Cases In Taxation

7/28/2019 Cases In Taxation

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As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and wasbased on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed,the reglementary period which started on the date the assessment was received, viz., January 14, 1965. The periodstarted running again only on April 7, 1965, when the private respondent was definitely informed of the impliedrejection of the said protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23,1965, only 20 days of the reglementary period had been consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not anordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing withAlgue, it held that the said amount had been legitimately paid by the private respondent for actual servicesrendered. The payment was in the form of promotional fees. These were collected by the Payees for their work inthe creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of theproperties of the Philippine Sugar Estate Development Company.

Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to bepersonal holding company income 12 but later conformed to the decision of the respondent court rejecting this

assertion.13

In fact, as the said court found, the amount was earned through the joint efforts of the persons amongwhom it was distributed It has been established that the Philippine Sugar Estate Development Company hadearlier appointed Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuantto such authority, Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez,worked for the formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in it. 14 Ultimately, after its incorporation largely through the promotion of the said persons, this new corporationpurchased the PSEDC properties. 15 For this sale, Algue received as agent a commission of P126,000.00, and it wasfrom this commission that the P75,000.00 promotional fees were paid to the aforenamed individuals. 16

There is no dispute that the payees duly reported their respective shares of the fees in their income tax returnsand paid the corresponding taxes thereon. 17 The Court of Tax Appeals also found, after examining the evidence,that no distribution of dividends was involved. 18

The petitioner claims that these payments are fictitious because most of the payees are members of the samefamily in control of Algue. It is argued that no indication was made as to how such payments were made, whetherby check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests atax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President, AlbertoGuevara, and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum butperiodically and in different amounts as each payee's need arose. 19 It should be remembered that this was afamily corporation where strict business procedures were not applied and immediate issuance of receipts was notrequired. Even so, at the end of the year, when the books were to be closed, each payee made an accounting of allof the fees received by him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to beinformal. This arrangement was understandable, however, in view of the close relationship among the persons inthe family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The totalcommission paid by the Philippine Sugar Estate Development Co. to the private respondent was P125,000.00. 21 After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction. Theamount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it wasthe payees who did practically everything, from the formation of the Vegetable Oil Investment Corporation to theactual purchase by it of the Sugar Estate properties. This finding of the respondent court is in accord with thefollowing provision of the Tax Code:


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SEC. 30. Deductions from gross income .--In computing net income there shall be allowed asdeductions

(a) Expenses:

(1) In general .--All the ordinary and necessary expenses paid or incurred during the taxable yearin carrying on any trade or business, including a reasonable allowance for salaries or othercompensation for personal services actually rendered; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services .--Among the ordinary and necessary expenses paidor incurred in carrying on any trade or business may be included a reasonable allowance forsalaries or other compensation for personal services actually rendered. The test of deductibilityin the case of compensation payments is whether they are reasonable and are, in fact, paymentspurely for service. This test and deductibility in the case of compensation payments is whetherthey are reasonable and are, in fact, payments purely for service. This test and its practicalapplication may be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of services, isnot deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividendon stock. This is likely to occur in the case of a corporation having few stockholders, Practically allof whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid forsimilar services, and the excessive payment correspond or bear a close relationship to thestockholdings of the officers of employees, it would seem likely that the salaries are not paidwholly for services rendered, but the excessive payments are a distribution of earnings upon thestock. . . . (Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they itscontrolling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimeddeduction. In the present case, however, we find that the onus has been discharged satisfactorily. The privaterespondent has proved that the payment of the fees was necessary and reasonable in the light of the effortsexerted by the payees in inducing investors and prominent businessmen to venture in an experimental enterpriseand involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as itwas, sufficiently recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed forlack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing authorities, every person who is able to must contribute his share in therunning of the government. The government for its part, is expected to respond in the form of tangible andintangible benefits intended to improve the lives of the people and enhance their moral and material values. Thissymbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrarymethod of exaction by those in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democraticregimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then thetaxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the taxcollector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has notbeen observed.


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We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with therespondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by theprivate respondent was permitted under the Internal Revenue Code and should therefore not have beendisallowed by the petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. L-29059 December 15, 1987

COMMISSIONER OF INTERNAL REVENUE,petitioner,vs.CEBU PORTLAND CEMENT COMPANY and COURT OF TAX APPEALS,respondents.

CRUZ, J.:

By virtue of a decision of the Court of Tax Appeals rendered on June 21, 1961, as modified on appeal by theSupreme Court on February 27, 1965, the Commissioner of Internal Revenue was ordered to refund to the CebuPortland Cement Company the amount of P 359,408.98, representing overpayments of ad valorem taxes oncement produced and sold by it after October 1957. 1

On March 28, 1968, following denial of motions for reconsideration filed by both the petitioner and the privaterespondent, the latter moved for a writ of execution to enforce the said judgment . 2

The motion was opposed by the petitioner on the ground that the private respondent had an outstanding sales taxliability to which the judgment debt had already been credited. In fact, it was stressed, there was still a balanceowing on the sales taxes in the amount of P 4,789,279.85 plus 28% surcharge. 3

On April 22, 1968, the Court of Tax Appeals * granted the motion, holding that the alleged sales tax liability of theprivate respondent was still being questioned and therefore could not be set-off against the refund. 4

In his petition to review the said resolution, the Commissioner of Internal Revenue claims that the refund shouldbe charged against the tax deficiency of the private respondent on the sales of cement under Section 186 of theTax Code. His position is that cement is a manufactured and not a mineral product and therefore not exempt fromsales taxes. He adds that enforcement of the said tax deficiency was properly effected through his power of distraint of personal property under Sections 316 and 318 5 of the said Code and, moreover, the collection of anynational internal revenue tax may not be enjoined under Section 305, 6 subject only to the exception prescribed inRep. Act No. 1125. 7 This is not applicable to the instant case. The petitioner also denies that the sales tax


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assessments have already prescribed because the prescriptive period should be counted from the filing of the salestax returns, which had not yet been done by the private respondent.

For its part, the private respondent disclaims liability for the sales taxes, on the ground that cement is not amanufactured product but a mineral product. 8 As such, it was exempted from sales taxes under Section 188 of theTax Code after the effectivity of Rep. Act No. 1299 on June 16, 1955, in accordance with Cebu Portland Cement Co.

v. Collector of Internal Revenue,9

decided in 1968. Here Justice Eugenio Angeles declared that "before theeffectivity of Rep. Act No. 1299, amending Section 246 of the National Internal Revenue Code, cement was taxableas a manufactured product under Section 186, in connection with Section 194(4) of the said Code," therebyimplying that it was not considered a manufactured product afterwards. Also, the alleged sales tax deficiency couldnot as yet be enforced against it because the tax assessment was not yet final, the same being still under protestand still to be definitely resolved on the merits. Besides, the assessment had already prescribed, not having beenmade within the reglementary five-year period from the filing of the tax returns. 10

Our ruling is that the sales tax was properly imposed upon the private respondent for the reason that cement hasalways been considered a manufactured product and not a mineral product. This matter was extensively discussedand categorically resolved in Commissioner of Internal Revenue v. Republic Cement Corporation , 11 decided onAugust 10, 1983, where Justice Efren L. Plana, after an exhaustive review of the pertinent cases, declared for a

unanimous Court:

From all the foregoing cases, it is clear that cement qua cement was never considered as amineral product within the meaning of Section 246 of the Tax Code, notwithstanding that at least80% of its components are minerals, for the simple reason that cement is the product of amanufacturing process and is no longer the mineral product contemplated in the Tax Code (i.e.;minerals subjected to simple treatments) for the purpose of imposing the ad valorem tax.

What has apparently encouraged the herein respondents to maintain their present posture is thecase of Cebu Portland Cement Co. v. Collector of Internal Revenue, L-20563, Oct. 29, 1968 (28SCRA 789) penned by Justice Eugenio Angeles. For some portions of that decision give theimpression that Republic Act No. 1299, which amended Section 246, reclassified cement as amineral product that was not subject to sales tax. ...

xxx xxx xxx

After a careful study of the foregoing, we conclude that reliance on the decision penned byJustice Angeles is misplaced. The said decision is no authority for the proposition that after theenactment of Republic Act No. 1299 in 1955 (defining mineral product as things with at least 80%mineral content), cement became a 'mineral product," as distinguished from a "manufacturedproduct," and therefore ceased to be subject to sales tax. It was not necessary for the Court to sorule. It was enough for the Court to say in effect that even assuming Republic Act No. 1299 hadreclassified cement was a mineral product, the reclassification could not be given retrospectiveapplication (so as to justify the refund of sales taxes paid before Republic Act 1299 was adopted)because laws operate prospectively only, unless the legislative intent to the contrary is manifest,which was not so in the case of Republic Act 1266. [The situation would have been different if the Court instead had ruled in favor of refund, in which case it would have been absolutelynecessary (1) to make an unconditional ruling that Republic Act 1299 re-classified cement as amineral product (not subject to sales tax), and (2) to declare the law retroactive, as a basis forgranting refund of sales tax paid before Republic Act 1299.]

In any event, we overrule the CEPOC decision of October 29, 1968 (G.R. No. L-20563) insofar asits pronouncements or any implication therefrom conflict with the instant decision.


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The above views were reiterated in the resolution 12 denying reconsideration of the said decision, thus:

The nature of cement as a "manufactured product" (rather than a "mineral product") is well-settled. The issue has repeatedly presented itself as a threshold question for determining thebasis for computing the ad valorem mining tax to be paid by cement Companies. Nopronouncement was made in these cases that as a "manufactured product" cement is subject to

sales tax because this was not at issue.

The decision sought to be reconsidered here referred to the legislative history of Republic ActNo. 1299 which introduced a definition of the terms "mineral" and "mineral products" in Sec. 246of the Tax Code. Given the legislative intent, the holding in the CEPOC case (G.R. No. L-20563)that cement was subject to sales tax prior to the effectivity f Republic Act No. 1299 cannot beconstrued to mean that, after the law took effect, cement ceased to be so subject to the tax. Toerase any and all misconceptions that may have been spawned by reliance on the case of CebuPortland Cement Co. v. Collector of Internal Revenue , L-20563, October 29, 1968 (28 SCRA 789)penned by Justice Eugenio Angeles, the Court has expressly overruled it insofar as it may conflictwith the decision of August 10, 1983, now subject of these motions for reconsideration.

On the question of prescription, the private respondent claims that the five-year reglementary period for theassessment of its tax liability started from the time it filed its gross sales returns on June 30, 1962. Hence, theassessment for sales taxes made on January 16, 1968 and March 4, 1968, were already out of time. We disagree.This contention must fail for what CEPOC filed was not the sales returns required in Section 183(n) but the ad valorem tax returns required under Section 245 of the Tax Code. As Justice Irene R. Cortes emphasized in theaforestated resolution:

In order to avail itself of the benefits of the five-year prescription period under Section 331 of theTax Code, the taxpayer should have filed the required return for the tax involved, that is, a salestax return. (Butuan Sawmill, Inc. v. CTA, et al., G.R. No. L-21516, April 29, 1966, 16 SCRA 277).Thus CEPOC should have filed sales tax returns of its gross sales for the subject periods. Bothparties admit that returns were made for the ad valorem mining tax. CEPOC argues that saidreturns contain the information necessary for the assessment of the sales tax. The Commissionerdoes not consider such returns as compliance with the requirement for the filing of tax returns soas to start the running of the five-year prescriptive period.

We agree with the Commissioner. It has been held in Butuan Sawmill Inc. v. CTA, supra, that thefiling of an income tax return cannot be considered as substantial compliance with therequirement of filing sales tax returns, in the same way that an income tax return cannot beconsidered as a return for compensating tax for the purpose of computing the period of prescription under Sec. 331. (Citing Bisaya Land Transportation Co., Inc. v. Collector of InternalRevenue, G.R. Nos. L-12100 and L-11812, May 29, 1959). There being no sales tax returns filed byCEPOC, the statute of stations in Sec. 331 did not begin to run against the government. Theassessment made by the Commissioner in 1968 on CEPOC's cement sales during the period fromJuly 1, 1959 to December 31, 1960 is not barred by the five-year prescriptive period. Absent a

return or when the return is false or fraudulent, the applicable period is ten (10) days from thediscovery of the fraud, falsity or omission. The question in this case is: When was CEPOC'somission to file tha return deemed discovered by the government, so as to start the running of said period? 13

The argument that the assessment cannot as yet be enforced because it is still being contested loses sight of theurgency of the need to collect taxes as "the lifeblood of the government." If the payment of taxes could bepostponed by simply questioning their validity, the machinery of the state would grind to a halt and all governmentfunctions would be paralyzed. That is the reason why, save for the exception already noted, the Tax Code provides:


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Sec. 291. Injunction not available to restrain collection of tax. No court shall have authority togrant an injunction to restrain the collection of any national internal revenue tax, fee or chargeimposed by this Code.

It goes without saying that this injunction is available not only when the assessment is already being questioned ina court of justice but more so if, as in the instant case, the challenge to the assessment is still-and only-on the

administrative level. There is all the more reason to apply the rule here because it appears that even after creditingof the refund against the tax deficiency, a balance of more than P 4 million is still due from the private respondent.

To require the petitioner to actually refund to the private respondent the amount of the judgment debt, which hewill later have the right to distrain for payment of its sales tax liability is in our view an Idle ritual. We hold that therespondent Court of Tax Appeals erred in ordering such a charade.

WHEREFORE, the petition is GRANTED. The resolution dated April 22, 1968, in CTA Case No. 786 is SET ASIDE,without any pronouncement as to costs.

SO ORDERED.


Manila

EN BANC

G.R. No. L-18129 January 31, 1963

C. N. HODGES,petitioner-appellant,vs.THE MUNICIPAL BOARD OF THE CITY OF ILOILO, ET AL.,respondents-appellants.

Leon P. Gellada and Norberto J. Posecion for petitioner-appellant.Filemon R. Consolacion for respondents-appellants.

BAUTISTA ANGELO, J.:

On June 13, 1960, the Municipal Board of the City of Iloilo enacted Ordinance No. 33, series of 1960, pursuant tothe provisions of Republic Act No. 2264, known as the Local Autonomy Act, requiring any person, firm, associationor corporation to pay a sales tax of 1/2 of 1% of the selling price of any motor vehicle and prohibiting theregistration of the sale of the motor vehicle in the Motor Vehicles Office of the City of Iloilo unless the tax has beenpaid. It is expressly required therein that the payment of the municipal tax shall be a requirement for registrationand transfer of ownership, the tax to be paid in the office of the city treasurer, and that the tax receipt shall bemade part of the documents to be presented to the Motor Vehicles Office..

C. N. Hodges, who was engaged in the business of buying and selling second-hand motor vehicles in the City of Iloilo, is one of those affected by the enactment of the ordinance, and believing that the same is invalid for havingbeen passed in excess of the authority conferred by law upon the municipal board, he filed on June 27, 1960 apetition for declaratory judgment with the Court of First Instance of Iloilo praying that said ordinance be declaredvoid ab initio, and that the City of Iloilo be ordered to refund to him the amounts he was required to paythereunder without prejudice to determining its validity in an appropriate action.


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The City of Iloilo, in its answer, justified the approval of the ordinance alleging that the same was approved byvirtue of the power and authority granted to it by Section 2 of Republic Act No. 2264, known as the LocalAutonomy Act.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and approved by thisHonorable Court, without prejudice to the parties adducing other evidence to prove their case not covered by this

stipulation of facts. 1wph1.t

A copy of the petition for declaratory judgment was furnished the Solicitor General in accordance with Section 4,Rule 66, of the Rules of Court.

The case having been submitted under a stipulation of facts, the court a quo rendered decision on December 8,1960 holding that that part of the ordinance which requires the owner of a used motor vehicle to pay a sales tax of 1/2 of 1% of the selling price is valid, but the portion thereof which requires the payment of the tax as a conditionprecedent for the registration of the sale in the Motor Vehicles Office is invalid for being repugnant to Section 2(h)of Republic Act 2264.

Both parties have appealed.

Section 2 of Republic Act No. 2264, known as the Local Autonomy Act pursuant to which the ordinance in questionwas approved by the Municipal Board of the City of Iloilo, provides in part:

SEC. 2. Taxation. Any provision of law to the contrary notwithstanding, all chartered cities,municipalities and municipal districts shall have authority to impose municipal license taxes or fees uponpersons engaged in any occupation or business, or exercising privileges in chartered cities, municipalitiesor municipal districts by requiring them to secure licenses at rates fixed by the municipal board or citycouncil of the city, the municipal council of the municipality, or the municipal district council of themunicipal district; to collect fees and charges for services rendered by the city, municipality or municipaldistrict; to regulate and impose reasonable fees for services rendered in connection with any business,profession or occupation being conducted within the city, municipality or municipal district and otherwise

to levy for public purposes, just and uniform taxes, licenses or fees; Provided , That municipalities andmunicipal districts shall, in no case, impose any percentage tax on sales or other taxes in any form basedthereon nor impose taxes on articles subject to specific tax, except gasoline, under the provisions of thenational internal revenue code: ....

It would appear that the City of Iloilo, thru its municipal board, is empowered (a) to impose municipal licenses,taxes or fees upon any person engaged in any occupation or business, or exercising any privilege, in the city; (b) toregulate and impose reasonable fees for services rendered in connection with any business, profession oroccupation conducted within the city; and (c) to levy for public purposes just and uniform taxes, licenses or fees. Itwould also appear that municipalities and municipal districts are prohibited from imposing any percentage tax onsales or other taxes in any form on articles subject to specific tax, except gasoline, under the provisions of theNational Internal Revenue Code.

From the cursory analysis of the provisions above-stated we can readily draw the conclusion that the City of Iloilohas the authority and power to approve the ordinance in question for it merely imposes a percentage tax on thesale of a second-hand motor vehicle that may be carried out within the city by any person, firm, association orcorporation owning or dealing with it who may come within the jurisdiction. Indeed, it cannot be disputed that asales tax of 1/2 of 1% of the selling price of a second-hand motor vehicle comes within the category of a just tax within the provision of Section 2 of Republic Act 2264. It is true that the tax in question is in the form of apercentage tax on the proceeds of the sale of a second-hand motor vehicle which comes within the prohibition of


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the section above adverted to; but the prohibition only refers to municipalities and municipal districts and doesnot comprehend chartered cities as the City of Iloilo.

But the ordinance, besides imposing a percentage tax, also imposes an additional requirement. It provides that thepayment of the tax shall be a requirement for registration and transfer of ownership and that unless the tax is paidthe registration and transfer of ownership cannot be effected in the Motor Vehicles Office of the City. The Court a

quo considered this portion invalid reasoning as follows: "Chartered cities are not authorized to establish anycondition on the registration of Motor vehicles. To require the payment of sales tax before the registration of thesale can be made in the Motor Vehicles Office, is tantamount to imposing a tax for the registration of motorvehicles."

We disagree. The court a quo undoubtedly had in mind the provisions of Section 2(h) of Republic Act No. 2264which prohibits a chartered city from imposing a tax on the registration of motor vehicles and the issuance of allkinds of licenses or permits for the driving thereof, which is one of the exceptions constituting a restriction on thetaxation power granted by said Act to a city, municipality or municipal district. But the requirement of theordinance cannot be considered a tax in the light viewed by the court a quo for the same is merely a coercivemeasure to make the enforcement of the contemplated sales tax more effective. Well-settled is the principle thattaxes are imposed for the support of the government in return for the general advantage and protection which the

government affords to taxpayers and their property (Union Refrigerator Transit Co. v. Com., 26 S. Ct. 36, 199 I[2nd] 160). Taxes are the lifeblood of the government. It is imperative that the power to impose them to beclothed with the implied authority to devise ways and means to accomplish their collection in the most effectivemanner. Without this implied power the end of government may falter or fail.

It is a general and undisputed proposition of law that a municipal corporation possesses and can exercisethe following powers, and no others: First, those granted in express words; second, those necessarily orfairly implied in or incident to the powers expressly granted; third, those essential to the accomplishmentof the declared objects and purposes of the corporation not simply convenient, but indispensable. (Dillon,Municipal Corporations, 5th Ed., Vol. I, p. 449; citing Cook Co. v. McCrea, 93 Ill. 236; Ottawa v. Carey, 108U.S., 110)

Municipal corporations may exercise all powers in the fair intent and purpose of their creation which arereasonably proper to give effect to the powers expressly granted, and in so doing they gave the choice of the means adapted to the ends and are not confined to any one mode of operation. (62 C.J.S., Section117, citing Spahn v. Stewart, 103 S.W. 2d 651, 559, 268 Ky. 97; Riddle v. Ledbetter, 5 S.E., 2d 542, 216 N.C.491)

If the power of municipalities are to be confined to those expressly granted by the law, in many cases theywill be denied even the power of self-preservation as well as of the means necessary to accomplish theessential object of their creation. Hence in giving corporations authority to carry out the powers expresslygranted to them, it is understood that they are also given the power to adopt such means as may benecessary for accomplishing their ends (Sinco, Philippine Political Law, l0th ed., p 688, citing Smith v. NewBern, 16 Am. Rep. 766.)

We are therefore, of the opinion that the ordinance in question is valid it being a valid exercise of the power of taxation granted to Iloilo City by Section 2 of Republic Act No. 2264.

WHEREFORE, the decision appealed from is modified by declaring Ordinance No. 22 of the City of Iloilo valid evenwith regard to the portion which requires the payment of the tax as a condition precedent for the registration of the sale in the Motor Vehicles Office of said city. No costs.


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vehicle from the payment of any lawful and equitable insular, local or municipal property tax imposedthereupon. . . .

Note that under the above section no fees may be exacted or demanded for the operation of any motor vehicleother than those therein provided, the only exception being that which refers to the property tax which may beimposed by a municipal corporation. This provision is all-inclusive in that sense that it applies to all motor vehicles.

In this sense, this provision should be construed as limiting the broad grant of power conferred upon the City of Manila by its Charter to impose taxes. When section 18 of said Charter provides that the City of Manila can imposea tax on motor vehicles operating within its limit, it can only refers to property tax as a different interpretationwould make it repugnant to the Motor Vehicle Law.

Coming now to the ordinance in question, we find that its title refers to it as "An Ordinance Levying a Property Taxon All Motor Vehicles Operating Within the City of Manila", and that in its section 1 it provides that the tax shouldbe 1 per cent ad valorem per annum. It also provides that the proceeds of the tax "shall accrue to the Streets andBridges Funds of the City and shall be expended exclusively for the repair, maintenance and improvement of itsstreets and bridges." Considering the wording used in the ordinance in the light in the purpose for which the tax iscreated, can we consider the tax thus imposed as property tax, as claimed by respondents?

While as a rule an ad valorem tax is a property tax, and this rule is supported by some authorities, the rule shouldnot be taken in its absolute sense if the nature and purpose of the tax as gathered from the context show that it isin effect an excise or a license tax. Thus, it has been held that "If a tax is in its nature an excise, it does not becomea property tax because it is proportioned in amount to the value of the property used in connection with theoccupation, privilege or act which is taxed. Every excise necessarily must finally fall upon and be paid by propertyand so may be indirectly a tax upon property; but if it is really imposed upon the performance of an act, enjoymentof a privilege, or the engaging in an occupation, it will be considered an excise." (26 R. C. L., 35-36.) It has also beenheld that

The character of the tax as a property tax or a license or occupation tax must be determined by itsincidents, and from the natural and legal effect of the language employed in the act or ordinance, and notby the name by which it is described, or by the mode adopted in fixing its amount. If it is clearly a propertytax, it will be so regarded, even though nominally and in form it is a license or occupation tax; and, on theother hand, if the tax is levied upon persons on account of their business, it will be construed as a licenseor occupation tax, even though it is graduated according to the property used in such business, or on thegross receipts of the business. (37 C.J., 172)

The ordinance in question falls under the foregoing rules. While it refers to property tax and it is fixed ad valorem yet we cannot reject the idea that it is merely levied on motor vehicles operating within the City of Manila with themain purpose of raising funds to be expended exclusively for the repair, maintenance and improvement of thestreets and bridges in said city. This is precisely what the Motor Vehicle Law (Act No. 3992) intends to prevent, forthe reason that, under said Act, municipal corporation already participate in the distribution of the proceeds thatare raised for the same purpose of repairing, maintaining and improving bridges and public highway (section 73 of the Motor Vehicle Law). This prohibition is intended to prevent duplication in the imposition of fees for the samepurpose. It is for this reason that we believe that the ordinance in question merely imposes a license fee although

under the cloak of an ad valorem tax to circumvent the prohibition above adverted to.

It is also our opinion that the ordinance infringes the rule of the uniformity of taxation ordained by ourConstitution. Note that the ordinance exacts the tax upon all motor vehicles operating within the City of Manila. Itdoes not distinguish between a motor vehicle for hire and one which is purely for private use. Neither does itdistinguish between a motor vehicle registered in the City of Manila and one registered in another place butoccasionally comes to Manila and uses its streets and public highways. The distinction is important if we note thatthe ordinance intends to burden with the tax only those registered in the City of Manila as may be inferred fromthe word "operating" used therein. The word "operating" denotes a connotation which is akin to a registration, for


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total of P434,232.92. The deficiency arose from the disallowance of the margin fees of Pl,226,647.72 paid by ESSOto the Central Bank on its profit remittances to its New York head office.

ESSO settled this deficiency assessment on August 10, 1964, by applying the tax credit of P221,033.00 representingits overpayment on its income tax for 1959 and paying under protest the additional amount of P213,201.92. OnAugust 13, 1964, it claimed the refund of P39,787.94 as overpayment on the interest on its deficiency income tax.

It argued that the 18% interest should have been imposed not on the total deficiency of P367,944.00 but only onthe amount of P146,961.00, the difference between the total deficiency and its tax credit of P221,033.00.

This claim was denied by the CIR, who insisted on charging the 18% interest on the entire amount of the deficiencytax. On May 4,1965, the CIR also denied the claims of ESSO for refund of the overpayment of its 1959 and 1960income taxes, holding that the margin fees paid to the Central Bank could not be considered taxes or allowed asdeductible business expenses.

ESSO appealed to the CTA and sought the refund of P102,246.00 for 1959, contending that the margin fees weredeductible from gross income either as a tax or as an ordinary and necessary business expense. It also claimed anoverpayment of its tax by P434,232.92 in 1960, for the same reason. Additionally, ESSO argued that even if theamount paid as margin fees were not legally deductible, there was still an overpayment by P39,787.94 for 1960,

representing excess interest.

After trial, the CTA denied petitioner's claim for refund of P102,246.00 for 1959 and P434,234.92 for 1960 butsustained its claim for P39,787.94 as excess interest. This portion of the decision was appealed by the CIR but wasaffirmed by this Court in Commissioner of Internal Revenue v. ESSO, G.R. No. L-28502- 03, promulgated on April 18,1989. ESSO for its part appealed the CTA decision denying its claims for the refund of the margin fees P102,246.00for 1959 and P434,234.92 for 1960. That is the issue now before us.

II

The first question we must settle is whether R.A. 2009, entitled An Act to Authorize the Central Bank of thePhilippines to Establish a Margin Over Banks' Selling Rates of Foreign Exchange, is a police measure or a revenue

measure. If it is a revenue measure, the margin fees paid by the petitioner to the Central Bank on its profitremittances to its New York head office should be deductible from ESSO's gross income under Sec. 30(c) of theNational Internal Revenue Code. This provides that all taxes paid or accrued during or within the taxable year andwhich are related to the taxpayer's trade, business or profession are deductible from gross income.

The petitioner maintains that margin fees are taxes and cites the background and legislative history of the MarginFee Law showing that R.A. 2609 was nothing less than a revival of the 17% excise tax on foreign exchange imposedby R.A. 601. This was a revenue measure formally proposed by President Carlos P. Garcia to Congress as part of,and in order to balance, the budget for 1959-1960. It was enacted by Congress as such and, significantly, properlyoriginated in the House of Representatives. During its two and a half years of existence, the measure was one of the major sources of revenue used to finance the ordinary operating expenditures of the government. It was,moreover, payable out of the General Fund.

On the claimed legislative intent, the Court of Tax Appeals, quoting established principles, pointed out that

We are not unmindful of the rule that opinions expressed in debates, actual proceedings of the legislature, stepstaken in the enactment of a law, or the history of the passage of the law through the legislature, may be resortedto as an aid in the interpretation of a statute which is ambiguous or of doubtful meaning. The courts may take intoconsideration the facts leading up to, coincident with, and in any way connected with, the passage of the act, inorder that they may properly interpret the legislative intent. But it is also well-settled jurisprudence that only inextremely doubtful matters of interpretation does the legislative history of an act of Congress become important.


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As a matter of fact, there may be no resort to the legislative history of the enactment of a statute, the language of which is plain and unambiguous, since such legislative history may only be resorted to for the purpose of solvingdoubt, not for the purpose of creating it. [50 Am. Jur. 328.]

Apart from the above consideration, there are at least two cases where we have held that a margin fee is not a taxbut an exaction designed to curb the excessive demands upon our international reserve.

In Caltex (Phil.) Inc. v. Acting Commissioner of Customs, 2 the Court stated through Justice Jose P. Bengzon:

A margin levy on foreign exchange is a form of exchange control or restriction designed todiscourage imports and encourage exports, and ultimately, 'curtail any excessive demand uponthe international reserve' in order to stabilize the currency. Originally adopted to cope withbalance of payment pressures, exchange restrictions have come to serve various purposes, suchas limiting non-essential imports, protecting domestic industry and when combined with the useof multiple currency rates providing a source of revenue to the government, and are in manydeveloping countries regarded as a more or less inevitable concomitant of their economicdevelopment programs. The different measures of exchange control or restriction cover differentphases of foreign exchange transactions, i.e., in quantitative restriction, the control is on the

amount of foreign exchange allowable. In the case of the margin levy, the immediate impact ison the rate of foreign exchange; in fact, its main function is to control the exchange rate withoutchanging the par value of the peso as fixed in the Bretton Woods Agreement Act. For a membernation is not supposed to alter its exchange rate (at par value) to correct a merely temporarydisequilibrium in its balance of payments. By its nature, the margin levy is part of the rate of exchange as fixed by the government.

As to the contention that the margin levy is a tax on the purchase of foreign exchange and hence should not formpart of the exchange rate, suffice it to state that We have already held the contrary for the reason that a tax islevied to provide revenue for government operations, while the proceeds of the margin fee are applied tostrengthen our country's international reserves.

Earlier, in Chamber of Agriculture and Natural Resources of the Philippines v. Central Bank, 3 the same idea wasexpressed, though in connection with a different levy, through Justice J.B.L. Reyes:

Neither do we find merit in the argument that the 20% retention of exporter's foreign exchangeconstitutes an export tax. A tax is a levy for the purpose of providing revenue for governmentoperations, while the proceeds of the 20% retention, as we have seen, are applied to strengthenthe Central Bank's international reserve.

We conclude then that the margin fee was imposed by the State in the exercise of its police power and not thepower of taxation.

Alternatively, ESSO prays that if margin fees are not taxes, they should nevertheless be considered necessary andordinary business expenses and therefore still deductible from its gross income. The fees were paid for theremittance by ESSO as part of the profits to the head office in the Unites States. Such remittance was anexpenditure necessary and proper for the conduct of its corporate affairs.

The applicable provision is Section 30(a) of the National Internal Revenue Code reading as follows:

SEC. 30. Deductions from gross income in computing net income there shall be allowed asdeductions


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(a) Expenses:

(1) In general . All the ordinary and necessary expenses paid or incurred during the taxableyear in carrying on any trade or business, including a reasonable allowance for salaries or othercompensation for personal services actually rendered; traveling expenses while away from homein the pursuit of a trade or business; and rentals or other payments required to be made as a

condition to the continued use or possession, for the purpose of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.

(2) Expenses allowable to non-resident alien individuals and foreign corporations . In the caseof a non-resident alien individual or a foreign corporation, the expenses deductible are thenecessary expenses paid or incurred in carrying on any business or trade conducted within thePhilippines exclusively.

In the case of Atlas Consolidated Mining and Development Corporation v. Commissioner of Internal Revenue , 4 theCourt laid down the rules on the deductibility of business expenses, thus:

The principle is recognized that when a taxpayer claims a deduction, he must point to some

specific provision of the statute in which that deduction is authorized and must be able to provethat he is entitled to the deduction which the law allows. As previously adverted to, the lawallowing expenses as deduction from gross income for purposes of the income tax is Section30(a) (1) of the National Internal Revenue which allows a deduction of 'all the ordinary andnecessary expenses paid or incurred during the taxable year in carrying on any trade or business.'An item of expenditure, in order to be deductible under this section of the statute, must fallsquarely within its language.

We come, then, to the statutory test of deductibility where it is axiomatic that to be deductibleas a business expense, three conditions are imposed, namely: (1) the expense must be ordinaryand necessary, (2) it must be paid or incurred within the taxable year, and (3) it must be paid orincurred in carrying on a trade or business. In addition, not only must the taxpayer meet thebusiness test, he must substantially prove by evidence or records the deductions claimed underthe law, otherwise, the same will be disallowed. The mere allegation of the taxpayer that an itemof expense is ordinary and necessary does not justify its deduction.

While it is true that there is a number of decisions in the United States delving on theinterpretation of the terms 'ordinary and necessary' as used in the federal tax laws, no adequateor satisfactory definition of those terms is possible. Similarly, this Court has never attempted todefine with precision the terms 'ordinary and necessary.' There are however, certain guidingprinciples worthy of serious consideration in the proper adjudication of conflicting claims.Ordinarily, an expense will be considered 'necessary' where the expenditure is appropriate andhelpful in the development of the taxpayer's business. It is 'ordinary' when it connotes a paymentwhich is normal in relation to the business of the taxpayer and the surrounding circumstances.The term 'ordinary' does not require that the payments be habitual or normal in the sense thatthe same taxpayer will have to make them often; the payment may be unique or non-recurringto the particular taxpayer affected.

There is thus no hard and fast rule on the matter. The right to a deduction depends in each caseon the particular facts and the relation of the payment to the type of business in which thetaxpayer is engaged. The intention of the taxpayer often may be the controlling fact in makingthe determination. Assuming that the expenditure is ordinary and necessary in the operation of the taxpayer's business, the answer to the question as to whether the expenditure is anallowable deduction as a business expense must be determined from the nature of the


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expenditure itself, which in turn depends on the extent and permanency of the workaccomplished by the expenditure.

In the light of the above explanation, we hold that the Court of Tax Appeals did not err when it held on this issue asfollows:

Considering the foregoing test of what constitutes an ordinary and necessary deductibleexpense, it may be asked: Were the margin fees paid by petitioner on its profit remittance to itsHead Office in New York appropriate and helpful in the taxpayer's business in the Philippines?Were the margin fees incurred for purposes proper to the conduct of the affairs of petitioner'sbranch in the Philippines? Or were the margin fees incurred for the purpose of realizing a profitor of minimizing a loss in the Philippines? Obviously not. As stated in the Lopez case, the marginfees are not expenses in connection with the production or earning of petitioner's incomes in thePhilippines. They were expenses incurred in the disposition of said incomes; expenses for theremittance of funds after they have already been earned by petitioner's branch in the Philippinesfor the disposal of its Head Office in New York which is already another distinct and separateincome taxpayer.

x x x

Since the margin fees in question were incurred for the remittance of funds to petitioner's HeadOffice in New York, which is a separate and distinct income taxpayer from the branch in thePhilippines, for its disposal abroad, it can never be said therefore that the margin fees wereappropriate and helpful in the development of petitioner's business in the Philippines exclusivelyor were incurred for purposes proper to the conduct of the affairs of petitioner's branch in thePhilippines exclusively or for the purpose of realizing a profit or of minimizing a loss in thePhilippines exclusively. If at all, the margin fees were incurred for purposes proper to the conductof the corporate affairs of Standard Vacuum Oil Company in New York, but certainly not in thePhilippines.

ESSO has not shown that the remittance to the head office of part of its profits was made in furtherance of its owntrade or business. The petitioner merely presumed that all corporate expenses are necessary and appropriate inthe absence of a showing that they are illegal or ultra vires . This is error. The public respondent is correct when itasserts that "the paramount rule is that claims for deductions are a matter of legislative grace and do not turn onmere equitable considerations ... . The taxpayer in every instance has the burden of justifying the allowance of anydeduction claimed." 5

It is clear that ESSO, having assumed an expense properly attributable to its head office, cannot now claim this asan ordinary and necessary expense paid or incurred in carrying on its own trade or business.

WHEREFORE, the decision of the Court of Tax Appeals denying the petitioner's claims for refund of P102,246.00 for1959 and P434,234.92 for 1960, is AFFIRMED, with costs against the petitioner.

SO ORDERED.


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Manila

THIRD DIVISION

G.R. No. L-36081 April 24, 1989

PROGRESSIVE DEVELOPMENT CORPORATION,petitioner ,vs.QUEZON CITY,respondent.

Jalandoni, Herrera, Del Castillo & Associates for petitioner.

FELICIANO,J.:

On 24 December 1969, the City Council of respondent Quezon City adopted Ordinance No. 7997, Series of 1969,otherwise known as the Market Code of Quezon City, Section 3 of which provided:

Sec. 3. Supervision Fee.- Privately owned and operated public markets shall submit monthly tothe Treasurer's Office, a certified list of stallholders showing the amount of stall fees or rentalspaid daily by each stallholder, ... and shall pay 10% of the gross receipts from stall rentals to theCity, ... , as supervision fee. Failure to submit said list and to pay the corresponding amountwithin the period herein prescribed shall subject the operator to the penalties provided in thisCode ... including revocation of permit to operate. ... .1

The Market Code was thereafter amended by Ordinance No. 9236, Series of 1972, on 23 March 1972, which reads:

SECTION 1. There is hereby imposed a five percent (5 %) tax on gross receipts on rentals or leaseof space in privately-owned public markets in Quezon City.

xxx xxx xxx

SECTION 3. For the effective implementation of this Ordinance, owners of privately owned publicmarkets shall submit ... a monthly certified list of stallholders of lessees of space in their marketsshowing ... :

a. name of stallholder or lessee;

b. amount of rental;

c. period of lease, indicating therein whether the same is on a daily, monthly or yearly basis.

xxx xxx xxx

SECTION 4. ... In case of consistent failure to pay the percentage tax for the (3) consecutivemonths, the City shall revoke the permit of the privately-owned market to operate and/or take


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any other appropriate action or remedy allowed by law for the collection of the overduepercentage tax and surcharge.

xxx xxx xxx2

On 15 July 1972, petitioner Progressive Development Corporation, owner and operator of a public market knownas the "Farmers Market & Shopping Center" filed a Petition for Prohibition with Preliminary Injunction againstrespondent before the then Court of First Instance of Rizal on the ground that the supervision fee or license taximposed by the above-mentioned ordinances is in reality a tax on income which respondent may not impose, thesame being expressly prohibited by Republic Act No. 2264, as amended.

In its Answer, respondent, through the City Fiscal, contended that it had authority to enact the questionedordinances, maintaining that the tax on gross receipts imposed therein is not a tax on income. The SolicitorGeneral also filed an Answer arguing that petitioner, not having paid the ten percent (10%) supervision feeprescribed by Ordinance No. 7997, had no personality to question, and was estopped from questioning, its validity;that the tax on gross receipts was not a tax on income but one imposed for the enjoyment of the privilege toengage in a particular trade or business which was within the power of respondent to impose.

In its Supplemental Petition of 23 September 1972, petitioner alleged having paid under protest the five percent(5%) tax under Ordinance No. 9236 for the months of June to September 1972. Two (2) days later, on 25September 1972, petitioner moved for judgment on the pleadings, alleging that the material facts had beenadmitted by the parties.

On 21 October 1972, the lower court dismissed the petition, ruling 3 that the questioned imposition is not a tax onincome, but rather a privilege tax or license fee which local governments, like respondent, are empowered toimpose and collect.

Having failed to obtain reconsideration of said decision, petitioner came to us on the present Petition for Review.

The only issue to be resolved here is whether the tax imposed by respondent on gross receipts of stall rentals is

properly characterized as partaking of the nature of an income tax or, alternatively, of a license fee.

We begin with the fact that Section 12, Article III of Republic Act No. 537, otherwise known as the Revised Charterof Quezon City, authorizes the City Council:

xxx xxx xxx

(b) To provide for the levy and collection of taxes and other city revenues and apply the same tothe payment of city expenses in accordance with appropriations.

(c) To tax, fix the license fee, and regulate the business of the following:

... preparation and sale of meat, poultry, fish, game, butter, cheese, lard vegetables, bread and other provisions . 4

The scope of legislative authority conferred upon the Quezon City Council in respect of businesses like that of thepetitioner, is comprehensive: the grant of authority is not only" [to] regulate" and "fix the license fee," but also " totax" 5

Moreover, Section 2 of Republic Act No. 2264, as amended, otherwise known as the Local Autonomy Act, providesthat:


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Any provision of law to the contrary notwithstanding, all chartered cities, municipalities andmunicipal districts shall have authority to impose municipal license taxes or fees upon personsengaged in any occupation or business, or exercising privileges in chartered cities , municipalitiesor municipal districts by requiring them to secure licenses at rates fixed by the municipal boardor city council of the city, the municipal council of the municipality, or the municipal districtcouncil of the municipal district; to collect fees and charges for service rendered by the city,

municipality or municipal district; to regulate and impose reasonable fees for services renderedin connection with any business, profession or occupation being conducted within the city,municipality or municipal district and otherwise to levy for public purposes just and uniformtaxes licenses or fees: ... 6

It is now settled that Republic Act No. 2264 confers upon local governments broad taxing authority extending toalmost "everything, excepting those which are mentioned therein," provided that the tax levied is "for publicpurposes, just and uniform," does not transgress any constitutional provision and is not repugnant to a controllingstatute. 7 Both the Local Autonomy Act and the Charter of respondent clearly show that respondent is authorizedto fix the license fee collectible from and regulate the business of petitioner as operator of a privately-ownedpublic market.

Petitioner, however, insist that the "supervision fee" collected from rentals, being a return from capital invested inthe construction of the Farmers Market, practically operates as a tax on income, one of those expressly exceptedfrom respondent's taxing authority, and thus beyond the latter's competence. Petitioner cites the same Section 2of the Local Autonomy Act which goes on to state: 8

... Provided, however, That no city, municipality or municipal district may levy or impose any of the following:

xxx xxx xxx

(g) Taxes on income of any kind whatsoever;

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

To be considered a license fee, the imposition questioned must relate to an occupation or activity that so engagesthe public interest in health, morals, safety and development as to require regulation for the protection andpromotion of such public interest; the imposition must also bear a reasonable relation to the probable expenses of regulation, taking into account not only the costs of direct regulation but also its incidental consequences as well.11 When an activity, occupation or profession is of such a character that inspection or supervision by publicofficials is reasonably necessary for the safeguarding and furtherance of public health, morals and safety, or thegeneral welfare, the legislature may provide that such inspection or supervision or other form of regulation shallbe carried out at the expense of the persons engaged in such occupation or performing such activity, and that noone shall engage in the occupation or carry out the activity until a fee or charge sufficient to cover the cost of theinspection or supervision has been paid. 12 Accordingly, a charge of a fixed sum which bears no relation at all tothe cost of inspection and regulation may be held to be a tax rather than an exercise of the police power. 13


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In the case at bar, the "Farmers Market & Shopping Center" was built by virtue of Resolution No. 7350 passed on30 January 1967 by respondents's local legislative body authorizing petitioner to establish and operate a marketwith a permit to sell fresh meat, fish, poultry and other foodstuffs. 14 The same resolution imposed uponpetitioner, as a condition for continuous operation, the obligation to "abide by and comply with the ordinances,rules and regulations prescribed for the establishment, operation and maintenance of markets in Quezon City." 15

The "Farmers' Market and Shopping Center" being a public market in the' sense of a market open to and invitingthe patronage of the general public, even though privately owned, petitioner's operation thereof required alicense issued by the respondent City, the issuance of which, applying the standards set forth above, was doneprincipally in the exercise of the respondent's police power. 16 The operation of a privately owned market is, ascorrectly noted by the Solicitor General, equivalent to or quite the same as the operation of a government-ownedmarket; both are established for the rendition of service to the general public, which warrants close supervisionand control by the respondent City, 17 for the protection of the health of the public by insuring, e.g., themaintenance of sanitary and hygienic conditions in the market, compliance of all food stuffs sold therein withapplicable food and drug and related standards, for the prevention of fraud and imposition upon the buying public,and so forth.

We believe and so hold that the five percent (5%) tax imposed in Ordinance No. 9236 constitutes, not a tax on

income, not a city income tax (as distinguished from the national income tax imposed by the National InternalRevenue Code) within the meaning of Section 2 (g) of the Local Autonomy Act, but rather a license tax or fee forthe regulation of the business in which the petitioner is engaged. While it is true that the amount imposed by thequestioned ordinances may be considered in determining whether the exaction is really one for revenue orprohibition, instead of one of regulation under the police power, 18 it nevertheless will be presumed to bereasonable. Local' governments are allowed wide discretion in determining the rates of imposable license feeseven in cases of purely police power measures, in the absence of proof as to particular municipal conditions andthe nature of the business being taxed as well as other detailed factors relevant to the issue of arbitrariness orunreasonableness of the questioned rates. 19 Thus:

[A]n ordinance carries with it the presumption of validity. The question of reasonableness thoughis open to judicial inquiry. Much should be left thus to the discretion of municipal authorities.Courts will go slow in writing off an ordinance as unreasonable unless the amount is so excessiveas to be prohibitory, arbitrary, unreasonable, oppressive, or confiscatory. A rule which has gainedacceptance is that factors relevant to such an inquiry are the municipal conditions as a whole andthe nature of the business made subject to imposition. 20

Petitioner has not shown that the rate of the gross receipts tax is so unreasonably large and excessive and sogrossly disproportionate to the costs of the regulatory service being performed by the respondent as to compelthe Court to characterize the imposition as a revenue measure exclusively. The lower court correctly held that thegross receipts from stall rentals have been used only as a basis for computing the fees or taxes due respondent tocover the latter's administrative expenses, i.e., for regulation and supervision of the sale of foodstuffs to thepublic. The use of the gross amount of stall rentals as basis for determining the collectible amount of license tax,does not by itself, upon the one hand, convert or render the license tax into a prohibited city tax on income. Uponthe other hand, it has not been suggested that such basis has no reasonable relationship to the probable costs of

regulation and supervision of the petitioner's kind of business. For, ordinarily, the higher the amount of stallrentals, the higher the aggregate volume of foodstuffs and related items sold in petitioner's privately ownedmarket; and the higher the volume of goods sold in such private market, the greater the extent and frequency of inspection and supervision that may be reasonably required in the interest of the buying public. Moreover, whatwe started with should be recalled here: the authority conferred upon the respondent's City Council is not merely"to regulate" but also embraces the power "to tax" the petitioner's business.

Finally, petitioner argues that respondent is without power to impose a gross receipts tax for revenue purposesabsent an express grant from the national government. As a general rule, there must be a statutory grant for a


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local government unit to impose lawfully a gross receipts tax, that unit not having the inherent power of taxation.21 The rule, however, finds no application in the instant case where what is involved is an exercise of, principally,the regulatory power of the respondent City and where that regulatory power is expressly accompanied by thetaxing power.

ACCORDINGLY, the Decision of the then Court of First Instance of Rizal, Quezon City, Branch 18, is hereby

AFFIRMED and the Court Resolved to DENY the Petition for lack of merit.

SO ORDERED.


Manila

EN BANC

G.R. No. L- 41383 August 15, 1988

PHILIPPINE AIRLINES, INC.,plaintiff-appellant,vs.ROMEO F. EDU in his capacity as Land Transportation Commissioner, and UBALDO CARBONELL, in his capacity asNational Treasurer, defendants-appellants.

Ricardo V. Puno, Jr. and Conrado A. Boro for plaintiff-appellant.

GUTIERREZ, JR., J.:

What is the nature of motor vehicle registration fees? Are they taxes or regulatory fees?

This question has been brought before this Court in the past. The parties are, in effect, asking for a re-examinationof the latest decision on this issue.

This appeal was certified to us as one involving a pure question of law by the Court of Appeals in a case where thethen Court of First Instance of Rizal dismissed the portion-about complaint for refund of registration fees paidunder protest.

The disputed registration fees were imposed by the appellee, Commissioner Romeo F. Elevate pursuant to Section8, Republic Act No. 4136, otherwise known as the Land Transportation and Traffic Code.

The Philippine Airlines (PAL) is a corporation organized and existing under the laws of the Philippines and engagedin the air transportation business under a legislative franchise, Act No. 42739, as amended by Republic Act Nos.25). and 269.1 Under its franchise, PAL is exempt from the payment of taxes. The pertinent provision of thefranchise provides as follows:


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Section 13. In consideration of the franchise and rights hereby granted, the grantee shall pay tothe National Government during the life of this franchise a tax of two per cent of the grossrevenue or gross earning derived by the grantee from its operations under this franchise. Suchtax shall be due and payable quarterly and shall be in lieu of all taxes of any kind, nature ordescription, levied, established or collected by any municipal, provincial or national automobiles,Provided, that if, after the audit of the accounts of the grantee by the Commissioner of Internal

Revenue, a deficiency tax is shown to be due, the deficiency tax shall be payable within the tendays from the receipt of the assessment. The grantee shall pay the tax on its real property inconformity with existing law.

On the strength of an opinion of the Secretary of Justice (Op. No. 307, series of 1956) PAL has, since 1956, notbeen paying motor vehicle registration fees.

Sometime in 1971, however, appellee Commissioner Romeo F. Elevate issued a regulation requiring all tax exemptentities, among them PAL to pay motor vehicle registration fees.

Despite PAL's protestations, the appellee refused to register the appellant's motor vehicles unless the amountsimposed under Republic Act 4136 were paid. The appellant thus paid, under protest, the amount of P19,529.75 as

registration fees of its motor vehicles.

After paying under protest, PAL through counsel, wrote a letter dated May 19,1971, to Commissioner Edudemanding a refund of the amounts paid, invoking the ruling in Calalang v. Lorenzo (97 Phil. 212 [1951]) where itwas held that motor vehicle registration fees are in reality taxes from the payment of which PAL is exempt byvirtue of its legislative franchise.

Appellee Edu denied the request for refund basing his action on the decision in Republic v. Philippine Rabbit BusLines, Inc ., (32 SCRA 211, March 30, 1970) to the effect that motor vehicle registration fees are regulatoryexceptional. and not revenue measures and, therefore, do not come within the exemption granted to PAL? underits franchise. Hence, PAL filed the complaint against Land Transportation Commissioner Romeo F. Edu and NationalTreasurer Ubaldo Carbonell with the Court of First Instance of Rizal, Branch 18 where it was docketed as Civil CaseNo. Q-15862.

Appellee Romeo F. Elevate in his capacity as LTC Commissioner, and LOI Carbonell in his capacity as NationalTreasurer, filed a motion to dismiss alleging that the complaint states no cause of action. In support of the motionto dismiss, defendants repatriation the ruling in Republic v. Philippine Rabbit Bus Lines, Inc., (supra) thatregistration fees of motor vehicles are not taxes, but regulatory fees imposed as an incident of the exercise of thepolice power of the state. They contended that while Act 4271 exempts PAL from the payment of any tax excepttwo per cent on its gross revenue or earnings, it does not exempt the plaintiff from paying regulatory fees, such asmotor vehicle registration fees. The resolution of the motion to dismiss was deferred by the Court until after trialon the merits.

On April 24, 1973, the trial court rendered a decision dismissing the appellant's complaint "moved by the laterruling laid down by the Supreme Court in the case or Republic v. Philippine Rabbit Bus Lines, Inc. , (supra) ." Fromthis judgment, PAL appealed to the Court of Appeals which certified the case to us.

Calalang v. Lorenzo (supra) and Republic v. Philippine Rabbit Bus Lines, Inc. (supra) cited by PAL and CommissionerRomeo F. Edu respectively, discuss the main points of contention in the case at bar.

Resolving the issue in the Philippine Rabbit case, this Court held:


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"The registration fee which defendant-appellee had to pay was imposed by Section 8 of theRevised Motor Vehicle Law (Republic Act No. 587 [1950]). Its heading speaks of "registrationfees." The term is repeated four times in the body thereof. Equally so, mention is made of the"fee for registration." ( Ibid. , Subsection G) A subsection starts with a categorical statement "Nofees shall be charged." ( lbid., Subsection H) The conclusion is difficult to resist therefore that theMotor Vehicle Act requires the payment not of a tax but of a registration fee under the police

power. Hence the incipient, of the section relied upon by defendant-appellee under the Back PayLaw, It is not held liable for a tax but for a registration fee. It therefore cannot make use of abackpay certificate to meet such an obligation.

Any vestige of any doubt as to the correctness of the above conclusion should be dissipated byRepublic Act No. 5448. ([1968]. Section 3 thereof as to the imposition of additional tax onprivately-owned passenger automobiles, motorcycles and scooters was amended by Republic ActNo. 5470 which is (sic) approved on May 30, 1969.) A special science fund was thereby createdand its title expressly sets forth that a tax on privately-owned passenger automobiles,motorcycles and scooters was imposed. The rates thereof were provided for in its Section 3which clearly specifies the" Philippine tax."(Cooley to be paid as distinguished from theregistration fee under the Motor Vehicle Act. There cannot be any clearer expression thereforeof the legislative will, even on the assumption that the earlier legislation could by subdivision thepoint be susceptible of the interpretation that a tax rather than a fee was levied. What is thusmost apparent is that where the legislative body relies on its authority to tax it expressly sostates, and where it is enacting a regulatory measure, it is equally exploded (at p. 22,1969

In direct refutation is the ruling in Calalang v. Lorenzo (supra) , where the Court, on the other hand, held:

The charges prescribed by the Revised Motor Vehicle Law for the registration of motor vehiclesare in section 8 of that law called "fees". But the appellation is no impediment to their beingconsidered taxes if taxes they really are. For not the name but the object of the chargedetermines whether it is a tax or a fee. Geveia speaking, taxes are for revenue, whereas fees areexceptional. for purposes of regulation and inspection and are for that reason limited in amountto what is necessary to cover the cost of the services rendered in that connection. Hence, acharge fixed by statute for the service to be person,-When by an officer, where the charge has norelation to the value of the services performed and where the amount collected eventually findsits way into the treasury of the branch of the government whose officer or officers collected thechauffeur, is not a fee but a tax."(Cooley on Taxation, Vol. 1, 4th ed., p. 110.)

From the data submitted in the court below, it appears that the expenditures of the MotorVehicle Office are but a small portion about 5 per centum of the total collections from motorvehicle registration fees. And as proof that the money collected is not intended for theexpenditures of that office, the law itself provides that all such money shall accrue to the fundsfor the construction and maintenance of public roads, streets and bridges. It is thus obvious thatthe fees are not collected for regulatory purposes, that is to say, as an incident to theenforcement of regulations governing the operation of motor vehicles on public highways, for

their express object is to provide revenue with which the Government is to discharge one of itsprincipal functions the construction and maintenance of public highways for everybody's use.They are veritable taxes, not merely fees.

As a matter of fact, the Revised Motor Vehicle Law itself now regards those fees as taxes, for itprovides that "no other taxes or fees than those prescribed in this Act shall be imposed," thusimplying that the charges therein imposed though called fees are of the category of taxes. Theprovision is contained in section 70, of subsection (b), of the law, as amended by section 17 of Republic Act 587, which reads:


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Sec. 70(b) No other taxes or fees than those prescribed in this Act shall beimposed for the registration or operation or on the ownership of any motorvehicle, or for the exercise of the profession of chauffeur, by any municipalcorporation, the provisions of any city charter to the contrary notwithstanding:Provided, however , That any provincial board, city or municipal council orboard, or other competent authority may exact and collect such reasonable

and equitable toll fees for the use of such bridges and ferries, within theirrespective jurisdiction, as may be authorized and approved by the Secretary of Public Works and Communications, and also for the use of such public roads, asmay be authorized by the President of the Philippines upon therecommendation of the Secretary of Public Works and Communications, but innone of these cases, shall any toll fee." be charged or collected until and unlessthe approved schedule of tolls shall have been posted levied, in a conspicuousplace at such toll station. (at pp. 213-214)

Motor vehicle registration fees were matters originally governed by the Revised Motor Vehicle Law (Act 3992[19511) as amended by Commonwealth Act 123 and Republic Acts Nos. 587 and 1621.

Today, the matter is governed by Rep. Act 4136 [1968]), otherwise known as the Land Transportation Code, (asamended by Rep. Acts Nos. 5715 and 64-67, P.D. Nos. 382, 843, 896, 110.) and BP Blg. 43, 74 and 398).

Section 73 of Commonwealth Act 123 (which amended Sec. 73 of Act 3992 and remained unsegregated, by Rep.Act Nos. 587 and 1603) states:

Section 73. Disposal of moneys collected .Twenty per centum of the money collected under theprovisions of this Act shall accrue to the road and bridge funds of the different provinces andchartered cities in proportion to the centum shall during the next previous year and theremaining eighty per centum shall be deposited in the Philippine Treasury to create a specialfund for the construction and maintenance of national and provincial roads and bridges. as wellas the streets and bridges in the chartered cities to be alloted by the Secretary of Public Worksand Communications for projects recommended by the Director of Public Works in the differentprovinces and chartered cities. ....

Presently, Sec. 61 of the Land Transportation and Traffic Code provides:

Sec. 61. Disposal of Mortgage. Collected Monies collected under the provisions of this Act shallbe deposited in a special trust account in the National Treasury to constitute the Highway SpecialFund, which shall be apportioned and expended in accordance with the provisions of the"Philippine Highway Act of 1935. "Provided, however, That the amount necessary to maintain andequip the Land Transportation Commission but not to exceed twenty per cent of the totalcollection during one year, shall be set aside for the purpose. (As amended by RA 64-67,approved August 6, 1971).

It appears clear from the above provisions that the legislative intent and purpose behind the law requiring ownersof vehicles to pay for their registration is mainly to raise funds for the construction and maintenance of highwaysand to a much lesser degree, pay for the operating expenses of the administering agency. On the other hand, thePhilippine Rabbit case mentions a presumption arising from the use of the term "fees," which appears to havebeen favored by the legislature to distinguish fees from other taxes such as those mentioned in Section 13 of Rep.Act 4136 which reads:


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Sec. 13. Payment of taxes upon registration .No original registration of motor vehicles subjectto payment of taxes, customs s duties or other charges shall be accepted unless proof of payment of the taxes due thereon has been presented to the Commission.

referring to taxes other than those imposed on the registration, operation or ownership of a motor vehicle (Sec.59, b, Rep. Act 4136, as amended).

Fees may be properly regarded as taxes even though they also serve as an instrument of regulation, As stated by aformer presiding judge of the Court of Tax Appeals and writer on various aspects of taxpayers

It is possible for an exaction to be both tax arose. regulation. License fees are changes. looked toas a source of revenue as well as a means of regulation (Sonzinky v. U.S., 300 U.S. 506) This istrue, for example, of automobile license fees. Isabela such case, the fees may properly beregarded as taxes even though they also serve as an instrument of regulation. If the purpose isprimarily revenue, or if revenue is at least one of the real and substantial purposes, then theexaction is properly called a tax. (1955 CCH Fed. tax Course, Par. 3101, citing Cooley on Taxation(2nd Ed.) 592, 593; Calalang v. Lorenzo. 97 Phil. 213-214) Lutz v. Araneta 98 Phil. 198.) Theseexactions are sometimes called regulatory taxes. (See Secs. 4701, 4711, 4741, 4801, 4811, 4851,

and 4881, U.S. Internal Revenue Code of 1954, which classify taxes on tobacco and alcohol asregulatory taxes.) (Umali, Reviewer in Taxation, 1980, pp. 12-13, citing Cooley on Taxation, 2ndEdition, 591-593).

Indeed, taxation may be made the implement of the state's police power (Lutz v. Araneta, 98 Phil. 148).

If the purpose is primarily revenue, or if revenue is, at least, one of the real and substantial purposes, then theexaction is properly called a tax (Umali, Id.) Such is the case of motor vehicle registration fees. The conclusionsbecome inescapable in view of Section 70(b) of Rep. Act 587 quoted in the Calalang case. The same provisionappears as Section 591-593). in the Land Transportation code. It is patent therefrom that the legislators had inmind a regulatory tax as the law refers to the imposition on the registration, operation or ownership of a motorvehicle as a " tax or fee ." Though nowhere in Rep. Act 4136 does the law specifically state that the imposition is atax, Section 591-593). speaks of "taxes." or fees ... for the registration or operation or on the ownership of anymotor vehicle, or for the exercise of the profession of chauffeur ..." making the intent to impose a tax moreapparent. Thus, even Rep. Act 5448 cited by the respondents, speak of an "additional" tax," where the law couldhave referred to an original tax and not one in addition to the tax already imposed on the registration, operation,or ownership of a motor vehicle under Rep. Act 41383. Simply put, if the exaction under Rep. Act 4136 weremerely a regulatory fee, the imposition in Rep. Act 5448 need not be an "additional" tax. Rep. Act 4136 also speaksof other "fees," such as the special permit fees for certain types of motor vehicles (Sec. 10) and additional fees forchange of registration (Sec. 11). These are not to be understood as taxes because such fees are very minimal to berevenue-raising. Thus, they are not mentioned by Sec. 591-593). of the Code as taxes like the motor vehicleregistration fee and chauffers' license fee. Such fees are to go into the expenditures of the Land TransportationCommission as provided for in the last proviso of see. 61, aforequoted.

It is quite apparent that vehicle registration fees were originally simple exceptional. intended only for rigidlypurposes in the exercise of the State's police powers. Over the years, however, as vehicular traffic exploded innumber and motor vehicles became absolute necessities without which modem life as we know it would standstill, Congress found the registration of vehicles a very convenient way of raising much needed revenues. Withoutchanging the earlier deputy. of registration payments as "fees," their nature has become that of "taxes."

In view of the foregoing, we rule that motor vehicle registration fees as at present exacted pursuant to the LandTransportation and Traffic Code are actually taxes intended for additional revenues. of government even if onefifth or less of the amount collected is set aside for the operating expenses of the agency administering theprogram.


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May the respondent administrative agency be required to refund the amounts stated in the complaint of PAL?

The answer is NO.

The claim for refund is made for payments given in 1971. I t is not clear from the records as to what payments weremade in succeeding years. We have ruled that Section 24 of Rep. Act No. 5448 dated June 27, 1968, repealed allearlier tax exemptions Of corporate taxpayers found in legislative franchises similar to that invoked by PAL in thiscase.

In Radio Communications of the Philippines, Inc. v. Court of Tax Appeals , et al. (G.R. No. 615)." July 11, 1985), thisCourt ruled:

Under its original franchise, Republic Act No. 21); enacted in 1957, petitioner RadioCommunications of the Philippines, Inc., was subject to both the franchise tax and income tax. In1964, however, petitioner's franchise was amended by Republic Act No. 41-42). to the effect thatits franchise tax of one and one-half percentum (1-1/2%) of all gross receipts was provided as "inlieu of any and all taxes of any kind, nature, or description levied, established, or collected by anyauthority whatsoever, municipal, provincial, or national from which taxes the grantee is hereby

expressly exempted." The issue raised to this Court now is the validity of the respondent court'sdecision which ruled that the exemption under Republic Act No. 41-42). was repealed by Section24 of Republic Act No. 5448 dated June 27, 1968 which reads:

"(d) The provisions of existing special or general laws to the contrarynotwithstanding, all corporate taxpayers not specifically exempt under Sections24 (c) (1) of this Code shall pay the rates provided in this section. Allcorporations, agencies, or instrumentalities owned or controlled by thegovernment, including the Government Service Insurance System and theSocial Security System but excluding educational institutions, shall pay suchrate of tax upon their taxable net income as are imposed by this section uponassociations or corporations engaged in a similar business or industry. "

An examination of Section 24 of the Tax Code as amended shows clearly that the law intended allcorporate taxpayers to pay income tax as provided by the statute. There can be no doubt as tothe power of Congress to repeal the earlier exemption it granted. Article XIV, Section 8 of the1935 Constitution and Article XIV, Section 5 of the Constitution as amended in 1973 expresslyprovide that no franchise shall be granted to any individual, firm, or corporation except underthe condition that it shall be subject to amendment, alteration, or repeal by the legislature whenthe public interest so requires. There is no question as to the public interest involved. Thecountry needs increased revenues. The repealing clause is clear and unambiguous. There is alisting of entities entitled to tax exemption. The petitioner is not covered by the provision.Considering the foregoing, the Court Resolved to DENY the petition for lack of merit. The decisionof the respondent court is affirmed.

Any registration fees collected between June 27, 1968 and April 9, 1979, were correctly imposed because the taxexemption in the franchise of PAL was repealed during the period. However, an amended franchise was given toPAL in 1979. Section 13 of Presidential Decree No. 1590, now provides:

In consideration of the franchise and rights hereby granted, the grantee shall pay to thePhilippine Government during the lifetime of this franchise whichever of subsections (a) and (b)hereunder will result in a lower taxes.)


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Manila

EN BANC

G.R. No. L-29646 November 10, 1978

MAYOR ANTONIO J. VILLEGAS,petitioner,vs.HIU CHIONG TSAI PAO HO and JUDGE FRANCISCO ARCA,respondents.

Angel C. Cruz, Gregorio A. Ejercito, Felix C. Chaves & Jose Laureta for petitioner.

Sotero H. Laurel for respondents.

FERNANDEZ, J.:

This is a petition for certiorari to review tile decision dated September 17, 1968 of respondent Judge FranciscoArca of the Court of First Instance of Manila, Branch I, in Civil Case No. 72797, the dispositive portion of winchreads.

Wherefore, judgment is hereby rendered in favor of the petitioner and against the respondents,declaring Ordinance No. 6 37 of the City of Manila null and void. The preliminary injunction ismade permanent. No pronouncement as to cost.

SO ORDERED.

Manila, Philippines, September 17, 1968.

(SGD.)FRANCISCOARCA

The controverted Ordinance No. 6537 was passed by the Municipal Board of Manila on February 22, 1968 andsigned by the herein petitioner Mayor Antonio J. Villegas of Manila on March 27, 1968. 2

City Ordinance No. 6537 is entitled:


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AN ORDINANCE MAKING IT UNLAWFUL FOR ANY PERSON NOT A CITIZEN OF THE PHILIPPINES TOBE EMPLOYED IN ANY PLACE OF EMPLOYMENT OR TO BE ENGAGED IN ANY KIND OF TRADE,BUSINESS OR OCCUPATION WITHIN THE CITY OF MANILA WITHOUT FIRST SECURING ANEMPLOYMENT PERMIT FROM THE MAYOR OF MANILA; AND FOR OTHER PURPOSES.3

Section 1 of said Ordinance No. 6537 4 prohibits aliens from being employed or to engage or participate in any

position or occupation or business enumerated therein, whether permanent, temporary or casual, without firstsecuring an employment permit from the Mayor of Manila and paying the permit fee of P50.00 except personsemployed in the diplomat

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