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Republic of the PhilippinesSupreme Court

Manila

SPECIAL SECOND DIVISION

NATIONAL POWER CORPORATION,

Petitioner,

- versus -

PROVINCE OF QUEZON andMUNICIPALITY OF PAGBILAO

,

Respondent.

G.R. No. 1715

Present:

CARPIO

MORALES, J.,

Acti

Chairperson,LEONARDO

DE CASTRO,

BRION,

ABAD, and

PEREZ,JJ.

Promulgated:

January2010

x ------------------------------------------------------------------------------------------x

R E S O L U T I O N

BRION,J.:

The petitioner National Power Corporation (Napocor) filed the

present motion for reconsideration[1] of the Courts Decision ofJuly 15,

2009, in which we denied Napocors claimed real property tax

exemptions. For the resolution of the motion, we deem it proper to provide

first a background of the case.

BACKGROUND FACTS
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The Province ofQuezon assessed Mirant Pagbilao Corporation

(Mirant) for unpaid real property taxes in the amount ofP1.5 Billion for the

machineries located in its power plant in Pagbilao, Quezon. Napocor, which

entered into a Build-Operate-Transfer (BOT) Agreement (entitledEnergyConversion Agreement) with Mirant, was furnished a copy of the tax

assessment.

Napocor (nota bene, not Mirant) protested the assessment before the

Local Board of Assessment Appeals (LBAA), claiming entitlement to the tax

exemptions provided under Section 234 of the Local Government Code

(LGC), which states:

Section 234. Exemptions from Real Property Tax. The following

are exempted from payment of the real property tax:

x x x x

(c) All machineries and equipment that are actually, directly,

and exclusively used by local water districts and government-owned or

controlled corporations engaged in the supply and distribution of

water and/or generation and transmission of electric power;

x x x x

(e) Machinery and equipment used for pollution control andenvironmental protection.

x x x x

Assuming that it cannot claim the above tax exemptions, Napocor argued

that it is entitled to certain tax privileges, namely:

a. the lower assessment level of 10% under Section 218(d) of the

LGC for government-owned and controlled corporations engaged

in the generation and transmission of electric power, instead of the80% assessment level for commercial properties imposed in the

assessment letter; and

b. an allowance for depreciation of the subject machineries under

Section 225 of the LGC.


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In the Courts Decision of July 15, 2009, we ruled that Napocor is not

entitled to any of these claimed tax exemptions and privileges on the basis

primarily of the defective protest filed by the Napocor. We found that

Napocor did not file a valid protest against the realty tax assessment because

it did not possess the requisite legal standing. When a taxpayer fails toquestion the assessment before the LBAA, the assessment becomes final,

executory, and demandable, precluding the taxpayer from questioning the

correctness of the assessment or from invoking any defense that would

reopen the question of its liability on the merits.[2]

Under Section 226 of the LGC,[3]any owner or person having legal

interest in the property may appeal an assessment for real property taxes to

the LBAA. Since Section 250 adopts the same language in enumerating who

may pay the tax, we equated those who are liable to pay the tax to the same

entities who may protest the tax assessment. A person legally burdened with

the obligation to pay for the tax imposed on the property has the legal

interest in the property and the personality to protest the tax assessment.

To prove that it had legal interest in the taxed machineries, Napocor

relied on:.

1. the stipulation in the BOT Agreement that authorized the transfer

of ownership to Napocor after 25 years;

2. its authority to control and supervise the construction and

operation of the power plant; and3. its obligation to pay for all taxes that may be incurred, as provided

in the BOT Agreement.

Napocor posited that these indicated that Mirant only possessed naked title

to the machineries.

We denied the first argument by ruling that legal interest should be

one that is actual and material, direct and immediate, not simply

contingent or expectant.[4]

We disproved Napocors claim of control andsupervision under the second argument after reading the full terms of the

BOT Agreement, which, contrary to Napocors claims, granted Mirant

substantial power in the control and supervision of the power plants

construction and operation.[5]
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For the third argument, we relied on the Courts rulings inBaguio v.

Busuego[6] and Lim v. Manila.[7] In these cases, the Court essentially

declared that contractual assumption of tax liability alone is insufficient to

make one liable for taxes. The contractual assumption of tax liability must

be supplemented by an interest that the party assuming the liability had onthe property; the person from whom payment is sought must have also

acquired the beneficial use of the property taxed. In other words, he must

have the use and possession of the property an element that was missing in

Napocors case.

We further stated that the tax liability must be a liability that arises

from law, which the local government unit can rightfully and successfully

enforce, not the contractual liability that is enforceable only between the

parties to the contract. In the present case, the Province of Quezon is a third

party to the BOT Agreement and could thus not exact payment from

Napocor without violating the principle of relativity of contracts.[8] Corollarily, for reasons of fairness, the local government units cannot be

compelled to recognize the protest of a tax assessment from Napocor, an

entity against whom it cannot enforce the tax liability.

At any rate, even if the Court were to brush aside the issue of legal

interest to protest, Napocor could still not successfully claim exemption

under Section 234 (c) of the LGC because to be entitled to the exemption

under that provision, there must be actual, direct, and exclusive use ofmachineries. Napocor failed to satisfy these requirements.

THE MOTION FOR RECONSIDERATION

Although Napocor insists that it is entitled to the tax exemptions and

privileges claimed, the primary issue for the Court to resolve, however, is to

determinewhether Napocor has sufficient legal interest to protest the tax

assessmentbecause without the requisite interest, the tax assessment stands,

and no claim of exemption or privilege can prevail.

Section 226 of the LGC, as mentioned, limits the right to appeal the

local assessors action to the owner or the person having legal interest in the

property. Napocor posits that it is the beneficial owner of the subject

machineries, with Mirant retaining merely a naked title to secure certain

obligations. Thus, it argues that the BOT Agreement is a mere financing
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agreement and is similar to the arrangement authorized under Article 1503

of the Civil Code, which declares:

Art. 1503. When there is a contract of sale of specific goods, the

seller may, by the terms of the contract, reserve the right of possession or

ownership in the goods until certain conditions have been fulfilled. Theright of possession or ownership may be thus reserved notwithstanding the

delivery of the goods to the buyer or to a carrier or other bailee for the

purpose of transmission to the buyer.

Where goods are shipped, and by the bill of lading the goods are

deliverable to the seller or his agent, or to the order of the seller or of hisagent, the seller thereby reserves the ownership in the goods. But, if

except for the form of the bill of lading, the ownership would have passed

to the buyer on shipment of the goods, the seller's property in the goods

shall be deemed to be only for the purpose of securing performance by

the buyer of his obligations under the contract.x x x x

Pursuant to this arrangement, Mirants ownership over the subject

machineries is merely a security interest, given only for the purpose of

ensuring the performance of Napocors obligations.

Napocor additionally contends that its contractual assumption liability

(through the BOT Agreement) for all taxes vests it with sufficient legal

interest because it is actually, directly, and materially affected by the

assessment.

While its motion for reconsideration was pending, Napocor filed

a Motion to Refer the Case to the Court En Banc considering that the issues

raised have far-reaching consequences in the power industry, the countrys

economy and the daily lives of the Filipino people, and since it involves the

application of real property tax provision of the LGC against Napocor, an

exempt government instrumentality.[9]

Also, the Philippine Independent Power Producers Association, Inc.(PIPPA) filed a Motion for Leave to Intervene and a Motion for

Reconsideration-in-Intervention. PIPPA is a non-stock corporation

comprising of privately-owned power generating companies which includes

TeaM Energy Corporation (TeaM Energy), successor of Mirant. PIPPA is

claiming interest in the case since any decision here will affect the other


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members of PIPPA, all of which have executed similar BOT agreements

with Napocor.

THE COURTS RULING

At the outset, we resolve to deny the referral of the case to the

Court en banc. We do not find the reasons raised by Napocor meritorious

enough to warrant the attention of the members of the Court en banc, as they

are merely reiterations of the arguments it raised in the petition for review

on certiorari that it earlier filed with the Court.[10]

Who may appeal a real

property tax assessment

Legal interest is defined as interest in property or a claim cognizable

at law, equivalent to that of a legal owner who has legal title to the property.[11] Given this definition, Napocor is clearly not vested with the requisite

interest to protest the tax assessment, as it is not an entity having the legal

title over the machineries. It has absolutely no solid claim of ownership or

even of use and possession of the machineries, as our July 15, 2009 Decision

explained.

A BOT agreement is not a mere financing arrangement. InNapocor

v. CBAA[12] a case strikingly similar to the one before us, we discussed the

nature of BOT agreements in the following manner:

The underlying concept behind a BOT agreement is defined and

described in the BOT law as follows:

Build-operate-and-transfer A contractual

arrangement whereby the project proponent undertakes the

construction, including financing, of a given infrastructure

facility, and the operation and maintenance thereof. The project proponent operates the facility over a fixed term

during which it is allowed to charge facility users

appropriate tolls, fees, rentals, and charges not exceedingthose proposed in its bid or as negotiated and incorporated

in the contract to enable the project proponent to recover its

investment, and operating and maintenance expenses in theproject. The project proponent transfers the facility to


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the government agency or local government unit

concerned at the end of the fixed term which shall not

exceed fifty (50) years x x x x.

Under this concept, it is the project proponent who constructs the project

at its own cost and subsequently operates and manages it. The proponentsecures the return on its investments from those using the

projects facilities through appropriate tolls, fees, rentals, and charges not

exceeding those proposed in its bid or as negotiated. At the end of the

fixed term agreed upon, the project proponent transfers the

ownership of the facility to the government agency. Thus, the

government is able to put up projects and provide immediate services

without the burden of the heavy expenditures that a project start uprequires.

A reading of the provisions of the parties BOT Agreement shows

that it fully conforms to this concept. By its express terms, BPPC hascomplete ownership both legal and beneficial of the project,including the machineries and equipment used, subject only to the

transfer of these properties without cost to NAPOCOR after the lapse

of the period agreed upon. As agreed upon, BPPC provided the funds

for the construction of the power plant, including the machineries and

equipment needed for power generation; thereafter, it actually operatedand still operates the power plant, uses its machineries and equipment, and

receives payment for these activities and the electricity generated under a

defined compensation scheme. Notably, BPPC as owner-user isresponsible for any defect in the machineries and equipment.

x x x x

That some kind of financing arrangement is contemplated in

the sense that the private sector proponent shall initially shoulder theheavy cost of constructing the projects buildings and structures and of

purchasing the needed machineries and equipment is undeniable. The

arrangement, however, goes beyond the simple provision of funds, since

the private sector proponent not only constructs and buys the necessaryassets to put up the project, but operates and manages it as well during an

agreed period that would allow it to recover its basic costs and earn

profits. In other words, the private sector proponent goes into business foritself, assuming risks and incurring costs for its account. If it receives

support from the government at all during the agreed period, these are pre-

agreed items of assistance geared to ensure that the BOT agreementsobjectives both for the project proponent and for the government are

achieved. In this sense, a BOT arrangement is sui generisand isdifferent from the usual financing arrangements where funds are

advanced to a borrower who uses the funds to establish a project that it


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owns, subject only to a collateral security arrangement to guard against the

nonpayment of the loan. It is different, too, from an arrangement where a

government agency borrows funds to put a project from a private sector-lender who is thereafter commissioned to run the project for the

government agency. In the latter case, the government agency is the

owner of the project from the beginning, and the lender-operator is merelyits agent in running the project.

If the BOT Agreement under consideration departs at all from theconcept of a BOT project as defined by law, it is only in the way BPPCs

cost recovery is achieved; instead of selling to facility users or to the

general public at large, the generated electricity is purchased by

NAPOCOR which then resells it to power distribution companies. Thisdeviation, however, is dictated, more than anything else, by the structure

and usages of the power industry and does not change the BOT nature of

the transaction between the parties.

Consistent with the BOT concept and as implemented, BPPC theowner-manager-operator of the project is the actual user of its

machineries and equipment. BPPCs ownership and use of the

machineries and equipment are actual, direct, and immediate, while

NAPOCORs is contingent and, at this stage of the BOT Agreement,

not sufficient to support its claim for tax exemption. Thus, the CTAcommitted no reversible error in denying NAPOCORs claim for tax

exemption. [Emphasis supplied.]

Given the special nature of a BOT agreement as discussed in the citedcase, we find Article 1503 inapplicable to define the contract between

Napocor and Mirant, as it refers only to ordinary contracts of sale. We thus

declared in Tatad v. Garcia[13]that under BOT agreements, the private

corporations/investors are the owners of the facility or machinery

concerned. Apparently, even Napocor and Mirant recognize this principle;

Article 2.12 of their BOT Agreement provides that until the Transfer Date,

[Mirant] shall, directly or indirectly, own the Power Station and all the

fixtures, fitting, machinery and equipment on the Site x x x. [Mirant] shall

operate, manage, and maintain the Power Station for the purpose ofconverting fuel of Napocor into electricity.

Moreover, if Napocor truly believed that it was the owner of the

subject machineries, it should have complied with Sections 202 and 206 of

the LGC which obligates owners of real property to:


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a. file a sworn statement declaring the true value of the real property,

whether taxable or exempt;[14]and

b. file sufficient documentary evidence supporting its claim for taxexemption.[15]

While a real property owners failure to comply with Sections 202 and 206

does not necessarily negate its tax obligation nor invalidate its legitimate

claim for tax exemption, Napocors omission to do so in this case can be

construed as contradictory to its claim of ownership of the subject

machineries. That it assumed liability for the taxes that may be imposed on

the subject machineries similarly does not clothe it with legal title over the

same. We do not believe that the phrase person having legal interest in

the propertyin Section 226 of the LGC can include an entity that

assumes another persons tax liability by contract.

A review of the provisions of the LGC on real property taxation

shows that the phrase has been repeatedly adopted and used to define an

entity:

a. in whose name the real property shall be listed, valued, and

assessed;[16]

b. who may be summoned by the local assessor to gather informationon which to base the market value of the real property;[17]

c. who may protest the tax assessment before the LBAA[18] and may

appeal the latters decision to the CBAA;[19]

d. who may be liable for the idle land tax,[20] as well as who may be

exempt from the same;[21]

e. who shall be notified of any proposed ordinance imposing a

special levy,[22] as well as who may object the proposed ordinance;[23]

f. who may pay the real property tax;[24]

g. who is entitled to be notified of the warrant of levy and against

whom it may be enforced;[25]

h. who may stay the public auction upon payment of the delinquent

tax, penalties and surcharge;[26] and

i. who may redeem the property after it was sold at the public

auction for delinquent taxes.[27]
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For the Court to consider an entity assuming another persons tax liability by

contract as aperson having legal interest in the real property would extend

to it the privileges and responsibilities enumerated above. The framers of

the LGC certainly did not contemplate that the listing, valuation, andassessment of real property can be made in the name of such entity; nor did

they intend to make the warrant of levy enforceable against it. Insofar as the

provisions of the LGC are concerned, this entity is a party foreign to the

operation of real property tax laws and could not be clothed with any legal

interest over the property apart from its assumed liability for tax. The rights

and obligations arising from the BOT Agreement between Napocor and

Mirant were of no legal interest to the tax collector

the Province of Quezon which is charged with the performance of

independent duties under the LGC.[28]

Some authorities considera person whose pecuniary interests is or

may be adversely affected by the tax assessment as one who has legal

interest in the property (hence, possessed of the requisite standing to protest

it), citing Cooleys Law on Taxation.[29] The reference to this foreign

material, however, is misplaced. The tax laws of the United States deem it

sufficient that a persons pecuniary interestsare affected by the tax

assessment to consider him as a person aggrieved and who may thus avail of

the judicial or administrative remedies against it. As opposed to our LGC,

mere pecuniary interest is not sufficient; our law has required legalinterestin the property taxed before any administrative or judicial remedy

can be availed. The right to appeal a tax assessment is a purely statutory

right; whether a person challenging an assessment bears such a relation to

the real property being assessed as to entitle him the right to appeal is

determined by the applicable statute in this case, our own LGC, not US

federal or state tax laws.

In light of our ruling above, PIPPAs motion to intervene and motion

for reconsideration-in-intervention is already mooted. PIPPA as anorganization of independent power producers is not an interested party

insofar as this case is concerned. Even if TeaM Energy, as Mirants

successor, is included as one of its members, the motion to intervene and

motion for reconsideration-in-intervention can no longer be entertained, as it

amounts to a protest against the tax assessment that was filed without the

complying with Section 252 of the LGC, a matter that we shall discuss
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below. Most importantly, our Decision has not touched or affected at all the

contractual stipulations between Napocor and its BOT partners for the

formers assumption of the tax liabilities of the latter.

Payment under protest isrequired before an appeal to

the LBAA can be made

Apart from Napocors failure to prove that it has sufficient legal

interest, a further review of the records revealed another basis for

disregarding Napocors protest against the assessment.

The LBAA dismissed Napocors petition for exemption for its failure

to comply with Section 252 of the LGC [30] requiring payment of the assailedtax before any protest can be made. Although the CBAA ultimately

dismissed Napocors appeal for failure to meet the requirements for tax

exemption, it agreed with Napocors position that the protest contemplated

in Section 252 (a) is applicable only when the taxpayer is questioning the

reasonableness or excessiveness of an assessment. It presupposes that the

taxpayer is subject to the tax but is disputing the correctness of the amount

assessed. It does not apply where, as in this case, the legality of the

assessment is put in issue on account of the taxpayers claim that it is

exempt from tax. The CTA en banc agreed with the CBAAs discussion,relying mainly on the cases ofTy v. Trampe[31]and Olivarez v. Marquez.[32]

We disagree. The cases ofTy and Olivarezmust be placed in their

proper perspective.

The petitioner in Ty v. Trampe questioned before the trial court the

increased real estate taxes imposed by and being collected

in Pasig City effective from the year 1994, premised on the legal question of

whether or not Presidential Decree No. 921 (PD 921) was repealed by theLGC. PD 921 required that the schedule of values of real properties in the

Metropolitan Manila area shall be prepared jointly by the city assessors in

the districts created therein; while Section 212 of the LGC stated that the

schedule shall be prepared by the provincial, city or municipal assessors of

the municipalities within the Metropolitan Manila Area for the different

classes of real property situated in their respective local government units for


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enactment by ordinance of the Sanggunian concerned. The private

respondents assailed Tys act of filing a prohibition petition before the trial

court contending that Ty should have availed first the administrative

remedies provided in the LGC, particularly Sections 252 (on payment under

protest before the local treasurer) and 226 (on appeals to the LBAA).

The Court, through former Chief Justice Artemio Panganiban,

declared that Ty correctly filed a petition for prohibition before the trial

court against the assailed act of the city assessor and treasurer. The

administrative protest proceedings provided in Section 252 and 226 will not

apply. The protest contemplated under Section 252 is required where

there is a question as to the reasonableness or correctness of the amount

assessed. Hence, if a taxpayer disputes the reasonableness of an increase in

a real property tax assessment, he is required to "first pay the tax" under

protest. Otherwise, the city or municipal treasurer will not act on his

protest. Ty however was questioning the very authority and power of the

assessor, acting solely and independently, to impose the assessment and of

the treasurer to collect the tax. These were not questions merely of amounts

of the increase in the tax but attacks on the very validity of any

increase. Moreover, Ty was raising a legal question that is properly

cognizable by the trial court; no issues of fact were involved. In

enumerating the power of the LBAA, Section 229 declares that the

proceedings of the Board shall be conducted solely for the purpose of

ascertaining the facts x x x. Appeals to the LBAA (under Section 226) aretherefore fruitful only where questions of fact are involved.

Olivarez v. Marquez, on the other hand, involved a petition

forcertiorari, mandamus, and prohibition questioning the assessment and

levy made by the City ofParaaque. Olivarez was seeking the annulment of

his realty tax delinquency assessment. Marquez assailed Olivarez failure to

first exhaust administrative remedies, particularly the requirement of

payment under protest. Olivarez replied that his petition was filed to

question the assessors authority to assess and collect realty taxes andtherefore, as held in Ty v. Trampe, the exhaustion of administrative remedies

was not required. The Court however did not agree with Olivarezs

argument. It found that there was nothing in his petition that supported his

claim regarding the assessors alleged lack of authority. What Olivarez

raised were the following grounds: (1) some of the taxes being collected

have already prescribed and may no longer be collected as provided in


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Section 194 of the Local Government Code of 1991; (2) some properties

have been doubly taxed/assessed; (3) some properties being taxed are no

longer existent; (4) some properties are exempt from taxation as they are

being used exclusively for educational purposes; and (5) some errors are

made in the assessment and collection of taxes due on petitionersproperties, and that respondents committed grave abuse of discretion in

making the improper, excessive and unlawful the collection of taxes against

the petitioner. The Olivarez petition filed before the trial court

primarily involved the correctness of the assessments, which is a question

of fact that is not allowed in a petition forcertiorari, prohibition,

and mandamus. Hence, we declared that the petition should have been

brought, at the very first instance, to the LBAA, not the trial court.

Like Olivarez, Napocor, by claiming exemption from realty taxation,

is simply raising a question of the correctness of the assessment. A claim

for tax exemption, whether full or partial, does not question the

authority of local assessor to assess real property tax. This may be

inferred from Section 206 which states that:

SEC. 206.Proof of Exemption of Real Property from Taxation. -

Every person by or for whom real property is declared, who shall claim

tax exemption for such property under this Title shall file with the

provincial, city or municipal assessor within thirty (30) days from the dateof the declaration of real property sufficient documentary evidence in

support of such claim including corporate charters, title of ownership,articles of incorporation, bylaws, contracts, affidavits, certifications andmortgage deeds, and similar documents. If the required evidence is not

submitted within the period herein prescribed, the property shall be

listed as taxable in the assessment roll. However, if the property shall

be proven to be tax exempt, the same shall be dropped from the

assessment roll. [Emphasis provided]

By providing that real property not declared and proved as tax-exempt shall

be included in the assessment roll, the above-quoted provision implies that

the local assessor has the authority to assess the property for realty taxes,and any subsequent claim for exemption shall be allowed only when

sufficient proof has been adduced supporting the claim. Since Napocor was

simply questioning the correctness of the assessment, it should have first

complied with Section 252, particularly the requirement of payment under

protest. Napocors failure to prove that this requirement has been complied

with thus renders its administrative protest under Section 226 of the LGC


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without any effect. No protest shall be entertained unless the taxpayer first

pays the tax.

It was an ill-advised move for Napocor to directly file an appeal with

the LBAA under Section 226 without first paying the tax as required underSection 252. Sections 252 and 226 providesuccessive administrative

remedies to a taxpayer who questions the correctness of an

assessment. Section 226, in declaring that any owner or person having

legal interest in the property who is not satisfied with the action of the

provincial, city, or municipal assessor in the assessment of his propertymay

x x x appeal to the Board of Assessment Appeals x x x, should be read in

conjunction with Section 252 (d), which states that in the event that the

protest is denied x x x, the taxpayer may avail of the remedies as

provided for in Chapter 3, Title II, Book II of the LGC [Chapter 3 refers to

Assessment Appeals, which includes Sections 226 to 231]. The action

referred to in Section 226 (in relation to a protest of real property tax

assessment) thus refers to the local assessors act of denying the protest filed

pursuant to Section 252. Without the action of the local assessor, the

appellate authority of the LBAA cannot be invoked. Napocors action

before the LBAA was thus prematurely filed.

For the foregoing reasons, we DENY the petitioners motion for

reconsideration.

SO ORDERED.

ARTURO D. BRION

Associate Justice

WE CONCUR:

CONCHITA CARPIO MORALES

Associate Justice

Acting Chairperson


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TERESITA J. LEONARDO-DE CASTRO

Associate Justice

ROBERTO A. ABAD

Associate Justice

JOSE P. PEREZ

Associate Justice

ATTESTATION

I attest that the conclusions in the above Decision had been reached inconsultation before the case was assigned to the writer of the opinion of the

Courts Division.


Associate Justice

Acting Chairperson

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution, and the

Division Chairpersons Attestation, it is hereby certified that the conclusions

in the above Decision had been reached in consultation before the case was

assigned to the writer of the opinion of the Courts Division.

REYNATO S. PUNO

Chief Justice

[1]Rollo, pp. 498-517.[2]FELS Energy Inc. v. Province of Batangas, G.R. No. 168557, February 16, 2007, 516 SCRA 186.
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[3] SEC. 226.Local Board of Assessment Appeals. - Any owner or person having legal interest in the

property who is not satisfied with the action of the provincial, city or municipal assessor in the

assessment of his property may, within sixty (60) days from the date of receipt of the written notice of

assessment, appeal to the Board of Assessment Appeals of the province or city by filing a petition under

oath in the form prescribed for the purpose, together with copies of the tax declarations and suchaffidavits or documents submitted in support of the appeal.

[4]

Citing Cario v. Ofilado, G.R. No. 102836, January 18, 1993, 217 SCRA 206.[5] Citing Articles 2.1, 3.1, 5.1, and 5.3 of the Energy Conversion Agreement.[6] 188 Phil. 218 (1980).[7] G.R. No. 90639, February 21, 1990, 182 SCRA 482.[8] CIVIL CODE, Article 1311.[9]Rollo, p. 535.[10] Supreme Court Circular No. 2-98.[11]Blacks Law Dictionary (5th ed.), pp. 805-806.[12] G.R. No. 171470, January 30, 2009, 57 SCRA 418, 434-437.[13] 313 Phil. 296, 323, 326 (1995).[14] SEC. 202.Declaration of Real Property by the Owner or Administrator. - It shall be the duty of all

persons, natural or juridical, owning or administering real property, including the improvements

therein, within a city or municipality, or their duly authorized representative, to prepare, or cause to

be prepared, and file with the provincial, city or municipal assessor, a sworn statement declaring the

true value of their property, whether previously declared or undeclared, taxable or exempt, whichshall be the current and fair market value of the property, as determined by the declarant. Such

declaration shall contain a description of the property sufficient in detail to enable the assessor or hisdeputy to identify the same for assessment purposes. The sworn declaration of real property herein

referred to shall be filed with the assessor concerned once every three (3) years during the period from

January first (1st) to June thirtieth (30th) commencing with the calendar year 1992. [emphasis provided][15] SEC. 206.Proof of Exemption of Real Property from Taxation. - Every person by or for whom real

property is declared, who shall claim tax exemption for such propertyunder this Title shall

file with the provincial, city or municipal assessor within thirty (30) days from the date of the

declaration of real property sufficient documentary evidence in support of such claim including

corporate charters, title of ownership, articles of incorporation, bylaws, contracts, affidavits,certifications and mortgage deeds, and similar documents. If the required evidence is not submitted

within the period herein prescribed, the property shall be listed as taxable in the assessment roll.

However, if the property shall be proven to be tax exempt, the same shall be dropped from theassessment roll.

[16] SEC. 205.Listing of Real Property in the Assessment Rolls. - (a) In every province and city, including

the municipalities within the Metropolitan Manila Area, there shall be prepared and maintained by the

provincial, city or municipal assessor an assessment roll wherein shall be listed all real property,

whether taxable or exempt, located within the territorial jurisdiction of the local government unitconcerned. Real property shall be listed, valued and assessed in the name of the owner or

administrator, or anyone having legal interest in the property. x x x x.[17] SEC. 213.Authority of Assessor to Take Evidence. - For the purpose of obtaining information on which

to base the market value of any real property, the assessor of the province, city or municipality or his

deputy may summon the owners of the properties to be affected or persons having legal interest

therein and witnesses, administer oaths, and take deposition concerning the property, its ownership,

amount, nature, and value.[18]

Supra note 3.[19] SEC. 229.Action by the Local Board of Assessment Appeals. x x x x

(c) The secretary of the Board shall furnish the owner of the property or the person having legal interesttherein and the provincial or city assessor with a copy of the decision of the Board. In case the

provincial or city assessor concurs in the revision or the assessment, it shall be his duty to notify the

owner of the property or the person having legal interest therein of such fact using the form

prescribed for the purpose. Theowner of the property or the person having legal interest

therein or the assessor who is not satisfied with the decision of the Board, may, within thirty (30)

days after receipt of the decision of said Board, appeal to the Central Board of Assessment appeals,

as herein provided. The decision of the Central Board shall be final and executory.
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[20] SEC. 237.Idle Lands, Coverage. - For purposes of real property taxation, idle lands shall include the

following:

(a) "Agricultural lands, more than one (1) hectare in area, suitable for cultivation, dairying, inland

fishery, and other agricultural uses, one-half (1/2) of which remain uncultivated or unimproved by

the owner of the property or person having legal interest therein." Agricultural lands planted topermanent or perennial crops with at least fifty (50) trees to a hectare shall not be considered idle

lands. Lands actually used for grazing purposes shall likewise not be considered idle lands.(b) Lands, other than agricultural, located in a city or municipality, more than one thousand (1,000)

square meters in area one-half (1/2) of which remain unutilized or unimproved by the owner of the

property or person having legal interest therein. Regardless of land area, this Section shall

likewise apply to residential lots in subdivisions duly approved by proper authorities, the ownership

of which has been transferred to individual owners, who shall be liable for the additional tax:

Provided, however, That individual lots of such subdivisions, the ownership of which has not beentransferred to the buyer shall be considered as part of the subdivision, and shall be subject to the

additional tax payable by subdivision owner or operator.[21] SEC. 238.Idle Lands Exempt from Tax. - A province or city or a municipality within the Metropolitan

Manila Area may exempt idle lands from the additional levy by reason of force majeure, civil

disturbance, natural calamity or any cause or circumstance which physically or legally prevents

the owner of the property or person having legal interest therein from improving, utilizing or

cultivating the same.[22] SEC. 242.Publication of Proposed Ordinance Imposing a Special Levy. - Before the enactment of an

ordinance imposing a special levy, thesanggunian concerned shall conduct a public hearing thereon;

notify in writing theowners of the real property to be affected or the persons having legal interest

therein as to the date and place thereof and afford the latter the opportunity to express their positions or

objections relative to the proposed ordinance.[23] SEC. 244. Taxpayers' Remedies Against Special Levy. - Any owner of real property affected by a

special levy or any person having a legal interest therein may, upon receipt of the written notice of

assessment of the special levy, avail of the remedies provided for in Chapter 3, Title Two, Book II of

this Code.[24] SEC. 250.Payment of Real Property Taxes in Installments. - The owner of the real property or the

person having legal interest therein may pay the basic real property tax and the additional tax forSpecial Education Fund (SEF) due thereon without interest in four (4) equal installments; the first

installment to be due and payable on or before March Thirty-first (31st); the second installment, on or

before June Thirty (30); the third installment, on or before September Thirty (30); and the lastinstallment on or before December Thirty-first (31st), except the special levy the payment of which

shall be governed by ordinance of thesanggunian concerned. The date for the payment of any other tax

imposed under this Title without interest shall be prescribed by thesanggunian concerned. Payments of

real property taxes shall first be applied to prior years delinquencies, interests, and penalties, if any, and

only after said delinquencies are settled may tax payments be credited for the current period.[25] SEC. 258.Levy on Real Property. - After the expiration of the time required to pay the basic real

property tax or any other tax levied under this Title, real property subject to such tax may be levied

upon through the issuance of a warrant on or before, or simultaneously with, the institution of the civil

action for the collection of the delinquent tax. The provincial or city treasurer, or a treasurer of a

municipality within the Metropolitan Manila Area, as the case may be, when issuing a warrant of levy

shall prepare a duly authenticated certificate showing the name of the delinquent owner of the

property or person having legal interest therein, the description of the property, the amount of the

tax due and the interest thereon. The warrant shall operate with the force of a legal execution throughoutthe province, city or a municipality within the Metropolitan Manila Area. The warrant shall be mailed to

or served upon the delinquent owner of the real property or person having legal interest therein, orin case he is out of the country or cannot be located, to the administrator or occupant of the property. At

the same time, written notice of the levy with the attached warrant shall be mailed to or served upon the

assessor and the Registrar of Deeds of the province, city or a municipality within the Metropolitan

Manila Area where the property is located, who shall annotate the levy on the tax declaration and

certificate of title of the property, respectively. The levying officer shall submit a report on the levy to

thesanggunian concerned within ten (10) days after receipt of the warrant by the owner of the property

or person having legal interest therein.
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[26] SEC. 260.Advertisement and Sale. - Within thirty (30) days after service of the warrant of levy, the

local treasurer shall proceed to publicly advertise for sale or auction the property or a usable portion

thereof as may be necessary to satisfy the tax delinquency and expenses of sale. The advertisement shall

be effected by posting a notice at the main entrance of the provincial, city or municipal building, and in

a publicly accessible and conspicuous place in thebarangay where the real property is located, and bypublication once a week for two (2) weeks in a newspaper of general circulation in the province, city or

municipality where the property is located. The advertisement shall specify the amount of the delinquenttax, the interest due thereon and expenses of sale, the date and place of sale, the name of the owner of

the real property or person having legal interest therein, and a description of the property to be sold. At

any time before the date fixed for the sale, the owner of the real property or person having legal

interest therein may stay the proceedings by paying the delinquent tax, the interest due thereon and the

expenses of sale. The sale shall be held either at the main entrance of the provincial, city or municipal

building, or on the property to be sold, or at any other place as specified in the notice of the sale. Withinthirty (30) days after the sale, the local treasurer or his deputy shall make a report of the sale to

thesanggunian concerned, and which shall form part of his records. The local treasurer shall likewise

prepare and deliver to the purchaser a certificate of sale which shall contain the name of the purchaser, a

description of the property sold, the amount of the delinquent tax, the interest due thereon, the expenses

of sale and a brief description of the proceedings: Provided, however, That proceeds of the sale in

excess of the delinquent tax, the interest due thereon, and the expenses of sale shall be remitted to the

owner of the real property or person having legal interest therein. The local treasurer may, by ordinance

duly approved, advance an amount sufficient to defray the costs of collection thru the remedies providedfor in this Title, including the expenses of advertisement and sale.

[27] SEC. 254.Notice of Delinquency in the Payment of the Real Property Tax. x x x x(b) Such notice shall specify the date upon which the tax became delinquent and shall state that personal

property may be distrained to effect payment. It shall likewise state that at any time before the distraint

of personal property, payment of the tax with surcharges, interests and penalties may be made in

accordance with the next following Section, and unless the tax, surcharges and penalties are paid before

the expiration of the year for which the tax is due except when the notice of assessment or special levy

is contested administratively or judicially pursuant to the provisions of Chapter 3, Title II, Book II of

this Code, the delinquent real property will be sold at public auction, and the title to the property will

be vested in the purchaser, subject, however, to the right of the delinquent owner of the property or

any person having legal interest therein to redeem the property within one (1) year from the date of

sale.

SEC. 261.Redemption of Property Sold. - Within one (1) year from the date of sale, the owner of thedelinquent real property or person having legal interest therein, or his representative, shall have the

right to redeem the property upon payment to the local treasurer of the amount of the delinquent tax,

including the interest due thereon, and the expenses of sale from the date of delinquency to the date of

sale, plus interest of not more than two percent (2%) per month on the purchase price from the date of

sale to the date of redemption. Such payment shall invalidate the certificate of sale issued to thepurchaser and the owner of the delinquent real property or person having legal interest therein shall be

entitled to a certificate of redemption which shall be issued by the local treasurer or his deputy. From

the date of sale until the expiration of the period of redemption, the delinquent real property shall

remain in the possession of the owner or person having legal interest therein who shall be entitled to the

income and other fruits thereof. The local treasurer or his deputy, upon receipt from the purchaser of the

certificate of sale, shall forthwith return to the latter the entire amount paid by him plus interest of not

more than two percent (2%) per month. Thereafter, the property shall be free from the lien of such

delinquent tax, interest due thereon and expenses of sale.[28]Hamilton Mfg. Co. v. City of Lowell, 274 Mass. 477, 175 N.E. 73.[29] Cooley on Taxation (4th ed.), Volume 3, 1207, p. 2420.[30] SEC. 252.Payment Under Protest. - (a) No protest shall be entertained unless the taxpayer first pays the

tax. There shall be annotated on the tax receipts the words "paid under protest". The protest in writing

must be filed within thirty (30) days from payment of the tax to the provincial, city treasurer or

municipal treasurer, in the case of a municipality within Metropolitan Manila Area, who shall decide the

protest within sixty (60) days from receipt.

(b) The tax or a portion thereof paid under protest, shall be held in trust by the treasurer concerned.
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(c) In the event that the protest is finally decided in favor of the taxpayer, the amount or portion of the tax

protested shall be refunded to the protestant, or applied as tax credit against his existing or future tax

liability.

(d) In the event that the protest is denied or upon the lapse of the sixty day period prescribed in

subparagraph (a), the taxpayer may avail of the remedies as provided for in Chapter 3, Title II, Book IIof this Code.

[31]

321 Phil. 81, 101-102 (1995).[32] G.R. No. 155591, September 22, 2004, 438 SCRA 679, 686, 687.

FIRST DIVISION
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TAMBUNTING PAWNSHOP,

INC.,

Petitioner,

- versus -

COMMISSIONER OF

INTERNAL REVENUE,

Respondent.

G.R. No. 179085

Present:

PUNO, C.J., Chairperson,CARPIO MORALES,

LEONARDO-DE CASTRO,

BERSAMIN, and

VILLARAMA, JR.,JJ.

Promulgated:

January 21, 2010

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

Petitioner protested the assessment.[2] As the protest merited no

response, it filed a Petition for Review[3]with the Court of Tax Appeals

(CTA) pursuant to Section 228 of the National Internal Revenue Code,[4]

raising the following arguments:

A. Pawnshops are not subject to Value Added Tax

pursuant to Section 108 of the National Internal

Revenue Code.[5]

B. Petitioner properly withheld and remitted to the

respondent the correct amount of expanded

withholding tax for taxable year 1999.[6]

C. Petitioner has already paid the assessed amount

of P 14,398.38 [sic], representing deficiencywithholding tax on compensation, thus, assessment

on withholding on compensation must be cancelled.[7]

D. Petitioners pawn tickets are not subject to

documentary stamp tax pursuant to existing laws
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andjurisprudence.[8] (emphasis and underscoring in

the original)

The First Division of the CTA ruled that petitioner is liable for

VAT and documentary stamp tax but not for withholding tax on

compensation and expanded withholding tax.[9] Thus it disposed:

WHEREFORE, premises considered, the Petition for Review

is PARTIALLY GRANTED. Respondents assessments for deficiency

Expanded Withholding Tax and Withholding Tax on Compensation

for the taxable year 1999, in the amounts of Twenty One Thousand

Seven Hundred Twenty Three and 75/100 Pesos (P21,723.75) andSixty

Seven Thousand Two Hundred One and 55/100 Pesos (P67,201.55),

respectively, are hereby CANCELLED and SET ASIDE. However,

the assessments for deficiency Value-Added Tax and DocumentaryStamp Tax are hereby AFFIRMED.

Accordingly, petitioner is ORDERED TO PAY the respondent

the amount of Three Million Fifty Five Thousand Five Hundred Sixty

Four and 34/100 Pesos(P3,055,564.34) and Four Hundred Six

Thousand Ninety Two and 500/100 Pesos (P406,092.50) representing

deficiency Value-Added Tax and Documentary Stamp Tax,

respectively, for the taxable year 1999, plus 20% delinquency interest

from February 18, 2003 up to the time such amount is fully paid

pursuant to Section 249 (c) of the 1997 NIRC.

SO ORDERED.[10] (emphasis in the original; underscoring

supplied)

Petitioners Motion for Partial Reconsideration[11] having been

denied,[12] it filed a Petition for Review[13]before the CTA En Banc which

dismissed[14] it as it did petitioners Motion for Reconsideration.[15]

Hence, the present Petition for Review on Certiorari.[16]

To petitioner, a pawnshop is not enumerated as one of those

engaged in sale or exchange of services[17]in Section 108 of the

National Internal Revenue Code.[18] Citing Commissioner of Internal

Revenue v. Michel J. Lhuillier Pawnshops, Inc.,[19]it contends that the
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nature of the business of pawnshops does not fall under service as

defined under the Legal Thesaurus of William C. Burton, viz:

accommodate, administer to, advance, afford, aid, assist, attend, be of

use, care for, come to the aid of, commodere, comply, confer a benefit,contribute to, cooperate, deservire, discharge ones duty, do a service, do

ones bidding, fill an office, forward, furnish aid, furnish assistance,

give help, lend, aid, minister to, promote, render help, servire, submit,

succor, supply aid, take care of, tend, wait on, work for.[20]

The petition is in part meritorious.

On the issue of whether pawnshops are liable to pay VAT, the

Court, in First Planters Pawnshop, Inc. v. Commissioner of InternalRevenue,[21]held:

In fine, prior to the [passage of the] EVAT Law [in 1994],

pawnshops were treated as lending investors subject to lending

investor's tax. Subsequently, with the Court's ruling inLhuillier,

pawnshops were then treated as VAT-able enterprises under the

general classification of "sale or exchange of services" under Section

108 (A) of the Tax Code of 1997, as amended. R.A. No. 9238 [which

was passed in 2004] finally classified pawnshops as Other Non-bank

Financial Intermediaries.

The Court finds that pawnshops should have been treated as

non-bank financial intermediaries from the very beginning, subject to

the appropriate taxes provided by law, thus

Under the National Internal Revenue Code of

1977, pawnshops should have been levied the 5% percentage tax on

gross receipts imposed on bank and non-bank financial

intermediaries under Section 119 (now Section 121 of the Tax Code of

1997);

With the imposition of the VAT under R.A. No. 7716 orthe EVAT Law, pawnshops should have been subjected to the 10%

VAT imposed on banks and non-bank financial intermediaries and

financial institutions under Section 102 of the Tax Code of 1977 (now

Section 108 of the Tax Code of 1997);

This was restated by R.A. No. 8241, 24 which amended

R.A. No. 7716, although the levy, collection and assessment of the
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10% VAT on services rendered by banks, non-bank financial

intermediaries, finance companies, and other financial intermediaries

not performing quasi-banking functions, were made effective January

1, 1998;

R.A. No. 8424 or the Tax Reform Act of 1997 26likewise imposed a 10% VAT under Section 108 but the levy,

collection and assessment thereof were again deferred until December

31, 1999;

The levy, collection and assessment of the 10% VAT

was further deferred by R.A. No. 8761 until December 31, 2000, and

by R.A. No. 9010, until December 31, 2002;

With no further deferments given by law, the levy,

collection and assessment of the 10% VAT on banks, non-bank

financial intermediaries, finance companies, and other financialintermediaries not performing quasi-banking functions were finally

made effective beginning January 1, 2003;

Finally, with the enactment of R.A. No. 9238 in 2004,

the services of banks, non-bank financial intermediaries, finance

companies, and other financial intermediaries not performing quasi-

banking functions were specifically exempted from VAT, 28 and the

0% to 5% percentage tax on gross receipts on other non-bank

financial intermediaries was reimposed under Section 122 of the Tax

Code of 1997.

At the time of the disputed assessment, that is, for the year

2000, pawnshops were not subject to 10% VAT under the general

provision on "sale or exchange of services" as defined under Section

108 (A) of the Tax Code of 1997, which states: "'sale or exchange of

services' means the performance of all kinds of services in the

Philippines for others for a fee, remuneration or

consideration . . . ." Instead, due to the specific nature of its business,

pawnshops were then subject to 10% VAT under the category of non-

bank financial intermediaries[.]

Coming now to the issue at hand Since petitioner is a non-

bank financial intermediary, it is subject to 10% VAT for the tax

years 1996 to 2002; however, with the levy, assessment and collection

of VAT from non-bank financial intermediaries being

specifically deferred by law, then petitioner is not liable for VAT

during these tax years. But with the full implementation of the VAT

system on non-bank financial intermediaries starting January 1, 2003,

petitioner is liable for 10% VAT for said tax year. Andbeginning


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2004 up to the present, by virtue of R.A. No. 9238, petitioner is no

longer liable for VAT but it is subject to percentage tax on gross

receipts from 0% to 5%, as the case may be. (emphasis and

underscoring supplied)

In light of the foregoing ruling, since the imposition of VAT on

pawnshops, which are non-bank financial intermediaries, was deferred

for the tax years 1996 to 2002, petitioner is not liable for VAT for the

tax year 1999.

In dodging liability for documentary stamp tax on its pawn

tickets, petitioner argues that such tickets are neither securities nor

printed evidence of indebtedness.[22] The argument fails.

Section 195 of the National Internal Revenue Code provides:

Section 195. On every mortgage or pledge of lands, estate or

property, real or personal, heritable or movable, whatsoever, where

the same shall be made as a security for the payment of any definite

and certain sum of money lent at the time or previously due and

owing or forborne to be paid, being payable, and on any conveyance

of land, estate, or property whatsoever, in trust or to be sold, or

otherwise converted into money which shall be and intended only as

security, either by express stipulation or otherwise, there shall be

collected a documentary stamp tax x x x. (underscoring supplied)

Construing this provision vis a vis pawn tickets, the Court held inMichel

J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue:

x x x A D[ocumentary] S[tamp] T[ax] is an excise tax on

the exercise of a right or privilege to transfer obligations, rights or

properties incident thereto. x x x

x x x x

Pledge is among the privileges, the exercise of which is subject

to DST. A pledge may be defined as an accessory, real and unilateral

contract by virtue of which the debtor or a third person delivers to the

creditor or to a third person movable property as security for the

performance of the principal obligation, upon the fulfillment of which


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the thing pledged, with all its accessions and accessories, shall be

returned to the debtor or to the third person. This is essentially the

business of pawnshops which are defined under Section 3 of

Presidential Decree No. 114, or the Pawnshop Regulation Act, as

persons or entities engaged in lending money on personal property

delivered as security for loans.

x x x x

Section 3 of the Pawnshop Regulation Act defines a pawn

ticket as follows:

Pawn ticket is the pawnbrokers receipt for a

pawn. It is neither a security nor a printed evidence of

indebtedness.

True, the law does not consider said ticket as an evidence of

security or indebtedness. However, for purposes of taxation, the samepawn ticket is proof of an exercise of a taxable privilege of concluding

a contract of pledge. There is therefore no basis in petitioners

assertion that a DST is literally a tax on a document and that no tax

may be imposed on a pawn ticket.[23] (emphasis and underscoring

supplied)

With respect to petitioners argument against liability for

surcharges and interest that it was in good faith in not payingdocumentary stamp taxes, it having relied on the rulings of respondent

CIR and the CTA that pawn tickets are not subject to documentary

stamp taxes[24] the Court finds the same meritorious.It is settled that good faith and honest belief that one is not subject

to tax on the basis of previous interpretations of government agencies

tasked to implement the tax law are sufficient justification to delete the

imposition of surcharges and interest.[25]

WHEREFORE, the petition is IN PART GRANTED. The May24, 2007 Decision of the Court of Tax Appeals is AFFIRMED with

theMODIFICATION that the assessment deficiency value-added taxes

for the taxable year 1999 and for surcharges and delinquency interest

on deficient Value-Added Tax and Documentary Income Tax are SET

ASIDE.
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SO ORDERED.


Associate Justice

WE CONCUR:

REYNATO S. PUNO

Chief Justice

Chairperson

TERESITA J. LEONARDO-DE

CASTRO

Associate Justice

LUCAS P. BERSAM

Associate Justice

MARTIN S. VILLARAMA, JR.

Associate Justice

CERTIFICATION


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Pursuant to Section 13, Article VIII of the Constitution, I certify

that the conclusions in the above decision had been reached in

consultation before the case was assigned to the writer of the opinion ofthe Courts Division.

REYNATO S. PUNO

Chief Justice

SECOND DIVISION


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COMMISSIONER OF INTERNAL

REVENUE,

Petitioner,

- versus -

JULIETA ARIETE,

Respondent.

G.R. No. 164152

Present:

CARPIO,J., Chairperson,BRION,

DEL CASTILLO,

ABAD, and

PEREZ,JJ.

Promulgated:

January 21, 2010

x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x

D E C I S I O N

CARPIO, J.:

The Case

The Commissioner of Internal Revenue (petitioner) filed this Petition

for Review[1] to reverse the Court of Appeals (CA) Decision[2] dated 14 June

2004 in CA-G.R. SP No. 70693. In the assailed decision, the CA affirmed

the Court of Tax Appeals (CTA) Decision[3]

and Resolution dated 15January 2002 and 3 May 2002, respectively. The CTA cancelled the

assessments issued against Julieta Ariete (respondent) for deficiency income

taxes ofP191,463.04 for the years 1993, 1994, 1995, and 1996.

The Facts


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On 21 May 1997, George P. Mercado filed an Affidavit with the

Special Investigation Division, Revenue Region No. 19, Davao City. The

affidavit attested that respondent earned substantial income in 1994, 1995,

and 1996 without paying income tax.[4]

The Chief of the Special Investigation Division (SID Chief) issued

Mission Order No. 118-97 dated 23 May 1997, directing a Revenue Officer

to conduct preliminary verification of the denunciation made and submit a

progress report. The SID Chief also sent a request to access the BIR records

of Revenue District No. 112, Tagum, Davao del Norte (RDO), inquiring if

the income tax returns of respondent for the years 1993 to 1996 are available

for examination. The RDO replied that respondent had no records of incometax returns for the years 1993 to 1996.[5]

On 15 October 1997, the Revenue Officer submitted a report stating

that respondent admitted her non-filing of income tax returns.[6]

On 2 December 1997, respondent filed her income tax returns for the

years 1993, 1994, 1995, and 1996 under Revenue Memorandum Order

(RMO) No. 59-97 as amended by RMO No. 60-97 and RMO No. 63-97,

otherwise known as the Voluntary Assessment Program (VAP).[7]

On 28 July 1998, the Regional Director issued a Letter of Authority to

investigate respondent for tax purposes covering the years 1993 to 1996.

On 14 October 1998, the Revenue Officer submitted a Memorandum

to the SID Chief recommending that respondent be assessed with deficiency

income taxes for the years 1993 to 1996. On 22 January 1999, fourassessment notices were issued against respondent. The total deficiency

income taxes, inclusive of interests and surcharges amounted

to P191,463.04:

1993 P 6,462.18[8]

1994 47,187.39[9]
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1995 24,729.64[10]

1996 113,083.83[11]

P 191,463.04

On 22 February 1999, respondent filed an Assessment Protest withPrayer for Reinvestigation. On 30 March 1999, the assessment protest was

denied.

On 16 April 1999, respondent offered a compromise settlement but the

same was denied.

Respondent filed a petition for review with the CTA assailing the

Bureau of Internal Revenues (BIR) decision denying with finality the

request for reinvestigation and disapproving her availment of the VAP.

Respondent also contested the issuance of the four assessment notices.

On 15 January 2002, the CTA rendered a decision cancelling the

deficiency assessments. Petitioner filed a motion for reconsideration but the

CTA denied the same in a Resolution dated 3 May 2002.

Petitioner appealed the CTAs decision to the CA. In a decision dated

14 June 2004, the CA affirmed the CTAs decision.

Aggrieved by the CAs decision affirming the cancellation of the tax

deficiency assessments, petitioner elevated the case before this Court.

Ruling of the Court of Tax Appeals

The CTA stated that when respondent filed her income tax returns on 2

December 1997, she was not yet under investigation by the Special

Investigation Division. The Letter of Authority to investigate respondent for

tax purposes was issued only on 28 July 1998. Further, respondents case

was not duly recorded in the Official Registry Book of the BIR before she

availed of the VAP.
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The CTA, quoting RMO Nos. 59-97, 60-97, and 63-97, ruled that the

requirements before a person may be excluded from the coverage of the

VAP are:

a.The person(s) must be under investigation by the Tax FraudDivision and/or the regional Special Investigation Division;

b. The investigation must be as a result of a verified information filed by

an informer under Section 281 of the NIRC, as amended; and

c. The investigation must be duly registered in the Official Registry Book

of the Bureau before the date of availment under the VAP.[12]

The CTA ruled that the conjunctive word and is used; therefore, allof the above requisites must be present before a person may be excluded

from the coverage of the VAP. The CTA explained that the word and is a

conjunction connecting words or phrases expressing the idea that the latter is

to be added or taken along with the first.[13]

The CTA also stated that the rationale behind the VAP is to give

taxpayers a final opportunity to come up with a clean slate before they will

be dealt with strictly for not paying their correct taxes. The CTA noted that

under the RMOs, among the benefits that can be availed by the taxpayer-

applicant are:

1) A bona fide rectification of filing errors and assessment of tax

liabilities under the VAP shall relieve the taxpayer-applicant from

any criminal or civil liability incident to the misdeclaration ofincomes, purchases, deductions, etc., and non-filing of a return.

2) The taxpayer who shall avail of the VAP shall be liable only for thepayment of the basic tax due.[14]

The CTA ruled that even if respondent violated the National Internal

Revenue Code (Tax Code), she was given the chance to rectify her fault and

be absolved of criminal and civil liabilities incident to her non-filing of

income tax by virtue of the VAP. The CTA held that respondent is not
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disqualified to avail of the VAP. Hence, respondent has no more liabilities

after paying the corresponding taxes due.[15]

The CTA found the four assessments issued against respondent to be

erroneous and ordered that the same be cancelled.[16]

Ruling of the Court of Appeals

The CA explained that the persons who may avail of the VAP are

those who are liable to pay any of the above-cited internal revenue taxes forthe above specified period who due to inadvertence or otherwise, has

underdeclared his internal revenue tax liabilities or has not filed the required

tax returns. The CA rationalized that the BIR used a broad language to

define the persons qualified to avail of the VAP because the BIR intended to

reach as many taxpayers as possible subject only to the exclusion of those

cases specially enumerated.

The CA ruled that in applying the rules of statutory construction, theexceptions enumerated in paragraph 3[17] of RMO No. 59-97, as well as those

added in RMO No. 63-97, should be strictly construed and all doubts should

be resolved in favor of the general provision stated under paragraph

2[18] rather than the said exceptions.

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