COMMISSIONER OF INTERNAL REVENUE AND COMMISSIONER OF CUSTOMS, PETITIONERS-APPELLANTS, VS. PHILIPPINE ACE LINES, INC., RESPONDENT-APPELLEE.

On appeal by the Government from the decision – rendered jointly
in Tax Cases Nos. 964 & 984 – of the Court of Tax Appeals, reversing the
rulings of the Commissioner of Internal Revenue holding the Philippine Ace Lines,
Inc. liable to pay the aggregate amount of P1,407,724.57 as compensating taxes on four (4) ocean-going cargo vessels
acquired by said company from the Reparation Commission of the Philippines, and
of the Commissioner of Customs to place the four vessels under customs custody
until the aforementioned amount claimed by the Govern­ment was first paid.

The antecedent facts of the case are not in dispute and may be
summarized briefly as follows:

Under date of January 23, 1959, the Reparation Commission agreed to sell to the Philippine Ace Lines the
cargo vessels M/S YAKAL and M/S MOLAVE which were procured by the former from
Japan for the end-use of the latter under the Philippine-Japanese Reparations
Agreement of May 9, 1956, at the agreed prices of P4,283,241.48
and P4,292,457.48, respectively.  Similar
agreements involving two (2) other ocean-going cargo vessels were subsequently
entered into by and between the same parties: 
one, dated November 11, 1959, referring to the purchase and sale of M/S
TINDALO for the price of P7,054,177.78 and, the other,
concerning the purchase and sale of M/S NARRA under date of December 14, 1959,
for the price of P3,599,995.44.  All these
agreements – invariably denominated as “Contract of Conditional Purchase
and Sale of Reparation Goods” – stipulated, among others, that the
Reparations Commission retains title and ownership of the above-described
vessels until they were fully paid for; and that the purchase prices of the vessels were
to be paid by Philippine Ace Lines to the Reparations Commission under deferred
payment plans in ten (10) equal annual installments.

The four (4) vessels referred to were thereafter delivered to
Philippine Ace Lines in Japan; they were taken to the Philippines where they
were registered in the Bureau of Customs in the name of the Reparations
Commission; and thereafter, the vessels were operated and utilized by
Philippine Ace Lines in its shipping business, plying between ports of foreign
countries and the Philippines.

Sometime later, however, the Commissioner of Internal Revenue
assessed against the Philippine Ace Lines the amounts of P304,428.00,
P256,275.00, P499,948.10 and P305,073.47 as compensating taxes on the M/S
YAKAL, M/S NARRA, M/S TINDALO and M/S MOLAVE, respectively, and demanded
payment of the said amounts.  The
Commissioner of Customs, joining the Commissioner of Internal Revenue, then
placed the vessels under customs custody at the different ports of the Philippines
where they were found at the time, and refused to give due course to the
“clearance” of said vessels as requested by their respective owner
and operator – Reparations Commission and Philippine Ace Lines – unless the
compensating taxes assessed against the latter were first paid to the
Commissioner of Internal Revenue.   Philippine
Ace Lines protested said actions of the Commissioners of Internal Revenue and
of Customs, alleging that the legal title and ownership of the vessels operated
by it were still vested with the Reparations Commission which, under Section 14
of the Reparations Act,^[1]
was exempt from payment of all duties, fees and taxes on all reparations goods
obtained by it; but the said officials rejected the protest and ruled that the
compensating taxes should first be paid, per directive to that effect by the
Secretary of Finance.  Subsequent
protests – calling the attention of the Commissioner
of Internal Revenue and the Commissioner of Customs to the substantial
loss and irreparable injury it has suffered by the tying up of the four ships
in port – also proved futile.  Offshoots
of the contro­versy,
Philippine Ace Lines interposed two (2) separate appeals (petitions for
review) from the above rulings or decisions of the Commissioner of Internal
Revenue and the Commissioner of Customs, to the Court of Tax Appeals where they
were docketed as C.T.A. Case No. 964, involving M/S YAKAL and M/S NARRA, and
C.T.A. Case No. 984, concerning M/S TINDALO and M/S MOLAVE.

While the cases were pending trial, Philippine Ace Lines
petitioned the court a quo to enjoin the collection of the
compensating tax assessed against it and after hearing, writs of preliminary
injunction were issued upon the filing of surety bonds to guaran­tee payment of
the amounts claimed.

In the meantime, Congress enacted Republic Act No. 3079 (effective June 17, 1961) which amended Re­public Act No. 1789,
otherwise known as the Reparations
Act, and provided as follows:

“Sec. 14. Exemption from tax.- All repations goods obtained by
the Government shall be exempt from the
payment of all duties, fees and taxes. 
Reparations goods obtained by private parties shall be exempt from the
payment of customs du­ties, compensating tax, consular fees and the
special import tax.

x        x          x          x          x

“Sec. 20. This Act shall take effect
upon its approval, except that the amendment contained in section seven hereof
relating to the requirements for procurement orders including the requirement
of downpayment by private applicant end-users shall
not apply to procurement orders already duly issued and verified at the time of
the passage of this amendatory Act, and except further that the amendment
contained in section ten relating to
the insurance of the reparations goods by the end-users upon delivery shall
apply also to goods covered by contracts already entered into by the Commission
and the end-user prior to the approval of this amendatory Act as well
as goods already delivered to the end-user, and except further that the
amendments con­tained in sections eleven and twelve hereof relating to the
terms of the installment payments on capital goods disposed of to private
parties, and the execution of a performance bond before delivery of reparations
goods, shall not apply to contracts for the utilization of reparations goods
already entered into by the Commission and the end-users prior to the approval
of this amendatory Act:  Provided,
That any end-user may apply for the renovation
of his utilization contract with the Commission in order to avail of any
provision of this amendatory Act which is more favorable to an applicant end-user than has hereto­fore been
granted in  like manner and to the same
extent as an end-user filling his
application after the approval of this amendatory Act, and the
Commission may agree to such renovation
on condition that the end-user shall voluntarily assume all the new
obligations provided for in this amendatory Act.” [Underscoring supplied]

Invoking the favorable
provisions of the new law (Republic Act No. 3079, above-quoted), Philippine Ace
Lines then entered into “Renovated Contract(s) of Conditional Purchase and
Sale of Reparations Goods” with the Reparations Commission, covering the
four(4) cargo vessels it had
previously acquired from the latter under the Reparations Act.  Thereafter, the said company filed a
“Supplement to the Petition for Review” in each of the above entitled
cases before the Court of Tax Appeals, submitting therewith copies of the said
renovated contracts it had entered with
the Repa­rations Commission regarding the purchase and sale of M/S MOLAVE, M/S
TINDALO, M/S YAKAL and M/S NARRA, with the allegation that “expressly
implementing section 14 of Republic Act No. 3079 in the aforesaid
renovated contracts”, the Reparations Commission and the Philip­pine Ace
Lines have agreed as follows:

“NOW THEREFORE, for and in consideration of the premises above
stated and of the payments to be made by the herein Conditional Vendee as stipulated
in Annex ‘B’ hereof which is made
an integral part of this contract, the parties herein agree to execute this
renovation of contract of Conditional Purchase and Sale and the Conditional
Vendor hereby transfers and conveys
unto the herein Conditional Vendee the ocean-going vessels above-described x x x; subject further to the pertinent provisions of Republic
Act No. 1789 as amended, including particularly the exempting provisions of
Section 14 thereof relative to the exemption from payment of compensating tax which the herein Conditional Vendee, as an imple­mented machinery, do hereby, by these presents,
implement.  x x x“

In their “Answer to
Supplement to Petition for Review” filed with the court below by counsel
for the Commissioner of Internal Revenue and the Commissioner of Customs, the
foregoing allegation was admitted.  They
claimed, however, that even if Philippine Ace Lines and the Reparations
Commission have agreed to implement the provisions of Section 14
of Republic Act No. 1789, as amended
by Republic Act No. 3079, in the “Renovated Contract of Conditional
Purchase and Sale of Reparations
Goods” entered into between them, such im­plementation did not relieve the
Philippine Ace Lines from the payment of the compensating taxes in
question.  The parties thereafter
submitted the cases for decision upon a stipulation of facts containing, substantially, the facts as above set
forth.

On January
25, 1963, the Court of Tax Appeals rendered a joint decision in the
two cases, reversing the rulings of the Commissioner of Internal Revenue and
the Commissioner of Customs, in the following
ra­tionale:

“The sole issue presented for our consideration is whether or
not petitioner is liable for the compensating tax on the four ocean-going
vessels in question.  Petitioner claims
that it is not liable on the grounds that said vessels are still owned by the
Reparations Commission and that, assuming that it was liable therefor under Section 190 of the National Internal Revenue
Code, in relation to Section 14 of Republic Act 1789 before its amendment, it
is now exempt from said tax by virtue of Section 20 of Republic Act No. 3079 in
relation to Section 14 of Republic Act No. 1789, as amended.  On the other hand, respondent claims that
petitioner is liable and that the latter’s liability is not affect­ed by the
exemption provision of the new law.

x        x          x          x

“The Government does not deny the fact that petitioner has
complied with all the requirements of law in order that it may avail itself of
all the favorable provisions granted in Republic Act No. 3079.  It is, however, contended that the favorable
provisions mentioned in Section 20 of
said Act which may be availed of by an
applicant for renovation of his utilization contract with the
Reparations Commission do not include exemption from compensating tax be cause
such exemption is not expressly
stated in the law.  In providing that the
favorable provisions of Republic Act No. 3079 shall be available to applicants
for renovation of their utilization contracts, on condition that said
applicants shall voluntarily assume all the new obligations provi­ded in the
new law, the law intends to place persons who acquired reparations goods before
the enactment of the amendatory Act on the same footing as those who acquire
reparations goods after its enactment. 
This is so because of the provision that once an application for
renovation of a utilization contract has been approved,
the favorable provisions of said Act shall be available to the applicant ‘in
like manner and to the same extent as an end-user filing his application
after the approval of this amendatory Act.’ 
To deny exemption from compen­sating tax to one whose utilization
contract has been renovated, while granting the exemption to one who files an
application for acquisition of reparations goods after the approval of the new
law, would be contrary to the express mandate of the law that they both be
subject to the same obliga­tions and they both enjoy the same privileges in
like manner and to the same extent. 
It would be a manifest distortion of the literal meaning and purpose of
the law.

“FOR THE FOREGOING CONSIDERATIONS, the decisions appealed from
in both cases are hereby reversed. 
Accordingly, the surety bonds filed by petitioner to guarantee payment
of the tax in question are hereby cancelled. 
No pronouncement as to costs.”

Not satisfied with the
foregoing decision of the Court of Tax Appeals, the Government has interposed
the instant appeal therefrom to this Court.

Appellant now charges
that the lower court had erred in holding that the renovation of the contracts
of purchase and sale of the vessels involved in these cases, after the approval
of Republic Act No. 3079, entitled Philippine Ace Lines to the exemption from
payment of compensating tax under the provisions of the said law, notwithstanding
the fact that the vessels referred to were acquired from the Reparations
Commission long before the approval of said amendatory Act which, by the way,
did not expressly authorize such exemption. 
It is argued that the favorable provisions of Republic Act No. 3079
invoked by Philippine Ace Lines and relied upon by the decision of the court below cannot include exemption from compensating
tax, otherwise, had Congress intended so, it would have provided for such
exemption in clear and explicit terms; that the tax exemption contained in
Section 14 of the amendatory Act cannot have retroactive application in the
absence of any provision for retroactivity; and that to grant such exemption to
end-users who have acquired reparations goods before the approval of Republic
Act No. 3079 would be prejudicial to the Government.

Appellant’s position
calls to mind Commissioner of Internal Revenue vs. Bothelo Shipping Corporation,^[2] the factual setting of which is on all fours
with the case at bar, and where this Court, speaking through Chief Justice
Roberto Concepcion, disposed of the same charge and
contentions in clear and unequivocal terms, in the following wise:

“The inherent weakness of the last ground becomes manifest
when we consider that, if true, there could be no tax exemption of any kind whatsoever, even if Congress should wish
to create one, because every such exemption implies a waiver of the right to collect what otherwise
would be due to the Government, and, in this sense, is prejudicial
thereto.  In fact, how­ever, tax exemptions may and do exist,
such as the one prescribed in Section 14 of Republic Act No. 1789, as amended by Republic Act No. 3079, which, by
the way, is ‘clear and explicit’, thus, meeting the first ground of appellant’s
contention.  It may not be amiss to add
that no tax exemption – like any other legal exemption or exception – is given
without any reason therefor.  In much the same way as other statutory
commands, its avowed purpose is some public benefit or interest, which the
law-making body, considers sufficient to offset the
monetary loss entailed in the grant of the exemption.  Indeed, section 20 of Republic Act no. 3079 exacts a valuable consideration for the re­troactivity of its favorable
provi­sion, namely, the voluntary assumpt­ion, by the end-user, who bought re­parations
goods prior to June 17, 1961, of ‘all the new obligations provided for in’ said Act.

“The argument adduced in support of the third ground is that the
view adopted
by the Tax Court would ope­rate
to grant exemption to particular persons, the Buyers therein.  It should be noted, however, that there is no
constitutional injunction against granting tax exemptions to particular persons.  In fact, it is not unusual to grant legislative franchises to specific individuals or
entities, conferring tax exempt­ions thereto. 
What the fundamental law forbids is the denial of equal protection, such as through unreason­able discrimination or
classification.

“Furthermore, Section 14 of the Law on Reparations, as amended,
exempts from the compensating tax, not particular persons, but persons belonging to a particular class.  Indeed, appellants do not assail the Constitutionality of said section 14, insofar as it grants exemptions to end-users who, after the approval of Republic Act No. 3079, on June 17, 1961, purchased
reparations goods procured by the Commission. 
From the view point of Constitutional Law, especially the equal protection clause, there is no
difference between the grant of exemption to said end-users, and the extension of the grant to those whose
contracts of purchase and sale were
made before said date, under Republic Act No 1789.

“It is true that Republic Act No. 3079 does
not explicitly declare that those who purchased reparations goods prior to June 17, 1961, are exempt from the compensating tax.  It does not say. 
So, because they do not really enjoy such
exemption, unless they comply with the proviso in Section 20 of said
Act, by applying for the renovation of their respective utilization
contracts, ‘in order to avail of any
provision of the Amendatory Act
which is more favorable’
to the applicant.  In other words, it is manifest, from the language of said section 20, that the same intended to give such buyers the
opportunity to be treated ‘in like manner and to the same extent as an end-user filing his application
after the approval of this Amendatory Act.’ Like the ‘most-favored-nation clause’
in international agreements, the aforementioned section 20 thus seeks, not
to discriminate or to create an exemption or exceptions, but to abolish
the discrimination, exemption or exception that would otherwise result, in
favor of the end-user who bought after June 17, 1961 and
against one who bought prior thereto. 
Indeed, it is difficult to find a substantial justification for the distinction between the one and the
other.  x x x“

We find no cogent reason
to modify, much less depart from the conclusion
reached in Bothelo, as expressed in the above-quoted
opinion of the Court there, and the same should resolve the identical problem
now brought before Us in this proceeding.

WHEREFORE, the decision of the Court of Tax Appeals
appealed from in these cases is affirmed;
no pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez,
Castro, Fernando, and Capistrano, JJ., concur.

Zaldivar, J., on leave.

^[1]
Sec. 14, R. A. 1789. Exemption from tax.- All reparations goods obtained by the Government shall be
exempt from the payment of all duties, fees and taxes.  Reparations goods obtained by private parties
shall be exempt only from the payment of customs
duties, consular fees and special import tax.

^[2]
L-21633, June 29, 1967.