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G.R. No.

156407               January 15, 2014 As the administrator, Teresita submitted an inventory of the estate of
Emigdio on December 14, 1992 for the consideration and approval by the
THELMA M. ARANAS, Petitioner, RTC. She indicated in the inventory that at the time of his death, Emigdio
vs. had "left no real properties but only personal properties" worth
TERESITA V. MERCADO, FELIMON V. MERCADO, CARMENCITA M. ₱6,675,435.25 in all, consisting of cash of ₱32,141.20; furniture and fixtures
SUTHERLAND, RICHARD V. MERCADO, MA. TERESITA M. ANDERSON, worth ₱20,000.00; pieces of jewelry valued at ₱15,000.00; 44,806 shares of
and FRANKLIN L. MERCADO, Respondents. stock of Mervir Realty worth ₱6,585,585.80; and 30 shares of stock of Cebu
Emerson worth ₱22,708.25.2
DECISION
Claiming that Emigdio had owned other properties that were excluded from
the inventory, Thelma moved that the RTC direct Teresita to amend the
The probate court is authorized to determine the issue of ownership of inventory, and to be examined regarding it. The RTC granted Thelma’s
properties for purposes of their inclusion or exclusion from the inventory to motion through the order of January 8, 1993.
be submitted by the administrator, but its determination shall only be
provisional unless the interested parties are all heirs of the decedent, or the
question is one of collation or advancement, or the parties consent to the On January 21, 1993, Teresita filed a compliance with the order of January
assumption of jurisdiction by the probate court and the rights of third parties 8, 1993,3 supporting her inventory with copies of three certificates of stocks
are not impaired. Its jurisdiction extends to matters incidental or collateral to covering the 44,806 Mervir Realty shares of stock;4 the deed of assignment
the settlement and distribution of the estate, such as the determination of the executed by Emigdio on January 10, 1991 involving real properties with the
status of each heir and whether property included in the inventory is the market value of ₱4,440,651.10 in exchange for 44,407 Mervir Realty shares
conjugal or exclusive property of the deceased spouse. of stock with total par value of ₱4,440,700.00; 5 and the certificate of stock
issued on January 30, 1979 for 300 shares of stock of Cebu Emerson worth
₱30,000.00.6
Antecedents
On January 26, 1993, Thelma again moved to require Teresita to be
Emigdio S. Mercado (Emigdio) died intestate on January 12, 1991, survived examined under oath on the inventory, and that she (Thelma) be allowed 30
by his second wife, Teresita V. Mercado (Teresita), and their five children, days within which to file a formal opposition to or comment on the inventory
namely: Allan V. Mercado, Felimon V. Mercado, Carmencita M. Sutherland, and the supporting documents Teresita had submitted.
Richard V. Mercado, and Maria Teresita M. Anderson; and his two children
by his first marriage, namely: respondent Franklin L. Mercado and petitioner
Thelma M. Aranas (Thelma). On February 4, 1993, the RTC issued an order expressing the need for the
parties to present evidence and for Teresita to be examined to enable the
court to resolve the motion for approval of the inventory.7
Emigdio inherited and acquired real properties during his lifetime. He owned
corporate shares in Mervir Realty Corporation (Mervir Realty) and Cebu
Emerson Transportation Corporation (Cebu Emerson). He assigned his real On April 19, 1993, Thelma opposed the approval of the inventory, and asked
properties in exchange for corporate stocks of Mervir Realty, and sold his leave of court to examine Teresita on the inventory.
real property in Badian, Cebu (Lot 3353 covered by Transfer Certificate of
Title No. 3252) to Mervir Realty. With the parties agreeing to submit themselves to the jurisdiction of the court
on the issue of what properties should be included in or excluded from the
On June 3, 1991, Thelma filed in the Regional Trial Court (RTC) in Cebu City inventory, the RTC set dates for the hearing on that issue.8
a petition for the appointment of Teresita as the administrator of Emigdio’s
estate (Special Proceedings No. 3094-CEB).1 The RTC granted the petition Ruling of the RTC
considering that there was no opposition. The letters of administration in
favor of Teresita were issued on September 7, 1992.
After a series of hearings that ran for almost eight years, the RTC issued on I
March 14, 2001 an order finding and holding that the inventory submitted by
Teresita had excluded properties that should be included, and accordingly THE HONORABLE RESPONDENT JUDGE HAS COMMITTED GRAVE
ruled: ABUSE OF JURISDICTION (sic) AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN HOLDING THAT THE REAL PROPERTY WHICH WAS
WHEREFORE, in view of all the foregoing premises and considerations, the SOLD BY THE LATE EMIGDIO S. MERCADO DURING HIS LIFETIME TO
Court hereby denies the administratrix’s motion for approval of inventory. A PRIVATE CORPORATION (MERVIR REALTY CORPORATION) BE
The Court hereby orders the said administratrix to re-do the inventory of INCLUDED IN THE INVENTORY OF THE ESTATE OF THE LATE
properties which are supposed to constitute as the estate of the late Emigdio EMIGDIO S. MERCADO.
S. Mercado by including therein the properties mentioned in the last five
immediately preceding paragraphs hereof and then submit the revised II
inventory within sixty (60) days from notice of this order.
THE HONORABLE RESPONDENT JUDGE HAS COMMITTED GRAVE
The Court also directs the said administratrix to render an account of her ABUSE OF JURISDICTION (sic) AMOUNTING TO LACK OR EXCESS OF
administration of the estate of the late Emigdio S. Mercado which had come JURISDICTION IN HOLDING THAT REAL PROPERTIES WHICH ARE IN
to her possession. She must render such accounting within sixty (60) days THE POSSESSION OF AND ALREADY REGISTERED IN THE NAME (OF)
from notice hereof. PRIVATE CORPORATION (MERVIR REALTY CORPORATION) BE
INCLUDED IN THE INVENTORY OF THE ESTATE OF THE LATE
SO ORDERED.9 EMIGDIO S. MERCADO.

On March 29, 2001, Teresita, joined by other heirs of Emigdio, timely sought III
the reconsideration of the order of March 14, 2001 on the ground that one of
the real properties affected, Lot No. 3353 located in Badian, Cebu, had THE HONORABLE RESPONDENT JUDGE HAS COMMITTED GRAVE
already been sold to Mervir Realty, and that the parcels of land covered by ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
the deed of assignment had already come into the possession of and JURISDICTION IN HOLDING THAT PETITIONERS ARE NOW ESTOPPED
registered in the name of Mervir Realty.10 Thelma opposed the motion. FROM QUESTIONING ITS JURISDICTION IN PASSING UPON THE
ISSUE OF WHAT PROPERTIES SHOULD BE INCLUDED IN THE
On May 18, 2001, the RTC denied the motion for reconsideration, 11 stating INVENTORY OF THE ESTATE OF THE LATE EMIGDIO MERCADO. 12
that there was no cogent reason for the reconsideration, and that the
movants’ agreement as heirs to submit to the RTC the issue of what On May 15, 2002, the CA partly granted the petition for certiorari, disposing
properties should be included or excluded from the inventory already as follows:13
estopped them from questioning its jurisdiction to pass upon the issue.
WHEREFORE, FOREGOING PREMISES CONSIDERED, this petition is
Decision of the CA GRANTED partially. The assailed Orders dated March 14, 2001 and May 18,
2001 are hereby reversed and set aside insofar as the inclusion of parcels of
Alleging that the RTC thereby acted with grave abuse of discretion in land known as Lot No. 3353 located at Badian, Cebu with an area of 53,301
refusing to approve the inventory, and in ordering her as administrator to square meters subject matter of the Deed of Absolute Sale dated November
include real properties that had been transferred to Mervir Realty, Teresita, 9, 1989 and the various parcels of land subject matter of the Deeds of
joined by her four children and her stepson Franklin, assailed the adverse Assignment dated February 17, 1989 and January 10, 1991 in the revised
orders of the RTC promulgated on March 14, 2001 and May 18, 2001 by inventory to be submitted by the administratrix is concerned and affirmed in
petition for certiorari, stating: all other respects.
SO ORDERED. discretion amounting to lack or in excess of limited jurisdiction when it issued
the assailed Order dated March 14, 2001 denying the administratrix’s motion
The CA opined that Teresita, et al. had properly filed the petition for certiorari for approval of the inventory of properties which were already titled and in
because the order of the RTC directing a new inventory of properties was possession of a third person that is, Mervir Realty Corporation, a private
interlocutory; that pursuant to Article 1477 of the Civil Code, to the effect that corporation, which under the law possessed a personality distinct and
the ownership of the thing sold "shall be transferred to the vendee" upon its separate from its stockholders, and in the absence of any cogency to shred
"actual and constructive delivery," and to Article 1498 of the Civil Code, to the veil of corporate fiction, the presumption of conclusiveness of said titles
the effect that the sale made through a public instrument was equivalent to in favor of Mervir Realty Corporation should stand undisturbed.
the delivery of the object of the sale, the sale by Emigdio and Teresita had
transferred the ownership of Lot No. 3353 to Mervir Realty because the deed Besides, public respondent court acting as a probate court had no authority
of absolute sale executed on November 9, 1989 had been notarized; that to determine the applicability of the doctrine of piercing the veil of corporate
Emigdio had thereby ceased to have any more interest in Lot 3353; that fiction and even if public respondent court was not merely acting in a limited
Emigdio had assigned the parcels of land to Mervir Realty as early as capacity as a probate court, private respondent nonetheless failed to
February 17, 1989 "for the purpose of saving, as in avoiding taxes with the adjudge competent evidence that would have justified the court to impale the
difference that in the Deed of Assignment dated January 10, 1991, additional veil of corporate fiction because to disregard the separate jurisdictional
seven (7) parcels of land were included"; that as to the January 10, 1991 personality of a corporation, the wrongdoing must be clearly and
deed of assignment, Mervir Realty had been "even at the losing end convincingly established since it cannot be presumed.14
considering that such parcels of land, subject matter(s) of the Deed of
Assignment dated February 12, 1989, were again given monetary On November 15, 2002, the CA denied the motion for reconsideration of
consideration through shares of stock"; that even if the assignment had been Teresita, et al.15
based on the deed of assignment dated January 10, 1991, the parcels of
land could not be included in the inventory "considering that there is nothing
wrong or objectionable about the estate planning scheme"; that the RTC, as Issue
an intestate court, also had no power to take cognizance of and determine
the issue of title to property registered in the name of third persons or Did the CA properly determine that the RTC committed grave abuse of
corporation; that a property covered by the Torrens system should be discretion amounting to lack or excess of jurisdiction in directing the inclusion
afforded the presumptive conclusiveness of title; that the RTC, by of certain properties in the inventory notwithstanding that such properties
disregarding the presumption, had transgressed the clear provisions of law had been either transferred by sale or exchanged for corporate shares in
and infringed settled jurisprudence on the matter; and that the RTC also Mervir Realty by the decedent during his lifetime?
gravely abused its discretion in holding that Teresita, et al. were estopped
from questioning its jurisdiction because of their agreement to submit to the Ruling of the Court
RTC the issue of which properties should be included in the inventory.

The appeal is meritorious.


The CA further opined as follows:

I
In the instant case, public respondent court erred when it ruled that
petitioners are estopped from questioning its jurisdiction considering that
they have already agreed to submit themselves to its jurisdiction of Was certiorari the proper recourse
determining what properties are to be included in or excluded from the to assail the questioned orders of the RTC?
inventory to be submitted by the administratrix, because actually, a reading
of petitioners’ Motion for Reconsideration dated March 26, 2001 filed before The first issue to be resolved is procedural. Thelma contends that the resort
public respondent court clearly shows that petitioners are not questioning its to the special civil action for certiorari to assail the orders of the RTC by
jurisdiction but the manner in which it was exercised for which they are not Teresita and her co-respondents was not proper.
estopped, since that is their right, considering that there is grave abuse of
Thelma’s contention cannot be sustained. ownership. Hence, the approval of the inventory and the concomitant
determination of the ownership as basis for inclusion or exclusion from the
The propriety of the special civil action for certiorari as a remedy depended inventory were provisional and subject to revision at anytime during the
on whether the assailed orders of the RTC were final or interlocutory in course of the administration proceedings.
nature. In Pahila-Garrido v. Tortogo, 16 the Court distinguished between final
and interlocutory orders as follows: In Valero Vda. De Rodriguez v. Court of Appeals,17 the Court, in affirming the
decision of the CA to the effect that the order of the intestate court excluding
The distinction between a final order and an interlocutory order is well certain real properties from the inventory was interlocutory and could be
known. The first disposes of the subject matter in its entirety or terminates a changed or modified at anytime during the course of the administration
particular proceeding or action, leaving nothing more to be done except to proceedings, held that the order of exclusion was not a final but an
enforce by execution what the court has determined, but the latter does not interlocutory order "in the sense that it did not settle once and for all the title
completely dispose of the case but leaves something else to be decided to the San Lorenzo Village lots." The Court observed there that:
upon. An interlocutory order deals with preliminary matters and the trial on
the merits is yet to be held and the judgment rendered. The test to ascertain The prevailing rule is that for the purpose of determining whether a certain
whether or not an order or a judgment is interlocutory or final is: does the property should or should not be included in the inventory, the probate court
order or judgment leave something to be done in the trial court with respect may pass upon the title thereto but such determination is not conclusive and
to the merits of the case? If it does, the order or judgment is interlocutory; is subject to the final decision in a separate action regarding ownership
otherwise, it is final. which may be instituted by the parties (3 Moran’s Comments on the Rules of
Court, 1970 Edition, pages 448-9 and 473; Lachenal vs. Salas, L-42257,
The order dated November 12, 2002, which granted the application for the June 14, 1976, 71 SCRA 262, 266).18 (Bold emphasis supplied)
writ of preliminary injunction, was an interlocutory, not a final, order, and
should not be the subject of an appeal. The reason for disallowing an appeal To the same effect was De Leon v. Court of Appeals,19 where the Court
from an interlocutory order is to avoid multiplicity of appeals in a single declared that a "probate court, whether in a testate or intestate proceeding,
action, which necessarily suspends the hearing and decision on the merits of can only pass upon questions of title provisionally," and reminded, citing
the action during the pendency of the appeals. Permitting multiple appeals Jimenez v. Court of Appeals, that the "patent reason is the probate court’s
will necessarily delay the trial on the merits of the case for a considerable limited jurisdiction and the principle that questions of title or ownership,
length of time, and will compel the adverse party to incur unnecessary which result in inclusion or exclusion from the inventory of the property, can
expenses, for one of the parties may interpose as many appeals as there are only be settled in a separate action." Indeed, in the cited case of Jimenez v.
incidental questions raised by him and as there are interlocutory orders Court of Appeals,20 the Court pointed out:
rendered or issued by the lower court. An interlocutory order may be the
subject of an appeal, but only after a judgment has been rendered, with the All that the said court could do as regards the said properties is determine
ground for appealing the order being included in the appeal of the judgment whether they should or should not be included in the inventory or list of
itself. properties to be administered by the administrator. If there is a dispute as to
the ownership, then the opposing parties and the administrator have to
The remedy against an interlocutory order not subject of an appeal is an resort to an ordinary action for a final determination of the conflicting claims
appropriate special civil action under Rule 65, provided that the interlocutory of title because the probate court cannot do so. (Bold emphasis supplied)
order is rendered without or in excess of jurisdiction or with grave abuse of
discretion. Then is certiorari under Rule 65 allowed to be resorted to. On the other hand, an appeal would not be the correct recourse for Teresita,
et al. to take against the assailed orders. The final judgment rule embodied
The assailed order of March 14, 2001 denying Teresita’s motion for the in the first paragraph of Section 1, Rule 41, Rules of Court, 21 which also
approval of the inventory and the order dated May 18, 2001 denying her governs appeals in special proceedings, stipulates that only the judgments,
motion for reconsideration were interlocutory. This is because the inclusion final orders (and resolutions) of a court of law "that completely disposes of
of the properties in the inventory was not yet a final determination of their the case, or of a particular matter therein when declared by these Rules to
be appealable" may be the subject of an appeal in due course. The same II
rule states that an interlocutory order or resolution (interlocutory because it
deals with preliminary matters, or that the trial on the merits is yet to be held Did the RTC commit grave abuse of discretion
and the judgment rendered) is expressly made non-appealable. in directing the inclusion of the properties
in the estate of the decedent?
Multiple appeals are permitted in special proceedings as a practical
recognition of the possibility that material issues may be finally determined at In its assailed decision, the CA concluded that the RTC committed grave
various stages of the special proceedings. Section 1, Rule 109 of the Rules abuse of discretion for including properties in the inventory notwithstanding
of Court enumerates the specific instances in which multiple appeals may be their having been transferred to Mervir Realty by Emigdio during his lifetime,
resorted to in special proceedings, viz: and for disregarding the registration of the properties in the name of Mervir
Realty, a third party, by applying the doctrine of piercing the veil of corporate
Section 1. Orders or judgments from which appeals may be taken. - An fiction.
interested person may appeal in special proceedings from an order or
judgment rendered by a Court of First Instance or a Juvenile and Domestic Was the CA correct in its conclusion?
Relations Court, where such order or judgment:
The answer is in the negative. It is unavoidable to find that the CA, in
(a) Allows or disallows a will; reaching its conclusion, ignored the law and the facts that had fully
warranted the assailed orders of the RTC.
(b) Determines who are the lawful heirs of a deceased person, or
the distributive share of the estate to which such person is entitled; Under Section 6(a), Rule 78 of the Rules of Court, the letters of
administration may be granted at the discretion of the court to the surviving
(c) Allows or disallows, in whole or in part, any claim against the spouse, who is competent and willing to serve when the person dies
estate of a deceased person, or any claim presented on behalf of intestate. Upon issuing the letters of administration to the surviving spouse,
the estate in offset to a claim against it; the RTC becomes duty-bound to direct the preparation and submission of
the inventory of the properties of the estate, and the surviving spouse, as the
(d) Settles the account of an executor, administrator, trustee or administrator, has the duty and responsibility to submit the inventory within
guardian; three months from the issuance of letters of administration pursuant to Rule
83 of the Rules of Court, viz:
(e) Constitutes, in proceedings relating to the settlement of the
estate of a deceased person, or the administration of a trustee or Section 1. Inventory and appraisal to be returned within three months. –
guardian, a final determination in the lower court of the rights of the Within three (3) months after his appointment every executor or
party appealing, except that no appeal shall be allowed from the administrator shall return to the court a true inventory and appraisal of all the
appointment of a special administrator; and real and personal estate of the deceased which has come into his
possession or knowledge. In the appraisement of such estate, the court may
order one or more of the inheritance tax appraisers to give his or their
(f) Is the final order or judgment rendered in the case, and affects assistance.
the substantial rights of the person appealing, unless it be an order
granting or denying a motion for a new trial or for reconsideration.
The usage of the word all in Section 1, supra, demands the inclusion of all
the real and personal properties of the decedent in the inventory.22 However,
Clearly, the assailed orders of the RTC, being interlocutory, did not come the word all is qualified by the phrase which has come into his possession or
under any of the instances in which multiple appeals are permitted. knowledge, which signifies that the properties must be known to the
administrator to belong to the decedent or are in her possession as the
administrator. Section 1 allows no exception, for the phrase true inventory included in the inventory of properties to be administered by the
implies that no properties appearing to belong to the decedent can be administrator. If there is no dispute, there poses no problem, but if there is,
excluded from the inventory, regardless of their being in the possession of then the parties, the administrator, and the opposing parties have to resort to
another person or entity. an ordinary action before a court exercising general jurisdiction for a final
determination of the conflicting claims of title.
The objective of the Rules of Court in requiring the inventory and appraisal of
the estate of the decedent is "to aid the court in revising the accounts and However, this general rule is subject to exceptions as justified by expediency
determining the liabilities of the executor or the administrator, and in making and convenience.
a final and equitable distribution (partition) of the estate and otherwise to
facilitate the administration of the estate."23 Hence, the RTC that presides First, the probate court may provisionally pass upon in an intestate or a
over the administration of an estate is vested with wide discretion on the testate proceeding the question of inclusion in, or exclusion from, the
question of what properties should be included in the inventory. According to inventory of a piece of property without prejudice to final determination of
Peralta v. Peralta,24 the CA cannot impose its judgment in order to supplant ownership in a separate action. Second, if the interested parties are all heirs
that of the RTC on the issue of which properties are to be included or to the estate, or the question is one of collation or advancement, or the
excluded from the inventory in the absence of "positive abuse of discretion," parties consent to the assumption of jurisdiction by the probate court and the
for in the administration of the estates of deceased persons, "the judges rights of third parties are not impaired, then the probate court is competent to
enjoy ample discretionary powers and the appellate courts should not resolve issues on ownership. Verily, its jurisdiction extends to matters
interfere with or attempt to replace the action taken by them, unless it be incidental or collateral to the settlement and distribution of the estate, such
shown that there has been a positive abuse of discretion." 25 As long as the as the determination of the status of each heir and whether the property in
RTC commits no patently grave abuse of discretion, its orders must be the inventory is conjugal or exclusive property of the deceased spouse. 27
respected as part of the regular performance of its judicial duty. (Italics in the original; bold emphasis supplied)

There is no dispute that the jurisdiction of the trial court as an intestate court It is clear to us that the RTC took pains to explain the factual bases for its
is special and limited. The trial court cannot adjudicate title to properties directive for the inclusion of the properties in question in its assailed order of
claimed to be a part of the estate but are claimed to belong to third parties by March 14, 2001, viz:
title adverse to that of the decedent and the estate, not by virtue of any right
of inheritance from the decedent. All that the trial court can do regarding said
properties is to determine whether or not they should be included in the In the first place, the administratrix of the estate admitted that Emigdio
inventory of properties to be administered by the administrator. Such Mercado was one of the heirs of Severina Mercado who, upon her death, left
determination is provisional and may be still revised. As the Court said in several properties as listed in the inventory of properties submitted in Court
Agtarap v. Agtarap:26 in Special Proceedings No. 306-R which are supposed to be divided among
her heirs. The administratrix admitted, while being examined in Court by the
counsel for the petitioner, that she did not include in the inventory submitted
The general rule is that the jurisdiction of the trial court, either as a probate by her in this case the shares of Emigdio Mercado in the said estate of
court or an intestate court, relates only to matters having to do with the Severina Mercado. Certainly, said properties constituting Emigdio Mercado’s
probate of the will and/or settlement of the estate of deceased persons, but share in the estate of Severina Mercado should be included in the inventory
does not extend to the determination of questions of ownership that arise of properties required to be submitted to the Court in this particular case.
during the proceedings. The patent rationale for this rule is that such court
merely exercises special and limited jurisdiction. As held in several cases, a
probate court or one in charge of estate proceedings, whether testate or In the second place, the administratrix of the estate of Emigdio Mercado also
intestate, cannot adjudicate or determine title to properties claimed to be a admitted in Court that she did not include in the inventory shares of stock of
part of the estate and which are claimed to belong to outside parties, not by Mervir Realty Corporation which are in her name and which were paid by her
virtue of any right of inheritance from the deceased but by title adverse to from money derived from the taxicab business which she and her husband
that of the deceased and his estate. All that the said court could do as had since 1955 as a conjugal undertaking. As these shares of stock partake
regards said properties is to determine whether or not they should be
of being conjugal in character, one-half thereof or of the value thereof should the administrator. The aforequoted explanations indicated that the directive
be included in the inventory of the estate of her husband. to include the properties in question in the inventory rested on good and
valid reasons, and thus was far from whimsical, or arbitrary, or capricious.
In the third place, the administratrix of the estate of Emigdio Mercado
admitted, too, in Court that she had a bank account in her name at Union Firstly, the shares in the properties inherited by Emigdio from Severina
Bank which she opened when her husband was still alive. Again, the money Mercado should be included in the inventory because Teresita, et al. did not
in said bank account partakes of being conjugal in character, and so, one- dispute the fact about the shares being inherited by Emigdio.
half thereof should be included in the inventory of the properties constituting
as estate of her husband. Secondly, with Emigdio and Teresita having been married prior to the
effectivity of the Family Code in August 3, 1988, their property regime was
In the fourth place, it has been established during the hearing in this case the conjugal partnership of gains.29 For purposes of the settlement of
that Lot No. 3353 of Pls-657-D located in Badian, Cebu containing an area Emigdio’s estate, it was unavoidable for Teresita to include his shares in the
of 53,301 square meters as described in and covered by Transfer Certificate conjugal partnership of gains. The party asserting that specific property
of Title No. 3252 of the Registry of Deeds for the Province of Cebu is still acquired during that property regime did not pertain to the conjugal
registered in the name of Emigdio S. Mercado until now. When it was the partnership of gains carried the burden of proof, and that party must prove
subject of Civil Case No. CEB-12690 which was decided on October 19, the exclusive ownership by one of them by clear, categorical, and convincing
1995, it was the estate of the late Emigdio Mercado which claimed to be the evidence.30 In the absence of or pending the presentation of such proof, the
owner thereof. Mervir Realty Corporation never intervened in the said case conjugal partnership of Emigdio and Teresita must be provisionally liquidated
in order to be the owner thereof. This fact was admitted by Richard Mercado to establish who the real owners of the affected properties were, 31 and which
himself when he testified in Court. x x x So the said property located in of the properties should form part of the estate of Emigdio. The portions that
Badian, Cebu should be included in the inventory in this case. pertained to the estate of Emigdio must be included in the inventory.

Fifthly and lastly, it appears that the assignment of several parcels of land by Moreover, although the title over Lot 3353 was already registered in the
the late Emigdio S. Mercado to Mervir Realty Corporation on January 10, name of Mervir Realty, the RTC made findings that put that title in dispute.
1991 by virtue of the Deed of Assignment signed by him on the said day Civil Case No. CEB-12692, a dispute that had involved the ownership of Lot
(Exhibit N for the petitioner and Exhibit 5 for the administratrix) was a 3353, was resolved in favor of the estate of Emigdio, and
transfer in contemplation of death. It was made two days before he died on
January 12, 1991. A transfer made in contemplation of death is one Transfer Certificate of Title No. 3252 covering Lot 3353 was still in Emigdio’s
prompted by the thought that the transferor has not long to live and made in name.1âwphi1 Indeed, the RTC noted in the order of March 14, 2001, or ten
place of a testamentary disposition (1959 Prentice Hall, p. 3909). Section 78 years after his death, that Lot 3353 had remained registered in the name of
of the National Internal Revenue Code of 1977 provides that the gross Emigdio.
estate of the decedent shall be determined by including the value at the time
of his death of all property to the extent of any interest therein of which the
decedent has at any time made a transfer in contemplation of death. So, the Interestingly, Mervir Realty did not intervene at all in Civil Case No. CEB-
inventory to be approved in this case should still include the said properties 12692. Such lack of interest in Civil Case No. CEB-12692 was susceptible of
of Emigdio Mercado which were transferred by him in contemplation of various interpretations, including one to the effect that the heirs of Emigdio
death. Besides, the said properties actually appeared to be still registered in could have already threshed out their differences with the assistance of the
the name of Emigdio S. Mercado at least ten (10) months after his death, as trial court. This interpretation was probable considering that Mervir Realty,
shown by the certification issued by the Cebu City Assessor’s Office on whose business was managed by respondent Richard, was headed by
October 31, 1991 (Exhibit O).28 Teresita herself as its President. In other words, Mervir Realty appeared to
be a family corporation.
Thereby, the RTC strictly followed the directives of the Rules of Court and
the jurisprudence relevant to the procedure for preparing the inventory by Also, the fact that the deed of absolute sale executed by Emigdio in favor of
Mervir Realty was a notarized instrument did not sufficiently justify the
exclusion from the inventory of the properties involved. A notarized deed of Assuming that only seven titled lots were the subject of the deed of
sale only enjoyed the presumption of regularity in favor of its execution, but assignment of January 10, 1991, such lots should still be included in the
its notarization did not per se guarantee the legal efficacy of the transaction inventory to enable the parties, by themselves, and with the assistance of
under the deed, and what the contents purported to be. The presumption of the RTC itself, to test and resolve the issue on the validity of the assignment.
regularity could be rebutted by clear and convincing evidence to the The limited jurisdiction of the RTC as an intestate court might have
contrary.32 As the Court has observed in Suntay v. Court of Appeals:33 constricted the determination of the rights to the properties arising from that
deed,36 but it does not prevent the RTC as intestate court from ordering the
x x x. Though the notarization of the deed of sale in question vests in its inclusion in the inventory of the properties subject of that deed. This is
favor the presumption of regularity, it is not the intention nor the function of because the RTC as intestate court, albeit vested only with special and
the notary public to validate and make binding an instrument never, in the limited jurisdiction, was still "deemed to have all the necessary powers to
first place, intended to have any binding legal effect upon the parties thereto. exercise such jurisdiction to make it effective."37
The intention of the parties still and always is the primary consideration in
determining the true nature of a contract. (Bold emphasis supplied) Lastly, the inventory of the estate of Emigdio must be prepared and
submitted for the important purpose of resolving the difficult issues of
It should likewise be pointed out that the exchange of shares of stock of collation and advancement to the heirs. Article 1061 of the Civil Code
Mervir Realty with the real properties owned by Emigdio would still have to required every compulsory heir and the surviving spouse, herein Teresita
be inquired into. That Emigdio executed the deed of assignment two days herself, to "bring into the mass of the estate any property or right which he
prior to his death was a circumstance that should put any interested party on (or she) may have received from the decedent, during the lifetime of the
his guard regarding the exchange, considering that there was a finding about latter, by way of donation, or any other gratuitous title, in order that it may be
Emigdio having been sick of cancer of the pancreas at the time.34 In this computed in the determination of the legitime of each heir, and in the
regard, whether the CA correctly characterized the exchange as a form of an account of the partition." Section 2, Rule 90 of the Rules of Court also
estate planning scheme remained to be validated by the facts to be provided that any advancement by the decedent on the legitime of an heir
established in court. "may be heard and determined by the court having jurisdiction of the estate
proceedings, and the final order of the court thereon shall be binding on the
person raising the questions and on the heir." Rule 90 thereby expanded the
The fact that the properties were already covered by Torrens titles in the special and limited jurisdiction of the RTC as an intestate court about the
name of Mervir Realty could not be a valid basis for immediately excluding matters relating to the inventory of the estate of the decedent by authorizing
them from the inventory in view of the circumstances admittedly surrounding it to direct the inclusion of properties donated or bestowed by gratuitous title
the execution of the deed of assignment. This is because: to any compulsory heir by the decedent.38

The Torrens system is not a mode of acquiring titles to lands; it is merely a The determination of which properties should be excluded from or included
system of registration of titles to lands.1âwphi1 However, justice and equity in the inventory of estate properties was well within the authority and
demand that the titleholder should not be made to bear the unfavorable discretion of the RTC as an intestate court. In making its determination, the
effect of the mistake or negligence of the State’s agents, in the absence of RTC acted with circumspection, and proceeded under the guiding policy that
proof of his complicity in a fraud or of manifest damage to third persons. The it was best to include all properties in the possession of the administrator or
real purpose of the Torrens system is to quiet title to land and put a stop were known to the administrator to belong to Emigdio rather than to exclude
forever to any question as to the legality of the title, except claims that were properties that could turn out in the end to be actually part of the estate. As
noted in the certificate at the time of registration or that may arise long as the RTC commits no patent grave abuse of discretion, its orders
subsequent thereto. Otherwise, the integrity of the Torrens system shall must be respected as part of the regular performance of its judicial duty.
forever be sullied by the ineptitude and inefficiency of land registration Grave abuse of discretion means either that the judicial or quasi-judicial
officials, who are ordinarily presumed to have regularly performed their power was exercised in an arbitrary or despotic manner by reason of
duties.35 passion or personal hostility, or that the respondent judge, tribunal or board
evaded a positive duty, or virtually refused to perform the duty enjoined or to
act in contemplation of law, such as when such judge, tribunal or board
exercising judicial or quasi-judicial powers acted in a capricious or whimsical
manner as to be equivalent to lack of jurisdiction.39

In light of the foregoing, the CA's conclusion of grave abuse of discretion on


the part of the RTC was unwarranted and erroneous.

WHEREFORE, the Court GRANTS the petition for review on certiorari;


REVERSES and SETS ASIDE the decision promulgated on May 15, 2002;
REINSTATES the orders issued on March 14, 2001 and May 18, 2001 by
the Regional Trial Court in Cebu; DIRECTS the Regional Trial Court in Cebu
to proceed with dispatch in Special Proceedings No. 3094-CEB entitled
Intestate Estate of the late Emigdio Mercado, Thelma Aranas, petitioner, and
to resolve the case; and ORDERS the respondents to pay the costs of suit.

SO ORDERED.
After Celestina's death, Ursulina had been sharing the produce of the
donated properties with private respondents Leocadia G. Flores, et al.,
G.R. No. 123968             April 24, 2003 nieces of Celestina.

URSULINA GANUELAS, METODIO GANUELAS and ANTONIO In 1982, or twenty-four years after the execution of the Deed of Donation,
GANUELAS, petitioners, Ursulina secured the corresponding tax declarations, in her name, over the
vs. donated properties, to wit: Tax Declarations Nos. 18108, 18109, 18110,
HON. ROBERT T. CAWED, Judge of the Regional Trial Court of San 18111, 18112, 18113 and 18114, and since then, she refused to give private
Fernando, La Union (Branch 29), LEOCADIA G. FLORES, respondents any share in the produce of the properties despite repeated
FELICITACION G. AGTARAP, CORAZON G. SIPALAY and ESTATE OF demands.
ROMANA GANUELAS DE LA ROSA, represented by GREGORIO DELA
ROSA, Administrator, respondents. Private respondents were thus prompted to file on May 26, 1986 with the
RTC of San Fernando, La Union a complaint5 against Ursulina, along with
The present petition for review under Rule 45 of the Rules of Court assails, Metodio Ganuelas and Antonio Ganuelas who were alleged to be unwilling
on a question of law, the February 22, 1996 decision 1 of the Regional Trial plaintiffs. The complaint alleged that the Deed of Donation executed by
Court of San Fernando, La Union, Branch 29, in Civil Case No. 3947, an Celestina in favor of Ursulina was void for lack of acknowledgment by the
action for declaration of nullity of a deed of donation. attesting witnesses thereto before notary public Atty. Henry Valmonte, and
the donation was a disposition mortis causa which failed to comply with the
provisions of the Civil Code regarding formalities of wills and testaments,
The facts, as culled from the records of the case, are as follows: hence, it was void. The plaintiffs-herein private respondents thus prayed that
judgment be rendered ordering Ursulina to return to them as intestate heirs
On April 11, 1958, Celestina Ganuelas Vda. de Valin (Celestina) executed a the possession and ownership of the properties. They likewise prayed for the
Deed of Donation of Real Property 2 covering seven parcels of land in favor cancellation of the tax declarations secured in the name of Ursulina, the
of her niece Ursulina Ganuelas (Ursulina), one of herein petitioners. partition of the properties among the intestate heirs of Celestina, and the
rendering by Ursulina of an accounting of all the fruits of the properties since
The pertinent provision of the deed of donation reads, quoted verbatim: 1982 and for her to return or pay the value of their shares.

That, for and in consideration of the love and affection which the The defendants-herein petitioners alleged in their Answer 6 that the donation
DONOR has for the DONEE, and of the faithful services the latter in favor of Ursulina was inter vivos as contemplated under Article 729 of the
has rendered in the past to the former, the said DONOR does by Civil Code,7 hence, the deed did not have to comply with the requirements
these presents transfer and convey, by way of DONATION, unto for the execution of a valid will; the Revocation of Donation is null and void
the DONEE the property above, described, to become effective as the ground mentioned therein is not among those provided by law to be
upon the death of the DONOR; but in the event that the DONEE the basis thereof; and at any rate, the revocation could only be legally
should die before the DONOR, the present donation shall be enforced upon filing of the appropriate complaint in court within the
deemed rescinded and of no further force and effect. prescriptive period provided by law, which period had, at the time the
complaint was filed, already lapsed.

On June 10, 1967, Celestina executed a document denominated as


Revocation of Donation4 purporting to set aside the deed of donation. More By Decision of February 22, 1996, the trial court, holding that the provision in
than a month later or on August 18, 1967, Celestina died without issue and the Deed of Donation that in the event that the DONEE should predecease
any surviving ascendants and siblings. the DONOR, the "donation shall be deemed rescinded and of no further
force and effect" is an explicit indication that the deed is a donation mortis
causa,8 found for the plaintiffs-herein private respondents, thus:
WHEREFORE the Court renders judgment declaring null and void Petitioners argue that the donation contained in the deed is inter vivos as the
the Deed of Donation of Real Property executed by Celestina main consideration for its execution was the donor's affection for the donee
Ganuelas, and orders the partition of the estate of Celestina among rather than the donor's death;15 that the provision on the effectivity of the
the intestate heirs. donation — after the donor's death — simply meant that absolute ownership
would pertain to the donee on the donor's death; 16 and that since the
SO ORDERED.9 donation is inter vivos, it may be revoked only for the reasons provided in
Articles 760,17 76418 and 76519 of the Civil Code.
The trial court also held that the absence of a reservation clause in the deed
implied that Celestina retained complete dominion over her properties, thus In a letter of March 16, 1998,20 private respondent Corazon Sipalay, reacting
supporting the conclusion that the donation is mortis causa,10 and that while to this Court's January 28, 1998 Resolution requiring private respondents "to
the deed contained an attestation clause and an acknowledgment showing SHOW CAUSE why they should not be disciplinarily dealt with or held in
the intent of the donor to effect a postmortem disposition, the contempt" for failure to submit the name and address of their new counsel,
acknowledgment was defective as only the donor and donee appear to have explains that they are no longer interested in pursuing the case and are
acknowledged the deed before the notary public, thereby rendering the "willing and ready to waive whatever rights" they have over the properties
entire document void.11 subject of the donation. Petitioners, who were required to comment on the
letter, by Comment of October 28, 1998,21 welcome private respondents'
gesture but pray that "for the sake of enriching jurisprudence, their [p]etition
Lastly, the trial court held that the subsequent execution by Celestina of the be given due course and resolved."
Revocation of Donation showed that the donor intended the revocability of
the donation ad nutum, thus sustaining its finding that the conveyance was
mortis causa.12 The issue is thus whether the donation is inter vivos or mortis causa.

On herein petitioners' argument that the Revocation of Donation was void as Crucial in the resolution of the issue is the determination of whether the
the ground mentioned therein is not one of those allowed by law to be a donor intended to transfer the ownership over the properties upon the
basis for revocation, the trial court held that the legal grounds for such execution of the deed.22
revocation as provided under the Civil Code arise only in cases of donations
inter vivos, but not in donations mortis causa which are revocable at will Donation inter vivos differs from donation mortis causa in that in the former,
during the lifetime of the donor. The trial court held, in any event, that given the act is immediately operative even if the actual execution may be deferred
the nullity of the disposition mortis causa in view of a failure to comply with until the death of the donor, while in the latter, nothing is conveyed to or
the formalities required therefor, the Deed of Revocation was a superfluity.13 acquired by the donee until the death of the donor-testator. 23 The following
ruling of this Court in Alejandro v. Geraldez is illuminating:24
Hence, the instant petition for review, petitioners contending that the trial
court erred: If the donation is made in contemplation of the donor's death,
meaning that the full or naked ownership of the donated properties
I. . . . WHEN IT DECLARED NULL AND VOID THE DONATION will pass to the donee only because of the donor's death, then it is
EXECUTED BY CELESTINA GANUELAS; at that time that the donation takes effect, and it is a donation
mortis causa which should be embodied in a last will and
testament.
II. . . . WHEN IT UPHELD THE REVOCATION OF DONATION;
But if the donation takes effect during the donor's lifetime or
III. . . . IN RENDERING ITS DECISION ADVERSE TO independently of the donor's death, meaning that the full or naked
PETITIONER URSULINA GANUELAS.14 ownership (nuda proprietas) of the donated properties passes to
the donee during the donor's lifetime, not by reason of his death but
because of the deed of donation, then the donation is inter vivos.
The distinction between a transfer inter vivos and mortis causa is important SIGNED by the above-named donor, Celestina Ganuelas, at the
as the validity or revocation of the donation depends upon its nature. If the foot of this deed of donation mortis causa, consisting of two (2)
donation is inter vivos, it must be executed and accepted with the formalities pages and on the left margin of each and every page thereof in the
prescribed by Articles 74825 and 74926 of the Civil Code, except when it is joint presence of all of us who at her request and in her presence
onerous in which case the rules on contracts will apply. If it is mortis causa, and that of each other have in like manner subscribed our names
the donation must be in the form of a will, with all the formalities for the as witnesses.31 (Emphasis supplied)
validity of wills, otherwise it is void and cannot transfer ownership.27
To classify the donation as inter vivos simply because it is founded on
The distinguishing characteristics of a donation mortis causa are the considerations of love and affection is erroneous. That the donation was
following: prompted by the affection of the donor for the donee and the services
rendered by the latter is of no particular significance in determining whether
1. It conveys no title or ownership to the transferee before the death the deed constitutes a transfer inter vivos or not, because a legacy may have
of the transferor; or, what amounts to the same thing, that the an identical motivation.32 In other words, love and affection may also
transferor should retain the ownership (full or naked) and control of underline transfers mortis causa.33
the property while alive;
In Maglasang v. Heirs of Cabatingan,34 the deeds of donation contained
2. That before his death, the transfer should be revocable by the provisions almost identical to those found in the deed subject of the present
transferor at will, ad nutum; but revocability may be provided for case:
indirectly by means of a reserved power in the donor to dispose of
the properties conveyed; That for and in consideration of the love and affection of the
DONOR for the DONEE, x x x. the DONOR does hereby, by these
3. That the transfer should be void if the transferor should survive presents, transfer, convey, by way of donation, unto the DONEE
the transferee.28 the above-described property, together with the buildings and all
improvements existing thereon, to become effective upon the death
of the DONOR; PROVIDED, HOWEVER, that in the event that the
In the donation subject of the present case, there is nothing therein which DONEE should die before the DONOR, the present donation shall
indicates that any right, title or interest in the donated properties was to be be deemed automatically rescinded and of no further force and
transferred to Ursulina prior to the death of Celestina. effect. (Emphasis supplied)

The phrase "to become effective upon the death of the DONOR" admits of In that case, this Court held that the donations were mortis causa, for the
no other interpretation but that Celestina intended to transfer the ownership above-quoted provision conclusively establishes the donor's intention to
of the properties to Ursulina on her death, not during her lifetime.29 transfer the ownership and possession of the donated property to the donee
only after the former's death. Like in the present case, the deeds therein did
More importantly, the provision in the deed stating that if the donee should not contain any clear provision that purports to pass proprietary rights to the
die before the donor, the donation shall be deemed rescinded and of no donee prior to the donor's death.
further force and effect shows that the donation is a postmortem disposition.
As the subject deed then is in the nature of a mortis causa disposition, the
As stated in a long line of cases, one of the decisive characteristics of a formalities of a will under Article 728 of the Civil Code should have been
donation mortis causa is that the transfer should be considered void if the complied with, failing which the donation is void and produces no effect.35
donor should survive the donee.30
As noted by the trial court, the attesting witnesses failed to acknowledge the
More. The deed contains an attestation clause expressly confirming the deed before the notary public, thus violating Article 806 of the Civil Code
donation as mortis causa: which provides:
Art. 806. Every will must be acknowledged before a notary public by
the testator and the witnesses. The notary public shall not be
required to retain a copy of the will, or file another with the office of
the Clerk of Court. (Emphasis supplied)

The trial court did not thus commit any reversible error in declaring the Deed
of Donation to be mortis causa.

WHEREFORE, the petition is hereby DENIED for lack of merit.

SO ORDERED.
G.R. No. 131953           June 5, 2002 On May 9, 1995, Conchita Cabatingan died.

MA. ESTELA MAGLASANG, NICOLAS CABATINGAN and MERLY S. Upon learning of the existence of the foregoing donations, respondents filed
CABATINGAN, petitioners, with the Regional Trial Court of Mandaue, Branch 55, an action for
vs. Annulment And/Or Declaration of Nullity of Deeds of Donations and
THE HEIRS OF CORAZON CABATINGAN, namely, LUZ M. BOQUIA, Accounting, docketed as Civil Case No. MAN-2599, seeking the annulment
PERLA M. ABELLA, ESTRELLA M. CAÑETE, LOURDES M. YUSON, and of said four (4) deeds of donation executed on January 14, 1995.
JULIA L. MAYOL, HEIRS OF GENOVIVA C. NATIVIDAD namely, OSCAR Respondents allege, inter alia, that petitioners, through their sinister
C. NATIVIDAD, OLGA NATIVIDAD, ODETTE NATIVIDAD, OPHELIA machinations and strategies and taking advantage of Conchita Cabatingan's
NATIVIDAD, RICHARD NATIVIDAD, RAYMUND NATIVIDAD, RICHIE fragile condition, caused the execution of the deeds of donation, and, that
NATIVIDAD, SONIA NATIVIDAD and ENCARNACION CABATINGAN the documents are void for failing to comply with the provisions of the Civil
VDA. DE TRINIDAD, ALFREDO CABATINGAN and JESUSA C. NAVADA, Code regarding formalities of wills and testaments, considering that these
respondents. are donations mortis causa.4 Respondents prayed that a receiver be
appointed in order to preserve the disputed properties, and, that they be
Posed for resolution before the Court in this petition for review on certiorari declared as co-owners of the properties in equal shares, together with
filed under Rule 45 of the Rules of Court is the sole issue of whether the petitioner Nicolas Cabatingan.5
donations made by the late Conchita Cabatingan are donations inter vivos or
mortis causa. Petitioners in their Amended Answer, deny respondents' allegations
contending that Conchita Cabatingan freely, knowingly and voluntarily
The facts of the case are as follows: caused the preparation of the instruments.6

On February 17, 1992, Conchita Cabatingan executed in favor of her On respondents' motion, the court a quo rendered a partial judgment on the
brother, petitioner Nicolas Cabatingan, a "Deed of Conditional of Donation pleadings on December 2, 1997 in favor of respondents, with the following
(sic) Inter Vivos for House and Lot" covering one-half (½) portion of the dispositive portion:
former's house and lot located at Cot-cot, Liloan, Cebu.1 Four (4) other
deeds of donation were subsequently executed by Conchita Cabatingan on "WHEREREFORE, and in consideration of all the foregoing,
January 14, 1995, bestowing upon: (a) petitioner Estela C. Maglasang, two judgment is hereby rendered in favor of the plaintiffs and against
(2) parcels of land - one located in Cogon, Cebu (307 sq. m.) and the other, the defendant and unwilling co-plaintiff with regards (sic) to the four
a portion of a parcel of land in Masbate (50,232 sq. m.); (b) petitioner Nicolas Deeds of Donation Annexes "A", "A-1", "B" and Annex "C" which is
Cabatingan, a portion of a parcel of land located in Masbate (80,000 sq. m.); the subject of this partial decision by:
and (c) petitioner Merly S. Cabatingan, a portion of the Masbate property
(80,000 sq. m.).2 These deeds of donation contain similar provisions, to wit: Declaring the four Deeds of Donation as null and void ab
initio for being a donation Mortis Causa and for failure to
"That for and in consideration of the love and affection of the comply with formal and solemn requisite under Art. 806 of
DONOR for the DONEE, x x x the DONOR does hereby, by these the New Civil Code;
presents, transfer, convey, by way of donation, unto the DONEE
the above-described property, together with the buildings and all b) To declare the plaintiffs and defendants as well as
improvements existing thereon, to become effective upon the unwilling co-plaintiff as the heirs of the deceased Conchita
death of the DONOR; PROVIDED, HOWEVER, that in the event Cabatingan and therefore hereditary co-owners of the
that the DONEE should die before the DONOR, the present properties subject of this partial decision, as mandated
donation shall be deemed automatically rescinded and of no under Art. 777 of the New Civil Code;
further force and effect; x x x"3 (Emphasis Ours)
SO ORDERED."7 (3) That the transfer should be void if the transferor should survive
the transferee.13
The court a quo ruled that the donations are donations mortis causa and
therefore the four (4) deeds in question executed on January 14, 1995 are In the present case, the nature of the donations as mortis causa is confirmed
null and void for failure to comply with the requisites of Article 806 of the Civil by the fact that the donations do not contain any clear provision that intends
Code on solemnities of wills and testaments.8 to pass proprietary rights to petitioners prior to Cabatingan's death.14 The
phrase "to become effective upon the death of the DONOR" admits of no
Raising questions of law, petitioners elevated the court a quo's decision to other interpretation but that Cabatingan did not intend to transfer the
this Court,9 alleging that: ownership of the properties to petitioners during her lifetime. Petitioners
themselves expressly confirmed the donations as mortis causa in the
following Acceptance and Attestation clauses, uniformly found in the subject
"THE LOWER COURT PALPABLY DISREGARDED THE LONG- deeds of donation, to wit:
AND-WELL-ESTABLISHED RULINGS OF THIS HONORABLE
SUPREME COURT ON THE CHARACTERIZATION OF
DONATIONS AS INTER VIVOS OR MORTIS CAUSA AND, "That the DONEE does hereby accept the foregoing donation
INSTEAD, PROCEEDED TO INTERPRET THE DONATIONS IN mortis causa under the terms and conditions set forth therein, and
QUESTION IN A MANNER CONTRARY THERETO."10 avail herself of this occasion to express her profound gratitude for
the kindness and generosity of the DONOR."
Petitioners insist that the donations are inter vivos donations as these were
made by the late Conchita Cabatingan "in consideration of the love and "SIGNED by the above-named DONOR and DONEE at the foot of
affection of the donor" for the donee, and there is nothing in the deeds which this Deed of Donation mortis causa, which consists of two (2) pages
indicate that the donations were made in consideration of Cabatingan's x x x."15
death.11 In addition, petitioners contend that the stipulation on rescission in
case petitioners die ahead of Cabatingan is a resolutory condition that That the donations were made "in consideration of the love and affection of
confirms the nature of the donation as inter vivos. the donor" does not qualify the donations as inter vivos because transfers
mortis causa may also be made for the same reason.16
Petitioners' arguments are bereft of merit.
Well in point is National Treasurer of the Phils. v. Vda. de Meimban.17 In
In a donation mortis causa, "the right of disposition is not transferred to the said case, the questioned donation contained the provision:
donee while the donor is still alive." 12 In determining whether a donation is
one of mortis causa, the following characteristics must be taken into account: "That for and in consideration of the love and affection which the
DONOR has for the DONEE, the said Donor by these presents
(1) It conveys no title or ownership to the transferee before the does hereby give, transfer, and convey unto the DONEE, her heirs
death of the transferor; or what amounts to the same thing, that the and assigns a portion of ONE HUNDRED THOUSAND (100,000)
transferor should retain the ownership (full or naked) and control of SQUARE METERS, on the southeastern part Pro-indiviso of the
the property while alive; above described property. (The portion herein donated is within Lot
2-B of the proposed amendment Plan Subdivision of Lots Nos. 1
and 2, Psu-109393), with all the buildings and improvements
(2) That before his death, the transfer should be revocable by the thereon, to become effective upon the death of the DONOR. (italics
transferor at will, ad nutum; but revocability may be provided for supplied.)"18
indirectly by means of a reserved power in the donor to dispose of
the properties conveyed;
Notably, the foregoing provision is similar to that contained in the donation
executed by Cabatingan. We held in Meimban case that the donation is a
and
mortis causa donation, and that the above quoted provision establishes the The attestation shall state the number of pages used upon which
donor's intention to transfer the ownership and possession of the donated the will is written , and the fact that the testator signed the will and
property to the donee only after the former's death. Further: every page thereof, or caused some other person to write his name,
under his express direction, in the presence of the instrumental
"As the donation is in the nature of a mortis causa disposition, the witnesses, and that the latter witnessed and signed the will and all
formalities of a will should have been complied with under Article the pages thereof in the presence of the testator and of one
728 of the Civil Code, otherwise, the donation is void and would another.
produce no effect. As we have held in Alejandro v. Geraldez (78
SCRA 245,253), "If the donation is made in contemplation of the If the attestation clause is in a language not known to the
donor's death, meaning that the full or naked ownership of the witnesses, it shall be interpreted to them. (n)
donated properties will pass to the donee because of the donor's
death, then it is at that time that the donation takes effect, and it is a ART. 806. Every will must be acknowledged before a notary public
donation mortis causa which should be embodied in a last will and by the testator and the witnesses. The notary public shall not be
testament. (Citing Bonsato v. Court of Appeals, 95 Phil. 481)."19 required to retain a copy of the will, or file another with the office of
the Clerk of Court. (n)"
We apply the above rulings to the present case. The herein subject deeds
expressly provide that the donation shall be rescinded in case petitioners The deeds in question although acknowledged before a notary public of the
predecease Conchita Cabatingan. As stated in Reyes v. Mosqueda,20 one donor and the donee, the documents were not executed in the manner
of the decisive characteristics of a donation mortis causa is that the transfer provided for under the above-quoted provisions of law.
should be considered void if the donor should survive the donee. This is
exactly what Cabatingan provided for in her donations. If she really intended
that the donation should take effect during her lifetime and that the Thus, the trial court did not commit any reversible error in declaring the
ownership of the properties donated be transferred to the donee or subject deeds of donation null and void.
independently of, and not by reason of her death, she would have not
expressed such proviso in the subject deeds.1âwphi1.nêt WHEREFORE, the petition is hereby DENIED for lack of merit.

Considering that the disputed donations are donations mortis causa, the SO ORDERED.
same partake of the nature of testamentary provisions21 and as such, said
deeds must be executed in accordance with the requisites on solemnities of
wills and testaments under Articles 805 and 806 of the Civil Code, to wit:

"ART. 805. Every will, other than a holographic will, must be


subscribed at the end thereof by the testator himself or by the
testator's name written by some other person in his presence, and
by his express direction, and attested and subscribed by three or
more credible witnesses in the presence of the testator and of one
another.

The testator or the person requested by him to write his name and
the instrumental witnesses of the will, shall also sign, as aforesaid, G.R. No. 137377            December 18, 2001
each and every page thereof, except the last, on the left margin,
and all the pages shall be numbered correlatively in letters placed
on the upper part of each page.
COMMISSIONER OF INTERNAL REVENUE, petitioner, I. DEFICIENCY INCOME TAX
vs.
MARUBENI CORPORATION, respondent.       FY ended March 31, 1985
Undeclared gross income (Philphos and NDC
In this petition for review, the Commissioner of Internal Revenue assails the construction projects) P967,269,811.14
decision dated January 15, 1999 of the Court of Appeals in CA-G.R. SP No. Less: Cost and expenses (50%) 483,634,905.57
42518 which affirmed the decision dated July 29, 1996 of the Court of Tax
Appeals in CTA Case No. 4109. The tax court ordered the Commissioner of Net undeclared income 483,634,905.57
Internal Revenue to desist from collecting the 1985 deficiency income, Income tax due thereon 169,272,217.00
branch profit remittance and contractor's taxes from Marubeni Corporation
Add: 50% surcharge 84,636,108.50
after finding the latter to have properly availed of the tax amnesty under
Executive Orders Nos. 41 and 64, as amended. 20% int. p.a.fr. 7-15-85 to 8-15-86 36,675,646.90
TOTAL AMOUNT DUE P290,583,972.40
Respondent Marubeni Corporation is a foreign corporation organized and II. DEFICIENCY BRANCH PROFIT REMITTANCE TAX
existing under the laws of Japan. It is engaged in general import and export
trading, financing and the construction business. It is duly registered to       FY ended March 31, 1985
engage in such business in the Philippines and maintains a branch office in Undeclared gross income from Philphos and NDC
Manila. construction projects P483,634,905.57
Less: Income tax thereon 169,272,217.00
Sometime in November 1985, petitioner Commissioner of Internal Revenue
issued a letter of authority to examine the books of accounts of the Manila Amount subject to Tax 314,362,688.57
branch office of respondent corporation for the fiscal year ending March Tax due thereon 47,154,403.00
1985. In the course of the examination, petitioner found respondent to have
undeclared income from two (2) contracts in the Philippines, both of which Add: 50% surcharge 23,577,201.50
were completed in 1984. One of the contracts was with the National 20% int. p.a.fr. 4-26-85 to 8-15-86 12,305,360.66
Development Company (NDC) in connection with the construction and
TOTAL AMOUNT DUE P83,036,965.16
installation of a wharf/port complex at the Leyte Industrial Development
Estate in the municipality of Isabel, province of Leyte. The other contract was III. DEFICIENCY CONTRACTOR'S TAX
with the Philippine Phosphate Fertilizer Corporation (Philphos) for the       FY ended March 31, 1985
construction of an ammonia storage complex also at the Leyte Industrial
Development Estate. Undeclared gross receipts/gross income from
Philphos and NDC construction projects P967,269,811.14
On March 1, 1986, petitioner's revenue examiners recommended an Contractor's tax due thereon (4%) 38,690,792.00
assessment for deficiency income, branch profit remittance, contractor's and Add: 50% surcharge for non-declaration 19,345,396.00
commercial broker's taxes. Respondent questioned this assessment in a
letter dated June 5, 1986. 20% surcharge for late payment 9,672,698.00
Sub-total 67,708,886.00
On August 27, 1986, respondent corporation received a letter dated August Add: 20% int. p.a.fr. 4-21-85 to 8-15-86 17,854,739.46
15, 1986 from petitioner assessing respondent several deficiency taxes. The
assessed deficiency internal revenue taxes, inclusive of surcharge and TOTAL AMOUNT DUE P85,563,625.46
interest, were as follows: IV. DEFICIENCY COMMERCIAL BROKER'S TAX
      FY ended March 31, 1985
Undeclared share from commission income return and pay a tax equivalent to ten per cent (10%) of the increase in net
(denominated as "subsidy from Home Office") P24,683,114.50 worth from December 31, 1980 to December 31, 1985.
Tax due thereon 1,628,569.00
In accordance with the terms of E.O. No. 41, respondent filed its tax amnesty
Add: 50% surcharge for non-declaration 814,284.50 return dated October 30, 1986 and attached thereto its sworn statement of
20% surcharge for late payment    407,142.25 assets and liabilities and net worth as of Fiscal Year (FY) 1981 and FY 1986.
The return was received by the BIR on November 3, 1986 and respondent
Sub-total 2,849,995.75 paid the amount of P2,891,273.00 equivalent to ten percent (10%) of its net
Add: 20% int. p.a.fr. 4-21-85 to 8-15-86    751,539.98 worth increase between 1981 and 1986.
TOTAL AMOUNT DUE      P3,600,535.68
The period of the amnesty in E.O. No. 41 was later extended from October
31, 1986 to December 5, 1986 by E.O. No. 54 dated November 4, 1986.
The 50% surcharge was imposed for your client's failure to report for tax
purposes the aforesaid taxable revenues while the 25% surcharge was
imposed because of your client's failure to pay on time the above deficiency On November 17, 1986, the scope and coverage of E.O. No. 41 was
percentage taxes. expanded by Executive Order (E.O.) No. 64. In addition to the income tax
amnesty granted by E.O. No. 41 for the years 1981 to 1985, E.O. No. 64 3
included estate and donor's taxes under Title III and the tax on business
Petitioner found that the NDC and Philphos contracts were made on a "turn- under Chapter II, Title V of the National Internal Revenue Code, also
key" basis and that the gross income from the two projects amounted to covering the years 1981 to 1985. E.O. No. 64 further provided that the
P967,269,811.14. Each contract was for a piece of work and since the immunities and privileges under E.O. No. 41 were extended to the foregoing
projects called for the construction and installation of facilities in the tax liabilities, and the period within which the taxpayer could avail of the
Philippines, the entire income therefrom constituted income from Philippine amnesty was extended to December 15, 1986. Those taxpayers who already
sources, hence, subject to internal revenue taxes. The assessment letter filed their amnesty return under E.O. No. 41, as amended, could avail
further stated that the same was petitioner's final decision and that if themselves of the benefits, immunities and privileges under the new E.O. by
respondent disagreed with it, respondent may file an appeal with the Court of filing an amended return and paying an additional 5% on the increase in net
Tax Appeals within thirty (30) days from receipt of the assessment. worth to cover business, estate and donor's tax liabilities.

On September 26, 1986, respondent filed two (2) petitions for review with the The period of amnesty under E.O. No. 64 was extended to January 31, 1987
Court of Tax Appeals. The first petition, CTA Case No. 4109, questioned the by E.O No. 95 dated December 17, 1986.
deficiency income, branch profit remittance and contractor's tax
assessments in petitioner's assessment letter. The second, CTA Case No.
4110, questioned the deficiency commercial broker's assessment in the On December 15, 1986, respondent filed a supplemental tax amnesty return
same letter. under the benefit of E.O. No. 64 and paid a further amount of P1,445,637.00
to the BIR equivalent to five percent (5%) of the increase of its net worth
between 1981 and 1986.
Earlier, on August 2, 1986, Executive Order (E.O.) No. 412 declaring a one-
time amnesty covering unpaid income taxes for the years 1981 to 1985 was
issued. Under this E.O., a taxpayer who wished to avail of the income tax On July 29, 1996, almost ten (10) years after filing of the case, the Court of
amnesty should, on or before October 31, 1986: (a) file a sworn statement Tax Appeals rendered a decision in CTA Case No. 4109. The tax court
declaring his net worth as of December 31, 1985; (b) file a certified true copy found that respondent had properly availed of the tax amnesty under E.O.
of his statement declaring his net worth as of December 31, 1980 on record Nos. 41 and 64 and declared the deficiency taxes subject of said case as
with the Bureau of Internal Revenue (BIR), or if no such record exists, file a deemed cancelled and withdrawn. The Court of Tax Appeals disposed of as
statement of said net worth subject to verification by the BIR; and (c) file a follows:
"WHEREFORE, the respondent Commissioner of Internal Revenue b) Those with income tax cases already filed in Court as of the
is hereby ORDERED to DESIST from collecting the 1985 deficiency effectivity hereof;
taxes it had assessed against petitioner and the same are deemed
considered [sic] CANCELLED and WITHDRAWN by reason of the c) Those with criminal cases involving violations of the income tax
proper availment by petitioner of the amnesty under Executive law already filed in court as of the effectivity hereof;
Order No. 41, as amended."4
d) Those that have withholding tax liabilities under the National
Petitioner challenged the decision of the tax court by filing CA-G.R. SP No. Internal Revenue Code, as amended, insofar as the said liabilities
42518 with the Court of Appeals. are concerned;

On January 15, 1999, the Court of Appeals dismissed the petition and e) Those with tax cases pending investigation by the Bureau of
affirmed the decision of the Court of Tax Appeals. Hence, this recourse. Internal Revenue as of the effectivity hereof as a result of
information furnished under Section 316 of the National Internal
Before us, petitioner raises the following issues: Revenue Code, as amended;

"(1) Whether or not the Court of Appeals erred in affirming the f) Those with pending cases involving unexplained or unlawfully
Decision of the Court of Tax Appeals which ruled that herein acquired wealth before the Sandiganbayan;
respondent's deficiency tax liabilities were extinguished upon
respondent's availment of tax amnesty under Executive Orders g) Those liable under Title Seven, Chapter Three (Frauds, Illegal
Nos. 41 and 64. Exactions and Transactions) and Chapter Four (Malversation of
Public Funds and Property) of the Revised Penal Code, as
(2) Whether or not respondent is liable to pay the income, branch amended."
profit remittance, and contractor's taxes assessed by petitioner."5
Petitioner argues that at the time respondent filed for income tax amnesty on
The main controversy in this case lies in the interpretation of the exception to October 30, 1986, CTA Case No. 4109 had already been filed and was
the amnesty coverage of E.O. Nos. 41 and 64. There are three (3) types of pending; before the Court of Tax Appeals. Respondent therefore fell under
taxes involved herein — income tax, branch profit remittance tax and the exception in Section 4 (b) of E.O. No. 41.
contractor's tax. These taxes are covered by the amnesties granted by E.O.
Nos. 41 and 64. Petitioner claims, however, that respondent is disqualified Petitioner's claim cannot be sustained. Section 4 (b) of E.O. No. 41 is very
from availing of the said amnesties because the latter falls under the clear and unambiguous. It excepts from income tax amnesty those taxpayers
exception in Section 4 (b) of E.O. No. 41. "with income tax cases already filed in court as of the effectivity hereof." The
point of reference is the date of effectivity of E.O. No. 41. The filing of
Section 4 of E.O. No. 41 enumerates which taxpayers cannot avail of the income tax cases in court must have been made before and as of the date
amnesty granted thereunder, viz: of effectivity of E.O. No. 41. Thus, for a taxpayer not to be disqualified under
Section 4 (b) there must have been no income tax cases filed in court
"Sec. 4. Exceptions. — The following taxpayers may not avail against him when E.O. No. 41 took effect. This is regardless of when the
themselves of the amnesty herein granted: taxpayer filed for income tax amnesty, provided of course he files it on or
before the deadline for filing.
a) Those falling under the provisions of Executive Order Nos. 1, 2
and 14; E.O. No. 41 took effect on August 22, 1986. CTA Case No. 4109 questioning
the 1985 deficiency income, branch profit remittance and contractor's tax
assessments was filed by respondent with the Court of Tax Appeals on
September 26, 1986. When E.O. No. 41 became effective on August 22, rule is that an amendatory act operates prospectively.9 While an amendment
1986, CTA Case No. 4109 had not yet been filed in court. Respondent is generally construed as becoming a part of the original act as if it had
corporation did not fall under the said exception in Section 4 (b), hence, always been contained therein,10 it may not be given a retroactive effect
respondent was not disqualified from availing of the amnesty for income tax unless it is so provided expressly or by necessary implication and no vested
under E.O. No. 41. right or obligations of contract are thereby impaired.11

The same ruling also applies to the deficiency branch profit remittance tax There is nothing in E.O. No. 64 that provides that it should retroact to the
assessment. A branch profit remittance tax is defined and imposed in date of effectivity of E.O. No. 41, the original issuance. Neither is it
Section 24 (b) (2) (ii), Title II, Chapter III of the National Internal Revenue necessarily implied from E.O. No. 64 that it or any of its provisions should
Code.6 In the tax code, this tax falls under Title II on Income Tax. It is a tax apply retroactively. Executive Order No. 64 is a substantive amendment of
on income. Respondent therefore did not fall under the exception in Section E.O. No. 41. It does not merely change provisions in E.O. No. 41. It
4 (b) when it filed for amnesty of its deficiency branch profit remittance tax supplements the original act by adding other taxes not covered in the
assessment. first.12 It has been held that where a statute amending a tax law is silent as to
whether it operates retroactively, the amendment will not be given a
The difficulty herein is with respect to the contractor's tax assessment and retroactive effect so as to subject to tax past transactions not subject to tax
respondent's availment of the amnesty under E.O. No. 64. E.O. No. 64 under the original act.13 In an amendatory act, every case of doubt must be
expanded the coverage of E.O. No. 41 by including estate and donor's taxes resolved against its retroactive effect.14
and tax on business. Estate and donor's taxes fall under Title III of the Tax
Code while business taxes fall under Chapter II, Title V of the same. The Moreover, E.O. Nos. 41 and 64 are tax amnesty issuances. A tax amnesty is
contractor's tax is provided in Section 205, Chapter II, Title V of the Tax a general pardon or intentional overlooking by the State of its authority to
Code; it is defined and imposed under the title on business taxes, and is impose penalties on persons otherwise guilty of evasion or violation of a
therefore a tax on business.7 revenue or tax law.15 It partakes of an absolute forgiveness or waiver by the
government of its right to collect what is due it and to give tax evaders who
When E.O. No. 64 took effect on November 17, 1986, it did not provide for wish to relent a chance to start with a clean slate.16 A tax amnesty, much like
exceptions to the coverage of the amnesty for business, estate and donor's a tax exemption, is never favored nor presumed in law.17 If granted, the
taxes. Instead, Section 8 of E.O. No. 64 provided that: terms of the amnesty, like that of a tax exemption, must be construed strictly
against the taxpayer and liberally in favor of the taxing authority.18 For the
right of taxation is inherent in government. The State cannot strip itself of the
"Section 8. The provisions of Executive Orders Nos. 41 and 54 most essential power of taxation by doubtful words. He who claims an
which are not contrary to or inconsistent with this amendatory exemption (or an amnesty) from the common burden must justify his claim
Executive Order shall remain in full force and effect." by the clearest grant of organic or state law. It cannot be allowed to exist
upon a vague implication. If a doubt arises as to the intent of the legislature,
By virtue of Section 8 as afore-quoted, the provisions of E.O. No. 41 not that doubt must be resolved in favor of the state.19
contrary to or inconsistent with the amendatory act were reenacted in E.O.
No. 64. Thus, Section 4 of E.O. No. 41 on the exceptions to amnesty In the instant case, the vagueness in Section 4 (b) brought about by E.O.
coverage also applied to E.O. No. 64. With respect to Section 4 (b) in No. 64 should therefore be construed strictly against the taxpayer. The term
particular, this provision excepts from tax amnesty coverage a taxpayer who "income tax cases" should be read as to refer to estate and donor's taxes
has "income tax cases already filed in court as of the effectivity hereof." As and taxes on business while the word "hereof," to E.O. No. 64. Since
to what Executive Order the exception refers to, respondent argues that Executive Order No. 64 took effect on November 17, 1986, consequently,
because of the words "income" and "hereof," they refer to Executive Order insofar as the taxes in E.O. No. 64 are concerned, the date of effectivity
No. 41.8 referred to in Section 4 (b) of E.O. No. 41 should be November 17, 1986.

In view of the amendment introduced by E.O. No. 64, Section 4 (b) cannot
be construed to refer to E.O. No. 41 and its date of effectivity. The general
Respondent filed CTA Case No. 4109 on September 26, 1986. When E.O. consist of a wharf, berths, causeways, mechanical and liquids unloading and
No. 64 took effect on November 17, 1986, CTA Case No. 4109 was already loading systems, fuel oil depot, utilities systems, storage and service
filed and pending in court. By the time respondent filed its supplementary tax buildings, offsite facilities, harbor service vessels, navigational aid system,
amnesty return on December 15, 1986, respondent already fell under the fire-fighting system, area lighting, mobile equipment, spare parts and other
exception in Section 4 (b) of E.O. Nos. 41 and 64 and was disqualified from related facilities.23 The scope of the works under the contract covered turn-
availing of the business tax amnesty granted therein. key supply, which included grants of licenses and the transfer of technology
and know-how,24 and:
It is respondent's other argument that assuming it did not validly avail of the
amnesty under the two Executive Orders, it is still not liable for the deficiency ". . . the design and engineering, supply and delivery, construction,
contractor's tax because the income from the projects came from the erection and installation, supervision, direction and control of testing
"Offshore Portion" of the contracts. The two contracts were divided into two and commissioning of the Wharf-Port Complex as set forth in
parts, i.e., the Onshore Portion and the Offshore Portion. All materials and Annex I of this Contract, as well as the coordination of tie-ins at
equipment in the contract under the "Offshore Portion" were manufactured boundaries and schedule of the use of a part or the whole of the
and completed in Japan, not in the Philippines, and are therefore not subject Wharf/Port Complex through the Owner, with the design and
to Philippine taxes. construction of other facilities around the site. The scope of works
shall also include any activity, work and supply necessary for,
Before going into respondent's arguments, it is necessary to discuss the incidental to or appropriate under present international industrial
background of the two contracts, examine their pertinent provisions and port practice, for the timely and successful implementation of the
implementation. object of this Contract, whether or not expressly referred to in the
abovementioned Annex I."25
The NDC and Philphos are two government corporations. In 1980, the NDC,
as the corporate investment arm of the Philippine Government, established The contract price for the wharf/port complex was ¥12,790,389,000.00 and
the Philphos to engage in the large-scale manufacture of phosphatic fertilizer P44,327,940.00. In the contract, the price in Japanese currency was broken
for the local and foreign markets.20 The Philphos plant complex which was down into two portions: (1) the Japanese Yen Portion I; (2) the Japanese
envisioned to be the largest phosphatic fertilizer operation in Asia, and Yen Portion II, while the price in Philippine currency was referred to as the
among the largest in the world, covered an area of 180 hectares within the Philippine Pesos Portion. The Japanese Yen Portions I and II were financed
435-hectare Leyte Industrial Development Estate in the municipality of in two (2) ways: (a) by yen credit loan provided by the Overseas Economic
Isabel, province of Leyte. Cooperation Fund (OECF); and (b) by supplier's credit in favor of Marubeni
from the Export-Import Bank of Japan. The OECF is a Fund under the
Ministry of Finance of Japan extended by the Japanese government as
In 1982, the NDC opened for public bidding a project to construct and install assistance to foreign governments to promote economic development.26 The
a modern, reliable, efficient and integrated wharf/port complex at the Leyte OECF extended to the Philippine Government a loan of ¥7,560,000,000.00
Industrial Development Estate. The wharf/port complex was intended to be for the Leyte Industrial Estate Port Development Project and authorized the
one of the major facilities for the industrial plants at the Leyte Industrial NDC to implement the same.27 The other type of financing is an indirect type
Development Estate. It was to be specifically adapted to the site for the where the supplier, i.e., Marubeni, obtained a loan from the Export-Import
handling of phosphate rock, bagged or bulk fertilizer products, liquid Bank of Japan to advance payment to its sub-contractors.28
materials and other products of Philphos, the Philippine Associated Smelting
and Refining Corporation (Pasar),21 and other industrial plants within the
Estate. The bidding was participated in by Marubeni Head Office in Japan. Under the financing schemes, the Japanese Yen Portions I and II and the
Philippine Pesos Portion were further broken down and subdivided
according to the materials, equipment and services rendered on the project.
Marubeni, Japan pre-qualified and on March 22, 1982, the NDC and The price breakdown and the corresponding materials, equipment and
respondent entered into an agreement entitled "Turn-Key Contract for Leyte services were contained in a list attached as Annex III to the contract.29
Industrial Estate Port Development Project Between National Development
Company and Marubeni Corporation."22 The Port Development Project would
A few months after execution of the NDC contract, Philphos opened for The division of the price into Japanese Yen Portions I and II and the
public bidding a project to construct and install two ammonia storage tanks in Philippine Pesos Portion under the two contracts corresponds to the two
Isabel. Like the NDC contract, it was Marubeni Head Office in Japan that parts into which the contracts were classified — the Foreign Offshore Portion
participated in and won the bidding. Thus, on May 2, 1982, Philphos and and the Philippine Onshore Portion. In both contracts, the Japanese Yen
respondent corporation entered into an agreement entitled "Turn-Key Portion I corresponds to the Foreign Offshore Portion.37 Japanese Yen
Contract for Ammonia Storage Complex Between Philippine Phosphate Portion II and the Philippine Pesos Portion correspond to the Philippine
Fertilizer Corporation and Marubeni Corporation."30 The object of the Onshore Portion.38
contract was to establish and place in operating condition a modern, reliable,
efficient and integrated ammonia storage complex adapted to the site for the Under the Philippine Onshore Portion, respondent does not deny its liability
receipt and storage of liquid anhydrous ammonia31 and for the delivery of for the contractor's tax on the income from the two projects. In fact
ammonia to an integrated fertilizer plant adjacent to the storage complex and respondent claims, which petitioner has not denied, that the income it
to vessels at the dock.32 The storage complex was to consist of ammonia derived from the Onshore Portion of the two projects had been declared for
storage tanks, refrigeration system, ship unloading system, transfer pumps, tax purposes and the taxes thereon already paid to the Philippine
ammonia heating system, fire-fighting system, area lighting, spare parts, and government.39 It is with regard to the gross receipts from the Foreign
other related facilities.33 The scope of the works required for the completion Offshore Portion of the two contracts that the liabilities involved in the
of the ammonia storage complex covered the supply, including grants of assessments subject of this case arose. Petitioner argues that since the two
licenses and transfer of technology and know-how,34 and: agreements are turn-key,40 they call for the supply of both materials and
services to the client, they are contracts for a piece of work and are
". . . the design and engineering, supply and delivery, construction, indivisible. The situs of the two projects is in the Philippines, and the
erection and installation, supervision, direction and control of testing materials provided and services rendered were all done and completed
and commissioning of the Ammonia Storage Complex as set forth within the territorial jurisdiction of the Philippines.41 Accordingly, respondent's
in Annex I of this Contract, as well as the coordination of tie-ins at entire receipts from the contracts, including its receipts from the Offshore
boundaries and schedule of the use of a part or the whole of the Portion, constitute income from Philippine sources. The total gross receipts
Ammonia Storage Complex through the Owner with the design and covering both labor and materials should be subjected to contractor's tax in
construction of other facilities at and around the Site. The scope of accordance with the ruling in Commissioner of Internal Revenue v.
works shall also include any activity, work and supply necessary Engineering Equipment & Supply Co.42
for, incidental to or appropriate under present international industrial
practice, for the timely and successful implementation of the object A contractor's tax is imposed in the National Internal Revenue Code (NIRC)
of this Contract, whether or not expressly referred to in the as follows:
abovementioned Annex I."35
"Sec. 205. Contractors, proprietors or operators of dockyards, and
The contract price for the project was ¥3,255,751,000.00 and others. —A contractor's tax of four percent of the gross receipts is
P17,406,000.00. Like the NDC contract, the price was divided into three hereby imposed on proprietors or operators of the following
portions. The price in Japanese currency was broken down into the business establishments and/or persons engaged in the business
Japanese Yen Portion I and Japanese Yen Portion II while the price in of selling or rendering the following services for a fee or
Philippine currency was classified as the Philippine Pesos Portion. Both compensation:
Japanese Yen Portions I and II were financed by supplier's credit from the
Export-Import Bank of Japan. The price stated in the three portions were
further broken down into the corresponding materials, equipment and (a) General engineering, general building and specialty
services required for the project and their individual prices. Like the NDC contractors, as defined in Republic Act No. 4566;
contract, the breakdown in the Philphos contract is contained in a list
attached to the latter as Annex III.36 (q) Other independent contractors. The term "independent
contractors" includes persons (juridical or natural) not
enumerated above (but not including individuals subject to
the occupation tax under the Local Tax Code) whose "Japanese Yen Portion I of the Contract Price has been subdivided
activity consists essentially of the sale of all kinds of according to discrete portions of materials and equipment which will
services for a fee regardless of whether or not the be shipped to Leyte as units and lots. This subdivision of price is to
performance of the service calls for the exercise or use of be used by owner to verify invoice for Progress Payments under
the physical or mental faculties of such contractors or their Article 19.2.1 of the Contract. The agreed subdivision of Japanese
employees. It does not include regional or area Yen Portion I is as follows:
headquarters established in the Philippines by
multinational corporations, including their alien executives, The subdivision of Japanese Yen Portion I covers materials and equipment
and which headquarters do not earn or derive income from while Japanese Yen Portion II and the Philippine Pesos Portion enumerate
the Philippines and which act as supervisory, other materials and equipment and the construction and installation work on
communications and coordinating centers for their the project. In other words, the supplies for the project are listed under
affiliates, subsidiaries or branches in the Asia-Pacific Portion I while labor and other supplies are listed under Portion II and the
Region. Philippine Pesos Portion. Mr. Takeshi Hojo, then General Manager of the
Industrial Plant Section II of the Industrial Plant Department of Marubeni
Under the afore-quoted provision, an independent contractor is a person Corporation in Japan who supervised the implementation of the two projects,
whose activity consists essentially of the sale of all kinds of services for a testified that all the machines and equipment listed under Japanese Yen
fee, regardless of whether or not the performance of the service calls for the Portion I in Annex III were manufactured in Japan.51 The machines and
exercise or use of the physical or mental faculties of such contractors or their equipment were designed, engineered and fabricated by Japanese firms
employees. The word "contractor" refers to a person who, in the pursuit of sub-contracted by Marubeni from the list of sub-contractors in the technical
independent business, undertakes to do a specific job or piece of work for appendices to each contract.52 Marubeni sub-contracted a majority of the
other persons, using his own means and methods without submitting himself equipment and supplies to Kawasaki Steel Corporation which did the design,
to control as to the petty details.44 fabrication, engineering and manufacture thereof;53 Yashima & Co. Ltd.
which manufactured the mobile equipment; Bridgestone which provided the
A contractor's tax is a tax imposed upon the privilege of engaging in rubber fenders of the mobile equipment;54 and B.S. Japan for the supply of
business.45 It is generally in the nature of an excise tax on the exercise of a radio equipment.55 The engineering and design works made by Kawasaki
privilege of selling services or labor rather than a sale on products;46 and is Steel Corporation included the lay-out of the plant facility and calculation of
directly collectible from the person exercising the privilege.47 Being an excise the design in accordance with the specifications given by respondent.56 All
tax, it can be levied by the taxing authority only when the acts, privileges or sub-contractors and manufacturers are Japanese corporations and are
business are done or performed within the jurisdiction of said based in Japan and all engineering and design works were performed in that
authority.48 Like property taxes, it cannot be imposed on an occupation or country.57
privilege outside the taxing district.49
The materials and equipment under Portion I of the NDC Port Project is
In the case at bar, it is undisputed that respondent was an independent primarily composed of two (2) sets of ship unloader and loader; several
contractor under the terms of the two subject contracts. Respondent, boats and mobile equipment.58 The ship unloader unloads bags or bulk
however, argues that the work therein were not all performed in the products from the ship to the port while the ship loader loads products from
Philippines because some of them were completed in Japan in accordance the port to the ship. The unloader and loader are big steel structures on top
with the provisions of the contracts. of each is a large crane and a compartment for operation of the crane. Two
sets of these equipment were completely manufactured in Japan according
to the specifications of the project. After manufacture, they were rolled on to
An examination of Annex III to the two contracts reveals that the materials a barge and transported to Isabel, Leyte.59 Upon reaching Isabel, the
and equipment to be made and the works and services to be performed by unloader and loader were rolled off the barge and pulled to the pier to the
respondent are indeed classified into two. The first part, entitled "Breakdown spot where they were installed.60 Their installation simply consisted of bolting
of Japanese Yen Portion I" provides: them onto the pier.61
Like the ship unloader and loader, the three tugboats and a line boat were Japanese Yen Portion I were paid by Marubeni in Japan. Receipts for such
completely manufactured in Japan. The boats sailed to Isabel on their own payments were duly issued by Kawasaki in Japanese and
power. The mobile equipment, consisting of three to four sets of tractors, English.69 Yashima & Co. Ltd. and B.S. Japan were likewise paid by
cranes and dozers, trailers and forklifts, were also manufactured and Marubeni in Japan.70
completed in Japan. They were loaded on to a shipping vessel and unloaded
at the Isabel Port. These pieces of equipment were all on wheels and self- Between Marubeni and the two Philippine corporations, payments for all
propelled. Once unloaded at the port, they were ready to be driven and materials and equipment under Japanese Yen Portion I were made to
perform what they were designed to do.62 Marubeni by NDC and Philphos also in Japan. The NDC, through the
Philippine National Bank, established letters of credit in favor of respondent
In addition to the foregoing, there are other items listed in Japanese Yen through the Bank of Tokyo. The letters of credit were financed by letters of
Portion I in Annex III to the NDC contract. These other items consist of commitment issued by the OECF with the Bank of Tokyo. The Bank of
supplies and materials for five (5) berths, two (2) roads, a causeway, a Tokyo, upon respondent's submission of pertinent documents, released the
warehouse, a transit shed, an administration building and a security building. amount in the letters of credit in favor of respondent and credited the amount
Most of the materials consist of steel sheets, steel pipes, channels and therein to respondent's account within the same bank.71
beams and other steel structures, navigational and communication as well
as electrical equipment.63 Clearly, the service of "design and engineering, supply and delivery,
construction, erection and installation, supervision, direction and control of
In connection with the Philphos contract, the major pieces of equipment testing and commissioning, coordination. . . "72 of the two projects involved
supplied by respondent were the ammonia storage tanks and refrigeration two taxing jurisdictions. These acts occurred in two countries — Japan and
units.64 The steel plates for the tank were manufactured and cut in Japan the Philippines. While the construction and installation work were completed
according to drawings and specifications and then shipped to Isabel. Once within the Philippines, the evidence is clear that some pieces of equipment
there, respondent's employees put the steel plates together to form the and supplies were completely designed and engineered in Japan. The two
storage tank. As to the refrigeration units, they were completed and sets of ship unloader and loader, the boats and mobile equipment for the
assembled in Japan and thereafter shipped to Isabel. The units were simply NDC project and the ammonia storage tanks and refrigeration units were
installed there. 65 Annex III to the Philphos contract lists down under the made and completed in Japan. They were already finished products when
Japanese Yen Portion I the materials for the ammonia storage tank, shipped to the Philippines. The other construction supplies listed under the
incidental equipment, piping facilities, electrical and instrumental apparatus, Offshore Portion such as the steel sheets, pipes and structures, electrical
foundation material and spare parts. and instrumental apparatus, these were not finished products when shipped
to the Philippines. They, however, were likewise fabricated and
All the materials and equipment transported to the Philippines were manufactured by the sub-contractors in Japan. All services for the design,
inspected and tested in Japan prior to shipment in accordance with the terms fabrication, engineering and manufacture of the materials and equipment
of the contracts.66 The inspection was made by representatives of under Japanese Yen Portion I were made and completed in Japan. These
respondent corporation, of NDC and Philphos. NDC, in fact, contracted the services were rendered outside the taxing jurisdiction of the Philippines and
services of a private consultancy firm to verify the correctness of the tests on are therefore not subject to contractor's tax.
the machines and equipment67 while Philphos sent a representative to Japan
to inspect the storage equipment.68 Contrary to petitioner's claim, the case of Commissioner of Internal Revenue
v. Engineering Equipment & Supply Co73 is not in point. In that case, the
The sub-contractors of the materials and equipment under Japanese Yen Court found that Engineering Equipment, although an independent
Portion I were all paid by respondent in Japan. In his deposition upon oral contractor, was not engaged in the manufacture of air conditioning units in
examination, Kenjiro Yamakawa, formerly the Assistant General Manager the Philippines. Engineering Equipment designed, supplied and installed
and Manager of the Steel Plant Marketing Department, Engineering & centralized air-conditioning systems for clients who contracted its services.
Construction Division, Kawasaki Steel Corporation, testified that the Engineering, however, did not manufacture all the materials for the air-
equipment and supplies for the two projects provided by Kawasaki under conditioning system. It imported some items for the system it designed and
installed.74 The issues in that case dealt with services performed within the
local taxing jurisdiction. There was no foreign element involved in the supply
of materials and services.

With the foregoing discussion, it is unnecessary to discuss the other issues


raised by the parties.

IN VIEW WHEREOF, the petition is denied. The decision in CA-G.R. SP No.


42518 is affirmed.

SO ORDERED.

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