G.R. No. L-49529 March 31, 1989 VALLEY TRADING CO., INC., petitioner, vs.

COURT OF FIRST INSTANCE OF ISABELA, BRANCH II; DR. CARLOS UY (in his capacity as Mayor of Cauayan, Isabela); MOISES BALMACEDA (in his capacity as Municipal Treasurer of Cauayan, Isabela); and SANGGUNIANG BAYAN of Cauayan, Isabela, respondents. Jesus M. Aguas for petitioner. The Solicitor General for respondents. REGALADO, J.: Challenged in this petition for certiorari are the orders of the then Court of First Instance of Isabela, 1 dated October 13, 1978 and November 17, 1978, denying petitioner's prayer for a writ of preliminary injunction in Special Civil Action Br. II-61. 2 The records show that petitioner Valley Trading Co., Inc. filed a complaint in the court a quo seeking a declaration of the supposed nullity of Section 2B.02, Sub-paragraph 1, Letter (A), Paragraph 2 of Ordinance No. T-1, Revenue Code of Cauayan, Isabela, which imposed a graduated tax on retailers, independent wholesalers and distributors; and for the refund of P23,202.12, plus interest of 14 % per annum thereon, which petitioner had paid pursuant to said ordinance. Petitioner likewise prayed for the issuance of a writ of preliminary prohibitory injunction to enjoin the collection of said tax. 3 Defendants in said case were Dr. Carlos A. Uy and Moises Balmaceda, who were sued in their capacity as Mayor and Municipal Treasurer of Cauayan, Isabela, respectively, together with the Sangguniang Bayan of the same town. Petitioner takes the position that said ordinance imposes a "graduated fixed tax based on Sales" that "in effect imposes a sales tax in contravention of Sec. 5, Charter I, par. (L) of P.D. 231 amended by P.D. 426 otherwise known as the Local Tax Code " 4 which prohibits a municipality from imposing a percentage tax on sales. Respondents, on the other hand, claim in their answer that the tax is an annual fixed business tax, not a percentage tax on sales, imposable by a municipality under Section 19(A-1) of the Local Tax Code. They cited the ruling of the Acting Secretary of Finance, in his letter of April 14, 1977, upholding the validity of said tax on the ground that the same is an annual graduated fixed tax imposed on the privilege to engage in business, and not a percentage tax on sales which consists of a fixed percentage of the proceeds realized out of every sale transaction of taxable items sold by the taxpayer. 5 After a reply to the answer had been filed, the trial court set the case for a pre-trial conference. 6 However, on October 13, 1978, the court issued an order terminating the pre-trial and reset the hearing on the merits for failure of the parties to arrive at an amicable settlement. In the same order, the trial court also denied the prayer for a writ of preliminary injunction on the ground that "the collection of taxes cannot be enjoined". 7 Petitioner moved for the reconsideration of the order, contending that a hearing is mandatory before action may be taken on the motion for the issuance of a writ of preliminary injunction, 8 but the court below denied said motion and reiterated its previous order. 9 At the center of this controversy is the submission of the petitioner that a hearing on the merits is necessary before a motion for a writ of preliminary injunction may be denied. Petitioner supports its contention by invoking Section 7, Rule 58 of the Rules of Court which provides that "(a)fter hearing on the merits the court may grant or refuse, continue, modify or dissolve the injunction as justice may require." Petitioner maintains that Section 6 of Rule 58 relied upon by respondents refers to the objections that might be interposed to the issuance of the writ or the

justification for the dissolution of an injunction previously issued ex parte, but that nowhere is it mentioned that a hearing is not necessary. The weakness of petitioner's position is easily discernible. While it correctly pointed out that Section 6 of Rule 58 provides for the grounds for objection to an injunction, petitioner ignores the circumstances under which these objections may be appreciated by the trial court. Thus, if the ground is the insufficiency of the complaint, the same is apparent from the complaint itself and preliminary injunction may be refused outright, with or without notice to the adverse party. In fact, under said section, the court may also refuse an injunction on other grounds on the basis of affidavits which may have been submitted by the parties in connection with such application. In the foregoing instances, a hearing is not necessary. The reliance of the petitioner on Section 7 of Rule 58 is misplaced. This section merely specifies the actions that the court may take on the application for the writ if there is a hearing on the merits; it does not declare that such hearing is mandatory or a prerequisite therefor. Otherwise, we may have a situation where courts will be forced to conduct a hearing even if from a consideration of the pleadings alone it can readily be ascertained that the movant is not entitled to the writ. In fine, it will thereby entail a useless exercise and unnecessary waste of judicial time. It would be different, of course, it there is a prima facie showing on the face of the motion and/or pleadings that the grant of preliminary injunction may be proper, in which case notice to the opposing party would be necessary since the grant of such writ on an ex parte proceeding is now proscribed. 10 A hearing should be conducted since, under such circumstances, only in case of extreme urgency will the writ issue prior to a final hearing. 11 Such requirement for prior notice and hearing underscores the necessity that a writ of preliminary injunction is to be dispensed with circumspection both sides should be heard whenever possible. 12 It does not follow, however, that such a hearing is indispensable where right at the outset the court is reasonably convinced that the writ will not lie. What was then discouraged, and is now specifically prohibited, is the issuance of the writ without notice and hearing. An opinion has been expressed that injunction is available as an ancillary remedy in actions to determine the construction or validity of a local tax ordinance. 13 Unlike the National Internal Revenue Code, the Local Tax Code does not contain any specific provision prohibiting courts from enjoining the collection of local taxes. Such Statutory lapse or intent, however it may be viewed, may have allowed preliminary injunction where local taxes are involved but cannot negate the procedural rules and requirements under Rule 58. The issuance of a writ of preliminary injunction in the present case, as in any other case, is addressed to the sound discretion of the court, conditioned on the existence of a clear and positive right of the movant which should be protected. It is an extraordinary peremptory remedy available only on the grounds expressly provided by law, specifically Section 3 of Rule 58 of the Rules of Court. The circumstances required for the writ to issue do not obtain in the case at bar. The damage that may be caused to the petitioner will not, of course, be irrepairable; where so indicated by subsequent events favorable to it, whatever it shall have paid is easily refundable. Besides, the damage to its property rights must perforce take a back seat to the paramount need of the State for funds to sustain governmental functions. Compared to the damage to the State which may be caused by reduced financial resources, the damage to petitioner is negligible. The policy of the law is to discountenance any delay in the collection of taxes because of the oft-repeated but unassailable consideration that taxes are the lifeblood of the Government and their prompt and certain availability is an imperious need. Equally pertinent is the rule that courts should avoid issuing a writ of preliminary injunction which, in effect, would dispose of the main case without trial. 14 In the present case, it is evident that the only ground relied upon for injunction relief is the alleged patent nullity of the ordinance. 15 If the court should issue the desired writ, premised on that sole justification therefor of petitioner, it would be a virtual acceptance of his claim that the imposition is patently invalid or, at the very least, that the ordinance is of doubtful validity. There would, in effect, be a prejudgment of the main case and a reversal of the rule on the burden of proof since it would assume the proposition which the petitioner is inceptively duty bound to prove.

Furthermore, such action will run counter to the well settled rule that laws are presumed to be valid unless and until the courts declare the contrary in clear and unequivocal terms. A court should issue a writ of preliminary injunction only when the petitioner assailing a statute has made out a case of unconstitutionality or invalidity strong enough to overcome, in the mind of the judge, the presumption of validity, aside from a showing of a clear legal right to the remedy sought. 16 The case before Us, however, presents no features sufficient to overcome such presumption. This must have been evident to the trial court from the answer of the respondents and the well reasoned ruling of the Acting Secretary of Finance. There mere fact that a statute is alleged to be unconstitutional or invalid will not entitle a party to have its enforcement enjoined. 17 Under the foregoing disquisitions, We see no plausible reason to consider this case as an exception. WHEREFORE, judgment is hereby rendered DISMISSING this petition and SUSTAINING the validity of the questioned orders of the trial court.
SO ORDERED. Melencio-Herrera, Paras, Padilla and Sarmiento, JJ., concur.

Footnotes 1 Branch II, presided over by Judge Andres B. Plan. 2 Rollo 27, 31. 3 Ibid 2, 11. 4 Ibid., 8. 5 Ibid., 55, Annex B. 6 Ibid., 21. 7 Ibid., 27, Annex C. 8 Ibid., 28, Annex D. 9 Ibid., 31, Annex E. 10 See. 5, Rule 58, as amended by B.P. 224; Par 8, Interim or Transitional Rules or Guidelines. 11 Alvaro vs. Zapanta, 118 SCRA 722 (1982). 12 Ramos vs. Court of Appeals, et al., 95 SCRA 359 (1980). 13 See Vitug, Compendium on Tax Law and Jurisprudence, 1988 Ed., 350. 14 Ortigas & Co. vs. Court of Appeals, et al., G.R. No. L-79128, June 16, 1988. See also Obias, et al. vs. , Borja, et al., 136 SCRA 687 (1985). 15 Rollo, 4, 71, 106. 16 Tablarin vs. Gutierrez, 152 SCRA 731, 737 (1987) 17 Co Chiong vs. Dinglasan, 79 Phil. 122 (1947); J.M. Tuazon & Co., Inc., et al. vs. Court of Appeals, et al., 113 Phil. 673, 681 (1961); Sto Domingo vs. De los Angeles, 96 SCRA 139, 147 (1980).

SECOND DIVISION SECRETARY OF FINANCE, Petitioner, - versus July 15, 2009 ORO MAURA SHIPPING LINES, Respondent. x --------------------------------------------------------------------------------------------- x DECISION BRION, J.: We resolve the petition[1] filed by the Secretary of Finance (petitioner), assailing the Decision dated August 26, 2002,[2] and Resolution dated January 20, 2003[3] of the Court of Appeals (CA) in CAG.R. SP No. 64644. The CA affirmed the decision[4] dated March 29, 2001 of the Court of Tax Appeals (CTA) holding that the assessment made by the Customs Collector of the Port of Manila on respondent Oro Maura Shipping Lines (respondent) vessel M/V HARUNA had become final and conclusive upon all parties, and could no longer be subject to re-assessment. FACTUAL ANTECEDENTS On November 24, 1992, the Maritime Industry Authority (MARINA) authorized the importation of one (1) unit vessel M/V HARUNA; ex: Shin Shu Maru No. 8, under a Bareboat Charter, for a period of five (5) years from its actual delivery to the charterer. The original parties to the bareboat charter agreement were Haruna Maritime S.A., represented by Mr. Yoji Morinaga of Panama, and Mr. Guerrero G. Dajao, proprietor and manager of Glory Shipping Lines, the charterer. On December 29, 1992, the Department of Finance (DOF), in its 1st Indorsement, allowed the temporary registration of the M/V HARUNA and its tax and duty-free release to Glory Shipping Lines, subject to the conditions imposed by MARINA. The Bureau of Customs (BOC) also required Glory Shipping Lines to post a bond in the amount equal to 150% of the duties, taxes and other charges due on the importation, conditioned on the re-exportation of the vessel upon termination of the charter period, but in no case to extend beyond the year 1999. On March 16, 1993, Glory Shipping Lines posted Ordinary Re-Export Bond No. C(9) 121818 for P1,952,000.00, conditioned on the re-export of the vessel within a period of one (1) year from March 22, 1993, or, in case of default, to pay customs duty, tax and other charges on the importation of the vessel in the amount of P1,296,710.00. G.R. No. 156946 Promulgated:

On March 22, 1993, the M/V HARUNA arrived at the Port of Mactan. Its Import Entry No. 120-93 indicated the vessels dutiable value to be P6,171,092.00 and its estimated customs duty to be P1,296,710.00. On March 22, 1994, Glory Shipping Lines re-export bond expired. Almost two (2) months after, or on May 10, 1994, Glory Shipping Lines sent a Letter of Guarantee to the Collector guaranteeing to renew the Re-Export Bond on vessel M/V HARUNA on or before May 20, 1994; otherwise, it would pay the duties and taxes on said vessel. Glory Shipping Lines never complied with its Letter of Guarantee; neither did it pay the duties and taxes and other charges due on the vessel despite repeated demands made by the Collector of the Port of Mactan. Since the re-export bond was not renewed, the Collector of the Port of Mactan assessed it customs duties and other charges amounting to P1,952,000.00; thereafter, it sent Glory Shipping Lines several demand letters dated April 22, 1996, June 21, 1996, and March 10, 1997, respectively. Glory Shipping Lines failed to pay the assessed duties despite receipt of these demand letters. Unknown to the Collector of the Port of Mactan, Glory Shipping Lines had already offered to sell the vessel M/V HARUNA to the respondent in October 1994. In fact, the respondent already applied for an Authority to Import the vessel with MARINA on October 21, 1994, pegging the proposed acquisition cost of the vessel at P1,100,000.00.MARINA granted this request through a letter dated December 5, 1994, after finding that the proposed acquisition cost of the vessel reasonable, taking into consideration the vessels depreciation due to wear and tear. On December 2, 1994, Haruna Maritime S.A. and Glory Shipping Lines sold the M/V HARUNA to the respondent without informing or notifying the Collector of the Port of Mactan. On December 13, 1994, Kariton and Company (Kariton), representing the respondent, inquired with the DOF if it could pay the duties and taxes due on the vessel, with the information that the vessel was acquired by Glory Shipping Lines through a bareboat charter and was previously authorized by the DOF to be released under a re-export bond. The DOF referred Karitons letter to the Commissioner of Customs for appropriate action, per a 1st Indorsement dated December 13, 1994. In turn, the Commissioner of Customs, in a 2nd Indorsement dated December 14, 1994, referred the DOFs 1st Indorsement to the Collector of Customs of the Port of Manila. On the basis of these indorsements and the MARINA appraisal, Kariton filed Import Entry No. 179260 at the Port of Manila on behalf of the respondent. The Collector of the Port of Manila accepted the declared value of the vessel at P1,100,000.00 and assessed duties and taxes amounting to P149,989.00, which the respondent duly paid on January 4, 1995, as evidenced by Bureau of Customs Official Receipt No. 50245666. On November 5, 1997, after discovering that the vessel M/V HARUNA had been sold to the respondent, the Collector of the Port of Mactan sent the respondent a demand letter for the unpaid customs duties and charges of Glory Shipping Lines. When the respondent failed to pay, the Collector of the Port of Mactan instituted seizure proceedings against the vessel M/V HARUNA for violation of Section 2530, par. 1, subpar. (1) to (5) of the Tariff and Customs Code of the Philippines (TCCP). 5

In his September 1998 Decision,[5] the Collector of the Port of Mactan ordered the forfeiture of the vessel in favor of the Government, after finding that both Glory Shipping Lines and the respondent acted fraudulently in the transaction. The Cebu District Collector, acting on the respondents appeal, reversed the decision of the Collector of the Port of Mactan in his December 1, 1998 decision, concluding that while there appeared to be fraud in the sale of the vessel M/V HARUNA by Haruna Maritime S.A. and Glory Shipping Lines to the respondent, there was no proof that the respondent was a party to the fraud.[6] Moreover, the Cebu District Collector gave weight to MARINAs appraisal of the dutiable value of the vessel. The decision also held that in light of this appraisal that the Collector of Custom of the Port of Manila used as basis for his assessment, the customs duty the Collector of the Port of Manila imposed was unquestionably proper. On December 14, 1998, the Commissioner of Customs, in a 3rd Indorsement,[7] affirmed the decision of the Cebu District Collector and recommended his approval to the petitioner. In a 4th Indorsement dated January 8, 1999,[8] the petitioner affirmed the Commissioners recommendation, but ordered a re-assessment of the vessel based on the entered value, without allowance for depreciation. The respondent filed a motion for reconsideration, which the petitioner denied. On May 15, 2000, the respondent filed a Petition for Review with the CTA,[9] assailing the petitioners January 8, 1999 decision. In a decision dated March 29, 2001, the CTA granted the respondents petition and set aside the petitioners 4th Indorsement, thus affirming the previous decision of the Commissioner of Customs.[10] Dissatisfied with this outcome, the petitioner sought its review through a petition filed with the CA; he claimed that the CTA erred when it held that the petitioner no longer had authority to order the reassessment of the vessel. [11]

The CA affirmed the findings of the CTA in its decision dated August 26, 2002.[12] The appellate court concluded that the assessment made by the Collector of the Port of Manila had already become final and conclusive on all parties, pursuant to Sections 1407 and 1603 of the TCCP; the respondent paid the assessed duties on January 4, 1995, while the Collector of the Port of Mactan demanded payment of additional duties and taxes only on November 5, 1997, or more than one year from the time the respondent paid. The CA also upheld the findings of the Cebu District Collector, of the Commissioner of Customs, and of the CTA that the fraud in this case could not be imputed to the respondent since it was not shown that the respondent knew about Glory Shipping Lines infractions. The CA subsequently denied petitioners Motion for Reconsideration in its resolution of January 20, 2003.[13] Hence, this petition. THE PETITION The petitioner submits three issues for our resolution: 6

I WHETHER THE COURT OF APPEALS ERRED IN HOLDING THAT THE ASSESSMENT MADE BY THE MANILA CUSTOMS COLLECTOR ON THE SUBJECT VESSEL HAD BECOME FINAL AND CONCLUSIVE UPON ALL PARTIES. II WHETHER THE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT WAS AN INNOCENT PURCHASER. III WHETHER THE COURT OF APPEALS ERRED IN NOT HOLDING THAT A LIEN IN FAVOR OF THE GOVERNMENT AND AGAINST THE VESSEL EXISTS.

The petitioner mainly argues that the CA committed a reversible error when it held that the assessment of the Customs Collector of the Port of Manila had become final and conclusive on all parties pursuant to Sections 1407 and 1603 of the TCCP. According to the petitioner, these provisions cannot limit the authority of the Secretary of Finance or the Commissioner of Customs to assess or collect deficiency duties; in the exercise of their supervisory powers, the Commissioner and the Secretary may at any time direct the re-assessment of dutiable articles and order the collection of deficiency duties. Even assuming that Sections 1407 and 1603 of the TCCP apply to the present case, the petitioner posits that the one-year limitation[14] set forth in these provisions presupposes that the return and all entries, as passed upon and approved by the Collector, reflect the accurate description and value of the imported article. Where the article was misdeclared or undervalued, the statute of limitations does not begin to run until a deficiency assessment has been issued and settled in full. Lastly, the petitioner claims that the respondent, being a direct and actual party to the importation, should have ensured that the imported article was properly declared and assessed the correct duties. The respondent, on the other hand, claims that the appraisal of the Collector can only be altered or modified within a year from payment of duties, per Sections 1407 and 1603 of the TCCP; it is only when there is fraud or protest or when the import entry was merely tentative that settlement of duties will not attain finality. The petitioners allegation that there was misdeclaration or undervaluation of the vessel is not supported by the evidence and is contrary to the findings of the District Collector of the Port of Cebu, which the petitioner himself affirmed in his 4th Indorsement dated January 8, 1999. Moreover, the records show that the value of the vessel was properly declared by the respondent atP1,100,000.00, pursuant to the appraisal of the MARINA. The core legal issue for our resolution is whether the Secretary of Finance can order a reassessment of the vessel M/V HARUNA. THE COURTS RULING 7

We find the petition meritorious and rule that the petitioner can order the re-assessment of the vessel M/V HARUNA. Procedural Issue The Collector of the Port of Mactan found that the respondent defrauded the BOC of the proper customs duty, but the District Collector of Cebu held otherwise on appeal and absolved the respondent from any participation in the fraud committed by Glory Shipping Lines. These factual findings and conclusion were affirmed by the Commissioner of Customs, by the CTA and, ultimately, by the CA. Although in agreement with the conclusion, the petitioner, however, ordered a reassessment of the dutiable value of the vessel based on the original entered value, without allowance for depreciation. Factual findings of the lower courts, when affirmed by the CA, are generally conclusive on the Court.[15] For this reason, the Rules of Court provide that only questions of law may be raised in a petition for review on certiorari. We delve into factual issues and act on the lower courts factual findings only in exceptional circumstances, such as when these findings contain palpable errors or are attended by arbitrariness.[16] After a review of the records of the present case, we find that the CTA and the CA overlooked and misinterpreted factual circumstances that, had they been brought to light and properly considered, would have changed the outcome of this case. In particular, a closer scrutiny of the surrounding circumstances of the case and the respondents actions reveal the existence of fraud that deprived the State of the customs duties properly due to it. A Critical Look at the Facts

Our examination of the facts tells us that there are four significant phases that should be considered in appreciating the present case. The first phase is the original tax and duty-free entry of the MV Haruna when Glory Shipping Lines filed Import Entry No. 120-93 with the Collector of the Port of Mactanon March 22, 1993. The vessel then had a declared dutiable value of P6,171,092.00 and the estimated customs duty was P1,296,710.00. It was allowed conditional entry on the basis of a one-year re-export bond that lapsed and was not renewed. Despite a letter of guarantee subsequently issued by Glory Shipping Lines and repeated demand letters, no customs duties and charges were paid. The vessel remained in the Philippines. The second significant phase occurred when Glory Shipping Lines offered to sell the vessel to the respondent in October 1994. At that point, the respondent applied for an Authority to Import the vessel, based on the proposed acquisition cost of P1,100,000.00. MARINA granted the request based on the proposed acquisition cost, taking depreciation into account.

From the first to the second phase, bad faith already intervened as Glory Shipping Lines, instead of paying in accordance with its commitment, simply turned around, disregarded the demand letters of the Collector of the Port of Mactan, and offered the vessel for sale to the respondent. The respondent, for its part, already knew of the status of the vessel (as it in fact subsequently manifested before the DOF); in fact, what it asked for was an authority to import, although the vessel was already in the Philippines. The respondent likewise was the party which secured an appraisal from MARINA knowing fully well of the vessels value based on its previous history. It also joined Glory Shipping Lines in the latters attempt to evade the payment of the customs duties and charges demanded by the Collector of the Port of Mactan by pushing through with the purchase of the vessel without any notification to the Collector of the Port of Mactan - the Port that first administratively enforced the rules on the vessels importation resulting in its tax-free entry and conditional release. The third phase came when the respondents representative asked the DOF if it could pay the duties and taxes due on the vessel, knowing fully well the vessels history of entry into the country. The respondents declared value in the request was P1.1 Million based on the lower appraisal that it secured from MARINA. The DOF referred the matter to the Commissioner of Customs who in turn made his own referral to the Collector of Customs of the Port of Manila. It was the Collector of the Port of Manila who accepted the declared value of P1.1 Million and assessed duties and taxes amounting to P149,989.00. The respondent thus paid the customs duties as approved by the Collector of thePort of Manila. As in the second phase, no notice was given in this third phase to the Port of Mactan as the Port that allowed the entry of the vessel into the country and which had existing demand letters for the customs duties and charges due on the vessel. The fourth phase started on November 5, 1997 when the Collector of the Port of Mactan acted after learning of the sale of the vessel to the respondent. The Collector eventually instituted seizure proceedings that led to the petition currently with us. Evidence of Fraud The tie-up between Glory Shipping Lines and the respondent in the four phases identified above can better be appreciated if the surrounding facts are considered. An undisputed given in the narration of the four phases is the valuation of P6,171,092.00 that Glory Shipping Lines gave when the vessel first entered the country under Import Permit No. 120-93 on March 22, 1993. When the respondent made its request with the MARINA for authorization to import the same vessel after a span of only 19 months, the respondent proposed an acquisition cost of only P1,100,000.00. Consistent with this proposal, the respondent, through Kariton, gave the vessel the same declared value in its own Import Entry No. 179260 filed with the Collector of the Port of Manila. Thus, in a little over a year and a half, the declared value of the vessel decreased by P5,000,000.00, or an astonishing 80% of its original price. We find this drop in value within a short period of 19 months to be too fantastic to be accepted without question, even allowing for depreciation. Equally fantastic is the change in the customs duties, taxes and other charges due which 9

fell from P1,296,710.00 in March 1993 toP149,989.00 in January 1995, all because of the sale, the new application by the vendee, and the change in the Port where the assessment and collection were made. The drop alone from the undisputed original entry valuation of P6,171,092.00 to the respondents new valuation of P1,100,000.00 (or a decrease of 80% from the original valuation) is already a prima facie evidence of fraud that the rulings below did not properly appreciate simply because they disregarded the records of the original entry of the vessel through the Port of Mactan. Section 2503 of the TCCP provides in this regard that:
Section 2503. Undervaluation, Misclassification and Misdeclaration of Entry. When the dutiable value of the imported articles shall be so declared and entered that the duties, based on the declaration of the importer on the face of the entry, would be less by ten percent (10%) than should be legally collected, or when the imported articles shall be so described and entered that the duties based on the importers description on the face of the entry would be less by ten percent (10%) than should be legally collected based on the tariff classification, or when the dutiable weight, measurement or quantity of imported articles is found upon examination to exceed by ten percent (10%) or more than the entered weight, measurement or quantity, a surcharge shall be collected from the importer in an amount of not less than the difference between the full duty and the estimated duty based upon the declaration of the importer, nor more than twice of such difference: Provided, That an undervaluation,misdeclaration in weight, measurement or quantity of more than thirty percent (30%) between the value, weight, measurement, or quantity declared in the entry, and the actual value, weight, quantity, or measurement shall constitute a prima facie evidence of fraud penalized under Section 2530 of this Code: Provided, further, That any misdeclared or underdeclared imported articles/items found upon examination shall ipso facto be forfeited in favor of the Government to be disposed of pursuant to the provision of this Code. When the undervaluation, misdescription, misclassification or misdeclaration in the import entry is intentional, the importer shall be subject to the penal provision under Section 3602 of this Code. [Emphasis supplied.]

The 80% drop in valuation existing in this case renders the consideration and application of Section 2503 unavoidable. Significantly, the respondent never explained the considerable disparity between the dutiable value declared by Glory Shipping Lines and the dutiable value it declared difference of P5,000,000.00 so as to overturn or contradict this prima facie finding of fraud. We note that the exercise of due diligence alone would have alerted it to Glory Shipping Lines acquisition cost and the vessels declared value at its first entry. The respondent, being in the shipping business, should have known the standard prices of vessels and that the value it proposed to MARINA, as described in the second phase above, is extraordinarily low compared to the vessels originally declared valuation. All these strengthen, rather than weaken, the prima facie evidence of fraud that the law dictates when an unconscionable disparity of valuations exists. Depreciation not factor in determining dutiable value Neither can the respondent hide behind the excuse that the vessels dutiable value at P1,100,000.00 was approved by MARINA via the Authority to Import, taking into consideration the vessels depreciation brought about by its ordinary wear and tear. In the first place, we observe 10

that nowhere in the TCCP does it state that the depreciated value of an imported item can be used as the basis to determine an imported items dutiable value. Section 201 of P.D. No. 1464 (the Tariff and Customs Code of 1978)[17] in this regard provides:
Sec. 201. Basis of Dutiable Value. The dutiable value of an imported article subject to an ad valorem rate of duty shall be based on the cost (fair market value) of same, like or similar articles, as bought and sold or offered for sale freely in the usual wholesale quantities in the ordinary course of trade in the principal markets of the exporting country on the date of exportation to the Philippines (excluding internal excise taxes to be remitted or rebated) or where there is none on such date, then on the cost (fair market value) nearest to the date of exportation, including the value of all container, covering and/or packings of any kind and all other expenses, costs and charges incident to placing the article in a condition ready for shipment to the Philippines, and freight as well as insurance premium covering the transportation of such articles to the port of entry in the Philippines. Where the fair market value or price of the article cannot be ascertained thereat or where there exists a reasonable doubt as to the fairness of such value or price, then the fair market value or price in the principal market in the country of manufacture or origin, if it is not the country of exportation, or in a third country with the same stage of economic development as the country of exportation shall be used. When the dutiable value of the article cannot be ascertained in accordance with the preceding paragraphs or where there exists a reasonable doubt as to the cost (fair market value) of the imported article declared in the entry, the correct dutiable value of the article shall be ascertained by the Commissioner Of Customs from the reports of the Revenue or Commercial Attache (Foreign Trade Promotion Attache), pursuant to Republic Act Numbered Fifty-four Hundred and Sixty-six or other Philippine diplomatic officers or Customs Attaches and from such other information that may be available to the Bureau of Customs. Such values shall be published by the Commissioner of Customs from time to time. When the dutiable value cannot be ascertained as provided in the preceding paragraphs, or where there exists a reasonable doubt as to the dutiable value of the imported article declared in the entry, it shall be domestic wholesale selling price of such or similar article in Manila or other principal markets in the Philippines or on the date the duty become payable on the article under appraisement, on the usual wholesale quantities and in the ordinary course of trade, minus: (a) not more than twenty-five (25) per cent thereof for expenses and profits; and (b) duties and taxes paid thereon. (as amended by E.O. 156) [Emphasis supplied.]

Even assuming that the depreciated value of the vessel can be considered in determining the vessels dutiable value, still, we find that the decrease of 80% from the original price after the passage of only 19 months cannot be believed and thus should not be accepted. Assuming further that MARINA merely committed a mistake in approving the vessels proposed acquisition cost at P1,100,000.00, and that the Collector of the Port of Manila similarly erred, we reiterate the legal principle that estoppel generally finds no application against the State when it acts to rectify mistakes, errors,[18] irregularities, or illegal acts,[19] of its officials and agents, irrespective of rank. This ensures efficient conduct of the affairs of the State without any hindrance on the part of the government from implementing laws and regulations, despite prior mistakes or even illegal acts of its agents shackling 11

government operations and allowing others, some by malice, to profit from official error or misbehavior. The rule holds true even if the rectification prejudices parties who had meanwhile received benefits.[20] This principle is particularly true when it comes to the collection of taxes. As we stated in IntraStrata Assurance Corporation v. Republic of the Philippines:[21]
It has long been a settled rule that the government is not bound by the errors committed by its agents. Estoppel does not also lie against the government or any of its agencies arising from unauthorized or illegal acts of public officers.[22] This is particularly true in the collection of legitimate taxes due where the collection has to be made whether or not there is error, complicity, or plain neglect on the part of the collecting agents.[23] In CIR v. CTA, we pointedly said: It is axiomatic that the government cannot and must not be estopped particularly in matters involving taxes. Taxes are the lifeblood of the nation through which the government agencies continue to operate and with which the State effects its functions for the welfare of its constituents. Thus, it should be collected without unnecessary hindrance or delay. [Emphasis supplied.]

The Respondents Complicity That the respondent fully participated in moves to defraud the BOC, as shown by the recital of the four phases above, is further supported by another factual circumstance the respondents acknowledgment to the DOF that the vessel M/V HARUNA conditionally entered the country under a re-export bond filed with the BOC. This is plain from the 1st Indorsement of the DOF dated December 13, 1994, which states:
1st Indorsement December 13, 1994 Respectfully forwarded to the Commissioner of Customs, Manila, for appropriate action, the herein letter of even date of Kariton & Company, requesting in behalf of their client, ORO MAURA SHIPPING LINE to pay the corresponding duties and taxes due on the vessel MV HARUNA (ex. Shinsu Maru No. 8) which was acquired by Glory Shipping Lines thru bareboat charter under P.D. No. 760, as amended and previously authorized by this Department to be released under a re-export bond pursuant to Section 1 of P.D. No. 1711 amending P.D. No. 760 under our 1stIndorsement dated December 29, 1992, copy attached, subject to pertinent import laws, rules and regulations.

With the knowledge that the vessel was released under a re-export bond, the respondent should have known that this original entry was subject to specific conditions, among them, the obligation to guarantee the re-export of the vessel within a given period, or otherwise to pay the customs duties on the vessel. It should have known, too, of the conditions of the vessels release under the re-export bond and of the state of Glory Shipping Lines status of compliance. There was an original but incomplete importation by Glory Shipping Lines that the respondent could not have simply disregarded proceeds from knowledge of the vessels history and the application of the relevant law. In this respect, Section 1202 of the TCCP provides: 12

Importation begins when the carrying vessel or aircraft enters the jurisdiction of the Philippines with intention to unlade therein. Importation is deemed terminated upon payment of the duties, taxes and other charges due upon the articles, or secured to be paid, at a port of entry and the legal permit for withdrawal shall have been granted, or in case said articles are free of duties, taxes and other charges, until they have legally left the jurisdiction of the customs.

In order for an importation to be deemed terminated, the payment of the duties, taxes, fees and other charges of the item brought into the country must be in full. For as long as the importation has not been completed, the imported item remains under the jurisdiction of the BOC.[24] From the perspective of process, the importation that originally started with Glory Shipping Lines was therefore never completed and terminated, so that the respondents present importation is merely a continuation of that original process. Saddled with knowledge of the underlying facts that preceded its purchase, the conclusion that the respondent fully cooperated with Glory Shipping Lines in avoiding the original charges and duties due is unavoidable; the respondent provided the medium (1) to disregard the original duties due on the vessels first entry; and (2) to avoid the Port of Mactan where demands for payment of overdue custom duties already existed. In the process, it of course acted for its own interest by securing for itself lower dutiable values and lesser duties due. The fact that the respondent did all these confirms that it participated in the moves to defraud the BOC of the legitimate taxes due as originally assessed. Finality of the Port of Manila Assessment Our finding of fraud leads us to conclude that the assessment of the Collector of the Port of Manila cannot become final and conclusive pursuant to Section 1603 of the TCCP, which states:
Section 1603. Finality of Liquidation. When articles have been entered and passed free of duty or final adjustments of duties made, with subsequent delivery, such entry and passage free of duty or settlements of duties will, after the expiration of one (1) year, from the date of the final payment of duties, in the absence of fraud or protest or compliance audit pursuant to the provisions of this Code, be final and conclusive upon all parties, unless the liquidation of the import entry was merely tentative.

Nature of a tax lien An important factual circumstance that the CTA and the CA appear to have completely overlooked is that the vessel first entered the Philippines through the Port of Mactan and it was the Collector of the Port of Mactan who first acquired jurisdiction over the vessel when he approved the vessels temporary release from the custody of the BOC, after Glory Shipping Lines filed Ordinary ReExport Bond No. C(9) 121818. When this re-export bond expired on March 22, 1994, Glory Shipping Lines filed a letter dated May 10, 1994 guaranteeing the renewal of the re-export bond on or beforeMay 20, 1994, otherwise the duties, taxes and other charges on the vessel would be paid. Therefore, when May 20, 1994 came and 13

went without the renewal of the vessels re-export bond, the obligation to pay customs duties, taxes and other charges on the importation in the amount of P1,296,710.00 arose and attached to the vessel. Undoubtedly, this lien was never paid by Glory Shipping Lines, thus it continued to exist even after the vessel was sold to the respondent. Section 1204 of the TCCP in this regard states:
Section 1204. Liability of Importer for Duties. Unless relieved by laws or regulations, the liability for duties, taxes, fees and other charges attaching on importation constitutes a personal debt due from the importer to the government which can be discharged only by payment in full of all duties, taxes, fees and other charges legally accruing. It also constitutes a lien upon the articles imported which may be enforced while such articles are in custody or subject to the control of the government.

As defined by Blacks Law Dictionary, a lien is a claim or charge on property for payment of some debt, obligation or duty.[25] In this particular instance, the obligation is a tax lien that attaches to imported goods, regardless of ownership.[26] Consequently, when the respondent bought the vessel from Glory Shipping Lines on December 2, 1994, the obligation to pay the BOC P1,296,710.00 as customs duties had already attached to the vessel and the non-renewal of the re-export bond made this liability due and demandable. The subsequent transfer of ownership of the vessel from Glory Shipping Lines to the respondent did not extinguish this liability. Therefore, while it is true that the respondent had already paid the customs duties assessed by the Collector of the Port of Manila, this payment did not have the effect of extinguishing the lien given the tax lien that had attached to the vessel and the fact that what had been paid was different from what was owed. From the point of amount alone, the customs duties paid to the Collector at the Port of Manila only amounted to P149,989.00, while the lien which had attached to the vessel based on the unpaid assessment by the Collector of the Port of Mactan amounted to P1,296,710.00. Finally, we deem it necessary to reiterate our pronouncement in Chevron Philippines v. Commissioner of the Bureau of Customs,[27] where we discussed the importance of tariff and customs duties in the following manner:
Taxes are the lifeblood of the nation. Tariff and customs duties are taxes constituting a significant portion of the public revenue which enables the government to carry out the functions it has been ordained to perform for the welfare of its constituents. [28] Hence, their prompt and certain availability is an imperative need [29] and they must be collected without unnecessary hindrance.[30] [Emphasis supplied.]

In keeping with this and other cited rulings, we find in favor of the petitioner and uphold his order for the re-assessment of the value of the vessel based on the entered value, which in this case should follow the unpaid assessment made by the Collector of Customs of the Port of Mactan. WHEREFORE, we REVERSE the decision of the Court of Appeals dated August 26, 2002 in CA-G.R. SP No. 64644, and REINSTATE WITH MODIFICATIONthe ruling under former Finance Secretary Edgardo Espiritus 4th Indorsement dated January 8, 1999. The re-assessment shall be based on 14

the unpaid assessment by the Collector of Customs of the Port of Mactan against respondent Oro Maura Shipping Lines dated November 5, 1997, made on the basis of M/V HARUNAs entered value, without allowance for depreciation, but including other taxes and charges due. Seizure proceedings shall proceed in due course unless the unpaid customs duties, other taxes and charges are duly paid. Costs against the petitioner. SO ORDERED.

Designated additional Member of the Second Division effective June 3, 2009 per Special Order No. 658 dated June 3, 2009. ** Designated additional Member of the Second Division effective May 11, 2009 per Special Order No. 635 dated May 7, 2009. [1] For Review on Certiorari under Rule 45; rollo, pp. 10-24. [2] Penned by Associate Justice Renato C. Dacudao, and concurred in by Associate Justice Ruben Reyes (retired member of this Court) and Associate Justice Amelita Tolentino; id, pp. 26-34. [3] Id, p. 35. [4] Penned by Associate Judge Amancio Q. Saga, and concurred in by Presiding Judge Ernesto D. Acosta; id, pp. 5870. [5] Id., pp. 71-82. [6] Id., pp. 83-95. [7] Id., p. 96. [8] Id., p. 97. [9] Id., pp. 99-109. [10] Supra note 4. [11] Rollo, pp. 36-55. [12] Supra note 1. [13] Supra note 2. [14] Per Republic Act No. 9135, Section 1603 has been amended such that the liquidation becomes final after the expiration of three (3) years from the date of the final payment of duties. However, this amendment does not apply to the present case since it took effect only in 2001. [15] Philippine Airlines, Inc. v. Court of Appeals, G.R. No. 120262, July 17, 1997, 275 SCRA 621. [16] This Court may review the factual findings of the lower courts where (1) the conclusion is a finding grounded entirely on speculation, surmise and conjecture; (2) the inference made is manifestly mistaken; (3) there is grave abuse of discretion; (4) the judgment is based on a misapprehension of facts; (5) the findings of fact are conflicting; (6) the Court of Appeals went beyond the issues of the case and its findings are contrary to the admissions of both appellant and appellees; (7) the findings of fact of the Court of Appeals are contrary to those of the trial court; (8) said findings of fact are conclusions without citation of specific evidence on which they are based; (9) the facts set forth in the petition as well as in the petitioners main and reply briefs are not disputed by the respondents; and (10) the findings of fact of the Court of Appeals are premised on the supposed absence of evidence and contradicted by the evidence on record; Sarmiento v. Court of Appeals, G.R. No. 110871, July 2, 1998, 291 SCRA 656. [17] The law applicable at the time the dutiable value of the vessel was assessed in 1994. [18] Republic v. Intermediate Appellate Court, G.R. No. 69138, May 19, 1992, 209 SCRA 90. [19] Sharp International Marketing v. Court of Appeals, G.R. No. 93661, September 4, 1991, 201 SCRA 299. [20] Kapisanan ng Manggagawa sa Government Service Insurance System v. COA, G.R. No. 150769, August 31, 2004, 437 SCRA 371; Baybay Water District v. COA, G.R. Nos. 147248-49, January 23, 2002, 374 SCRA 482. [21] G.R. No. 156571, July 9, 2008. [22] Republic of the Philippines v. Heirs of Felix Caballero, G.R. No. L-27473, September 30, 1977, 79 SCRA 177. [23] Caltex Philippines v. COA, G.R. No. 92585, May 8, 1992, 208 SCRA 726. [24] See: Papa v. Mago, G.R. No. L-27360, February 28, 1968, 22 SCRA 865; Viduya v. Berdiago, G.R. No. L29218, October 29, 1976, 73 SCRA 553. [25] th 5 ed., 1979, p. 832.

15

See: 51 Am. Jur. 857. G.R. No. 178759, August 11, 2008. [28] Commissioner of Internal Revenue v. Court of Tax Appeals, G.R. No. 106611, July 21, 1994, 234 SCRA 348; Commissioner of Customs v. Makasiar, G.R. No. 79307, August 29, 1989, 177 SCRA 27. According to then Senator Gloria Macapagal-Arroyo (now President of the Republic of the Philippines):
[27]

[26]

The [BOC] is one of the premier revenue collecting arms of the Government, who together with the Bureau of the Internal Revenue accounts for the collection of more than eighty percent (80%) of government revenue. (March 29, 1993, Explanatory Note of Senate Bill No. 451, p. 14) [29] Commissioner of Internal Revenue v. Goodrich International Rubber Co., G.R. No. L-22265, March 27, 1968, 22 SCRA 1256; Commissioner of Internal Revenue v. Pineda, G.R. No. L-22734, September 15, 1967, 21 SCRA 105. [30] Philex Mining Corporation v. Commissioner of Internal Revenue, G.R. No. 125704, August 28, 1998, 294 SCRA 687.

16

G.R. No. 76281 September 30, 1991 COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. WYETH SUACO LABORATORIES, INC. and THE COURT OF TAX APPEALS, respondents. FERNAN, C.J.:p

The sole issue in this petition for review on certiorari is whether or not petitioner's right to collect deficiency withholding tax at source and sales tax liabilities from private respondent is barred by prescription. The antecedent facts are as follows: Private respondent Wyeth Suaco Laboratories, Inc. (Wyeth Suaco for brevity) is a domestic corporation engaged in the manufacture and sale of assorted pharmaceutical and nutritional products. Its accounting period is on a fiscal year basis ending October 31 of every year. By virtue of Letter of Authority No. 52415 dated June 17, 1974 issued by then Commissioner of Internal Revenue Misael P. Vera, Revenue Examiner Dante Kabigting conducted an investigation and examination of the books of accounts of Wyeth Suaco. 1 On October 15, 1974, he submitted a report containing the result of his investigation. The report disclosed that Wyeth Suaco was paying royalties to its foreign licensors as well as remuneration for technical services to Wyeth International Laboratories of London. Wyeth Suaco was also found to have declared cash dividends on September 27, 1973 and these were paid on October 31, 1973. However, it allegedly failed to remit withholding tax at source for the fourth (4th) quarter of 1973 on accrued royalties, remuneration for technical services and cash dividends, resulting in a deficiency withholding tax at source in the aggregate amount of P3,178,994.15. 2 Moreover, it was reported that during the periods from November 1, 1972 to December 31, 1972 and January 1, 1973 to October 31, 1973, Wyeth Suaco deducted the cost of non-deductible raw materials, resulting in its alleged failure to pay the correct amount of advance sales tax. There was reportedly also a short payment of advance sales tax in its importation of "Mega Polymycin D" on October 3, 1972. All these resulted in a deficiency sales tax in the amount of P60,855.21 and compromise penalty in the amount of P300.00 or a total amount of P61,155.21. 3 Consequently, the Bureau of Internal Revenue assessed Wyeth Suaco on the aforesaid tax liabilities in two (2) notices dated December 16, 1974 and December 17, 1974. These assessment notices were both received by Wyeth Suaco on December 19, 1974. 4 Thereafter, Wyeth Suaco through its tax consultant SGV &Co., sent the Bureau of Intemal Revenue two (2) letters dated January 17, 1975 and February 8, 1975, protesting the assessments and requesting their cancellation or withdrawal on the ground that said assessments lacked factual or legal basis. Wyeth Suaco argued that it was not liable to pay withholding tax at source on the accrued royalties and dividends because they have yet to be remitted or paid abroad. It claimed that it was not able to remit the balance of fifty percent (50%) of the accrued royalties to its foreign licensors because of Central Bank Circular No. 289 allowing remittance of royalties up to fifty percent (50%) only. With regard to what the Bureau of Internal Revenue claimed as the amount of P2,952,391.00 forming part of the cash dividends declared in 1973, Wyeth Suaco alleged that the same was due its foreign stockholders. Again, Wyeth Suaco was not able to remit these dividends because of the restriction of the Central Bank in a memorandum implementing CB Circular No. 289 dated February 21, 1970. Thus, Wyeth Suaco's contention was that a withholding tax at source on royalties and dividends becomes due and payable only upon their actual payment or remittance. On the matter of the withholding tax at source on remuneration for technical services, Wyeth Suaco insisted that it was up-to-date in remitting the corresponding withholding tax on this income to the Bureau of Internal Revenue.

17

As to the assessed deficiency sales tax, Wyeth Suaco maintained that the difference between its landed cost figure (which is the basis for computing the advancesales tax) and that of the revenue examiner, was due to the use of estimated amounts by the Bureau of Customs and to foreign exchange differential. Wyeth Suaco however, admitted liability with respect to the short payment of advance sales tax in the amount of P1,000.00 on its importation of "Mega Polymycin D." 5 On September 12, 1975, the Commissioner of Internal Revenue asked Wyeth Suaco to avail itself of the compromise settlement under LOI 308. In its answer, Wyeth Suaco manifested its conformity to a 10% compromise provided it be applied only to the basic sales tax, excluding surcharge and interest. As to the deficiency withholding tax at source, Wyeth took exception on the ground that it involves purely a legal question and some of the amounts included in the assessment have already bee paid. On December 10, 1979, petitioner, thru then acting Commissioner of Internal Revenue Ruben B. Ancheta, rendered a decision reducing the assessment of the withholding tax at source for 1973 to P1,973,112.86. However, the amount of P61,155.21 as deficiency sales tax remained the same. 6 Thereafter, Wyeth Suaco filed a petition for review in Court of Tax Appeals on January 18, 1980, praying that lpeti tioner be enjoined from enforcing the assessments by reason of prescription and that the assessments be declared null and void for lack of legal and factual basis. 7 On February 7, 1980, petitioner issued a warrant of distrain of personal property and warrant of levy of real property again private respondent to enforce collection of the deficiency taxes. These were served on private respondent on March 12, 1980. 8 However, collection of the deficiency taxes by virtue of warrants of distraint and levy was enjoined by respondent court upon motion of Wyeth Suaco in a resolution dated May 22, 1980. 9 On May 30, 1980, petitioner filed his answer to Wyeth Suaco's petition for review praying, among others, that private respondent be declared liable to pay the amount of P61,155.21 as deficiency sales tax for the periods November 1, 1972 to December 31, 1972 and January 1, 1973 to October 31, 1973, plus 14% annual interest thereon from December 17, 1974 until payment thereof pursuant to Section 183 (now Section 193) of the Tax Code, and the amount of P1,973,112.86 as deficie withholding tax at source for the 4th quarter of 1973 plus 5% surcharge and 14% per annum interest thereon from December 16, 1974 to December 16, 1977, pursuant to Section 51 (e) of the Tax Code of 1977, as amended. 10 On August 29, 1986, the Court of Tax Appeals rendered a decision enjoining the Commissioner of Internal Revenue from collecting the deficiency taxes, the dispositive portion of which reads as follows:

WHEREFORE, the decision appealed from is hereby reversed and respondent Commissioner of Internal Revenue is hereby enjoined from collecting the deficiency withholding tax at source for the fourth quarter of 1973 as well as the deficiency sales tax assessed against petitioner (Wyeth Suaco). Without pronouncement as to costs. 11
The basis of the above decision was the finding of the Tax Court that while the assessments for the deficiency taxes were made within the five-year period of limitation, the right of petitioner to collect the same has already prescribed, in accordance with Section 319 (c) of the Tax Code of 1977. The said law provides that an assessment of any internal revenue tax within the five-year period of limitation may be collected by distraint or levy or by a proceeding in court, but only if begun within five (5) years after the assessment of the tax. Hence, this recourse by petitioner.

18

The applicable laws in the instant case are Sections 318 and 319 (c) of the National Internal Revenue Code of 1977 (now Sections 203 and 224 of the National Internal Revenue Code of 1986), to wit: SEC. 318. Period of limitation upon assessment and collection Except as provided in the succeeding section, internal revenue taxes shall be assessed within five years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period. ... SEC. 319. Exceptions as to period of limitations of assessment and collection of taxes. xxx xxx xxx (c) Where the assessment of any internal revenue tax has been made within the period of limitation above-prescribed such tax may be collected by distraint or levy by a proceeding in court, but only if begun (1) within five years after the assessment of the tax, or (2) prior the expiration of any period for collection agreed upon in writing by the Commissioner and the taxpayer before the expiration of such five-year period. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon. (emphasis supplied) The main thrust of petitioner for the allowance of this petition is that the five-year prescriptive period provided by law to mak a collection by distraint or levy or by a proceeding in court has not yet prescribed. Although he admits that more than five (5) years have already lapsed from the time the assessment notices were received by private respondent on December 19, 1974 up to the time the warrants of distraint and levy were served on March 12, 1980, he avers that the running of the prescriptive period was stayed or interrupted when Wyeth Suaco protested the assessments. Petitioner argues that the protest letters sent by SGV & Co. in behalf of Wyeth Suaco dated January 17, 1975 and February 8, 1975, requesting for withdrawal and cancellation of the assessments were actually requests for reinvestigation or reconsideration, which could interrupt the running of the five-year prescriptive period. Wyeth Suaco, on the other hand, maintains the position that it never asked for a reinvestigation nor reconsideration of th assessments. What it requested was the cancellation and with drawal of the assessments for lack of legal and factual basis. Thus, its protest letters dated January 17, 1975 and February 8, 1975 did not suspend or interrupt the running of the five-year prescriptive period. Settled is the rule that the prescriptive period provided by law to make a collection by distraint or levy or by a proceeding in court is interrupted once a taxpayer requests for reinvestigation or reconsideration of the assessment. In the case of Commissioner of Internal Revenue vs. Capitol Subdivision, Inc., 12 this Court held: The period of prescription of action to collect a taxpayer's deficiency income tax assessment is interrupted when the taxpayer request for a review or reconsideration of said assessment, and starts to run again when said request is denied. In another case, this Court stated that the statutory period of limitation for collection may be interrupted if by the taxpayer's repeated requests or positive acts the Government has been, for good reasons, persuaded to postpone collection to make him feel that the demand was not unreasonable or that no harassment or injustice is meant by the Goverrument. 13 Also in the case of Cordero vs. Gonda, 14 we held: Partial payment would not prevent the government from suing the taxpayer. Because, by such act of payment, the government is not thereby "persuaded to postpone collection to make him feel that the demand was not unreasonable or that no harassment or injustice is meant." This is the underlying reason behind the rule that the prescriptive period is arrested by the taxpayer's request for re-examination or reinvestigation even if he "has not previously waived it (prescription in writing)". ... (emphasis supplied)

19

Thus, the pivotal issue in this case is whether or not Wyeth Suaco sought reinvestigation or reconsideration of the deficiency tax assessments issued by the Bureau of Internal Revenue. After carefully examining the records of the case, we find that Wyeth Suaco admitted that it was seeking reconsideration of the tax assessments as shown in a letter of James A. Gump, its President and General Manager, dated April 28, 1975, the relevant portion of which is quoted hereunder, to wit:

We submit this letter as a follow-up to our protest filed with your office, through our tax advisers, Sycip, Gorres, Velayo & Co., on January 20 and February 10, 1975 regarding alleged deficiency on withholding tax at source of P3,178,994.15 and on percentage tax of P60,855.21, including interest and surcharges, on which we are seeking reconsideration.
15

(emphasis supplied)

Furthermore, when Wyeth Suaco thru its tax consultant SGV & Co. sent the letters protesting the assessments, the Bureau of Internal Revenue, Manufacturing Audit Division, conducted a review and reinvestigation of the assessments. This fact was admitted by Wyeth Suaco thru its Finance Manager in a letter dated July 1, 1975 addressed to the Chief, Tax Accounts Division. The pertinent portion of said letter reads as follows: This will acknowledge receipt of your letter dated May 22, 1975 regarding our alleged income and business tax deficiencies for fiscal year 1972/73. xxx xxx xxx Nevertheless, please be advised that the deficiency tax stated in your letter is what we are protesting on pursuant to the letters we filed with the Bureau of Internal Revenue on January 20, 1975 and on February 10, 1975. xxx xxx xxx

As we understand, the matter is now undergoing review and consideration by your Manufacturing Audit Division. Pending the outcome of their decision, we regret our inability to make settlement. ...
16

(Emphasis supplied)

Although the protest letters prepared by SGV & Co. in behalf of private respondent did not categorically state or use th words "reinvestigation" and "reconsideration," the same are to be treated as letters of reinvestigation and reconsideration. By virtue of these letters, the Bureau of Internal Revenue ordered its Manufacturing Audit Division to review the assessment made. Furthermore, private respondent's claim that it did not seek reinvestigation or reconsideration of the assessments is belied by the subsequent correspondence or letters written by its officers, as shown above. These letters of Wyeth Suaco interrupted the running of the five-year prescriptive period to collect the deficiency taxes. The Bureau of Internal Revenue, after having reviewed the record of Wyeth Suaco, in accordance with its request for reinvestigation, rendered a final assessment. This final assessment issue by then Acting Commissioner Ruben B. Ancheta was date December 10, 1979 and received by private respondent on January 2, 1980, fixed its tax liability at P1,973,112.86 as deficiency withholding tax at source and P61,155.21 as deficiency sales tax. It was only upon receipt by Wyeth Suaco of this final assessment that the five-year prescriptive period started to run again. Verily, the original assessments dated December 16 and 17, 1974 were both received by Wyeth Suaco on December 19, 1974. However, when Wyeth Suaco protested the assessments and sought its reconsideration in two (2) letters received by the Bureau of Internal Revenue on January 20 and February 10, 1975, the prescriptive period was

20

interrupted. This period started to run again when the Bureau of Internal Revenue served the final assessment to Wyeth Suaco on January 2, 1980. Since the warrants of distraint and levy were served on Wyeth Suaco on March 12, 1980, then, only about four (4) months of the five-year prescriptive period was used. Having resolved the issue of prescription, we now come to the merits of the case. Wyeth Suaco questions the legality of the regulation imposed by the Bureau of Intemal Revenue of requiring a withholding agent or taxpayer to remit the taxes deducted and withheld at source on incomes which have not yet been paid. It maintains the stand that withholding tax at source should only be remitted to the Bureau of Internal Revenue once the incomes subject to withholding tax at source have actually been paid. Thus, private respondent avers that it was not liable to remit the taxes withheld at source on royalties and dividends unless these incomes have been actually paid to its foreign licensors and stockholders. It is said that taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. ... It is the lifeblood of the government and so should be collected without unnecessary hindrance ... 17 In line with this principle, the Tax Code, particularly Section 54 (a) [now Section 51 (a)] provides that "the Commissioner of Internal Revenue may, with the approval of the Secretary of Finance, require the withholding agents to pay or deposit the taxes deducted and withheld at more frequent intervals when necessary to protect the interest of the government. The return shall be filed and the payment made within 25 days from the close of each calendar quarter". Presently, Revenue Regulation No. 6-85 effective July 1, 1985, requires the filing of monthly return and payment of taxes withheld at source within (10) days after the end of each month. Moreover, the records show that Wyeth Suaco adopted the accrual method of accounting wherein the effect of transactions and other events on assets and liabilities are recognized and reported in the time periods to which they relate rather than only when cash is received or paid. The "Report of Investigation" submitted by the tax examiner indicated that accrual was the basis of the taxpayer's return. 18 Thus, private respondent recorded accrued royalties and dividends payable as well as the withholding tax at source payable on these incomes. Having deducted and withheld the tax at source and having recorded the withholding tax at source payable in its books of accounts, private respondent was obligated to remit the same to the Bureau of Internal Revenue. With regard to the accuracy of the assessment on deficiency sales tax, we rule that the examiner's assessment should be given full weight and credit, in the absence of proof submitted by Wyeth Suaco to the contrary. This is in line with our ruling in several cases wherein we said that tax assessments by tax examiners are presumed correct and made in good faith. The taxpayer has the duty to prove otherwise. In the absence of proof of any irregularities in the performance of duties, an assessment duly made by a Bureau of Internal Revenue examiner and approved by his superior officers will not be disturbed. All presumptions are in favor of the correctness of tax assessments. 19 The case of Commissioner of Internal Revenue vs. Construction Resources of Asia, Inc., 20 where this Court cited 51 Am. Jur. pp. 620-621, states the principle in detail, thus: All presumptions are in favor of the correctness of tax assessments. The good faith of tax assessors and the validity of their actions are presumed. They will be presumed to have taken into consideration all the facts to which their attention was called. No presumption can be indulged that all of the public officials of the State in the various counties who have to do with the assessment of property for taxation will knowingly violate the duties imposed upon them by law. The final assessment issued by the Bureau of Internal Revenue declared the issuance of deficiency sales tax assessments to be legal and valid. It was ascertained that during the investigation, Wyeth Suaco deducted nondeductible raw materials which were not subjected to advance sales tax thereby resulting in its failure to pay the correct amount of sales tax under Section 183, in relation to Section 186 and 186-B of the Tax Code, prior to and after amendment by Presidential Decree No. 69. Wyeth Suaco was not able to refute this by submitting supporting documents. 21

21

WHEREFORE, the petition is GRANTED. Wyeth Suaco Laboratories, Inc, is hereby ordered to pay the Bureau of Internal Revenue the amount of P1,973,112.86 as deficiency withholding tax at source, with interest and surcharge in accordance with law, without prejudice to any reduction brought about by payments or remittance made. Wyeth Suaco Laboratories, Inc. is also ordered to pay the Bureau of Internal Revenue the amount of P60,855.21 as deficiency sales tax with interest and surcharge in accordance with law. Costs against private respondent.
SO ORDERED. Gutierrez, Jr., Feliciano, Bidin and Davide, Jr., JJ., concur. Footnotes 1 Original Record, Volume II, p. 61. 2 Original Record, Volume II, pp. 65-66; 62-63. 3 Original Record, Volume I, pp. 9-10. 4 Original Record, Volume I, pp. 7-10. 5 Original Record, Volume II, pp. 137-145. 6 Original Record, Volume I, pp. 11-12. 7 Rollo, pp. 44-49; Original Record, Volume I, pp. 1-6. 8 Original Record, Volume I, pp. 24-25. 9 Original Record, Volume I, pp. 43-44. 10 Rollo, pp. 50-53. 11 Rollo, pp. 30-35, through Associate Judge Alex Z. Reyes, ponente, and Presiding Judge Amante Filler and Associate Judge Constante C. Roaquin, concurring. 12 G.R. No. L-18993, April 30, 1964. 10 SCRA 773. 13 Commissioner of Internal Revenue v. Consolidated Mining Co., G.R. No. 11527, November 29, 1968. 14 G.R. No. L-22369, October 15, 1966, 18 SCRA 331. 15 Original Record, Volume II, pp. 116-117. 16 Original Record, Volume II, p. 102. 17 Commissioner of Internal Revenue v. Algue, Inc., No. L-28896, February 17, 1988, 158 SCRA 9. 18 Original Record, Volume II, p. 64. 19 Sy Po v. Court of Tax Appeals, No. L-81446, August 18, 1988, 164 SCRA 524. 20 No. 68230, November 25, 1986, 145 SCRA 671. 21 Original Record, Vol. I, p. 11.

22

EN BANC G.R. No. L-25043 April 26, 1968

ANTONIO ROXAS, EDUARDO ROXAS and ROXAS Y CIA., in their own respective behalf and as judicial co-guardians of JOSE ROXAS, petitioners, vs. COURT OF TAX APPEALS and COMMISSIONER OF INTERNAL REVENUE, respondents. Leido, Andrada, Perez and Associates for petitioners. Office of the Solicitor General for respondents. BENGZON, J.P., J.: Don Pedro Roxas and Dona Carmen Ayala, Spanish subjects, transmitted to their grandchildren by hereditary succession the following properties: (1) Agricultural lands with a total area of 19,000 hectares, situated in the municipality of Nasugbu, Batangas province; (2) A residential house and lot located at Wright St., Malate, Manila; and (3) Shares of stocks in different corporations. To manage the above-mentioned properties, said children, namely, Antonio Roxas, Eduardo Roxas and Jose Roxas, formed a partnership called Roxas y Compania. AGRICULTURAL LANDS At the conclusion of the Second World War, the tenants who have all been tilling the lands in Nasugbu for generations expressed their desire to purchase from Roxas y Cia. the parcels which they actually occupied. For its part, the Government, in consonance with the constitutional mandate to acquire big landed estates and apportion them among landless tenants-farmers, persuaded the Roxas brothers to part with their landholdings. Conferences were held with the farmers in the early part of 1948 and finally the Roxas brothers agreed to sell 13,500 hectares to the Government for distribution to actual occupants for a price of P2,079,048.47 plus P300,000.00 for survey and subdivision expenses. It turned out however that the Government did not have funds to cover the purchase price, and so a special arrangement was made for the Rehabilitation Finance Corporation to advance to Roxas y Cia. the amount of P1,500,000.00 as loan. Collateral for such loan were the lands proposed to be sold to the farmers. Under the arrangement, Roxas y Cia. allowed the farmers to buy the lands for the same price but by installment, and contracted with the Rehabilitation Finance Corporation to pay its loan from the proceeds of the yearly amortizations paid by the farmers. In 1953 and 1955 Roxas y Cia. derived from said installment payments a net gain of P42,480.83 and P29,500.71. Fifty percent of said net gain was reported for income tax purposes as gain on the sale of capital asset held for more than one year pursuant to Section 34 of the Tax Code. RESIDENTIAL HOUSE During their bachelor days the Roxas brothers lived in the residential house at Wright St., Malate, Manila, which they inherited from their grandparents. After Antonio and Eduardo got married, they resided somewhere else leaving

23

only Jose in the old house. In fairness to his brothers, Jose paid to Roxas y Cia. rentals for the house in the sum of P8,000.00 a year. ASSESSMENTS On June 17, 1958, the Commissioner of Internal Revenue demanded from Roxas y Cia the payment of real estate dealer's tax for 1952 in the amount of P150.00 plus P10.00 compromise penalty for late payment, and P150.00 tax for dealers of securities for 1952 plus P10.00 compromise penalty for late payment. The assessment for real estate dealer's tax was based on the fact that Roxas y Cia. received house rentals from Jose Roxas in the amount of P8,000.00. Pursuant to Sec. 194 of the Tax Code, an owner of a real estate who derives a yearly rental income therefrom in the amount of P3,000.00 or more is considered a real estate dealer and is liable to pay the corresponding fixed tax. The Commissioner of Internal Revenue justified his demand for the fixed tax on dealers of securities against Roxas y Cia., on the fact that said partnership made profits from the purchase and sale of securities. In the same assessment, the Commissioner assessed deficiency income taxes against the Roxas Brothers for the years 1953 and 1955, as follows: 1953 P7,010.00 7,281.00 6,323.00 1955 P5,813.00 5,828.00 5,588.00

Antonio Roxas Eduardo Roxas Jose Roxas

The deficiency income taxes resulted from the inclusion as income of Roxas y Cia. of the unreported 50% of the net profits for 1953 and 1955 derived from the sale of the Nasugbu farm lands to the tenants, and the disallowance of deductions from gross income of various business expenses and contributions claimed by Roxas y Cia. and the Roxas brothers. For the reason that Roxas y Cia. subdivided its Nasugbu farm lands and sold them to the farmers on installment, the Commissioner considered the partnership as engaged in the business of real estate, hence, 100% of the profits derived therefrom was taxed. The following deductions were disallowed: ROXAS Y CIA.: 1953 Tickets for Banquet in honor of S. Osmea Gifts of San Miguel beer Contributions to Philippine Air Force Chapel Manila Police Trust Fund Philippines Herald's fund for Manila's neediest families 1955 100.00 150.00 P 40.00 28.00

100.00

Contributions to Contribution to Our Lady of Fatima Chapel, FEU 50.00

24

ANTONIO ROXAS: 1953 Contributions to Pasay City Firemen Christmas Fund Pasay City Police Dept. X'mas fund 1955 Contributions to Baguio City Police Christmas fund 25.00 Pasay City Firemen Christmas fund 25.00 Pasay City Police Christmas fund EDUARDO ROXAS: 1953 Contributions to Hijas de Jesus' Retiro de Manresa 450.00 Philippines Herald's fund for Manila's neediest families 1955 Contributions to Philippines Herald's fund for Manila's neediest families JOSE ROXAS: 1955 Contributions to Philippines Herald's fund for Manila's neediest families 50.00

25.00

50.00

100.00

120.00

120.00

The Roxas brothers protested the assessment but inasmuch as said protest was denied, they instituted an appeal in the Court of Tax Appeals on January 9, 1961. The Tax Court heard the appeal and rendered judgment on July 31, 1965 sustaining the assessment except the demand for the payment of the fixed tax on dealer of securities and the disallowance of the deductions for contributions to the Philippine Air Force Chapel and Hijas de Jesus' Retiro de Manresa. The Tax Court's judgment reads: WHEREFORE, the decision appealed from is hereby affirmed with respect to petitioners Antonio Roxas, Eduardo Roxas, and Jose Roxas who are hereby ordered to pay the respondent Commissioner of Internal Revenue the amounts of P12,808.00, P12,887.00 and P11,857.00, respectively, as deficiency income taxes for the years 1953 and 1955, plus 5% surcharge and 1% monthly interest as provided for in Sec. 51(a) of the Revenue Code; and modified with respect to the partnership Roxas y Cia. in the sense that it should pay only P150.00, as real estate dealer's tax. With costs against petitioners.

25

Not satisfied, Roxas y Cia. and the Roxas brothers appealed to this Court. The Commissioner of Internal Revenue did not appeal. The issues: (1) Is the gain derived from the sale of the Nasugbu farm lands an ordinary gain, hence 100% taxable? (2) Are the deductions for business expenses and contributions deductible? (3) Is Roxas y Cia. liable for the payment of the fixed tax on real estate dealers? The Commissioner of Internal Revenue contends that Roxas y Cia. could be considered a real estate dealer because it engaged in the business of selling real estate. The business activity alluded to was the act of subdividing the Nasugbu farm lands and selling them to the farmers-occupants on installment. To bolster his stand on the point, he cites one of the purposes of Roxas y Cia. as contained in its articles of partnership, quoted below: 4. (a) La explotacion de fincas urbanes pertenecientes a la misma o que pueden pertenecer a ella en el futuro, alquilandoles por los plazos y demas condiciones, estime convenientes y vendiendo aquellas que a juicio de sus gerentes no deben conservarse; The above-quoted purpose notwithstanding, the proposition of the Commissioner of Internal Revenue cannot be favorably accepted by Us in this isolated transaction with its peculiar circumstances in spite of the fact that there were hundreds of vendees. Although they paid for their respective holdings in installment for a period of ten years, it would nevertheless not make the vendor Roxas y Cia. a real estate dealer during the ten-year amortization period. It should be borne in mind that the sale of the Nasugbu farm lands to the very farmers who tilled them for generations was not only in consonance with, but more in obedience to the request and pursuant to the policy of our Government to allocate lands to the landless. It was the bounden duty of the Government to pay the agreed compensation after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them among the farmers at very reasonable terms and prices. However, the Government could not comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's burden, went out of its way and sold lands directly to the farmers in the same way and under the same terms as would have been the case had the Government done it itself. For this magnanimous act, the municipal council of Nasugbu passed a resolution expressing the people's gratitude. The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg". And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously. It does not conform with Our sense of justice in the instant case for the Government to persuade the taxpayer to lend it a helping hand and later on to penalize him for duly answering the urgent call. In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence, pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the gain derived from the sale thereof is capital gain, taxable only to the extent of 50%. DISALLOWED DEDUCTIONS Roxas y Cia. deducted from its gross income the amount of P40.00 for tickets to a banquet given in honor of Sergio Osmena and P28.00 for San Miguel beer given as gifts to various persons. The deduction were claimed as representation expenses. Representation expenses are deductible from gross income as expenditures incurred in carrying on a trade or business under Section 30(a) of the Tax Code provided the taxpayer proves that they are reasonable in amount, ordinary and necessary, and incurred in connection with his business. In the case at bar, the

26

evidence does not show such link between the expenses and the business of Roxas y Cia. The findings of the Court of Tax Appeals must therefore be sustained. The petitioners also claim deductions for contributions to the Pasay City Police, Pasay City Firemen, and Baguio City Police Christmas funds, Manila Police Trust Fund, Philippines Herald's fund for Manila's neediest families and Our Lady of Fatima chapel at Far Eastern University. The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and Baguio City Police are not deductible for the reason that the Christmas funds were not spent for public purposes but as Christmas gifts to the families of the members of said entities. Under Section 39(h), a contribution to a government entity is deductible when used exclusively for public purposes. For this reason, the disallowance must be sustained. On the other hand, the contribution to the Manila Police trust fund is an allowable deduction for said trust fund belongs to the Manila Police, a government entity, intended to be used exclusively for its public functions. The contributions to the Philippines Herald's fund for Manila's neediest families were disallowed on the ground that the Philippines Herald is not a corporation or an association contemplated in Section 30 (h) of the Tax Code. It should be noted however that the contributions were not made to the Philippines Herald but to a group of civic spirited citizens organized by the Philippines Herald solely for charitable purposes. There is no question that the members of this group of citizens do not receive profits, for all the funds they raised were for Manila's neediest families. Such a group of citizens may be classified as an association organized exclusively for charitable purposes mentioned in Section 30(h) of the Tax Code. Rightly, the Commissioner of Internal Revenue disallowed the contribution to Our Lady of Fatima chapel at the Far Eastern University on the ground that the said university gives dividends to its stockholders. Located within the premises of the university, the chapel in question has not been shown to belong to the Catholic Church or any religious organization. On the other hand, the lower court found that it belongs to the Far Eastern University, contributions to which are not deductible under Section 30(h) of the Tax Code for the reason that the net income of said university injures to the benefit of its stockholders. The disallowance should be sustained. Lastly, Roxas y Cia. questions the imposition of the real estate dealer's fixed tax upon it, because although it earned a rental income of P8,000.00 per annum in 1952, said rental income came from Jose Roxas, one of the partners. Section 194 of the Tax Code, in considering as real estate dealers owners of real estate receiving rentals of at least P3,000.00 a year, does not provide any qualification as to the persons paying the rentals. The law, which states:
1wph1.t

. . . "Real estate dealer" includes any person engaged in the business of buying, selling, exchanging, leasing or renting property on his own account as principal and holding himself out as a full or part-time dealer in real estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of three thousand pesos or more a year: . . . (Emphasis supplied) . is too clear and explicit to admit construction. The findings of the Court of Tax Appeals or, this point is sustained.
1wph1.t

To Summarize, no deficiency income tax is due for 1953 from Antonio Roxas, Eduardo Roxas and Jose Roxas. For 1955 they are liable to pay deficiency income tax in the sum of P109.00, P91.00 and P49.00, respectively, computed as follows: * ANTONIO ROXAS Net income per return Add: 1/3 share, profits in P 153,249.15 Roxas y Cia. Less amount declared 146,135.46 P315,476.59

27

Amount understated Contributions disallowed

P 7,113.69 115.00 P 7,228.69

Less 1/3 share of contributions amounting to P21,126.06 disallowed from partnership but allowed to partners 7,042.02 Net income per review Less: Exemptions Net taxable income Tax due Tax paid Deficiency EDUARDO ROXAS Net income per return Add: 1/3 share, profits in P 153,249.15 Roxas y Cia Less profits declared Amount understated 146,052.58 P 7,196.57 154,169.00 154,060.00 P 109.00 ==========

186.67 P315,663.26 4,200.00 P311,463.26

P 304,166.92

Less 1/3 share in contributions amounting to P21,126.06 disallowed from partnership but allowed to partners 7,042.02 Net income per review Less: Exemptions Net taxable income Tax Due Tax paid Deficiency P147,250.00 147,159.00 P91.00 ===========

155.55 P304,322.47 4,800.00 P299,592.47

28

JOSE ROXAS Net income per return Add: 1/3 share, profits in P153,429.15 Roxas y Cia. Less amount reported Amount understated 146,135.46 7,113.69 P222,681.76

Less 1/3 share of contributions disallowed from partnership but allowed as deductions to partners 7,042.02 Net income per review Less: Exemption Net income subject to tax Tax due Tax paid Deficiency P102,763.00 102,714.00 P 49.00 ===========

71.67 P222,753.43 1,800.00 P220,953.43

WHEREFORE, the decision appealed from is modified. Roxas y Cia. is hereby ordered to pay the sum of P150.00 as real estate dealer's fixed tax for 1952, and Antonio Roxas, Eduardo Roxas and Jose Roxas are ordered to pay the respective sums of P109.00, P91.00 and P49.00 as their individual deficiency income tax all corresponding for the year 1955. No costs. So ordered. Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and Fernando, JJ., concur. Zaldivar, J., took no part. Concepcion, C.J., is on leave. Footnotes
*

See BIR Records, p. 387.

29

THIRD DIVISION

G.R. No. 125704 August 28, 1998 PHILEX MINING CORPORATION, petitioner, vs. COMMISSIONER OF INTERNAL REVENUE, COURT OF APPEALS, and THE COURT OF TAX APPEALS,respondents.

ROMERO,

J.:

Petitioner Philex Mining Corp. assails the decision of the Court of Appeals promulgated on April 8, 1996 in CA-G.R. SP No. 36975 1 affirming the Court of Tax Appeals decision in CTA Case No. 4872 dated March 16, 1995 2 ordering it to pay the amount of P110,677,668.52 as excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Sections 248 and 249 of the Tax Code of 1977.
The facts show that on August 5, 1992, the BIR sent a letter to Philex asking it to settle its tax liabilities for the 2nd, 3rd and 4th quarter of 1991 as well as the 1st and 2nd quarter of 1992 in the total amount of P123,821.982.52 computed as follows: PERIOD COVERED BASIC TAX 25% SURCHARGE INTEREST TOTAL EXCISE TAX DUE 2nd Qtr., 1991 12,911,124.60 3,227,781.15 3,378,116.16 19,517,021.91 3rd Qtr., 1991 14,994,749.21 3,748,687.30 2,978,409.09 21,721,845.60 4th Qtr., 1991 19,406,480.13 4,851,620.03 2,631,837.72 26,889,937.88

47,312,353.94 11,828,088.48 8,988,362.97 68,128,805.39

1st Qtr., 1992 23,341,849.94 5,835,462.49 1,710,669.82 30,887,982.25 2nd Qtr., 1992 19,671,691.76 4,917,922.94 215,580.18 24,805,194.88

43,013,541.70 10,753,385.43 1,926,250.00 55,693,177.13

30

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

In a letter dated August 20, 1992, 4 Philex protested the demand for payment of the tax liabilities stating that it has pending claims for VAT input credit/refund for the taxes it paid for the years 1989 to 1991 in the amount of P119,977,037.02 plus interest. Therefore these claims for tax credit/refund should be applied against the tax liabilities, citing our ruling inCommissioner of Internal Revenue v. Itogon-Suyoc Mines, Inc. 5 In reply, the BIR, in a letter dated September 7, 1992, 6 found no merit in Philex's position. Since these pending claims have not yet been established or determined with certainty, it follows that no legal compensation can take place. Hence, the BIR reiterated its demand that Philex settle the amount plus interest within 30 days from the receipt of the letter. In view of the BIR's denial of the offsetting of Philex's claim for VAT input credit/refund against its excise tax obligation, Philex raised the issue to the Court of Tax Appeals on November 6, 1992. 7 In the course of the proceedings, the BIR issued Tax Credit Certificate SN 001795 in the amount of P13,144,313.88 which, applied to the total tax liabilities of Philex of P123,821,982.52; effectively lowered the latter's tax obligation to P110,677,688.52.
Despite the reduction of its tax liabilities, the CTA still ordered Philex to pay the remaining balance of P110,677,688.52 plus interest, elucidating its reason, to wit:
Thus, for legal compensation to take place, both obligations must be liquidated and demandable. "Liquidated" debts are those where the exact amount has already been determined (PARAS, Civil Code of the Philippines, Annotated, Vol. IV, Ninth Edition, p. 259). In the instant case, the claims of the Petitioner for VAT refund is still pending litigation, and still has to be determined by this Court (C.T.A. Case No. 4707). A fortiori, the liquidated debt of the Petitioner to the government cannot, therefore, be set-off against the unliquidated claim which Petitioner conceived to exist in its favor (see Compaia General de Tabacos vs. French and Unson, No. 14027, November 8, 1918, 39 Phil. 34). 8

Moreover, the Court of Tax Appeals ruled that "taxes cannot be subject to set-off on compensation since claim for taxes is not a debt or contract." 9 The dispositive portion of the CTA decision 10 provides:
In all the foregoing, this Petition for Review is hereby DENIED for lack of merit and Petitioner is hereby ORDERED to PAY the Respondent the amount of P110,677,668.52 representing excise tax liability for the period from the 2nd quarter of 1991 to the 2nd quarter of 1992 plus 20% annual interest from August 6, 1994 until fully paid pursuant to Section 248 and 249 of the Tax Code, as amended.

Aggrieved with the decision, Philex appealed the case before the Court of Appeals docketed as CA-GR. CV No. 36975. 11Nonetheless, on April 8, 1996, the Court of Appeals a Affirmed the Court of Tax Appeals observation. The pertinent portion of which reads: 12
WHEREFORE, the appeal by way of petition for review is hereby DISMISSED and the decision dated March 16, 1995 is AFFIRMED.

Philex filed a motion for reconsideration which was, nevertheless, denied in a Resolution dated July 11, 1996. 13

31

However, a few days after the denial of its motion for reconsideration, Philex was able to obtain its VAT input credit/refund not only for the taxable year 1989 to 1991 but also for 1992 and 1994, computed as follows: 14
Period Covered Tax Credit Date By Claims For Certificate of VAT refund/credit Number Issue Amount 1994 (2nd Quarter) 007730 11 July 1996 P25,317,534.01 1994 (4th Quarter) 007731 11 July 1996 P21,791,020.61 1989 007732 11 July 1996 P37,322,799.19 1990-1991 007751 16 July 1996 P84,662,787.46 1992 (1st-3rd Quarter) 007755 23 July 1996 P36,501,147.95

In view of the grant of its VAT input credit/refund, Philex now contends that the same should, ipso jure, off-set its excise tax liabilities 15 since both had already become "due and demandable, as well as fully liquidated;" 16 hence, legal compensation can properly take place.
We see no merit in this contention.

In several instances prior to the instant case, we have already made the pronouncement that taxes cannot be subject to compensation for the simple reason that the government and the taxpayer are not creditors and debtors of each other. 17There is a material distinction between a tax and debt. Debts are due to the Government in its corporate capacity, while taxes are due to the Government in its sovereign capacity. 18 We find no cogent reason to deviate from the aforementioned distinction. Prescinding from this premise, in Francia v. Intermediate Appellate Court, taxes cannot be subject to set-off or compensation, thus:
19

we categorically held that

We have consistently ruled that there can be no off-setting of taxes against the claims that the taxpayer may have against the government. A person cannot refuse to pay a tax on the ground that the government owes him an amount equal to or greater than the tax being collected. The collection of a tax cannot await the results of a lawsuit against the government.

The ruling in Francia has been applied to the subsequent case of Caltex Philippines, Inc. v. Commission on Audit, 20 which reiterated that:
. . . a taxpayer may not offset taxes due from the claims that he may have against the government. Taxes cannot be the subject of compensation because the government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.

32

Further, Philex's reliance on our holding in Commissioner of Internal Revenue v. Itogon-Suyoc Mines Inc., wherein we ruled that a pending refund may be set off against an existing tax liability even though the refund has not yet been approved by the Commissioner, 21 is no longer without any support in statutory law. It is important to note, that the premise of our ruling in the aforementioned case was anchored on Section 51 (d) of the National Revenue Code of 1939. However, when the National Internal Revenue Code of 1977 was enacted, the same provision upon which the Itogon-Suyoc pronouncement was based was omitted. 22 Accordingly, the doctrine enunciated in Itogon-Suyoc cannot be invoked by Philex. Despite the foregoing rulings clearly adverse to Philex's position, it asserts that the imposition of surcharge and interest for the non-payment of the excise taxes within the time prescribed was unjustified. Philex posits the theory that it had no obligation to pay the excise tax liabilities within the prescribed period since, after all, it still has pending claims for VAT input credit/refund with BIR. 23 We fail to see the logic of Philex's claim for this is an outright disregard of the basic principle in tax law that taxes are the lifeblood of the government and so should be collected without unnecessary hindrance. 24 Evidently, to countenance Philex's whimsical reason would render ineffective our tax collection system. Too simplistic, it finds no support in law or in jurisprudence. To be sure, we cannot allow Philex to refuse the payment of its tax liabilities on the ground that it has a pending tax claim for refund or credit against the government which has not yet been granted. It must be noted that a distinguishing feature of a tax is that it is compulsory rather than a matter of bargain. 25 Hence, a tax does not depend upon the consent of the taxpayer. 26 If any taxpayer can defer the payment of taxes by raising the defense that it still has a pending claim for refund or credit, this would adversely affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they fall due simply because he has a claim against the government or that the collection of the tax is contingent on the result of the lawsuit it filed against the government. 27 Moreover, Philex's theory that would automatically apply its VAT input credit/refund against its tax liabilities can easily give rise to confusion and abuse, depriving the government of authority over the manner by which taxpayers credit and offset their tax liabilities. Corollarily, the fact that Philex has pending claims for VAT input claim/refund with the government is immaterial for the imposition of charges and penalties prescribed under Section 248 and 249 of the Tax Code of 1977. The payment of the surcharge is mandatory and the BIR is not vested with any authority to waive the collection thereof. 28 The same cannot be condoned for flimsy reasons, 29 similar to the one advanced by Philex in justifying its non-payment of its tax liabilities. Finally, Philex asserts that the BIR violated Section 106 (e) 30 of the National Internal Revenue Code of 1977, which requires the refund of input taxes within 60 days, 31 when it took five years for the latter to grant its tax claim for VAT input credit/refund. 32 In this regard, we agree with Philex. While there is no dispute that a claimant has the burden of proof to establish the factual basis of his or her claim for tax credit or refund, 33 however, once the claimant has submitted all the required documents it is the function of the BIR to assess these documents with

33

purposeful dispatch. After all, since taxpayers owe honestly to government it is but just that government render fair service to the taxpayers. 34 In the instant case, the VAT input taxes were paid between 1989 to 1991 but the refund of these erroneously paid taxes was only granted in 1996. Obviously, had the BIR been more diligent and judicious with their duty, it could have granted the refund earlier. We need not remind the BIR that simple justice requires the speedy refund of wrongly-held taxes. 35 Fair dealing and nothing less, is expected by the taxpayer from the BIR in the latter's discharge of its function. As aptly held in Roxas v. Court of Tax Appeals: 36
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden egg" And, in order to maintain the general public's trust and confidence in the Government this power must be used justly and not treacherously.

Despite our concern with the lethargic manner by which the BIR handled Philex's tax claim, it is a settled rule that in the performance of governmental function, the State is not bound by the neglect of its agents and officers. Nowhere is this more true than in the field of taxation. 37 Again, while we understand Philex's predicament, it must be stressed that the same is not a valid reason for the non-payment of its tax liabilities. To be sure, this is not to state that the taxpayer is devoid of remedy against public servants or employees, especially BIR examiners who, in investigating tax claims are seen to drag their feet needlessly. First, if the BIR takes time in acting upon the taxpayer's claim for refund, the latter can seek judicial remedy before the Court of Tax Appeals in the manner prescribed by law. 38 Second, if the inaction can be characterized as willful neglect of duty, then recourse under the Civil Code and the Tax Code can also be availed of.
Art. 27 of the Civil Code provides: Art. 27. Any person suffering material or moral loss because a public servant or employee refuses or neglects, without just cause, to perform his official duty may file an action for damages and other relief against the latter, without prejudice to any disciplinary action that may be taken. More importantly, Section 269 (c) of the National Internal Revenue Act of 1997 states: xxx xxx xxx (c) Wilfully neglecting to give receipts, as by law required for any sum collected in the performance of duty or wilfully neglecting to perform, any other duties enjoyed by law.

Simply put, both provisions abhor official inaction, willful neglect and unreasonable delay in the performance of official duties.39 In no uncertain terms must we stress that every public employee or servant must strive to render service to the people with utmost diligence and efficiency. Insolence and delay have no place in government service. The BIR, being the government collecting arm, must and should do no less. It simply cannot be apathetic and laggard in rendering service to the taxpayer if it wishes to remain true to its mission of hastening the country's development. We take judicial notice of the

34

taxpayer's generally negative perception towards the BIR; hence, it is up to the latter to prove its detractors wrong.
In sum, while we can never condone the BIR's apparent callousness in performing its duties, still, the same cannot justify Philex's non-payment of its tax liabilities. The adage "no one should take the law into his own hands" should have guided Philex's action. WHEREFORE, in view of the foregoing, the instant petition is hereby DISMISSED. The assailed decision of the Court of Appeals dated April 8, 1996 is hereby AFFIRMED. SO ORDERED.
Narvasa, C.J., Kapunan and Purisima, JJ., concur.

Footnotes
1 Penned by Justice Artemon D. Luna, concurred in by Justices Ramon A. Barcelona and Portia AlinoHormachuelos. 2 Penned by Associate Judge Manuel K. Gruba. concurred in by Presiding Judge Ernesto D. Acosta and Associate Judge Ramon O. De Veyra. 3 CTA Records, pp. 34-35. 4 Rollo, pp. 172-174. 5 28 SCRA 867 (1969). 6 Id., pp. 175-176. 7 Docketed as Case No. 4872. Rollo, pp. 177-187. 8 Rollo, p. 55. 9 CTA Decision, Rollo, p. 59. 10 Rollo, pp. 59-60. 11 Rollo, pp. 87-101. 12 Rollo, p. 45. 13 Rollo, p. 48. 14 Rollo, pp. 112-116. 15 Memorandum, Rollo, pp. 307-308. 16 Ibid. 17 Cordero v. Gonda, 18 SCRA 331 (1966). 18 Commissioner of Internal Revenue v. Palanca, 18 SCRA 496 (1966). 19 162 SCRA 753 (1988). 20 208 SCRA 726 (1992). 21 Rollo, p. 33. 22 Aban, Law on Basic Taxation, 1994, p. 19. 23 Memorandum, Rollo, p. 389. 24 Commissioner of Internal Revenue v. Algue, Inc., 158 SCRA 9 (1988). 25 I Cooley, Taxation, 22. 26 Ibid. 27 Supra, note 19. 28 Republic v. Philippine Bank of Commerce, 34 SCRA 361 (1970). 29 Jamora v. Meer, 74 Phil. 22 (1942). 30 (e) Period within which refund of input taxes may be made by the Commissioner. The Commissioner shall refund input taxes within 60 days from the date the application for refund was filed with him or his duly authorized representative. No refund of input taxes shall be allowed unless the VAT-registered person files an application for refund within the period prescribed in paragraphs (a), (b) and (c) as the case may be. 31 Rollo, pp. 32-33. 32 This provision has been amended by Section 112 (D) of Republic Act 8424 entitled the "National Internal Revenue Act of 1997." "(D) Period within which Refund or Tax Credit of Input Taxes shall be Made. In proper cases, the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes within one

35

hundred twenty (120) days from the date of submission of complete documents in support of the application filed in accordance with Subsections (A) and (B) hereof. In case of full of partial denial of the claim for tax refund or tax credit, or the failure on the part of the Commissioner to act on the application within the period prescribed above, the taxpayer affected, within thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with the Court of Tax Appeals." 33 Commissioner of Internal Revenue v. Tokyo Shipping Co. Ltd., 244 SCRA 332 (1995). 34 Ibid. 35 Citibank of N.A. v. Court of Appeals. G.R. No. 107434, October 10, 1997. 36 23 SCRA 276 (1968). 37 Commissioner of Internal Revenue v. Proctor and Gamble PMC, 160 SCRA 560 (1988). 38 Insular Lumber Co. v. Court of Appeals, 104 SCRA 721 (1981); Commissioner of Internal Revenue v. Victoria Milling Co., Inc., 22 SCRA 12 (1968). 39 Tolentino, Civil Code of the Philippines, Vol. 1, 1983, p. 117.

36

SPECIAL FIRST DIVISION

x - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x
RESOLUTION

CORONA, J.:
ARTICLE II Declaration of Principles and State Policies Section 15. The State shall protect and promote the right to health of the people and instill health consciousness among them. ARTICLE XIII Social Justice and Human Rights Section 11. The State shall adopt an integrated and comprehensive approach to health development which shall endeavor to make essential goods, health and other social services available to all the people at affordable cost. There shall be priority for the needs of the underprivileged sick, elderly, disabled, women, and children. The State shall endeavor to provide free medical care to paupers. [1]

For resolution are a motion for reconsideration and supplemental motion for reconsideration dated July 10, 2008 and July 14, 2008, respectively, filed by petitioner Philippine Health Care Providers, Inc.[2] We recall the facts of this case, as follows:
Petitioner is a domestic corporation whose primary purpose is [t]o 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. Individuals enrolled in its health care programs pay an annual membership fee and are entitled to various preventive, diagnostic and curative medical services provided by its duly licensed physicians, specialists and other professional technical staff participating in the group practice health delivery system at a hospital or clinic owned, operated or accredited by it.

37

xxx

xxx

xxx

On January 27, 2000, respondent Commissioner of Internal Revenue [CIR] sent petitioner a formal demand letter and the corresponding assessment notices demanding the payment of deficiency taxes, including surcharges and interest, for the taxable years 1996 and 1997 in the total amount of P224,702,641.18. xxxx The deficiency [documentary stamp tax (DST)] assessment was imposed on petitioners health care agreement with the members of its health care program pursuant to Section 185 of the 1997 Tax Code xxxx xxx xxx xxx

Petitioner protested the assessment in a letter dated February 23, 2000. As respondent did not act on the protest, petitioner filed a petition for review in the Court of Tax Appeals (CTA) seeking the cancellation of the deficiency VAT and DST assessments. On April 5, 2002, the CTA rendered a decision, the dispositive portion of which read: WHEREFORE, in view of the foregoing, the instant Petition for Review is PARTIALLY GRANTED. Petitioner is hereby ORDERED to PAY the deficiency VAT amounting toP22,054,831.75 inclusive of 25% surcharge plus 20% interest from January 20, 1997 until fully paid for the 1996 VAT deficiency and P31,094,163.87 inclusive of 25% surcharge plus 20% interest from January 20, 1998 until fully paid for the 1997 VAT deficiency. Accordingly, VAT Ruling No. [231]-88 is declared void and without force and effect. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED AND SET ASIDE. Respondent is ORDERED to DESIST from collecting the said DST deficiency tax. SO ORDERED. Respondent appealed the CTA decision to the [Court of Appeals (CA)] insofar as it cancelled the DST assessment. He claimed that petitioners health care agreement was a contract of insurance subject to DST under Section 185 of the 1997 Tax Code. On August 16, 2004, the CA rendered its decision. It held that petitioners health care agreement was in the nature of a non-life insurance contract subject to DST. WHEREFORE, the petition for review is GRANTED. The Decision of the Court of Tax Appeals, insofar as it cancelled and set aside the 1996 and 1997 deficiency documentary stamp tax assessment and ordered petitioner to desist from collecting the same is REVERSED and SET ASIDE. Respondent is ordered to pay the amounts of P55,746,352.19 and P68,450,258.73 as deficiency Documentary Stamp Tax for 1996 and 1997, respectively, plus 25% surcharge for late payment and 20% interest per annum from January 27, 2000, pursuant to Sections 248 and 249 of the Tax Code, until the same shall have been fully paid. SO ORDERED. Petitioner moved for reconsideration but the CA denied it. Hence, petitioner filed this case. xxx xxx xxx

38

In a decision dated June 12, 2008, the Court denied the petition and affirmed the CAs decision. We held that petitioners health care agreement during the pertinent period was in the nature of non-life insurance which is a contract of indemnity, citing Blue Cross Healthcare, Inc. v. Olivares[3] and Philamcare Health Systems, Inc. v. CA.[4] We also ruled that petitioners contention that it is a health maintenance organization (HMO) and not an insurance company is irrelevant because contracts between companies like petitioner and the beneficiaries under their plans are treated as insurance contracts. Moreover, DST is not a tax on the business transacted but an excise on the privilege, opportunity or facility offered at exchanges for the transaction of the business. Unable to accept our verdict, petitioner filed the present motion for reconsideration and supplemental motion for reconsideration, asserting the following arguments:
(a) The DST under Section 185 of the National Internal Revenue of 1997 is imposed only on a company engaged in the business of fidelity bonds and other insurance policies. Petitioner, as an HMO, is a service provider, not an insurance company. The Court, in dismissing the appeal in CIR v. Philippine National Bank, affirmed in effect the CAs disposition that health care services are not in the nature of an insurance business. Section 185 should be strictly construed. Legislative intent to exclude health care agreements from items subject to DST is clear, especially in the light of the amendments made in the DST law in 2002. Assuming arguendo that petitioners agreements are contracts of indemnity, they are not those contemplated under Section 185. Assuming arguendo that petitioners agreements are akin to health insurance, health insurance is not covered by Section 185. The agreements do not fall under the phrase other branch of insurance mentioned in Section 185. The June 12, 2008 decision should only apply prospectively. Petitioner availed of the tax amnesty benefits under RA[5] 9480 for the taxable year 2005 and all prior years. Therefore, the questioned assessments on the DST are now rendered moot and academic.[6]

(b)

(c) (d)

(e)

(f)

(g) (h) (i)

Oral arguments were held in Baguio City on April 22, 2009. The parties submitted their memoranda on June 8, 2009.

39

In its motion for reconsideration, petitioner reveals for the first time that it availed of a tax amnesty under RA 9480[7] (also known as the Tax Amnesty Act of 2007) by fully paying the amount of P5,127,149.08 representing 5% of its net worth as of the year ending December 31, 2005.[8] We find merit in petitioners motion for reconsideration. Petitioner was formally registered and incorporated with the Securities and Exchange Commission on June 30, 1987.[9] It is engaged in the dispensation of the following medical services to individuals who enter into health care agreements with it:
Preventive medical services such as periodic monitoring of health problems, family planning counseling, consultation and advices on diet, exercise and other healthy habits, and immunization; Diagnostic medical services such as routine physical examinations, x-rays, urinalysis, fecalysis, complete blood count, and the like and Curative medical services which pertain to the performing of other remedial and therapeutic processes in the event of an injury or sickness on the part of the enrolled member. [10]

Individuals enrolled in its health care program pay an annual membership fee. Membership is on a year-to-year basis. The medical services are dispensed to enrolled members in a hospital or clinic owned, operated or accredited by petitioner, through physicians, medical and dental practitioners under contract with it. It negotiates with such health care practitioners regarding payment schemes, financing and other procedures for the delivery of health services. Except in cases of emergency, the professional services are to be provided only by petitioner's physicians, i.e. those directly employed by it[11] or whose services are contracted by it.[12] Petitioner also provides hospital services such as room and board accommodation, laboratory services, operating rooms, x-ray facilities and general nursing care.[13] If and when a member avails of the benefits under the agreement, petitioner pays the participating physicians and other health care providers for the services rendered, at pre-agreed rates.[14] To avail of petitioners health care programs, the individual members are required to sign and execute a standard health care agreement embodying the terms and conditions for the provision of the health care services. The same agreement contains the various health care services that can be engaged by the enrolled member, i.e., preventive, diagnostic and curative medical services. Except for the curative

40

aspect of the medical service offered, the enrolled member may actually make use of the health care services being offered by petitioner at any time.
HEALTH MAINTENANCE ORGANIZATIONS ARE NOT ENGAGED IN THE INSURANCE BUSINESS

We said in our June 12, 2008 decision that it is irrelevant that petitioner is an HMO and not an insurer because its agreements are treated as insurance contracts and the DST is not a tax on the business but an excise on the privilege, opportunity or facility used in the transaction of the business.[15] Petitioner, however, submits that it is of critical importance to characterize the business it is engaged in, that is, to determine whether it is an HMO or an insurance company, as this distinction is indispensable in turn to the issue of whether or not it is liable for DST on its health care agreements. [16] A second hard look at the relevant law and jurisprudence convinces the Court that the arguments of petitioner are meritorious. Section 185 of the National Internal Revenue Code of 1997 (NIRC of 1997) provides:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or bonds or obligations of the nature of indemnity for loss, damage, or liability made or renewed by any person, association or company or corporation transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), and all bonds, undertakings, or recognizances, conditioned for the performance of the duties of any office or position, for the doing or not doing of anything therein specified, and on all obligations guaranteeing the validity or legality of any bond or other obligations issued by any province, city, municipality, or other public body or organization, and on all obligations guaranteeing the title to any real estate, or guaranteeing any mercantile credits, which may be made or renewed by any such person, company or corporation, there shall be collected a documentary stamp tax of fifty centavos (P0.50) on each four pesos (P4.00), or fractional part thereof, of the premium charged. (Emphasis supplied)

It is a cardinal rule in statutory construction that no word, clause, sentence, provision or part of a statute shall be considered surplusage or superfluous, meaningless, void and insignificant. To this end, a construction which renders every word operative is preferred over that which makes some words idle and nugatory.[17] This principle is expressed in the maxim Ut magis valeat quam pereat, that is, we choose the interpretation which gives effect to the whole of the statute its every word.[18] From the language of Section 185, it is evident that two requisites must concur before the DST can apply, namely: (1) the document must be a policy of insurance or an obligation in the nature of

41

indemnity and (2) the maker should be transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance). Petitioner is admittedly an HMO. Under RA 7875 (or The National Health Insurance Act of 1995), an HMO is an entity that provides, offers or arranges for coverage of designated health services needed by plan members for a fixed prepaid premium.[19] The payments do not vary with the extent, frequency or type of services provided. The question is: was petitioner, as an HMO, engaged in the business of insurance during the pertinent taxable years? We rule that it was not. Section 2 (2) of PD[20] 1460 (otherwise known as the Insurance Code) enumerates what constitutes doing an insurance business or transacting an insurance business:
a) b) making or proposing to make, as insurer, any insurance contract; making or proposing to make, as surety, any contract of suretyship as a vocation and not as merely incidental to any other legitimate business or activity of the surety; doing any kind of business, including a reinsurance business, specifically recognized as constituting the doing of an insurance business within the meaning of this Code; doing or proposing to do any business in substance equivalent to any of the foregoing in a manner designed to evade the provisions of this Code.

c)

d)

In the application of the provisions of this Code, the fact that no profit is derived from the making of insurance contracts, agreements or transactions or that no separate or direct consideration is received therefore, shall not be deemed conclusive to show that the making thereof does not constitute the doing or transacting of an insurance business.

Various courts in the United States, whose jurisprudence has a persuasive effect on our decisions,[21] have determined that HMOs are not in the insurance business. One test that they have applied is whether the assumption of risk and indemnification of loss (which are elements of an insurance business) are the principal object and purpose of the organization or whether they are merely incidental to its business. If these are the principal objectives, the business is that of insurance. But if they are merely incidental and service is the principal purpose, then the business is not insurance.

42

Applying the principal object and purpose test,[22] there is significant American case law supporting the argument that a corporation (such as an HMO, whether or not organized for profit), whose main object is to provide the members of a group with health services, is not engaged in the insurance business. The rule was enunciated in Jordan v. Group Health Association[23] wherein the Court of Appeals of the District of Columbia Circuit held that Group Health Association should not be considered as engaged in insurance activities since it was created primarily for the distribution of health care services rather than the assumption of insurance risk.
xxx Although Group Healths activities may be considered in one aspect as creating security against loss from illness or accident more truly they constitute the quantity purchase of well-rounded, continuous medical service by its members. xxx The functions of such an organization are not identical with those of insurance or indemnity companies. The latter are concerned primarily, if not exclusively, with risk and the consequences of its descent, not with service, or its extension in kind, quantity or distribution; with the unusual occurrence, not the daily routine of living. Hazard is predominant. On the other hand, the cooperative is concerned principally with getting service rendered to its members and doing so at lower prices made possible by quantity purchasing and economies in operation. Its primary purpose is to reduce the cost rather than the risk of medical care; to broaden the service to the individual in kind and quantity; to enlarge the number receiving it; to regularize it as an everyday incident of living, like purchasing food and clothing or oil and gas, rather than merely protecting against the financial loss caused by extraordinary and unusual occurrences, such as death, disaster at sea, fire and tornado. It is, in this instance, to take care of colds, ordinary aches and pains, minor ills and all the temporary bodily discomforts as well as the more serious and unusual illness. To summarize, the distinctive features of the cooperative are the rendering of service, its extension, the bringing of physician and patient together, the preventive features, the regularization of service as well as payment, the substantial reduction in cost by quantity purchasing in short, getting the medical job done and paid for; not, except incidentally to these features, the indemnification for cost after the services is rendered. Except the last, these are not distinctive or generally characteristic of the insurance arrangement. There is, therefore, a substantial difference between contracting in this way for the rendering of service, even on the contingency that it be needed, and contracting merely to stand its cost when or after it is rendered. That an incidental element of risk distribution or assumption may be present should not outweigh all other factors. If attention is focused only on that feature, the line between insurance or indemnity and other types of legal arrangement and economic function becomes faint, if not extinct. This is especially true when the contract is for the sale of goods or services on contingency. But obviously it was not the purpose of the insurance statutes to regulate all arrangements for assumption or distribution of risk. That view would cause them to engulf practically all contracts, particularly conditional sales and contingent service agreements. The fallacy is in looking only at the risk element, to the exclusion of all others present or their subordination to it. The question turns, not on whether risk is involved or assumed, but on whether that or something else to which it is related in the particular plan is its principal object purpose.[24] (Emphasis supplied)

43

In California Physicians Service v. Garrison,[25] the California court felt that, after scrutinizing the plan of operation as a whole of the corporation, it was service rather than indemnity which stood as its principal purpose.
There is another and more compelling reason for holding that the service is not engaged in the insurance business. Absence or presence of assumption of risk or peril is not the sole test to be applied in determining its status. The question, more broadly, is whether, looking at the plan of operation as a whole, service rather than indemnity is its principal object and purpose.Certainly the objects and purposes of the corporation organized and maintained by the California physicians have a wide scope in the field of social service. Probably there is no more impelling need than that of adequate medical care on a voluntary, low-cost basis for persons of small income. The medical profession unitedly is endeavoring to meet that need. Unquestionably this is service of a high order and not indemnity. [26] (Emphasis supplied)

American courts have pointed out that the main difference between an HMO and an insurance company is that HMOs undertake to provide or arrange for the provision of medical services through participating physicians while insurance companies simply undertake to indemnify the insured for medical expenses incurred up to a pre-agreed limit. Somerset Orthopedic Associates, P.A. v. Horizon Blue Cross and Blue Shield of New Jersey[27] is clear on this point:
The basic distinction between medical service corporations and ordinary health and accident insurers is that the former undertake to provide prepaid medical services through participating physicians, thus relieving subscribers of any further financial burden, while the latter only undertake to indemnify an insured for medical expenses up to, but not beyond, the schedule of rates contained in the policy. xxx xxx xxx The primary purpose of a medical service corporation, however, is an undertaking to provide physicians who will render services to subscribers on a prepaid basis. Hence, if there are no physicians participating in the medical service corporations plan, not only will the subscribers be deprived of the protection which they might reasonably have expected would be provided, but the corporation will, in effect, be doing business solely as a health and accident indemnity insurer without having qualified as such and rendering itself subject to the more stringent financial requirements of the General Insurance Laws. A participating provider of health care services is one who agrees in writing to render health care services to or for persons covered by a contract issued by health service corporation in return for which the health service corporation agrees to make payment directly to the participating provider.[28] (Emphasis supplied)

Consequently, the mere presence of risk would be insufficient to override the primary purpose of the business to provide medical services as needed, with payment made directly to the provider of these services.[29] In short, even if petitioner assumes the risk of paying the cost of these services even if 44

significantly more than what the member has prepaid, it nevertheless cannot be considered as being engaged in the insurance business. By the same token, any indemnification resulting from the payment for services rendered in case of emergency by non-participating health providers would still be incidental to petitioners purpose of providing and arranging for health care services and does not transform it into an insurer. To fulfill its obligations to its members under the agreements, petitioner is required to set up a system and the facilities for the delivery of such medical services. This indubitably shows that indemnification is not its sole object. In fact, a substantial portion of petitioners services covers preventive and diagnostic medical services intended to keep members from developing medical conditions or diseases.[30] As an HMO, it is its obligation to maintain the good health of its members. Accordingly, its health care programs are designed to prevent or to minimize thepossibility of any assumption of risk on its part. Thus, its undertaking under its agreements is not to indemnify its members against any loss or damage arising from a medical condition but, on the contrary, to provide the health and medical services needed to prevent such loss or damage.[31] Overall, petitioner appears to provide insurance-type benefits to its members (with respect to its curative medical services), but these are incidental to the principal activity of providing them medical care. The insurance-like aspect of petitioners business is miniscule compared to its noninsurance activities. Therefore, since it substantially provides health care services rather than insurance services, it cannot be considered as being in the insurance business. It is important to emphasize that, in adopting the principal purpose test used in the abovequoted U.S. cases, we are not saying that petitioners operations are identical in every respect to those of the HMOs or health providers which were parties to those cases. What we are stating is that, for the purpose of determining what doing an insurance business means, we have to scrutinize the operations of the business as a whole and not its mere components. This is of course only prudent and appropriate, taking into account the burdensome and strict laws, rules and regulations applicable to insurers and other

45

entities engaged in the insurance business. Moreover, we are also not unmindful that there are other American authorities who have found particular HMOs to be actually engaged in insurance activities.[32] Lastly, it is significant that petitioner, as an HMO, is not part of the insurance industry. This is evident from the fact that it is not supervised by the Insurance Commission but by the Department of Health.[33] In fact, in a letter dated September 3, 2000, the Insurance Commissioner confirmed that petitioner is not engaged in the insurance business. This determination of the commissioner must be accorded great weight. It is well-settled that the interpretation of an administrative agency which is tasked to implement a statute is accorded great respect and ordinarily controls the interpretation of laws by the courts. The reason behind this rule was explained in Nestle Philippines, Inc. v. Court of Appeals:[34]
The rationale for this rule relates not only to the emergence of the multifarious needs of a modern or modernizing society and the establishment of diverse administrative agencies for addressing and satisfying those needs; it also relates to the accumulation of experience and growth of specialized capabilities by the administrative agency charged with implementing a particular statute. In Asturias Sugar Central, Inc. vs. Commissioner of Customs,[35] the Court stressed that executive officials are presumed to have familiarized themselves with all the considerations pertinent to the meaning and purpose of the law, and to have formed an independent, conscientious and competent expert opinion thereon. The courts give much weight to the government agency officials charged with the implementation of the law, their competence, expertness, experience and informed judgment, and the fact that they frequently are the drafters of the law they interpret.[36]

A HEALTH CARE AGREEMENT IS NOT AN INSURANCE CONTRACT CONTEMPLATED UNDER SECTION 185 OF THE NIRC OF 1997

Section 185 states that DST is imposed on all policies of insurance or obligations of the nature of indemnity for loss, damage, or liability. In our decision dated June 12, 2008, we ruled that petitioners health care agreements are contracts of indemnity and are therefore insurance contracts:
It is incorrect to say that the health care agreement is not based on loss or damage because, under the said agreement, petitioner assumes the liability and indemnifies its member for hospital, medical and related expenses (such as professional fees of physicians). The term "loss or damage" is broad enough to cover the monetary expense or liability a member will incur in case of illness or injury. Under the health care agreement, the rendition of hospital, medical and professional services to the member in case of sickness, injury or emergency or his availment of so-called "out-patient services" (including physical examination, x-ray and laboratory tests, medical consultations, vaccine administration and family planning counseling) is the contingent event which gives rise to liability on the part of the member. In case of exposure of the member to liability, he would be entitled to indemnification by petitioner. Furthermore, the fact that petitioner must relieve its member from liability by paying for expenses arising from the stipulated contingencies belies its claim that its services are prepaid. The expenses to be

46

incurred by each member cannot be predicted beforehand, if they can be predicted at all. Petitioner assumes the risk of paying for the costs of the services even if they are significantly and substantially more than what the member has "prepaid." Petitioner does not bear the costs alone but distributes or spreads them out among a large group of persons bearing a similar risk, that is, among all the other members of the health care program. This is insurance.[37]

We reconsider. We shall quote once again the pertinent portion of Section 185:
Section 185. Stamp tax on fidelity bonds and other insurance policies. On all policies of insurance or bonds or obligations of the nature of indemnity for loss, damage, or liabilitymade or renewed by any person, association or company or corporation transacting the business of accident, fidelity, employers liability, plate, glass, steam boiler, burglar, elevator, automatic sprinkler, or other branch of insurance (except life, marine, inland, and fire insurance), xxxx (Emphasis supplied)

In construing this provision, we should be guided by the principle that tax statutes are strictly construed against the taxing authority.[38] This is because taxation is a destructive power which interferes with the personal and property rights of the people and takes from them a portion of their property for the support of the government.[39] Hence, tax laws may not be extended by implication beyond the clear import of their language, nor their operation enlarged so as to embrace matters not specifically provided.[40] We are aware that, in Blue Cross and Philamcare, the Court pronounced that a health care agreement is in the nature of non-life insurance, which is primarily a contract of indemnity. However, those cases did not involve the interpretation of a tax provision. Instead, they dealt with the liability of a health service provider to a member under the terms of their health care agreement. Such contracts, as contracts of adhesion, are liberally interpreted in favor of the member and strictly against the HMO. For this reason, we reconsider our ruling that Blue Cross and Philamcare are applicable here. Section 2 (1) of the Insurance Code defines a contract of insurance as an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. An insurance contract exists where the following elements concur:
1. 2. 3. The insured has an insurable interest; The insured is subject to a risk of loss by the happening of the designed peril; The insurer assumes the risk;

47

4.

Such assumption of risk is part of a general scheme to distribute actual losses among a large group of persons bearing a similar risk and In consideration of the insurers promise, the insured pays a premium. [41]

5.

Do the agreements between petitioner and its members possess all these elements? They do not. First. In our jurisdiction, a commentator of our insurance laws has pointed out that, even if a contract contains all the elements of an insurance contract, if its primary purpose is the rendering of service, it is not a contract of insurance:
It does not necessarily follow however, that a contract containing all the four elements mentioned above would be an insurance contract. The primary purpose of the parties in making the contract may negate the existence of an insurance contract. For example, a law firm which enters into contracts with clients whereby in consideration of periodical payments, it promises to represent such clients in all suits for or against them, is not engaged in the insurance business. Its contracts are simply for the purpose of rendering personal services. On the other hand, a contract by which a corporation, in consideration of a stipulated amount, agrees at its own expense to defend a physician against all suits for damages for malpractice is one of insurance, and the corporation will be deemed as engaged in the business of insurance. Unlike the lawyers retainer contract, the essential purpose of such a contract is not to render personal services, but to indemnify against loss and damage resulting from the defense of actions for malpractice. [42] (Emphasis supplied)

Second. Not all the necessary elements of a contract of insurance are present in petitioners agreements. To begin with, there is no loss, damage or liability on the part of the member that should be indemnified by petitioner as an HMO. Under the agreement, the member pays petitioner a predetermined consideration in exchange for the hospital, medical and professional services rendered by the petitioners physician or affiliated physician to him. In case of availment by a member of the benefits under the agreement,petitioner does not reimburse or indemnify the member as the latter does not pay any third party. Instead, it is the petitioner who pays the participating physicians and other health care providers for the services rendered at pre-agreed rates. The member does not make any such payment. In other words, there is nothing in petitioner's agreements that gives rise to a monetary liability on the part of the member to any third party-provider of medical services which might in turn necessitate indemnification from petitioner. The terms indemnify or indemnity presuppose that a liability or claim has already been incurred. There is no indemnity precisely because the member merely avails of medical services to be paid or already paid in advance at a pre-agreed price under the agreements. Third. According to the agreement, a member can take advantage of the bulk of the benefits anytime, e.g. laboratory services, x-ray, routine annual physical examination and consultations, vaccine

48

administration as well as family planning counseling, even in the absence of any peril, loss or damage on his or her part. Fourth. In case of emergency, petitioner is obliged to reimburse the member who receives care from a non-participating physician or hospital. However, this is only a very minor part of the list of services available. The assumption of the expense by petitioner is not confined to the happening of a contingency but includes incidents even in the absence of illness or injury. In Michigan Podiatric Medical Association v. National Foot Care Program, Inc.,[43] although the health care contracts called for the defendant to partially reimburse a subscriber for treatment received from a non-designated doctor, this did not make defendant an insurer. Citing Jordan, the Court determined that the primary activity of the defendant (was) the provision of podiatric services to subscribers in consideration of prepayment for such services.[44] Since indemnity of the insured was not the focal point of the agreement but the extension of medical services to the member at an affordable cost, it did not partake of the nature of a contract of insurance. Fifth. Although risk is a primary element of an insurance contract, it is not necessarily true that risk alone is sufficient to establish it. Almost anyone who undertakes a contractual obligation always bears a certain degree of financial risk. Consequently, there is a need to distinguish prepaid service contracts (like those of petitioner) from the usual insurance contracts. Indeed, petitioner, as an HMO, undertakes a business risk when it offers to provide health services: the risk that it might fail to earn a reasonable return on its investment. But it is not the risk of the type peculiar only to insurance companies. Insurance risk, also known as actuarial risk, is the risk that the cost of insurance claims might be higher than the premiums paid. The amount of premium is calculated on the basis of assumptions made relative to the insured.[45] However, assuming that petitioners commitment to provide medical services to its members can be construed as an acceptance of the risk that it will shell out more than the prepaid fees, it still will not qualify as an insurance contract because petitioners objective is to provide medical services at reduced cost, not to distribute risk like an insurer. In sum, an examination of petitioners agreements with its members leads us to conclude that it is not an insurance contract within the context of our Insurance Code.
THERE WAS NO LEGISLATIVE INTENT TO IMPOSE DST ON HEALTH CARE AGREEMENTS OF HMOS

Furthermore, militating in convincing fashion against the imposition of DST on petitioners health care agreements under Section 185 of the NIRC of 1997 is the provisions legislative history. The text of Section 185 came into U.S. law as early as 1904 when HMOs and health care agreements were not even in existence in this jurisdiction. It was imposed under Section 116, Article XI of Act No. 1189 (otherwise known as the Internal Revenue Law of 1904)[46] enacted on July 2, 1904 and became 49

effective on August 1, 1904. Except for the rate of tax, Section 185 of the NIRC of 1997 is a verbatim reproduction of the pertinent portion of Section 116, to wit:
ARTICLE XI Stamp Taxes on Specified Objects Section 116. There shall be levied, collected, and paid for and in respect to the several bonds, debentures, or certificates of stock and indebtedness, and other documents, instruments, matters, and things mentioned and described in this section, or for or in respect to the vellum, parchment, or paper upon which such instrument, matters, or things or any of them shall be written or printed by any person or persons who shall make, sign, or issue the same, on and after January first, nineteen hundred and five, the several taxes following: xxx xxx xxx

Third xxx (c) on all policies of insurance or bond or obligation of the nature of indemnity for loss, damage, or liability made or renewed by any person, association, company, or corporation transacting the business of accident, fidelity, employers liability, plate glass, steam boiler, burglar, elevator, automatic sprinkle, or other branch of insurance (except life, marine, inland, and fire insurance) xxxx (Emphasis supplied)

On February 27, 1914, Act No. 2339 (the Internal Revenue Law of 1914) was enacted revising and consolidating the laws relating to internal revenue. The aforecited pertinent portion of Section 116, Article XI of Act No. 1189 was completely reproduced as Section 30 (l), Article III of Act No. 2339. The very detailed and exclusive enumeration of items subject to DST was thus retained. On December 31, 1916, Section 30 (l), Article III of Act No. 2339 was again reproduced as Section 1604 (l), Article IV of Act No. 2657 (Administrative Code). Upon its amendment on March 10, 1917, the pertinent DST provision became Section 1449 (l) of Act No. 2711, otherwise known as the Administrative Code of 1917. Section 1449 (1) eventually became Sec. 222 of Commonwealth Act No. 466 (the NIRC of 1939), which codified all the internal revenue laws of the Philippines. In an amendment introduced by RA 40 on October 1, 1946, the DST rate was increased but the provision remained substantially the same. Thereafter, on June 3, 1977, the same provision with the same DST rate was reproduced in PD 1158 (NIRC of 1977) as Section 234. Under PDs 1457 and 1959, enacted on June 11, 1978 and October 10, 1984 respectively, the DST rate was again increased.

50

Effective January 1, 1986, pursuant to Section 45 of PD 1994, Section 234 of the NIRC of 1977 was renumbered as Section 198. And under Section 23 of EO[47] 273 dated July 25, 1987, it was again renumbered and became Section 185. On December 23, 1993, under RA 7660, Section 185 was amended but, again, only with respect to the rate of tax. Notwithstanding the comprehensive amendment of the NIRC of 1977 by RA 8424 (or the NIRC of 1997), the subject legal provision was retained as the present Section 185. In 2004, amendments to the DST provisions were introduced by RA 9243[48] but Section 185 was untouched. On the other hand, the concept of an HMO was introduced in the Philippines with the formation of Bancom Health Care Corporation in 1974. The same pioneer HMO was later reorganized and renamed Integrated Health Care Services, Inc. (or Intercare). However, there are those who claim that Health Maintenance, Inc. is the HMO industry pioneer, having set foot in the Philippines as early as 1965 and having been formally incorporated in 1991. Afterwards, HMOs proliferated quickly and currently, there are 36 registered HMOs with a total enrollment of more than 2 million.[49] We can clearly see from these two histories (of the DST on the one hand and HMOs on the other) that when the law imposing the DST was first passed, HMOs were yet unknown in the Philippines. However, when the various amendments to the DST law were enacted, they were already in existence in the Philippines and the term had in fact already been defined by RA 7875. If it had been the intent of the legislature to impose DST on health care agreements, it could have done so in clear and categorical terms. It had many opportunities to do so. But it did not. The fact that the NIRC contained no specific provision on the DST liability of health care agreements of HMOs at a time they were already known as such, belies any legislative intent to impose it on them. As a matter of fact, petitioner was assessed its DST liability only on January 27, 2000, after more than a decade in the business as an HMO.[50] Considering that Section 185 did not change since 1904 (except for the rate of tax), it would be safe to say that health care agreements were never, at any time, recognized as insurance contracts or deemed engaged in the business of insurance within the context of the provision.

51

THE POWER TO TAX IS NOT THE POWER TO DESTROY

As a general rule, the power to tax is an incident of sovereignty and is unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who is to pay it. [51] So potent indeed is the power that it was once opined that the power to tax involves the power to destroy.[52] Petitioner claims that the assessed DST to date which amounts to P376 million[53] is way beyond its net worth of P259 million.[54] Respondent never disputed these assertions. Given the realities on the ground, imposing the DST on petitioner would be highly oppressive. It is not the purpose of the government to throttle private business. On the contrary, the government ought to encourage private enterprise.[55] Petitioner, just like any concern organized for a lawful economic activity, has a right to maintain a legitimate business.[56] As aptly held in Roxas, et al. v. CTA, et al.:[57]
The power of taxation is sometimes called also the power to destroy. Therefore it should be exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be exercised fairly, equally and uniformly, lest the tax collector kill the hen that lays the golden egg. [58]

Legitimate

enterprises

enjoy the

constitutional

protection

not

to be

taxed

out

of

existence. Incurring losses because of a tax imposition may be an acceptable consequence but killing the business of an entity is another matter and should not be allowed. It is counter-productive and ultimately subversive of the nations thrust towards a better economy which will ultimately benefit the majority of our people.[59]

PETITIONERS TAX LIABILITY WAS EXTINGUISHED UNDER THE PROVISIONS OF RA 9840

Petitioner asserts that, regardless of the arguments, the DST assessment for taxable years 1996 and 1997 became moot and academic[60] when it availed of the tax amnesty under RA 9480 on December 10, 2007. It paid P5,127,149.08 representing 5% of its net worth as of the year ended December 31, 2005 and complied with all requirements of the tax amnesty. Under Section 6(a) of RA 9480, it is entitled to immunity from payment of taxes as well as additions thereto, and the appurtenant civil, criminal or 52

administrative penalties under the 1997 NIRC, as amended, arising from the failure to pay any and all internal revenue taxes for taxable year 2005 and prior years.[61] Far from disagreeing with petitioner, respondent manifested in its memorandum:
Section 6 of [RA 9840] provides that availment of tax amnesty entitles a taxpayer to immunity from payment of the tax involved, including the civil, criminal, or administrative penalties provided under the 1997 [NIRC], for tax liabilities arising in 2005 and the preceding years. In view of petitioners availment of the benefits of [RA 9840], and without conceding the merits of this case as discussed above, respondent concedes that such tax amnesty extinguishes the tax liabilities of petitioner. This admission, however, is not meant to preclude a revocation of the amnesty granted in case it is found to have been granted under circumstances amounting to tax fraud under Section 10 of said amnesty law.[62] (Emphasis supplied)

Furthermore, we held in a recent case that DST is one of the taxes covered by the tax amnesty program under RA 9480.[63] There is no other conclusion to draw than that petitioners liability for DST for the taxable years 1996 and 1997 was totally extinguished by its availment of the tax amnesty under RA 9480.

IS THE COURT BOUND BY A MINUTE RESOLUTION IN ANOTHER CASE?

Petitioner raises another interesting issue in its motion for reconsideration: whether this Court is bound by the ruling of the CA[64] in CIR v. Philippine National Bank[65]that a health care agreement of Philamcare Health Systems is not an insurance contract for purposes of the DST. In support of its argument, petitioner cites the August 29, 2001 minute resolution of this Court dismissing the appeal in Philippine National Bank (G.R. No. 148680).[66]Petitioner argues that the dismissal of G.R. No. 148680 by minute resolution was a judgment on the merits; hence, the Court should apply the CA ruling there that a health care agreement is not an insurance contract. It is true that, although contained in a minute resolution, our dismissal of the petition was a disposition of the merits of the case. When we dismissed the petition, we effectively affirmed the CA ruling being questioned. As a result, our ruling in that case has already become final. [67] When a minute

53

resolution denies or dismisses a petition for failure to comply with formal and substantive requirements, the challenged decision, together with its findings of fact and legal conclusions, are deemed sustained.[68] But what is its effect on other cases? With respect to the same subject matter and the same issues concerning the same parties, it constitutes res judicata.[69] However, if other parties or another subject matter (even with the same parties and issues) is involved, the minute resolution is not binding precedent. Thus, in CIR v. BaierNickel,[70] the Court noted that a previous case, CIR v. Baier-Nickel[71] involving the same parties and the same issues, was previously disposed of by the Court thru a minute resolution dated February 17, 2003 sustaining the ruling of the CA. Nonetheless, the Court ruled that the previous case ha(d) no bearing on the latter case because the two cases involved different subject matters as they were concerned with the taxable income of different taxable years.[72] Besides, there are substantial, not simply formal, distinctions between a minute resolution and a decision. The constitutional requirement under the first paragraph of Section 14, Article VIII of the Constitution that the facts and the law on which the judgment is based must be expressed clearly and distinctly applies only to decisions, not to minute resolutions. A minute resolution is signed only by the clerk of court by authority of the justices, unlike a decision. It does not require the certification of the Chief Justice. Moreover, unlike decisions, minute resolutions are not published in the Philippine Reports. Finally, the proviso of Section 4(3) of Article VIII speaks of a decision.[73] Indeed, as a rule, this Court lays down doctrines or principles of law which constitute binding precedent in a decision duly signed by the members of the Court and certified by the Chief Justice. Accordingly, since petitioner was not a party in G.R. No. 148680 and since petitioners liability for DST on its health care agreement was not the subject matter of G.R. No. 148680, petitioner cannot successfully invoke the minute resolution in that case (which is not even binding precedent) in its favor. Nonetheless, in view of the reasons already discussed, this does not detract in any way from the fact that petitioners health care agreements are not subject to DST.
A FINAL NOTE

54

Taking into account that health care agreements are clearly not within the ambit of Section 185 of the NIRC and there was never any legislative intent to impose the same on HMOs like petitioner, the same should not be arbitrarily and unjustly included in its coverage. It is a matter of common knowledge that there is a great social need for adequate medical services at a cost which the average wage earner can afford. HMOs arrange, organize and manage health care treatment in the furtherance of the goal of providing a more efficient and inexpensive health care system made possible by quantity purchasing of services and economies of scale. They offer advantages over the pay-for-service system (wherein individuals are charged a fee each time they receive medical services), including the ability to control costs. They protect their members from exposure to the high cost of hospitalization and other medical expenses brought about by a fluctuating economy. Accordingly, they play an important role in society as partners of the State in achieving its constitutional mandate of providing its citizens with affordable health services. The rate of DST under Section 185 is equivalent to 12.5% of the premium charged.[74] Its imposition will elevate the cost of health care services. This will in turn necessitate an increase in the membership fees, resulting in either placing health services beyond the reach of the ordinary wage earner or driving the industry to the ground. At the end of the day, neither side wins, considering the indispensability of the services offered by HMOs. WHEREFORE, the motion for reconsideration is GRANTED. The August 16, 2004 decision of the Court of Appeals in CA-G.R. SP No. 70479 is REVERSED andSET ASIDE. The 1996 and 1997 deficiency DST assessment against petitioner is hereby CANCELLED and SET ASIDE. Respondent is ordered to desist from collecting the said tax. No costs. SO ORDERED.
* [1] [2] [3] [4]

Per Special Order No. 698 dated September 4, 2009. Additional member per raffle list of 13 April 2009. 1987 Constitution. Now known as Maxicare Healthcare Corp. Rollo, p. 293. G.R. No. 169737, 12 February 2008, 544 SCRA 580. 429 Phil. 82 (2002).

55

[5] [6] [7]

[8] [9] [10] [11]

[12]

[13] [14] [15] [16] [17]

[18] [19] [20] [21]

[22] [23]

Republic Act. Rollo, pp. 257-258. Entitled An Act Enhancing Revenue Administration and Collection by Granting an Amnesty on All Unpaid Internal Revenue Taxes Imposed by the National Government for Taxable Year 2005 and Prior Years. Rollo, p. 288. Id., p. 591. Id., pp. 592, 613. This is called the Staff Model, i.e., the HMO employs salaried health care professionals to provide health care services. (Id., pp. 268, 271.) This is referred to as the Group Practice Model wherein the HMO contracts with a private practice group to provide health services to its members. (Id., pp. 268, 271, 592.) Thus, it is both a service provider and a service contractor. It is a service provider when it directly provides the health care services through its salaried employees. It is a service contractor when it contracts with third parties for the delivery of health services to its members. Id., p. 102. Id., p. 280. Decision, p. 422. Rollo, p. 265. Allied Banking Corporation v. Court of Appeals, G.R. No. 124290, 16 January 1998, 284 SCRA 327, 367, citing Shimonek v. Tillanan, 1 P. 2d., 154. Inding v. Sandiganbayan, G.R. No. 143047, 14 July 2004, 434 SCRA 388, 403. Section 4 (o) (3) thereof. Under this law, it is one of the classes of a health care provider. Presidential Decree. Our Insurance Code was based on California and New York laws. When a statute has been adopted from some other state or country and said statute has previously been construed by the courts of such state or country, the statute is deemed to have been adopted with the construction given. (Prudential Guarantee and Assurance Inc. v. Trans-Asia Shipping Lines, Inc., G.R. No. 151890, 20 June 2006, 491 SCRA 411, 439; Constantino v. Asia Life Inc. Co., 87 Phil. 248, 251 [1950]; Gercio v. Sun Life Assurance Co. of Canada, 48 Phil. 53, 59 [1925]; Cerezo v. Atlantic, Gulf & Pacific Co., 33 Phil. 425, 428-429 [1916]). H. S. de Leon, The Insurance Code of the Philippines Annotated, p. 56 (2002 ed.). 107 F.2d 239 (D.C. App. 1939). This is a seminal case which had been reiterated in succeeding cases, e.g. Smith v. Reserve Nat'l Ins. Co., 370 So. 2d 186 ( La. Ct. App. 3d Cir. 1979); Transportation Guarantee Co. v. Jellins, 29 Cal.2d 242, 174 P.2d 625 (1946); State v. Anderson, 195 Kan. 649, 408 P.2d 864 (1966); Commissioner of Banking and Insurance v. Community Health Service, 129 N.J.L. 427, 30 A.2d 44 (1943).

[24] [25] [26] [27] [28] [29] [30]

Id., pp. 247-248. 28 Cal. 2d 790 (1946). Id., p. 809. 345 N.J. Super. 410, 785 A.2d 457 (2001);< http://lawlibrary.rutgers.edu/courts/appellate/a1562-00.opn.html> (visited July 14, 2009). Id., citing Group Health Ins. of N.J. v. Howell, 40 N.J. 436, 451 (1963). L.R. Russ and S.F. Segalla, 1 Couch on Ins. 1:46 (3rd ed., December 2008). This involves the determination of a medical condition (such as a disease) by physical examination or by study of its symptoms (Rollo, p. 613, citing Blacks Law Dictionary, p. 484 [8 th ed.]). Rollo, pp. 612-613. One such decision of the United States Supreme Court is Rush Prudential HMO, Inc. v. Moran (536 U.S. 355 [2002]). In that case, the Court recognized that HMOs provide both insurance and health care services and that Congress has understood the insurance aspects of HMOs since the passage of the HMO Act of 1973. This case is not applicable here. Firstly, this was not a tax case. Secondly, the Court stated that Congress expressly understood and viewed HMOs as insurers. It is not the same here in the Philippines. As will be discussed below, there is no showing that the Philippine Congress had demonstrated an awareness of HMOs as insurers. See Executive Order No. 119 (1987) and Administrative Order (AO) No. 34 (1994), as amended by AO No. 36 (1996). G.R. No. 86738, 13 November 1991, 203 SCRA 504. 140 Phil. 20 (1969). Supra note 34, pp. 510-511. Decision, pp. 420-421. Commissioner of Internal Revenue v. Solidbank Corporation, G.R. No. 148191, 25 November 2003, 416 SCRA 436, citing Miller v. Illinois Cent. R Co., Ill. So. 559, 28 February 1927. Paseo Realty & Development Corporation v. Court of Appeals, G.R. No. 119286, 13 October 2004, 440 SCRA 235, 251. Collector of Int. Rev. v. La Tondea, Inc. and CTA, 115 Phil. 841, 846 (1963). Gulf Resorts, Inc. v. Philippine Charter Insurance Corporation, G.R. No. 156167, 16 May 2005, 458 SCRA 550, 566, citations omitted.

[31]

[32]

[33] [34] [35] [36] [37] [38]

[39] [40] [41]

56

[42] [43] [44] [45] [46] [47] [48]

[49]

M. C. L. Campos, Insurance, pp. 17-18 (1983), citing Physicians Defense Co. v. OBrien, 100 Minn. 490, 111 N.W. 397 (1907). 438 N.W.2d 350. (Mich. Ct. App. 1989). Id., p. 354. Rollo, p. 702, citing Phillip, Booth et al., Modern Actuarial Theory and Practice (2005). Entitled An Act to Provide for the Support of the Insular, Provincial and Municipal Governments, by Internal Taxation. Executive Order No. An Act Rationalizing the Provisions of the DST of the NIRC of 1997, as amended, and for other purposes. Rollo, pp. 589, 591, citing <http://www.rmaf.org.ph/Awardees/Biography/ Biography BengzonAlf.htm>; <http://doktorko.com/_blog/index.php?mod=blog_article&a=80&md=897>; <http://www.hmi.com.ph/prof.html> (visited July 15, 2009). Id., p. 592. MCIAA v. Marcos, 330 Phil. 392, 404 (1996). United States Chief Justice Marshall in McCulloch v. Maryland, 17 U.S. 316, 4 Wheat, 316, 4 L ed. 579, 607 (1819). Inclusive of penalties. Rollo, p. 589. Manila Railroad Company v. A. L. Ammen Transportation Co., Inc., 48 Phil. 900, 907 (1926). Constitution, Section 3, Article XIII on Social Justice and Human Rights reads as follows: Section 3. xxx The State shall regulate the relations between workers and employers, recognizing the right of labor to its just share in the fruits of production and the right of enterprises to reasonable return on investments, and to expansion and growth. (Emphasis supplied)

[50] [51] [52] [53] [54] [55] [56]

[57] [58] [59] [60] [61] [62] [63] [64] [65] [66] [67] [68]

131 Phil. 773 (1968). Id., pp. 780-781. Manatad v. Philippine Telegraph and Telephone Corporation, G.R. No. 172363, 7 March 2008, 548 SCRA 64, 80. Rollo, p. 661. Id., pp. 260-261. Id., p. 742. Philippine Banking Corporation v. CIR, G.R. No. 170574, 30 January 2009. CA-G.R. SP No. 53301, 18 June 2001. G.R. No. 148680. The dismissal was due to the failure of petitioner therein to attach a certified true copy of the assailed decision. Del Rosario v. Sandiganbayan, G.R. No. 143419, 22 June 2006, 492 SCRA 170, 177. Complaint of Mr. Aurelio Indencia Arrienda Against SC Justices Puno, Kapunan, Pardo, Ynares-Santiago, et al., A.M. No. 03-11-30SC, 9 June 2005, 460 SCRA 1, 14, citing Tan v. Nitafan, G.R. No. 76965, 11 March 1994, 231 SCRA 129;Republic v. CA, 381 Phil. 558, 565 (2000), citing Bernarte, et al. v. Court of Appeals, et al., 331 Phil. 643, 659 (1996). See Bernarte, et al. v. Court of Appeals, et al., id., p. 567. G.R. No. 153793, 29 August 2006, 500 SCRA 87. Extended Resolution, G.R. No. 156305, 17 February 2003. Supra note 70, p. 102. G.R. No. 156305 referred to the income of Baier-Nickel for taxable year 1994 while G.R. No. 153793 pertained to Baier-Nickels income in 1995. Section 4. xxx (3) Cases or matters heard by a Division shall be decided or resolved with the concurrence of a majority of the members who actually took part in the deliberation on the issues in the case and voted thereon, and in no case, without the concurrence of at least three of such members. When the required number is not obtained, the case shall be decided En Banc: Provided, that no doctrine or principle of law laid down by the Court in a decision rendered En Banc or in Division may be modified or reversed except by the Court sitting En Banc. (Emphasis supplied) That is, fifty centavos (P0.50) on each four pesos (P4.00), or a fractional part thereof, of the premium charged.

[69] [70] [71] [72]

[73]

[74]

57