one hand, convert or render the license tax into a
prohibited city tax on income.

ACCORDINGLY, the Decision of the then Court of First Instance of Rizal, Quezon City,
Branch 18, is hereby AFFIRMED and the Court Resolved to DENY the Petition for lack of
merit.

PERSONAL END NOTES

The term "tax" frequently applies to all kinds of exactions of monies which become public
funds. It is often loosely used to include levies for revenue as well as levies for regulatory
purposes such that license fees are frequently called taxes although license fee is a legal
concept distinguishable from tax: the former is imposed in the exercise of police power
primarily for purposes of regulation, while the latter is imposed under the taxing power
primarily for purposes of raising revenues. [9] Thus, if the generating of revenue is the primary
purpose and regulation is merely incidental, the imposition is a tax; but if regulation is the
primary purpose the fact that incidentally revenue is also obtained does not make the
imposition a tax.[10]

To be considered a license fee, the imposition questioned must relate to an occupation or

activity that so engages the public interest in health, morals, safety and development as to
require regulation for the protection and promotion of such public interest; the imposition must
also bear a reasonable relation to the probable expenses of regulation, taking into account
not only the costs of direct regulation but also its incidental consequences as well.
CIR V NIPPON EXPRESS CORP.

FACTS:
Involves issue estoppel of the Government from acts of officers

a. As to the Taxpayers
Nippon is a domestic corporation duly organized and existing under Philippine laws which is
primarily engaged in the business of freight forwarding. It is a Value-Added Tax (VAT)
registered entity.

it filed its quarterly VAT returns for the year 2002 on April 25, 2002, July 25, 2002, October 25,
2002, and January 27, 2003

It maintained that during the said period it incurred input VAT attributable to its zero-rated
sales in the amount of f 28,405,167.60, from which only P3,760,660.74 was applied as tax
credit, thus, reflecting refundable excess input VAT in the amount of P24,644,506.86.

On April 22, 2004, Nippon filed an administrative claim for refund [10] of its unutilized input VAT
for the year 2002 before the Bureau of Internal Revenue (BIR). [11] A day later, or on April 23,
2004, it filed a judicial claim for tax refund, by way of petition for review, [12] before the CTA.

CTA Division partially granted Nippon's claim for tax refund, and thereby ordered the CIR to
issue a tax credit certificate in the reduced amount of P2,614,296.84, representing its
unutilized input VAT which was attributable to its zero-rated sales.

Before its receipt of the August 10, 2011 Decision, or on August 12, 2011, Nippon filed
a motion to withdraw,[19] considering that the BIR, acting on its administrative claim, already
issued a tax credit certificate in the amount of P21,675,128.91 on July 27, 2011

b. As to the Government
CIR moved for reconsideration[20] of the August 10, 2011 Decision and filed its
comment/opposition[21] to Nippon's motion to withdraw. The motion to withdraw being granted
by CTA division, CIR elevated the case to CTA En Banc which affirmed the CTA Resolution
granting Nippon's motion to withdraw.

ISSUES
a. Taxpayer
Whether CTA properly granted Nippon's motion to withdraw

b. Government
Whether the Government is estopped from assailing the Tax Credit Certificate issued by the
BIR.

RULING
The massive discrepancy alone between the administrative and judicial determinations of the
amount to be refunded to Nippon should have already raised a red flag to the CTA Division.

a. CTA – Nippon was only entitled to P2,614,296.84

b. BIR Ruling – Nippon should receive P21,675,128.91
Difference – P19,060,832.07

Clearly, the interest of the government, and, more significantly, the public, will be greatly
prejudiced by the erroneous grant of refund - at a substantial amount at that - in favor of
Nippon. Hence, under these circumstances, the CTA Division should not have granted the
motion to withdraw.

In this relation, it deserves mentioning that the CIR is not estopped from assailing the validity
of the July 27, 2011 Tax Credit Certificate which was issued by her subordinates in the BIR. In
matters of taxation, the government cannot be estopped by the mistakes, errors or omissions
of its agents for upon it depends the ability of the government to serve the people for whose
benefit taxes are collected.

WHEREFORE, the petition is GRANTED. The Decision dated December 18, 2013 and the
Resolution dated June 10, 2014 of the Court of Tax Appeals En Banc in CTA EB Case No.
924 are hereby SET ASIDE. The Decision dated August 10, 2011 of the Court of Tax Appeals
Third Division in CTA Case No. 6967 is REINSTATED, without prejudice, however, to the right
of either party to appeal the same in accordance with the Revised Rules of the Court of Tax
Appeals.

PERSONAL END NOTES

BRITISH AMERICAN TOBACCO V CAMACHO

FACTS:
Involves question as to the validity of Sec 145 of the NIRC as well as some Revenue
Regulations issued by the BIR.

a. As to the Taxpayers
Petitioners filed for a Motion for Reconsideration, insisting that the assailed provisions (1)
violate the equal protection and uniformity of taxation clauses of the Constitution, (2)
contravene Section 19,[1] Article XII of the Constitution on unfair competition, and (3) infringe
the constitutional provisions on regressive and inequitable taxation. Petitioner further argues
that assuming the assailed provisions are constitutional, petitioner is entitled to a downward
reclassification of Lucky Strike from the premium-priced to the high-priced tax bracket.

b. As to the Government
On August 20, 2008, the Court rendered a Decision partially granting the petition in this
case, viz:

WHEREFORE, the petition is PARTIALLY GRANTED and the decision

of the Regional Trial Court of Makati, Branch 61, in Civil Case No. 03-1032,
is AFFIRMED with MODIFICATION. As modified, this Court declares that:

(1) Section 145 of the NIRC, as amended by Republic Act No. 9334,
is CONSTITUTIONAL; and that

(2) Section 4(B)(e)(c), 2nd paragraph of Revenue Regulations No. 1-97,

as amended by Section 2 of Revenue Regulations 9-2003, and Sections II(1)(b),
II(4)(b), II(6), II(7), III (Large Tax Payers Assistance Division II) II(b) of Revenue
Memorandum Order No. 6-2003, insofar as pertinent to cigarettes packed by
machine, are INVALID insofar as they grant the BIR the power to reclassify or
update the classification of new brands every two years or earlier.

ISSUES
a. Taxpayer
Whether the assailed law and rules are unconstitutional and invalid.

b. Government
Whether the assailed law and rules are valid and constitutional.

RULING
The assailed law does not violate the equal protection and uniformity of taxation clauses.
These contentions are without merit and a rehash of petitioners previous arguments before
this Court. As held in the assailed Decision, the instant case neither involves a suspect
classification nor impinges on a fundamental right. Consequently, the rational basis test was
properly applied to gauge the constitutionality of the assailed law in the face of an equal
protection challenge. It has been held that in the areas of social and economic policy, a
statutory classification that neither proceeds along suspect lines nor infringes constitutional
rights must be upheld against equal protection challenge if there is any reasonably
conceivable state of facts that could provide a rational basis for the classification. [3] Under the
rational basis test, it is sufficient that the legislative classification is rationally related to
achieving some legitimate State interest.

Moreover, petitioners contention that the assailed provisions violate the uniformity of taxation
clause is similarly unavailing. In Churchill v. Concepcion,[4] we explained that a tax is uniform
when it operates with the same force and effect in every place where the subject of it is found.
[5]
It does not signify an intrinsic but simply a geographical uniformity. [6] A levy of tax is not
unconstitutional because it is not intrinsically equal and uniform in its operation. [7] The
uniformity rule does not prohibit classification for purposes of taxation. In the instant case,
there is no question that the classification freeze provision meets the geographical uniformity
requirement because the assailed law applies to all cigarette brands in the Philippines. And,
for reasons already adverted to in our August 20, 2008 Decision, the above four-fold test has
been met in the present case.

The assailed provisions do not violate the constitutional prohibition on unfair competition.
While previously arguing that the rational basis test was not satisfied, petitioner now asserts
that this test does not apply in this case and that the proper matrix to evaluate the
constitutionality of the assailed law is the prohibition on unfair competition under Section 19,
Article XII of the Constitution. It should be noted that during the trial below, petitioner did not
invoke said constitutional provision as it relied solely on the alleged violation of the equal
protection and uniformity of taxation clauses. Well-settled is the rule that points of law,
theories, issues and arguments not adequately brought to the attention of the lower court will
not be ordinarily considered by a reviewing court as they cannot be raised for the first time on
appeal.[13] At any rate, even if we were to relax this rule, as previously stated, the evidence
presented before the trial court is insufficient to establish the alleged violation of the
constitutional proscription against unfair competition.

Anent the issue of regressivity, it may be conceded that the assailed law imposes an excise
tax on cigarettes which is a form of indirect tax, and thus, regressive in character. While there
was an attempt to make the imposition of the excise tax more equitable by creating a four-
tiered taxation system where higher priced cigarettes are taxed at a higher rate, still, every
consumer, whether rich or poor, of a cigarette brand within a specific tax bracket pays the
same tax rate. To this extent, the tax does not take into account the persons ability to
pay. Nevertheless, this does not mean that the assailed law may be declared unconstitutional
for being regressive in character because the Constitution does not prohibit the imposition of
indirect taxes but merely provides that Congress shall evolve a progressive system of
taxation.

PERSONAL END NOTES

FITNESS BY DESIGN INC. V CIR

FACTS:

a. As to the Taxpayers
On March 17, 2004, the Commissioner on Internal Revenue (respondent) assessed Fitness
by Design, Inc. (petitioner) for deficiency income taxes for the tax year 1995 in the total
amount of P10,647,529.69.[1] .

Petitioner protested the assessment on the ground that it was issued beyond the three-year
prescriptive period under Section 203 of the Tax Code. [2] Additionally, petitioner claimed that
since it was incorporated only on May 30, 1995, there was no basis to assume that it had
already earned income for the tax year 1995.

Respondent issued a warrant of distraint and/or levy against petitioner, [4] drawing petitioner to
file a Petition for Review (with Motion to Suspend Collection of Income Tax, Value Added Tax,
Documentary Stamp Tax and Surcharges and Interests subject of this Petition) [5] before the
Court of Tax Appeals (CTA) before which it reiterated its defense of prescription.

In his Answer,[6] CIR alleged that Petitioners 1995 Income Tax Return (ITR) filed on April 11,
1996 was false and fraudulent for its deliberate failure to declare its true sales. Hence,
for failure to file a VAT return and for filing a fraudulent income tax return for the year
1995, the corresponding taxes may be assessed at any time within ten (10) years after
the discovery of such omission or fraud pursuant to Section 222(a) of the 1997 Tax Code.

b. As to the Government
Bureau of Internal Revenue (BIR) in fact filed on March 10, 2005 a criminal complaint before
the Department of Justice against the officers and accountant of petitioner for violation of the
provisions of The National Internal Revenue Code

During the preliminary hearing on the issue of prescription, petitioner's former bookkeeper
attested that his former colleague, CPA Sablan, illegally took custody of accounting records
and turned them over to the BIR.

Petitioner then requested a subpoena ad testificandum for Sablan who failed to appear.

CTA: Denied the motion for issuance of subpoena and disallowed the submission of written
interrogatories to Sablan who is NOT a party to the case nor was his testimony relevant. It
also violates Section 2 of Republic Act No. 2338, as implemented by Section 12 of Finance
Department Order No. 46-66, proscribing the revelation of identities of informers of violations
of internal revenue laws, except when the information is proven to be malicious or false.
Moreover, the subpoena is NOT needed to obtain affidavit of the informer.

ISSUES
a. Taxpayer
Whether the denial by the CTA of the Motion tor the issuance of subpoena amounts to grave
abuse of discretion.
b. Government
Whether BIR can use the information (documents from Sablan) without petitioner's consent.

RULING
The Court finds that the issuance by the CTA of the questioned resolutions was not tainted by
arbitrariness.

The fact that Sablan was not a party to the case aside, the testimonies, documents, and
admissions sought by petitioner are not indeed relevant to the issue before the CTA.

Petitioners lack of consent does not, however, imply that the BIR obtained them illegally or that
the information received is false or malicious. Nor does the lack of consent preclude the BIR
from assessing deficiency taxes on petitioner based on the documents.

The law (Sec. 5 of Tax Code) thus allows the BIR access to all relevant or material records
and data in the person of the taxpayer, [32] and the BIR can accept documents which cannot be
admitted in a judicial proceeding where the Rules of Court are strictly observed. [33] To require
the consent of the taxpayer would defeat the intent of the law to help the BIR assess and
collect the correct amount of taxes.

WHEREFORE, in light of the foregoing disquisition, the petition is DISMISSED.

PERSONAL END NOTES

CIR V GOULDS PUMPS INC.

FACTS:

a. As to the Taxpayers
Goulds Pumps received from petitioner CIR a FAN amounting to P137,787,590.14. To which
Goulds Pumps protested. Due to the inaction of petitoner, Goulds Pumps filed for a petition
for review which was raffled to the CTA 1 st division.

However, respondent filed a Manifestation and Motion stating that it availed of the tax
amnesty program. As a result, respondent filed an amendment petition incorporating the
allegation pertaining to the availment of tax amnesty.

CTA 3rd division rendered assailed decision canceling the assessment for deficiency final
withholding tax for the fiscal year of 2000 amounting to P5,977,242.62. The same decision
affirmed the assessments for deficiency withholding tax on compensation and EWT issued by
the CIR to Goulds Pumps.

b. As to the Government
Not satisfied, CIR filed for reconsideration but was denied. This prompted the filing of petition
for review before the CTA En Banc.

ISSUES
a. Taxpayer
Whether CTA 3rd division erred in the cancellation of the assessment for deficiency final
withholding tax.

b. Government
Whether the CIR's right to assess the EWT has already expired.

RULING

On the issue of the prescription of CIR's right to assess, the CTA 3 rd division was correct when
it held that fraud contemplated by law must be actual and not constructive. It must be
intentional, consisting of deception, willfully and deliberately done or resorted to in order to
induce another to give up some right.

In the instant case, a careful review of the evidence reveals that the same do not support or
prove acts constituting fraud as alleged by the CIR. Thus, CIR failed to prove that the alleged
failure to withhold and/or underwithholding of various income payments constitute fraud to
qualify the period of prescription from 3 years to 10 years.

With regard to the final withholding tax, the CIR persistently argued that the respondent failed
to substantiate its claim during the administrative investigation and the disallowance was due
to the failure to accompany the remittance return with official receipt duly issued by an
accredited bank.
The CTA 3rd division correctly ruled that said argument is without merit. As pointed out in its
decision, the alleged non-submission of complete documents at the administrative level will
no bar the court from receiving, evaluating and appreciating evidence. Once the claim for
refund has been elevated to the court, the admissibility, materiality, relevancy, probative value
and weight of evidence presented becomes subject to the rules of Court. Otherwise stated,
judicial claims are being decided based on what has been presented and formally offered by
the party litigants during the trial of the case before the Court and not on the mere allegation
of non-submission of complete documents before the BIR. In this connection, it may not be
amiss to mention that the question of whether or not the evidence submitted by a party is
sufficient to warrant the granting of its prayer lies within the sound discretion and judgment of
the Court.

From the assailed decision, respondent paid a FWT in 1997, but instead of filing or claiming
refund, Goulds pumps just offset and credited the same for the FWT on dividends in 1999
paid in 2000, which should not be allowed. Under the final withholding tax system, the amount
of income tax withheld by the withholding agent is constituted as a full and final payment of
the income tax due from the payee on the said income. It is not creditable. In case of
overpayment or erroneous payment therein, the withholding agent has the right to file the
claim for refund. In fine, the right of a withholding agent to a claim for refund does not entitle
the same to credit or offset to othe tax liabilities.

WHEREFORE, the petition is DENIED. The Decision of the 3 rd Division of this Court in CTA
Case No. 7057, promulgated on February 4, 2011 and its Resolution, promulgated on May
23, 2011 are AFFIRMED. No pronouncement as to cost.

PERSONAL END NOTES

CIR V ESTATE OF BENIGNO TODA

FACTS:
Involves determination whether tax evasion or tax avoidance.

a. As to the Taxpayers
A Notice of Assessment sent to CIC by the Commissioner of Internal Revenue for deficiency
income tax arising from an alleged simulated sale of a 16-storey commercial building known
as Cibeles Building.

CIC authorized Benigno P. Toda, Jr., President and owner of 99.991% of its issued and
outstanding capital stock, to sell the Cibeles Building and the two parcels of land on which the
building stands for an amount of not less than P90 million.

Toda purportedly sold the property for P100 million to Rafael A. Altonaga, who, in turn, sold
the same property on the same day to Royal Match Inc. (RMI) for P200 million. These two
transactions were evidenced by Deeds of Absolute Sale notarized on the same day by the
same notary public. For the sale of the property to RMI, Altonaga paid capital gains tax in the
amount of P10 million.

On 16 April 1990, CIC filed its corporate annual income tax return [7] for the year 1989,
declaring, among other things, its gain from the sale of real property in the amount
of P75,728.021. After crediting withholding taxes of P254,497.00, it paid P26,341,207[8] for its
net taxable income of P75,987,725.

b. As to the Government
On 29 March 1994, the Bureau of Internal Revenue (BIR) sent an assessment notice [10] and
demand letter to the CIC for deficiency income tax for the year 1989 in the amount
of P79,099,999.22.

The new CIC asked for a reconsideration, asserting that the assessment should be directed
against the old CIC, and not against the new CIC, which is owned by an entirely different set
of stockholders; moreover, Toda had undertaken to hold the buyer of his stockholdings and
the CIC free from all tax liabilities for the fiscal years 1987-1989.

On 27 January 1995, the Estate of Benigno P. Toda, Jr., represented by special co-
administrators Lorna Kapunan and Mario Luza Bautista, received a Notice of
Assessment[12] dated 9 January 1995 from the Commissioner of Internal Revenue for
deficiency income tax for the year 1989 in the amount of P79,099,999.22, The estate filed a
letter of protest but was dismissed by the CIR, for fraud in covering up the additional 100M
gained.

Estate filed a petition for review [15] with the CTA alleging that the Commissioner erred in
holding the Estate liable for income tax deficiency; that the inference of fraud of the sale of the
properties is unreasonable and unsupported; and that the right of the Commissioner to
assess CIC had already prescribed. The CTA granted the petition stating that the CIR failed to
prove that CIC committed farud to deprive the government of the taxes due it and that the
government's tight to assess already prescribed. This was affirmed by the CTA.
ISSUES
a. Taxpayer
Whether the the 2 sales (to Altonaga, then to RMI) valid.

b. Government
Whether CIC committed tax evasion.

RULING
The scheme resorted to by CIC in making it appear that there were two sales of the subject
properties, i.e., from CIC to Altonaga, and then from Altonaga to RMI cannot be considered a
legitimate tax planning. Such scheme is tainted with fraud. The investigation conducted by the
BIR disclosed that Altonaga was a close business associate and one of the many trusted
corporate executives of Toda. This information was revealed by Mr. Boy Prieto, the assistant
accountant of CIC and an old timer in the company.

Here, it is obvious that the objective of the sale to Altonaga was to reduce the amount of tax
to be paid especially that the transfer from him to RMI would then subject the income to only
5% individual capital gains tax, and not the 35% corporate income tax. Altonagas sole
purpose of acquiring and transferring title of the subject properties on the same day was to
create a tax shelter.

In a nutshell, the intermediary transaction, i.e., the sale of Altonaga, which was prompted
more on the mitigation of tax liabilities than for legitimate business purposes constitutes one
of tax evasion.

the prescriptive period to assess the correct taxes in case of false returns is ten years from
the discovery of the falsity. The false return was filed on 15 April 1990, and the falsity thereof
was claimed to have been discovered only on 8 March 1991. [37] The assessment for the 1989
deficiency income tax of CIC was issued on 9 January 1995. Clearly, the issuance of the
correct assessment for deficiency income tax was well within the prescriptive period.

WHEREFORE, in view of all the foregoing, the petition is hereby GRANTED. The decision of
the Court of Appeals of 31 January 2001 in CA-G.R. SP No. 57799 is REVERSED and SET
ASIDE, and another one is hereby rendered ordering respondent Estate of Benigno P. Toda
Jr. to pay P79,099,999.22 as deficiency income tax of Cibeles Insurance Corporation for the
year 1989, plus legal interest from 1 May 1994 until the amount is fully paid.

PERSONAL END NOTES

Tax avoidance and tax evasion are the two most common ways used by taxpayers in
escaping from taxation. Tax avoidance is the tax saving device within the means sanctioned
by law. This method should be used by the taxpayer in good faith and at arms length. Tax
evasion, on the other hand, is a scheme used outside of those lawful means and when
availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. [23]

Tax evasion connotes the integration of three factors: (1) the end to be achieved, i.e., the
payment of less than that known by the taxpayer to be legally due, or the non-payment of tax
when it is shown that a tax is due; (2) an accompanying state of mind which is described as
being evil, in bad faith, willfull,or deliberate and not accidental; and (3) a course of action or
failure of action which is unlawful.[24]
CIR V PILIPINAS SHELL PETROLEUM CORP.

FACTS:
Involves issue on whether the producers are also exempt from excise tax when buyers are
exempt.

a. As to the Taxpayers
For resolution are the Motion for Reconsideration dated May 22, 2012 and Supplemental
Motion for Reconsideration dated December 12, 2012 filed by Pilipinas Shell Petroleum
Corporation.

In a Decision promulgated on April 25, 2012, SC ruled that the Court of Tax Appeals (CTA)
erred in granting respondent's claim for tax refund because the latter failed to establish a tax
exemption in its favor under Section 135(a) of the National Internal Revenue Code of 1997
(NIRC).

Respondent argues that a plain reading of Section 135 of the NIRC reveals that it is the
petroleum products sold to international carriers which are exempt from excise tax for which
reason no excise taxes are deemed to have been due in the first place. It points out that
excise tax being an indirect tax, Section 135 in relation to Section 148 should be interpreted
as referring to a tax exemption from the point of production and removal from the place of
production considering that it is only at that point that an excise tax is imposed.

Respondent also contends that our ruling that Section 135 only prohibits local petroleum
manufacturers like respondent from shifting the burden of excise tax to international carriers
has adverse economic impact as it severely curtails the domestic oil industry.

Lastly, respondent asserts that the imposition by the Philippine Government of excise tax on
petroleum products sold to international carriers is in violation of the Chicago Convention on
International Aviation ("Chicago Convention") to which it is a signatory, as well as other
international agreements

b. As to the Government
the Solicitor General underscores the statutory basis of this Court’s ruling that the exemption
under Section 135 does not attach to the products. Citing Exxonmobil Petroleum & Chemical
Holdings, Inc.-Philippine Branch v. Commissioner of Internal Revenue, 2 which held that the
excise tax, when passed on to the purchaser, becomes part of the purchase price, the
Solicitor General claims this refutes respondent’s theory that the exemption attaches to the
petroleum product itself and not to the purchaser for it would have been erroneous for the
seller to pay the excise tax and inequitable to pass it on to the purchaser if the excise tax
exemption attaches to the product

ISSUES
a. Taxpayer
Whether respondent as manufacturer of petroleum products is exempt from payment of
excise tax of petroleum products sold to international carriers.

b. Government
Whether Pilipinas Shell is not exempt from payment of excise tax.
RULING
We maintain that Section 135 (a), in fulfillment of international agreement and practice to
exempt aviation fuel from excise tax and other impositions, prohibits the passing of the excise
tax to international carriers who buys petroleum products from local manufacturers/sellers
such as respondent. However, we agree that there is a need to reexamine the effect of
denying the domestic manufacturers/sellers’ claim for refund of the excise taxes they already
paid on petroleum products sold to international carriers, and its serious implications on our
Government’s commitment to the goals and objectives of the Chicago Convention.

The Chicago Convention, which established the legal framework for international civil
aviation, did not deal comprehensively with tax matters. Article 24 (a) of the Convention
simply provides that fuel and lubricating oils on board an aircraft of a Contracting State, on
arrival in the territory of another Contracting State and retained on board on leaving the
territory of that State, shall be exempt from customs duty, inspection fees or similar national or
local duties and charges. Subsequently, the exemption of airlines from national taxes and
customs duties on spare parts and fuel has become a standard element of bilateral air service
agreements (ASAs) between individual countries.

With the prospect of declining sales of aviation jet fuel sales to international carriers on
account of major domestic oil companies' unwillingness to shoulder the burden of excise tax,
or of petroleum products being sold to said carriers by local manufacturers or sellers at still
high prices , the practice of "tankering" would not be discouraged. This scenario does not
augur well for the Philippines' growing economy and the booming tourism industry. Worse, our
Government would be risking retaliatory action under several bilateral agreements with
various countries. Evidently, construction of the tax exemption provision in question should
give primary consideration to its broad implications on our commitment under international
agreements.

In view of the foregoing reasons, we find merit in respondent's motion for reconsideration. We
therefore hold that respondent, as the statutory taxpayer who is directly liable to pay the
excise tax on its petroleum products, is entitled to a refund or credit of the excise taxes it paid
for petroleum products sold to international carriers, the latter having been granted exemption
from the payment of said excise tax under Sec. 135 (a) of the NIRC.

PERSONAL END NOTES

Under Section 129 of the NIRC, excise taxes are those applied to goods manufactured or
produced in the Philippines for domestic sale or consumption or for any other disposition and
to things imported. Excise taxes as used in our Tax Code fall under two types – (1) specific
tax which is based on weight or volume capacity and other physical unit of measurement, and
(2) ad valorem tax which is based on selling price or other specified value of the goods.
CIR V ISABELA CULTURAL CORPORATION

FACTS:

a. As to the Taxpayers
ICC, a domestic corporation, received from the BIR Assessment Notice for deficiency income
tax in the amount of P333,196.86, and Assessment Notice for deficiency expanded
withholding tax in the amount of P4,897.79, inclusive of surcharges and interest, both for the
taxable year 1986.

The deficiency income tax of P333,196.86, arose from:

(1) The BIR’s disallowance of ICC’s claimed expense deductions for professional and
security services billed to and paid by ICC in 1986, to wit:
(a) Expenses for the auditing services of SGV & Co., 3 for the year ending
December 31, 1985;4
(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 1985.5
(c) Expense for security services of El Tigre Security & Investigation Agency for
the months of April and May 1986.6
(2) The alleged understatement of ICC’s interest income on the three promissory notes
due from Realty Investment, Inc.

The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and surcharge)
was allegedly due to the 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. Hence, it
brought the case to the CTA which held that the petition is premature because the final notice
of assessment cannot be considered as a final decision appealable to the tax court

This was reversed by the Court of Appeals holding that a demand letter of the BIR reiterating
the payment of deficiency tax, amounts to a final decision on the protested assessment and
may therefore be questioned before the CTA. This conclusion was sustained by this Court on
July 1, 2001, in G.R. No. 135210. 8 The case was thus remanded to the CTA for further
proceedings.

b. As to the Government
CTA 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 in 1986 because it was only in the said year when the bills demanding
payment were sent to ICC. Hence, even if some of these professional services were rendered
to ICC in 1984 or 1985, it could not declare the same as deduction for the said years as the
amount thereof could not be determined at that time.

CTA also held that ICC did not understate its interest income on the subject promissory notes.
It found that it was the BIR which made an overstatement of said income when it
compounded the interest income receivable by ICC from the promissory notes of Realty
Investment, Inc., despite the absence of a stipulation in the contract providing for a
compounded interest; nor of a circumstance, like delay in payment or breach of contract, that
would justify the application of compounded interest.

Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its claimed
deduction for security services as shown by the various payment orders and confirmation
receipts it presented as evidence.

ISSUES
a. Taxpayer
Whether CA correctly sustained the deduction of the expenses for the professional and
security services from ICC's gross income

b. Government
Whether BIR overstate said income when it compounded the interest receivable by ICC.

RULING
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of
accounting, 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. 13

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 all-events test requires the right to income or liability be fixed, and the amount of such
income or liability be determined with reasonable accuracy. 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.

In the instant case, the expenses for professional fees consist of expenses for legal and
auditing services. From the nature of the claimed deductions and the span of time during
which the firm was retained, ICC can be expected to have reasonably known the retainer fees
charged by the firm as well as the compensation for its legal services. 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.

As previously stated, the accrual method presents largely a question of fact and that the
taxpayer bears the burden of establishing the accrual of an expense or income. However, ICC
failed to discharge this burden. As to when the firm’s performance of its services in connection
with the 1984 tax problems were completed, or whether ICC exercised reasonable diligence
to inquire about the amount of its liability, or whether it does or does not possess the
information necessary to compute the amount of said liability with reasonable accuracy, are
questions of fact which ICC never established.

In the same vein, 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.

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. As to the
expenses for security services, the records show that these expenses were incurred by ICC in
198620 and could therefore be properly claimed as deductions for the said year.

Likewise, 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. 22 Hence, the Assessment
Notice for deficiency expanded withholding tax was properly cancelled and set aside.

WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005 Decision of
the Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the MODIFICATION that
Assessment Notice No. FAS-1-86-90-000680, which disallowed the expense deduction of
Isabela Cultural Corporation for professional and security services, is declared valid only
insofar as the expenses for the professional fees of SGV & Co. and of the law firm, Bengzon
Zarraga Narciso Cudala Pecson Azcuna & Bengson, are concerned. The decision is affirmed
in all other respects.

The case is remanded to the BIR for the computation of Isabela Cultural Corporation’s liability
under Assessment Notice No. FAS-1-86-90-000680.

PERSONAL END NOTES

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 be supported by receipts, records or other pertinent papers.

it is a governing principle in taxation that tax exemptions must be construed in strictissimi

juris against the taxpayer and liberally in favor of the taxing authority; and one who claims an
exemption must be able to justify the same by the clearest grant of organic or statute law.
DIAZ and TIMBOL V SECRETARY OF FINANCE and CIR

FACTS:

a. As to the Taxpayers
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol (petitioners) filed this petition for
declaratory relief[1] assailing the validity of the impending imposition of value-added tax (VAT)
by the Bureau of Internal Revenue (BIR) on the collections of tollway operators.

Petitioners claim that, since the VAT would result in increased toll fees, they have an interest
as regular users of tollways in stopping the BIR action.

Petitioners hold the view that Congress did not, when it enacted the NIRC, intend to include
toll fees within the meaning of sale of services that are subject to VAT; that a toll fee is a users
tax, not a sale of services; that to impose VAT on toll fees would amount to a tax on public
service; and that, since VAT was never factored into the formula for computing toll fees, its
imposition would violate the non-impairment clause of the constitution.

On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the
implementation of the VAT.

b. As to the Government
the Office of the Solicitor General filed the governments comment. [4] The government avers
that the NIRC imposes VAT on all kinds of services of franchise grantees, including tollway
operations, except where the law provides otherwise; that the Court should seek the meaning
and intent of the law from the words used in the statute; and that the imposition of VAT on
tollway operations has been the subject as early as 2003 of several BIR rulings and circulars.

The government also argues that petitioners have no right to invoke the non-impairment of
contracts clause since they clearly have no personal interest in existing toll operating
agreements (TOAs) between the government and tollway operators. At any rate, the non-
impairment clause cannot limit the States sovereign taxing power which is generally read into
contracts.

Finally, the government contends that the non-inclusion of VAT in the parametric formula for
computing toll rates cannot exempt tollway operators from VAT. In any event, it cannot be
claimed that the rights of tollway operators to a reasonable rate of return will be impaired by
the VAT since this is imposed on top of the toll rate. Further, the imposition of VAT on toll fees
would have very minimal effect on motorists using the tollways.

ISSUES
a. Taxpayer
Whether VAT is a tax on tax.

b. Government
Whether VAT is a tax on services.
RULING
Section 108 of the NIRC, as amended. VAT is levied, assessed, and collected, according to
Section 108, on the gross receipts derived from the sale or exchange of services as well as
from the use or lease of properties.

It is plain from the above that the law imposes VAT on all kinds of services rendered in
the Philippines for a fee, including those specified in the list. The enumeration of affected
services is not exclusive.

Section 108 subjects to VAT all kinds of services rendered for a fee regardless of whether or
not the performance thereof calls for the exercise or use of the physical or mental
faculties. This means that services to be subject to VAT need not fall under the traditional
concept of services, the personal or professional kinds that require the use of human
knowledge and skills.

Petitioners of course contend that tollway operators cannot be considered franchise grantees
under Section 108 since they do not hold legislative franchises. But nothing in Section 108
indicates that the franchise grantees it speaks of are those who hold legislative franchises.

Tollway fees are not taxes. Indeed, they are not assessed and collected by the BIR and do
not go to the general coffers of the government. What the government seeks to tax here are
fees collected from tollways that are constructed, maintained, and operated by private tollway
operators at their own expense under the build, operate, and transfer scheme that the
government has adopted for expressways.

In sum, fees paid by the public to tollway operators for use of the tollways, are not taxes in
any sense. A tax is imposed under the taxing power of the government principally for the
purpose of raising revenues to fund public expenditures. [27] Toll fees, on the other hand, are
collected by private tollway operators as reimbursement for the costs and expenses incurred
in the construction, maintenance and operation of the tollways, as well as to assure them a
reasonable margin of income. Although toll fees are charged for the use of public facilities,
therefore, they are not government exactions that can be properly treated as a tax. Taxes may
be imposed only by the government under its sovereign authority, toll fees may be demanded
by either the government or private individuals or entities, as an attribute of ownership.

VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an
indirect tax. In indirect taxation, a distinction is made between the liability for the tax and
burden of the tax. The seller who is liable for the VAT may shift or pass on the amount of VAT
it paid on goods, properties or services to the buyer. In such a case, what is transferred is not
the sellers liability but merely the burden of the VAT.

Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the
tollway operator. Under Section 105 of the Code, [31] VAT is imposed on any person who, in the
course of trade or business, sells or renders services for a fee. In other words, the seller of
services, who in this case is the tollway operator, is the person liable for VAT. The latter
merely shifts the burden of VAT to the tollway user as part of the toll fees.

PERSONAL END NOTES